M/S. AWAVE SEMICONDUCTOR INDIA PVT LTD., (FORMERLYM/S. OPEN SILICON RESEARCH PVT. LTD.,,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-3(1)(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SMT BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

IT(TP)A No. 966/Bang/2023 Assessment Year : 2012-13

M/s. Awave Semiconductor India Pvt. Ltd., (Formerly M/s. Open Silicon The Deputy Research Pvt. Ltd.), Commissioner of 11/1 & 12/1, Maruthi Income Tax, Infotech Centre, Circle – 3(1)(1), B-Block, 2nd Floor, Bangalore. Koramangala, Vs. Bangalore – 560 071. PAN: AAACO5915B APPELLANT RESPONDENT

Assessee by : Shri Prashant .G.S, CA : Shri G. Manoj Kumar, Revenue by CIT-DR Date of Hearing : 02-04-2024 Date of Pronouncement : 12-06-2024 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of the order giving effect to passed by the Ld.DCIT, Circle – 3(1)(1) dated 30.09.2023 .

Page 2 IT(TP)A No. 966/Bang/2023 2. Brief facts of the case are as under: 2.1 The assessee filed its return of income for AY 2012-13 on 29.11.2012 by declaring a total income of Rs.3,82,64,350/- The case was selected for scrutiny and notice u/s 143(2) was issued and duly served on the assessee. The assessment was completed u/s 143(3) r.w.s. 144C vide order dated 29.09.2016 by determining total income of Rs. 7,07,26,112/-. Aggrieved by this order, the assessee preferred appeal before this Tribunal. This Tribunal vide its order dated 28.08.2019 in ITA No. 1997/Bang/2016 set aside the TP issues to the file of Ld.TPO and dismissed revenue's appeal in respect of deduction u/s. 10A.

2.2 As the Hon'ble ITAT has set aside the TP Matter, as per para 3.5 of the instruction 3/2016 dated 10.03.2016, it is mandatory to refer the case to TPO. Accordingly, reference to TPO u/s 92CA of the Act was made for determination of Arms Length Price (ALP) with the prior approval of Principal Commissioner of Income-Tax. The TPO vide order u/s 92CA(3) of the I.T. Act, 1961 dated 25.01.2022, determined adjustments to ALP at Rs.6,69,36,803/-.

2.3 The DRP vide direction u/s 144C (5) of the Act, dated 15.05.2023 (Annexure-N) has rejected the grounds of objection raised by the assessee. Further, Order Giving Effect to the Directions under section 144C of the Act was passed on 16.05.2023 vide DIN & Order No. ITBA/COM/F/17/2023- 24/1052886643(1), determining TP adjustment of Rs.6,69,36,803/- in respect of the taxpayer's international

Page 3 IT(TP)A No. 966/Bang/2023 transactions with the Associated Enterprises on R & D in SWD segment continues to remains the same.

2.4 The final assessment order under section 143(3) r.w.s. 254 r.w.s. 144B of the Act was passed on 26.10.2022, assessing total income of Rs.10,52,01,153 and raising demand of Rs.6,43,97,016/-.

2.5 Aggrieved by the order under section 143(3) r.w.s. 254 r.w.s. 144B of the Act dated 26.10.2022, the assessee filed Writ Petition before the Hon'ble High Court of Karnataka. The Hon'ble High Court vide order in Writ Petition No.14541 of 2023 (T-IT) dated 19.07.2023 restored the matter and directed the Assessing Officer to proceed further in terms of the procedure under section 144C(13) of the Act.

2.6 The Ld.AO thereafter called for relevant information / documents vide letter dated 14.08.2023. The assessee vide letter dated 30.08.2023 furnished the details as called for. The Ld.TPO again determined the transfer pricing adjustment at Rs.6,69,36,803/- by treating the assessee to be research and development under the SWD segment. The Ld.AO also did not consider the comparables that was sought for exclusion as the assessee had a turnover of only 35 crores for the year under consideration.

