NXP INDIA PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-5(1)(1), BANGALORE

IT(TP)A No.264/Bang/2021 Assessment year : 2016-17 NXP India Pvt.Ltd. Vs. The Deputy Commissioner (Successor of NXP Semiconductors of Income Tax, India P. Ltd.), Circle 5(1)(1), Ground Floor, Manyatta Tech Park, Bangalore. Green Heart Phase III, Nagawara, Bengaluru – 560 045 PAN: AADCP 9454H APPELLANT RESPONDENT Appellant by : Shri Vikram Vijayaraghavan, Advocate Respondent by : Shri V S Chakrapani, CIT(DR)(ITAT), Bengaluru. Date of hearing : 01.09.2022 Date of Pronouncement : 13.09.2022 O R D E R

Per Padmavathy S., Accountant Member

• Developing marketing and sales collaterals • Advertising and sales promotion • Assistance in identifying customers in India • Pricing decision • Contracting with customers and invoicing. 4. The assessee filed its return of income for AY 2016-17 on 28.11.2016 declaring income of Rs.24,37,05,200. The case was selected for complete scrutiny and notice u/s. 143(2) and 142(1) of the Act served on the assessee. The case was referred to the Transfer Pricing Officer (TPO) u/s. 92CA for computation of arm’s length price [ALP] u/s. 92CA of the Act. The TPO made an adjustment to the ALP for an amount of Rs. 36,37,43,477. The AO passed the draft assessment order incorporating the TP adjustment and further made disallowance towards depreciation on networking equipments and mismatch in income as per Form 26AS and ITR. Aggrieved the assessee raised its objects before the DRP. The DRP gave marginal relief to the assessee due to which the TP adjustments was reduced to Rs.31,36,95,835 and upheld the disallowances/additions made by the AO. The AO passed the final order pursuant to the directions of the DRP against which the assessee is in appeal before the Tribunal.

i. Ground Nos.1 & 2 - General ii. Ground Nos.3 to 10 - Transfer Pricing issues. iii. Ground 11 & 12 - Disallowance of depreciation on networking equipment iv. Ground 13 - Disallowance of differential interest income and sub- lease income as appearing in Form 26AS v. Ground 14 — Non allowance of deduction of education cess vi. Ground 15 — Initiation of Penalty proceedings under section 271(1)(c) of the Act vii. Ground 16 — Levy of interest under section 234B of the Act

6. Ground No. 1 and 2 being general does not warrant separate adjudication. Ground No.14 is not pressed and hence dismissed as not pressed. Ground No.15 & and 16 are consequential. Out of the 8 grounds raised for TP adjustment, the assessee vide Ground No.7 (a) sought exclusion of 13 companies from the comparables. During the course of hearing the ld. AR pressed for exclusion of only the following 4 companies out of 13 companies and therefore the other comparables sought for exclusion are dismissed as not pressed:-

(1) Infosys Ltd. (2) Larsen & Toubro Ltd. (3) Persistent Systems Ltd. (4) Thirdware Solutions Ltd.

7. The assessee sought inclusion of 6 comparables vide Ground No.7 (b) and (c). Out of this during the course of hearing the ld AR pressed for inclusion on only Akshay Software Technologies Limited and therefore the rest of the inclusions are dismissed as not pressed. The other grounds raised for TP adjustments are also dismissed as not pressed.

Transfer Pricing adjustment 8. The assessee company has entered into the following international transactions with its Associated Enterprises (AEs) as per the Transfer Pricing (TP) document furnished for the A.Y.2015-16:-

International Transactions Receivables Payables Particulars Method /Received /Paid Purchase of Capital equipment 22,84,233 TNMM Purchase of consumable packing material 3,345 TNMM Received Free of charge 12,19,295 TNMM Provision of Software Development Services 2,21,96,46,928 TNMM

1 Provision of Sale agent support Services 9,85,46,260 TNMM Outstanding Receivables 21,15,82,448 TNMM Reimbursement of employee 4,55,81,740 Benefit Other Method Reimbursement of provident fund 26,42,176 Other method Unbilled revenue 2,35,91,424 TNMM Total 2,52,97,75,636 7,53,22,213 2,60,50,97,849

