M/S TELSIMA COMMUNICATIONS PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

Per Jason P. Boaz, Accountant Member

This appeal by the assessee is directed against the order of assessment for Assessment Year 2011-12 passed u/ 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short ‘the Act’) vide order dated 31.12.2015, pursuant to the directions issued by the Dispute Resolution Panel – 2, Bangalore (DRP) u/s 144C (5) of the Act dated 19.11.2015.

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2.1 The assessee, an Indian company, is the subsidiary of Telsima Inc., USA and is primarily engaged in the provision of software development services to its Associated Enterprises (AE) for the products developed by the Telsima Group. The assessee has classified its international transactions as software development services.

2.2 For Assessment Year 2011-12, the assessee filed its return of income on 28.11.2011 declaring NIL income. The case was taken up for scrutiny by issue of notice u/s 143(2) of the Act and subsequently a reference was made by the Assessing Officer (AO) u/s 92CA of the Act to the Transfer Pricing Officer (TPO) for determination of the arms length price (ALP) of the international transactions entered into by the assessee with its AEs. The TPO passed an order u/s 92CA of the Act dated 29.10.2015 proposing an adjustment of Rs.73,13,781/- to the international transactions pertaining to the software development services of the assessee. After receipt of the TPO’s order, the AO passed the draft order of assessment u/s 143(3) r.w.s. 144C(1) of the Act dated 24.02.2015; wherein the assessee’s income was determined at Rs.84,12,937/- by virtue of additions, inter alia, including the TP adjustment of Rs.73,13,781/- proposed by the TPO.

2.3 Aggrieved by the draft order of assessment dated 24.02.2015 for Assessment Year 2011-12, the assessee filed its objections thereto before the DRP; which issued its directions thereon u/s 144C(5) of the

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Page 3 of 29 Act on 19.11.2015. Pursuant to the directions issued by the DRP, the AO passed the final order of assessment u/s 143(3) r.w.s. 144C(13) of the Act dated 31.12.2015; wherein the assessee’s income was determined at Rs.87,19,890/- and which included TP adjustment of Rs.76,20,824/-; disallowances of R & D expenses amounting to Rs.3,54,424/- and u/s 40(a)(ia) amounting to Rs.7,40,542/- for non- deduction of tax at source on payments towards internet access charges under the head communication expenses.

3.1 The assessee, being aggrieved by the final order of assessment dated 31.12.2015 for Assessment Year 2011-12, has preferred this appeal before the Tribunal wherein it has raised the following grounds:

I. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another. 1. The learned Assessing Officer ("learned AO"), learned Transfer Pricing Officer ("learned TPO") and the Honourable Dispute Resolution Panel ("Hon'ble DRP") grossly erred in adjusting the transfer price by INR 76,20,824/- of the Appellant's international transactions with its Associated Enterprises ("AEs") with respect to the Software Development Services ("IT") rendered by the tax payer u/s 92CA of the Income-tax Act, 1961. 2. The learned AO/learned TPO/Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of sub-section (3) of 92C of the Act. 3. The learned AO/learned TPO/Hon'ble DRP erred in rejecting comparability analysis carried in the TP documentation and in conducting a fresh comparability analysis by introducing various filters in determining the ALP. 4. The learned AO/learned TPO/Hon'ble DRP erred in not considering the previous two years financial data of the comparable companies while determining the ALP.

