M/S. INFINEON TECHNOLOGIES INDIA PVT. LTD,BANGALORE vs. ACIT, BANGALORE

O R D E R PER SHRI A.K.GARODIA, AM

This appeal is filed by the assessee which is directed against the assessment order passed on 11.10.2010 u/s 143 (3) r.w.s. 144 C of the IT Act, 1961 for A. Y. 2006-07 as per the directions of the DRP.

I. Transfer Pricing

The learned members of the Dispute Resolution Panel (hereinafter referred to as DRP) and the learned Assessing Officer (hereinafter referred to as AO") erred in upholding the income adjustment proposed by the learned Transfer Pricing Officer

(hereinafter referred to as "TPO") amounting to Rs.13,52,29,699/-.

1.1 The learned members of the DRP and the learned AO ought to have appreciated the fact that the margin earned by the appellant is reflective of services rendered by a contract service provider.

1.2 The learned members of the DRP and the learned AO have erroneously upheld the TPO's contention of rejecting Cost Plus Method as the most appropriate method and accepting Transactional Net Margin Method as the most appropriate method.

1.3 The learned members of the DRP and the learned AO have erroneously upheld the TPO's contention that an upper limit to the turnover should not be applied while selecting the comparable companies.

1.4 The learned members of the DRP and the learned AO erred in accepting the filters applied by the TPO inconsistently namely: a) Rejection of companies with different year ending filter; and b) Rejection of companies having software development revenue less than 75% of total operating revenue filter 1.5 The learned members of the DRP and the learned AO have erroneously upheld the learned TPO's contention that the companies having onsite revenues greater than 75% of the operating revenue should be rejected.

1.6 The learned members of the DRP and the learned AO have erred in upholding the TPO's comparable companies which are not functionally comparable to the appellant namely Tata Elxsi Limited, Flextronics Systems Limited, R Systems International Limited and KALS Information System.

1.7 The learned members of the DRP and the learned AO have erred in accepting comparable companies which are not comparable to the appellant namely Infosys Technologies Limited, Accel Transmatics Limited, Megasoft Limited, Flextronics Software Systems Limited KALS Information Systems Limited and R Systems International Limited.

1.8. The ld. Members of the DRP and the learned AO have erred by not accepting the following comparable companies namely Maars Software International Ltd. Quitegra Solutions Ltd, Melstar Information Technologies and Network Programs Ltd. 1.9 Market Risk adjustment a. The learned members of the DRP and the learned AO have grossly erred in accepting the learned TPO's rejection of market risk adjustment submitted by the appellant based on the Capital Asset Pricing Model (CAPM) model. b. The learned members of the DRP and the learned AO have erred in not appreciating the difference in the functional profile that exists between the appellant who functions in the role of a captive service provider vis-a-vis the independent unrelated comparable companies who operate in the capacity of entrepreneurial entities c. The learned members of the DRP and the learned AO erred in concluding that the market risk adjustment will be nullified against the existence of single customer and political risks.

1.10 The learned members of the DRP and the learned AO have erred in denying the benefit of +/-5% while arriving at the arm's length price.

1.11 The learned members of the DRP and the learned AO erred in concluding that the appellant ought to have employed contemporaneous data in the preparation of the Transfer Pricing report.

1.12 The learned members of the DRP and the learned AO erred in upholding the RPT threshold limit of 25% as arrived at by the learned TPO for the purposes of accepting/eliminating companies as comparable companies.

1.13 The learned members of the DRP and the learned AO ought to have appreciated that the powers conferred under Section 133 (6) of the Income Tax Act, 1961, ought to be employed in such a manner so as to comply with the provisions of judiciousness as well as with the principles of natural justice.

1.14 The learned members of the DRP and the learned AO ought to have appreciated that in the absence of fraudulent manipulation of Transfer Prices or an intention on the part of the appellant to shifting of profits from the jurisdiction of India, the Transfer Pricing provisions ought not to be applied.

II. Corporate Tax

2.1 Disallowance of Project Specific Costs amounting to Rs.15,78,96,116 under section 40(a)(ia} of the Income Tax Act, 1961 ('Act'). a. The learned AO erred in disallowing the expenditure of Rs.15,78,96,116/-, incurred by the appellant towards the usage of EDA (Electronic Design Automation) software tools in software development, under section 40(a) of the Act. b. The learned AO erred in disallowing the expenses by placing reliance on the judgment of Hon'ble Karnataka High Court in the assessee's own case for the assessment years 2000- 01 and 2001-02 (ITA Nos. 1264 and 1265 of 2006) which has been duly set aside by the Honorable Supreme Court in the assessee's own case for the assessment years 2000-01 and 2001-02 vide judgment dated 9thSeptemerb, 2010(SLP (Civil) No.7821-7822 of 2010). c) The ld.AO erred in not placing reliance on the decision of the Hon’ble ITAT, Bangalore in assessee’s own case for the assessment years

2000-01 and 2001-02 (ITA No.467 & 468/Bang/2002), herein it has been held that the amount paid by the appellant to its parent company was not in the nature of royalty and no tax was required to be deducted at source.