Particulars Unallocat Total Sales agent Software ed support Development Services Services Income Income from Services 2,31,81,93,188 2,21,96,46,928 9,85,46,260 Foreign exchange gain 1,68,04,461 1,68,04,461 1,68,788 5,00,73,647 5,02,42,435 Non Operating Income Operating revenues 2,23,66,20,177 9,85,46,260 5,00,73,647 2,38,52,40,084 Expenditure Employee benefits 1,22,55,75,271 4,10,44,547 5,02,99,200 1,31,69,19,048 expenses Finance Cost 6,09,415 52,88,542 58,97,957 12,96,88,211 Depreciation and amortization expenses 12,96,88,211 Other operating expenses 68,68,88,007 2,39,56,766 71,08,44,773 Operating cost 2,04,27,60,904 6,50,01,313 5,55,87,742 2,16,33,49,960 Operating profit 19,38,59,272 3,35,44,947 (55,14,095) 22,18,90,124 Operating profit/ Operating cost 9.49% 51.61% 10.26%

Financial Year wise OP/OC (%) Weighted S.No. Company Name 2015-16 2014-15 2013-14 Average Kals Information Systems Pvt. Ltd. 3.97% 5.77% 16.94% 8.60% 1 3.20% 2.76% 36.64% 14.50% Rheal Software Pvt. Ltd. 2 No Data in Harbinger Systems Pvt. Limited 12.69% 17.18% Public 15.06% 3 Domain 18.50% C G-V A K Software & Exports 19.60% 19.87% 13.81% 4 Ltd. R S Software (India) Ltd. -2.09% 32.75% 24.14% 20.87% 5 Larsen & Toubro Infotech Ltd. 26.29% 24.22% 23.54% 24.83% 6 26.36% 15.94% 29.19% 35.72% 7 Nihilent Ltd. 32.14% 45.00% 28.20% 7.53% 8 Inteq Software Pvt. Ltd. 30.89% 26.92% 31.34% 35.64% 9 Persistent Systems Ltd. 41,95% 32.42% Infobeans Technologies Ltd. 34.98% 20.78% 10 44.39% 44.68% 36.90% 11 Thirdware Solution Ltd. 23.89% Infosys Ltd. 38.22% 41.30% 36.28% 38.61% 12 47.56% 38.04% 39.28% Aspire Systems (India) Pvt. Ltd: 34.26% 13 68.68% 68.82% 66.45% Cybage Software Pvt. Ltd. 62.90% 14 35th Percentile 20.87% 27.28% Median 32.42% 65th Percentile

SWD SEGMENT Particulars Formula Amount (in Rs.) OR 2,23,62,82,601 Taxpayers operating revenue 2,04,27,60,904 Taxpayers operating cost OC 19,35,21,697 Taxpayers operating profit OP PL1=OP/OC Taxpayers PLI 9.47% 35th Percentile Margin of comparable set 20.87% Yes Adjustment Required (if PLI< 35th Percentile) Median Margin of comparable set M 27.28% ALP = Arm's Length Price 2,60,00,26,078 (1+M)*OC Price Received OR 2,23,62,82,601 Shortfall being adjustment ALP-OR 36,37,43,477

The ld. AR further submitted that these 3 companies were considered by the coordinate Bench of the Tribunal in assessee’s own case for AYs 2012-13 & 2013-14 in IT(TP)A Nos.692 & 2861/Bang/2017 and by order dated 27.4.2020 directed for exclusion of from the list of comparables.