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Page 4 of 29 5. The learned AO/learned TPO/Hon'ble DRP erred in using data available at the time of assessment proceedings, instead of the data available at the time of preparing the TP documentation for comparable companies while determining ALP. 6. The learned AO/learned TPO/Hon'ble DRP erred in applying export earning filter of 75% instead of 25% of the total sales, leading to a narrower comparable set. 7. The learned AO/learned TPO/Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies. 8. The learned AO/learned TPO/Hon'ble DRP erred in not considering the provision for bad and doubtful debts as extraordinary in nature. 9. The Hon'ble DRP has erred in not adjudicating upon the comparability of certain TPO's proposed companies which have been objected by the Appellant. 10.The learned AO/learned TPO/Hon'ble DRP has grossly erred in not rejecting the following companies as comparables: Acropetal Technologies Ltd E Zest Solutions E-infochips Ltd ICRA Techno Analytics Ltd Persistent Systems & Solutions 11.The Ld. DRP while rejecting Infosys Ltd. on upper limit of turnover filter has grossly erred in not adjudicating on the following grounds:  Functional dissimilarity  Engaged in R &D  Lack of segmental data  Presence of brand  Incorrect computation of mark-up 12.The Ld. DRP while rejecting Larsen & Tourbo Infotech Ltd. on upper limit of turnover filter has grossly erred in not adjudicating on the following grounds:  Functional dissimilarity  Lack of segmental data  Presence of intangibles  Presence of brand

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Page 5 of 29 Incorrect computation of mark-up

13.The Ld. DRP while rejecting Tata Elxsi on upper limit of turnover filter has grossly erred in not adjudicating on the following grounds:  Functional dissimilarity  Engaged in IP development  Presence of brand  Incorrect computation of mark-up 14.The learned AO/learned TPO/Hon'ble while rejecting Persistent Systems Ltd. on upper limit of turnover filter has grossly erred in not adjudicating on the following grounds:  Functional dissimilarity  Lack of segmental data  Engaged in R &D  Presence of intangibles  Extraordinary events during the year  Incorrect computation of mark-up 15.The learned AO/learned TPO/Hon'ble while rejecting Sasken Communication Technologies Ltd. on upper limit of turnover filter has grossly erred in not adjudicating on the following grounds:  Functional dissimilarity  Lack of segmental data  Engaged in R &D  Presence of intangibles  Incorrect computation of mark-up

16.The learned AO/learned TPO/Hon'ble DRP has grossly erred in rejecting companies that ought to have been included as comparables:  Akshay Software Technologies Ltd  Caliber Point Business Solutions Ltd.  CG-VAK Software Exports Ltd.  Comp-U-Learn Tech India Ltd.  Goldstone Technologies Ltd.  LGS Global Ltd.  Maveric Systems Ltd.  R Systems International Ltd.

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Page 6 of 29  Thinksoft Global Services Ltd.  Thirdware Global Services Limited

17.The learned AO/learned TPO/Hon'ble DRP has erred in making the following errors in the computation of working capital adjustment: a.in restricted the working capital adjustment without giving any cogent reason. b.in insisting the Appellant to maintain a fixed level for debtors, inventory and creditors, on the basis of average cost of capital of the industry as a whole, before providing the adjustments for working capital. c. in considering the wrong SBI PLR while computing the working capital adjustment

18.The learned AO/learned TPO erred in not allowing appropriate adjustment towards the risk differential between the Appellant vis-à- vis comparable companies. The Hon'ble DRP jr4ered--' in not adjudicating upon the same.

II. Corporate Tax

a. The learned DRP/AO has erred in disallowing Rs.3,54,424 towards research and development expenditure by treating the same as capital in nature. b. The learned DRP/AO ought to have appreciated that the research and development expenditure typically includes the cost of developing prototypes, transportation costs and other incidental costs and were incurred by the assessee in connection with development of telecommunication product in the relevant assessment year.

c. The learned DRP/AO ought to have appreciated that the research and development cost was incurred by the assessee for upgrading the telecommunication products for meeting with the

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Page 7 of 29 customer/market requirements and were not incurred towards purchase of any capital equipment/creating any distinct technology towards prototypes development.

The learned DRP/AO ought to have appreciated that the research d. and development cost are incurred by the assessee on a yearly basis for upgrading its telecommunication product and hence unlikely as observed by the DRP/AO are revenue in nature duly allowable under section 37 of the Income-tax Act, 1961 ("the Act") being expenses incurred wholly and solely for business purposes.

The learned DRP/AO ought to have appreciated that research and e. development cost being recurring in nature and incurred for continuous upgradation of its telecommunication product, the same could not be held to be expenses incurred towards ensuing enduring benefit to the assessee company.

