Nvidia Graphics Private Ltd, Bangalore V. Deputy commissioner of Income tax, Bangalore

ITA 1087/BANG/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95204 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 04-08-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 21-08-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUNIL KUMAR AGARWAL JT
• Keywords: Depreciation; Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT( TP )A NO.1118/BANG/2014 ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(2), BANGALORE. VS. M/S. NVIDIA GRAPHICS PVT. LTD., 9 TH & 10 TH FLOOR, L6 BLOCK, MANYATA EMBASSY BUSINESS PARK, OUTER RING ROAD, BANGALORE 560 045. PAN : AABCN 9200H APPELLANT RESPONDENT IT( TP )A NO.1087/BANG/2014 ASSESSMENT YEAR : 2009-10 M/S. NVIDIA GRAPHICS PVT. LTD., BANGALORE 560 045. PAN : AABCN 9200H VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(2), BANGALORE. APPELLANT RESPONDENT REVENUE BY : SHRI SUNIL KUMAR AGARWAL, JT. CIT(DR) ASSESSEE BY : SHRI CHAVALI NARAYAN, CA DATE OF HEARING : 04.08.2015 DATE OF PRONOUNCEMENT : 14.08.2015 IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 2 OF 27 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THESE ARE CROSS APPEALS BY THE REVENUE AND ASSESS EE AGAINST THE ORDER DATED 26.6.2014 OF THE CIT(APPEALS)-IV, BANGA LORE RELATING TO ASSESSMENT YEAR 2009-10. ITA 1118/B/14 (REVENUES APPEAL) 2. FIRST WE SHALL TAKE UP FOR CONSIDERATION APPEAL BY THE REVENUE. GROUND NOS. 1, 5 & 6 ARE GENERAL IN NATURE AND CALL S FOR NO SPECIFIC ADJUDICATION. 3. GROUND NOS. 2 & 3 READ AS FOLLOWS:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN LAW IN DIRECTING THE AO TO EXCLUDE THE REIMBURSEMENT OF CERTAIN EXPENSES BOTH FROM THE EXP ORT TURNOVER AS WELL AS FROM TOTAL TURNOVER FOR THE PURPOSE OF C OMPUTATION OF DEDUCTION U/S 10A, WITHOUT APPRECIATING THE FACT TH AT THE STATUTE ALLOWS EXCLUSION OF SUCH EXPENDITURE ONLY FROM EXPO RT TURNOVER BY WAY OF SPECIFIC DEFINITION OF EXPORT TURNOVER AS ENVISAGED BY SUB-CLAUSE (4) OF EXPLANATION 2 BELOW SUB-SECTION ( 8) OF SECTION 10A AND THE TOTAL TURNOVER HAS NOT BEEN DEFINED IN THIS SECTION. 3/. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN DIRECTING THE AO TO COMPUTE DEDUCTION U/S 1OA IN THE ABOVE MANNER BY PLACING RELIANCE ON THE DECISION OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF M /S TATA ELXSI LTD., WHICH HAS NOT BECOME FINAL SINCE THE SAME HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND SLPS ARE PENDING BEF ORE THE HONBLE SUPREME COURT. IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 3 OF 27 4. THESE GROUNDS ARE WITH REGARD TO EXCLUSION OF IN TERNET CHARGES AND TRAVELLING EXPENSES INCURRED IN FOREIGN CURRENCY FR OM EXPORT TURNOVER WITHOUT REDUCING THE SAME FROM THE TOTAL TURNOVER, WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. 5. ACCORDING TO THE AO, AS PER THE DEFINITION OF EX PORT TURNOVER GIVEN IN CLAUSE (IV) TO EXPLANATION 2, THE EXPENSES INCURRED FOR FREIGHT EXPENSES ATTRIBUTABLE TO THE DELIVERY OF THE PRODUCT OR SOFT WARE OUTSIDE INDIA SHOULD BE REDUCED FROM THE EXPORT TURNOVER. HOWEVER, THE PROVISIONS OF SECTION 10A DO NOT PROVIDE FOR EXCLUSION OF SUCH EXPENDITUR E FROM TOTAL TURNOVER. IN THE ABSENCE OF A DEFINITION FOR TOTAL TURNOVER IN S ECTION 10A, THE NORMAL DEFINITION OF TOTAL TURNOVER HAS TO BE ADOPTED AND AS SUCH THE EXPENSES WHICH ARE REDUCED FROM THE EXPORT TURNOVER IN ACCOR DANCE WITH THE SPECIFIC DEFINITION CANNOT BE REDUCED FROM THE TOTAL TURNOVE R. 6. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) FOLL OWING THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD., 349 ITR 98 (KARN) , HELD THAT WHATEVER IS EXCLUDED FROM THE EXPORT TURNOVER, HAS ALSO TO BE EXCLUDED FROM THE TOTAL TU RNOVER. 7. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 8. THE GRIEVANCE OF THE REVENUE IS THAT THE DECISIO N OF HON'BLE HIGH COURT OF KARNATAKA IN TATA ELXSI (SUPRA) HAS NOT ATTAINED FINALITY AND A IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 4 OF 27 SLP BY THE DEPARTMENT IS PENDING BEFORE THE HON'BLE SUPREME COURT. WE ARE OF THE VIEW THAT AS OF TODAY, LAW DECLARED BY T HE HON'BLE HIGH COURT OF KARNATAKA WHICH IS THE JURISDICTIONAL HIGH COURT IS BINDING ON US. WE THEREFORE HOLD THAT THE ORDER OF CIT(A) DOES NOT CA LL FOR ANY INTERFERENCE AND ACCORDINGLY THE SAME IS CONFIRMED. 9. GROUND NO.4 RAISED BY THE REVENUE WILL BE DEALT WITH WHILE DEALING WITH GROUNDS NO.2 TO 9 OF THE ASSESSEES APPEAL. 10. IN THE RESULT, THE APPEAL BY THE REVENUE IS DIS MISSED. 1087/B/14 (ASSESSEES APPEAL) 11. GROUND NO.1 IS GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. 