LOGICA PVT LTD,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI NARENDRA KUMAR CHOUDHURY, JUDICIAL MEMBER IT(TP)A No.1621/Bang/2014 Assessment year : 2009-10 M/s. Logica Private Limited Deputy Commissioner of Income (Now merged with CGI Information Vs. Tax, Systems and Management Circle-11(5), Consultants Private Limited) Bangalore E-City, Tower 2, 95/1 & 95/2, Electronic City Phase 1 (West), Bangalore PAN: AAACL3330M APPELLANT RESPONDENT

IT(TP)A No.1664/Bang/2014 Assessment year : 2009-10 Asst. Commissioner of Income M/s. Logica Private Limited (Now Tax, Vs. merged with CGI Information Systems and Management Circle-2(1)(1), Consultation Private Limited) Bangalore E-City, Tower 2, 95/1 & 95/2, Electronic City Phase 1 (West), Bangalore PAN: AAACL3330M APPELLANT RESPONDENT

Assessee by : Shri T. Surya Narayana, Advocate Revenue by : Ms. Neera Malhotra, CIT-DR II

Date of hearing : 10-03-2016 Date of Pronouncement : 18-03-2016 O R D E R Per B. Ramakotaiah, Accountant Member These cross-appeals are by Assessee and Revenue on the order of the Ld. Commissioner of Income Tax (Appeals)-IV, Bangalore dated 17-10-2014 on the issue of Transfer Pricing and other corporate issues.

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 2 of 21

contract software development services (Application management) and

provision of ITES Infrastructure Management Services to Logica group

companies. Assessee has two areas of operation and its international

transactions are as under:

Particulars Amount in Rs. Outcome of TP order Provision of SWD 323,49,75,252 Adjustment of Rs. 24,63,25,395/- Provision of ITeS 63,03,93,353 Adjustment of Rs. 4,03,38,142/- Reimbursement of expenses 7,70,20,731 Accepted to be at arm’s length Management fee written back 5,50,16,833 Accepted to be at arm’s length Interest on unsecured loan 16,78,381 Accepted to be at arm’s length

of OP/OC and reported income of Rs. 323.49 Crores was considered arm’s

length by selecting TNMM as most appropriate method, 17 comparable

companies whose OP/OC was arrived at 13%.

and reported income of Rs. 63.03 Crores was considered as Arm’s Length

in the TNMM method by selecting 14 comparables with a mean of 11%.

and for other reasons. He adopted a different filters, selected databases

and finally selected 11 companies with an arithmetic mean of 24.05% after

working capital adjustment and proposed an adjustment of Rs.

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 3 of 21

24,63,25,398/- in SWD. Likewise, in ITES division, the TPO selected 8 comparables with an Arithmetic mean of 25.22% after working capital adjustment and proposed Rs. 4,03,38,142/- as an adjustment. Ld.AO has passed the order making the above two additions under TP provisions. In addition, the AO also disallowed software license fee paid as capital expenditure to an extent of Rs. 3,02,80,510/-. While computing tax liability, AO did not give credit of TDS to an extent of Rs. 2.61 Crores. He also recomputed deduction u/s. 10A by reducing some expenditure from export turnover.

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 4 of 21

Revenue’s Appeal in IT(TP)A No. 1664/Bang/2014:

8.1. This issue is already decided in favour of assessee in various

decisions. AO has disallowed certain expenditure pertaining to delivery of goods outside India and re-worked out the export turnover while calculating

deduction u/s. 10A. However, he has not reduced the same from the total turnover. CIT(A) directed the AO to treat the same for the purpose of total

turnover also and to exclude them, following the decision of ITAT in the

case of Tata Elxsi. Revenue is aggrieved on that. It is admitted that on a parity of comparison, whatever is reduced from the export turnover has to

be reduced from the total turnover and this principle was accepted by the jurisdictional Karnataka High Court in the case of CIT Vs. Tata Elxsi

Ltd.,342 ITR 98(Kar) which the Ld CIT(A) has followed. We do not see any reason to interfere with the above. CIT(A) direction that whatever is

excluded from the export turnover should also be excluded from the total

turnover is upheld. Revenue’s grounds on this issue are accordingly dismissed.