The learned DRP/AO erred in not placing reliance on the f. decision of the jurisdictional Karnataka High Court in the case of Tejas Networks India Limited vs. ACIT (ITA Nos. 813 of 2007, 1073 of 2008 and 72 of 2011 for the AYs 2002-03, 2003- 04 and 2004-05) wherein it has been held that expenditure claimed towards upgrading an existing telecommunication product is a revenue expenditure and not capital in nature.

Notwithstanding and without prejudice to our above g. contentions, the Learned DRP/AO erred in not appreciating that research and development expenses incurred by the assessee if accepted as capital expenditure should have been allowed as deduction under section 35(1)(iv) of the Act.

The learned DRP/AO erred in not following the principles as h. laid down by the jurisdictional Karnataka High Court in the case of Talisma Corporation Private Limited (ITA No.515 of 2007) wherein it has been held that if software is classified as a capital asset, amount expended towards upgrading the same should also be treated as capital in nature.

The learned AO erred in not allowing depreciation on the i. research and development expenditure treated as capital in nature by the DRP/AO irrespective of the directions of the learned DRP.

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Page 8 of 29 j.The learned AO erred in disallowing research and development cost amounting to Rs.3,54,424 relying on the order of the previous assessment year, ignoring that each assessment year is distinct and separate from the previous assessment years.

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Page 9 of 29 22. Interest under section 234D-Rs.6,62,774 a. The learned AO erred in levying interest under section 234D of the Act amounting to Rs.6,62,774 upon the assessee in the relevant assessment year.

3.2 Additional grounds of appeal

The assessee vide letter filed on 02.08.2018, filed Additional Grounds related to working capital adjustment which is as under:

Transfer Pricing grounds 17.1 The learned AO/TPO/Hon’ble DRP has erred in not appreciating the fact that negative working capital adjustment should not be allowed.

3.3 In the course of proceedings before us, the learned AR of the assessee put forth oral and written submissions. As regards TP issues, the assessee filed a chart of comparable companies, written submissions and a compendium of case laws; all of which have been duly considered. The learned DR has also put forth oral and written submissions which are taken on record and duly considered.

4.1 In the course of proceedings before us, the learned AR of the assessee submitted that the assessee wishes to press only the following 4 grounds in this appeal:

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Page 10 of 29 (i) Ground No. 10 relating to the exclusion of certain companies from the list of comparables. (ii) Ground No. 16 relating to the inclusion of certain companies into the list of comparables. (iii) Ground No. 19 relating to the disallowance of research and development expenses. (iv) Ground No. 20 related to disallowance of internet access charges u/s 40(a)(ia) of the Act for non-deduction of tax at source.

4.2 In view of the above, the learned AR submitted that the assessee is not pressing / urging ground Nos. 1 to 9, 11 to 15, 17, 18 and 21 and additional ground No. 17.1. These grounds (supra) are therefore rendered infructuous and are accordingly dismissed as not pressed.

Transfer Pricing Issues

55.1 Before proceeding to adjudicate on the issue of exclusion and / or inclusion of comparable companies in the final set of comparables, the brief facts relating to TP issues is summarized hereunder.

5.2 For the year under consideration, the assessee had reported various international transactions, including, inter alia, software development services aggregating to Rs.7,12,34,131/-. The financial results reported by the assessee during the year under consideration are as under:

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Page 11 of 29 Particulars Amount (Rs.) Operating Income (OR)* 206061496 Expenditure (OC)** 208343599 Operating Profit (OP) -2282103 OP/OC -1.09% OP/OR 1.10% * Excluding other income ** excluding Foreign exchange 5.3 As per the assessee TP report, it had two segments, namely software development services (SWD) and pre and post sales support services and the OP/OC margin of both the segments was shown at 16%. The assessee conducted a TP study for the international transactions and selected 22 comparables in respect of software development activity by applying TNMM as the most appropriate method (MAM). Based on the study conducted and the comparability analysis conducted, the assessee concluded that the international transactions it had entered into were at arms length.