12. IN GROUNDS 2 TO 9, THE ASSESSEE HAS CHALLENGED THE ACTION OF THE DRP IN CONFIRMING THE ADDITION SUGGESTED BY THE TPO BY WAY OF ADJUSTMENT OF ARMS LENGTH PRICE (ALP) IN RESPECT OF INTERNATI ONAL TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES BY THE ASSE SSEE TO ITS AE. IN GROUND NO.3 FILED BY THE REVENUE THE REVENUE HAS CH ALLENGED THE ORDER OF THE CIT(A) WHEREBY HE HELD THAT FOREX LOSS/GAIN IS OPERATING IN NATURE AND THEREFORE HAS TO BE REGARDED AS PART OF THE OPERATI VE INCOME FOR THE PURPOSE OF DETERMINING THE PROFIT MARGINS OF THE AS SESSEE AS WELL AS THAT OF THE COMPARABLE COMPANIES. THE FACTS IN THIS REG ARD ARE AS FOLLOWS. IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 5 OF 27 13. NVIDIA IS A WORLDWIDE LEADER IN GRAPHICS AND DI GITAL MEDIA PROCESSORS DEDICATED TO CREATING 7 PRODUCTS THAT EN HANCE THE INTERACTIVE EXPERIENCE ON CONSUMER AND PROFESSIONAL COMPUTING P LATFORMS. ITS PRODUCTS HAVE BROAD MARKET REACH AND ARE INCORPORAT ED INTO A VARIETY OF PLATFORMS, INCLUDING CONSUMER AND ENTERPRISE PCS, N OTEBOOKS, WORKSTATIONS, MOBILE PHONES AND GAME CONSOLES. T HE ASSESSEE PROVIDES RESEARCH AND DEVELOPMENT SERVICES TO NVIDIA INTERNA TIONAL, FROM ITS BANGALORE, PUNE AND HYDERABAD FACILITIES. IT ALSO P ROVIDES MARKETING SUPPORT SERVICES TO NVIDA SINGAPORE PTE. LTD. NVI DIA INDIA IS COMPENSATED ON A COST PLUS MARK-UP BASIS FOR THE PR OVISION OF RESEARCH AND DEVELOPMENT SERVICES TO NVIDA INTERNATIONAL AND MARKETING SUPPORT SERVICES PROVIDED TO NVIDIA SINGAPORE. THE DETAILS OF SEGMENTAL FINANCIALS ARE AS FOLLOWS:- DESCRIPTION RESEARCH & DEVELOPMENT SERVICES (SOFTWARE) (RS.) OPERATING REVENUES 208,44,86,068 OPERATING EXPENSES 183,33,97,561 OPERATING PROFIT/LOSS 25,10,88,507 OP PROFIT ON COST 13.70% 14. THE ISSUE RAISED BY THE ASSESSEE IN GROUNDS NO. 2 TO 9 RELATES TO THE DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RE SPECT OF RECEIPTS BY THE ASSESSEE FROM ITS AE IN RESPECT OF TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES. IN SUPPORT OF THE CLAIM OF T HE ASSESSEE THAT THE PRICE PAID AS ABOVE WAS AT ARMS LENGTH, THE ASSESS EE FILED A TRANSFER IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 6 OF 27 PRICING ANALYSIS. THE ASSESSEE ADOPTED TNMM AS THE MOST APPROPRIATE METHOD. THE PROFIT LEVEL INDICATOR (PLI) CHOSEN WA S OPERATING PROFIT TO OPERATING COST. THE ASSESSEE PROPOSED 21 COMPARABL E COMPANIES OUT OF WHICH THE TPO ACCEPTED 8 COMPARABLE COMPANIES AND R EJECTED THE 13 COMPARABLE COMPANIES PROPOSED BY THE ASSESSEE. ON HIS OWN, THE TPO SELECTED 3 COMPANIES AND ARRIVED AT A FINAL SET OF 11 COMPARABLES AND THEIR OPERATING MARGINS AS FOLLOWS:- SL. NO. NAME OF THE COMPARABLE SALES (IN RS.) COST (IN RS.) MARGIN 1 KALS INFORMATION SYSTEMS LTD 2,14,04,686 1,87.93,813 L3.89% 2 AKSHAY SOFTWARE TECHNOLOGIES LTD. 12,23,21,483 11,31,49,350 8.11% 3 BODHTREE CONSULTING LTD. 16,05,75,212 9,89,56,821 62.27% 4 R S SOFTWARE (INDIA) LTD. 1,49,57,12,634 1,36,01,02,589 9.97% 5 TATA ELXSI LTD. (SEGMENTAL) 3,78,43,03,000 3,14,63,15,000 20.28% 6 SASKEN COMMUNICATION TECHNOLOGIES LTD. 4,05,31,20,000 3,18,69,97,000 27.91% 7 PERSISTENT SYSTEMS LTD. 5,19,69,10,000 3,67,52,70,000 41.40% 8 ZYLOG SYSTEMS LTD. 7,34,93,51,475 6,81,69,98,160 7.81% 9 MINDTREE LTD. (SEG) 7,93,22,79,326 5,74,06,73,058 5.52% 10 LARSEN AND TOUBRO INFOTECH 19,50,83,81,374 15,64,12,76,626 24.72% 11 INFOSYS LTD. 2,02,64,00,00,000 1,39,17,00,00,000 45.61% AVERAGE MEAN 24.32% 15. THE MARGINS OF THE ASSESSEE AS COMPUTED BY THE TPO WAS 13.70%, WHICH WAS NOT WITHIN THE (+) OR (-) 5% RANGE OF THE ARITHMETIC MEAN OF THE FINAL SET OF COMPARABLE COMPANIES CHOSEN BY THE TPO . THE TPO THEREFORE PROCEEDED TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION BY APPLYING THE ARITHMETIC MEAN OF THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY HIM. AFTER ALLOWING WORKING CAPITAL ADJUSTMENT, TH E TPO COMPUTED THE ALP AS FOLLOWS:- IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 7 OF 27 ARMS LENGTH MEAN MARGIN ON COST 24.32% LESS: WORKING CAPITAL ADJUSTMENT (ANNEX.C1 READ WIT H PARA3.7) -1.71% ADJUSTED MARGIN 22.61% OPERATING COST 183,33.97,561 ARMS LENGTH PRICE 124.73% OF OPERATING COST 224,76, 28,749 PRICE RECEIVED 208,44,86,068 SHORTFALL BEING ADJUSTMENT U/S 92CA 16,34,42,681 16. THE ASSESSEE FILED OBJECTIONS BEFORE THE CIT(A) TO THE PROPOSAL MADE BY THE TPO IN THE ORDER PASSED U/S. 92CA OF TH E ACT. THE CIT(A) CONFIRMED THE ORDER OF THE TPO IN SO FAR AS IT RELA TES TO SELECTION OF COMPARABLE COMPANIES. THE CIT(A), HOWEVER, HELD TH AT FOREX LOSS/ GAIN IS OPERATING IN NATURE AND HAS TO BE CONSIDERED AS PAR T OF THE OPERATING PROFITS FOR THE PURPOSE OF COMPUTING PROFIT MARGIN OF THE A SSESSEE. THE AO PASSED FAIR ASSESSMENT ORDER IN WHICH THE ADDITION PROPOSED BY THE TPO WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. AGG RIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE THE TRIBUNAL. 