Mentor Graphics (India) Private Limited, Noida V. Deputy Commissioner of Income-tax, New Delhi

ITA 1883/DEL/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3178 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 01-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANUPAM KANT SENIOR
• Keywords: Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; Principle of natural justice; International transaction; Rule of consistency
• Section: 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1883/DEL./2015 (ASSESSMENT YEAR : 2010--11) M/S. MENTOR GRAPHICS (INDIA) PVT.LTD., VS. DCIT, BUILDING A, LOGIX TECHNO PARK, CIRCLE 16 (2), PLOT NO.5, SECTOR 127, NEW DELHI. NOIDA 201 301 (U.P.) (PAN : AABCM5494Q) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU SINHA, ADVOCATE SHRI BHUWAN DOOPER, ADVOCATE REVENUE BY : SHRI ANUPAM KANT, SENIOR DR DATE OF HEARING : 20.12.2018 DATE OF ORDER : 26.02.2019 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. MENTOR GRAPHICS (INDIA) PVT.LTD . (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 29.01.2015 PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144 C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010-11 ON THE GROUNDS INTER ALIA THAT :- ITA NO.1883/DEL/2015 2 TRANSFER PRICING 1. ON THE FACTS AND IN LAW, THE LEARNED TRANSFER PR ICING OFFICER (HEREINAFTER REFERRED TO AS 'LD. TPO'), THE LEARNED ASSESSING OFFICER (HEREINAFTER REFERRED TO AS 'LD. AO') AND THE HON'B LE DISPUTE RESOLUTION PANEL ('DRP') HAVE ERRED IN MAKING AN AD JUSTMENT OF RS.64,734,446 TO THE VALUE OF INTERNATIONAL TRANSAC TIONS PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES BY TH E APPELLANT UNDER SECTION 92CA(3) OF THE INCOME-TAX ACT, 1961 ( 'THE ACT'). 2. ON THE FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP ERRED IN VIOLATING THE PROVISIONS OF RU LE 10B(2) BY SELECTING CERTAIN ALLEGED COMPARABLE COMPANIES WITH OUT CONSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED BY THE APPELLANT VIS-A-VIS THESE COMP ANIES, THEREBY RESORTING TO CHERRY PICKING OF COMPARABLES. 3. ON THE FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP ERRED IN VIOLATING THE PROVISIONS OF RU LE 10B(2) BY ALLEGING E-INFOCHIPS BANGALORE LTD. AS A COMPARABLE TO THE APPELLANT. 4. ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP ERRED IN CONTRAVENING THE PROVISIONS OF RULE 10 B(1)(E)(II) BY ALLEGING INFINITE DATA SYSTEM PVT. LTD. AS A COMPAR ABLE TO THE APPELLANT. 5. ON THE FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP VIOLATED THE PROVISIONS OF RULE 10B(2) BY ALLEGING SONATA SOFTWARE LTD AS A COMPARABLE TO THE APPELLAN T. 6. ON THE FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP ERRED IN VIOLATING THE PROVISIONS OF RU LE 10B(2) BY ALLEGING ZYLOG SYSTEMS LIMITED AS A COMPARABLE TO T HE APPELLANT. 7. ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP ERRED IN VIOLATING THE PROVISIONS OF RULE 10B(2 ) BY REJECTING CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPE LLANT IN ITS TP DOCUMENTATION. 8. ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP ERRED IN VIOLATING THE PROVISIONS OF RULE 10B(2 ) BY REJECTING CG-VAK SOFTWARE & EXPORTS LIMITED. FROM THE SET OF COMPARABLES SELECTED BY THE APPELLANT. 9. ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP ERRED IN VIOLATING THE PROVISIONS OF RULE 10B(2 ) BY REJECTING POWERS OF GLOBAL SOLUTIONS LIMITED FROM THE SET OF COMPARABLES SELECTED BY THE APPELLANT. ITA NO.1883/DEL/2015 3 10. ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AN D THE HON'BLE DRP ERRED IN VIOLATING THE PROVISIONS OF RULE 10B(2 ) BY REJECTING HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. FROM THE SET OF COMPARABLES SELECTED BY THE APPELLANT. 11. ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AN D THE HON'BLE DRP ERRED IN ERRED IN VIOLATING THE PROVISIONS OF R ULE 10B(2) BY REJECTING EFORCE INDIA PRIVATE LIMITED FROM THE SET OF COMPARABLES SELECTED BY THE APPELLANT, ON THE BASIS OF DATA NON -AVAILABILITY FOR FY 2009-10, IGNORING THE FINANCIAL STATEMENTS OF TH E SAID YEAR SUBMITTED BEFORE THE LD. TPO. 12. ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AN D THE HON'BLE DRP ERRED IN VIOLATING THE PROVISIONS OF RULE 10B(2 ) BY REJECTING VARNA INDUSTRIES LIMITED FROM THE SET OF COMPARABLE S SELECTED BY THE APPELLANT. 13. ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AN D THE HON'BLE DRP ERRED IN PROPOSING AN ADJUSTMENT OF RS.23,633,0 50 TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF OVERDUE RECEIV ABLES FROM ITS AES. 14. WITHOUT PREJUDICE TO THE ABOVE GROUND, ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP ERRED I N APPLYING AN AD-HOC INTEREST RATE OF 14.88% FOR COMPUTING THE IN TEREST ON OVERDUE RECEIVABLES FROM ITS AES. 15. ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AN D THE HON'BLE DRP ERRED IN GROSSLY MISINTERPRETING THE REQUIREMEN T OF 'CONTEMPORANEOUS' DATA IN THE RULE 10B(4) BY NECESS ARILY USING CURRENT YEAR DATA (I.E. FINANCIAL YEAR 2009-10), TH EREBY BREACHING THE PRINCIPLES OF NATURAL JUSTICE AND IMPOSSIBILITY OF PERFORMANCE. 16. ON FACTS AND IN LAW, THE LD. TPO, THE LD. AO AN D THE HON'BLE DRP ERRED IN LAW AND ON THE FACTS IN NOT ALLOWING A PPROPRIATE ADJUSTMENTS UNDER 10B(1)(E)(III) AND RULE 10B(3) TO III ACCOUNT FOR DIFFERENCES IN RISK PROFILE OF THE COMP ARABLES VIS-A-VIS THE APPELLANT. 17. ON FACTS AND IN LAW, THE LD. AO/ LD. TPO ERRED IN NOT GRANTING THE BENEFIT OF REDUCTION/ VARIATION OF 5 P ERCENT FROM THE ARITHMETIC MEAN WHILE DETERMINING THE ARM'S LENGTH PRICE TO THE APPELLANT AS PER THE PROVISO TO SECTION 92C(2) OF T HE ACT. 18. ON FACTS AND IN LAW, THE LD. AO / LD. TPO AND T HE HON'BLE DRP HAS ERRED IN PROPOSING TO INITIATE PENALTY PROC EEDINGS UNDER SECTION 271 (1) (C) OF THE ACT. ITA NO.1883/DEL/2015 4 CORPORATE TAX 19. THAT ON FACTS AND IN LAW THE LD. AO AND HON'BLE DRP HAS ERRED IN NOT CONSIDERING THE APPELLANT'S PLEA FOR P ROVIDING ALLOWANCE OF 'SEVERANCE COST' OF RS.66,762,386 INCU RRED BY THE APPELLANT DURING THE FINANCIAL YEAR 2008-09. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : MENTOR GRAPHICS (INDIA) P VT. LTD. (MENTOR INDIA), THE TAXPAYER PROVIDES SOFTWARE PROD UCT DEVELOPMENT SUPPORT AND QUALITY ANALYSIS SUPPORT SE RVICES TO MENTOR GRAPHICS (IRELAND) LTD. (MENTOR IRELAND) HAS ENTERED INTO AN AGREEMENT WITH THE TAXPAYER FOR PURCHASE OF THE AFORESAID SERVICES. THE TAXPAYER INVOICES MENTOR IRELAND FOR THE SOFTWARE DEVELOPMENT SERVICES PROVIDED FOR BOTH THE UNITS LO CATED IN NOIDA AND HYDERABAD. DURING THE YEAR UNDER ASSESSMENT, T HE TAXPAYER ENTERED INTO INTERNATIONAL TRANSACTIONS AS UNDER :- S.NO. INTERNATIONAL TRANSACTION AMOUNT (IN RS.) 1 PURCHASE OF FIXED ASSETS 93,70,761 2 SALES OF ASSETS 29,31,345 3 PROVISION OF SOFTWARE DEVELOPMENT AND QUALITY ANALYSIS SERVICES 90,83,58,259 4 PAYMENT TOWARDS COMMUNICATION EXPENSES 3,75,07,526 5 REIMBURSEMENT OF EXPENSES - PAYABLE 66,30,259 6 REIMBURSEMENT OF EXPENSES RECEIVABLE 29,88,273 3. THE TAXPAYER IN ORDER TO BENCHMARK ITS INTERNATI ONAL TRANSACTION USED TRANSACTIONAL NET MARGIN METHOD (T NMM) AS THE MOST APPROPRIATE METHOD (MAM) AND NET OPERATING PRO FIT ITA NO.1883/DEL/2015 5 MARGIN BASED ON COSTS (NCP MARGIN) AS THE PROFIT LE VEL INDICATOR (PLI). THE TAXPAYER CHOSEN 16 COMPANIES WITH AVERA GE MARGIN OF 14.26% BY USING MULTIPLE YEARS DATA AS AGAINST TAXP AYERS OWN MARGIN OF 15.03% QUA SOFTWARE DEVELOPMENT SERVICES AND FOUND ITS INTERNATIONAL TRANSACTIONS AT ARMS LENGTH. 