5.4 The TPO examined the assessee’s TP report and rejected the same for various reasons laid out in his TP order. The TPO then conducted a fresh search, applying various criteria / filters; adopting TNMM as the MAM and finally selected the following 13 companies as the final set of comparables:

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5.5 The TPO computed the ALP of the international transactions of the software development services segment of the assessee as under:

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Page 13 of 29 5.6 We have heard both parties, perused and carefully considered the orders of the authorities below, the submissions of both the learned DR for Revenue and the learned AR of the assessee, including the judicial pronouncements cited.

6.1 In this ground (supra), the assessee challenges the inclusion of following 5 companies selected by the TPO as comparables: (i) Acropetal Technologies Ltd., (ii) e-Zest Solutions Ltd., (iii) E-infochips Ltd., (iv) ICRA Techno Analysts Ltd., (v) Persistent Systems and Solutions Ltd.,

6.2 Out of the 13 companies selected by the TPO as comparables, the DRP has excluded 6 companies by applying the turnover filter of more than Rs.200 Crores, thereby leaving 7 companies in the set of comparables. Out of these, the assessee challenges the inclusion of the above 5 companies on grounds of functional dis-similarity and has put forth submissions on each of the above 5 companies, which are discussed later in this order.

6.3 Per contra, the learned DR submitted that the DRP has not rendered any specific direction on the functional comparability of any of the above 5 companies and on the same grounds of the DRP order /

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Page 14 of 29 directions being cryptic, the matter was remanded back by the Tribunal to the file of the DRP in the assessee’s own case for Assessment Year 2006-07 in IT(TP)A No.1178/Bang/2010 dated 17.11.2017.

7.1 According to the assessee’s submissions, this company, ‘Acropetal’, needs to be excluded on the following grounds: A. Functionally different It is submitted that ‘Acropetal’ (i) is engaged in development of software products, services and solutions. (ii) owns products, (iii) is engaged in R & D activities, (iv) is having on-site development activities (v) is having marketing expenses.

B. Fails Employee cost filter, as this company operates on outsourcing model and the on-site expenses is towards payment to technical sub-contractors.

C. Fails 75% services revenue filter.

D. Has abnormal trend of profitability. In support of its contentions for exclusion of this company, ‘Acropetal’ from the set of comparables, the assessee has placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of

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Page 15 of 29 Finastra Software Solutions (I) Ltd., in IT(TP)A Nos.491 and 519/Bang/2016 dated 05.05.2018.

7.2 Per contra, the learned DR for Revenue supported the orders of the authorities below.

7.3 We have considered the rival contentions / submissions and perused the material on record. We find that the assessee in Form 35A had raised only two grounds of objections before the DRP in respect of ‘Acropetal’ namely (i) that this company fails the employee cost filter of 25% and (ii) that this company operates in a different business model.

However, from the TPO’s order, it is seen that the assessee had objected to the inclusion of this company, ‘Acropetal’ as a comparable on the ground that it operates in ITES segment and segmental details are not available.

7.3.2 From the above, it is seen that the assessee had objected to the inclusion of ‘Acropetal’ on different issues before different authorities. The TPO and DRP have not addressed the issues raised before them. Before us, the assessee has objected to the inclusion of this company on various issues, listed above; some of which are being raised for the first time. In the judicial decision cited by the assessee, ‘Acropetal’ has been excluded from the set of comparables by the co-ordinate bench of this Tribunal on the ground that the service revenue from software development services is less than 75% of the operating revenue; which

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Page 16 of 29 ground was never taken by the assessee before the authorities and has been raised by the assessee for the first time before us.

7.3.2 Taking into account the facts and circumstances as narrated above and considering that the assessee has raised certain grounds before us for the first time and also the fact that the DRP has not rendered a finding on the issues raised by the assessee before it, we deem it necessary to remand the issue of comparability of this company back to the file of the TPO, for examining the issue afresh and adjudication on all the issues raised by the assessee in respect of the comparability of this company, Acropetal Technologies Ltd. Needless to add, the TPO is directed to afford the assessee adequate opportunity of being heard and to file details/submissions required, which shall be considered before deciding on the comparability of this company. We hold and dirct accordingly.