17. THE FIRST ASPECT THAT NEEDS CONSIDERATION IS TH E COMPUTATION OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. IN GROUND NO. 3 RAISED BY THE REVENUE, THE REVENUE HAS CHALLENGED THE ORDER OF THE CIT(A) WHEREBY HE HELD THAT FOREX LOSS/GAIN IS OPERATING IN NATURE AND THEREFORE HAS TO BE REGARDED AS PART OF THE OPERATIVE INCOME FOR THE PU RPOSE OF DETERMINING THE PROFIT MARGINS OF THE ASSESSEE AS WELL AS THAT OF T HE COMPARABLE COMPANIES. IT WAS THE PLEA OF THE ASSESSEE BEFORE THE CIT(A) THAT THE TPO IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 8 OF 27 ERRED IN NOT TREATING THE FOREIGN EXCHANGE FLUCTUAT ION AS PART OF THE OPERATING PROFITS AND ADDING THE SAME TO THE INCOME FROM SOFTWARE DEVELOPMENT SERVICES. THE ASSESSEE SPECIFICALLY BR OUGHT TO THE NOTICE OF THE CIT(A) THAT THE TPO WHILE COMPUTING THE OPERATI NG MARGIN, HAS NOT INCLUDED THE INCOME FROM FOREIGN EXCHANGE FLUCTUATI ON ON THE GROUND THAT THE SAME IS NON-OPERATING IN NATURE. THE ASSESSEE B ROUGHT TO THE NOTICE OF THE DRP THAT THE ITAT BANGALORE BENCH IN THE CASE O F TRILOGY E- BUSINESS SOFTWARE INDIA PRIVATE LTD. IN ITA NO.1054/BANG/2011 , HAS HELD THAT FOREIGN EXCHANGE GAIN/LOSS HAS TO BE CONSIDERED AS OPERATING IN NATURE. THE TRIBUNAL FOLLOWED THE DECISION REND ERED BY THE BANGALORE BENCH IN THE CASE OF SAP LABS INDIA PVT. LTD. V. ACIT, [2011] 44 SOT 156 (BANG) . THE CIT(A) AGREED WITH THE SUBMISSIONS OF THE ASSESSEE AND HELD THAT FOREIGN EXCHANGE FLUCTUATION AS BEING OPERATING IN NATURE IN COMPUTING THE OPERATING MARGINS OF THE AP PELLANT AND THE COMPARABLE COMPANIES. 18. THE LD. DR PLACED RELIANCE ON THE ORDER OF THE TPO ON THIS ISSUE. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE CIT(A). 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN O UR VIEW, THE CIT(A) HAS RELIED ON THE DECISIONS RENDERED BY THE TRIBUNA L IN THE CASE OF SAP LABS (SUPRA). IN THE GIVEN FACTS AND CIRCUMSTANCE S, WE UPHOLD THE ORDER OF THE CIT(A) HOLDING THAT THE FOREIGN EXCHANGE GAI N FROM SOFTWARE IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 9 OF 27 DEVELOPMENT SERVICES HAS TO BE CONSIDERED AS PART O F THE INCOME FROM SOFTWARE DEVELOPMENT SERVICES WHILE COMPUTING THE M ARGIN OF THE ASSESSEE. 20. THE NEXT ASPECT THAT REQUIRES CONSIDERATION IS WITH REGARD TO THE COMPARABILITY ANALYSIS CARRIED OUT BY THE TPO. AS WE HAVE ALREADY SEEN, THE ASSESSEE HAD CHOSEN A LIST OF 11 COMPARABLE COM PANIES, WHICH ARE GIVEN IN THE EARLIER PART OF THIS ORDER. WE HAVE ALSO SEEN THAT OUT OF THE 21 COMPARABLE CHOSEN BY THE ASSESSEE, THE AO ACCEPTED ONLY 8 COMPANIES AS COMPARABLE WITH THAT OF THE ASSESSEE AND EXCLUDE D THE REMAINING 13 COMPANIES. THE TPO ON HIS OWN CONDUCTED A SEARCH O F DATABASE AND ARRIVED AT A LIST OF 3 NEW COMPARABLE COMPANIES. T HE FINAL LIST OF 11 COMPARABLE COMPANIES AND THEIR MARGINS WERE TAKEN F OR ARRIVING AT AN ARITHMETIC MEAN OF 24.32% OF THE COMPARABLES. 21. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS FILED A CHART IN WHICH HE HAS QUESTIONED THE ACTION OF THE TPO IN INCLUDIN G/RETAINING SOME OF THE COMPARABLE CHOSEN BY THE TPO IN THE FINAL LIST OF C OMPARABLES CHOSEN BY HIM. THE ASSESSEE HAS ALSO SUBMITTED THAT SOME OF THE COMPARABLE CHOSEN BY THE ASSESSEE OUGHT NOT TO HAVE BEEN REJEC TED BY THE TPO. WE WILL DEAL WITH EACH OF SUCH COMPARABLE COMPANIES IN THE FOLLOWING PARAS. IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 10 OF 27 COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 22. BODHTREE CONSULTING LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLES C HOSEN BY THE ASSESSEE, THIS COMPANY WAS ALSO INCLUDED BY THE ASSESSEE. THE ASS ESSEE, HOWEVER, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSE SSEES NOTICE THAT THIS COMPANY IS NOT BEING CONSIDERED AS A COMPARABLE COM PANY IN THE CASE OF COMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V. ITO, ITA NO.7633/MUM/2012, ORDER DATED 6.11 .2013 . IN THIS CASE, THE TRIBUNAL FOLLOWED THE DECISION RENDE RED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SERVICES (I) P. LTD., ITA NO.4547/MUM/2012 . IN THE AFORESAID DECISIONS, THE TRIBUNAL HAS TAKEN THE VIEW THAT BODHTREE CONSULTING LTD. IS IN THE BUSINESS OF SOFTWARE PRODUCTS AND WAS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOP MENT OF SOFTWARE USING LATEST TECHNOLOGY. THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. (SUPRA) IS IN RELATION TO A.Y. 2008-09. IT WAS AFFIRMED BY THE L EARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES IN THE PR ESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNED. FO LLOWING THE AFORESAID IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 11 OF 27 DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE HO LD THAT BODHTREE CONSULTING LTD. CANNOT BE REGARDED AS A COMPARABLE. IN THIS REGARDS, THE FACT THAT THE ASSESSEE HAD ITSELF PROPOSED THIS COM PANY AS COMPARABLE, IN OUR OPINION, SHOULD NOT BE THE BASIS ON WHICH THE S AID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WHEN FACTUALLY IT IS SHOW N THAT THE SAID COMPANY IS A SOFTWARE PRODUCT COMPANY AND NOT A SOFTWARE DE VELOPMENT SERVICES COMPANY. 23. INFOSYS LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSID ERED TO BE FUNCTIONALLY DIFFERENT FROM A COMPANY PROVIDING SIMPLE SOFTWARE DEVELOPMENT SERVICES, AS THIS COMPANY OWNS SIGNIFICANT INTANGIBLES AND HA S HUGE REVENUES FROM SOFTWARE PRODUCTS. IN THIS REGARD, WE FIND THAT TH E BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TDPLM SOFTWARE SOLUTIO NS LTD. V. DCIT, ITA NO.1303/BANG/2012, BY ORDER DATED 28.11.2013 WITH R EGARD TO THIS COMPARABLE HAS HELD AS FOLLOWS:- 11.0 INFOSYS TECHNOLOGIES LTD. 11.