JCIT, BANGALORE vs. M/S NIVIDIA GRAPHICS PRIVATE LIMITED, BANGALORE

IT(TP)A Nos.979 and 1090/Bang/2016 Page 2 of 9 against the order dated 29.06.2016 of CIT(A)-5, Bengaluru, relating to Assessment Year 2010-11. The issue that arises for consideration in the appeal by the asseseee and ground Nos. 3 and 4 raised by the Revenue in its appeal relate to the determination of Arms Length Price (ALP) in respect of international transaction entered into between the assessee and its AE. Ground Nos.3 & 4 raised by the Revenue in its appeal reads as follows:

The assessee is a subsidiary of NVIDIA International Inc. ("NVIDIA International") US. The Assessee provides software development services to NVIDIA International, from its Bangalore, Pune and Hyderabad facilities. The assessee is compensated on a cost-plus mark-up basis for the provision of software development services to NVIDIA International. The learned AO made reference u/s 92CA(1) of the Income Tax Act, 1961 (‘Act’) to the Joint Commissioner of Income Tax (Transfer Pricing)-II ("Transfer Pricing Officer- or "TPO") for determination of ALP of the international transaction entered by the assessee with its Associated Enterprises ("AEs"). The TPO passed an order dated 30 January 2014 u/s 92CA of the Act making an adjustment INR 136221,840 for software development services transaction.

Net margin on cost earned by the Assessee as computed by the TPO in the TP Order for software development services ( treating forex gain/ loss as non- operating):

Comparison of the TP study done by the Assessee and TPO: Particulars Assessee TPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/TC OP/TC Database used PROWESS & PROWESS & CAPITALINE PLUS CAPITALINE PLUS Comparables selected 21 14

Comparable companies ultimately selected by TPO and their arithmetic mean: Margin Margin Sl. No. Comparable (Unadjusted (adjusted) ) 1. Infosys Technologies Limited 45.01% 43.88% 19.33% 19.13% 2. Larsen & Toubro Infotech Limited LGS Limited 11.95% 7.42% 3. 4. Mindtree Limited (Seg) 14.83% 14.45% Persistent Systems Private Limited 30.35% 29.21% 5. RS (Software) India Limited 10.29% 9.96% 6. 7. 17.36% 17.17% Sasken Communication Technologies Limited Thinksoft Global Services Limited 17.05% 15.60% 8. 9. Zylog Systems Limited 19.06% 15.69% 10. Evoke Technologies Private Limited 18.75% 18.14% 11. e-Zest Solutions Limited 16.79% 13.86% 12. Kals Information Systems Limited 38.37% 34.10% (Seg) 11.88% 13. Persistent Systems & Solutions Ltd 15.38% 14. Tata Elxsi 21.88% 19.35% Arithmetic Mean 21.17% 19.27%

The TPO computed the ALP in the following manner:

The aforesaid sum suggested as addition on account of determination of ALP by the TPO was incorporated by the AO in the draft order of assessment passed by him and further in the final order of assessment, as the Assessee did not propose to file objections to the Dispute Resolution Panel (DRP) against the proposed addition in the draft assessment order.

The Assessee preferred appeal before CIT(A) against the addition made in the final assessment order on account of determination of ALP. On appeal by the assessee, the CIT(A) rejected 3 comparables (Tata Elxsi, Infosys Technologies Limited & Kals Information System Limited (Seg)) based on functionally different criteria based on the ITAT order for AY 2009-10 in the assessee’s own case. The CIT(A) directed the AO/TPO to treat the foreign exchange fluctuation as operating in nature, while computing the operating margin of the Assessee as well as the comparable companies, as it has direct nexus with the business of the assessee. The CIT(A) directed AO/TPO to consider corrected receivable/payable figures for assessee and comparable companies and also directed re-computation of margins for certain comparable companies which were erroneously computed by the TPO. The assessee argued

The learned Counsel for the assessee however submitted that out of the 3 companies sought to be excluded in the additional grounds of appeal, exclusion of Persistent Systems Ltd., from the list of comparable companies would alone be sufficient. As far as exclusion of Persistent Systems Ltd., is concerned, the learned Counsel for the assessee brought to our notice decision of the ITAT, Bangalore Bench, in the case of Cerner Health Care Solutions Pvt. Ltd., in IT(TP)A No.44/Bang/2015 for Assessment Year 2010-11 wherein this Tribunal in the case of the assessee, rendering software Development Services such as assessee in this appeal, considered the comparability of Persistent Systems Ltd., and held as follows:-

We have heard the Id. DR as well as Id. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during the year under consideration.

The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 11. There, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables.”

In view of the aforesaid decision of the ITAT, we are of the view that the aforesaid company should be excluded from the list of comparable companies. No other grounds of appeal were pressed for adjudication in the assessee’s appeal.

The only other ground that remains for adjudication in this appeal is ground No.2 raised by the Revenue in its appeal as to whether the Revenue authorities were justified in reducing the travel and telecommunication charges from the export turnover without reducing the same from the total turnover while allowing deduction to the assessee under section 10A of the Act. It is not in dispute before us that the Hon’ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd., 349 ITR 98 (Karnataka) has held that whatever is excluded from the export turnover should also be excluded from the total turnover while computing deduction under section 10A of the Act. This view of the Hon’ble Karnataka High Court has been upheld by the Hon’ble Supreme Court in the case of CIT Vs. HCL Technologies Ltd., (2018) 93 taxmann.com 33 (SC). In view of the above, we hold that telecommunication charges should be excluded both from the export turnover as well as from the total turnover and deduction under section 10A computed accordingly.

In the result, the appeal by the assessee is partly allowed while the appeal by the Revenue is dismissed.