8.1 The assessee contends that this company, ‘e-Zest’ needs to be excluded from the set of comparables as it is functionally different from the assessee; being engaged in the business of software development services and product engineering and that segmental details are not available. It was also submitted that this company owns inventories, indicating that it is into software products and also it has R & D. In support of the assessee’s plea for exclusion of this company from the set of comparables, reliance was placed on the decision of the co-ordinate bench of this Tribunal in the case of Electronics for Imaging India Pvt.

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Page 17 of 29 Ltd., in IT(TP)A No.1506/Bang/2015 and 16/Bang/2017 dated 04.07.2017.

8.2 Per contra, the learned DR for Revenue supported the orders of the authorities below.

8.3 We have considered the rival contentions / submissions and perused the material on record. We find that the assessee has raised objections against this company ‘e-Zest’ before the DRP on the same issues as raised before us. However, it is seen that the DRP has not adjudicated on all the objections raised by the assessee and has merely observed that the TPO has considered the objections raised by the assessee, whereas the TPO has not considered all the issues raised before us. In the judicial decisions cited by the assessee before us, the issue of comparability of this company, ‘e-Zest’, has been remanded back to the file of the TPO for verification of the relevant facts as well as considering the objections of the assessee. Following the decision of the Co-ordinate Bench in the case of Electronics Imaging India Pvt. Ltd., (supra) also for Assessment Year 2011-12, we deem it necessary to remand the issue of comparability of e-Zest Solutions Ltd., to the file of the AO for examination and verification of the facts and adjudication on the issues raised by the assessee. Needless to add, the TPO will afford the assessee adequate opportunity of being heard and to file details / submissions which shall be duly considered before deciding this matter. We hold and direct accordingly.

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Page 18 of 29 9. E-infochips Ltd., (‘E-infochips’)

9.1 The assessee contends that this company, ‘E-infochips’, needs to be excluded as it is engaged in the business of software development and maintenance services, ITES and sale of products, but that segmental details are not available. It is also submitted that this company is engaged in engineering development services, manufactures printed circuit boards; incurs expenditure on R & D and holds inventories. In support of the assessee’s plea for exclusion of this company from the set of comparables, reliance was placed on the decision of the Co-ordinate Bench in the case of

(i) Finastra Software Solutions (I) Ltd., (supra) and (ii) Electronics for Imaging India Pvt. Ltd., (supra).

9.2 Per contra, the learned DR supported the orders of the authorities below.

9.3.1 We have considered the rival contentions / submissions and perused the material on record. We find from an appraisal of the record before us, that the assessee has raised the objection before the TPO that this company ‘E-infochips’, is functionally dissimilar to the assessee and that the revenue from software development services is less than 75%. The TPO, however, rejected the assessee’s contention on the ground that the revenue from software development services is 88% and hence it satisfies the filter. However, the TPO has not rendered any finding on

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Page 19 of 29 the issue of functional dissimilarity of ‘E-infochips’ vis-à-vis the assessee in the case on hand. It is also seen that before the DRP, the assessee has raised objections on the inclusion of this company as a comparable on various issues, but the DRP has not rendered any findings on the same.

9.3.2 We find tha thte Co-ordinate Bench of this Tribunal in the decision of Finastra Software Solutions (I) Ltd., (supra) cited by the assessee (supra) has excluded this company ‘E-infochips’ from the set of comparables by relying on the decision in the case of Applied Materials (P) Ltd., (IT(TP)A No.17 and 39/Bang/2016 dated 21.09.2016). However, the issue on which this company has been excluded from the set of comparables is not clear from the judicial pronouncement cited by the assessee. Since the assessee has raised certain issues for exclusion of this company from the list of comparables for the first time before us, and the authorities below have not rendered any finding on the functional comparability of this company ‘E- infochips’ vis-à-vis the assessee in the case on hand, we deem it appropriate to remand the issue of comparability of this company, E- infochips Ltd., back to the file of the TPO, for examination / verification of the facts and adjudication on the issues raised by the assessee. Needless to add, the TPO shall afford the assessee adequate opportunity of being heard and to file details / submissions in this regard, which shall be considered before deciding the matter. It is accordingly ordered.