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BE FORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPA NY IN THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AND BRAND A TTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASP ECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEG MENT. 11.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTAT IVE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. THE LEARNED AUTHORISED REPRESENTA TIVE 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 IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 12 OF 27 DEVELOPMENT ACTIVITIES, WHEREAS THE ASSESSEE IS MER ELY A SOFTWARE SERVICE PROVIDER OPERATING ITS BUSINESS IN INDIA AN D DOES NOT POSSESS EITHER ANY BRAND VALUE OR OWN ANY INTANGIBLE OR INT ELLECTUAL 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 AN D HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. IT IS S UBMITTED THAT THIS DECISION IS APPLICABLE TO THE ASSESSEE'S CASE, AS T HE ASSESSEE DOES NOT OWN ANY INTANGIBLES AND HENCE INFOSYS TECHNOLOG IES LTD. CANNOT BE COMPARABLE TO THE ASSESSEE ; (II) THE OBSERVATION OF THE ITAT, DELHI BENCH IN T HE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.3856 (DEL)/2 010 AT PARA 5.2 THEREOF, THAT INFOSYS TECHNOLOGIES LTD. BEING A GIA NT COMPANY AND MARKET LEADER ASSUMING ALL RISKS LEADING TO HIGHER PROFITS CANNOT BE CONSIDERED AS COMPARABLE TO CAPTIVE SERVICE PROVIDE RS 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 SOF TWARE 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 ACQ UISITION OF IPRS IN AUTOLAY, A COMMERCIAL APPLICATION PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. IN VIEW OF THE ABOVE REASONS, THE LEARNED AUTHORI SED REPRESENTATIVE PLEADED THAT, THIS COMPANY I.E. INFO SYS TECHNOLOGIES LTD., BE EXCLUDED FORM THE LIST OF COMPARABLE COMPA NIES. 11.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE A SSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF O PERATIONS AND THE BRAND ATTRIBUTABLE PROFIT MARGINS OF THIS COMPANY H AVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTM ENTAL REPRESENTATIVE 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 PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIN D THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABL ISH THAT THIS IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 13 OF 27 COMPANY IS FUNCTIONALLY DIS-SIMILAR AND DIFFERENT F ROM THE ASSESSEE AND HENCE IS NOT COMPARABLE AND THE FINDING RENDERE D IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007-08 IS APPLICABLE TO THIS YEAR ALSO. WE AR E INCLINED TO CONCUR WITH THE ARGUMENT PUT FORTH BY THE ASSESSEE THAT IN FOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SI GNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFT WARE PRODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMP ANIES. 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 TH AT THE FACTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO REMAINS IDEN TICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNED. RESPECTFULLY FOLLOWING THE D ECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT INFOSYS LTD. BE EXC LUDED FROM THE LIST OF COMPARABLE COMPANIES. 24. KALS INFORMATION SYSTEMS LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSIDERED AS NOT COMPARABLE TO A PURE SOFTWARE DEV ELOPMENT SERVICES COMPANY BY THE BANGALORE BENCH OF THE TRIBUNAL IN T HE CASE OF M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) . THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDE S THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGE D IN PROVIDING IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 14 OF 27 TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTW ARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TR IBUNALS DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON A CCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPA NIES. THE RELEVANT EXTRACT ARE AS FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUS ION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T HAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THU S ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJ ECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SU BMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T PO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHI CH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF T HIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21. 6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVI DER. WE IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 15 OF 27 THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, W E HOLD THAT KALS INFORMATION SYSTEMS LTD. SHOULD NOT BE REGARDED AS A COMPARABLE. 