M/S SAMSUNG R & D INSTITUTE INDIA BANGALORE PRIVATE LIMITED,BANGALORE vs. ADDL C.I.T., BANGALORE

PER LALIET KUMAR, JUDICIAL MEMBER

These appeals are filled by the Revenue as well as the assessee

against the order passed by the Commissioner of Income-tax (Appeals) –

IV, Bangalore dated 14/11/2014 for the asst. year 2009-10.

First we shall take up appeal of the Revenue.

IT(TP)A No.60/Bang/2015

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server/networking equipment. The learned authorised representative on the

behalf of the assessee had submitted that this issue is covered by the

judgment of Hon’ble Madras High Court and therefore this issue is required

to be decided in favour of the assessee and against the revenue. The ld

Departmental representative relies upon the order passed by the assessing

officer.

server/networking equipment is covered by the decision of the Madras

High Court in the case of Dinamalar Vs. CIT (2016) 74 taxman.com 14 and

also the decision of Hyderabad Tribunal in the case of ACIT Vs. Ushodaya

Enterprises Ltd., (2013) 33 taxmann.com 381.

(Supra) held as under :

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case of Dinamalar (Supra), we dismiss this ground of Revenue.

goodwill.

order, wherein it has been held as under:

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submitted that this issue is also covered by the judgment of Hon’ble

Supreme court and Madras High Court and therefore this issue is required

to be decided in favour of the assessee and against the revenue. The ld

Departmental representative relies upon the order passed by the assessing

officer and submitted that the assessee has not filed the rectified return of

income before the assessing officer, claiming the depreciation on the

goodwill therefore this issue should be decided in favour of the revenue in

view of the law laid down by Goetze (India) Ltd.. [2006] 157 Taxman 1 (SC)

CIT(A) relied upon the decision of Madras High Court in the case of

Pentasoft Technologies Ltd., wherein decision of the Hon’ble Supreme Court in the case of Smifs Securities Ltd., 348 ITR 302 was followed.

the recent decision of Delhi High Court in the case of Triune Energy Systems Vs. DCIT (2016) 65 taxman.com 288 at paragraph 15 to 18 it has

held as under: 15. From an accounting perspective, it is well established that 'goodwill' is an intangible asset,

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which is required to be accounted for when a purchaser acquires a business as a going concern by paying more than the fair market value of the net tangible assets, that is, assets less liabilities. The difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts. The 'Financial Reporting Standard 10' issued by Accounting Standard Board which is applicable in United Kingdom and by Institute of Chartered Accountants of Ireland in respect of its application in the Republic of Ireland, explains that "the accounting requirements for goodwill reflect the view that goodwill arising on an acquisition is neither an asset like other assets nor an immediate loss in value. Rather, it forms the bridge between the cost of an investment shown as an asset in the acquirer's own financial statements and the values attributed to the acquired assets and liabilities in the consolidated financial statements". 16. The abovementioned Financial Reporting Standard 10 also provides for accounting of purchased goodwill as "the difference between the cost of an acquired entity and the aggregate of the fair values of that entity's identifiable assets and liabilities. Positive goodwill arises when the acquisition cost exceeds the aggregate fair values of the identifiable assets and liabilities. Negative goodwill arises when the aggregate fair values of the identifiable assets and liabilities of the entity exceed the acquisition cost." 17. At this stage, it is also relevant to refer to Accounting Standard 10 as issued by the Institute of Chartered Accountants of India. The relevant extract of which reads as under:— "16.1 Goodwill, in general, is recorded in the books only when some consideration in money or money's worth has been paid for it. Whenever a

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business id acquired for a price (payable either in cash or in shares or otherwise) which is in excess of the value of the net assets of the business taken over, the excess id termed as 'goodwill'. Goodwill arises from business connections, trade name or reputation of an enterprise or from other intangible benefits enjoyed by an enterprise." 18. It is also relevant to note that Smifs Securities Ltd. (supra) was a case where assets of company - YSN shares and Securities (P.) Ltd. were transferred to Smifs Securities Ltd. under a scheme of amalgamation. And, the excess consideration paid by the Assessee therein over the value of net assets of YSN Shares and Securities (P.) Ltd. acquired by the Assessee, was accounted as goodwill.

