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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI. B. R. BASKARAN & SMT. BEENA PILLAI
ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals has been filed by assessee as well as revenue against order dated 02/12/2016 passed by the Ld.CIT(A), Bngalore on following grounds of appeal: “Based on the facts and circumstances of the case and in law, NVIDIA Graphics Private Limited (hereinafter referred to as "Appellant"), respectfully craves leave to prefer an appeal against the appeal order passed by the learned Commissioner of Income-Tax (Appeals) - 5 [hereinafter referred to as the "learned CIT(A)"] under section 250 of the Income-tax Act, 1961 ('Act") on the following grounds: That on the facts and circumstances of the case and in law, The order of the learned AO/ TPO is based on incorrect interpretation of law and therefore is bad in law. The learned AO/TPO has erred, in law and in facts, by assessing/ computing the total income at INR 343,738,662 and the total net tax payable as INR 91,851,777; Transfer Pricing grounds 2. The learned AO! TPO have erred in making an addition of INR 267,671,356 to the total income of the Appellant on account of adjustment in the arm's length price of the provision of software development services and marketing support services transactions entered by the Appellant with its Associated Enterprises; The learned CIT(A) has erred, in law and in facts, by not accepting the Appellant's plea in entirely and confirming with the learned AO/ TPO on not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("Rules"), for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length;
4. The learned CIT(A) has erred in law and facts by upholding the action of AD! TPO in determining the arm's length margin/ price using only FY 2010-11 data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements;
5. The learned CIT(A) has erred in law and facts by upholding action of AO!TPO in not making suitable adjustments to account for differences in the risk profile of the Appellant vis-à-vis the comparables; Software Development Services Transaction
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6. The order of the learned CIT(A) is based on incorrect facts, which are not relevant for Assessment Year ("AY") 2011-12 but relevant to AY 2010-11; 7. The learned CIT(A) has erred in law and facts by upholding the action of AO/ TFO in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters: 7.1 The learned CIT(A) has erred, in law and in facts, by upholding AO/ TPO action of rejecting certain comparable companies identified by the Appellant using export earnings greater than 75% of the sales as a comparability criterion. 7.2 The learned CIT(A) has erred, in law and in facts, by upholding AO/ TPO action of rejecting certain comparable companies identified by the Appellant for having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months); 7.3 The learned CIT(A) has erred, in law and in facts, by upholding AO/ TPO action of rejecting certain comparable companies identified by the Appellant by applying employee cost greater than 25% of the total revenues' as a comparability criterion; 7.4 The learned CIT(A) has erred, in law and in facts, by upholding AO/ TPO action by rejecting certain comparable companies identified by the Appellant where consolidated results had been used for analysis. The Appellant had considered the consolidated results in only those cases where the income of the Indian company constituted more than 75% of the consolidated company-wide/ segmental revenues; 8. The learned CIT(A) has erred in law and in facts, by upholding AO/ TPO action of accepting certain companies based on unreasonable comparability criteria; 9. The learned CIT(A) has erred in law and in facts, by upholding AO/ TPO action of rejecting certain companies based on unreasonable comparability criteria; Marketing Support Services Transaction 10. The learned CIT(A) has erred, in law and in facts, by not providing any specific adjudication against any of the grounds regarding marketing support services transaction which the Assessee wishes to raise as follows: 10.1 The learned TPOI AD have erred, in law and in facts, by not providing the search strategy, filters and basis on which the comparable companies were selected by TPO; 10.2 The learned TPO/ AD have erred, in law and in facts, by suo moto rejecting certain comparable companies selected by the TPO in the show cause notice, against which the Appellant did not raise any objections for exclusion; 10.3 The learned TPO/ AD have erred, in law and in facts, by rejecting companies selected by Appellant in TP documentation based on Page 4 of 23 & IT(TP)A No.801/Bang/2017
unreasonable comparability criteria and without providing any rationale justification; 10.4 The learned TPO/ AD have erred, in law and in facts, by not providing the margin computation of the final set of comparable companies selected by the TPO in the TIP order; 10 5 The learned TPO/ AO have erred, in law and in facts, by not making suitable adjustments to account for differences in the working capital of the Appellant vis-ä-vis the comparables while the benefit of working capital adjustment has been provided for software development services transaction; General grounds 11 The learned CIT(A) has erred, in law and facts, in confirming the imposition of interest of INR 27,215,433 and INR 1,515,775 under Section 234B and 234D respectively of the Act by the learned AO. 12 The learned CIT(A) has erred, in law and facts, in holding that initiation of penalty proceedings under section 271(1)(c) of the Act by the learned AO is consequential in nature. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.