25. TATA ELXSI LTD. :- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT IN ASSESSEES OWN CASE FOR T HE A.Y. 2007-08, THIS COMPANY WAS NOT REGARDED AS A COMPARABLE IN ITS SOF TWARE DEVELOPMENT SERVICES SEGMENT IN ITA NO.1076/BANG/2011, ORDER DATED 29.3.2013 . FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRI BUNAL:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. THE LEARNED CHARTERED ACCOUNTANT PLEADED THAT O UT OF THE SIX COMPARABLES SHORTLISTED ABOVE AS COMPARABLES BASED ON THE TURNOVER FILTER, THE FOLLOWING TWO COMPANIES, NAMEL Y (I) TATA ELXSI LTD; AND (II) M/S. FLEXTRONICS SOFTWARE SYSTE MS LTD., DESERVE TO BE ELIMINATED FOR THE FOLLOWING REASONS : (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-SERVI CES BREAK UP/INFORMATION PROVIDED IN THE ANNUAL REPORT OR THE DATABASES BASED ON WHICH THE MARGIN FROM SOFTWARE SERVICES ACTIVITY ONLY COULD BE COMPUTED. THE COMPA NY HAS ALSO IN ITS RESPONSE TO THE NOTICE U/S.133(6) S TATED THAT IT CANNOT BE CONSIDERED AS COMPARABLE TO ANY OTHER SOFTWARE SERVICES COMPANY BECAUSE OF ITS COMPLEX NA TURE. HENCE, TATA ELXSI LTD., IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. (II) FLEXTRONICS SOFTWARE SYSTEMS LTD. : THE LEARN ED TPO HAS CONSIDERED THIS COMPANY AS A COMPARABLE BASED ON 13 3(6) REPLY WHEREIN THIS COMPANY REFLECTED ITS SOFTWARE DEVELOP MENT SERVICES IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 16 OF 27 REVENUES TO BE MORE THAN 75% OF THE 'SOFTWARE PRODU CTS AND SERVICES' SEGMENT REVENUES. FLEXTRONICS HAS A HYBRI D REVENUE MODEL AND HENCE SHOULD BE REJECTED AS FUNCTIONALLY DIFFERENT. BASED ON THE INFORMATION PROVIDED UNDER 'REVENUE RE COGNITION' IN ITS ANNUAL REPORT, IT CAN BE INFERRED THAT THE S OFTWARE 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 PLEAD ED THAT A REGULAR SOFTWARE SERVICES PROVIDER COULD NOT BE COM PARED TO A COMPANY HAVING SUCH A UNIQUE REVENUE MODEL, WHEREIN THE REVENUES OF THE COMPANY FROM SOFTWARE/PRODUCT DEVEL OPMENT SERVICES DEPENDS ON THE SUCCESS OF THE PRODUCTS SOL D BY ITS CLIENTS IN THE MARKETPLACE. HENCE, IT WOULD BE INAPPROPRIAT E TO COMPARE THE BUSINESS OPERATIONS OF THE ASSESSEE WITH THAT O F A COMPANY FOLLOWING HYBRID BUSINESS MODEL COMPRISING OF ROYAL TY INCOME AS WELL AS REGULAR SOFTWARE SERVICES INCOME, FOR WHICH REVENUE BREAK-UP IS NOT AVAILABLE. HE FINALLY SUBMITTED THA T THIS WAS A GOOD REASON TO EXCLUDE THIS COMPANY ALSO FROM THE L IST OF COMPARABLES. 20. ON THE OTHER HAND, THE LEARNED DR SUPPORTED TH E ORDER OF THE LOWER AUTHORITIES REGARDING THE INCLUSION OF TA TA ELXSI AND FLEXTRONICS SOFTWARE SYSTEMS LTD., IN THE LIST OF C OMPARABLES. HE REITERATED THE CONTENTS OF PARA 14.2.25 OF THE TPO' S ORDER. HE ALSO READ OUT THE FOLLOWING PORTION FROM THE TPO'S ORDER : 'THUS AS STATED ABOVE BY THE COMPANY, THE FOLLOWING FACTS EMERGE : 1. THE COMPANY'S SOFTWARE DEVELOPMENT AND SERVICES SEGMENT CONSTITUTES THREE SUB-SEGMENTS I) PRODUCT DESIGN SERVICES; II) ENGINEERING DESIGN SERVICES AN D III) VISUAL COMPUTING LABS. 2. THE PRODUCT DESIGN SERVICES SUB-SEGMENT IS INTO EMBEDDED SOFTWARE DEVELOPMENT. THUS THIS SEGMENT IS INTO SOFTWARE DEVELOPMENT SERVICES. 3. THE CONTRIBUTION OF THE EMBEDDED SERVICES SEGMEN T IS TO THE TUNE OF RS.230 CRORES IN THE TOTAL SEGMENT REVENUE OF RS.263 CRORES. EVEN IF WE CONSIDER THE OTHER TWO SUB-SEGMENTS PERTAIN TO IT ENABLED SERVICES, THE 87.45% (75%) OF THE SEGMENT'S REVENU ES IS FROM SOFTWARE DEVELOPMENT SERVICES. IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 17 OF 27 4. THIS SEGMENT QUALIFIES ALL THE FILTERS APPLIED B Y THE TPO.' REGARDING FLEXTRONICS SOFTWARE SYSTEMS, THE FOLLOWI NG 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 COMP ANY WAS CONSIDERED BY THE TAXPAYER AS A COMPARABLE FOR THE PRECEDING ASSESSMENT YEAR I.E., AY 2006-07. WHEN TH E SAME WAS ACCEPTED BY THE TPO AS A COMPARABLE, THE S AME WAS NOT OBJECTED TO IT BY THE TAXPAYER. AS THE FACT S MENTIONED BY THE TAXPAYER ARE THE SAME AND THESE WE RE 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 T HE PRECEDING YEAR. THUS THE TAXPAYER IS ARGUING AGAINS T THIS COMPARABLE AS THE COMPANY WAS NOT CONSIDERED AS A COMPARABLE BY THE TAXPAYER FOR THE PRESENT FY 2006- 07.' 21. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSID ERED THE FACTS AND MATERIALS ON RECORD. AFTER CONSIDERING TH E SUBMISSIONS, WE FIND THAT TATA ELXSI AND FLEXTRONICS ARE FUNCTIO NALLY DIFFERENT FROM THAT OF THE ASSESSEE AND HENCE THEY DESERVE TO BE DELETED FROM THE LIST OF SIX COMPARABLES AND HENCE THERE RE MAINS ONLY FOUR COMPANIES AS COMPARABLES, AS LISTED BELOW: 26. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNA L, WE HOLD THAT M/S.TATA ELXSI LTD. SHOULD NOT BE REGARDED AS A COM PARABLE. 