“Persystent Systems Limited 6. The assessee objected for the exclusion of this company by the lower authorities in the tally of comparables by arguing that it is engaged in OPD and there is a difference in OPD and IT services and that the assessee is having revenue from other sources and no segmental data is available. It was also submitted that in the assessment year 2012-2013, it is an abnormal year of operation and it is owning various intangibles. For this purpose, he relied on the order of the Bangalore Bench of the Tribunal in the case of NXP Semiconductor India (P.) Ltd. v. Dy. CIT [IT Appeal No. 1634 (Bang.) of 2014, dated 22-7-2015]. 6.1 We have carefully gone through the order of the coordinate Bench in the case of NXP Semiconductor India (P.) Ltd. (supra) for the assessment year 2009-2010, wherein it was observed that Persystent Systems Limited was engaged in product development and product design and analysis services is functionally different from a pure software service provider and therefore, excluded it from the list of comparables for software development services. The same view was taken in the case of Saxo India (P.) Ltd. v. Asstt. CIT [2016] 67 taxmann.com 155 (Delhi - Trib.), by observing that Persystent Systems Limited is engaged in running software development services as well as sale of software products. Albeit the percentage of software products in the total revenue is less, as has been noted by the TPO, and also there is no precise information about the contribution made by such small sale of software products to the total profits of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, it was directed to exclude Persystent Systems Limited from the list of comparables. In the present case also, it is noticed that Persystent Systems Limited is engaged in software products development. There is a difference between the outsourced software product development and IT services, which is evident from page nos. 973 and 974 of the paper book, as under:— "Outsourced Software Product Development (OPD) is different from IT services. Unlike a typical IT services project, where requirements are fixed while time and money are variable, a software product development project starts with fixed time and money, thus leaving requirements as the only variable. Essentially, the product development team's task is to produce the best set of requirements within a fixed time and budget. Persistent Systems has emerged as a leader in the OPD segment - a segment which is fast growing. OPD and outsourced IT services: the difference. How is OPD different from outsourced IT services is an oft asked question. In IT services, projects start with well- defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for the project. After completion, the project goes into maintenance mode. In product development, requirements are less clearly defined. Instead, most product developers are given ship-dates for the product that are typically determined by external factors. Once the ship-dates are identified, the budgets for the product are frozen. In product development projects, all requirements can never be completely fulfilled in a particular version. As a result, most product companies plan multiple product versions for their product. Every team member must contribute not only to building features for the current release but must also contribute enhancements and provide feedback for future releases of the product." 6.2 Persystent Systems Limited having revenue of 8103.64 Million from software services and other income of 323.76 million from income from other sources. Assessment year 2012-2013 is an abnormal year of operation to Persystent Systems Limited, which is evident from the annual report placed on record by the assessee in its paper book. Further, Persystent Systems Limited is having intangibles to the tune of 2402.67 million as evident from its balance sheet ended on 31.03.2012. Being so, it is not comparable to assessee's case. We, therefore, direct the TPO to exclude Persystent Systems Limited from the list of comparables. Larsen & Toubro Infotech Limited 7. The learned AR relied on the order of the ITAT Bangalore Benches in the case of CGI Information Systems and Management Consultants (P.) Ltd. v. Asstt. CIT [2018] 94 taxmann.com 97 and submitted that it was excluded from the list of comparables for the reason that Larsen & Toubro Infotech Limited was a software product company and segmental information on SWD services was not available. In the present case, Larsen & Toubro Infotech Limited engaged in development of software onsite and its overseas revenue for the financial year 2011-2012 was Rs.27,838,752,995 and domestic revenue was Rs.1,756,792,454. Further in the case of Huawei Technologies India (P.) Ltd. v. Jt. CIT [2019] 101 taxmann.com 313 (Bang. - Trib.) has taken the same view that it cannot be a comparable with that of the assessee. Being so, we direct the TPO to exclude the same from the list of comparables. Infosys Limited 8. The argument of the learned AR is that Infosys Limited is functionally different from the assessee. It owns intangible and undertakes research and development. The learned AR also submitted that it has high brand value and turnover. On the contrary, the learned DR submitted that the nature of services remains the same irrespective of whether it is engaged in providing onsite/offsite services. 8.1 We have heard the rival submissions and perused the material on record. Similar issue came up for consideration before the Tribunal in the case of NXP Semi Conductors India (P.) Ltd. (supra), wherein it was held as under:— "10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a coordinate bench of the Tribunal in the case of Cisco Systems Services B.V., India Branch (supra), for Assessment Year 2009- 10 had held that this company be excluded from the final set of comparables on the ground that it is functionally dis-similar and different from a purely software service provider and at para 20 of the order has held as under :— "20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though the said company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kals Information Systems Ltd. and Tata Elxsi Ltd. to be not proper comparables. Relevant paras of the order dt.14.8.2014 is reproduced hereunder:— 26.2 Infosys Technologies Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. v. DCIT, by order dated 28-11-2013 with regard to this comparable has held as follows:— "11.0 Infosys Technologies Ltd.