“1. The order of the Commissioner of Income Tax(Appeals) - 12, Bangalore, is opposed to the law and not on the facts and circumstances of the case.
Whether, on the facts and in the circumstances of the case, the CIT(A) is justified in law in deleting the addition made on account of advertisement expenses considering Non-STPI unit of the assessee company rendered services exclusively to NVDIA Singapore and none of the other STPI units had the benefit of those services even though the advertisement is made in India exclusively for the products of NVDJA Singapore in India. However, all the group companies may also be benefitted due to increase in popularity of the brand and the company through marketing.
On the facts and in the circumstances of the case, the CIT(A) erred in law in directing the Assessing Officer to reduce the expenditure incurred in travel, telecommunication etc, both from the Export Turnover as well as the Total Turnover for the purpose of computation of deduction u/s.10A of the IT Act without appreciating the fact that the statue allows exclusion of such expenditure only from the Export turnover by way of specific definition of Export Turnover as envisaged by sub-clause(4) of explanation 2 below sub-section 8 of section bA. On the other hand, there is no specific
Page 5 of 23 & IT(TP)A No.801/Bang/2017 provision in section bOA warranting exclusion of above expenses from total turnover also.
Whether in the facts and circumstances of the case and in law, the Hon'ble CIT(A) was justified in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies.
Whether the Hon'ble CIT(A) was right in not accepting the quantitative filters and qualitative filters of the TPO and applied functional matrix which is narrower than the functionality matrix originally used by TPO.
6. For these and other grounds that may be urged upon, the order of the CIT(A) may be reversed and that assessment order be restored.
The appellant craves leave to add, alter, amend or delete any other grounds on or before hearing of the appeal. Brief Facts of the case are as under: 2. Nvidia Graphics Pvt Ltd is a subsidiary of NVIDIA International Inc., US. The assessee provides software development services and marketing support services to its Associated Enterprises ('AEs'). The assessee filed its return of income on 25/10/2011 declaring total income of Rs.4,53,97,517/- under normal provisions of the Act. The return of income was processed under section 143(2) of the Act and had been selected for scrutiny. Assessee was served with notice for assessment. 2.1 Ld.AO observed that assessee is a company engaged in business of software development. As assessee entered into international transaction with its associated enterprise, issue was referred to Ld.TPO under section 92CA of the Act. On receipt of reference, Ld.TPO issued notice to assessee calling upon to file economic details of international transaction between assessee and AE in Form-3CEB. From details filed by assessee, Ld.AO observed that assessee had following international transaction with its AE:
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Particulars Software Marketing development support Total services services
2,56,37,23,450 11,86,62,180 2,68,23,85,630 Value of international transactions (in Rs.)
2.2 Ld.TPO observed that assessee used TNMM as most appropriate method and OP/OC as PLI and determined margin to be 11.96% for software and hardware development service segment. It was observed that assessee used following 16 comparables with an average margin of 12.84%. Assessee thus held its transaction to be at arms length price. Weighted SI Comparable Average No. Margin 1 Evoke Technologies Private Ltd 20.05% 2 Larsen & Toubro Infotech Ltd 18.19%
3 Mindtree Ltd (Segmental) 12.08% 4 R S Software (India) Ltd 11.99% Sasken Communication 5 22.79% Technologies Ltd 6 Persistent Systems Ltd 23.91% Akshay Software Technologies 7 4.58% Ltd Ancent Software International 8 6.83% Ltd 9 Aztecsoft Ltd (Consolidated) 6.80% 10 Caliber Point Business -0.95% Solutions Ltd (Segmental) 11 Cat Technologies Ltd 26.90% 12 CG-VAK Software & Exports Ltd 0.31% (Segmental) 13 Goldstone Technologies Ltd 3.70% Helios & Matheson Information 17.22% 14 Technology Ltd K P I T Cummins Infosystems Ltd 15 12.53% (Consolidated)
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16 LGS Global Ltd 14.53% 17 Maveric systems Ltd 14.50% 18 Quintegra Solutions Ltd -0.29% 19 R Systems International Ltd 12.10% (Segmental) 20 Saven Technologies Ltd 17.52% (Consolidated Segmental) 21 Thinksoft Global Services Ltd 11.54% 22 Thirdware Solutions Ltd 21.75% 23 Zylog Systems Ltd 16.64% Arithmetic Mean 12.84% 2.3. In respect of Marketing Support Service Segment, assessee computed its margin at 8.74%. It used following 9 comparables with average margin of 6.68%. Assessee thus held its transaction to be at arms length.