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Page 20 of 29 10. ICRA Technologies Ltd., (‘ICRA’)

10.1 The learned AR submits that this company, ‘ICRA’, is functionally dissimilar to the assessee in the case on hand, since it is engaged in the purchase and sale of software and also has income from business intelligence and analytics. It is also submitted that ‘ICRA’ has income from licensing and sub-licensing and owns IPRs and that were peculiar economic circumstances due to business restructuring which is an extraordinary activity. It was also submitted that the segmental details are not provided. In support of its contentions for exclusion of this company, the assessee has placed reliance on the decisions of the Co-ordinate Bench of this Tribunal in the case of Finastra Software Solutions (I) Ltd., (supra) and in the case of Electronics for Imaging India Pvt. Ltd., (supra).

10.2 Per contra, the learned DR supported the orders of the authorities below.

10.3 We have considered the rival contentions / submissions and perused the material on record. We find that the assessee had objected to inclusion of this company, ‘ICRA’ as a comparable, contending that it is functionally dissimilar to the assessee in the case on hand and that segmental details are not available. The TPO, however, rejected the assessee’s contentions and included ICRA as a comparable. Before the DRP, the assessee raised objections to inclusion of this company on grounds of functional difference and that segmental details are not available, but we observe that the DRP has not rendered any findings on

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Page 21 of 29 the same. We find that the Co-ordinate Bench of this Tribunal in the case of Finastra Software Solutions (India) Pvt. Ltd., (supra), cited by the assessee, in its order, has excluded ‘ICRA’ from the set of comparables by relying on the decision of another Co-ordinate Bench in the case of Applied Materials (P) Ltd., (IT(TP)A No.17 and 39/Bang/2016 dated 29.09.2016). However, the issue on which this company ‘ICRA’ has been excluded from the set of comparables is not clear from the judicial pronouncement cited by the assessee. Since the assessee has raised certain issues for seeking exclusion of this company for the first time before us, we deem it appropriate to remand the issue of comparability of ‘ICRA’ back to the file of the TPO for examination and verification of facts of the matter and adjudication on the issues raised by the assessee. Needless to add, the TPO shall afford the assessee adequate opportunity of being heard and to file details / submissions in this regard, which shall be considered before deciding this matter.

11.1 The learned AR contends that this company, ‘Persistent’ is functionally dissimilar to the assessee in the case on hand, as it is engaged in diverse activities like software development, consultancy and systems integration, outsourced product development and that segmental details are not available. It was submitted that this company also has income from licensing of products and royalty, owns products and is engaged in R & D activities. In support of the assessee’s contentions for exclusion of this company, ‘Persistent’ from the set of

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Page 22 of 29 comparables, reliance was placed on the decisions of the Co-ordinate Bench of this Tribunal in the case of Finastra Software Solutions (I) Pvt. Ltd., (supra) and Electronics for Imaging India Pvt. Ltd., (supra).

11.2 Per contra, the learned DR supported the orders of the authorities below.

11.3.1 We have considered the rival contentions / submissions and perused the material on record. From an appraisal of the details on record, it is seen that though this company ‘Persistent’ was selected as a comparable by the TPO, the assessee had accepted the TPO’s proposal and did not object to its inclusion in the set of comparables. However, before the DRP, the assessee raised objections seeking exclusion of ‘Persistent’ from the set of comparables on grounds of functional dissimilarity and also objected to the computation of mark up. However, the DRP has not rendered any findings on the issues raised.