11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :— (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ;

(v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies."

10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra), we direct the Assessing Officer/TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider. " 8.2 In the present case also, Infosys Limited is engaged in a leading global technology services corporation. The company provides business consulting, technology, engineering and outsourcing services to help clients build tomorrows enterprise. In addition, the company offers software products for the banking industry. It owns high brand value at Rs.56,286 crore in the year 2012 and percentage of brand value to revenue is 1.67% and brand value as a percentage of market capitalization is 34.2%, and also incur huge amount for research and development at Rs.5 crore as a capital expenditure and Rs.655 crore as a revenue expenditure for the year ended 31st March, 2012. Therefore, it cannot be said to be a comparable. We, therefore, direct the TPO to exclude Infosys Limited from the list of comparables.”

17. As far as Thirdware Solutions Ltd. is concerned, the ld. AR submitted that this company is also functionally different and engaged in product development and earns revenue from sale of licenses and subscriptions. Segmental information is not available. Further, this company was excluded as a comparable in the decision of the coordinate bench of the Tribunal in the case of Sandisk India Device Design Centre Pvt. Ltd. in IT(TP)A No.288/Bang/2021 for AY 2016- 17 by order dated 30.6.2022.

17.6 We have perused the submissions advanced by both sides in the light of records placed before us. 17.7 He placed reliance on the decision of Coordinate Bench of this Tribunal in case of OLF (India) Software Pvt. Ltd. vs. ACIT (supra) wherein this Tribunal following its decision in case of LSI India research development (P.) Ltd. vs. DCIT reported in [2021] 124 taxmann.com 83, excluded Persistent Systems Ltd., L&T Infotech Ltd., Thirdware Solutions and Infosys Ltd. by observing as under: “3.2 This Tribunal in LSI India research development (P.) Ltd. v. DCIT (supra) observed in respect of persistent systems, L & T Infotech, Thirdware Solutions, Infosys Ltd. as under: 16. As far as the challenge by the assessee on exclusion of aforesaid 5 companies in ground No. 2(f), the ld. counsel for the assessee has brought to our notice a decision of Bangalore Bench of ITAT for the very same Assessment Year 2014-15 in the case of LG Soft India (P.) Ltd. v. DCIT [IT(TP) Appeal No. 3122 (Bang.) of 2018, dated 28-5-2019]. In this order rendered in a case of assessee rendering SWD services such as the assessee, the Tribunal excluded 3 out of 5 companies referred to in the earlier paragraph and remanded 1 company for fresh consideration with the following observations:-

5. The Ld A.R submitted that M/s Infosys Ltd, M/s Persistent Systems Ltd and M/s Thirdware Solutions Ltd have been excluded by the co-ordinate bench in the assessee's own case in AY 2008-09 in IT(TP)A No. 1673/Bang/2012.

IV. AKSHAY SOFTWARE TECHNOLOGIES LIMITED 32. It was rejected by the TPO for the reason that the function of this company appears to be more in the nature of support services and I.T. enabled services. However, this company is engaged in providing professional services, implementation, support and maintenance of ERP products and other services. These are nothing but software development services, as is evident from Notes forming part of the financial statement, which is placed at paper book page No.1825. Further, the revenue from software services accounts for 99.45% of the total revenue of the company as evident from the financial statement placed on record at paper book page No.1831. Being so, we direct the TPO to consider this company as comparable to the assessee’s case while selecting the comparables.

