M/s STMicroelectronics Pvt. Ltd., Uttar Pradesh V. DCIT, Bangalore

CO 193/BANG/2015

• Counselvise Citation: [2024] 100 COUNSELVISE.COM (IT) 3476 (ITAT-BANGALORE)
• Duration Of Justice: 8 year(s) 4 month(s) 25 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 07-03-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 04-03-2024
• Assessment Year: 2004-2005
• Appeal Filed On: 12-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI ‘I’ BENCH, NEW DELHI BEFORE SHRI SAKTIJIT DEY, VICE PRESIDENT, AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ITA No. 625/Bang/2013 [A.Y. 2004-05] Dy. CIT Vs. M/s STMicroelectronics Pvt Ltd Circle – 11(3) [Formerly M/s Genesis Microchips Bangalore India Pvt Ltd, Level 4, Ferns Icon, 28 & 36/5 Doddanekkundi Village, K.R. Puram Hobli, Outer Ring Road, Bangalore PAN : AAADCS 6227 K CO No. 193/BANG/2013 [A.Y. 2004-05] [A/o ITA No. 625/Bang/2013] M/s STMicroelectronics Pvt Ltd Vs. Dy. CIT [Formerly M/s Genesis Microchips Circle – 11(3) India Pvt Ltd , Level 4, Bangalore Ferns Icon, 28 & 36/5 Doddanekkundi Village, K.R. Puram Hobli, Outer Ring Road, Bangalore PAN : AAADCS 6227 K (Applicant) (Respondent) Assessee By : Shri Vishal Kalra, Adv Ms. Sumisha Murgai, AR Department By : Shri Manish Kumar Dabas, Sr. DR Date of Hearing : 05.03.2024 Date of Pronouncement : 08.03.2024 2 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER:- The above captioned appeal by the Revenue and cross objection by the assessee are directed towards the order of the CIT(A) - IV, Bengaluru dated 14.02.2013 pertaining to A.Y. 2004-05. 2. Since the appeal and cross objection were heard together, they are disposed of by this common order for the sake of convenience and brevity. 3. Grievances of the Revenue read as under: “1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstance of the case. 2. The learned CIT(A) erred in excluding the comparable in the segment: M/s. L&T Infotech Ltd., Satyam Computers Ltd., M/s. Infosys Technology Ltd. holding that the size, turnover and brand of the company are deciding factors for treating a company as a comparable 3. The Ld. CIT(A) erred in excluding the cornparable companies like Sat lnvesteck Ltd by rejecting companies on the 3 basis of Abnormal Profit without defining what constitutes abnormal profit filter and how the same is determined. 4. The learned CIT(A) erred in holding that persistent losses of the company do not disqualify a company for being treated as a comparable without appreciating the fact that the same is designed to eliminate companies which are not in line with the trend of growth witnessed in the software industry. 5. The Ld.CIT(A) has erred in rejecting the employee cost filter applied by the TPO to select companies which are predominantly into software development services. 6. That the CIT(A), erred on facts and in the circumstances of the case, in holding that M/s Bodhtree Consulting Limited and Kushugru Software Limited cannot be taken as comparables, without appreciating the fact that the companies qualify all the qualitative and quantitative filters applied by the TPO in selection of these companies as comparables. 6.1. That the CIT(A), erred on facts and in the circumstances of the case, in directing the inclusion of Omni Ax's software Ltd. (Astro Bio sys Ud) as a comparable. 4 7. The learned CIT (A) erred in directing inclusion of M/s D- link India Ltd as a comparable without calling for a remand report from the TPO to ascertain whether the company qualifies as an appropriate comparable specially in light of the fact that it does not qualify non availability of data in the appropriate bases filter for the purposes of TP analyst . 8. The learned CIT(A) erred in directing inclusion of M/s Dlink India Ltd without recording any finding as to how the same qualifies the filters [qualitative and quantitative) applied for the purposes of comparability analysis. 9. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored.” 2. The grievances of the assessee read as under: 1. The order of the Learned CIT (Appeals). in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT(A) erred in excluding the comparable in the segment: M/s. L&T Infotech Ltd., Satyarn Computers Ltd M/s lnfosys Technology Ltd. holding that the size, turnover and brand of the company are deciding factors for treating a company as a comparable. 5 3. The Ld. CIT (A) erred in excluding the comparable companies like Sat Investeck Ltd. by rejecting companies on the basis of Abnormal Profit without defining what constitutes abnormal profit filter and how the same is determined 4. The learned CIT(A) erred in holding that persistent loses of the company do not disqualify a company for being treated as a comparable without appreciating he fact that the same is designed to eliminate companies which are not in line with the trend of growth witnessed in the software industry. 5. The Ld.CIT(A) has erred in rejecting the employee cost filter applied by the TPO to select companies which are predominantly into software development services. 6. The CIT (A) erred, on the facts and in the circumstances of the case. in holding that M/s Bodhtree Consulting Ltd. Omni Ax's Software Ltd. (Astro bio sys Ltd.) and Kushagra Software Ltd cannot be taken as com parables. without appreciating the fact that the companies qualify all the qualitative and quantitative filters applied by the TPO in selection of this companies as' com parables. 