2.2 Disallowance of Software Rentals amounting to Rs.48,650,623/-. a. The ld. AO erred in disallowing the sum of Rs.4,86,50623/- incurred by the appellant towards software expenses on the ground that these expenses re capital in nature. b.Notwithstanding and without prejudice to the contention above, the ld. AO erred in not allowing depreciation on the depreciation on h application software purchase of Rs.89,19,603/- while considering the same as capital in nature.

2.3 Adjustments made to the Total turnover in computing the deduction u/s 10A of the Act. a) The ld. AO erred in reducing telecommunication expenses (bandwidth charges) mounting to Rs.33,00,581/- from the export turnover while computing tax holiday benefit u/s10A on the contention that these expenses are attributable to the delivery of computer software outside India. b) Notwithstanding and without prejudice to the above, the learned AO erred in not observing that should a portion of the telecommunication expenses (bandwidth charges) be reduced from the export turnover, the expenses should also be reduced from the total turnover in arriving at th3e deduction u/s 10A of the Act. c) The ld. AO erred in computing deduction u/s10A by erroneously considering the profits of the software (STP) unit as Rs.33,59,65,815/-) instead of Rs.36,51,56,189/-S thereby resulting in a lower deduction u/s10A.

2.4 The ld. AO has erred in levying interest u/s 234B of the Act amounting to Rs.3,06,54,625/- respectively.

2.5 The appellant raves leave to add, alter and modify the above grounds during the course of the appeal.

2.6 For the above and any other grounds which may be raised at the time of hearing, it s prayed that the order of the AO be set aside.

Ground I - Transfer Pricing

It is most humbly prayed to the Hon'ble Tribunal to permit the Appellant to raise the following additional ground of appeal in continuation of the existing grounds of appeal and be read as Ground No. I .15 immediately after Ground No. 1.14.

"Ground No. 1.15 Depreciation adjustment

The Appellant submits that it should be granted Depreciation adjustment. •The depreciation cost as a percentage of the cost of the appellant during the fmancial year 2005-06 is significantly different from that of the comparable companies. •The difference in the depreciation cost arises due to differences in the accounting treatment across the comparable companies and the appellant. •Considering the above fact, to achieve reliable comparability, the margins of the comparable companies should be adjusted for differences in depreciation cost of comparable companies and tested party.

Reason for filing Additional Ground of Appeal i)When applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin). In case, there are any such differences, reasonably accurate adjustments need to be made to eliminate the effect of any such differences. ii) There are differences in the treatment across enterprises of operating expenses and non-operating expenses particularly of depreciation affecting the net profit. Such differences should be reckoned in order to achieve reliable comparability between the taxpayer and the third party comparable companies. Hence, it is essential to perform a depreciation adjustment o bridge the disparities between appellant and the comparable companies selected by the TPO. Therefore, it is necessary to make appropriate adjustments for depreciation while benchmarking the appellant with comparable companies.

The appellant craves leave to add, alter amend or delete any of the grounds of appeal on or before the date of hearing.

as per which the assessee is seeking exclusion of M/s Tata Elxsi Ltd., and M/s Flextronics Software Systems Ltd.(Seg.), M/s R Systems International Ltd. (Seg.) and M/s Kals Information Systems Ltd.(Seg.)and also for exclusion of M/s Infosys Ltd., M/s Accel Transmatics, M/s Megasoft, M/s Flextronics Software Systems Ltd. M/s Kals Information Systems Ltd and R.Systems International Ltd. (Seg.). The assessee is also seeking market risk adjustment and some grounds are regarding Corporate Tax issues i.e. disallowance of Project Specific cost amounting to Rs.15,78,96,116/- u/s 40 a(ia) of IT Act,1961 and disallowance of software rentals amounting to Rs.48,650,623/- and there is one issue regarding granting of deduction u/s10A of the Act, which is reduced by the AO by reducing the export turnover but not reducing the total turnover. He submitted that this last issue is covered in favour of the assessee by the judgment of the Hon’ble Karnataka High Court rendered in the case of M/s Tata Elxsi Ltd., 349 ITR

98. He submitted that all these issues were before the Tribunal in assessee’s own case for the assessment year 2008-09 and in that year in IT(TP)A No.1670(B)/2012 dated 06-11- 2015, these issues were remanded by the Tribunal to the AO for a fresh decision and therefore, in the present year also, these issues should be restored back to the file of AO for fresh decision. The ld. DR of the revenue supported the orders of authorities below.

disallowance of software rentals amounting to Rs.48,650,623/-, we find force in the alternative contention of the assessee that having held that software expenditure of Rs.4,86,50,623/- is capital expenditure, the AO should have allowed depreciation on the same but for that the assessee has to establish that the software in question were put into use in the present year and it is also to be seen that the same were used in the present year for how many days i.e. for 180 days or more and hence, on this issue, we set aside the order of the AO and restore back the file to AO/TPO with the direction that the assessee should establish before the AO that the software in question were used in the present year and for how many days, software were used and thereafter, the AO should determine the quantum of depreciation on software allowable in the present year as per law.

Order pronounced in the open court on the date mentioned on the caption page.