Commissioner appeal as well as on the powers of the Tribunal to entertain

the fresh claim filed by the assessee by way of rectification or otherwise.

The purposes of proceedings before the Tribunal is to tax the taxable

income and ensure income which is not required to be taxed under the law

should not be taxed. Therefore the judgment of hpon,ble Supreme court in

the matter of Goetz (supra) is not applicable .

high court in the matter of Commissioner of Income-tax, Central-I, Mumbai vs Pruthvi Brokers & Shareholders* [2012] 23 taxmann.com 23 (Bom.) wherein it was held as under :

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that of the Income-tax Officer. He can do what the Income-tax Officer can do and also direct him to do what he has failed to do." (emphasis supplied) 6. The above observations are squarely applicable to the interpretation of Section 251(1)(a) of the Act. The declaration of law is clear that the power of the Appellate Assistant Commissioner is co-terminus with that of the Income Tax Officer, if that be so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income Tax Officer. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise an Appellate Authority while hearing appeal against the order of a subordinate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations if any prescribed by the statutory provisions. In the absence of any statutory provision the Appellate Authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appears to be no good reason and none was placed before us to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income Tax Officer." [Emphasis supplied] (B) It is clear, therefore, that an assessee is entitled to raise not merely additional legal submissions before the appellate authorities, but is also entitled to raise additional claims before them. The appellate authorities have the discretion whether or not to permit such additional claims to be raised. It cannot, however, be said that they have no jurisdiction to consider the same. They have the jurisdiction to entertain the new claim. That they may choose not to exercise their jurisdiction in a given case is another matter. The exercise of discretion is entirely different from the existence of jurisdiction. 12. At page 694, after referring to certain observations of the Supreme Court in Addl. CIT v. Gurjargravures (P.) Ltd., [1978] 111 ITR 1 , the Supreme Court observed at Page 694 as under :- "The above observations do not rule out a case for raising an additional ground before the Appellate Assistant Commissioner if the ground so raised could not have been raised at that particular stage when the return was filed or when the assessment order was made, or that the

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ground became available on account of change of circumstances or law. There may be several factors justifying raising of such new plea in appeal, and each case has to be considered on its own facts. If the Appellate Assistant Commissioner is satisfied he would be acting within his jurisdiction in considering the question so raised in all its aspects. Of course, while permitting the assessee to raise an additional ground, the Appellate Assistant Commissioner should exercise his discretion in accordance with law and reason. He must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The satisfaction of the Appellate Assistant Commissioner depends upon the facts and circumstances of each case and no rigid principles or any hard and fast rule can be laid down for this purpose." [Emphasis supplied] 13. The underlined observations in the above passage do not curtail the ambit of the jurisdiction of the appellate authorities stipulated earlier. They do not restrict the new/additional grounds that may be taken by the assessee before the the appellate authorities to those that were not available when the return was filed or even when the assessment order was made. The sentence read as a whole entitles an assessee to raise new grounds/make additional claims :- "if the ground so raised could not have been raised at that particular stage when the return was filed or when the assessment order was made...." "or" if "the ground became available on account of change of circumstances or law" The appellate authorities, therefore, have jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. The first part viz. "if the ground so raised could not have been raised at that particular stage when the return was filed or when the assessment order was made..." clearly relate to cases where the ground was available when the return was filed and the assessment order was made but "could not have been raised" at that stage. The words are "could not have been raised" and not "were not in existence". Grounds which were not in existence when the return was filed or when the assessment order was made fall within the second category viz. where "the ground became available on account of change of circumstances or law."