4. HOWEVER, TPO IN HIS TP ANALYSIS REJECTED 7 COMPA RABLES OF THE TAXPAYER AND INTRODUCED 10 NEW COMPARABLES HAVI NG AVERAGE OF 24.40% AS AGAINST TAXPAYERS OWN MARGIN OF 15.03% A ND THEREBY DETERMINED THE ALP OF INTERNATIONAL TRANSACTIONS AT RS.98,25,23,396/- AS AGAINST RS.90,85,48,175/- DETE RMINED BY THE TAXPAYER. TPO ALSO MADE ADJUSTMENT OF RS.2,36,33,0 50/- ON ACCOUNT OF RECEIVABLES DUE FROM THE ASSOCIATED ENTE RPRISES (AES) BY THE TAXPAYER AND PROPOSED THE TOTAL ADJUSTMENT O F RS.9,76,08,271/- ON ACCOUNT OF TRANSFER PRICING ADJ USTMENT. 5. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY WAY OF FILING OBJECTIONS WHO HAS ORDERED TO EXCLUDE ONE COMPARABLE, NAMELY, INFOSYS LIMITED, FROM THE FINAL SET OF COMP ARABLES, BY PARTLY ALLOWING THE OBJECTIONS MADE BY THE LD. TPO. 6. IN COMPLIANCE TO THE ORDER PASSED BY THE TPO/DRP , AO FRAMED THE ASSESSMENT U/S 143 (3) READ WITH SECTION 144 OF THE ACT AT AN INCOME OF RS.21,41,72,020/- BY MAKING ADDITIO N ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF RS.8,83,67,496/- AND BY MAKING ITA NO.1883/DEL/2015 6 ADDITION OF RS.135/- AND RS.9,336/- ON ACCOUNT OF F IND & PENALTY AND BUSINESS EXPENDITURE RESPECTIVELY. 7. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFO RE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. OUR GROUND-WI SE FINDINGS ARE AS UNDER. 9. UNDISPUTEDLY, THE TNMM WITH OP/OC AS MAM APPLIED BY THE TAXPAYER HAS NOT BEEN DISPUTED BY THE TPO. IT IS ALSO NOT IN DISPUTE THAT THE TPO HAS ALSO NOT DISPUTED THE FUNC TIONAL PROFILE AND MARGIN OF THE TAXPAYER OF 15.03% FOR SOFTWARE D EVELOPMENT SERVICES. LD. TPO ON THE BASIS OF ITS TP ANALYSIS IN ORDER TO DETERMINE THE TRANSFER PRICING ADJUSTMENT OF INTERN ATIONAL TRANSACTIONS ENTERED INTO BY THE TAXPAYER WITH ITS AES, CHOSEN 19 COMPARABLES HAVING AVERAGE OF 24.04% AND PROPOSED T P ADJUSTMENT OF RS.7,39,75,221/-, WHICH ARE AS UNDER :- S.NO. NAME OF THE COMPANY OP/OC 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. -1.07% 2. C T I L LTD. 18.11% 3. E-INFOCHIPS BANGALORE LTD. 71.38% 4. EVOKE TECH 18.56% 5. E-ZEST SOLUTIONS 18.66% 6. INFINITE DATA SYSTEM PRIVATE LIMITED 88.25% 7. INFOSYS LIMITED 45.47% ITA NO.1883/DEL/2015 7 8. LARSEN & TOUBRO INFOTECH LTD. 19.06% 9. MINDTREE LTD. (SEGMENT) 13.92% 10. PERSISTENT SYSTEMS LIMITED 29.02% 11. PERSISTENT SYSTEMS & SOLUTIONS LTD. (MERGED) 11.37% 12. QUINTEGRA SOLUTIONS LTD. -8.20% 13. R S SOFTWARE (INDIA) LTD. 10.18% 14. SASKEN COMMUNICATION TECHNOLOGIES LTD. 17.54% 15. SONATA SOFTWARE 35.87% 16. TATA ELXSI (SEGMENT) 20.29% 17. THINKSOFT GLOBAL SERVICES LTD. 17.35% 18. ZYLOG SYSTEMS LIMITED 25.07% 19. LGS GLOBAL 12.78% AVERAGE 24.40% 10. OUT OF 19 COMPARABLES, THE LD. DRP EXCLUDED IN FOSYS LIMITED. TPO ALSO PROPOSED ADJUSTMENT OF RS.2,36, 33,050/- ON ACCOUNT OF RECEIVABLES DUE FROM THE AES BY THE TAXP AYER WHICH HAS NOT BEEN DISTURBED BY THE LD. DRP. 11. THE LD. AR FOR THE TAXPAYER IN ORDER TO COMPRES S THE CONTROVERSY HAD SOUGHT EXCLUSION OF 5 COMPARABLES V IZ. (I) PERSISTENT SYSTEMS LTD., (II) TATA ELXSI LTD., (III ) E-INFOCHIPS BANGALORE LTD., (IV) INFINITE DATA SYSTEMS PVT. LTD . & (V) ZYLOG SYSTEMS LTD. AND ALSO DISPUTED ALP DETERMINED BY LD . TPO/DRP ON RECEIVABLES. WE WOULD DISPOSE OF THE ISSUES GRO UND-WISE AS UNDER. GROUND NO.1 12. GROUND NO.1 BEING GENERAL IN NATURE NEEDS NO AD JUDICATION. ITA NO.1883/DEL/2015 8 GROUNDS NO.5, 8, 9, 10, 