Weighted SI Comparable Average No. OP/OC 1 I D C (India) Ltd 11.27% 2 Access India Advisors Ltd 6.62% E D C I L (India) Ltd 3 3.80% (Segmental) HT Music & Entertainment 4 3.98% Co. Ltd I C R A Management Consulting Services 5 4.72% Limited India Tourism Development Corporation Ltd (Segmental) 6 -1.28% Indus Technical & Financial 7 9.53% Consultants Ltd Inhouse Productions Limited 4.25% 8 (Segmental) Inmacs Management Services 9 17.22% Ltd Arithmetic Mean 6.68%
Page 8 of 23 & IT(TP)A No.801/Bang/2017 2.4 Ld.TPO dissatisfied with economic analysis, filed by assessee for both segments, conducted fresh search and by applying various filters rejected comparables selected by assessee. 2.4.1. For Software Development segment, the Ld.TPO arrived at following set of following 13 comparables with average margin of 24.82% . SI. OP/OC Comparable (Unadjust No. ed) 1 Larsen & Toubro Infotech Ltd 19.83% 2 Mindtree Ltd (Segmental) 10.66% 22.84% 3 Persistent Systems Ltd 4 R S (Software) India Ltd 16.37% 5 Sasken Communication 24.13% Technologies Ltd 8.11% 6 Evoke Technologies Private Ltd 7 Acropetal Technologies Ltd 31.98% (Segmental) 21.03% 8 e-Zest Solutions Ltd 9 E- infochips Ltd 56.44% 10 I C R A Techno Analytics Limited 24.83% 11 Infosys Ltd 43.39% 12 Persistent Systems & Solutions 22.12% Ltd 13 Tata Elxsi Ltd (Segmental) 20.91% Arithmetic Mean 24.82% 2.4.2. He thus proposed an adjustment of Rs.22,37,15,272/- under SWD segment being Rs.1,65,11,013/- being shortfall. 2.4.3. For Marketing Support Services, the Ld.TPO shortlisted following comparables with average margin of 18.25%.
SI Comparable Margin No. (Unadjusted) Asian Business Exhibition & 19 51% Conference Ltd
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Cyber Media Research Ltd 10.59% ICC International Agencies Ltd 24.66% Arithmetic Mean 18.25% 2.4.4. The Ld.TPO thus proposed adjustment at Rs.1,03,77,006/- 3. On receipt of the order passed under section 92CA of the Act, the Ld.AO passed draft assessment order. In the draft assessment order apart from transfer pricing adjustment, the 3.1. Ld.AO proposed following additions:- (i) Reallocation of the advertising expenses among all the four units of the Assessee in ratio of their turnover. As a result, the Ld.AO made an addition of Rs 1,22,93,684/- to the total income of the Assessee. (ii) Reduction of the expenditure incurred on travel and communication incurred by the Assessee in foreign currency only from the export turnover and not from the total turnover for the purpose of computation of deduction u/s 10 of the IT Act. Based on the same the Ld.AO disallowed deduction u/s 10A of Rs.1,83,76,105/- and added the same back to the total income of the Assessee. 3.2. Assessee vide letter dated 23/9/2015 intimated the Ld.AO about its preference to file an appeal before the Ld.CIT(A). The Ld.AO thus passed the final assessment order u/s 143(3) r.w 144C of the Act thereby computing total income in the hands of assessee at Rs.34,37,38,662/-.