7. The learned CIT (A) erred in directing inclusion of M/s D- Link India Ltd. as a comparable without calling for a remand report from the TPO to ascertain whether the company qualifies as an appropriate comparable specially in light of the fact that it does not qualify non availability of data in the appropriate data bases filter for the purposes of TP analysis. 6 8. The learned CIT (A) erred in directing inclusion of MIs D- Link lndia Ltd without recording any finding a to how the same qualifies the filters (qualitative and quantitative) applied for the purpose of comparability analysis. 9. For these and such other grounds that may be urged at the time of hearing. It is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored.” 3. Briefly stated, the facts of the case are that the assessee is engaged in the provision of software development services to its Associated Enterprises (AEs). The assessee undertakes software development activities with the help of tangible assets owned by it. Intellectual Property Rights developed during the course of software development are property of customer affiliates and not the assessee. 4. International transactions during the year under consideration relates to the provision of contract software services having value of Rs. 1,81,142,888/-. The assessee adopted TNMM as the most appropriate method and the PLI was taken as operating profit (OP)/operating cost (OC).The assessee used 77 comparable companies for benchmarking and margin summary of comparable companies is as 7 under: Particulars Weighted average OP/OC (%) Unadjusted margin of comparable companies (Pg 50/PB-I) 13% Adjusted margin of comparable companies (Pg 50/PB-I) 10% Margin of the Appellant (Pg 61/PB-I) 8% +5% range 16% 5. The TPO used the following comparables for benchmarking the international transactions relating to provision of contract software development services: S. No. Particulars Unadjusted OP/OC (%) 1 Infosys Technologies Ltd 39.91 2 Infotech Ltd 10.89 3 Lanco Global Systems Ltd 8.68 4 L&T Infotech Ltd 9.20 5 Orient information Technology Ltd. 14.53 6 Satyam Computer Services Ltd. 27.65 7 Sunbeam Infotech Ltd. 2.43 8 Akshay software technologies Ltd. 9.13 9 Bodhtree Consulting Ltd. 23.94 10 E-Star Infotech Ltd 15.79 11 Goldstone Technologies Ltd 9.00 12 Helios &Mathenson Information Technology Ltd. 28.09 13 Kushagra Software Ltd. 29.37 14 Netvista Information Technology Ltd. 19.86 15 VJIL Consulting Ltd. 7.82 16 ABM Knowlegdeware ltd. 16.63 17 Sat Investeck Ltd 125.96 18 Systemslogic Solutions Ltd 34.00 Average 24.05 Appellant’s margin 9.73 8 6. Accordingly, ALP of the international transactions was computed by the TPO as under: Particulars (Page 168/B Vol I) Operating Revenue 18,40,88,447 Operating Cost 16,77,68,979 Arm’s length margin 24.05% Adjusted Arm’s length margin 22.05% Arm’s length revenue 20,47,62,039 Arm’s length difference 2,06,73,592 7. The quarrel of the Revenue revolves around the exclusion of : (i) Infosys Technologies Ltd (ii) Larsen and Toubro Infotech Ltd (iii) Omni Ax’s Software Ltd (iv) Satyam Computer Services Ltd (v) Bodh Tree Consulting Ltd (vi) D-link India ltd (vii) Kushagra Software Ltd (viii) Sat Investeck Ltd 8. Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules. Judicial decisions relied upon duly considered. 9 9. The bone of contention is the turnover filter applied by the TPO in the range of Rs. 1 crore on the lower side and infinity on the higher side. The main contention of the ld. DR is that the comparables excluded by the ld. CIT(A) were part of the 77 comparables used by the assessee in its TP Study Report. Therefore, the assessee ought not to have prayed for exclusion of those comparable before the ld. CIT(A) and the ld. CIT(A) should not have entertained the prayer of the assessee. 10. In our considered opinion, once the TPO has applied a turnover filter of Rs. 1 crore, and once he himself has excluded the companies whose turnover is below Rs. 1 crore, then, the TPO himself agreed that the turnover and brand aspects are materially relevant and turnover has a direct bearing on the company’s profitability. 11. For the same analogy, we are of the considered view that the companies having turnover of Rs. 1000 crores cannot be compared with that of a company having turnover in the range of Rs. 10 crores as the size of the two companies and relative economies of scale make a significant difference in their businesses. It is like comparing the speed of TATA Nano with the speed of a Ferari. 10 12. It is an unwritten law of the market that big companies are in a position to bargain price, attract more customers and would have a broader base of skilled employees and small companies may not have these benefits. Therefore, the turnover would definitely play an important role. 13. Financials of Infosys Technologies Limited show its turnover at Rs. 4767.38 cores, Larsen & Toubro Infotech Ltd at Rs. 364.61 crores and Satyam Computer Services Ltd’s turnover is at Rs. 2541.54 crores whereas the turnover of the assessee is in the range of Rs. 10 to 20 crores. 14. We are of the considered view that the ld. CIT(A) has rightly excluded Larsen Toubro Infotech Ltd, Satyam Computer Services Ltd and Infosys Technologies Ltd from the final list of comparables which calls for no interference. Ground No. 2 is dismissed. 