11, 12, 15, 16, 17 13. GROUNDS NO.5, 8, 9, 10, 11, 12, 15, 16 & 17 ARE DISMISSED HAVING NOT BEEN PRESSED DURING THE COURSE OF ARGUME NTS. GROUND NO.18 14. GROUND NO.18 BEING PREMATURE NEEDS NO SPECIFIC FINDINGS TRANSFER PRICING GROUNDS GROUNDS NO.2, 3, 4, 6 & 7 15. COMPARABILITY OF AFORESAID COMPANIES VIZ. (I) PERSISTENT SYSTEMS LTD., (II) TATA ELXSI LTD., (III) E-INFOCHI PS BANGALORE LTD., (IV) INFINITE DATA SYSTEMS PVT. LTD. & (V) ZY LOG SYSTEMS LTD. , VIS--VIS TAXPAYER FOR BENCHMARKING THE INTERNATION AL TRANSACTION IS BEING EXAMINED ONE BY ONE AS UNDER. PERSISTENT SYSTEMS LTD. (PERSISTENT) 16. PERSISTENT IS TAXPAYERS OWN COMPARABLE WHICH I T HAS NOW SOUGHT TO BE EXCLUDED ON THE GROUND THAT ITS SEGMEN TAL FINANCIALS ARE NOT AVAILABLE. PERUSAL OF THE PROFIT & LOSS AC COUNT FOR THE YEAR UNDER ASSESSMENT, AVAILABLE AT PAGE 388 OF THE PAPE R BOOK (ANNUAL REPORTS), SHOWS THAT THE INCOME OF PERSISTENT IS FR OM SALE OF SOFTWARE SERVICES AND PRODUCTS TO THE TUNE OF RS.51 96.91 MILLIONS ITA NO.1883/DEL/2015 9 AS ON 31.03.2009 AND RS.5044.13 AS ON 31.03.2010 WI TH NO SEGMENTAL FINANCIALS. 17. PERSISTENT HAS ALREADY BEEN REJECTED BY THE COO RDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2008- 09, AVAILABLE AT PAGES 63 TO 79 OF THE PAPER BOOK, ON GROUND OF N ON-AVAILABILITY OF SEGMENTAL DATA. SO, WE ARE OF THE CONSIDERED VI EW THAT PERSISTENT IS NOT A VALID COMPARABLE, HENCE ORDERED TO BE EXCLUDED. TATA ELXSI LTD. (TATA ELXSI) 18. TATA ELXSI IS AGAIN TAXPAYERS OWN COMPARABLE W HICH THE TAXPAYER HAS SOUGHT TO BE EXCLUDED ON GROUND OF FUN CTIONAL DISSIMILARITY. PERUSAL OF ANNUAL REPORT, AVAILABLE AT PAGES 482, 483, 484 & 485 OF THE PAPER BOOK, GOES TO PROVE THAT BUS INESS UNITS OF TATA ELXSI CONSIST OF PRODUCT DESIGN SERVICES (PD S) TO PROVIDE FULL SERVICE EMBEDDED SOFTWARE, HARDWARE AND SYSTEM DESIGN PROGRAMMES FOR A VARIETY OF TECHNOLOGY PRODUCTS. P DS HAS CORE DOMAIN AND TECHNOLOGY EXPERTISE IN VLSI DESIGN, EMB EDDED SOFTWARE, MULTIMEDIA, NETWORKING AND WIRELESS COMMU NICATIONS; INDUSTRIAL DESIGN AND ENGINEERING (IDE) SUPPORTING GLOBAL CORPORATIONS IN THE AREA OF NEW BRAND/PRODUCT INTRO DUCTION FROM CONCEPT TO MARKET ITS EXPERTISE LIES IN THE AREAS O F CONSUMER INSIGHTS, PRODUCT/SERVICE INNOVATION, INDUSTRIAL DE SIGN, FUNCTIONAL ITA NO.1883/DEL/2015 10 PROTOTYPING AND MECHANICAL ENGINEERING; IT ALSO ENG AGES IN BRAND DEVELOPMENT AND RETAIL DESIGN; VISUAL COMPUTING LAB S (VCL) IS AN AWARD WINNING PRODUCTION STUDIO, OFFERING 3D ANI MATION AND VISUAL EFFECTS (VFX) SERVICES; WITH A BLEND OF CREA TIVITY AND LEADING-EDGE TECHNOLOGY, VCL OFFERS PRE AND POST PR ODUCTION SERVICES FOR FEATURE FILMS, TELEVISION SERIES, TELE VISION COMMERCIALS AND CUSTOM CONTENT DEVELOPMENT; AND SYSTEM INTEGRAT ION (SI) TO IMPLEMENT COMPLETE SYSTEMS AND SOLUTIONS IN THE ENT ERTAINMENT, MANUFACTURING, GOVERNMENT AND EDUCATION SECTORS. T HIS IS BACKED BY A NETWORK OF OFFICES, A TEAM OF SPECIALISTS IN D ESIGN TOOLS, VISUALIZATION, HIGH PERFORMANCE COMPUTING, STORAGE AND STRATEGIC PARTNERSHIPS WITH WORLD-LEADING TECHNOLOGY PROVIDER S. 19. PERUSAL OF THE DIRECTORS REPORT, AVAILABLE AT PAGES 490 & 491 OF THE PAPER BOOK, SHOWS THAT TATA ELXSIS IP R ELATED SALE SAW GOOD TRACTION DURING THE YEAR ESPECIALLY IN THE BRO ADBAND WIRELESS AREA AND THE COMPANY HAS DEVELOPED IP RELATED TO WI MAX AND IS ALREADY WORKING ON DEVELOPMENT OF IP AND REFERENCE DESIGNS FOR LTE, WHICH IS AN UPCOMING STANDARD FOR 4G WIRELESS. 20. SOFTWARE DEVELOPMENT AND SERVICES SEGMENT CONST ITUTES PRODUCT DESIGN SERVICES (DESIGN & DEVELOPMENT OF HA RDWARE AND SOFTWARE), INNOVATION DESIGN ENGINEERING (MECHANICA L DESIGN ITA NO.1883/DEL/2015 11 WITH A FOCUS ON INDUSTRIAL DESIGN) AND VISUAL COMPU TING LABS DIVISION (ANIMATION AND SPECIAL EFFECTS). 