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4. Aggrieved by the order of Ld.AO assessee preferred appeal before the Ld.CIT(A). 4.1. Before the Ld.CIT(A) assessee filed its objections in respect of certain comparables for exclusion. Assessees also sought for inclusion of certain comparables. The Ld.CIT(A) rejected the Tata Elxsi Ltd (Seg.) and Infosys Technologies Ltd., comparables stating these to be functionally different, by relying on various judicial precedents as submitted by the Appellant. 4.2. The Ld.CIT(A) directed the Ld.AO/TPO to treat foreign exchange fluctuation as operating in nature, while computing the operating margin of Appellant as well as the comparable companies, as it had direct nexus with the business of the assessee’s. 4.3. The Assessee had objected for the action of the Ld.TPO/AO in not providing the search strategy, filter, basis for selection of comparables and suo moto rejection of certain comparables without providing any rationale/justification. The Ld.CIT(A) did not adjudicate on any of matters with respect to the marketing support services segment. 0n corporate tax issues: 4.4. The Ld.CIT(A) directed the Ld.AO to reduce the expenditure incurred on travel and communication both from the export turnover and total turnover for the purpose of computation of deduction u/s 10A of the IT Act by following the decision of the Hon’ble Karnataka High Court in the case of CIT vs.Tata Elxsi Ltd. (349 ITR 98)
Page 11 of 23 & IT(TP)A No.801/Bang/2017 4.5. The Ld.CIT(A) deleated the addition made on account of re- allocation of advertisement expenses by considering the order of the coordinate bench of this Tribunal in favour of the Assessee in its own case for the AY 2009-10. 4.6. Comparables that were finally retained post Ld.CIT(A) order as under:- SI. Margin Margin Comparable (Unadjusted No (Adjusted) ) . 1 Larsen & Toubro Infotech Ltd 19.70% 18.93% 10.66% 8.53% 2 Mindtree Limited (Seg) 3 Persistent Systems Ltd 22.84% 20.83% 4 R S (Software) India Ltd 16.37% 15.46% Sasken Communication 5 24.13% 23.69% Technologies Ltd
6 Evoke Technologies Private Ltd 8.11% 7.28%
7 Acropetal Technologies Ltd (seg) 23.67% 19.83% 8 e-Zest Solutions Ltd 21.03% 18.20% 9 E- infochips Ltd 56.44% 55.12% 24.83% 22.02% 10 I C R A Techno Analytics Ltd
11 Persistent Systems & Solutions 21.51% 19.79% Ltd 4.7. The Ld.CIT(A) deleted the additins made by the Ld.AO under corporate tax issues. 5. Aggreived by the order of Ld.CIT(A), both assessees as well as revenue are in appeal before us. We first take up appeal filed by revenue.
Page 12 of 23 & IT(TP)A No.801/Bang/2017 5.1. Ground No.1 is general in nature and do not require adjudication. 5.2. Ground No.2 is in respect of deleting the addition made in respect of advertisment expenes. The Ld.AR submitted that, the software development activities were undertaken by NVIDIA India from its STPI registered units at Bangalore, Pune and Hyderabad. The STPI units are not engaged in any sales and marketing activities. 5.3. He submitted that the Non - STPI unit at Bangalore is engaged in providing only marketing support services to its group companies overseas. In respect of this marketing support activity, the assessee has entered into Service Representative Agreement with its group Company, NVIDIA Singapore. The marketing support services include promotion of products of NVIDIA Singapore in India. The Marketing unit was compensated at cost plus 8% by NVIDIA Singapore. 5.4. The Ld.AR submitted that, separate set of accounts were maintained for STPI and Non-STPI unit and expenditure pertaining to each unit is clearly identifiable and is debited to respective unit. It was also submits that, there is a clear demarcation of expenses and income between STPI Unit and Non STPI units as disclosed in Form 56F. Advertisement expenses amounting to Rs.1,43,69,419/- have been shown under the Non STPI unit. 5.5. The Ld.AR thus submitted that the Ld.AO still made addition to the total income of the assessee as a result of re-allocation of expenses from the Non-STPI unit to the STPI units.
Page 13 of 23 & IT(TP)A No.801/Bang/2017 5.6. The Ld.AR submitted that the coordinate bench of this Tribunal, in assessee's own case for AY 2009-10, deleted identical addition made on account of re-allocation of expenses from the Non-STPI to the STPI unit as they wew made without any basis. This Tribunal in assessee’s own case held as under :- “43. We have heard the rival submissions. Perusal of the order u/s. 92CA of the Act shows that the issue with regard to provision of marketing support services by the Bangalore Non-STP unit to NVIDIA Singapore was subject matter of TP analysis made by the assessee.
The TPO considered the analysis done by assessee and held as follows:- "2.4 In respect of marketing support services, the taxpayer has earned an operating profit margin of 10.18%. In this segment, the taxpayer considered 15 comparables under TNMIM. The average operating profit margin of these 15 comparables is arrived at 10.7 1% on cost by considering the weighted average based on the three years data i.e. FY 2006-07, FY 2007-08, and FY 2008-09 wherever available. The operating profit to total cost ratio is taken as the profit level indicator (PL) in TNMM analysis. The TPO has made an independent analysis of the international transactions of the Marketing Support Services segment by comparing the Net margins under TNMM. The mean margin of the comparables shows a operating profit on cost at 10% (Please see Annexure - E). The taxpayer's margin is not less than the TPO's margin. Hence the transaction is treated as having been made at arm's length."
