Income Tax Appellate Tribunal - Bangalore
Honeywell Technology Solutions Lab ... vs Assessee on 12 February, 2013
IT(TP)A.1344/Bang/2011 Page - 1
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'A', BANGALORE
BEFORE SHRI. N. BARATHVAJA SANKAR, VICE PRESIDENT
AND
SHRI. GEORGE GEORGE K. JUDICIAL MEMBER
I.T(TP).A No.1344/Bang/2011
(Assessment Year : 2007-08)
M/s. Honeywell Technology Solutions Lab P. Ltd.,
151/1, Doraisaripalya, Bannerghatta Road,
Bangalore 560 076 .. Appellant
PAN : AABCC0258Q
v.
Deputy Commissioner of Income-tax,
Circle - 11(4), Bangalore .. Respondent
Appellant by : Shri. Rajan Vora, CA
Respondent by : Shri. S. K. Ambastha, CIT-I, DR
Date of hearing : 12.02.2013
Date of pronouncement : 28.03.2013
ORDER
PER N. BARATHVAJA SANKAR, VICE PRESIDENT :
This is an appeal preferred by the assessee, M/s. Honeywell Technology Solutions Lab P. Ltd., Bangalore, for the assessment year 2007-08 against the assessment order dated.13.10.2011, of the DCIT, Circle -11(4), Bangalore.
02. Briefly stated, the facts of the case are that Honeywell Technology Solutions Lab P. Ltd., (hereinafter referred to as HTSL), IT(TP)A.1344/Bang/2011 Page - 2 is a private limited company incorporated in Bangalore and is a wholly owned subsidiary of Honeywell International Inc. USA. The assessee is engaged in the development of software, primarily for its parent company and other Honeywell group of companies, specifically high-end software engineering product development and technology development for the aerospace and automation control business. For the A.Y.2007-08, the assessee filed its return of income on 31.10.2007 declaring total income of Rs.8,39,46,266/- after claiming deduction u/s.10A, amounting to Rs.50,75,75,651/- and deduction u/s.80JJAA amounting to Rs.11,09,95,555/-. In the proceedings u/s.143(3) r.w.s.144C, the Assessing Officer and the TPO proposed certain corporate tax and transfer pricing adjustments to the returned income of the assessee which were incorporated in the draft assessment order dated.20.12.2010, The Assessing Officer made the following additions/disallowances to the total income of the assessee :
Sl Nature of addition/disallowances Amount Amount No (Rs,) (Rs,) 1a Reduction of the following amounts from 'export turnover' for computing deduction u/s.10A of the Act
-Data link charges 2,35,08,825
-Certain expenditure incurred in 33,09,33,846 foreign currency 1b. Reduction in total 10A 3,74,32,089 deduction(Rs.59,75,75,651 -
Rs,56,01,43,562
2. Capitalisation of expenses 3,83,71,306 IT(TP)A.1344/Bang/2011 Page - 3 incurred on purchase of software debited to the Profit & Loss account
3. Disallowance of entire deduction 11,09,95,555 u/s.80JJAA
4. Additions made on account of TP 49,23,67,726 adjustments Thus the total taxable income determined in the draft assessment order was Rs.74,96,05,889/-, as against the returned income of Rs.8,39,46,266/-. The matter also became the subject matter of the order u/s.92CA of the IT Act by the TPO by order dated.14.10.2010.
After considering the submissions of the assessee's counsel, the Assessing Officer passed the final assessment order dated.13.10.2011. Aggrieved by this order, assessee is in appeal before us.
03. At the time of hearing, the learned Chartered Accountant Shri. Rajan Vohra, appeared and argued on behalf of the assessee. He has filed various paper books, charts, case laws etc., on record.
04. Now let us take up the issue relating to transfer pricing adjustment, grounds of appeal relating to which are reproduced under :
"Assessment and reference to Transfer Pricing Officer are bad in law
8. The final order issued by the learned DCIT is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the learned DCIT is bad in law insofar as the fact that the DCIT did not issue IT(TP)A.1344/Bang/2011 Page - 4 to HTSL, a show cause notice, as per proviso to section 92C(3) of the Act.
9. The learned DCIT has erred in making a reference to the Transfer Pricing Officer ("TPO"), inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The learned DCIT also erred in not following the provision contained in section 92CA(1) of the Act.
The fresh comparable search undertaken by the TPO is bad in law
10. The learned TPO/ DCIT erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises.
11. On the facts and in the circumstances of the case and in law, the TPO/ DCIT erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions, which is a pre- requisite condition to make any adjustment under the provision of Chapter X of the Act.
Comparability analysis adopted by the TPO/ DCIT for determination of arm's length price
12. The learned TPO/ DCIT grossly erred on facts in benchmarking the transactions of the captive software services of the Appellant with companies operating as full-fledged entrepreneurs, without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-à-vis comparable companies.
13. The learned TPO/ DCIT erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study, without considering the functional and risk analysis of the Appellant.
14. The learned TPO/ DCIT erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability.
IT(TP)A.1344/Bang/2011 Page - 5
15. The learned TPO/ DCIT grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules, 1963 and arbitrarily applying a 25% related party criteria in accepting/ rejecting comparables.
16. The learned TPO! DCIT also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2007).
17. The learned TPOI DCIT erred on facts in arbitrarily rejecting companies having employee cost less than 25% of the operating revenue.
18. The learned TPO/ DCIT also erred on facts in arbitrarily rejecting companies having export revenues less than 25% of their total sales.
19. The learned TPOI DCIT erred on facts in arbitrarily rejecting companies having onsite revenue more than 75% of the export revenue.
20. The learned TPO/ DCIT grossly erred on facts in arbitrarily rejecting companies having software development revenue less than 75% of total operating revenue and inconsistently applying such filter, without considering the specific segmental results.
21. The learned TPO/ DCIT also erred on facts in arbitrarily rejecting companies based on their financial results without considering the functional comparability.
22. The learned TPO/ DCIT erred on facts and in law in considering a set of 'secret data', (i.e. data which was not available in public domain), in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified.
Erroneous data used by the TPO/ DCIT
23. The learned TPO/ DCIT has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant.
IT(TP)A.1344/Bang/2011 Page - 6
24. The learned TPO/ DCIT erred in law in not applying the multiple-year data while computing the margin of alleged comparable companies.
Non-allowance of appropriate adjustments to the comparable companies
25. The learned TPO! DCIT erred in law and on facts in not allowing appropriate adjustments under Rule l0B to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the Appellant and the comparable companies.
26. The learned TPO/DCIT erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant."
Though the assessee has taken various grounds as narrated above, the learned representative mainly argued the grounds relating to turnover filter and filter relating to functionally different companies.