15. Ground No. 3 relates to the exclusion of Sat Investeck Ltd on the basis of abnormal profit. 16. It appears that the Revenue has referred the name of wrong comparable. Correct names should be PFI Data Limited, Rs. Software 11 Ltd and 7 Tech Limited. The main reason for exclusion of these companies is that they have operating loss of minus 17.10%, - 8.254% and – 24.35% respectively. 17. Since these companies have negative operating margins in the relevant F.Y, the ld. CIT(A) has excluded these companies from the final set of comparable. No error or infirmity is found in the findings of the ld. CIT(A). Ground No. 3 is dismissed. 18. Ground Nos. 4 and 5 are merely for academic interest and have no bearing on the final set of comparables and are accordingly treated as otiose. 19. Next ground relates to the exclusion of Bodh Tree Consulting Limited and Kushagra Software Limited. 20. In so far as Bodh Tree Consulting Limited is concerned, it has been strongly contended that it is functionally different. This company is engaged in product development offering product solutions in the area of data quality, business intelligence and life sciences to a reputed customer base worldwide and its products include data 12 cleansing and integration software, patent asset management and patent search and patent analysis tool. 21. The services of this company can be categorized as software development and information technology enables services [ITES]. But no break up of segmental revenue is available which hits functionality filter set by the TPO. Therefore, this company is excluded and remains excluded. 22. In so far as Kushagra Software Ltd is concerned, it has two business segments – software and finance, and its revenue under the software segment relates to sale of computer hardware, CD ROMS, etc. Quantitative information is available for purchase and sale of computer hardware. 23. The entire sales of software division is from sale of computer hardware. There are no reportable geographical segments, which means that this company fails export revenue filter and being functionally different, is rightly excluded from the final set of comparables. Ground No. 6 is also dismissed. 13 24. Now coming to the inclusion of Omni Ax’s Software Limited and D-link India Ltd, we find that Omni Ax’s was rejected on the ground of functional dissimilarity since it had significant outsourcing expenses and details have not been provided. We are of the considered view that the TPO should have called for information from the company itself whether the company performs any software development on its own. 25. Merely because the company has very low employee cost cannot be basis to presume that the company is not performing any software development on its own which can be easily verified by calling for information from the company itself. We, therefore, direct the TPO to call for information directly from the company and decide the issue afresh. Ground No. 6.1 is allowed for statistical purposes. 26. In so far as D-link India Ltd is concerned, the ld. CIT(A) has issued necessary direction to the TPO. We do not find any reason to interfere with the directions of the ld. CIT(A). This ground is dismissed. 27. The other grounds are of academic interest and need no separate adjudication. 14 28. Now coming to the cross objection of the assessee, the first objection is in respect of inclusion of Systemslogic Solutions Ltd. It was strongly contended that this company is functionally different. It is the say of the ld. counsel for the assessee that this company is engaged in providing onsite consulting and software development services and does not have any employee cost. Reference to its financials, there are no employee cost and income is from software sales and services which means that this company is outsourcing its business totally. 29. We have given thoughtful consideration to the contentions of the ld. counsel for the assessee. Though there is no mention under Schedule J, software services and administrative expenses, employee cost but at the same time, we find that expenses of Rs. 3,51,38,218/- have been charged for software services and development expenses. 30. It is prevalent in most of the companies to charge employee cost under various different heads. Therefore, we direct the TPO to call for information directly from the company whether they have any employee cost in relation to software services and furnish details. 15 31. The TPO is directed to gather information and decide afresh in light of our directions given for comparable Omni Ax’s Ltd. This objection is allowed for statistical purposes. 32. In so far as benefit of +5/-5 available to the assessee u/s 92C(2) of the Act is concerned, we are of the considered view that the said benefit is very much available to the assessee and the Assessing Officer/TPO is directed to allow such benefit as per provisions of law. 33. In the result, the appeal of the Revenue in ITA No. 625/BANG/2013 is partly allowed for statistical purposes whereas the Cross objection of the assessee in CO No. 193/BANG/2015 is allowed for statistical purposes. The order is pronounced in the open court on 08.03.2024. Sd/- Sd/- [SAKTIJIT DEY] [N.K. BILLAIYA] VICE PRESIDENT ACCOUNTANT MEMBER Dated: 08 th MARCH, 2024. VL/ 16 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr.PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order