It is thus clear from the order of TPO that non-STP unit of the assessee rendered services exclusively to NVIDIA Singapore and none of the other STP-units had the benefit of those services. This aspect has not been considered by the CIT(A) at all. On the other hand, the CIT(A) as well as the AO proceeded on the assumption that non-STP unit as well as STP units in India would benefit from the advertisement done for NVIDIA Singapore. It is seen that NVIDIA Singapore has acknowledged that software products and advertisement is attributable to those products. Non-STP units of assessee are engaged in software development activities and do not engage in sales or marketing activities or software product. In these circumstances, we find merit in the contention of assessee that advertisement expenses apportioned by the AO and confirmed by the CIT(A) was without any basis. The said addition is accordingly directed to be deleted. Ground No. 11 by the assessee is allowed.” 5.7. Revenue has not been able to establish any factual difference in the year under consideration with that of AY 2009-10.
Page 14 of 23 & IT(TP)A No.801/Bang/2017 Respectfully following the same we do not find any infirmity in the view taken by the Ld.CIT(A). Accordingly this gruond raised by revenue stands dismissed.
Ground No.3 is in respect of reducing the expenditure incurred in travel, telecommunicaiton etc. from export turnover and toatl turnover for compulting deduciton u/s 10A of the Act. Admitedly this issue stands settled by Hon’ble Supreme Court in case of HCL Technologies Ltd. reported in (2018) 93 taxman.com 33. 6.1. Respectfully following the same, we do nto find any infirmtiy in the view taken by Ld.CIT(A). Accordingly this ground raised
by revenue stands dismissed. Assessee’s Appeal:
7. Though there were several grounds raised by the assessee in the modified grounds of appeal, at the time of hearing the Ld.AR pressed for adjudication of Ground no.8 only. Following issue, has been alledged in Ground 8.
8. The Ld.AR submitted that Ground nos.1-3 & 9 are general in nature. Therefore these grounds need not be adjudicated.
9. Ground no.4-7 are not pressed by the Ld.AR. Accordingly these grounds are dismissed as not pressed.
10. Ground No.8 The assessee seeks exclusion of following comparables: Acropetal Technologies Ltd., e-Zest Solutions Ltd., E-Infochips Ltd. and ICRA Techno Analytics Ltd. 10.1 Before we undertake the comparability analysis, it is sine qua non to understand the functions performed, assets owned and the risks assumed by this assessee.
Page 15 of 23 & IT(TP)A No.801/Bang/2017 Functions: 10.2 As per the master service agreement it has been observed by the Ld.TPO that assessee provides research and development services to its AE from its Bangalore Pune and Hydrabad facilities. It is also been observed that it provides marketing support services to Nvida Singapore Pte Ltd. The Ld.TPO observed that assessee is compensated on cost plus markup basis for the provision of research and development services to Nvida international and marketing support services provided to Nvida Singapore. 10.3 The Ld.TPO noted that assessee under software development assessee carries out research and development for its associated enterprises. From the trans-apprising study at page 871 of paper book we note that assessee performs functions limited to project management and quality control under the supervision of its AE’s. It does not undertake any marketing activity with respect to the products that are delivered to the customer and does not perform the conceptualising and design of the products deliverable to the customer Assets owned at page 877 of the paper book we note that the assets employed by assessee are tangible assets being office equipment furniture fixtures data processing equipments etc. Risks assumed in terms of SWD segment and in respect of marketing support service segment, assessee undertakes only foreign exchange risk. Assessee has thus been characterised to be a contract service provider who is compensated on a cost +12% basis on all cost
Page 16 of 23 & IT(TP)A No.801/Bang/2017 incurred by it in provision of research and development services. And in respect of marketing support service segment assessee is compensated on cost plus basis on the cost incurred excluding foreign exchange loss/gain.