21. LD. DR FOR THE REVENUE, TO RETAIN TATA ELXSI AS A VALID COMPARABLE, CONTENDED THAT IN THE EARLIER YEAR, TAT A ELXSI WAS EXCLUDED ON THE GROUND THAT IT WAS INTO PRODUCT BUT THERE IS NO SALE OF PRODUCT. IT IS ALSO CONTENDED THAT TAXPAYER IS ALSO DESIGNING IP. 22. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT THE TAXPAYER IS NOT THE OWNER OF IP WHICH IS A CAPTIVE SOFTWARE DE VELOPMENT SERVICE PROVIDER WHEREAS, ON THE OTHER HAND, TATA E LXSI IS THE OWNER OF IP DESIGN OF IT. MOREOVER, BUSINESS UNIT OF TAXPAYER IS VERY DIVERSE HAVING FOUR BUSINESS SEGMENTS AS DISCU SSED IN THE PRECEDING PARAS, WHEREAS ONLY SEGMENTAL OF TWO OF I TS UNIT ARE AVAILABLE. MOREOVER, THERE ARE UN-ALLOCABLE EXPE NSES (NET) OF RS.937.66 LAKHS, AS IS EVIDENT FROM SCHEDULE TO THE FINANCIAL STATEMENTS FROM THE YEAR ENDING MARCH 31, 2010, AVA ILABLE AT PAGE 526 OF THE PAPER BOOK. SO FAR AS SEGMENTAL REPORTI NG GIVEN AT PAGE 526 OF THE PAPER BOOK (ANNUAL REPORT) IS CONCERNED, IT SHOWS THAT THE COMPANYS OPERATIONS PREDOMINANTLY RELATE TO PR OVIDING SYSTEMS INTEGRATION AND SOFTWARE DEVELOPMENT SERVIC ES IN THE INFORMATION TECHNOLOGY FIELD. SO, ALL THESE FACTS GO TO PROVE THAT TATA ELXSI IS FUNCTIONALLY DISSIMILAR VIS--VIS THE TAXPAYER BEING ITA NO.1883/DEL/2015 12 ENGAGED IN THE DEVELOPMENT OF SPECIALIZED/NICHE PRO DUCT, HENCE ORDERED TO BE EXCLUDED BEING NOT A VALID COMPARABLE . E-INFOCHIPS BANGALORE LTD. (E-INFOCHIPS) 23. THIS IS TPOS COMPARABLE WHICH THE TAXPAYER HAS SOUGHT TO EXCLUDE ON GROUNDS OF FUNCTIONAL DISSIMILARITY, IT BEING ENGAGED IN PRODUCT AND SEMI-CONDUCTOR ENGINEERING SERVICES; IT S SEGMENTAL INFORMATION IS NOT AVAILABLE; IT HAS ABNORMAL DEVIA TION IN PROFIT MARGIN INDICATING SIGNIFICANT DIFFERENCE IN RISK PR OFILE WHICH IS UNLIKE A SOFTWARE DEVELOPMENT COMPANY. 24. PERUSAL OF PAGE 18 OF THE ANNUAL REPORT SHOWS T HAT E- INFOCHIP IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPME NT AND IT ENABLED SERVICES (ITES) WHICH IS CONSIDERED AS THE ONLY REPORTABLE BUSINESS SEGMENT AS PER ACCOUNTING STANDARD -17. E -INFOCHIP IS ALSO ENGAGED IN PRODUCT AND SEMI-CONDUCTOR ENGINEER ING SERVICES HAVING 500 PRODUCTS FOR KEY VERTICALS LIKE AEROSPAC E AND DEFENCE, SECURITY AND SURVEILLANCE, CONSUMER DEVISES, MEDICA L DEVICES, RETAIL AND E-COMMERCE AND SOFTWARE TECHNOLOGY. E-INFOCHIP IN ITS RESEARCH AND DEVELOPMENT ACTIVITIES IS ALSO ENGAGED IN DEVELOPMENT OF SOFTWARE AS PER THE SPECIFIC REQUIRE MENT OF THE CLIENTS AS IS EVIDENT FROM ANNEXURE TO DIRECTORS R EPORT, AVAILABLE AT PAGE 5 OF THE PAPER BOOK. THE SEGMENTAL INFORMA TION OF E- ITA NO.1883/DEL/2015 13 INFOCHIP BIFURCATING SOFTWARE DEVELOPMENT AND ITES AND PRODUCTS IS NOT AVAILABLE AS IS EVIDENT FROM PAGE 63 OF THE PAPER BOOK. 25. THE TAXPAYER HAS BROUGHT ON RECORD DATA AS TO A BNORMAL HIGH MARGIN IN FY 2009-10 IN E-INFOCHIP, AVAILABLE AT PA GE 289 OF THE PAPER BOOK, WHICH IS EXTRACTED AS UNDER :- E-INFOCHIPS BANGALORE LTD. 31-MAR-08 31-MAR-09 31-MAR-10 31-MAR-11 ANNUAL REPORT INCOME INCOME FROM SOFTWARE SERVICES 240,278,099 148,676,474 430,466,481 451,181,724 VARIATION IN STOCK OF FINISHED GOODS 1,790,766 604,113 - - OTHER INCOME 27,878 643 23,323 - TOTAL INCOME 242,096,743 149,281,230 430,489,804 451,181,724 EXPENDITURE SOFTWARE DEVELOPMENT EXPENSES 122,517,471 130,050,892 206,674,788 297,136,212 RAW MATERIAL CONSUMED 4,683,651 1,464,005 - - ADMINISTRATIVE EXPENSES 44,184,354 39,801,604 38,404,671 47,529,955 DEPRECIATION 14,184,354 10,713,079 7,870,005 