05. The assessee undertook a transfer pricing study for establishing the arm's length price of its international transactions with the Associated Enterprises (AEs). The transfer pricing study was carried out by an independent external consultant in accordance with the provisions of the Act, read with Income-tax Rules 1962. An analysis was undertaken to determine the functions performed, risks assumed and assets utilized (FAR analysis) by the assessee and its AEs in respect of the international transactions between them. Based on the TP study, the independent external consultant concluded that the price charged by the assessee in respect of its international transaction with IT(TP)A.1344/Bang/2011 Page - 7 AEs is at arm's length. The key features of the TP study undertaken for software services are as under :
As per the functional analysis, the assessee was categorized as a 'risk mitigated service provider' and selected as the tested party.
TNMM was determined as the most appropriate method to determine the ALP. The search was conducted on Prowess database and Capitaline database to select comparable companies. Given the nature of the international transactions under review, economic conditions, differences in business or product life cycles and other relevant factors and also the fact that financial data for the financial year 2006-07 was not available in all cases, financial data for financial years 2004-05 and 2005-06, wherever available, was also considered. The searches on the databases yielded a set of 17 comparables for software services, with weighted average operating profit/operating cost of 10.86%. As the operating margin of the assessee was 15.07% on operating cost (i.e., higher than the arithmetic mean margin of the identified comparables), the international transaction was considered to be at arm's length from an Indian TP regulations' standpoint. The comparables ultimately selected by the assessee are as follows :
Sl Name of the company 2005 2006 2007 Average No 1 Akshay Software 7.68% 7.07% NA 7.38% Technologies Ltd
2. Brels Infotech Ltd 2.46% NA NA 2.46% IT(TP)A.1344/Bang/2011 Page - 8
3. Dynacons Systems 2.83% 3.17% NA 3.00%
4. Melstar Infotech -9.06% 1.39% NA -3.84%
5. Orient Information 15.37% - NA -0.65% Technology Ltd 16.66%
6. Quintegra Solutions Ltd., 12.81% 14.95% NA 13.88%
7. R S Software (India) Ltd 8.08% 15.69% 13.55% 12.44%
8. Ranklin Solution 5.80% 7.55% NA 6.68%
9. SIP Technologies & Exports NA 21.99% NA 21.99% Ltd
10. Sankhya Infotech Ltd 27.73% 25.81% NA 26.77%
11. Shree Tulsi Online.Com Ltd 1.75% 2.82% NA 2.29%
12. Systemlogic Solutions Ltd 26.52% 30.94% NA 28.73%
13. Tutis Technologies Ltd 7.28% 10.85% NA 9.07%
14. V & K Softech Ltd 16.33% 1.49% NA 8.91%
15. VJIL Consulting Ltd 8.26% 9.86% NA 9.06%
16. Visualsoft Technologies Ltd 16.10% 13.29% NA 14.70%
17. Bodhtree Consulting Ltd 26.47% 17.18% NA 21.83% Average (Arithmetic Mean) 11.03% 10.46% 13.55% 10.86%
06. The assessee made various submissions before the TPO to justify the arm's length nature of its international transaction. While determining the ALP of the assessee in relation to the software services to its AEs, the TPO did not accept the economic analysis undertaken by the assessee and conducted a fresh economic analysis and undertook a fresh analysis, for which the TPO chose the following 26 companies as comparables :
Turnover Gross No. Name of the Company Margin 1 Accel Transmatic Ltd.(Segment) 9.68 21.11 2 Avani Cimcom Technologies Ltd 3.55 52.59 3 Celestial Labs Ltd. 14.13 58.35 4 Batamatics Ltd 54.51 1.38 5 E-Zest Solutions Ltd. 6.26 36.12 Flextronics Software Systems Ltd. 848.66 6 25.31 (Segment) IT(TP)A.1344/Bang/2011 Page - 9 7 Geometric Ltd. (Segment) 158.38 10.71 Helio c Matheson Information 178.63 36.63 8 Technology Ltd.
9 iGate Global Solutions Ltd 747.27 7.49 10 Infosys Technologies Ltd 13,149.00 40.30 11 Ishir Infortech Ltd. 7.42 30.12 12 KALS Information Systems Ltd. 2.00 30.55 13 LGS Global Ltd. 45.39 15.75 14 Lucid Software Ltd 1.70 19.37 15 Media Soft Solutions Pvt. Ltd 1.85 3.66 16 Megasoft Ltd 139.33 60.23 17 Mindtree Ltd 590.35 16.90 18 Persistent Systems Ltd 293/75 24.52 19 Quintegra Solutions Ltd 62.72 12.56 20 R 5 Software (India) Ltd 101.04 13.47 21 R Systems International Ltd(Segment) 112.01 15 07 Sasken Communication Technologies 343.57 22 22.17 Ltd(Segment) 23 S I P Technologies & Exports Ltd 3.80 13.90 24 Tata Elxsi Ltd (Segment) 262.58 26.51 25 Thirdware Solutions Ltd. (Segment) 36.08 25.12 26 Wipro Ltd (Segment) 9,616.09 33.65 ARITHMETIC MEAN 25.14 The TPO used only single year data i.e, for F.Y.2006-07 for analysis.
By using his powers vested u/s.133(6), the TPO obtained information in respect of certain companies. He rejected certain comparables on the following filters :
• Companies having software development sales revenue less than 75% of the total operating revenue;
• Companies having economic performance contrary to the industry behavior (eg companies which showed a diminishing revenue trend);
• Companies having consistent operating losses;
IT(TP)A.1344/Bang/2011 Page - 10 • Companies whose turnover was less than Rs.1 crore;
• Companies having different accounting year, other than March 31 or companies whose financial statements were for a period other than 12 months;
• Companies having onsite revenues greater than 75% of the export revenues;
• Companies having employee cost greater than 25% of the total revenues; etc The TPO provided an adjustment towards working capital of 0.64%. The adjusted net margin of comparable companies after providing the working capital adjustment was determined at 24.49% on operating cost. He did not make suitable adjustments to account for differences in the risk profile, accounting policies, marketing & R&D expenses of the assessee, vis-à-vis the comparable companies and also did not consider that the adjustment to the ALP, if any, should be limited to the lower end of the 5% range as the assessee has the right to exercise this option under the proviso to section 92C(2) of the Act.