27. AS FAR AS PERSISTENT SYSTEMS LTD. , A COMPARABLE BY THE ASSESSEE IN HIS TP STUDY BUT WAS OBJECTED TO BY THE ASSESSEE BE FORE TPO AS NOT COMPARABLE, THIS TRIBUNAL IN THE CASE OF IT(TP) A.N O.108(BANG) 2014 ORDER DATED 12.12.2014 IN THE CASE OF YODLEE INFOTECH PVT .LTD. VS. ITO HELD AS FOLLOWS:- IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 18 OF 27 5.12 THIS TRIBUNAL IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD. VS DCIT [IT(TP)A 1303/BANG /2012 DATED 28-11-2013] HAD ALSO HELD THAT PERSISTENT SOF TWARE SYSTEMS PVT. LTD., WAS IN PRODUCT DESIGNING SERVICES AND IN TO SOFTWARE PRODUCT DEVELOPMENT. IN THE SAME DECISION IT WAS A LSO HELD THAT M/S. INFOSYS TECHNOLOGIES LTD, HAD CONSIDERABLE INT ANGIBLES LIKE IPR, AND WAS ALSO INTO SOFTWARE PRODUCT DEVELOPMENT . IT WAS ALSO HELD THAT M/S. TATA ELXSI LTD., WAS DEVELOPING NICH E PRODUCTS AND INTO PRODUCT DESIGNING SERVICES. HENCE, THESE COMPA NIES WOULD IN ANY CASE HAVE TO BE EXCLUDED FROM THE COMPARABLES B EING FUNCTIONALLY DIFFERENT. 28. FOLLOWING THE SAID DECISION, WE DIRECT THAT PER SISTENT SYSTEMS LTD., BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPA NIES CHOSEN BY THE TPO. 29. THE AO/TPO IS DIRECTED TO COMPUTE THE ARITHMETI C MEAN OF THE PROFIT MARGINS OF THE REMAINING COMPARABLE COMPANIES AFTER EXCLUDING THE COMPANIES FROM THE FINAL LIST OF 11 COMPARABLE COMP ANIES CHOSEN BY THE TPO AND COMPARE THE SAME WITH THE PROFIT MARGIN OF THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF SEC.92C OF THE AC T. 30. NO OTHER ARGUMENTS WERE RAISED ON THE OTHER ISS UES RAISED IN THE CONCISE GROUNDS OF APPEAL NO.2 TO 9 AND THEREFORE T HE ISSUE WITH REGARD TO DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTI ON OF PROVIDING SOFTWARE DEVELOPMENT SERVICES TO THE AE BY THE ASSESSEE IS D ECIDED AS SET OUT IN THE EARLIER PARAGRAPHS. GROUND NO.4 RAISED BY THE R EVENUE IS DISMISSED. IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 19 OF 27 31. GROUND NO.10 READS AS FOLLOWS:- GROUNDS RELATING TO CORPORATE TAX MATTERS 10. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT S, 10.1 BY CONFIRMING WITH THE LEARNED AO THAT THE BU ILDING AT NANAKRAMGUDA R.R DIST, HYDERABAD, BELONGING TO THE APPELLANT (ACQUIRED AFTER ITS AMALGAMATION WITH POR TAL PLAYER INDIA PRIVATE LIMITED WITH EFFECT FROM 1 APR IL 2007), WAS PUT TO USE IN THE AY 2007-08. 10.2 BY CONFIRMING THE RE-COMPUTATION OF THE ELIGIB LE DEPRECIATION FOR THE AY 2009-10 AND THE CONSEQUENT DISALLOWANCE OF THE EXCESS DEPRECIATION OF RS 1,409 ,854 FROM THE PROFITS OF STP UNIT, BY THE LEARNED AO. 32. THE GRIEVANCE OF THE ASSESSEE LIES IN THE ACTIO N OF THE AO IN DISALLOWANCE OF DEPRECIATION ON BUILDING. RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE HAS THREE STPI UNITS IN BANGALORE, PUN E & HYDERABAD AND ONE NON-STPI UNIT IN BANGALORE. THE AO NOTED THAT A COMPANY BY NAME M/S. PORTAL PLAYER PVT. LTD. [PPPL] WAS AMALGAMA TED WITH THE ASSESSEE COMPANY W.E.F. 01.04.2007. CONSEQUENTLY THE OWNER SHIP OF THE PROPERTY BEING LAND AND BUILDING AT HYDERABAD BELONGING TO P PPL VESTED WITH THE ASSESSEE AND WAS SHOWN UNDER THE HEAD FIXED ASSETS . CONSEQUENT ON AMALGAMATION, THE WORK-IN PROGRESS IN THE BOOKS OF THE AMALGAMATING ENTITY AS ON 31.03.2007 ALONG WITH EXPENSES INCURRE D BY THE ASSESSEE TILL IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 20 OF 27 22.04.2007 WAS CAPITALIZED AS ADDITION TO THE BLOCK OF THE BUILDING IN THE FIXED ASSETS AND DEPRECIATION WAS CLAIMED. ACCORDIN G TO THE WORK-IN PROGRESS IN THE BOOKS OF THE AMALGAMATING ENTITY AL SO INCLUDED BUILDING THAT WAS PUT TO USE BY THE AMALGAMATING COMPANY IN FINAN CIAL YEAR 2006-07. THE AO THEREFORE RE-WORKED THE VALUE OF THE BUILDIN G AFTER REDUCING THE DEPRECIATION FOR THE F.Y. 2006-07 ALLOWED TO THE AM ALGAMATING COMPANY AND ACCORDINGLY, DISALLOWED THE CLAIM OF EXCESS DEP RECIATION. 33. BEFORE THE CIT(APPEALS), IT WAS SUBMITTED THAT DURING THE F.Y. 2006- 07, THE CONSTRUCTION OF THE BUILDING WAS NOT COMPLE TE AND THE VALUE OF THE BUILDING WAS SHOWN AS CAPITAL WORK-IN PROGRESS IN THE BALANCE SHEET OF PPPL AS ON 31.03.2007. THE CONSTRUCTION OF THE BUIL DING WAS COMPLETED IN THE MONTH OF APRIL, 2007 AND UPON ITS COMPLETION, I T WAS LEASED TO THE ASSESSEE COMPANY. SUBSEQUENTLY, THE VALUE OF THE SA ID BUILDING WAS CAPITALIZED IN THE BOOKS OF NVIDIA INDIA. 34. THE CIT(APPEALS) ON CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, OBSERVED THAT THE SOLE ISSUE WAS WHETHER THE BUILDING WAS PUT TO USE IN THE FINANCIAL YEAR 2006-07. HE HELD THAT TH E ASSESSEE WAS NOT ABLE TO ESTABLISH WHETHER PPPL CLAIMED DEPRECIATION ON T HIS BUILDING IN AY 2007-08. HE CONFIRMED THE ACTION OF THE AO IN ABSEN CE OF THE DETAILS. 35. THE LIMITED PRAYER OF THE LD. COUNSEL FOR THE A SSESSEE BEFORE US WAS THAT THE REQUIRED DETAILS WERE INADVERTENTLY NOT FI LED BEFORE THE CIT(APPEALS). HE SOUGHT TO FILE BEFORE DOCUMENTS T O SHOW THAT PPPL HAD IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 21 OF 27 NOT CLAIMED DEPRECIATION ON THE BUILDING IN AY 2007 -08. ON A PERUSAL OF THE AFORESAID DOCUMENTS, WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO SET ASIDE THE ORDER OF THE CIT(APPEA LS) ON THIS ISSUE AND REMAND THE ISSUE TO THE ASSESSING OFFICER FOR FRESH CONSIDERATION. THE ASSESSEE IS AT LIBERTY TO FILE THE DOCUMENTS TO SHO W THAT NO DEPRECIATION WAS CLAIMED BY PPPL ON THE BUILDING IN QUESTION. THE ASSESSEE WILL ALSO BE AT LIBERTY TO ESTABLISH ITS CLAIM FOR DEPRECIATI ON BY PRODUCING ALL THE RELEVANT DOCUMENTS. IT IS ORDERED ACCORDINGLY. TH US GROUND NO.10 RAISED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTIC AL PURPOSES. 