TMI Blog2016 (9) TMI 1546X X X X Extracts X X X X X X X X Extracts X X X X ..... to its AE in FY 2009-10 can be concluded as being at arm s length. Section 40(a)(ia) application to depreciation allowance under Section 32 - assessee had capitalized software expenses and appropriate income tax depreciation was claimed u/s 32 - HELD THAT:- We are of the opinion that the issue is squarely covered by the decision in the case of Kawasaki Microelectronics Inc. Vs DICT (International Taxation) [ 2015 (9) TMI 9 - ITAT BANGALORE] where it has been held that once the assessee has capitalized payment in question though the assessee has not deducted tax at source on such payment, section 40 (a) (1) cannot be invoked for disallowance of depreciation. - IT(TP)A No.281 /Bang/2015 CO No.101 /Bang/2015 (Asst. Year 2010-11) - - - Dated:- 30-9-2016 - Smt. Asha Vijayaraghavan, Judicial Member Shri S Jayaraman, Accountant Member Revenue by: Shri G.R Reddy, CIT Assessee by: Shri T Suryanarayana, Advocate ORDER Asha Vijayaraghavan, This appeal by the Revenue is directed against the order of Dy. Commissioner of Income-tax, Circle 5(1)(2) dated 29/1/2015 and it pertains to the assessment year 2010-11. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... file a separate appeal before this Hon ble Tribunal. However on receipt of notice of the above Revenue s appeal, it filed cross-objections to the Revenue s appeal, urging grounds to the extent that the TPO s order stands confirmed and also as regards the disallowance made under Section 40(a)(ia). 8. Aggrieved, the Department has filed the following grounds : The DRP erred in directing the AO in deleting the addition made without appreciating the provisions of section 14A r.w.r.8D and the clarification given by the Board in Circular NO.5/2014 dated 11.02.2014 which emphasizes that only expenditure allowable is which is relatable to earning of income and therefore the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. 2. The learned DRP member erred in directing to exclude the depreciation from the cost of the taxpayer as well as the comparables. 9. We find that the Hon ble High Court of Delhi in ITA 749/2014 in the case of ITA 749/2014 in the case of Chem Investment Ltd., Vs CIT has held that sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also be relevant to note that Rule 10B(3) of the Rules provides that an uncontrolled transaction shall be considered as a comparable if: a) None of the differences between the comparable company and the controlled transaction are likely to materially affect the profit arising from such transactions in the open market; or b) Reasonably accurate adjustments can be made to eliminate the material effect of such differences. Assessee s depreciation policy vis-avis depreciation policies of the comparables selected by the TPO: The assessee has a policy of charging a higher rate of depreciation as compared tot eh companies selected by the TPO. It is, therefore, submitted t6hat there is a need for making an adjustment to eliminate the differences in the accounting policies of the assessee and the comparable companies. The assessee s depreciation policy for the year is as below: (iii) Depreciation Depreciation is provided from the date of capitalization on Straight Line method at the rates mentioned below, based on management s estimate of the useful lives of assets concerned, which are higher than the corresponding rates presc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s reliance on the judgments of this Hon ble Tribunal in E-gain Communication Pvt. Ltd. Vs. ITO reported in [2008] 23 SOT 385 (Pune) (at page 36) and Honeywell Technology Solutions Lab P. Ltd., in IT(TP)A No.1344/Bang/2011 at para 5.71. The decision of Hyderabad Bench B in the case of Market Tools Research Pvt. Ltd., in ITA No.2066/2011 is to be followed, wherein the Hon ble JM is a party to the order. The relevant portion is extracted below: All facts which impact the financial result of comparable companies should be taken into account and reasonable accurate adjustment should be made for the same. In this connection the rates of depreciation adopted by the assessee are significantly different from (straight line as compared with WTP; higher rate than that prescribed in schedule VI) those adopted by the comparable companies suitable adjustment for the different has to be made or the profit before depreciation may be considered. 12. Following the ratio of the above said decision in the case of Market Tools Research Pvt. Ltd., (Supra), we hold that DRP erred in directing to exclude depreciation from the cost of the Tax Payer as well as comparables. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Ltd. 240.74 11.95 13.70 9.10 Accept 2 Infosys Ltd.,* 21140 45.01 53.51% 52.51% Reject 3 Kals Information Systems Ltd. (Seg)* 2.17 38.37 47.69 43.13 Reject 4 Larsen Toubro Infotech Ltd. 1176.76 19.33 23.33 23.22 Reject 5 Mindtree Ltd. (seg) 698.02 14.83 21.75 19.04 Accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the said company as a comparable on the ground that there was no related party disclosure for FY 2009-10(Page 269 of the paperbook). The assessee had objected to the same stating that on the basis of the annual report of the company, the related party transactions would only be 4.33% and that therefore, it ought to be included in the list of final comparables (Page 307 of the paperbook). However, in the TP order, the TPO rejected the said company on the basis that 90% of its export revenues for the year were from Dubai operations, whereas the assessee earns 100% of its revenues from India. On the basis that the company and the assessee operated in different geographical areas, the TPO excluded the said company. The assessee submits that the company passes all the filters applied by the TPO and, therefore, the exclusion of the company solely on the basis that its operations lie in different geographical areas, which was not at all a filter applied by the TPO, is wholly arbitrary and thus the company ought to be included in final list of comparables. In fact, in the assessee s own case for the immediately preceding assessment year, Akshay Software Technologies Ltd. ( Aksh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the Company Mark-up on costs (unadj) % Mark-up on costs (depreciation Adj) % Mark-up on costs (WC and depreciation adj % 1 Persistent Systems Solutions Ltd. 15.38 20.35 16.78 2 LGS Global Ltd. 11.95 13.70 9.10 3 RS Software (Ind) Ltd. 10.29 15.92 15.55 4 Thinksoft Global Services Ltd. 17.05 19.44 17.99 5 Mindtree Ltd. (seg) 14.83 21.75 19.04 6 Akshay Software Technologies Ltd., -1.04 -0.53 -1.09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply only to revenue expenditure. Depreciation is in the nature of an allowance, that is, a statutory deduction under Section 32 of the Act, and does not represent an outgo/ expenditure to attract the provisions of Section 40(a)(ia). 29. In support of this proposition, reliance is placed on the following decisions: (i) Crane Software International Ltd. v. ACIT (judgment dated 08.02.2011 in ITA No.741/Bang/2010). (ii) SKOL Breweries Ltd. v. ACIT (2013) 29 taxmann.com 111/ITAT Mum) (iii) SMS Demag P.Ltd v. DCIT (2010) 132 TTJ 498 (ITAT Del) (iv) Kawasaki Microelectronics Inc. v. DDIT (2015) 60 taxmann.com 256 (Bangalore Trb.) 30. We are of the opinion that the issue is squarely covered by the decision in the case of Kawasaki Microelectronics Inc. Vs DICT (International Taxation) in IT(TP) No.1512/Bang/2010 dated 26,6,2015, where it has been held that once the assessee has capitalized payment in question though the assessee has not deducted tax at source on such payment, section 40 (a) (1) cannot be invoked for disallowance of depreciation. 31. The Cross-objection filed by the assessee is allowed. 32. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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