11.3.2 We find that the Co-ordinate Bench of this Tribunal in the case of Finastra software Solutions (I) Pvt. Ltd., (supra), cited by the assessee, has not rendered any finding on the comparability of this company; ‘Persistent’. In the case of Electronics for Imaging India (P) Ltd., (supra), this company ‘Persistent’ has been excluded on the basis of findings rendered by the DRP on the functional profile of this company. Since the assessee had accepted this company as a comparable before the TPO and the DRP has not rendered any finding on the functionality comparability and also considering that the assessee has raised other issues before us for the first time, we deem it appropriate to remand the

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Page 23 of 29 matter of comparability of this company, ‘Persistent’ back to the file of the TPO for examination / verification of the facts and adjudication on the issues / contentions raised by the assessee. Needless to add the TPO shall afford the assessee adequate opportunity of being heard and to file details / submissions, which shall be considered before adjudicating on this issue. It is accordingly ordered.

12.1 Even though in this ground (supra), the assessee has sought for inclusion of several companies, in the chart filed; the Notes to arguments submitted vide letter dated 07.08.2018, in the arguments put forth before us, the assessee has urged only for the inclusion of the company Thinksoft Global Services Ltd., (‘Thinksoft’) and for none of the other companies. Therefore, we are adjudicating only on the comparability of the company ‘Thinksoft’ with reference to the assessee’s arguments for its inclusion in the set of comparables.

12.2 Before us, it was submitted by the learned AR of the assessee that this company ‘Persistent’ provides software validation and verification services to banking and financial services industry and is therefore comparable to the assessee. It was also submitted that the company qualifies the forex filter.

12.3 Per contra, the learned DR supported the orders of the authorities below.

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12.4.1 We have considered the rival contentions and perused the material on record. From the record before us, it is seen that this company, ‘Thinksoft’ was chosen by the assessee as a comparable in its TP study and the TPO rejected it on the ground of failing the Forex filter. The assessee disputes this finding of the TPO stating that it qualifies the forex filter. Before the DRP, the assessee has raised the forex filter issue only, but the DRP has not rendered any finding on the same.

12.4.2 We find that the Co-ordinate Bench of this Tribunal in the case of Finastra Software Solutions (India) Pvt. Ltd., (supra), cited by the assessee has only rendered a finding on the issue of whether this company can be excluded on grounds of working capital adjustment. However, it is seen that another Co-ordinate Bench in the case of ACIT Vs. Marvell India Pvt. Ltd., (2017) 84 taxmann.com 212 (Bangalore – Trib.) has included it in the set of comparables rendering a finding that this company, ‘Thinksoft’ is into software development services. Since this company has been rejected as a comparable by the TPO only on grounds of failing the forex filter and the authorities below have not rendered any finding on the issue of functional comparability, we deem it appropriate to remand the matter of comparability of this company ‘Persistent’, back to the file of the TPO for verification of facts and adjudication on the issues raised by the assessee in the light of the decision of the Co-ordinate Bench in the case of Marvell India Pvt. Ltd., (supra) also for Assessment Year 2011-12, the year under consideration in the present appeal. Needless to add, the TPO shall afford the assessee adequate opportunity of being heard and to file details / submissions in

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Page 25 of 29 the matter, which shall be considered before adjudicating the issues involved. It is accordingly deleted.

13.1 In the course of assessment proceedings, the AO noticed that the assessee had debited certain expenses amounting to Rs.3,54,424/- towards research and development activities. On being queried by the AO, the assessee contended that these expenses are revenue in nature and incurred in the normal course of business. The assessee’s contentions did not find favour with the AO who, by observing that the assessee company is not doing any scientific research, held that the assessee is not eligible for deduction u/s 35 of the Act. The AO also held that the research and development is in the nature of enduring benefit and therefore disallowed the claim of the assessee. Aggrieved, the assessee filed objections before the DRP who upheld the decision of the AO placing reliance on the decision of the ITAT, Mumbai Bench in the case of 3i Infotech Ltd., in ITA No.2831/Mum/2007.

