DCIT, NEW DELHI vs. M/S. INTUIT TECHNOLOGY SERVICES LTD., BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘I’, NEW DELHI

BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. No.1892/Del/2013 (Assessment Year 2008-09) DCIT, Circle 11(1), Vs. M/s. Intuit Technology New Delhi. Services Ltd., 7-8 Floor, Campus 4A, Pri Tech Park, (Esospace), Balandur, Bangalore-560103 (Ktk) GIR / PAN :AABCI3011M (Appellant) (Respondent)

Appellant by :Shri S.P. Singh, AR Shri Vishnu Goel, Adv. Ms. Somya Seth, CA Respondent by :Shri Amrendra Kumar, CIT DR

Date of hearing: 26.04.2016 Date of Pronouncement: 25.07.2016 ORDER PER BEENA A. PILLAI, JM: This appeal has been preferred by the Revenue against the order dated 12.02.2013 passed by Ld. CIT(A) XX, New Delhi for the Assessment Year 2008-09. 2. The brief facts of the case are as under: 2.1 The assessee filed its return of income declaring total income of Rs.14,53,161/- on 26.09.2008. The case was selected for scrutiny and notice u/s 143(2) was issued to the assessee. In response thereto, representatives of the

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assessee attended the proceedings and furnished requisite details / information sought by the Assessing Officer. 2.2 During the assessment proceeding, Ld. A.O. observed that the assessee is engaged in the business of rendering software development to its Associated Enterprises (AE) i.e. Intuit Inc. USA. The assessee company mainly provides software development services which include design, research, development and production of software for F.Y. and deliver the same to its AE. The Assessing Officer observed that the assessee had entered into international transaction during the year under consideration and reference was made to the TPO-I (2), New Delhi for determination of Arm’s Length Price (ALP) of such transaction u/s 92CA(1) of the Act and accordingly, the assessee filed all necessary details in terms of Section 92B before the Ld. TPO. 2.3 Ld. TPO observed that the Intuit Technology Services Ltd. (“assessee”) is a wholly owned subsidiary of M/s. Intuit Inc. USA. The assessee had started its operation in the since October 2004 and is a software development centre to provide software development services to its AEs. The business of the assessee is to provide application development services to the Intuit group. During the financial year under consideration, the assessee had entered into the following international transactions as per 3CEB report: S.N. Nature of the Amount in Rs. International Transaction

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1 Software development services 420,395,071 2 Provision of Support services 3,219,059 3 Expenses reimbursed 8,901,641

2.5 The assessee has used entity level Transitional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP. The assessee adopted operating profit to total cost (OP/TC) to calculate the Profit Level Indicator (PLI) for calculating margins of the comparables. The assessee had calculated its margin at 14.86%. 2.6 The Ld. TPO rejected the transfer pricing study conducted by the assessee because, the assessee used multiple year data for benchmarking the transaction and for eliminating companies based on qualitative analysis instead of applying quantitative filters. The Ld. TPO conducted independent search for the comparables by using quantitative filters like turnover filter, software development service filter, export earning filter, different financial year filter, employee cost filter, diminishing revenue filter, persistent loss filter, related party filter and onsite revenue filter. Further, the Ld. TPO rejected the additional filters used by the taxpayer like R&D filter. The TPO issued a detailed show cause notice to the assessee indicating the reasons for rejection of TP documentation and the search for appropriate comparables based on different filters. The assessee responded to the show cause notice by making a detailed submission before him. The

