M/s. SCM Microsystems (India) Pvt Limited, CHENNAI V. ACIT, CHENNAI

ITA 2155/CHNY/2011

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 4895 (ITAT-CHENNAI)
• Duration Of Justice: 6 year(s) 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-04-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 07-08-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 29-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: CHIDAMBARAM
• Keywords: Wholly owned subsidiary

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , , $ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER /. I.T.A. NO. 2155/CHNY/2011 / ASSESSMENT YEAR : 2007-08 M/S. SCM MICROSYSTEMS (INDIA) PVT. LTD., BHAWAN IT PARK 4 TH FLOOR, OKKIYAMTHORAIPAKKAM, CHENNAI 600 097. [PAN: AABCS 3064Q] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(1) CHENNAI 600 034. ( / APPELLANT) ( / RESPONDENT) &' / APPELLANT BY : SHRI. CHIDAMBARAM, ADVOCATE *+&' / RESPONDENT BY : SHRI. SRINIVASARAO. CIT ' /DATE OF HEARING : 05.01.2018 ' /DATE OF PRONOUNCEMENT : 04.04.2018 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THE ASSESSEE FILED THIS APPEAL AGAINST THE ORDER P ASSED BY THE ACIT, COMPANY CIRCLE VI(1), CHENNAI IN PURSUANCE OF THE D IRECTIONS OF THE DRP, CHENNAI DATED 19.08.2011 FOR ASSESSMENT YEAR 2007- 08. 2. M/S. SCM MICRO SYSTEMS (INDIA) PVT. LTD., THE AS SESSEE, IS A WHOLLY OWNED SUBSIDIARY OF SCM MICRO SYSTEMS GROUP, UK LTD . THE ULTIMATE HOLDING :-2-: ITA NO. 2155/CHNY/2011 COMPANY IS SCM MICRO SYSTEMS INC, USA. THE ASSESSE E IS ENGAGED IN PROTOTYPE DESIGN, DEVELOPMENT AND RELATED SUPPORT A CTIVITIES BASED ON TECHNICAL SPECIFICATIONS AND PRODUCT IDEA OBTAINED FROM AFFILIATES. DURING THE YEAR, IT HAS UNDERTAKEN SOFTWARE DEVELOPMENT SERVI CES. THE ASSESSEE ADOPTED TNMM AS THE MOST APPROPRIATE METHOD TO ARRI VE ITS ALP, ADOPTING OP/TOI AS THE PLI. THOUGH THE TPO AGREED ON THE MA M OF THE ASSESSEES TP STUDY, HOWEVER, REJECTED IT ON VARIOUS GROUNDS, PIC KED UP 28 COMPARABLES WHICH INCLUDED 3 OF THE ASSESSEES COMPARABLES, ARR IVED THE PLI AT 27.96% AS AGAINST ASSESSEES PLI AT 14.7%. CONSEQUENTLY, THE TPO MADE AN UPWARD ADJUSTMENT OF RS. 1,09,28,305/-. WHILE COMPUTING D EDUCTION U/S. 10B, THE ASSESSING OFFICER REDUCED RS. 9,65,410/- INCURRED T OWARDS VSNL LEASE LINE CHARGES/INTERNET CHARGES FROM EXPORT TURNOVER. AG GRIEVED, THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP AND IT DID NOT SUCCEED AND HENCE FILED THIS APPEAL. 3. THE AR PRIMARILY CHALLENGED INCLUSION OF CERTAIN COMPARABLES BASED ON FUNCTIONAL DIFFERENCE, CERTAIN FILTERS, TURNOVERS E TC., WITH REFERENCE TO ASSESSEES ACTIVITIES. IN THIS REGARD, HE RELIED O N THE DECISION OF THE ITAT BANGALORE IN THE CASE OF HEWLETT PACK AND (INDIA) S OFTWARE OPERATION P. LTD., [2016] 67 TAXMANN.COM 309 (BANGALORE- TRIB) IN IT(T P) APPEAL NO. 1304 (BANG) OF 2011, AY 2006-07 (SIC = 2007-08) DATED 03 .09.2016. THE GIST OF :-3-: ITA NO. 2155/CHNY/2011 HIS SUBMISSIONS AS TO WHY THE FOLLOWING COMPARABLES SHOULD BE EXCLUDED IS EXTRACTED, COMPARABLE WISE, AS UNDER: 1. ACCELTRANSMATICS LTD (SEGMENT) - THE COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 20 AND 3D ANIMATION AND IS FUNCTIONALLY DIFFERENT FROM SOFTWARE DEVELOPMENT SERVICES PROVID ER FAILS RPT FILTER ( RPT = I 0.S6 CR, TURNOVER = 3S. 98 ER, RPT / SALES = 29.3S%). 2. AVANICIMCON TECHNOLOGIES LTD ABNORMALLY HIGH MARGINS = 52.59%, OPERATING REVENUE INCREASED BY 63.03%, EXTRAORDINARY YEAR, AS PER NASSCOM GROWTH OF SOFTWA RE INDUSTRY IS 32% THE COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NAM E 'OXCHANGE', AND THUS, THE COMPANY WOULD HAVE REVENUE FROM SOFTWARE PRODUCT SALES APART FROM RENDERING OF SOFTWARE SERVICES AND, THEREFORE, IS F UNCTIONALLY DIFFERENT FROM THE ASSESSEE. 