07. The assessee appealed against the draft assessment order before the DRP. However, the DRP agreed with the views of the Assessing Officer/TPO and rejected the contentions raised by the assessee. Thus the adjustments were confirmed by the DRP vide directions dated.14.09.2011. The final assessment order was passed on 13.10.2011, by making TP adjustment of Rs.49,23,67,720/-, which IT(TP)A.1344/Bang/2011 Page - 11 was arrived at as under, considering the computation of ALP, price received vis-à-vis the Arm's length price :
Computation of Arm's Length Price :
The arithmetic mean of the PLI is taken as the arm's length margin. Based on this, the ALP of the software development services rendered by the taxpayer to its AE(s) is computed as under :
Arithmetic mean PLI : 25.14%
Less : Working capital adjustment : 0.64%
Adjusted Arithmetic mean PLI : 24.50%
Arm's Length Price :
Operating cost Rs.519,84,56,000
Arm's Length Margin 24.50% of the operating cost
Arm's Length Price (ALP) @ Rs.647,20,77,720
124.40% of operating cost
The price charged by the tax payer to its Associated Enterprises is compared to the Arm's Length Price, as under : Arm's Length Price @ 124.50% of operating Rs.647,20,77,720 cost (a) Price charged in the international transactions Rs.594,15,42,882
(b) Operating revenues (c) Rs.597,97,10,000 Revenues from non-AE parties (d) = (c) - (b) Rs. 3,81,67,118 Arm's length price of international transactions Rs.643,39,10,602
(c) = (a) - (d) Shortfall being adjustment u/s.92CA (f) = (e) - Rs. 49,23,67,720
(b) Aggrieved, the assessee is in appeal before us.
IT(TP)A.1344/Bang/2011 Page - 12
08. While relying on the crux of the grounds of appeal extracted elsewhere, the learned Chartered Accountant filed written submissions along with charts and the same is compiled in the following lines. The representative relied on the decisions of this Tribunal in the case of Genesis Integrating Systems (India) Pvt. Ltd v. DCIT (ITA No.1231/Bang/2010) and M/s. Trilogy E-Business Software India Ltd., (ITA No.1054/Bang/2011) and submitted that in the above decisions, the classification of the companies on the basis of net sales/turnover are upheld and the Hon'ble Tribunal has held that considering the Indian scenario, the classification made by Dun Bradstreet is more suitable and reasonable. As per the ratio laid down, comparables having turnover between Rs.200 crores to Rs.2,000 crores needs to be considered in the case of the assessee as the revenue of the assessee is Rs.597 crores. On application of the principles of the aforesaid decisions, there would only be 6 comparables as below, out of the set of 26 comparables as identified by the TPO :
Sl. Company Name Turnover as per Gross
No. TPO Margins as
per TPO
1. Flextronics Software Systems 848.66 25.31%
Ltd., (Seg.)
2. iGate Global Solutions Ltd., 747.27 7.49%
3. Mindtree Ltd., (Seg.) 590.35 16.90%
4. Persistent Systems Ltd., 293.75 24.52%
5. Sasken Communication 34 3.57 22.18%
Technologies Ltd. (Seg.)
6. Tata Elxi Ltd. (Seg.) 262.56 26.51%
IT(TP)A.1344/Bang/2011 Page - 13
09. On the other hand, the learned DR submitted as under :
"4. Ld. AR has contended that by applying the turnover filter of Rs. 200 crores to Rs. 2000 crores to the comparables taken by the TPO, the assessee's profit margin would fall within the ALP. For taking lower turnover limit of Rs. 200 crores, Ld. AR has relied on the ITAT Bangalore decision in case of Genesis Integrating Systems (ITA 1231/B/2010) and Triology E- business (ITA 1054/B/2011) order dated 23.11.2012. It may be submitted that in the case of Genesis, the assessee's turnover was merely Rs. 8 crores, it was held that the turnover filter (upper limit) of Rs. 200 crores (being 25 times of the tested company) should be applied to exclude the super big companies, as comparables. For this basis, a mere reference has been made to Dun and Bradstreet study of 2005 of software industry in India, which has categorisied the software companies of India on the basis of turnover in order to study their financial trends over the period of study (two years). In case of Triology also, the turnover was of only Rs. 48 crores, and hence turnover filter of Rs. 200 crores was adopted. 4.2 It is submitted that in both these cases, turnover filter has been used for the upper limit of the comparables. Further, the Dun and Bradstreet study (D & B Study) cannot be followed to adopt both the upper and lower limit of turnover as a rigid compartment, assumably segregating different species of software companies for the following reasons:
(i) This is not a study of any basic and inherent economic parameters/differences which leads to any conclusion that the three distinct categories of software companies exist in India, in terms of profitability.
(ii) The turnover criterion has been adopted merely to facilitate the study of comparative analysis in economic behaviour of three groups of software companies over two years, i.e. 2004 & 2005. It may be compared to a football tournament among four sections of Standard IX students of a school. While the tournament would throw up some section (Say C) as winner and the other would be ranked last (Say A), it cannot be concluded based on the results that students with better football skills have been kept selectively in Section C or that every time/year Section C would win the football tournament. This is because there is nothing fundamentally different in Section C as compared to other sections. The IT(TP)A.1344/Bang/2011 Page - 14 outcome of studies in social sciences (financial studies included) cannot be adopted in tax laws, as economic theories or universal principles of financial behaviour.
(iii) No economic principles have been laid down based on any empirical study, and the D & B study is neither aimed nor attempts to conclude, and has neither concluded that based on any economic parameters such as return on investment, size of investment, the software companies of the selected categories behave in similar fashion or trend, in a given year or over the study period.
(iv) The study itself shows that there were significant variations in profit margins (on a category average) of the three segments- viz, small, medium, and large, of the sample software companies in India, over the two consecutive years of comparative study.
(v) No reliable and reasonable economic principle relating to profit margins based on turnover, could be deduced from the study, which could be universally applied as laws of nature, over all the years.
(vi) The principle of economy of scale operates differently for the manufacturing sector (return on investment in capital assets) and trading sector (laws of diminishing returns). The same could not be applied, mutatis mutandis to the software industry which depends primarily on manpower resources and the manpower cost to operating cost is universally and generally 60-70%, irrespective of the scale of operations/turnover.
4.3 While the upper limit of turnover adopted in Genesis and Triology, based on D & B Study may appear reasonable and logical filter in the given facts of those cases, it would be absurd to discard a comparable having Rs. 210 crores against the turnover of Rs. 190 crores of the tested company, for the sake of conforming to the unreliable D & B study, which is not basically and fundamentally relevant to adopting a turnover filter for the transfer pricing study. Even other-wise, the Tribunal orders do not lay down any all encompassing principle to be universally applied, at least not with regard to the lower turnover limit in a case of with turnover of Rs. 598 crores, as that of the assessee. The case laws may be applied only in cases having similar turnover for the sake of upper turnover margin of Rs. 200 crores as filter. As explained IT(TP)A.1344/Bang/2011 Page - 15 above, there is no finding even in the D&B study that such segments of software industry conform to any fixed rate or range of profit margins to operational cost.