Page 4 IT(TP)A No. 966/Bang/2023 2.7 Aggrieved by the order of the Ld.AO, assessee has filed the present appeal before this Tribunal being the second round of litigation on following grounds of appeal:

Sl. Tax Effect GROUNDS OF APPEAL No. in Rs.

a) The orders of the authorities below in so far as these are against the Appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the Appellant's case. 1 - b) The appellant denies itself liable to be assessed on a total income of Rs.10,52,01,153/- as against returned income of Rs.3,82,64,350/- under the facts and circumstances of the case. The addition of Rs.6,69,36.803/- being adjustment under section 92CA of the Act made by the assessing officer is bad in law 2 2,17,17,646 and thus the addition made needs to be deleted on the facts and circumstances of the case The authorities below erred in alleging that the appellant is into 'Research & Development activities' in software development as against pure Software Development Services provided 3 by the appellant thereby rendering the entire - process of selection of comparables devoid of any merit and thus the orders of the authorities below are bad in law and needs to be quashed on the facts of the case.

a) The authorities below ought to have applied the turnover filter of Rs. 1 crore to Rs.200 crores for selection of comparables on the facts of the case. 4 - b) Without prejudice, the authorities below ought to have restricted the upper limit of turnover at 10 times to that of the assessee company.

Page 5 IT(TP)A No. 966/Bang/2023

a) The authorities below erred in treating E-Infochips Ltd as a comparable company though it is functionally different to that of the appellant on the facts of the case. b) The authorities below failed to appreciate that there was an extraordinary event during the year under consideration and therefore the company E-Infochips Limited ought not to have been considered as a comparable under the circumstances of the case. c) The authorities below further failed to appreciate that the comparable E-Infochips Limited fails related party transaction filter 5 applied by the TPO and therefore needs to - be excluded under the circumstances of the case. d) The authorities below further erred in considering E-Infochips Ltd. with super profit margin as a comparable company, resulting in wrong computation of ALP Margin and therefore the company needs to be deleted as a comparable on the facts of the case. e) The authorities below failed to appreciate that the numbers adopted to arrive at the margin of the comparable at 73.91% is not discernible from the transfer pricing order on the facts of the case.

The authorities below failed the appreciate that the following companies are also functionally different to that of the appellant on the facts of the case: 6 a. Mindtree Limited - b. Sasken Technologies Limited c. Coforge Ltd. d. Persistent Systems Limited e. Infosys Limited

The comparable Mindtree Limited selected by the TPO needs to be excluded as it fails 7 turnover and functionality filter, although it - formed part of the assessee's original comparables on the facts of the case.

Page 6 IT(TP)A No. 966/Bang/2023

The TPO and the AO erred in — a) Rejecting the TP study of the appellant. b) Rejecting the use of multiple year data while arriving at appropriate comparables. c) Rejecting companies having different financial year ending d) Rejecting companies that have export sales 8 _ less than 75% of the sales. e) Rejecting companies whose service income is less than 75% of the total operating income. f) Applying related party filter at 25% of sales g) Selecting companies having substantial Research & Development activities

The learned DRP erred in not considering the submissions made by the appellant regarding filters and comparable companies which is sine 9 - qua non for passing the order and thus the order passed needs to be set aside on the facts and circumstances of the case.

The authorities below erred in not providing 10 working capital adjustment under the facts and - circumstances of the case.

a) The TPO and the AO erred in denying an appropriate risk adjustment for the year under consideration. b) The TPO, DRP and the AO further erred in 11 not appreciating that the appellant renders - services only to their parent company and thus suitable risk adjustment needs to be made in case of the appellant under the facts and circumstances of the case.

Page 7 IT(TP)A No. 966/Bang/2023

a) The TPO, DRP and the assessing officer failed to understand the spirit and intent of Rule 10B(1)(e)(ii) as per which even if one of the comparables selected by the appellant satisfies the computation mechanism for determination of the ALP, the 12 - determination of ALP by using arithmetic mean of different comparables is not warranted. b) The TPO erred in conducting the new study without rejecting all the comparables of the appellant.

The draft order of the assessing officer is bad in law as the mandatory conditions to invoke the jurisdiction under section 92CA of the Act 13 did not exist, or having not been complied with - and consequently the order of the assessing officer is bad in law for want of requisite jurisdiction

The appellant denies itself liable to be levied to interest under sections 234B and 234C of the Act and further the computation of interest 14 under sections 234B and 234C was not 4,18,75,665 provided to the appellant as regard to the rate, period and method of calculation of interest under the facts and circumstances of the case. The appellant craves leave of your Honour to add, alter, delete or substitute any of the grounds urged above. In view of the above and other grounds that may be urged at the time of the hearing of the appeal, the appellant prays that the appeal may be allowed in the interest of justice and equity.