10.4 Based on the above categorisation we shall now undertake the comparability analysis of assessee with alleged comparables sought for exclusion. 10.5 We note that under similar circumstances this Tribunal in case of DCIT vs CGI Information Systems reported in [2018] 93 taxmann.com 9 observed as under: “19. Acropetal Technologies Limited - As far as exclusion of this company as a comparable company is concerned, it is seen from the Directions of the DRP at paragraph 2.7 at page-9, that this company was excluded on the grounds that: (i) the segmental information containing the break-up of its export sales and employee costs, was not available and it was not possible to ascertain if it passed the export earnings and/or employee costs filters; and (ii) a substantial portion of its software development activities have been outsourced on sub- contract and it could, therefore, not be retained as a comparable. The DRP in directing exclusion of this company followed decision of Hyderbad Bench of ITAT in the case of Capital IQ Information Systems (India) (P.) Ltd. v. Dy. CIT (International Taxation) [2013] 32 taxmann.com 21/57 SOT 14 (URO) (Hyd. - Trib.). The DRP also observed that this company was predominantly doing on-site development of software and therefore cannot be compared with a company which develops software off-shore. One of the filters applied by the TPO was that companies where employee costs are less than 25% of turnover cannot be regarded as comparable. In the absence of segmental information, it was not possible to ascertain as to whether this company passes the test adopted by the TPO himself for comparison. The learned DR submitted that the required data can be culled out from the information available in the public domain or by resorting to a process of calling for information from this company u/s.133(6) of the Act. The learned counsel for the Assessee in this regard pointed out that the Hon'ble Delhi High Court rejected a similar argument by the Revenue in the case of Pr. CIT v. Saxo India (P.) Ltd. [2016] 74 taxmann.com 88/243 Taxman 411/397 ITR 160. In the circumstances, this company was rightly held by the DRP to be not comparable. We are of the view that once a company becomes not Page 17 of 23 & IT(TP)A No.801/Bang/2017 comparable for the reason that segmental information to apply filters, we need not consider any other aspect of comparability. The learned counsel for the Assessee made submissions before us that this company was rightly directed to be excluded by the DRP on the above basis and further contended that even otherwise, this company is not functionally comparable to the Assessee. As already stated, we do not wish to go into this aspect as this company goes out of comparability on other reasons.”
10.6 Further, Ld.AR alleged that, Acropetal is functionally not similar with a contract service provider like assessee. This observation could not be dislodged by Ld.CIT.DR. We also note that, Acropetal Technologies has been held to be into products and that RPT is at 18.66% which is beyond the marginal limit of 15% for year under consideration, by this Tribunal, in case of Electronics for Imaging India Pvt.Ltd for assessment year 2011-12 reported in [2017] 85 taxmann.com 124. We therefore do not find any this comparables to be functionally similar with assessee. Respectfully following the aforesaid decisions, we direct exclusion of Acropetal Technologies M/s.E-Infochips: 10.7 The Ld.AR placed reliance upon decision of coordinate bench of this Tribunal in case of Electronics for Imaging India Pvt.Ltd for assessment year 2011-12 reported in [2017] 85 taxmann.com 124 wherein, E- Infochips Ltd is excluded for failing in service income filter. 10.8 The Ld.CIT DR submitted that Ld.TPO while analysing comparables observed that, this company has revenue from software development up to 88%. Submitted that per contra, DRP observes that revenue earned by this company is less than 75%,
Page 18 of 23 & IT(TP)A No.801/Bang/2017 and therefore cannot be included. She submitted that basis of DRP to hold that revenue is less than 75% has not been demonstrated and therefore needs to be reconsidered. 