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Ld. TPO considered the objections raised by the assessee in his order. 2.7 The draft order u/s 144C was passed and served upon the assessee. The assessee vide his submission dated 25.01.2012, stated to file an appeal before Ld. CIT(A) u/s 246A of the Act. Accordingly, Ld. A.O. passed the final assessment order on 22.02.2012 on the basis of the order passed by Ld. TPO. 2.8 Aggrieved by the assessment order passed by the A.O., the assessee preferred appeal before Ld. CIT(A). Before Ld. CIT(A), it was submitted that there is no dispute in respect of MAM adopted, i.e. TNMM and the assessee had agreed upon OP/OC to be the PLI. The Ld. TPO agreed for an entity level analysis that was carried out by the assessee in TP study. The only issue that was disputed by the assessee was in respect of the comparables selected by the TPO. 2.9 Ld. TPO used 19 new comparables and rejected the entire TP study in respect of comparables selected by the assessee. It was claimed by the assessee that the margin calculated in case of a few comparables were not correct. Therefore, Ld. CIT(A) remanded the issue and asked the Ld. TPO to calculate the same in respect of the comparables selected by the assessee being; (i) Sasken Communication Technologies Ltd., (ii) KALS Information Systems Ltd. and (iii) Softsol India Ltd. The Ld. TPO in his remand report dated 08.10.2012 stated that the calculation of OP/OC of these companies were 13.44%,

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41.94% and 25.59% respectively. He submitted that these figures are before the working capital adjustments. The assessee did not accept the calculation made by the Ld. TPO in the remand report in the case of Sasken Communication Technologies Ltd. KALS Information System and Softsol India Ltd. the assessee objected to the use of Celestial Biolabs as a comparable in this case. The three comparables have been discussed and decided by the Ld. CIT(A) in paras 3.6 to 3.7 of his order, which are as under: “3.6 The appellant has stated that the TPO has used segmental information in this case. While drawing the segmental, an amount of Rs.13,44,913/ - remains unallocated when the segmental accounts are reconciled with the Profit & Loss account of the company. It has to be stated that the appellant challenged this company on the basis of functions performed by this company also. The assessee has also pointed out that in the AY 2009-10, the TPO himself has rejected this company because of segmentals are not drawn correctly. However, the correct calculation of margin of the company is given below after allocating the unallocated expenses on the ratio of revenue of each segment. The revised calculation is given in the Table-3 below: KALS Segmental Margin calculation Assessment Year 2007- 08: Particulars Software Training Total Reference segment Segment Segment A 20,540,68 1,441,904 21,982,589 Page 19 revenue of the Annual report Segment B 6,069,175 (1,568,659) 4,500,516 Page 19 profit of the annual report Total C=A-B 14,471,510 3,010,563 17,482,073 Segment segmental Revenue cost less

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Segment expenses Add D 1,256,696 88,217 1,344,913 Unallocated cost Total Cost E=C+D 15,728,206 3,098,780 18,826,986 Revised F=A-E 4,812,479 (1,656,876) 3,155,603 OP/OC% G=F/E 30.60% -53.47% 16.767%

Total cost as per P & L after A 18,826,986 Page 14 and 17 excluding interest on car loan of annual report Total cost as per segmental B 17,482,073 Please see accounts above Remaining cost not calculated to C=A- 1,344,913 segmental accounts B Allocated in the proportion of D=E4- 1,256,696 Revenue G4

3.7 The appellant had also submitted that Dispute Resolution Panel (DRP), in many cases, has taken the margin of this Company at 30.92%. In view of the above, I hold that the margin of this company should be taken at 30.92% . 3.8 Softsol India Ltd.: The appellant had objected to the calculation of the margin m this case because of the other income which constitutes the rental income. The TPO in his remand report has considered this and recalculated the margin at 25.59% as against 42.15% in the TP order. I have examined the issue and hold that the calculation as corrected by the TPO should be taken in this case.”

2.10 In case of the comparables selected by the TPO being Celestial Biolabs, Ld. CIT(A) upheld the objections raised by the assessee and rejected this company from the final set of comparables. 2.11 The assessee had raised issue regarding disallowance of registration fee and stamp duty expenses of the lease deed before Ld. CIT(A). Ld. CIT(A) relied upon the decision of various High Courts more particularly, list

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in para 4.4 of his order and held that the expenditure should be treated as revenue in nature and should be allowed as deduction u/s 37(1) of the Act. 3. Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before us now on the following grounds of appeal: “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition of Rs.3,39,43,014/- made on account of ALP by the TPO. 2. On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in deleting addition of Rs.23,54,580/- made on account of registration fees an stamp duty expense for lease deed.”