4.4 The assessee's turnover is about Rs. 598 crores, and during the proceedings before the TPO, it agreed to the selection of comparables having minimum turnover of Rs. 100 crores and maximum of Rs.2000 crores. For the purpose of lower turnover limit, it is submitted that Rs. 60 crores may be adopted which would be reasonable being 10 times smaller than the assessee, and upper limit of Rs. 5000 crore, being 8 times higher, Ld. AR has not shown any fundamental economic differences in the comparables having turnover of Rs. 50 crores and above with that of the assessee."
10. We have heard the rival submissions and perused the materials on record. Regarding the turnover filter, we are convinced that this issue is covered by the decision of this Tribunal in Genesis Integrating Systems (India) Pvt. Ltd v. DCIT (ITA No.1231/Bang/2010), wherein it was held that, for the purpose of classification of companies on the basis of net sales or turnover and also taking into consideration the Indian scenario, the classification made by Dun & Bradstreet is more suitable and reasonable. As per the ratio laid down by the Tribunal, comparables of companies having turnover of less than Rs.2000 crores and above Rs.200 crores only need to be considered. The above decision was also followed by the Tribunal in the following cases :
Sl. Name of the case ITA No.
No.
1. M/s. Kodiak Networks (I) P. ITA.1413/Bang/2010 Ltd v. ACIT
2. M/s. Genesis Microchip (I) P. ITA 1254/Bang/2010 Ltd., v. DCIT IT(TP)A.1344/Bang/2011 Page - 16
3. Electronic for Imaging India ITA.1171/Bang/2010 P. Ltd.,
4. M/s. Trilogy E-Business ITA.1054/Bang/2011, Software India P. Ltd., v. dated.23.11.2012 DCIT Hence, in order to be consistent with the view of the Tribunal in its earlier orders as above, we eliminate 20 comparables from the list of 26 comparables chosen by the TPO, and accordingly only six companies will be left over as under :
Sl. Company Name Turnover as per Gross
No. TPO Margins as
per TPO
1. Flextronics Software Systems 848.66 25.31%
Ltd., (Seg.)
2. iGate Global Solutions Ltd., 747.27 7.49%
3. Mindtree Ltd., (Seg.) 590.35 16.90%
4. Persistent Systems Ltd., 293.75 24.52%
5. Sasken Communication 34 3.57 22.18%
Technologies Ltd. (Seg.)
6. Tata Elxi Ltd. (Seg.) 262.56 26.51%
Arithmetic Mean 17.77
It is ordered accordingly.
Filter based on functional difference :
11. The learned chartered accountant pleaded that out of the above six comparables short-listed as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons :
IT(TP)A.1344/Bang/2011 Page - 17
Tata Elxsi Limited (seg) :
The company operates in the segments of software development & services segment which comprises of embedded product design services, industrial design and engineering services and visual computing labs & system integration services segment. There is no sub services break up/information provided in the annual report or the databases based on which we could compute the margin from software services activity only. The company has also in its response to the notice u/s 133(6 stated that it cannot be considered as comparable to any other software services company due to its complex nature. Accordingly, the Appellant wishes to submit that Tata Elxsi should be excluded from the list of comparables.
Flextronics Software Systems Limited (seg) The company has earned revenues from software services on the basis of a hybrid revenue model (i.e. royalty that would become receivable on successful sale of products by the customers of the company) which is based on the information provided under "Revenue recognition" in the annual report of the company. This model adopted by the company is not similar to the regular models adopted by other software service providers. The Hon'ble Tribunal would appreciate that a regular software services provider cannot be compared to a company having such a conditional/unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the IT(TP)A.1344/Bang/2011 Page - 18 Appellant with that of a company which has hybrid business model (i.e. the company's services revenues comprises of royalty income as well as regular software services income and for which the revenue break-up is not available). Accordingly, we wish to submit that the company should not be considered as a comparable and should be rejected as "functionally different".
12. On the other hand, the learned DR relied on the orders of the lower authorities. He reiterated the contents of the TPO's order as his submissions.
13. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence, they deserve to be eliminated from the list of six comparables and hence, there remains only four companies as listed below :
Sl. Company Name Turnover as per Gross
No. TPO Margins as
per TPO
1. iGate Global Solutions Ltd., 747.27 7.49%
2. Mindtree Ltd., (Seg.) 590.35 16.90%
3. Persistent Systems Ltd., 293.75 24.52%
4. Sasken Communication 34 3.57 22.18%
Technologies Ltd. (Seg.)
Average 17.77%
IT(TP)A.1344/Bang/2011 Page - 19
III. Depreciation adjustment filter :
14. The assessee's submission in respect of this are as under :
"12. The learned TPO has not made appropriate depreciation adjustment. The Appellant wishes to submit that HTSL has a policy of charging depreciation on its assets on a "straight line basis" at a higher rate as against most of the company adopted by the learned TPO, which either follow "written down value" method of depreciation or charge depreciation at lower rates in comparison to the assessee. Given the above, as stated under Rule 10B of the Income tax rules 1962, there is a need to make appropriate depreciation adjustment to eliminate the difference in the accounting policies of the Appellant and the comparable companies.
13. The Appellant's contentions find support in the following rulings:
• Mentor Graphics (Noida) Pvt. Ltd. v. Dy. Commissioner of Income tax [(2007) 109 ITD 101 (Delhi)] (Page 573-576 of Paperbook II) • E-gain Communication Pvt. Ltd. v. ITO [2008-TIOL-282- ITAT-PUNE] (Page 581-584 of Paperbook II) • Schefenacker Motherson Ltd v. Income Tax Officer [2009- TIOL-376-ITAT-DEL] (Page 585- 586 of Paperbook II) • 24/7 Customer.com Pvt. Ltd. Vs. DCIT [ITA No. 227/Bang/2010]
14. The Appellant wishes to submit detailed depreciation adjustment calculation as follow:
IT(TP)A.1344/Bang/2011 Page - 20 Step 1: Depreciation charged by companies selected by TPO was extracted from respective annual reports;
Step 2: For the purpose of comparison, the assets were broadly classified under different heads, viz., Computer, Furniture, etc. Step 3: The depreciation rate charged by HTSL was applied to the assets of the comparable companies (except land and building to which the actual rate charged was applied) accepted by the TPO.
Step 4: The actual charged by the companies is added back and the revised depreciation is deducted to arrive at the operating profits and operating margin, which is compared with the operating margin of HTSL.