Corporate Issues

“ 11. We have considered the rival submissions and are of the view that the issue requires a fresh consideration in the light of the submissions made by the Assessee before the DRP. As far as depreciation on Networking equipment is concerned, the AO has not called upon the Assessee to demonstrate as to how Networking equipment on which depreciation was claimed at 60%, satisfied the requirements being classified as “Computers”. This specific objection by the Assessee before the DRP has not been controverted. Therefore there was lack of proper opportunity afforded to the Assessee before the AO. Therefore the issue requires to be examined afresh by the AO after due opportunity to the Assessee of being heard. As far as depreciation on active components and 19 inch heavy racks, the position remains the same, in as much as the AO has not given due opportunity of being heard to the Assessee. Before DRP the Assessee has explained the nature of the components and racks on which depreciation was claimed at 60% and as to how they were in the nature of “Computers”. These submissions have not been considered by the DRP. In the circumstances, we are of the view that this issue also requires to be examined afresh by the AO after due opportunity to the Assessee of being heard to the Assessee. We hold and direct accordingly. The relevant ground of appeal is treated as allowed for statistical purpose.”

28. We also notice that the Special Bench of Hon’ble ITAT Mumbai has considered a similar issue in the case of Datacraft India Ltd (133 TTJ 377) and held that -

'31. Now we have to consider whether a 'router' can be considered as "computer hardware" or a "computer component". Computer hardware refers to the physical parts of a computer and related devices. Internal hardware devices include motherboards, hard drives, and RAM. External hardware devices include monitors, keyboards, mouse, printers, and scanners. The internal hardware parts of a computer are often referred to as 'components', while external hardware devices are usually called 'peripherals'. Together, they all fall under the category of computer hardware. 'Software', on the other hand, consist of the programs and applications that run on computers. Because software runs on computer hardware, software programs often have 'system requirements', that list the minimum hardware required for the software to run. 31.1 In short, "Router" is a hardware device that routes data (hence the name) from a local area network (LAN) to another network connection. A router acts like a coin sorting machine, allowing only authorized machines to connect to other computer systems. Most routers also keep log files about the local network activity. Now the question is whether this "machine" can be used independent of Computer. If yes, then it cannot be called "Computer Hardware" in all circumstances. 31.2 When "Computer Hardware", is used as a component of the computer, it becomes part and parcel of the computer, as in the case of operating software in the computer. In such a situation, hardware in question can be considered as a part of a computer and hence a 'computer'. Per contra, when the machine is not used as a necessary assessory or in combination with a Computer, it cannot be called a 'Computer component.' 31.3 Coming to the Routers, it is seen that these can also be used with a Television and in such use, no computer is required. These are also called T.V. routers. Similarly, "Internet Service Providers", give connectivity, by installing a router in the premises of the persons/institutions availing the internet connection. In these cases the router is not used along with a computer. In such a situation, it would be a "Stand alone" equipment. In such cases this cannot be considered a component of a computer or computer Hardware. Giving another example, a computer software can be used in many devices including washing machine, televisions, telephone equipment etc. When such software is used in those devices, it integrates with that particular devices. The predominant function of the device determines its classification. Only if the Computer software, resides in a computer, then it become a part and parcel of a computer and, as long as it is as integral part of a computer, it is classified as a 'Computer'. 31.4 In view of the above discussion, we are of the considered view that router and switches can be classified as a computer Hardware when they are used along with a computer and when their functions are integrated with a 'computer' In other words, when a device is used as part of the computer in its functions, then it would be termed as a computer.

32. Now we will advert to the decisions relied on by the rival parties. We have set out above the cases decided by various Benches of the Tribunal in favour of the assessee. The lead order is in the case of Samiran Majumdar (supra) which has been followed, directly or indirectly, in most of the subsequent cases. We will take up this case for discussion, in which the question was whether printer and scanner could be allowed a higher rate of depreciation as applicable to computers. The Bench noticed that the printer and scanner cannot be used without computer. It was on this appreciation of the factual position that the printer and scanners were held to be part of computer qualifying for depreciation at the rate applicable to computer. In the opposition the orders taking view in favour of the Revenue are led by the case of router mania Technologies (supra). In this case it was observed that the router is a device which links or connects the computers for the exchange of relevant data. In reaching the conclusion that router is not eligible for depreciation at the rate applicable to computer, the Bench noticed that the router at its own does not perform any logical, arithmetical or memory functions by manipulations of electronic, magnetic or optical impulses.