3.1 In respect of Ground No.1, raised, the only issue for consideration is relating to the margin upheld by the Ld. CIT(A) in respect of comparables which are as under: Comparables selected by the assessee: i) KALS Information System ii) Sasken Communication Technologies Ltd. iii) Softsol India Ltd.

3.2 Basically, the assessee is disputing the incorrect margins taken by the Ld. TPO in these comparables and thus, Ld. TPO has not considered the working capital adjustment in respect of these comparables. Apart from these, Ld. CIT(A) had excluded the new comparables which was Celestial Biolabs, as this comparable has been rejected by the DRP in many cases. Before dealing with these comparables, it is necessary sine qua non to discuss the functional profile of the assessee.

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3.3 From the TP study, it is observed that the assessee is a wholly owned subsidiary of Intuite Inc. USA (AE). The assessee started its operation in Oct. 2004, and its role was to manage the parent relationship with the 3rd parties call centers located in India. The main business of the assessee is to provide application development services to the Intuite group. 3.4 Profile of the Group: The Intuit group, founded in 1983, has nearly 8,200 employees with major offices in 16 states across the U.S., and offices in Canada. It is a leading provider of business and financial management solutions for small businesses, accounting professionals and consumers primarily in the USA. It offers financial software and Web-based financial services for consumers and small businesses. Intuit provides software for online tax preparation and filing and online mortgages. Intuit also offers a broad array of tools to help businesses process payroll, manage employees, administer benefit programs and offer retirement plans. Its flagship products and services, such as Quick books, TurboTax, Proseries etc simplify small business management, tax preparation and filing, and personal finance. Intuit continues to expand its tax preparation offerings, providing powerful and easy-to-use products and services to taxpayers and accounting professionals. For individual taxpayers, Intuit offers TurboTaX® software

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and TurboTax for the WebsM, for online tax preparation and filing service. 3.5 The assessee received ‘cost +’ remuneration form Intuite group in lieu of services rendered as per the agreement entered with the AE. The assessee operates as capital service provider and is not exposed to market competition. The assessee, during the year under consideration had transacted with Intuite Inc. USA and Intuite Canada Ltd. for providing business and financial management solution for small business, accounting professional and consumers. The assessee, based on detailed specifications for its AE provide application development services which includes i) development of new version; ii) enhancement and realize AE’s sustenance product; iii) development of new products; iv) technical consultancy of AE; v) debugging; vi) bridging gap and vii) rectifying errors and remove defects. 3.6 Thus, the assessee is a technology diversion company, providing application development and support services. The sale and profitability growth of the assessee depends upon demand of IT industry. It is further observed from the TP study that assessee does not face upon risk in respect of credit / marketing of the products. Since it receives the payments in US$, it bear the risk and it involves in employment of qualified personnel as well as assessee is exposed to employee risk. There is no intangible assets which is owned by the assessee except for computer software worth Rs.84,56,451/-. Thus,

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assessee is a low risk bearing company in respect f international transaction entered into with its AEs. 3.7 On the basis of above functional profile of the assessee, we shall now discuss the comparable disputed by the Revenue due to its exclusion. These comparables were selected by the TPO to be included in the final list of comparables. Before the Ld. TPO, the assessee had objected to the inclusion of this comparable for the reason that it is functionally different from the assessee. The Ld. TPO however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessment year 2007-08. As regards the objection raised in respect of the employee cost filter issue, the TPO Ld. rejected the objections raised by assessee by observing that the employee cost filter is only a trigger to know the functionality of the company.