Page 8 IT(TP)A No. 966/Bang/2023 3.1 Ground no. 3 is in respect of treating the assessee to be carrying out R&D functions as against a captive software development service provider.

3.1.1 The Ld.AR submitted that the Ld.AO/TPO recharacterised assessee to be R&D company. He submitted that identical issue had come up for consideration in assessee’s own case before this Tribunal for A.Y. 2011-12 in ITA No. 965/Bang/2022 vide order dated 17.05.2023 wherein this Tribunal observed and held as under. He submitted that, there is no change of facts and the service agreement based on which the rendition of services are common for both the years under consideration. He submitted that copy of the service agreement is placed at page 105 of the paper book which is entered into by assessee on 09.07.2004. The Ld.AR submitted that this Tribunal for A.Y. 2011-12, decided the issue by observing as under: “4.6 We have perused the service agreement in great detail. We note that, in the process of development of software as per the requirement and need by the AE, the intangible that arises out of the research carried out by the assessee is owned by Open Silicon Inc. as per clause (7) of the agreements. Clause 7 of the agreement also categorically reveals the assessee is a captive service provider though rendering research and development services. Merely because assessee has sufficient infrastructure or qualified employees / professionals to fulfil the requirement as per the projects designated by the AE cannot lead to the conclusion that it is a risk bearing research and development service provider. In the transfer pricing study, the entire risk pertaining to project and operation is borne by Open Silicon Inc. Even the technology risk in the development of the project is borne by the AE. The assessee is only undertaking manpower risk, as it has to identify qualified personnel who could render the services to the satisfaction of the AE. The Ld.TPO or the DRP do not dispute assessee is remunerated at cost+markup at 10%. Rule 10TA of the IT Rules defines a contract and research

Page 9 IT(TP)A No. 966/Bang/2023 and development services relating to software development wholly and partly includes research and development and producing of new theorems etc. Based on the above, we are of the considered opinion that assessee though renders research and development services to its AE in the process and fulfilling the designated contract, cannot be characterised as a KPO relating to software development. It is still a contract service provider who is remunerated on cost+ 10% markup and does not own any intangibles that is generated in the process of rendering of services. Assessee thus needs to be characterised as a captive service provider. Accordingly, we allow ground no. 4 raised by assessee.” 3.1.2 Nothing contrary has been brought on record by the Ld.DR. We note that the services rendered by the assessee is identical in the A.Y. 2011-12, wherein assessee is held to be a SWD provider. Respectfully following the above, we direct the Ld.AO/TPO to consider the assessee as a captive SWD service provider as against carrying out R&D under SWD. Accordingly, ground no. 3 raised by the assessee stands allowed.

Page 10 IT(TP)A No. 966/Bang/2023 4.1 The Ld.AR submitted that all the above comparables have turnover more than 200 crores and as against the assessee who has turnover of only 35 crores for the year under consideration. He submitted that for A.Y. 2011-12 in assessee’s own case, Mindtree Ltd., Persistent Systems Ltd. and Infosys Ltd. stood excluded on failure of upper turnover filter.

4.2 For the year under consideration, in respect of the following comparables, the turnover is as under: a) Sasken Technologies Ltd. – 388.09 crores b) Coforge Ltd – 800.99 crores

4.3 He thus submitted that, these comparables may be excluded as it does not satisfy the upper turnover of 200 crores.

4.4 In respect of E-Infochips Ltd., the Ld.AR submitted that the RPT filter is more than 25%. It is also submitted that this comparable is involved in diversified activities under the software development segment and ITeS segment which has been considered and reported under one head.

4.4.1 On the contrary, the assessee is a captive service provider. The Ld.AR submitted that this comparable has significant inventory and intangibles in the books of accounts and reliance was placed in paper book. He also placed reliance on the decision of Coordinate bench of this Tribunal in case of Micro focus software India Pvt. Ltd. reported in 140 taxman.com 175 wherein this comparable for A.Y. 2012-13, stood excluded for the various

Page 11 IT(TP)A No. 966/Bang/2023 reasons. The Ld.AR also submitted that the assessee therein was also identified as a captive service provider like that of assessee based on the FAR of that assessee.