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 5 of 21

9.1. After considering the rival contentions, we see no reason to interfere

from the findings of Ld.CIT(A). The CIT(A) rightly held that the turnover of comparable companies ought to be within a range of Rs. 1 Crore to Rs.

2000 Crore in relation to the SWD segment of assessee as its turnover for the SWD segment for FY. 2008-09 was Rs. 323 Crores, and that, in

relation to its ITeS segment, as its turnover was Rs. 63 Crores, only those companies whose turnovers fell within a range of Rs. 1 Crore to Rs. 200

Crores ought to be retained, by following this Tribunal’s decision in the

case of Genisys Integrating Systems India (P) Ltd., Vs. DCIT [15 ITR (Trib) 475], apart from other decision in Kodiak Networks Vs. ACIT [15 ITR (Trib)

610] and Trilogy E-Business Software India Pvt. Ltd., [23 ITR (Trib) 464], which are all binding on the CIT(A). There is no error in the order of the

CIT(A). Accordingly, the above grounds raised by the Revenue, which in

any event is misconceived insofar as assessee’s SWD segment is concerned, are liable to be rejected. Even otherwise, as regard assessee’s

SWD segment, Infosys Ltd., has been held to be functionally dissimilar to a software development service provider by this Hon’ble Tribunal in Cisco

Systems (India) Private Limited Vs. DCIT [IT(TP)A No. 271/Bang/2014] therefore the same gets excluded on functionality aswell.

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9.2. Further, in relation to assessee’s ITeS segment, Infosys BPO Ltd., has been held to be functionally dissimilar by this Tribunal in Minteck

(India) Ltd., Vs. DCIT [IT(TP)A No. 70/Bang/2014]. Also, Aditya Birla Minacs Ltd’s related party transactions for FY. 2008-09 constituted 15.68%

of its total revenues for that year and, accordingly, in the light of this

Tribunal’s decision in 24/7 customer.com Vs. DCIT [ITA No. 227/Bang/2010], it ought to stand excluded from the final list of

comparables. In view of the above, we reject the Revenue’s grounds.

Assessee’s Appeal in IT(TP)A No. 1621/Bang/2014:

well as corporate issues. In the TP issues, the contentions are confined to selection of certain comparables and in corporate tax issues, the claim of

software license expenditure as revenue. These are dealt with as under.

In the course of present appeal, assessee’s contentions on RPT filter are not pressed. Consequently, rejection of L&T Infotech and Allsec

Technologies Ltd., were not pressed.

Software Devolopement Services:

Sl No. Name of the company Margin % 1. Akshay Software Technologies Ltd 9.05 2. Bodhtree Consulting Ltd 62.03 3. KALS Info Systems Limited 12.94 4. Larsen & Turbo Infotech Ltd 25.47

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 7 of 21

segment:

i. Bodhtree Consulting Ltd. ii. KALS Info Systems Limited. iii. Tata Elxsi Ltd.

It was submitted that these are considered and rejected in (1) Mindteck

(India) Ltd.vs DCIT in ITA(TP) no 70/Bang/2014, (2) M/s. CISCO Systems

(India) Private Ltd., in IT(TPA) No 271/Bang/2014 (3) 24/7 Customer Care

Pvt. Ltd., in IT(TPA) No 227/Bang/2011.

11.2. The above three comparables were already considered and rejected

in M/s. CISCO Systems (India) Private Ltd., in IT(TP)A No. 271/Bang/2014

dt. 14-08-2014 by the Co-ordinate Bench and the decision is as under:

“26. COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee’s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 8 of 21

Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 IT(TP)A No.271/Bang/2014 Page 18 of 61 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company. 26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- “11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 9 of 21

does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk; (iii) the company has generated several inventions and filed for many patents in India and USA; (iv) the company has substantial revenues from software products and the break up of such revenues is not available; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in ‘AUTOLAY’, a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly.” The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned.