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(ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in following cases for Assessment Year 2007-08: (a) 3DPLM Software Solutions Ltd. (Successor of Delmia Solutions Private Ltd.) IT (TP) A No.1303/Bang/2012 (b) M/s. AT&T Global Business Services India Pvt. Ltd. IT(TP)A No.1604/Bang/2012 (c) Interwoven Software Services India (P) Ltd. IT (T) A No.1669/Bang/2012 (d) Mercedes-Benz Research & Development India Pvt. Ltd. IT (TP)A No.1336/Bang/2012. (e) LG Soft India Pvt. Ltd. in I.T.A.No. 112/Bang/2011 (f) CSR India Pvt. Ltd. In IT(TP)A No.1119/Bang/2011 (g) Transwitch India Pvt. Ltd. in I.T.A.No. 6083/Del/2010.

(iii) A Co-ordinate bench of this Tribunal in its order in the case of Triology E-Business Software India Pvt. Ltd. in I.T.A.No. 1054/Bang/2011 has had observed about this company as under:

“….As explained earlier, it is a diversified company and therefore, cannot be considered as comparable functionally with the assessee. There has been no attempt to identify, eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustments, the TPO has rendered this company as not qualifying for comparability. We, therefore, accept the plea of the assessee in this regard.” (iv) Ld. A.R. submitted that the facts pertaining to this company has not changed from Assessment Year 2007-08 to Asstt Year 2OO8-09 and therefore this company cannot

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be considered for the purpose of Comparability in the instant case and hence ought to be rejected.

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6.1 Apart from relying on the afore cited judicial decisions, the assessee has brought on record substantial factual evidence to establish that this company is functionally dissimilar and different from the assessee before us. Even the Ld. CIT(A) has discussed at para 3.8.2 6.2 We do not find any infirmity in the findings of Ld. CIT(A). We thus direct the Ld. TPO to exclude this comparable form the list of comparables. 6.3 In respect of the margins calculated in respect of Sasken Communication Technologies Ltd., KALAS Information Systems Ltd. And Softsol India Ltd., the Ld. CIT(A) had directed to grant working capital adjustments. In the remand report, the Ld. A.O. did not follow the directions of Ld. CIT(A). 6.4 Ld. CIT(A) thus accepted the margins submitted by the assessee, which is in accordance with the margins considered by DRP in many cases. 6.5 We have perused the submissions advanced by both the parties. When the assessee has brought forward business losses as well as unabsorbed depreciation, the Act specifies a sequence in which these allowances shall be set off. The relevant provisions of the Act are as under: “section 32 (2):

Where in the assessment of the assessee, full effect cannot be given to any elements under subsection (1) in any

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previous year, owing to there being no profits or gains chargeable for the previous year, or owing to the profits or gains chargeable being less than the elements, then, subject to the provisions of subsection (2) of section 72 and section (3) of section 73, the allowance or the part of the elements to which effect has not been given, as the case may be, shall be added to the amount of the allowance of depreciation for the following previous year and deemed to be part of that elements, or if there is no such relevance for that previous year, or deemed to be the allowance for that previous year, and so on for the succeeding previous years.

Section 72 (2):

Where any allowance or part thereof, under subsection of subsection (2) of section 32 or subsection (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section.”

6.6 A combined reading of the above sections it is clear that while computing total income of an assessee, carry forward unabsorbed depreciation can be set off in future years only after setting off the brought forward business losses. Further the provision is clear that carry forward unabsorbed depreciation can be set off not only against income from profits and gains from business and profession, but also against income from any other head including income from other sources.

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6.7 In the present case before us the assessee has brought forward business losses as well as unobserved depreciation. The act specifies the sequence in which these allowances can be set off. Section 72 (3) implies that, the set off of unobserved depreciation as per section 32 (2) against business income shall be given effect to only after setting off the brought forward business losses. From the calculation made by the Ld.AO, it is observed that the Ld.AO has adjusted the amount of unobserved depreciation from the business income before making adjustment for brought forward business losses. The circular relied upon by the Ld.AR is not applicable to the present case under consideration as it is applicable where the set off each to be made against the profits of a STP/EOU/SEZ unit, before the deduction under section 10 A/10 B of the Income tax Act is allowed.