9,732,818 TOTAL EXPENSES 186,167,157 182,029,580 252,949,464 354,398,985 NET PROFIT 55,929,586 (32,748,350) 177,540,340 96,782,739 NCP% 30.04 -17.99 70.19 27.31 26. SO, IN THE LIGHT OF THE DECISION RENDERED BY TH E SPECIAL BENCH OF THE TRIBUNAL IN MAERSK GLOBAL CENTERS (INDIA) PRIVATE LTD. VS. ACIT , WE ARE OF THE CONSIDERED VIEW THAT TREND OF PROFI TS NEEDS TO BE INVESTIGATED INTO TO ASCERTAIN WHETHER EARNING O F HIGH PROFITS ITA NO.1883/DEL/2015 14 REFLECTS NORMAL BUSINESS CONDITION OR WHETHER IT IS A RESALE OF ABNORMAL BUSINESS CONDITIONS. 27. E-INFOCHIP HAS BEEN ORDERED TO BE EXCLUDED BY T HE COORDINATE BENCH OF THE TRIBUNAL IN STRYKER GLOBAL TECHNOLOGY CENTER PRIVATE LIMITED VS. DCIT [TS-863-ITAT-2017 (DEL)- TP](AY2010-11) VIS--VIS ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDER BY RETURNING FOLLOWING FINDINGS :- 17. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT TH E ENTIRE RESERVES ARE TO BE EXAMINED IN TOTALITY. MOREOVER, FROM SCHEDULE III, DEPICTING FIXED ASSETS , AVAILABLE AT PAGE 39 OF THE ANNUAL REPORT, SHOWS TH AT THE COMPARABLE COMPANY HAS HUGE INTANGIBLES WHICH INCREASES THE BRAND VALUE OF THE COMPARABLE COMPANY . 28. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, W E ARE OF THE CONSIDERED VIEW THAT E-INFOCHIPS BEING A PRODUCT A ND SEMI- CONDUCTOR ENGINEERING SERVICES HAVING 500 PRODUCTS FOR KEY VERTICALS LIKE AEROSPACE AND DEFENCE, SECURITY AND SURVEILLANCE, ETC., HAVING HUGE INTANGIBLES WHICH INCREASES ITS BRAND V ALUE AND ITS SEGMENTAL FINANCIALS ARE NOT AVAILABLE, IS NOT A SU ITABLE COMPARABLE VIS--VIS THE TAXPAYER, HENCE ORDERED TO BE EXCLUDE D. INFINITE DATA SYSTEMS PVT. LTD. (INFINITE) 29. THE TAXPAYER SOUGHT TO EXCLUDE INFINITE ON GROU NDS OF FUNCTIONAL DISSIMILARITY THAT IT DRIVES REVENUE FRO M TECHNICAL SUPPORT AND INFRASTRUCTURE SERVICES; THAT IT HAS AB NORMALLY HIGH ITA NO.1883/DEL/2015 15 MARGIN HAVING EXCEPTIONAL GROWTH IN BUSINESS OPERAT ION OVER THE LAST FOUR YEARS I.E. 908% IN SALES OVER THE PREVIOU S YEAR; THAT INFINITE SIGNED AN AGREEMENT (BUILT, OPERATE AND TRANSFER MODE) WITH FUJITSU SERVICES LIMITED TO SET UP GLOBAL DELI VERY CENTERS IN INDIA TO PROVIDE OFFSHORE DELIVERY CAPABILITIES TO FUJITSU AND FUJITSUS ASSOCIATED COMPANIES. PERUSAL OF THE FUN CTIONAL PROFILE OF INFINITE, AVAILABLE AT PAGE 13 OF THE PAPER BOOK, S HOWS THAT IT PROVIDES SOLUTIONS THAT ENCOMPASS TECHNICAL CONSULT ING, DESIGN & DEVELOPMENT OF SOFTWARE, MAINTENANCE, SYSTEMS INTEG RATION, IMPLEMENTATION, TESTING AND INFRASTRUCTURE MANAGEME NT SERVICES. THIS OBJECTION WAS TAKEN BY THE TAXPAYER BEFORE THE LD. DRP, AS IS EVIDENT FROM PAGE 293 OF THE PAPER BOOK, BUT IT HAS NOT CONTROVERTED THE FUNCTIONAL DISSIMILARITY POINTED O UT BY THE TAXPAYER. 30. AS PER REVENUE RECOGNITION GIVEN IN ANNUAL REPO RT AT PAGE 82 OF THE ANNUAL REPORT PAPER BOOK, IT IS MENTIONED TH AT INFINITE PRIMARILY DERIVED ITS REVENUE FROM TECHNICAL SUPPOR T AND INFRASTRUCTURE MANAGEMENT SERVICES. MOREOVER, IT I S A SINGLE CUSTOMER COMPANY OPERATING ON BUILD, OPERATE AND TR ANSFER BUSINESS MODEL. 31. INFINITE HAS ALREADY BEEN ORDERED TO BE EXCLUDE D FROM THE FINAL SET OF COMPARABLES BY THE COORDINATE BENCH OF THE TRIBUNAL ITA NO.1883/DEL/2015 16 VIS--VIS THE ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDER IN CASE CITED AS STRYKER GLOBAL TECHNOLOGY CENTER PRIVATE LIMITED VS . DCIT (SUPRA) BY RETURNING FOLLOWING FINDINGS :- 22. THE LD. AR FOR THE ASSESSEE IN ORDER TO POINT OUT FUNCTIONAL DISSIMILARITY OF INFINITE DREW OUR ATTEN TION TO PAGES 98 TO 102 OF ANNUAL REPORT. IN PARA 17 AT PA GE 98 OF SCHEDULES TO FINANCIAL STATEMENTS IN COMPANY