2020 (7) TMI 645 - AT - Income Tax

ITAT Remands Working Capital Issue, Upholds CIT(A)'s Decisions on Comparables, Depreciation, and Software Costs.

DCIT, Circle-3 (1), New Delhi. Versus Cadence Design Systems (India) Pvt. Ltd. And (Vice-Versa)

DCIT, Circle-3 (1), New Delhi. Versus Cadence Design Systems (India) Pvt. Ltd. And (Vice-Versa) - TMI Issues Involved:1. Working Capital Adjustment2. Rejection of Comparable Companies due to Related Party Transactions (RPT)3. Exclusion of Satyam Computer Services Ltd. due to unreliable financials4. Depreciation on Computer Peripherals5. Software Upgradation Expenses as Revenue ExpenditureIssue-wise Detailed Analysis:1. Working Capital Adjustment:The Tribunal examined the CIT(A)'s decision to grant working capital adjustment to the assessee. The TPO had previously allowed such adjustments in the assessment year 2002-03. The Tribunal, referencing its own decision in the assessee's case for A.Y. 2005-06, concurred with the CIT(A) that working capital adjustment should be granted. However, the Tribunal restored the issue to the TPO for verification and proper computation, emphasizing the need for detailed examination of the submitted data.2. Rejection of Comparable Companies due to Related Party Transactions (RPT):The Tribunal upheld the CIT(A)'s decision to exclude HCL Technologies Ltd. and HP Globalsoft Ltd. as comparables due to their substantial RPTs (71.09% and 87.44%, respectively). The Tribunal referenced the Delhi Bench's decision in Agilant Technologies International (P) Ltd. vs. ACIT, which held that companies with more than 25% RPT should be ignored. Thus, the exclusion was justified and the Revenue's ground on this issue was dismissed.3. Exclusion of Satyam Computer Services Ltd. due to unreliable financials:The Tribunal supported the CIT(A)'s decision to exclude Satyam Computer Services Ltd. from the list of comparables due to financial irregularities and falsification of accounts. The Tribunal cited the case of ACIT vs. Motherson Sumi Infotech & Design Ltd., where it was held that financial statements of Satyam could not be relied upon. The Tribunal found no error in the CIT(A)'s direction to exclude Satyam, dismissing the Revenue's ground on this issue.4. Depreciation on Computer Peripherals:The Tribunal affirmed the CIT(A)'s decision to allow depreciation at 60% on computer peripherals, consistent with the Tribunal's decision in the assessee's case for A.Y. 2005-06 and the Delhi High Court's ruling in CIT vs. BSES Yamuna Power Ltd. The Tribunal found that computer peripherals, being integral to the computer system, qualify for higher depreciation. The Revenue's ground on this issue was dismissed.5. Software Upgradation Expenses as Revenue Expenditure:For A.Y. 2004-05, the Tribunal examined the CIT(A)'s decision to treat software upgradation expenses as revenue expenditure. The CIT(A) had relied on the Delhi High Court's decision in CIT vs. GE Capital Services Ltd., which held that non-customized software requiring regular upgrades should be treated as revenue expenditure. The Tribunal found no infirmity in the CIT(A)'s decision and dismissed the Revenue's ground on this issue.Conclusion:The Tribunal allowed the Revenue's appeal for statistical purposes by restoring the issue of working capital adjustment to the TPO for verification. It dismissed the Revenue's grounds regarding the exclusion of certain comparables, depreciation on computer peripherals, and classification of software upgradation expenses, upholding the CIT(A)'s decisions on these matters. The Cross Objection filed by the assessee was dismissed as academic. The decision was pronounced on 24.07.2020.