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claim and additional grounds before the Tribunal in that connection. The Tribunal rejected the same. The second question which was raised in the reference before the Division Bench was as under :- "(2) Whether, on the facts and in the circumstances of the case, the Tribunal erred in not allowing the assessee leave to raise in its own appeals additional grounds and in the departmental appeals cross objections regarding the deductibility of the sums transferred to contingency reserve and tariff and dividend control reserve?" (B) The Division Bench which heard the reference, finding that there was a conflict of decisions, placed the papers before the Hon'ble Chief Justice for constituting a larger bench to resolve the controversy. The Full Bench answered the reference in the affirmative and in favour of the assessee. The Full Bench held :- "Thus, the Appellate Assistant Commissioner has very wide powers while considering an appeal which may be filed by the assessee. He may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of an assessee in accordance with law. Hence an Appellate Assistant Commissioner also has the power to enhance the tax liability of the assessee although the Department does not have a right of appeal before the Appellate Assistant Commissioner. The Explanation to subsection (2), however, makes it clear that for the purpose of enhancement, the Appellate Assistant Commissioner cannot travel beyond the proceedings which were originally before the Income-tax Officer or refer to new sources of income which were not before the Income-tax Officer at all. For this purpose, there are other separate remedies provided under the Income-tax Act." (C) It is unnecessary to refer to all the judgments that the Full Bench referred to while answering the reference. The Full Bench referred to the observations of the Supreme Court in Jute Corpn. of India Ltd. (supra) set out above. It is important to note that even in this case, therefore, the ground existed when the return was filed. The mere fact that a decision of a court is rendered subsequently does not indicate that the ground did not exist when the law was enacted. Judgments are only a declaration of the law. The assessee could have raised the ground in its return itself. It did not have to await a decision of a court in that regard. Indeed, even if a judgment is against an assessee, it is always open to the assessee to claim

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the deduction and carry the matter higher. The words "could not have been raised", therefore, cannot be read strictly. Neither the Supreme Court nor the Full Bench of this Court meant them to be read strictly. They include cases where the assessee did not raise the claim for a reason found to be reasonable or valid by the appellate authorities in the facts and circumstances of a case. 17. The next judgment to which our attention was invited by Mr. Mistri is the judgment of a Bench of three learned Judges of the Supreme Court in National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 . In that case, the assessee had deposited its funds not immediately required by it on short term deposits with banks. The interest received on such deposits was offered by the assessee itself for tax and the assessment was completed on that basis. Even before the Commissioner of Income-tax (Appeals), the inclusion of this amount was neither challenged by the assessee nor considered by the Commissioner of Income-tax (Appeals). The assessee filed an appeal before the Tribunal. The inclusion of the amount was not objected to even in the grounds of appeal as originally filed before the Tribunal. Subsequently, the assessee by a letter, raised additional grounds to the effect that the said sum could not be included in the total income. The assessee contended that on a erroneous admission, no income can be included in the total income. It was further contended that the ITO and the Commissioner of Income-tax (Appeals) had erred and failed in their duty in adjudicating the matter correctly and by mechanically including the amount in the total income. It is pertinent to note that the assessee contended that it was entitled to the deduction in view of two orders of the Special Benches of the Tribunal and the assessee further stated that it had raised these additional grounds on learning about the legal position subsequently. The Tribunal declined to entertain these additional grounds. The Supreme Court did not answer the question on merits, but framed the following question and held as under :- "4. The Tribunal has framed as many as five questions while making a reference to us. Since the Tribunal has not examined the additional grounds raised by the assessee on merit, we do not propose to answer the questions relating to the merit of those contentions. We reframe the question which arises for our consideration in order to bring out the point which requires determination more clearly. It is as follows:

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"Where on the facts found by the authorities below a question of law arises (though not raised before the authorities) which bears on the tax liability of the assessee, whether the Tribunal has jurisdiction to examine the same." Under Section 254 of the Income Tax Act the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with the appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under Section 254 only to decide the grounds which arise from the order of the Commissioner of Income Tax (Appeals). Both the assessee as well as the Department have a right to file an appea1/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier." 18. In the case before us, the CIT(A) and the Tribunal have held the omission to claim the deduction of Rs.40,00,000/- to be inadvertent. Both the appellate authorities held, after considering all the facts, that the assessee had inadvertently claimed a deduction of Rs.20,00,000/-paid after the end of the year in question. We see no reason to interfere with this finding. We see less reason to interfere with the exercise of discretion by the appellate authorities in permitting the respondent to raise this claim. That the respondent is entitled to the deduction in law is admitted and, in any event, clearly established. In the circumstances, the respondent ought not be prejudiced. 19. The orders of the CIT(A) and the Tribunal clearly indicate that both the appellate authorities had exercised their jurisdiction to consider the additional claim as they were entitled to in view of the various judgments on the issue, including the judgment of the Supreme Court in National Thermal Power Corpn. Ltd. (supra) . This is clear from the fact

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that these judgments have been expressly referred to in detail by the CIT(A) and by the Tribunal. 20. We wish to clarify that both the appellate authorities have themselves considered the additional claim and allowed it. They have not remanded the matter to the Assessing Officer to consider the same. Both the orders expressly direct the Assessing Officer to allow the deduction of Rs. 40,00,000/- under section 43B of the Act. The Assessing Officer is, therefore, now only to compute the respondent's tax liability which he must do in accordance with the orders allowing the respondent a deduction of Rs. 40,00,000/- under section 43B of the Act. 21. The conclusion that the error in not claiming the deduction in the return of income was inadvertent cannot be faulted for more than one reason. It is a finding of fact which cannot be termed perverse. There is nothing on record that militates against the finding. The appellant has not suggested, much less established that the omission was deliberate, mala-fide or even otherwise. The inference that the omission was inadvertent is, therefore, irresistible. 22. It was then submitted by Mr. Gupta that the Supreme Court had taken a different view in Goetze (India) Ltd ( supra). We are unable to agree. The decision was rendered by a Bench of two learned Judges and expressly refers to the judgment of the Bench of three learned Judges in National Thermal Power Comp. Ltd. ( supra). The question before the Court was whether the appellant-assessee could make a claim for deduction, other than by filing a revised return. After the return was filed, the appellant sought to claim a deduction by way of a letter before the Assessing Officer. The claim, therefore, was not before the appellate authorities. The deduction was disallowed by the Assessing Officer on the ground that there was no provision under the Act to make an amendment in the return of income by modifying an application at the assessment stage without revising the return. The Commissioner of Income-tax (Appeals) allowed the assessee's appeal. The Tribunal, however, allowed the department's appeal. In the Supreme Court, the assessee relied upon the judgment in National Thermal Power Co. Ltd. (supra) contending that it was open to the assessee to raise the points of law even before the Tribunal. The Supreme Court held :- "4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way

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relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs." [Emphasis supplied] 23. It is clear to us that the Supreme Court did not hold anything contrary to what was held in the previous judgments to the effect that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the assessing authority and that the judgment does not impinge on the power of the Tribunal under section 254.

the judgment referred herein above. Respectfully following the decisions

of the various High Courts, we dismiss this ground of the Revenue.

issue was considered by the learned CIT(A) by relying on the following

decisions of High Courts and also the Tribunal.

1) of Mumbai Tribunal in the case of SKOL Breweries Ltd. Vs. ACIT (ITAT, Mum)

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2) Madras High Court in the case of Pentasoft Technologies Ltd.,

( Madras, HC)

3) Rajsthan High Court in the case of Rajasthan tax Consultants Association Vs. CBDT (Rajasthan HC)

that Explanation to sec. 194J was amended during the Assessment year

under consideration and is applicable to the case in hand .The explanation

reads as as under:-

“Explanation. - For the purposes of this section,- (a) "professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is n.otlned.99 b-y the Board. for the "purposes of section 44AA or of this section; (b) "fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; [(ba)] "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;] c) where any sum referred to in sub-section (1) is credited

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to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such sum, such crediting shall be deemed to be credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.”

that, the learned AR did not oppose and submitted that this issue is covered

by the amended provision introduced in the Act.

the judgment pertaining to the period prior to the amendment of the

explanation to section 194J, therefore the judgments relied were not

applicable and the applicable provision was the amended explanation. In

our view the case of the assessee falls within the ambit of explanation to

section 194J, therefore the violation committed by the assessee is required

to be dealt accordingly. Accordingly, the ground of the Revenue with

respect to disallowance u/s 194J is allowed.