6.8 We accordingly direct the Ld.AO to allow the set off as per law. Accordingly this ground raised by the assessee stands allowed.

Ground No. 2: 7. The assessee in its return of income had claimed deduction of rent and rates expenses of Rs.13,,42,841 /- under section 37 (1) of the act. During the course of assessment proceedings the Ld. AO called for the details

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of the rates and taxes expended as debited in the P&L account. The assessee furnished the requisite details wide letter dated 21st of December 2011. The assessee was asked to explain as to why the stamp duty and registration expenses of the lease deed should not be capitalised. The assessee relied upon various judicial pronouncements in support of its contention that the expenses incurred towards stamp duty and registration of the lease deed east to be considered as revenue expenditure. 7.1 The Ld. AO disagreeing with the submissions made by the assessee held that since the premises were taken on lease for 6 to 9 years which will give enduring benefits to the assessee is the expenses incurred towards stamp duty and registration cannot be allowed as revenue expenditure. The Ld. AO held that such expenditure have to be capitalised with the block of assets on which the assessee is entitled for depreciation of 10%. Accordingly the Ld. AO allow depreciation at the rate of 10% and disallowed the balance amount of Rs.23,54,580/-. 7.2 Aggrieved by the assessment order the assessee preferred an appeal before the Ld. CIT (A). The Ld. CIT (A) after considering the submissions and the judicial decisions relied upon by the assessee allowed the claim of claim of expenses incurred by the assessee by way of stamp duty and registration charges on the lease deed to be revenue in nature.

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7.3 Aggrieved by the order of the Ld. CIT (A) the revenue is in appeal before us now. 7.4 The ld. DR placed his reliance upon the order passed by the Ld.AO and Ld.AR placed is reliance upon the order passed by the Ld. CIT (A). 7.5 We have perused the orders passed by the authorities below and the judgments relied upon by the Ld. CIT (A). Section 37 (1) of the act, deduction is allowable in respect of any expenditure not being in the nature of capital expenditure or personal expenses of the assessee, laid out on expended wholly and exclusively for the purposes of business or profession of the assessee. It is observed that the Ld. CIT (A) has placed his reliance upon the decision of Honble Bombay High Court in the case of CIT vs. Cincetia Pvt. Ltd reported in 137 ITR 652, which has been followed subsequently by Honble Madras High Court in the case of Shree Krishna Tiles and Potteries Madras Pvt. Ltd. Vs. CIT reported in 173 ITR 311. Hon’ble Madras High Court in Srikrishna Tiles (supra), has disagreed with the decision of Hon’ble Karnataka High Court in the case of Hotel Raj Mahal vs. CIT reported in 152 ITR 218. It has been held by Hon’ble Madras High Court that Hon’ble Karnataka High Court while dealing the issue has really not discuss the matter in detail but held that went for the 1st time the assessee enters into a lease deed securing lease holding rights for a long period, the expenditure incurred on stamp duty, registration and

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legal fees etc should be treated as expenditure of capital nature. The Hon’ble Bombay High Court and Hon’ble Madras High Court has held that: “…. the period of the lease could not be regarded as decisive of the circumstances as to whether the asset or advantage secured was an enduring nature.” 7.6 While holding so Hon’ble Bombay High Court placed its reliance on CIT vs. Hoechst Pharmaceuticals Ltd reported in 113 ITR 877 and CIT vs. Bombay Cycle & Motor Agency Ltd., reported in 118 ITR 42. 7.7 Respectfully following the afore stated decisions of Hon’ble High Courts, we are of the considered opinion that the Ld. CIT (A) was right in allowing the claim of the assessee to treat the stamp duty and registration expenses as revenue expenditure. 7.8 Accordingly the ground No. 2 raised by the revenue stands dismissed. 8. In the result appeal filed by the revenue stands dismissed. Order pronounced in the open court on 25th July, 2016

Sd./- Sd./- (PRAMOD KUMAR) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Date:25.07.2016 Sp.

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