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Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- “(d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal’s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: “16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds.” Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable.”

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 11 of 21

Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable. 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee’s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013”.

11.3. Since the objections of assessee are similar and facts being same

AO/TPO is directed to exclude the above three companies.

11.4. Assessee seeks to include two companies Thinksoft Global Services

Private Limited (‘Thinksoft’ for short) and FCS Software Solutions Private

Limited (‘FCS Software’ for short). The said two companies were initially

proposed as comparables by the TPO in her show cause notice dt. 14-11-

2012 (page 789 of the Paper Book), but were subsequently not included as

comparables by the TPO despite assessee having accepted the said

companies as comparables. The TPO having accepted that the said

companies are functionally similar to assessee, excluded them on the sole

ground that when their respective working capital adjustment is coming to

more than 4%. It is submitted that the ad hoc rejection of the said

companies on the ground of working capital impact of more than 4% on

profit has no basis in law and is, therefore, liable to be set aside as the said

companies satisfied all the filters applied by the TPO and there having

been no filter applied by the TPO to the above effect, their exclusion is

unsustainable. The working capital adjustment has been arrived at on the

basis of a scientific calculation and by adopting the methodology prescribed

by the OECD Guidelines. Thus, once a working capital adjustment is

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 12 of 21

arrived at in the manner prescribed by law, the consequences of such an adjustment on a comparable’s profit margin cannot be a reason for its

exclusion. It is submitted that in case of a third party comparable, the working capital funding is lent from a bank, for which the company pays

interest and the costs related to such finding is also passed on to the third

party customers. In case of assessee, however, AEs had provided the funds for operations and thus assessee did not have to rely on working

capital funding from banks. In any event, merely because of a working capital impact of over 4%, the said companies cannot be characterized as

being engaged in the provision of financing activities, as has been held by the TPO in her order. It is submitted that Thinksoft and FCS Software are

comparable companies which ought not have been excluded from the list of

comparables. Moreover, the TPO has, vide the TP order, accepted that they are functionally comparable to assessee. Since they are comparables

which were proposed by the TPO herself, it is evident that the said companies have passed all the filters applied by the TPO in her study.

Thus, for the foregoing reasons, it is submitted that the said companies

ought to be considered as comparables to assessee.

11.5. Inclusion of these two companies on similar submissions was

already considered in the decision of ARM Embedded Technologies Pvt. Ltd., in ITA No. 1659/Bang/14 dt. 31-08-2015 for the same assessment

year as under:

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 13 of 21

“20. Coming to the ground for inclusion of M/s. Thinksoft Global Solutions Ltd and FCS Software Solutions Ltd, we find that TPO herself had suggested these in the show cause notice, but had thereafter come to a conclusion that working capital adjustment required for these two companies exceeded 4% of profits and could not be therefore taken as proper comparables. Reasons given by the TPO for excluding these two companies, appear at paras 3.6.5.1, of her order which reads as under :

b) Two companies proposed in the show-cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin gets distorted. It may not be out of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded.

We cannot say that the ‘other income’ arose out of any financial services done by the assessee and would take away the sheen of its software services income. The amount, in our opinion, was insignificantly small and not enough to warrant a conclusion that its operating margins had come not from its core operational activities.

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 14 of 21

services was Rs.1902547907/-. As against this, miscellaneous income was only Rs.7875588/-. Break-up of such miscellaneous income as given at schedule M, placed at paper book page. 328 reads as under :

Interest .. 2,875,685 Rent income .. 4,515,000 Amount W/Back .. 484,902 7,875,588 23. Compared to the software development services income, interest received by M/s. FCS Software Solutions Ltd, was in our opinion, insignificantly small. Thus the reasoning given by TPO for rejecting these two companies as proper comparables, was in our opinion, incorrect. We set aside the orders of the lower authorities in this regard and direct these two companies to be included in the list of comparables for working out the average PLI”. Respectfully following the above decision we direct the TPO to include them in the list of comparable companies for working out average PLI.