10.9 We have perused submissions advanced by both sides in light of records placed before us. 10.10 It is observed that this Tribunal in case of Autodesk India Pvt Ltd. vs ACIT in ITA(TP)A No.156/Bang/2016 for assessment year 2011-12 vide order dated 21/12/18, excluded E- Infochips Ltd., by following view taken by this Tribunal in case of Comscop Network (India) Pvt.Ltd. Limited vs ITO in IT (TP) A/Bang/2016 dated 22/02/17 wherein, this company was excluded for reason that, there is no segmental information regarding diverse functions performed by this company and that there was major fluctuation in its profits, which influenced turnover of this company. We also note that this Tribunal in case of DCIT vs CGI Information Systems (supra) had encountered with an identical situation for year under consideration. This tribunal observed as under: “24. As far as ground No. 4 raised by revenue is concerned, the said ground of appeal is weak and any event comparability of companies that were excluded by the DRP were on valid grounds contemplated by the relevant statutory provisions of the act and rules. As far as ground No. 5 in revenue’s appeal is concerned, the revenue seeks to challenge the exclusion of E Infotech Ltd. On the ground that it failed direct software service income filter at 75%. At the outset, the assessee submits that E Infotech Ltd was excluded by the DRP on the ground that: (i) no segmental information is regarding its diverse functions is available; (ii) it failed the software service income filter and 75%; (iii) there were major fluctuations in profit and turnover every years which seems to be influenced by extraordinary/peculiar circumstances; and (iv) there is a presence of inventory (page 10 and 11 of the DRP’s directions). The revenue, in its appeal has challenged its exclusion only on the 2nd ground. In other words, the revenue has not challenged its exclusion on the other grounds stated hereinabove and thus its exclusion on these grounds have attained finality and Page 19 of 23 & IT(TP)A No.801/Bang/2017 cannot be disturbed by this Hon’ble Tribunal. Even otherwise, we are of the view that the DRP rightly arrived at the finding that companies software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for the year. Thus the above action of the DRP in rejecting the above companies correct.” 10.11 From the above, it is observed by this Tribunal consistently in various decisions for A.Y: 2011-12 held that, this company does not satisfy service income filter being 75%. We therefore, do not see any reason to set aside this company to Ld.TPO. 10.12 Therefore, respectfully following view taken by coordinate bench of this Tribunal in DCIT vs M/s CGI Information Systems and Management Consultations Pvt.Ltd. (supra), we direct Ld. TPO to exclude this company. Respectfully following the aforesaid decisions, we direct exclusion of E Infochips Ltd., ICRA Techno Analytics Ltd., E-Zhest Solutions Ltd., 10.13 It has been submitted by Ld.CIT.DR that, DRP erred in directing exclusion of ICRA Techno Analytics Ltd on the ground that it is into diversified activity and no segmental details are available. In respect of E-Zhest Solutions Ltd., Ld.CIT DR submitted that DRP excluded them for functionally not comparable. He submitted supporting order of Ld.TPO that they are predominantly into Software development. 10.14 The Ld.CIT.DR thus submitted that, these comparables are into SWD and is functionally similar with assessee and deserves to be included. 10.15 On the contrary, Ld.AR relied on decisions of coordinate bench of this Tribunal in case of Applied Material India Pvt.Ltd (supra), is followed in plethora of other decisions of this Page 20 of 23 & IT(TP)A No.801/Bang/2017 Tribunal for exclusion of these comparables. He submitted that all these comparables have been excluded from DCIT vs. LSI India Research Pvt.Ltd reported in (2017) 83 taxmann.com 357 for assessment year 2011-12, being the Transferee Company as under: “9. Now we decide about the remaining six comparables excluded by the DRP and other four comparables retained by the DRP for which the assessee is seeking exclusion. We find that out of these six comparables excluded by the DRP, one comparable i.e. ICRA Techno Analytics Ltd. is having RPT in excess of 15% and therefore, for this reason alone this company has to be excluded although, the DRP has excluded it for a different reason that it is having various activities and the segmental data are not available. We hold this exclusion on account of RPT filter. In fact, we find that para-8 & 9 of the Tribunal order rendered in the case Commscope Networks (India) (P.) Ltd. (Supra) is relevant in respect of inclusion/exclusion of nine companies directed to be excluded by DRP and also in respect of exclusion of four companies which were retained by DRP but it was the contention of the assessee for exclusion thereof. We therefore, re-produce para-8 & 9 of the Tribunal order for the sake of ready reference; "8. We decide the issue of various exclusions and inclusions in these cross appeals. Regarding inclusion of 3 comparables out of 9 comparables excluded by DRP, we find that when both sides are seeking inclusion of these 3 comparables being 1 (Evoke Technologies Pvt Ltd., 2) Mindtree Ltd. (Seg) and 3) R S Software (India) Ltd. and their inclusion is proper as per the tribunal order rendered in the case of Applied Materials India Pvt. Ltd. v. ACIT as reported in TS-815- ITAT - 2016, we reverse the order; of DRP; about exclusion of these 3 '' comparables and 'direct the AO/TPO to include these three in final list of comparables.