The revised arithmetical mean margin of the companies selected by the learned TPO as comparables, after taking into account the depreciation adjustment goes down from 25.14% to 20.36%. The Appellant wishes to submit that to ensure uniformity and to ensure a fair and equitable comparison, the Appellant requests the Hon'ble Bench to grant adjustments for depreciation owing to the differences in depreciation policies."
15. Per contra, the learned DR supported the order of the TPO and DRP and reiterated the contents of the same as his submissions. He relied on the observations of the DRP as under :
"The Eligible Assessee contends that the expenditure incurred in this context are in respect of the shelf/application software which do not result in any enduring benefit to the company.
IT(TP)A.1344/Bang/2011 Page - 21 In fact this is an issue where no dispute is called for because the depreciation table as prescribed under the Income-tax Rules itself categorizes the software as a capital item on which depreciation has to be claimed at the prescribed rate. This does not leave scope for treating the expenditure on purchase of software anything otherwise than a capitalized expenditure on which depreciation is allowable.
No interference is called for in this regard."
16. We have heard the rival submissions and considered the facts and materials on record. We find that in the case of 24/7 Customer.Com Pvt. Ltd., in ITA No.227/Bang/2010, dated.09.11.2012, for the assessment year 2004-05, the Tribunal in para.19.8, has ordered as under :
"19.8 .........However, mere claim for an adjustment will serve no purpose unless it is backed by proper details. The additional ground states that the depreciation of the assessee is a ratio of its gross block of 25% as against 10% of the comparable companies. The assessee has not stated the depreciation as a percentage of operational cost nor has any evidence been placed on record to show that the difference in depreciation is due to any operational reasons. As discussed (supra), there could be several reasons for difference in depreciation between companies like, rates of depreciation, age of the assets etc., and therefore adjustment towards depreciation can be granted only if there are operational differences that affect comparability. We remit the issue of depreciation raised IT(TP)A.1344/Bang/2011 Page - 22 by the assessee in the additional grounds to the file of the Assessing Officer/TPO with direction to examine and consider the claim for adjustment towards depreciation in the light of our observations from paras 19.3 to 19.8 of this order and to dispose the matter expeditiously after affording adequate opportunity of being heard to the assessee. It is ordered accordingly."
Apart from the above Tribunal decision, the other decisions of Delhi and Pune benches of the ITAT have also taken similar view regarding depreciation adjustment. Hence, following the above decision, we are directing the TPO/Assessing Officer to give the benefit of depreciation adjustment to the assessee as per the chart filed by the assessee which works out to around 3.39%. Thus, after the depreciation adjustment of 3.39%, from 16.56% (105% of 15.77% the ALP will come to 13.17%. Apart from this, the Assessing Officer shall give effect to the proviso to sub-section (2) of Section 92C, as per the latest amended Act, as regards 5% range. Thus, the issue of transfer pricing is restored to the file of the Assessing Officer/TPO, to carry out the above directions, of course, after giving effective opportunity of hearing to the assessee.
Though the assessee has taken other grounds relating to TP issue (extracted elsewhere in this order), we are not going into those issues as the learned chartered accountant during the course of hearing submitted that if these adjustments dealt by us, viz., turnover IT(TP)A.1344/Bang/2011 Page - 23 filter, unreasonable comparison filter and depreciation adjustment, are given, the assessee's profit would be within the ALP. It is ordered accordingly.
Ground relating to correction of arithmetic mistakes :
17. Ground relating to correction of arithmetical mistake is as under :
The learned TPO/DCIT erred on facts in erroneously computing the adjustment u/s.92CA of the Appellant from its international transactions.
18. The learned chartered accountant submitted as under :
"i) The TPO has disregarded the operating costs attributable to the non-AE segment of the Appellant while calculating the TP adjustment. The appellant wishes to submit that while calculating the TP adjustment the TPO has not excluded the operating cost attributable to the non-AE transactions of the appellant. This has resulted in an artificial inflation of the operating cost of the Appellant thereby resulting in arriving at a higher TP adjustment as determined in the TP Order.
ii) The Appellant has submitted the details of the revised workings giving effect for the cost attributable to the non-AE transactions.
The Appellant wishes to submit the revised calculation of the TP adjustment as provided in the order and the revised workings giving effect for the cost attributable to the non-AE transactions :
IT(TP)A.1344/Bang/2011 Page - 24
Adjustment as per TP As per order Revised amount
order (Rs.) (Rs.)
Operating Cost 519,84,56,000 516,52,67,202
ALP (%) 24.50% 24.50%
ALP - (A) 647,20,77,720 643,07,57,666
Price charged in the 594,15,42,822 594,15,42,822
international
transaction -(B)
Operating revenue -(c) 597,97,10,100 597,97,10,100
Revenue from non-AE 3,81,67,118
transaction D= (c) -(b)
ALP of international 643,39,10,602 643.07,57,666
transaction E= (A) -(D)
Adjustment F=(E) - (B) 59,23,67,720 48,92,14,784
Margins 15.07% 15.77%
19. The learned DR submitted that if any arithmetical mistakes are there, this may be sent back to the Assessing Officer for reappraisal of the claim of the assessee.
20. We have heard the rival submissions and considered the facts and materials on record. As this mistake has to be verified at the level of the Assessing Officer, we accept the contention of the learned DR and restore this issue back to the file of the Assessing Officer for doing the needful adjustment.
21. Now let us turn to the corporate tax issues. Regarding the computation of deduction u/s.10A of the Act, the assessee has taken the following grounds :
3. The learned DCIT has erred, in law and in facts, by reducing the expenses incurred by the Appellant towards IT(TP)A.1344/Bang/2011 Page - 25 telecommunication in respect of STP Unit II [amounting to Rs 23,508,825] from the export turnover, as being attributable towards the delivery of computer software outside India in computing the deduction under section 10A of the Act.
4. The learned DCIT has erred in law and in facts, by reducing certain expenditure incurred by the Appellant in foreign currency pertaining to STP Unit II amounting to Rs 330,933,847, without appreciating the fact that the Appellant is engaged in the business of software development and does not render any technical services outside India.
5. Without .prejudice to the above, the learned DCIT has erred, in law, and in facts, by not considering the plea of the Appellant that, if the telecommunication attributable to the delivery of computer software outside India and foreign expenses incurred towards rendering of technical services are reduced from export turnover, a corresponding amount should also be reduced from total turnover for computing the deduction under section 10A of the Act, based on the 'principle of parity'.
22. At the time of hearing, the learned chartered accountant submitted that if ground no.5 is dealt with, following the Karnataka High Court decision, then ground nos.3 and 4 would become infructuous.