36. GROUND NO.11 RAISED BY THE READS AS FOLLOWS:- 11 THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FAC TS, BY NOT APPRECIATING THE FACT THAT THE NON-STP UNIT OF THE APPELLANT HAD INCURRED EXPENSES IN THE NATURE OF ADVERTISEMENT EX CLUSIVELY FOR THE PROMOTION OF PRODUCTS OF NVIDIA SINGAPORE PTE. LIMITED IN INDIA. ACCORDINGLY, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THAT THE ADVERTISEMENT EXPENSES INCURRED BY NON-STP I UNIT SHOULD BE APPORTIONED BETWEEN ALL UNITS IN THE RATIO OF TU RNOVER. 37. DURING THE AY 2009-10, NVIDIA INDIA HAS INCURRE D TOTAL ADVERTISEMENT EXPENSES OF RS 25,053,976 [RS. 676,87 0 STP UNIT AND RS. 24,377,106 NON STP UNIT]. DURING THE ASSESSMENT PRO CEEDINGS THE AO QUESTIONED AS TO WHY THE WHOLE OF THE ADVERTISEMENT EXPENSES IS DEBITED TO THE NON STP UNIT. IN THIS REGARD, IT WAS SUBMITT ED THAT THE NON-STP UNIT IS ENGAGED IN PROVIDING MARKETING SUPPORT SERVICES TO NVIDIA SINGAPORE PTE. LTD (NVIDIA SINGAPORE) AND IN THIS REGARD, T HE ADVERTISEMENT IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 22 OF 27 EXPENSES OF RS. 24,377,106 HAVE BEEN INCURRED BY TH E NVIDIA INDIAS NON-STP UNIT. THE AO HELD THAT ALL THE GROUP COMPA NIES MAY BE BENEFITTED DUE TO INCREASE IN POPULARITY OF THE BRA ND AND COMPANY THROUGH MARKETING IN INDIA. ACCORDINGLY, WITHOUT PROVIDING ANY OTHER JUSTIFICATION, HE APPORTIONED 15% OF WHOLE OF THE EXPENSES OF THE NON -STP UNIT (I.E. EXPENDITURE ON EMPLOYEES AND OPERATING AND OTHER EX PENSES) AMOUNTING TO RS. 75,027,928 TO THE STP UNIT. WITH THIS APPOR TIONMENT, THE PROFIT OF THE NON-STP UNIT HAS BEEN INCREASED BY RS. 11,254,190 A ND PROFIT OF THE STP UNIT HAS DECREASED BY AN EQUIVALENT AMOUNT. 38. THE ASSESSEE SUBMITTED THAT THE SOFTWARE DEVELO PMENT ACTIVITY IS UNDERTAKEN BY NVIDIA INDIA FROM ITS STP REGISTERED UNITS AT BANGALORE, PUNE AND HYDERABAD. THE STP UNITS ARE NOT ENGAGED I N ANY SALES AND MARKETING ACTIVITIES. ON THE OTHER HAND, THE NON - STP UNIT AT BANGALORE IS ENGAGED IN PROVIDING ONLY MARKETING SUPPORT SERVICE S TO ITS GROUP COMPANIES OVERSEAS. IN RESPECT OF THIS MARKETING SU PPORT ACTIVITY, THE ASSESSEE HAS ENTERED INTO A SERVICE REPRESENTATIVE AGREEMENT WITH ITS GROUP COMPANY, NVIDIA SINGAPORE. FOR THESE SERVICE S, THE ASSESSEE IS REMUNERATED ON A COST PLUS BASIS. UNDER THE AGREEME NT WITH NVIDIA SINGAPORE, THE ASSESSEE UNDERTAKES ADVERTISING AND PROMOTION OF NVIDIA GROUP PRODUCTS WITHIN INDIA SUCH AS PARTICIPATING I N TRADE SHOWS AND EXHIBITIONS AND PERFORMING PRODUCT PRESENTATIONS. T HE ADVERTISEMENT EXPENSES OF RS. 24,377,106 REFERRED BY THE AO IN HI S ORDER HAS BEEN IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 23 OF 27 INCURRED BY THE ASSESSEES NON-STP UNIT IN THE COUR SE OF RENDERING THE MARKETING SUPPORT ACTIVITIES. 39. FURTHER, THE ASSESSEE SUBMITTED THAT THE TPO HA S MADE AN INDEPENDENT ANALYSIS OF THE INTERNATIONAL TRANSACTI ONS OF THE MARKETING SUPPORT SERVICES SEGMENT BY COMPARING THE NET MARGI NS UNDER THE TNMM AND HAS ACCEPTED THAT THE ASSESSEES MARGIN IS NOT LESS THAN THE TPOS MARGIN AND HAS NOT MADE ANY ADJUSTMENTS ACCORDINGLY . ALSO, THE INDEPENDENT ANALYSIS OF THE TPO INCLUDES ANALYSIS O F THE INCOME AS WELL AS EXPENSES AND NVIDIA INDIA BEING REMUNERATED AT COST PLUS BASIS, WHATEVER IS CHARGED AS EXPENSE WOULD BE INCLUDED UN DER INCOME WITH THE MARGIN. 40. THE APPELLANT ALSO SUBMITTED THAT SEPARATE SET OF ACCOUNTS WERE MAINTAINED BY IT FOR BOTH STP AND NON-STP UNIT AND EXPENDITURE PERTAINING TO EACH UNIT IS CLEARLY IDENTIFIABLE AND IS DEBITED TO RESPECTIVE UNIT. THERE IS A CLEAR DEMARCATION OF EXPENSES AND INCOME BETWEEN STP UNIT AND NON STP UNIT AS DISCLOSED IN FORM 56F. ADVERTISEMENT EX PENSES AMOUNTING TO RS. 24,377,106 HAS BEEN SHOWN UNDER THE NON-STP UNI T. THE DETAILS OF THE EXPENDITURE INCURRED BY THE RESPECTIVE UNITS IS ALSO ENCLOSED AS ANNEXURE-I TO THIS ORDER . 41. THE CIT(APPEALS), HOWEVER, DID NOT AGREE WITH T HE SUBMISSIONS OF THE ASSESSEE AND HE HELD AS FOLLOWS:- IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 24 OF 27 6.1 BEFORE ME, IT WAS SUBMITTED THAT ONLY SOFTWA RE DEVELOPMENT ACTIVITY IS UNDERTAKEN BY THE STPI UNIT S REGISTERED AT BANGALORE, PUNE & HYDERABAD AND THESE UNITS ARE NOT ENGAGED IN ANY SALES AND MARKETING ACTIVITIES, WHEREAS THE NON -STPI UNITS ARE ENGAGED IN PROVIDING ONLY MARKETING SUPPORT SER VICES TO ITS GROUP COMPANIES OVERSEAS. IN RESPECT OF THE MARKETI NG SUPPORT ACTIVITY, THE APPELLANT HAS ENTERED INTO A SERVICE REPRESENTATIVE AGREEMENT WITH ITS GROUP COMPANY NVIDIA SINGAPORE A ND THE ADVERTISEMENT EXPENSES REFERRED BY THE AO HAS BEEN INCURRED BY THIS UNIT IN THE COURSE OF RENDERING MARKETING SUPP ORT ACTIVITIES. IN [2011] 16 TAXMANN.COM 305 (DELHI) COMMISSIONER O F INCOME- TAX V. EHPT INDIA (P.) LTD., THE HONBLE HIGH COURT OF DELHI LAID DOWN THE PROPOSITION THAT IN CASE DISTORTION OF PRO FITS IS DETECTED BETWEEN STPI & NON-STPI UNITS FOR THE PURPOSES OF D EDUCTION U/S. 10A APPORTIONMENT OF EXPENDITURE CAN BE MADE, BUT ON VERY SOUND BASIS. I HAVE CONSIDERED THE FACTS AND CIRCUM STANCES OF THE CASE AND I FIND THE EXPLANATION OF THE ASSESSEE IS SELF- CONTRADICTORY AS THE STPI UNIT AT PUNE HAS BEEN APP ORTIONED A PART OF THIS EXPENDITURE AT RS. 6.76 LAKHS, WHEREAS NO PART OF THIS EXPENDITURE HAS BEEN APPORTIONED TO THE BANGALORE & HYDERABAD UNITS. THERE IS DEFINITELY SOME SUBSTANCE IN THE FI NDING OF THE AO THAT SUCH EXPENDITURE BENEFITS ALL THE GROUP COMPAN IES INCLUDING THE STPI UNITS IN INDIA ON ACCOUNT OF INCREASE IN P OPULARITY OF THE BRAND AND COMPANY VIA MARKETING, ADVERTISING AND PR OMOTION OF GROUP PRODUCTS BY WAY OF TRADE SHOWS, EXHIBITIONS A ND PRODUCT PRESENTATIONS. THUS, IN MY VIEW, THE EXPENDITURE IN CURRED REQUIRES TO BE APPORTIONED AMONG ALL UNITS IN INDIA AS DEBITING LARGE PART OF THE AMOUNT TO THE NON-STPI UNIT RESUL TS IN THE SERIOUS DISTORTION OF PROFITS AMONG THE STPI UNITS. BUT I FIND THAT THE AO HAS APPORTIONED, ON ADHOC BASIS, A PART, ONL Y TO THE BANGALORE STPI UNIT. TO ADD A SOUND BASIS TO THE AP PORTIONMENT THE AO IS DIRECTED TO APPORTION THE ENTIRE EXPENDIT URE CLAIMED BY THE NON-STPI UNIT AS WELL AS THE STPI UNIT AMONG AL L 4 UNITS ON TURNOVER BASIS. IT IS ORDERED ACCORDINGLY. 42. THE LD. COUNSEL FOR THE ASSESSEE REITERATED SUB MISSIONS MADE BEFORE THE CIT(APPEALS). THE LD. DR RELIED ON THE ORDER OF CIT(APPEALS). IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 25 OF 27 43. WE HAVE HEARD THE RIVAL SUBMISSIONS. PERUSAL OF THE ORDER U/S. 92CA OF THE ACT SHOWS THAT THE ISSUE WITH REGARD TO PROVISION OF MARKETING SUPPORT SERVICES BY THE BANGALORE NON-STP UNIT TO N VIDIA SINGAPORE WAS SUBJECT MATTER OF TP ANALYSIS MADE BY THE ASSESSEE. 44. THE TPO CONSIDERED THE ANALYSIS DONE BY ASSESSE E AND HELD AS FOLLOWS:- 2.4 IN RESPECT OF MARKETING SUPPORT SERVICES, THE TAXPAYER HAS EARNED AN OPERATING PROFIT MARGIN OF 10.18%. IN THI S SEGMENT, THE TAXPAYER CONSIDERED 15 COMPARABLES UNDER TNMM. THE AVERAGE OPERATING PROFIT MARGIN OF THESE 15 COMPARABLES IS ARRIVED AT 10.71% ON COST BY CONSIDERING THE WEIGHTED AVERAGE BASED ON THE THREE YEARS DATA I.E. FY 2006-07, FY 2007-08, AND F Y 2008-09 WHEREVER AVAILABLE. THE OPERATING PROFIT TO TOTAL C OST RATIO IS TAKEN AS THE PROFIT LEVEL INDICATOR (PLI) IN TNMM A NALYSIS. THE TPO HAS MADE AN INDEPENDENT ANALYSIS OF THE INT ERNATIONAL TRANSACTIONS OF THE MARKETING SUPPORT SERVICES SEGM ENT BY COMPARING THE NET MARGINS UNDER TNMM. THE MEAN MARG IN OF THE COMPARABLES SHOWS A OPERATING PROFIT ON COST AT 10% (PLEASE SEE ANNEXURE E). THE TAXPAYERS MARGIN IS NOT LES S THAN THE TPOS MARGIN. HENCE THE TRANSACTION IS TREATED AS H AVING BEEN MADE AT ARMS LENGTH. 45. IT IS THUS CLEAR FROM THE ORDER OF TPO THAT NON -STP UNIT OF THE ASSESSEE RENDERED SERVICES EXCLUSIVELY TO NVIDIA SI NGAPORE AND NONE OF THE OTHER STP-UNITS HAD THE BENEFIT OF THOSE SERVIC ES. THIS ASPECT HAS NOT BEEN CONSIDERED BY THE CIT(A) AT ALL. ON THE OTHER HAND, THE CIT(A) AS WELL AS THE AO PROCEEDED ON THE ASSUMPTION THAT NON-STP UNIT AS WELL AS STP IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 26 OF 27 UNITS IN INDIA WOULD BENEFIT FROM THE ADVERTISEMENT DONE FOR NVIDIA SINGAPORE. IT IS SEEN THAT NVIDIA SINGAPORE HAS AC KNOWLEDGED THAT SOFTWARE PRODUCTS AND ADVERTISEMENT IS ATTRIBUTABLE TO THOSE PRODUCTS. NON-STP UNITS OF ASSESSEE ARE ENGAGED IN SOFTWARE D EVELOPMENT ACTIVITIES AND DO NOT ENGAGE IN SALES OR MARKETING ACTIVITIES OR SOFTWARE PRODUCT. IN THESE CIRCUMSTANCES, WE FIND MERIT IN THE CONTENTIO N OF ASSESSEE THAT ADVERTISEMENT EXPENSES APPORTIONED BY THE AO AND CO NFIRMED BY THE CIT(A) WAS WITHOUT ANY BASIS. THE SAID ADDITION IS ACCORDINGLY DIRECTED TO BE DELETED. GROUND NO.11 BY THE ASSESSEE IS ALLOWE D. 46. GROUND NO.12 IS WITH REGARD TO NOT GRANTING FUL L CREDIT IN RESPECT OF TDS TO THE EXTENT OF RS.91,37,908. CREDIT WAS NOT GIVEN FOR THE REASON THAT THE SAME WAS NOT APPEARING IN FORM 26AS. THE CBDT IN INSTRUCTION NO.5/2013 DATED 8.7.2013 HAD DIRECTED ALL THE ASSES SING OFFICERS TO VERIFY THE TDS CERTIFICATE AND NOT GO ONLY ON THE BASIS OF ENTRY IN FORM 26AS. WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIA TE TO DIRECT THE AO TO VERIFY THE CLAIM OF ASSESSEE FOR CREDIT OF TDS IN L IGHT OF THE CBDT INSTRUCTION REFERRED TO ABOVE. THE AO WILL AFFORD O PPORTUNITY OF BEING HEARD TO THE ASSESSEE IN THIS REGARD. IT(TP)A NO.1118 & 1087 /BANG/2014 PAGE 27 OF 27 47. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 14 TH DAY OF AUGUST, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER ENCL: ANNEXURE-I. BANGALORE, DATED, THE 14 TH AUGUST, 2015. /D S/ COPY TO: 1. REVENUE 2. ASSESSEE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.