DCIT, BANGALORE vs. M/S BROADCOM COMMUNICATION TECHNOLOGIES PVT. LTD.,, BANGALORE

ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present cross appeals has been filed by revenue as well as assessee against final assessment order under section 143(3) read with section 144C(13) of the Act, dated 18/01/2016 passed by Ld.DCIT Circle 1(1)(2) on following grounds of appeal: (revenue appeal)

1. The order of the Dispute Resolution panel is opposed to law and the facts and circumstances of the case. Software development services segment

2. The DRP erred in directing the AO/TPO to exclude M/s. Acropetal Technologies Ltd. and M/s. Larsen & Toubro InfoTech Ltd. from the list of comparables, holding them to be functionally dissimilar as they are having significant onsite revenues, thereby 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. Also, the nature of activity, i.e. software development remains the same, irrespective of the company engaged in providing onsite offshore services.

3. The DRP erred in directing the AO to exclude M/s. Larsen & Toubro infoTech Ltd.. and MIs. Acropetal Technologies Ltd,. on the ground that they have significant onsite revenue, without appreciating the fact that onsite developments of software entails more cost and thereby results in power profit margins.

4. The DRP erred in directing the AO to exclude M/s. Acropetal Technologies Ltd., from the list of final comparable also for the reason that clear segmental information of the employee cost was not available. Without appreciating that proper segmental information was available on prowess database as well audited finials.

Page 3 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017

6. The I)RP erred in directing exclusion of M/s. ICRA Techno Analytics Ltd., from the list of comparables on the ground that it is into diversified activity and no segmental data is available, without appreciating that the basic faction of the company is developing software talons in those and other verticals. The company's business of analysis of statistical data of its clients before providing software solutions does no render the services to be functionally incomparable. 7. The DRP erred directing to exclude MIs. E-Zest Solutions Ltd. from the list of comparables holding it to be functionally uncomparable, thereby by seeking exact comparability by imposing condition beyond law whereas requirement of law is to acknowledge only those differences that are likely to materially affect the margin, the DRP thought to have appreciated that the comparable affect the qualified all the qualitative and quantitative filters applied by the TPO and in a computer software services, if considered as a sector of business, the 15 different lines prevailing in the business can not be considered functionally different from each other. 8. The DRP erred in directing exclusion of M/s. Infosys Technologies Ltd., from the list of companies holding it to be functional incomparable, without appreciating that the primary source of income of the comparable is from provision of software development services. Also the DRP erred in imposing a condition beyond law in seeking exact comparability that are likely to materially affect the margin, 9. The DRP erred in directing the position of law that there could be differences between the enterprises compared under TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises. 10. The DRP erred in directing the AO to exclude M/s. Tata Elxsi Ltd. from the list of comparables, holding it to be functionally uncomparable, without appreciating the that fact the comparable qualified all the qualitative and quantitative filter applied by the TPO and it is a similar comparable company and moreover, the requirement of law and international jurisprudence require seeking similar comparable company and moreover, the requirement of law and international jurisprudence require seeking similar comparable companies while searching for comparable companies under TNMM. The DRY has also not appreciated that there have been no projects in visual computing labs during the relevant previous year. Corporate issue:- 11. The DRP erred in directing the AO to follow the ratio laid down by the Honble court in the case of Tata Elxsi Limited 349 ITR 98 and exclude travel and conveyance expenses as well as expenditure on repairs and Page 4 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017

maintenance, from the total turnover also, while computing the deduction u/s 10 A of the l.T Act, Without appreciating the fact that there is no provision in section 1 OA that a such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section I OA provides that that Such expenses are to be reduced only from the export turnover.” CO No. 7/B/2017 (by assessee) 1 The directions dated December 28, 2015 passed by the Honorable Dispute Resolution Panel ("DRP") in so far as it relates to the following ground are opposed to law and facts of the case. 2 The Honorable DRP and the learned Assessing Officer ("AO") have erred in upholding the action of the Transfer Pricing Officer ("TPO") in rejecting the Transfer Pricing ("TP") documentation maintained and the detailed benchmarking analysis conducted by the Cross-Objector; 3 The Honorable DRP and learned TPO have erred in law and on facts in rejecting the use of multiple year data, without considering that the past year data had an influence on the determination of arm's length price and that the Cross-objector had considered contemporaneous data available at the time when it carried out the benchmarking study having regard to the statutory requirement to maintain the TP documentation by the specified date; 4 The Honorable DRP and the TPO have erred in law and on facts in undertaking a new search and arriving at a fresh set of comparables.” Brief facts of the case are as under:

2. Assessee is a company and has filed return of income for year under consideration on 30/09/2011 showing total income of Rs.7,65,881/- after claiming deduction under section 10 A to the extent of Rs.3,36,39,775/-. The case was selected for scrutiny and notice under section 143(2) was issued to assessee along with notice under section 142(1). In response to statutory notices, representative of assessee appeared before Ld.AO and filed details that were examined. Ld.AO observed that during the year, assessee had international transaction exceeding Rs.15 crores. Accordingly reference was made to the transfer pricing officer for determining arms length price of international transaction as per provisions of section 92CA of the Act.

Page 5 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017

Page 6 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017

Sl.No Company name Net margin as per TP order 1 Acropetal Technologies Ltd. 31.98% 2 E Zest Solutions 21.03% 3 E-Infochips Ltd 56.44% 4 Evoke 8.11% 5 ICRA Techno Analytics Ltd. 24.83% 6 Infosys Ltd 43.39% 7 Larsen & Toubro Infotech Ltd 19.83% 8 Mindtree Ltd.(Seg.) 10.66% 9 Persistent Systems & Solutions Ltd. 22.12% 10 Persistent Systems Ltd. 22.84% 11 R S Software (India)Ltd. 16.37% 12 Sasken Communication Technologies Ltd. 24.13% 13 Tata Elxsi Ltd.(Seg.) 20.91% Average 24.82% 7. It is submitted that, Ld.TPO provided adjustment restricting it to 1.63% towards working capital. Ld.TPO also rejected risk adjustment in the hands of assessee as no details were provided by assessee to eliminate such material effect or differences. Ld.TPO thus computed proposed adjustment being shortfall of Rs.4,72,58,655/- in the hands of assessee.

Page 7 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017

9. Aggrieved by additions made by Ld.AO/TPO, assessee raised objections before DRP. 10. DRP rejected 10 comparables selected by Ld.TPO and restricted to 4 comparables with average margin of 19.94% as under: Company name Net margin Sl.No as per TP order 1 Persistent Systems & Solutions Ltd. 22.12% 2 Persistent Systems Ltd 22.84% 4. Mindtree Ltd 10.68% 3 Sasken Communication Technologies 24.13% Ltd. Average 19.94% 11. DRP allowed working capital to be computed as per actual following decision of this Tribunal in case of M/s.Rambus Chip Technologies (I) Pvt.Ltd., in IT(TP)A No.23/Bang/2015. DRP also directed to rectify the arithmetical mistake if any in computation of adjustment in respect of comparables retained. 12. DRP further allowed sum of Rs.73,75,224/- towards expenditure incurred in foreign currency on travel and Rs.1,60,25,123/- as expenditure towards repairs and Page 8 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017 maintenance, while computing export turnover and total turnover for purposes of deduction under section 10A of the Act by following decision of Hon’ble Karnataka High Court in case of Tata Elxsi reported in [2012] 17 taxmann.com 100. DRP also held that losses suffered by non-eligible units cannot be set off against the eligible profit by following decision of Hon’ble Karnataka High Court in case of CIT vs Yukogava India Ltd reported in (2012) 21 Taxmann.com 154.

Page 9 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017 • Infosys Technologies Ltd. • M/s.TATA Elxi Ltd.

Page 11 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017 Assets Owned: 24. It has been submitted that assessee owns routine tangible assets like, furniture, fixtures, computers etc. It is also submitted that it does not possess nor does it develop any non- routine valuable intangibles. Risk Assumed: 25. Assessee does not bare any contract and service liability risk as it render services solely to AE. It has been submitted that assessee is compensated on a cost plus basis and is therefore insulated from the risk of under utilisation of capacity. It is also submitted that Foreign exchange fluctuation on risk is also vests with AE. Characterisation 26. Based on the above, it can be concluded that assessee is bearing substantially less than normal risks, as it performs limited functions with guidance provided by AE. We first take up appeal filed by revenue in Ground No. 2 -4: 27. Ld.CIT.DR submitted that, DRP applied applying “on-site revenue filter” selectively respect of following comparables: • Acropetal Technologies Ltd • L&T Infotech Ltd., 28. He submitted that, DRP suo-moto applied on-site revenue filter selectively. It was argued that application of a filter determines, kind of comparables displayed on database, where