IT Enabled Services:

Sl No. Name of the company RPT % 1. Microland Ltd (Both segments) 1.65% 2. Allsec Technologies Ltd., 15.82% 3. Accentia Technologies Ltd., 0% 4. Informed Technologies India Ltd., 9.82% 5. Cosmic Global Ltd., 0% 6. E-clerx Services Ltd., 13.76%

12.1. Assessee is objecting to the inclusion of three comparables: (1)

Accentia Technologies Ltd., ; (2) Cosmic global : (3) E-clerx Services Ltd.,

on the basis of decisions of Capital IQ in ITA No. 170/Hyd/2014 and other

decisions.

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12.2. Co-ordinate Bench at Hyderabad has already considered (one of us,

AM is the author) the same comparables in the case of Capital IQ

Information Systems (India) P. Ltd., in ITA No. 124/Hyd/2014 dt. 31-07-

2014 as under:

i. Accentia Technologies Limited: 21. This company was objected to by assessee on the reason of super profits as well as extra-ordinary events. It was submitted that acquisition of Oak Technologies & Trans Services has impact on the profits of the company and has taken inorganic growth as strategy to increase the profits because of the peculiar economic circumstances and brand value. The same in these circumstances cannot be selected. It was submitted that assessee was in medical transcription services. 21.1. The Departmental Representative however, objected to the pleas of assessee stating that the extraordinary events occurred in earlier year and therefore, the same cannot be considered as having any impact in the year under consideration. 21.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected. (ii) Cosmic Global Ltd. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee’s TP study, it has raised objection before the TPO that this company’s employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges,and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the

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coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- “13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at Rs.7.37 crore divided into three segments, namely, Medical transcription and consultancy services at Rs.9.90 lacs, Translation charges at Rs.6.99 crore and Accounts BPO at Rs.27.76 lac. The ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs.3.00 crore, which is strictly inthe realm of the Translation segment, revenues from which are to the tune of Rs.6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment. 13.3. However, we find this case to incomparable on the alternative argument advanced by the ld. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs.27.76 lacs. We have discussed this aspect above in the context of CG-VAK’s case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs.86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs.27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables.”

In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. iii. Eclerx Services Ltd. 18. The objection of assessee to this comparable is that this company is functionally dissimilar. It is in the business of consultancy and advisory service and provides only analytical data. It is also involved in quality monitoring. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. Therefore, the functions of the above company are dissimilar to assessee, which is a captive service provider. On the principles laid down by the Hon’ble Special Bench of the

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ITAT (Mumbai) in the case of Maersk Global Centres (India) Pvt. Ltd. V/s. ACIT (ITA No.7466/Mum/2012 for assessment year 2008-09 dated 7.3.2014) and the principles laid down by the coordinate bench of the Tribunal(Delhi) in the case of M/s. Mercer Consulting (India) Pvt. Ltd., (supra), assessee submits that this company cannot be selected as a comparable. 18.1 The Learned Departmental Representative, however, submitted that having accepted Aditya Birla Minacs Worldwide Ltd., as a comparable company, this company should also be included, as otherwise, both the companies should be excluded. 18.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee’s services. We therefore, direct the Assessing Officer/TPO to exclude this company.

12.3. Respectfully following the above, we direct the TPO to exclude the

above comparables and arrive at the addition, if any, on the basis of

provisions of Section 92C. Ordered accordingly.

Corporate Tax issues:

licenses as ‘capital in nature’ and not giving credit of TDS by the AO.