Ltd. and `LGS Global Ltd., respectively.

had submitted that this issue pertaining to Infosys Ltd. is covered by the

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judgment of coordinate Bench and therefore this issue is required to be

decided in favour of the assessee and against the revenue. The ld

Departmental representative relies upon the order passed by the assessing

officer.

para 10.2.1, 11 to 11.4 held as under:-

10.2.1 We have heard both the learned Authorised Representative and the learned Departmental Representative and have perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. We find that the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) excluded these two companies as comparable to an assessee who is purely a software development service provider, holding as under at paras 19 & 20 thereof :-

" 19. The next submission of the learned Counsel for the Assessee was that though, Infosys Technologies Ltd., & Tata Elxsi Ltd. (seg.) have to be excluded by applying the Turnover filter, they are also additionally functionally not comparable as held by this Tribunal in the case of Genisys Integrating Systems (India) Ltd. (supra) and

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Cisco Systems (India) (supra). We have considered his submission and we find that in the case of Cisco Systems (India) (supra), this tribunal has also held that the aforesaid two companies are also not functionally comparable to a company such as the Assessee rendering purely software IT(T.P)A No.1009/Bang/2014 development services. The following were the relevant observations of the Tribunal.

"26.2 Infosys 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. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, 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.

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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 ITA No.227/Bang/2010 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

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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

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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

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Infosys Ltd. be excluded from the list of comparable companies."

26.3 ........

IT(T.P)A No.1009/Bang/2014 "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007- 08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA :

(i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be

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computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables.

(ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not

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available. He finally submitted that this was a good reason to exclude this company also from the list of comparables.

"Thus as stated above by the company, the following facts emerge :

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Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions :

"It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07."

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Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable." 20. Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid two companies from the list of comparable companies for the purpose of computation of ALP."

10.2.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) and other Tribunal decisions referred to above, and taking note of the facts and circumstances under which the aforesaid two companies [viz. Infosys Technologies Ltd. and Tata Elxsi Ltd. (Seg.)] were considered to be comparable with a software development service provider, such as is the assessee in the case on hand, for identical reasons we direct the TPO to exclude aforesaid two companies from the list of comparables. It is ordered accordingly.

The ld Department Representative relies upon the order of TPO and submits that the Infosys should not be excluded from the list of comparable .

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LGS Global Ltd. :

by the Revenue.

“On the facts and in the circumstances of the case, the CIT(A) erred in directing the TPO to include M/s LGS Global Ltd, the company which was excluded by eh TPO as the same had failed to pass the TPO’s filter export sales/sales ,75% this filter is also deciding factor for treating a company as a comparable and accordingly erred in including the comparable, M/s LGS Global Ltd., in Software Development Segment.”

IT(TP)A No.55 & 60 /B/15 34

the TP at page 45 which reads as under:-

“As in the case of Aztecsoft, this company also was rejected because, the forex earnings repatriated on export sales was less than 75% of revenues earned during the year. Though export sales were 96% of total sales in the P&L account, the forex earnings repatriated was only 40.61%.

If the P&L account of this company is further examined, it is observed that as against total standalone sales of Rs.189 crores, sundry debtors figure stands at Rs.175 crores (including Rs.96.7 crores debtors outstanding for more than six months, ref. Sch.6 to balance sheet). Obviously, the business model of this company is not comparable to that of the taxpayer. Therefore, this company is also not accepted as a comparable.”

the TPO has excluded the LGS Global Ltd., on the basis of the business

model of the assessee and also on account of the fact that the forex

earnings repatriated was only 40.61%. Thus, it was submitted that as

forex earnings repatriated was very low, therefore, it was submitted that

though the export sales being made, the tax payer was not in a hurry to

IT(TP)A No.55 & 60 /B/15 35

realize export profits as the forex earnings repatriated appears to be

postponed.