23. Now, let us deal with ground no.5. In this regard, the learned chartered accountant relies on the decision of the Karnataka High Court in the assessee's own case in ITA.No.818 of 2009, dated.30.08.2011, IT(TP)A.1344/Bang/2011 Page - 26 for the assessment year 2004-05, wherein the Hon'ble High Court has held as under :
"......If what is excluded in computing the export turnover is included while arriving at the total turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore the formula for computation of the deduction under section 10A, would be as under :
Profits of the business X Export turnover of the undertaking Total turnover (Export turnover + domestic turnover)
11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgements rendered in the context of Section 80HHC in interpreting Section 10A when the principle underlying both these provisions is one and the same.
Therefore, we do not see any merit in this appeals."
24. We have heard the learned DR and considered the facts and materials on record. The decision of the Hon'ble Karnataka High Court in assesee's own case has been filed on record. The Hon'ble High IT(TP)A.1344/Bang/2011 Page - 27 Court has allowed the claim of the assessee. In a nutshell, this issue has been decided in favour of the assessee by the Hon'ble High Court for the assessment year 2004-05. Respectfully following the same, we also allow this ground of appeal of the assessee. Since ground no.5 is allowed as above in favour of the assessee, we are not going into ground nos.3 and 4 as they become infructuous, even according to the learned AR.
25. This issue is allowed in favour of the assessee.
26. Now, let us turn to the ground no.6 relating to software expenses, which reads as under :
"The learned DCIT has erred in law and in fact, in capitalizing the software charges expensed by the Appellant, amounting to Rs.38,371,306 without appreciating the detailed submission made by the Appellant that such software expenses do not result in any enduring benefit to the Appellant."
27. The brief facts are that during the assessment year 2007-08, the assessee has incurred software expenses to the extent of approximately Rs 7.7 crores, pertaining to annual maintenance expenses and purchase of software, which have been debited to the P&L Account. Further, the Company has also capitalized in its books certain software expenses which provide enduring benefit to the Company, amounting to approximately Rs 4 crores. During the course of the assessment IT(TP)A.1344/Bang/2011 Page - 28 proceedings, the learned AO has capitalized software expenses debited to the P&L account amounting to Rs 3.8 crores incurred towards purchase of software (out of the total of Rs 7.7 crores), on the basis that since the depreciation table specifies 'computer software' as a separate category, expenses incurred on purchase of software would need to be capitalized and depreciation be claimed. In this context, the Appellant wishes to submit that in the current commercial environment, software technology is undergoing rapid changes. As a result, the original software purchased becomes redundant! obsolete very quickly and this necessitates recurring expenditure to be incurred by the Appellant on constant upgradation of the same. The Appellant also wishes to highlight that the Company itself capitalizes operating software in the books along with major application software which have an enduring benefit, in accordance, with the accounting policy of the Company. Thus, only those off-the-shelf/ application software are charged off to the P&L A/c by the Company, which do not provide any enduring benefit to the Company. This typically comprises software licenses which have a short life. In this regard, the Delhi ITAT Special Bench in the case of Amway India Enterprises vs DCIT and SQL Star International Ltd vs ACIT (111 lTD 112) has laid out the following principles in determining the issue of deductibility of software expenses, which was upheld by the Delhi High IT(TP)A.1344/Bang/2011 Page - 29 Court as well (TS-639-HC-2011). Extract of the case law is produced before the Tribunal. It has been held by the Delhi High Court as under:
"Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure, Any software having its utility to assessee for a period beyond 2 years can be considered as accrual of benefit of enduring nature. However, that by itself will not make expenditure incurred on software as capital in nature and the functional tests as discussed above will also need to be satisfied"
The Delhi High Court, in the case of Asahi India Safety Glass Ltd (TS- 640-HC-2011) held that expenditure incurred for licence fee, annual technical support fee, etc does not result in creation of new asset or a new source of income for the assessee and hence, would be revenue in nature (extract of the case law is enclosed at page 530-533 of the Paperbook II). The above judgement also held that what is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation of fixed capital for the assessee. he expenditure which is incurred, which enables the profit making structure to work more efficiently leaving the source of the profit making structure untouched, would be an expense in the nature of revenue expenditure.
IT(TP)A.1344/Bang/2011 Page - 30
28. The learned AR further submitted that the software expenses debited to the P&L A/c are attributable towards purchase of application software and software licenses which predominantly have a short shelf life. This software is used to carry out the Appellant's business more efficiently and profitably and is not part of the 'profit-making apparatus'. Thus, in accordance with the principles laid out in the cases of Amway and Asahi Glass, the Appellant wishes to submit that the software expenses are revenue in nature. The learned AR placed reliance on certain other case laws which have upheld the above principles, as under :
• Raychem RPG Ltd - Bombay High Court (ITA No 4176 of 2009) • CIT Vs. Southern Roadways Ltd - Madras High Court (304 ITR 84) He also to placed reliance on the Delhi High Court decision in the case of Denso India Private Limited (Appeal No 1011/2007, 16/2008, 107/2009, 293, 839 & 840 of 2010), wherein HC observed as under :
"There is a clear fallacy in the aforesaid line of argument advanced by the learned counsel of the Revenue. The attempt is to cover the payment under section 32 of the Act and then to assert that it qualifies for depreciation. There from, the learned counsel wants to draw the inference that the payment is capital in nature and not revenue. This kind of 'reverse engineering' in our view is not permissible. As per the scheme of the Act, we have to first determine the nature of expenditure, namely, whether it is of IT(TP)A.1344/Bang/2011 Page - 31 revenue in nature or whether the expenditure is capital in nature. The question of depreciation would arise only if it is first determined and established that the expenditure is capital in nature."
Further, Reliance was placed on the following judgements which were rendered post the inclusion of software as a category in the depreciation table ie AY 2003-04:
Jurisdictional judgements:
• Toyota Kirloskar Motors Pvt. Ltd. -- Karnataka High Court (ITA No.174/ 2009 dated 23rd March, 2011) • Robert Bosch Engineering and Business Solutions Ltd
-- Bangalore Tribunal (ITA No 980/ Bang/ 2008 -- AY 2003-04) Non-jurisdictional judgements:
• Spice Communications Limited -- Delhi Tribunal (ITAs Nos.
2073, 2074 and 2739/ Del/ 2008
- AY 2003-04, 2004-05 and 2005-06) • Spice Elastic Private Limited -- Mumbai Tribunal (ITA No 5161/ Mum/ 2008 -- AY 2004-05)
29. Per contra, the learned DR submitted that the software can be an operating software or an application software. Sometimes, the software is a part and parcel of hardware like car and the corroborator. At best, the matter can go back to the Assessing Officer to bifurcate the software expenses as capital and revenue.