13.2.1 We have considered the rival contentions and submissions and perused the details on record. In the course of proceedings before us, it was submitted that this issue was before the Co-ordinate Bench of this Tribunal, in the assessee’s own case for Assessment Year 2006-07 and in its order in IT(TP)A No.1178/Bang/2010 this issue was remanded to the file of the AO for fresh examination and adjudication. At paras 5.5.1 and 5.5.2 of its aforesaid order (supra), the Tribunal held as under:

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13.2.2 The reasons for remand by the Tribunal in Assessment Year 2006-07 (supra) are applicable for this year also; in that neither has the assessee furnished the details of R & D expenses nor has the AO called for or examined the details thereof; but has decided this issue only on the basis of the nomenclature of “R & D” Expenses. The DRP has also decided / upheld the issue on principles, without examining the actual nature of these expenses. In the factual matrix as laid out above and respectfully following the decision of the Tribunal in the assessee’s own case for Assessment Year 2006-07 (IT(TP)A No.1178/Bang/2010 dated 17.11.2017), we remand the issue of the assessee’s claim of Research and Development expenditure to the file of the AO for fresh examination / consideration of the facts of the case and then adjudicate this matter. Needless to add, the AO is directed to afford the assessee adequate opportunity of being heard and to file details / submissions required, which shall be considered before deciding this issue. We hold and direct accordingly.

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Page 27 of 29 14. Ground No. 20 – Internet access charges

14.1 In the course of assessment proceedings, the AO observed that the assessee had debited Rs.7,40,542/- towards internet access charges under the head “communication charges” on which tax was not deducted at source on such payments. Therefore, the AO disallowed the expenses claimed by invoking the provisions of section 40(a)(ia) of the Act. The DRP in its order, rejected the assessee’s objections and upheld the action taken by the AO.

14.2.1 We have considered the rival contentions and perused the material on record. In the course of proceedings before us, it was submitted that this issue was up for consideration before the Co-ordinate Bench of this Tribunal in the assessee’s own case for Assessment Year 2009-10, wherein at para 9 of its order, in IT(TP)A No.1112/Bang/2014 dated 03.08.2018, the matter was decided in favour of the assessee, as extracted hereunder:

“We have considered the rival submissions. We find that this issue was decided by CIT(A) as per Para 4 of his order by following the Tribunal order rendered in the case of ACIT Vs. Twenty First Century Shares & Securities Ltd. as reported in [2013] 39 taxmann.com 176 (Mumbai – Trib.) and this judgment is dated 15.05.2013. In our considered opinion, this issue is squarely covered in favour of the assessee by this Tribunal order and therefore, we find no infirmity in the order of CIT (A) on this issue. Regarding the judgment of Hon’ble Apex Court cited by ld. DR of revenue having been rendered in the case of CIT Vs. Bharti Cellular Ltd. (supra), we find that in that case, the assessee was a cellular service provider and the dispute was regarding interconnect agreement of that assessee with BSNL/MTNL whereas in the present case, the assessee is not a cellular service provider. Moreover in that case, as per the judgment dated 12.08.2010,

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Page 28 of 29 guidelines were given by Hon’ble Apex Court to establish that human intervention takes place in the process of providing telecommunication services and then only such services can be considered as Fee for Technical Services (FTS) and section 194J can be made applicable. The present assessment order has been passed by AO after about 3 years after this judgment of Hon’ble Apex Court and this is admitted position that no such expert evidence has been brought on record by AO to establish that there was any human intervention making services received by the assessee as FTS. In our considered opinion, as per this judgment of Hon’ble Apex Court, required finding is not given by the AO and hence, this judgment does not render any help to the revenue and restoring back the matter to AO as requested by DR is not considered proper by us because sufficient time of more than three years was available with the AO after this judgment to examine this aspect and record a finding. This ground of the revenue’s appeal is rejected. There is no other ground in the revenue’s appeal.”

14.2.2 Respectfully following the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case for Assessment Year 2009-10 (supra), we decide this issue in favour of the assessee. Consequently, ground No. 20 of assessee’s appeal is allowed.

Pronounced in the open court on 22nd February, 2019.

Sd/- Sd/- (LALIET KUMAR) (JASON P. BOAZ) Judicial Member Accountant Member Bangalore. Dated: 22nd February, 2019. /NS/*

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Page 29 of 29 Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order

Assistant Registrar, ITAT, Bangalore.