4.4.2 On the contrary, the Ld.DR relied on the orders passed by the authorities below.

We have perused the submissions advanced by both sides in the light of records placed before us.

Admittedly in assessee’s own case for the immediately preceding assessment year, Infosys Ltd., Mindtree Ltd. and Persistent Systems Ltd. stood excluded for failure of upper turnover filter. Respectfully following the same, we direct the Ld.AO/TPO to exclude these comparables for the year under consideration.

4.4.3 In respect of E-Infochips Ltd., we note that this company is into diversified activities under SWD service segment and cannot be considered as a captive service provider. It is noted that this Tribunal in case of Micro Focus Software India (P.) Ltd. (supra) excluded this comparable by observing as under: “C.5 We note that in similar circumstance of a captive service provider, this Tribunal in case of Aspect Technology Center (I.) Pvt. Ltd. v. ITO(supra) observed and held as under: “21. As far as Gr.No.6 raised by the Revenue is concerned, the revenue in this ground has challenged exclusion of E-Infochips Ltd. on the ground that it failed the software service income filter at 75%. At the outset, the Assessee submits that E-Infochips Ltd. was excluded by the DRP on the ground that: (i) no segmental information regarding its diverse functions is available; (ii) there is presence of significant inventory

Page 12 IT(TP)A No. 966/Bang/2023 and (iii) it failed the software service income filter at 75% (Pages 17-18 of the DRP's directions). The Revenue, in its appeal, has challenged its exclusion only the first and the third grounds. In other words, the Revenue has not challenged its exclusion on the ground of presence of significant inventory and thus its exclusion on this ground has attained finality and cannot be disturbed by this Hon'ble Tribunal. Apart from the above, we find that the company's software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for that year. Thus, the above action of the DRP in rejecting the above company is correct. The DRP has also rightly appreciated that the above company is engaged in diverse activities such as product development and the provision of IT enabled services for which no separate segmental information is available in its Annual Report. On the contrary, the diverse activities of software development and the IT enabled services are considered and reported together in one segment. Thus, in the absence of such segmental details, the company was rightly held to be functionally not comparable to the Assessee which is a captive software development service provider (relevant submissions at internal IT(TP)A Nos.187 & 175/Bang/2016 page 73 of the objections filed before the DRP and pages 237-239 of the paperbook). Further, as was noted by the DRP, the company also has presence of inventory and is, therefore, incomparable to the Assessee. We also find that this Tribunal in Electronic Imaging India P. Ltd v. DCIT [(2017) 85 taxmann.com 124 (Bangalore-Trib) para 9 at pages 1726-1727]; Saxo India Pvt. Ltd. v. ACIT [2016] 67 taxmann.com 155 (Delhi - Trib.) (paras 10.1 and 10.2 at pages 1656-1657)] (which came to be upheld by the Hon'ble Delhi High Court); Finastra Software Solutions (India) (P.) Ltd. v. ACIT [[2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 at page 1744]; Cypress Semi-conductor Technology India Pvt. Ltd. v. DCIT [IT(TP)A No.356/Bang/2016 at paras 19-20 at pages 1773-1775]; and Commscope Networks (I) Pvt. Ltd. v. ITO [TS-161-ITAT-2017(Bang)-TP at para 9 on pages 1639-1640] held that this company ought to be excluded from list of comparable companies in the case of companies rendering SWD services similar to that of the Assessee. Consequently, for the above reasons, the action of the DRP in directing the exclusion of E- Infochips Ltd. is upheld and the ground is dismissed.” C.6 Respectfully following the above view, we direct the Ld.AO/TPO to exclude this Comparable from the final list.”

Page 13 IT(TP)A No. 966/Bang/2023

Nothing contrary has been brought on record by the Ld.DR. Respectfully following the above view, we direct the Ld.AO/TPO to exclude E-Infochips from the final list of comparables. Accordingly, ground nos. 4-5 raised by assessee stands allowed. In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 12th June, 2024.

Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 12th June, 2024. /MS /

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

Assistant Registrar, ITAT, Bangalore