IT(TP)A.1344/Bang/2011 Page - 32
30. In his rejoinder, the learned chartered accountant submitted that he has no objection if the Tribunal is restoring this issue back to the Assessing Officer to reappraise this issue with respect to the expenditure of Rs.10 lakhs and above.
31. We have heard the rival submissions and considered the facts and materials on record. We deem it fit and proper to restore this issue back to the file of the Assessing Officer to reappraise the expenditure in respect of Rs.10 lakhs and above and decide the issue in accordance with the decisions of the Delhi Special Bench in Amway India Enterprises (supra) and the decision. of the Karnataka High Court in Toyota Kirloskar Motors P. Ltd., (supra), after giving effective opportunity of hearing to the assessee. Thus, this issue is allowed for statistical purpose.
It is ordered accordingly.
32. Now, let us turn to the ground relating to deduction u/s.80 JJAA of the Act, which reads as under :
"The learned DCIT has erred in law and in facts by disallowing the deduction claimed by the Appellant under section 80JJAA of the Act amounting to Rs.110,995,555, without appreciating the detailed factual and technical submissions made by the Appellant in support of its claim."
IT(TP)A.1344/Bang/2011 Page - 33
33. The brief facts are that while framing the assessment u/s.143(3) r.w.s.144C of the Act, the Assessing Officer noted that during the year, the assessee claimed an amounting of Rs.11,09,55,555/- as deduction u/s.80JJAA of the IT Act. The Assessing Officer disallowed the claim of the assessee the deduction u/s.80JJAA, as the assessee could not substantiate the claim, particularly with respect to the definition of "workman " as given in the Industrial Disputes Act.
The assessee is aggrieved and is in appeal with this issue before us.
34. At the time of hearing, the learned chartered accountant submitted as under :
• The Appellant is a company engaged in the development of computer software. We wish to humbly submit that the Appellant believes that software engineers qualify as 'workmen' as envisaged under section 8OJJAA of the Act. Accordingly, during the subject AY 2007-08, the Appellant has claimed a deduction under section 8OJJAA of the Act amounting to Rs 11,09,95,555, in respect of salary paid to the new software engineers and technical personnel employed during the year.
• However, during the assessment proceedings, the learned AC has disallowed the entire deduction claimed by the Appellant on the basis that the employees of the Company do not qualify as 'workmen' for the purposes of section 8OJJAA.
• As per section 8OJJAA, the deduction is available provided the following conditions are fulfilled:
• The eligible assessee should be an Indian Company;
IT(TP)A.1344/Bang/2011 Page - 34 • The gross total income of the assessee should include profits and gains derived from an industrial undertaking engaged in the manufacture or production of an article or thing;
• The eligible undertaking should not have been formed as a result of splitting-up or reconstruction of a business already in existence;
• The eligible undertaking should employ at least 100 workmen. Further, the additional employees should be in excess of 10% of the workforce as on the last day of the immediately preceding previous year;
• The 'regular workman' should --
o not be a casual workman o not be a worker employed through contract labour o be employed for at least 300 days during the previous year • An audit report should be furnished along with the return of income.
If the above conditions are fulfilled, the eligible assessee would be able to claim 30% of the 'additional wages' as a deduction, which would be over and above the expenditure on wages which is otherwise allowable as business expenditure to the Company. Further, the deduction would be allowable for three years, including the AY relevant to the previous year in which such employment is provided by the assessee company.
• In this context, it would be relevant to examine the definition of workmen, and whether the employees of the Company with respect to whom the said deduction has been claimed qualify as 'workmen' under section 8OJJAA.
• Workman The basis for deduction under section 8OJJAA is the salary paid to 'new regular workman'. The section contains the definition of 'workman', and is defined to have the same meaning assigned to it in clause (5) of section (2) of the Industrial Disputes Act 1947.
IT(TP)A.1344/Bang/2011 Page - 35 The term 'workman' is defined in the Industrial Disputes Act as under:
"'Workman means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whet her the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include any such person --
(i) who is subject to the Air Force Act, 1950 (45 of 1950), or the Army Act, 1956 (56 of 1950), or the Navy Act, 1957 (62 of 1957); or
(ii) who is employed in the police service or as an officer or other employee of a prison; or
(iii) who is employed mainly in a managerial or administrative capacity; or
(iv) who, being employed in a supervisory capacity, draws wages exceeding one thousand six hundred rupees per mensem or exercises either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature."
Thus, the definition of 'workman' is very comprehensive. The definition clearly specifies the persons included therein and those excluded. Further, the main part of the definition refers to various types of workers and includes those engaged in skilled and technical work as well.
• The Appellant wishes to submit that the deduction is claimed in respect of the salary paid to software engineers who carry out software development work. Since they are employed to carry out work in a technical capacity, they would fall within the purview of the definition of workmen. Further, the Appellant itself excludes those employees who are predominantly engaged in carrying out of administrative, managerial and supervisory functions and no deduction has been claimed in relation to remuneration paid to such workmen.
IT(TP)A.1344/Bang/2011 Page - 36 • "Technical"
The word 'technical' has different meanings depending on the context in which it is used. The etymological meaning of the word 'technical', which according to Oxford Dictionary is: "of or pertaining to the mechanical arts and applied science generally, as in technical education, or in technical school".
• Whether a work is 'technical' or not depends upon the special mental training or scientific or technical knowledge of a person. The broad test is that if a person is employed because he possesses such faculties and they enable him to produce something as a creation of his own, he would be employed on 'technical work' even though in carrying out that work, he may have to go through a lot of manual labour or routine/ repetitive work.
• In the case of a person employed in a technical capacity, the application of knowledge of a particular craft or work is the distinguishing feature. It is not necessary that the work that such a person does must be inventive, but it must necessarily be a work the contours of which are not pre-determined before that work is actually performed by the person employed in a technical capacity. This principle was brought out by the Mumbai High Court in the case of Bombay Dyeing and Manufacturing Co Ltd vs RA Bidoo(q) [1991] I LLJ 98, 101-2 (extract of the case law enclosed at page 549-550 of the Paperbook II).
• We also wish to place reliance on the guiding principles brought out in the "The Law of Industrial Disputes" by 0 P Malhotra on the Industrial Disputes Act, 1947. While analysing which persons are considered to be employed in a technical capacity, it has been concluded that persons doing technical work such as draftsman, engineers, assistant engineers, foremen, glass technologist, medical officers, compounders and doctors, etc would therefore fall within the definition of workmen.