OVERVI EW, IT IS CATEGORICALLY MENTIONED THAT INFINITE PROVIDES S OLUTIONS THAT ENCOMPASS TECHNICAL CONSULTING, DESIGN AND DEVELOPMENT OF SOFTWARE, MAINTENANCE, SYSTEMS INTEG RATION, IMPLEMENTATION, TESTING AND INFRASTRUCTURE MANAGEME NT SERVICES, WHEREAS ASSESSEE COMPANY IS A ROUTINE SER VICE PROVIDER. FURTHERMORE WHEN WE EXAMINE PARA 17.1.3. AT PAGE 98 OF THE ANNUAL REPORT UNDISPUTEDLY INFINITE DERIVES ITS REVENUE PRIMARILY FROM TECHNICAL SUPPORT AND INFRASTRUCTURE MANAGEMENT SERVICES WHICH MAKES INFI NITE FUNCTIONALLY DISSIMILAR TO THE ASSESSEE. 23. FURTHERMORE INFINITE HAS EXCEPTIONAL GROWTH IN BUSINESS OPERATION OVER THE LAST FOUR YEARS I.E. 90 8% GROWTH RATE IN SALES OVER PREVIOUS YEAR AS IS EVIDENT FORM AUDITING TABULATED AS UNDER:- PARTICULARS MAR-12 MAR-11 MAR-10 MAR- 09 SALES (IN INR (CRORES) 43.31 52.75 38.31 4.74 % GROWTH IN SALES 182% 238% 908% - OP/TC 124.40% 153.97 % 88.25% 31.48 % 24. THE COMPARABILITY OF INFINITE WAS ALSO EXAMINED IN SUN LIFE INDIA SERVICE CENTRE (P.) LTD. (SUPRA) WIT H SUN LIFE INDIA SERVICE CENTRE (P.) LTD. WHICH IS A ROU TINE SOFTWARE DEVELOPMENT AND SERVICE PROVIDER AND HELD TO BE NOT A SUITABLE COMPARABLE AS IT IS A FULL-FLEDGED I T CONSULTING ORGANISATION AND PROVIDES SERVICES IN TH E NATURE OF TECHNICAL CONSULTING, DESIGN AND DEVELOPMENT OF SOFTWARE, MAINTENANCE, SYSTEM IRRIGATION, IMPLEMENTATION, TES TING AND INFRASTRUCTURE MANAGEMENT SERVICES. SO, IN VIEW OF THE MATTER, WE ARE OF THE CONSIDERED VIEW THAT INFINITE IS NOT A SUITABLE COMPARABLE VIS--VIS ASSESSEE COMPANY, HEN CE ORDERED TO BE EXCLUDED. ITA NO.1883/DEL/2015 17 32. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, W E ARE OF THE CONSIDERED VIEW THAT INFINITE IS FUNCTIONALLY DISSI MILAR VIS--VIS TAXPAYER HAVING BEEN INTO PROVIDING SOLUTIONS THAT ENCOMPASS TECHNICAL CONSULTING, DESIGN AND DEVELOPMENT OF SOF TWARE MAINTENANCE, SYSTEMS INTEGRATION, IMPLEMENTATION, T ESTING AND INFRASTRUCTURE MANAGEMENT SERVICES. FURTHERMORE, I NFINITE HAS ENTERED INTO BUILD, OPERATE AND TRANSFER (BOT) AGRE EMENT WITH FUJITSU SERVICES LIMITED TO SET UP GLOBAL DELIVERY CENTERS IN INDIA TO PROVIDE OFFSHORE CAPABILITIES TO FUJITSU AND FUJ ITSUS ASSOCIATED COMPANIES. IT HAS ALSO SHOWN EXCEPTIONAL GROWTH IN BUSINESS OPERATION IN THE LAST FOUR YEARS I.E. 908% GROWTH R ATE OVER THE PREVIOUS YEAR. SO, INFINITE CANNOT BE A VALID COMP ARABLE VIS--VIS THE TAXPAYER, HENCE ORDERED TO BE EXCLUDED. ZYLOG SYSTEMS LTD. (ZYLOG) 33. THE TAXPAYER SOUGHT TO EXCLUDE ZYLOG ON GROUND OF ITS DIVERSIFIED OPERATION; HAVING SUBSTANTIAL BRAND VAL UE AND INTANGIBLE ASSETS; HAVING SIGNIFICANT AMP SPENT; IT INCURRED R & D EXPENSES. WHEN WE EXAMINE ANNUAL REPORT OF THE ZYLOG UNDER TH E HEAD OUR STRENGTHS IT SHOWS THAT ZYLOG OFFERED A VALUE TO T HEIR CUSTOMERS AND MARKED PLACE THROUGH VALUE ADDED RESEARCH & DEV ELOPMENT, PRODUCT ENGINEERING, AND END-TO-END PRODUCT LIFECYC LE ITA NO.1883/DEL/2015 18 MANAGEMENT SOLUTIONS FROM CONCEPTUALIZATION, PROTOT YPING, DEVELOPMENT, INTEGRATION WITH ENTERPRISE APPLICATIO NS, MIGRATION, PORTING, PERFORMANCE TUNING, APPLICATION UPGRADE, T ESTING AND MAINTENANCE. ZYLOG BUSINESS APPLICATIONS ARE CREAT ED WITH LEADING INDUSTRY EXPERTS AND EXPERIENCED DEVELOPERS TO HELP PROPEL LEGACY SYSTEMS AND PROCESSES TO FULLY LEVERAGE THE CURRENT MARKET TECHNOLOGY. ZYLOG GOAL IS TO HELP TO MIGRATE IN TH E DIRECTION OF ITS GOAL, GREATER PROFITABILITY, MARKET PROSPERITY AND ITS OPERATION IS E- WASTE & COMPLIANCE FRAMEWORK (MANUFACTURING); VESAL IUS HIS (PHARMA); PHOENIX, M-BANKING, M-WALLET (BFSI); SMAR T CARD SOLUTIONS (RTO, HEALTHCARE, AGRICULTURE), E-POLICE SYSTEM (E- GOVERNANCE), WI54, FIELD FORCE AUTOMATION (TELECOM) AND E- ENABLEMENT (RETAIL). 