29 of the CIT(A) order wherein it reads as under:-

12.2. On the basis of this reasoning, which takes into account the decision rendered in the Sony India case, being one of the initial cases on the same issue, of the same Bench of the Hon'ble Tribunal, the action of the TPO with respect to RPT filter is held to be justified. Hence, in summation, I find that the - TPO has provided cogent reasons for rejecting some of the assessee's comparables and thus. his / her action of rejecting/introducing his own comparables is upheld .. It was pointed out that one of the assessee's comparable viz .. LGS Global satisfies the TPO's export earning filter. It was stated that the assessee follows a mercantile system of accounting and sale proceeds were realized in the next year. But for accounting purpose, the export revenue was definitely more than 75% .. The TPO is directed to look into this matter and take rectificatory action on his/her satisfaction.”

IT(TP)A No.55 & 60 /B/15 36

through the order passed by the learned CIT(A). It is contended that the

learned CIT(A) instead of deciding the issue of exclusion of LGS Global

Ltd., has remitted back the issue to the file of the TPO for fresh

adjudication. In our view, the learned CIT(A) under the Income-tax Act

is required to decide issue at his own level and should not have remitted

matter back to the file of the TPO.

CIT(A) to decide afresh on the basis of material available with him in

accordance with law.

IT(TP)A No.55/Bang/2015 (Assessee appeal)

passed by the DCIT Circle-6(1)(1), Bangalore dated 31/12/2014,

whereby the order of the CIT dated 14/11/2014 on the subject matter of

the appeal has been given effect and the revised taxable income was

computed by the AO.

declaring the income of Rs.67,94,36,842/- which included the income

under the head business/profession amounting to Rs.5360,28,657/- and

IT(TP)A No.55 & 60 /B/15 37

income from other source amounting to Rs.14,34,08,185/-. Subsequent

to the filing of the electronic return, a revised return was also filed on

30/3/2011, wherein the total income was mentioned as Rs.67,86,55,021/-

The learned AR has pointed out that after giving the appeal effect,

revised taxable income computed by the AO on 31/12/2014 comes to

Rs.66,35,52,329/- and, therefore, the issues raised in the appeal of the

assessee are academic in nature and he does not wish to adjudicate upon

the issues raised by the assessee in the appeal.

though the appeal effect has been given by learned AO pursuant to the

order passed by the CIT(A) on 14/11/2014, however the order passed by

the CIT(A) on 14/11/2014 has not attained finality and is subject to the

outcome of the Revenue appeal.

record. The income declared by the assessee in the revised return of

income on 30/3/2014 was Rs.67,86,55,021/- and the total taxable income

calculated by the AO was Rs.91,54,21,780/-. In our view, the grounds of

the assessee are not required to be adjudicated as the appeal effect has been given

and the income of the assessee was found to be Rs.66,35,42,329/- against

the declared income of the assessee to Rs.67,86,55,021/-.

IT(TP)A No.55 & 60 /B/15 38

we have restored back the matter to the learned CIT(A) to decide afresh

about the inclusion or exclusion of LGS Global Ltd., into final list of

comparables but we also find that whatever be the result of that exercise,

the assessed income of the assessee as per the appeal effect order will not

change because even after excluding LGS Global Ltd. from the list of

final comparables as per the claim of the Revenue, PLI comes to

10.834% as against appellant’s margin of 15.45%. In this view of the

matter, we hold that the appeal of the assessee is of academic interest and

hence no adjudication is called for in respect of any of the grounds raised

by the assessee in its appeal. Therefore, we dismiss the appeal of

assessee as of academic interest.

statistical purposes and the appeal of the assessee is dismissed.

Order pronounced in the open court on 3rd March, 2017.

Sd/- Sd/- (A.K GARODIA) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore Dated : 3/03/2017

Vms

IT(TP)A No.55 & 60 /B/15 39

Copy to :1. The Assessee 2. The Revenue 3.The CIT concerned. 4.The CIT(A) concerned. 5.DR 6.GF By order

Asst. Registrar, ITAT, Bangalore.