Software Licenses :

incurred towards purchase of licenses for computer software used primarily

as application software for various projects undertaken by it. Assessee has

treated the said expenses as revenue in nature and claimed deduction of

the entire amount but the AO took the position that the expenses are

capital in nature and therefore disallowed the entire expenses as capital

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 18 of 21

expenditure. The assessee’s arguments are that the software licenses procured by it are renewable year after year and the software itself is

applied in projects undertaken by assessee and once the project is concluded there is no further use of the software. Assessee also submits

that the nature of software procured is such that it becomes obsolete in a

very short period of time and there is no enduring benefit or advantage i.e., derived by assessee from such software and therefore the expenses

incurred for such software licenses is revenue in nature and not capital. Assessee relies on the decisions of the Hon'ble Tribunal in the case of IBM

India Private Ltd., Vs. CIT – (2007) [290 ITR (AT) 183 (Bang) and Amway India Enterprises Vs. DCIT – (2008) [301 ITR (AT) 1 (Del). For the AY.

2007-08, in assessee’s own case, this Hon'ble Tribunal in IT (TP) No.

1129/Bang/2011], in paras 42 to 46 at pages 47-48, has set aside the assessment order and remanded the issue for fresh consideration in the

light of the principles laid down by the Special Bench in Amway India Enterprises Vs. DCIT. Thereafter, the AO asked assessee to make

submissions justifying the claim of software expenses as revenue

expenditure. Assessee made various submissions as required by the AO. On perusal of the submissions, the AO in the final assessment order, in

paras 6.1 to 6.6 at pages 6 to 9, allowed the claim of software expenses as revenue expenditure. Also, the Hon'ble Tribunal in IT(TP)A No.

1192/Bang/2012, in paras 5 to 6 at pages 3 and 4, in assessee’s own case for AY. 2008-09 has held that the software expense incurred by assessee

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 19 of 21

in the relevant assessment year are similar to the expenses claimed by assessee during the AY. 2007-08 and hence are revenue in nature.

14.1. Since the issue is covered in favour of assessee in earlier years, the

claim of assessee as revenue expenditure is acceptable. However, as seen from the order of Ld.CIT(A), even after noticing the judgment of

jurisdictional High Court he did not grant the benefit in the absence of details. Before us, Learned Counsel submitted that most of the

expenditure is on microsoft licenses which are renewable on an yearly basis. This aspect require examination by AO. Consequently, while

accepting the principle that software licenses are revenue in nature,

examination of expenditure claim is restored to the file of AO. AO after due verification should allow the expenditure accordingly.

TDS:

the AO has restricted the claim of the company to Rs. 45,20,737/-. In this regard, the Ld Counsel placed reliance on the decision of Allahabad High

Court in the case of Rakesh Kumar Gupta [TS-321-HC-2014 (ALL)],

wherein it was held that the mismatch of Tax Deducted at Source (TDS), with the details shown in Form 26AS, is not attributable to the taxpayer,

and the fault solely lies with the deductor. Further, the Allahabad High Court referred to the Delhi HC ruling in a PIL in the ‘Court on its own

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 20 of 21

motion’ Vs. CIT [2013 (352 ITR 273)] gave directions. Pursuant to the Delhi High Court decision, the CDBT issued Instruction No. 5 of 2013,

dated July 8, 2013, directing that where assessee approaches AO with requisite details and particulars in the form of TDS certificate as an

evidence against any mismatch amount, AO sould verify whether or not the

deductor had made TDS payment in the government account and, in the event, the payment had been made, credit of the same would be given to

assessee. It is therefore prayed that the AO be directed to verify and allow the entire claim of TDS amounting to Rs. 2,61,44,238/- as claimed by the

company in its return of income.

15.1. Since the issue is one of verification, we direct the AO to undertake the exercising of verification and allow credit, keeping in mind the Board

Circular 5 of 2013 and principles laid down by the High Courts (supra) and allow the credit as claimed based on TDS certificates. Ordered accordingly.

and Revenue’s appeal is dismissed.

Pronounced in the open court on this 18th day of March, 2016

Sd/- Sd/- (NARENDRA KUMAR CHOUDHURY) (B. RAMAKOTAIAH) Judicial Member Accountant Member Bangalore, Dated, the 18th March, 2016 TNMM

IT(TP)A Nos. 1621 & 1664 /Bang/2014 Page 21 of 21

Copy to: 1. Appellant 2. Respondents 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file

By order

Assistant Registrar, ITAT, Bangalore.