9. Now we decide about the remaining 6 comparables excluded by DRP and 4 comparables retained by DRP but for which the assessee is seeking exclusion. Out of these 6 comparables excluded by DRP, one comparable ICRA Techno Analytics Ltd. is having RPT in excess of 15% and therefore, for this reason alone, this comparable has to be excluded although DRP has excluded it for a different reason that it is having various activities and segmental data are not available. We uphold its exclusion on account of RPT filter. Exclusion of Acropetal Technologies Ltd. (Seg) is covered in favour of the assessee by the same tribunal order rendered in the case of Applied materials India Pvt. Ltd. v. ACIT (Supra). Respectfully following the same, we uphold its exclusion. Exclusion of 1) e - Zest Solutions Ltd., 2) Infosys Ltd., 3) Larsen & Toubro Infotech Ltd., 4) Persistent Systems & Solutions Ltd., 5) Persistent Systems Ltd., 6) Sasken Communication Technologies Ltd. and 7) Tata Ebcsi Ltd. are also Page 21 of 23 & IT(TP)A No.801/Bang/2017 covered in favour of the assessee by the same tribunal order rendered in the case of Applied Materials India Pvt. Ltd. v. ACIT (Supra). Respectfully following the same, we uphold the exclusion of these Seven comparables also. Exclusion of E - Infochips Ltd. is covered in favour of the assessee by the tribunal order rendered in the case of Saxo India Pvt. Ltd. v. ACIT in ITA No, 6148/Del/2015 dated 05.02.2016 Para 10.1 & 10.2 available at pages 221 to 223. Respectfully following the same, we uphold its exclusion. In this manner, we uphold the exclusion of six comparables excluded by DRP out of 9 comparables excluded by DRP and exclude 4 comparables retained by DRP and we have already held that out of 9 comparables excluded by DRP, 3 have to come back being 1.) Evoke Technologies Pvt, Ltd., 2) Mindtree Ltd. (Seg) and 3) R S Software (India) Ltd. Now, we decide about LGS Global Ltd. As per the tribunal order rendered in the case of Applied materials India Pvt. Ltd. v. ACIT (Supra), this is a good comparable and therefore, we direct the A.O. and TPO to include this comparable. So, there should be 4 comparables in the final list of comparable and on the basis of that, the AO/TPO should work out the ALP".
As per the above two paras, reproduced from the order of the Tribunal rendered in the case Commscope Networks (India) (P.) Ltd. (Supra), we find that in that case, the Tribunal held that out of 9 comparables excluded by DRP, 3 have to come back being 1) Evoke Technologies Pvt. Ltd., 2) Mindtree Ltd. (Seg) and 3) R S Software (India) Ltd. Out of remaining 10 comparable companies selected by TPO, the tribunal in that case excluded. 9 companies being 1) ICRA Techno Analytics Ltd., 2) Acropetal Technologies Ltd. (Seg), 3) e - Zest Solutions Ltd., 4) Infosys Ltd., 5) Larsen & Toubro Infotech Ltd., 6) Persistent Systems & Solutions Ltd., 7) Persistent Systems Ltd., 8) Sasken Communication Technologies Ltd, and 9) Tata Elxsi Ltd. Hence, in that case, only four companies were left in the final list of comparables being J) 1) Evoke Technologies Pvt. Ltd., 2) Mindtree Ltd. (Seg) and 3) R S Software (India) Ltd. and 4) Larsen & Toubro Infotech Ltd. 10.16 From the above, it is observed that ICRA Techno Analytics Ltd., E-Zhest Solutions Ltd. have been consistently excluded by this Tribunal in case of a captive service provider like assessee. Further Ld.CIT.DR could not establish anything contrary to observations of this Tribunal reproduced hereinabove. Respectfully following aforestated view, we do not find any infirmity in exclusion of these comparables by DRP.
Page 22 of 23 & IT(TP)A No.801/Bang/2017 Respectfully following the aforesaid decisions, we direct exclusion of ICRA Techno Analytical Ltd., and e-Zhest Solutions Ltd.
Ground 10: The assessee seeks exclusion of certain comparables under marketing support service segment. It has been submitted that this ground has not been adjudicated by the Ld.CIT(A) though the same was raised. We therefore direct we therefore remand this issues back to the Ld.CIT(A). Ld.CIT(A) is directed to pass a detailed order after considering the submissions advanced by assessee in the light of evidences filed in accordance with law. Accordingly these grounds raised
by assessee stands allowed for statistical purposes. In the result appeal filed by revenue stands dismissed and appeal filed by assessee stands allowed. Order pronounced in the open court on 31st Aug, 2021 Sd/- Sd/- (B. R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 31st Aug, 2021. /Vms/ Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order Assistant Registrar, ITAT, Bangalore
Page 23 of 23 & IT(TP)A No.801/Bang/2017 Date Initial On Dragon 1. Draft dictated on Sr.PS -08-2021 2. Draft placed before Sr.PS author -08-2021 3. Draft proposed & placed JM/AM before the second member -08-2021 4. Draft discussed/approved JM/AM by Second Member. -08-2021 5. Approved Draft comes to Sr.PS/PS the Sr.PS/PS -08-2021 6. Kept for pronouncement Sr.PS on -08-2021 7. Date of uploading the Sr.PS order on Website -- 8. If not uploaded, furnish Sr.PS the reason -08-2021 9. File sent to the Bench Sr.PS Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk.
Date of dispatch of Order. No 13. Draft dictation sheets are Sr.PS attached