• Exclusion from the definition of workman IT(TP)A.1344/Bang/2011 Page - 37 As mentioned above clause (iv) of section 2(s) of the Industrial Disputes Act, 1947 requires the following conditions to be fulfilled for a person to be excluded from the definition of a workman, namely:
(a) he has to be employed mainly in a managerial or administrative capacity; or
(b) he has to be employed in a supervisory capacity should be drawing wages exceeding one thousand six hundred rupees per mensem Based on the above exclusion conditions, the Appellant wishes to submit that it excludes employees engaged in a managerial or administrative capacity, or those engaged in a supervisory capacity and drawing wages exceeding Rs 1,600 per month.
• Further, we wish to emphasize that the mere fact that a person draws wages exceeding Rs 1,600 per month does not by itself disentitle that person from being regarded as a 'workman'. The person must be necessarily also employed in a 'supervisory capacity'.
• Mere performance of some supervisory duties would not result in the exclusion of the employee from the definition of workman. Further, in determining whether a person is employed in a supervisory capacity or otherwise, the mere designation is not decisive of the nature of employment.
• The determination of whether an employee qualifies as a 'workman' should be with reference to his principal nature of duties and functions, which is required to be determined having regard to the circumstances in each case. In this context, we wish to bring to your notice the case of SK Maini v Carona Sahu Ltd (1994) [2 LU 1153], wherein the Supreme Court observed the following (extract of the caselaw enclosed at page 551-552 of the Paperbook II):
• ". . . the designation of an employee is not of much importance and what is important is the nature of duties being performed by him. The determinative factor is the main duties of the concerned employee and not some work incidentally done. In other words, what is in substance, the work which employee does or what is in substance he is employed to do. Viewed from IT(TP)A.1344/Bang/2011 Page - 38 this angle, the employee is mainly doing supeivisoiy work but incidentally or for a fraction of time, does also some manual or clerical work, the employee should be held to be doing supervision work. Conversely, if the main work is of manual, clerical or technical nature, the mere fact that some supervisory work or other work is also done by the employee incidentally or only a small fraction of working time is devoted to some supervisory work, the employee will come within the purview of the "workman" as defined in section 2(s) of the Industrial Disputes Act."
• The Supreme Court in the case of Ananda Bazar Patrika Pvt Ltd v Its Workmen (1969) [2 LLJ 670-71] also laid out the following similar principle (extract of the case law enclosed at page 553- 554 of the Paperbook II):
• "The question, whether a person is employed in a supervisory capacity or on clerical work, in our opinion, depends upon whether the main and principal duties carried out by him are those of a supervisory character, or of a nature carried out by a clerk. If a person is mainly doing supervisory work, but, incidentally or for a fraction of the time, also does some clerical work, it would have to be held that he is employed in supervisory capacity; and, conversely, if the main work done is of clerical nature the mere fact that some supervisory duties are also carried out incidentally or as a small fraction of the work done by him will not convert his employment as a clerk into one in supervisory capacity."
• The above principles have also been brought out in the following judicial precedents, on which we wish to place reliance:
• Arkal Govind Raj Rao v Ciba Geigy of India Ltd, Bombay (1985) Supreme Court [2 LU 401]) • All India Reserve Bank Employees' Assn v Reserve Bank of India (1965) Supreme Court [2 LU 175, 188] • We also wish to highlight the judgement of the Hon'ble Bangalore Tribunal in the case of Texas Instruments (India) Pvt Ltd (115 TTJ 976), which is engaged in the development of computer software. The Hon'ble Tribunal held that the employees of the company were workmen' for the purposes of IT(TP)A.1344/Bang/2011 Page - 39 section 8OJJAA and the company which was engaged in the development of computer software was eligible for deduction under section 80JJA (copy of the case law is enclosed at page 540-548 of the Paperbook II).
• It would be pertinent to note the objectives with which section 8OJJAA was introduced into the tax legislation. Section 80JJAA was introduced into the by the Finance (No 2) Act, 1998, to be operative from April 1, 1999. The Finance Minister's speech as well as the memorandum explaining the provisions of the Finance Bill refer to deduction being introduced to encourage employers to generate more employment opportunities (extract enclosed for your reference at page 559-560 of the Paperbook II). The objective of introducing section 8OJJAA is also explained by Circular No 772 dated December 23, 1998 (extract of the circular enclosed for your reference on page 561 of the Paperbook II). By virtue of introduction of this section, a fiscal incentive was intended to be offered to employers giving employment to a specified minimum number of employees. Hence, the interpretation of the section should be in a manner which promotes the objective sought to be achieved and not frustrate it. • Further, the Appellant wishes to humbly submit that being a beneficial provision, it must be liberally construed. These were the principles brought out by the Supreme Court while dealing with deduction under section 80J in the case of Bajaj Tempo vs CIT (196 ITR 188). Hence, the section would need to be interpreted in a purposive manner.
• In view of all the principles enumerated above, we wish to humbly submit that a software engineer would also be covered by the definition of the term workman', and the salary drawn by him would ergo qualify for deduction under section 80JJAA. Further, since the Appellant has satisfied the conditions for being eligible to claim the deduction under section 80JJAA of the Act and has demonstrated the same in detail during the course of scrutiny assessment proceedings, we pray that the deduction not be disallowed in the hands of the Appellant.
35. Per contra, the learned DR reiterated the contents of the assessment order as his submissions. He also pleaded that this matter may be sent back to the Assessing Officer for passing a detailed order IT(TP)A.1344/Bang/2011 Page - 40 as many of the facts are to be referred to the Assessing Officer in the light of the submissions made by the learned AR.
36. We also find that the Tribunal in the case of Texas Instruments P. Ltd., in ITA No.1/Bang/2011, dated.07.09.2012, for the assessment year 2005-06, at para no.10.7, has remitted the matter back to the Commissioner of Income-tax (Appeals) for fresh consideration. Hence, we are inclined to restore this issue back to the file of the Assessing Officer with a direction to redecide the issue be passing a speaking order, of course, after giving effective opportunity of hearing to the assessee. The assessee is also hereby directed to cooperate with the Assessing Officer by producing the details as called for by him. It is ordered accordingly.
37. The issue raised by the assessee in respect of levy of interest u/s.234D is consequential in nature. We direct the Assessing Officer to give consequential relief.
38. The last issue taken up by the assessee is with regard to initiation of penalty proceedings u/s.271(1)(c) of the Act, which is premature in nature, since it is only initiation of penalty. The assessee can come on appeal only after levy of penalty.
IT(TP)A.1344/Bang/2011 Page - 41
39. In the result, the appeal filed by the assessee is partly allowed for statistical purpose.
Order pronounced in the open court on 28.03.2013.
Sd/- Sd/- (GEORGE GEORGE K) (N. BARATHVAJA SANKAR) JUDICIAL MEMBER VICE PRESIDENT IT(TP)A.1344/Bang/2011 Page - 42