34. FURTHERMORE, PERUSAL OF THE INTANGIBLE ASSETS O WNED BY ZYLOG, DETAIL AVAILABLE AT PAGE 229 OF THE PAPER BO OK, SHOWS THAT IT HAS HUGE INTANGIBLES. FURTHERMORE, ZYLOG HAS INCUR RED RS.8,885 LAKHS I.E. 9.1% OF OPERATING REVENUE ON AMP EXPENSE S. SIMILARLY, RESEARCH AND DEVELOPMENT EXPENSES ARE INCURRED BY Z YLOG AS PER SCHEDULE 15, AVAILABLE AT PAGE 278 OF THE PAPER BOO K, WHICH ARE CHARGED OFF TO PROFIT & LOSS ACCOUNT, SO IN-HOUSE R &D ACTIVITIES CARRIED OUT BY ZYLOG CERTAINLY DELIVERED HIGH VALUE SERVICES. ITA NO.1883/DEL/2015 19 35. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, ON AC COUNT OF DIVERSIFIED OPERATION, SUBSTANTIAL BRAND VALUE AND HUGE INTANGIBLE ASSETS HAVING SIGNIFICANT AMP SPENT AND R & D EXPEN SES, ZYLOG CANNOT BE A VALID COMPARABLE VIS--VIS TAXPAYER WHI CH IS A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER TO ITS AE ONL Y, SO WE ORDER TO EXCLUDE THE SAME. GROUNDS NO.13 & 14 36. TPO/AO/DRP HAVE MADE ADJUSTMENT OF RS.2,36,33,0 50/- TO THE INCOME OF THE TAXPAYER ON ACCOUNT OF OVERDUE RE CEIVABLES FROM ITS AE BY APPLYING THE AD HOC INTEREST RATE OF 14.8 8%. IT IS THE CASE OF THE TAXPAYER THAT AS PER PARA 5.7 OF THE AGREEME NT, INTEREST, IF ANY, IS TO BE CHARGED ON RECEIVABLES WHICH HAS BEEN FOLLOWED IN THE EARLIER YEARS AND SUBSEQUENT YEARS. SO, TPO/AO IS DIRECTED TO COMPUTE THE INTEREST, IF ANY, FOLLOWING THE RULE OF CONSISTENCY, IN VIEW OF PARA 5.7 OF THE AGREEMENT BY TAKING INTO AC COUNT THE FINDINGS RETURNED IN EARLIER YEARS AND SUBSEQUENT Y EARS. SO, THIS ISSUE IS REMANDED BACK TO TPO/AO TO DECIDE AFRESH A FTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE TAXPAYER. CORPORATE TAX GROUND NO.19 37. AO/DRP HAD DISALLOWED SEVERANCE COST OF RS.6,67 ,62,386/- INCURRED BY THE TAXPAYER DURING THE FINANCIAL YEAR 2008-09 ALSO. ITA NO.1883/DEL/2015 20 IDENTICAL ISSUE HAS UNDISPUTEDLY BEEN SET ASIDE TO AO BY THE COORDINATE BENCH OF THE TRIBUNAL QUA AY 2008-09BY R ETURNING FOLLOWING FINDINGS :- 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT DOCUMENTS. IT IS PERTINENT TO NOTE THAT TH E ASSESSEE COMPANY MADE PAYMENT OF THE SEVERANCE COST DURING T HE FINANCIAL YEAR 2008-09. HOWEVER, AS PER THE LETTER DATED 06.03.2009 PRODUCED BY THE ASSESSEE IT WAS SEEN THA T THE EMPLOYEE'S WERE TO BE RELIEVED FROM SERVICE ON 30.0 4.2009. THEREFORE, THE LIABILITY TO PAY THE SEVERANCE/ NOTI CE PAY ETC. ACCRUED TO THE ASSESSEE COMPANY IN A.Y. 2010-11 AS PER THE VERSION OF THE ASSESSING OFFICER. FROM THE RECORDS AND FROM THE ASSESSMENT ORDER IT IS NOT CLEAR AS TO WHEN THE SEV ERANCE COST HAS BEEN CRYSTALLIZED. THEREFORE, IT WILL BE APPROP RIATE TO REMAND BACK THIS ISSUE TO THE FILE OF THE ASSESSING OFFICE R. NEEDLESS TO SAY, THE ASSESSEE BE GIVEN OPPORTUNITY OF HEARING B Y FOLLOWING PRINCIPLES OF NATURAL JUSTICE. THUS, GROUND NO. 18 OF ASSESSEE'S APPEAL FOR A.Y. 2009-10 IS PARTLY ALLOWED FOR STATI STICAL PURPOSE. 38. SO, IN VIEW OF THE MATTER, THIS ISSUE BEING OF SUBSEQUENT YEAR IS REQUIRED TO BE DECIDED BY THE AO ALONG WITH AY 2 009-10. CONSEQUENTLY, THIS ISSUE IS SET ASIDE TO AO TO DECI DE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE TAXP AYER. 39. RESULTANTLY, THE APPEAL FILED BY THE TAXPAYER I S ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 26 TH DAY OF FEBRUARY, 2019. SD/- SD/- (N.S. SAINI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 26 TH DAY OF FEBRUARY, 2019 TS ITA NO.1883/DEL/2015 21 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A). 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.