Page 12 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017 search is carried. Application of filter to shortlist companies under particular segment is the second step in transfer pricing analysis. It was argued that, once comparables are shortlisted by Ld.TPO, DRP suo moto cannot apply any filter to exclude any particular comparables. Ld.CIT.DR submitted that, DRP applied “on-site revenue filter” and excluded 3 comparables, which is not considered by TPO. He submitted that “on-site revenue filter” applied by DRP, neither applied by assessee in transfer pricing study nor considered by Ld.TPO, while conducting analysis under section 92CA of the Act.

Page 13 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017 once TP analysis has been concluded by Ld.TPO However, on perusal of observations recorded by DRP, Acropetal Technologies Ltd., L&T Infotech Ltd., was primarily excluded on basis of functional dissimilarities and that segmental information not being available. DRP further observed that these comparables cannot be considered as comparable with low risk bearing contract service provider like assessee. Further, Ld.AR relied on decision of coordinate bench of this Tribunal in case of Electronics for Imaging India Pvt. Ltd., vs. DCIT for assessment year 2011-12 reported in [2017] 85 taxmann.com 124, wherein these comparables have been held to be functionally different with a contract service provider like assessee.

Page 14 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017 “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 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.

20. L & T Infotech Ltd.- This company was directed to be excluded by the DRP for the following reasons: (i) 48.84% of its total expenses are incurred in foreign currency, which includes substantial expenses on sub-contracting, indicating that the company has high onsite revenue; (ii) the TPO has considered the entire revenue from its 3 segments, viz. financial services, manufacturing and telecom as was disclosed in its Annual Report for FY 2010-11, for the purposes of comparability to the Page 15 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017 Assessee's software development services; and (iii) predominantly engaged in the onsite development of software in FY 2010-11. The learned DR submitted before us that the Assessee's profile also is similar to the profile of L & T Infotech Ltd. and therefore this company should be included as comparable company. He also submitted that what is the quantum of on-site revenue has not been spelt out by the DRP. In this regard it was argued by him that on-site revenue beyond 25% of the total revenue of the company would be beyond the tolerance level and without a finding that on-site revenue is more than 25% of the total revenue, this company ought not to have been excluded from the list of comparable companies. We agree with the submission of the learned DR that for application of on-site revenue filter, the DRP ought to have given a finding regarding the quantum of revenue from on-site software development. Nevertheless, this company goes out of comparability on the ground that the profit margins adopted by the TPO was from 3 divisions of the Assessee. We also find, as submitted by the learned counsel for the Assessee this company was held to be functionally not comparable as it is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles and intellectual property rights. Also, in addition to the above, the company owns proprietary software products which are developed in- house. Accordingly, the Assessee submits that the company is a product company having significant intangibles and is thus not comparable to captive software service providers such as the Assessee. In this regard the learned counsel for the Assessee has placed reliance on the decisions of this Hon'ble Tribunal in Applied Materials (India) (P.) Ltd. v. ACIT [Appeal No. 17 (Bang.) of 2016] at para 19 on pages 35-36] and Commscope Networks (I) (P.) Ltd. v. ITO [IT (TP) Appeal No. 166 (Bang.) of 2016] at para 9 on pages 16-17] where the exclusion of the said company from the list of comparables in similar circumstances was upheld by this Hon'ble Tribunal. We therefore do not find any grounds to interfere with the directions of the DRP on exclusion of this company.”

Page 17 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017 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 AE 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 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.”

40. 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. 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. Accordingly this ground raised by revenue stands dismissed.

Page 18 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017 Ground 6-10: 41. ICRA Techno Analytics Ltd., E-Zhest Solutions Ltd., M/s.Infosys Technologies Ltd. and M/s.Tata Elxsi Ltd. 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., M/s.Infisys Technologies Ltd. and M/s.Tata Elxsi 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.

Page 21 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017

Page 22 of 23 IT(TP)A No.482/Bang/2016 CO No.7/Bang/2017