3. CELESTIAL LABS LTD THE COMPANY WAS BASICALLY/ADMITTEDLY IN CLINICAL RE SEARCH AND MANUFACTURE OF BIO-PRODUCTS AND OTHER PRODUCTS, AND, THUS, IT COUL D NOT BE COMPARED WITH COMPANY MAINLY IN THE BUSINESS OF PROVIDING SOFTWARE DEVELO PMENT SERVICES. 4. E-ZEST SOLUTIONS LTD THE COMPANY IS RENDERING PRODUCT DEVELOPMENT SERVIC ES AND HIGH END TECHNICAL SERVICES WHICH COME UNDER THE CATEGORY OF KPO SERVICES. HENCE, THE COMPANY IS NOT FUNCTIONALLY COMPARABLE. 5. FLEXTRONICS SOFTWARE SYSTEMS LTD (SEGMENT) FUNCTIONALLY DIFFERENT AND RELIANCE WAS PLACED ON H EWLETT-PACKARD (INDIA) GLOBALSOFT (P) LTD. VS OCIT - [20 IS] 63 TAXMANN.CO M 136 (BANG.) WHEREIN ON ACCOUNT OF NO PROPER SEGMENTAL DATA WAS AVAILABLE FOR YEAR ENDING 31 MARCH 2007, THE COMPARABLE WAS REJECTED . 6. HELIOS & MATHESON INFORMATION TECHNOLOGY THE COMPANY WAS ENGAGED IN SALE OF SOFTWARE PRO DUCTS, WHICH WAS QUITE DISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESS EE IN THE IT SERVICES SEGMENT AND, THUS THE COMPANY IS NOT COMPARABLE. 7. LNFOSYS TECHNOLOGIES LTD THE COMPANY OWNS SIGNIFICANT INTANGIBLE AND HAS HUG E REVENUES FROM SOFTWARE PRODUCTS AND THE BREAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAILABLE. 8. ISHIRINFOTECH LTD :-4-: ITA NO. 2155/CHNY/2011 FAILS EMPLOYEE COST FILTER - THE COMPANY IS OUT -SOURCING ITS WORK AND THEREFORE, HAS NOT SATISFIED THE 2S PER CENT EMPLOYEE COST FILTER (3.96% EMPLOYEE COST ON REVENUE). 9. KALS LNFOSYSTERNS LTD (SEG) THE COMPANY IS ENGAGED IN THE BUSINESS OF DEVELOPIN G SOFWARE PRODUCTS AND ALSO ENGAGED IN PROVIDING TRAINING. THE INFORMATION IS NOT AVAILABLE IN PUBLIC DOMAIN. 10. LUCID SOFTWARE LTD FAILS EMPLOYEE COST FILTER THE COMPANY IS OUT-SOU RCING ITS WORK AND, THEREFORE, HAS NOT SATISFIED THE 25% EMPLOYEE COST FILTER . 11. MEGASOFLLLD (SEG) THE COMPANY OPERATES INTO TWO SEGMENTS NAMELY, SOFT WARE DEVELOPMENT AND SOFTWARE PRODUCTS. HENCE, SOFTWARE DEVELOPMENT SEGM ENT ONLY TO BE CONSIDERED WHILE COMPUTING THE MARGINS OF THE COMPANY. - 23.11% 12. PERSISTENT SYSTEMS LTD THE COMPANY OPERATES INTO TWO SEGMENTS NAMELY, SO FTWARE PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES. THE SEGMEN TAL DETAILS REGARDING THE SAME IS NOT AVAILABLE IN THE FINANCIAL STATEMENTS. 13. QUINTEGRA SOLUTIONS LTD THE COMPANY IS ENGAGED IN THE BUSINESS OF PRODUCT E NGINEERING SERVICES. THECOMPANY IS ALSO ENGAGED IN THE RESEARCH & DEVELO PMENT ACTIVITIES RESULTING IN THE CREATION OF OWN INTANGIBLES AND INTELLECTUAL PROPRI ETARY RIGHTS (IPR) . 14. TATA ELXSI LTD (SEG) THE COMPANY IS ENGAGED IN THE DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES NAMELY PRODUCT DESIGN SERVICES , INNOVATIVE DESIGN ENGINEERING AND VISUAL COMPUTING LABS. 15. THIRDWARE SOLUTIONS LTD THE COMPANY IS ENGAGED IN THE BUSINESS OF PRODUCT D EVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. HOW EVER THE SEGMENTAL PROFIT AND LOSS ACCOUNT FOR SOFTWARE DEVELOPMENT SERVICES AND PRODU CT DEVELOPMENT ARE NOT GIVEN SEPARATELY. 16. WIPRO LTD (SEG) THE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND PRODUCT DEVELOPMENT SERVICES WITH NO SEGMENTAL INFORMATION. THE COMPANY ALSO OWNS CUSTOMER RELATED AND TECHNOLOGY RELATED INTANGIBLES. ALSO TH E COMPANY OWNSINTELLECTUAL PROPERTY IN FORM OF REGISTERED PATENTS AND SEVERAL PENDINGAP PLICATIONS FOR GRANT OF PATENTS. PER CONTRA, THE DR RELIED ON THE ORDERS OF THE LOWE R AUTHORITIES. :-5-: ITA NO. 2155/CHNY/2011 4. WE HEARD THE RIVAL SUBMISSIONS. WE FIND FROM TH E ORDER RELIED ON BY THE AR, SUPRA, THAT THE ISSUE INVOLVED IN THAT COM PANY WAS IN SOFTWARE DEVELOPMENT SERVICES SEGMENT AND THEREFORE THE DECI SIONS RELIED ON BY THE AR IS APPLICABLE TO THE FACTS OF THIS CASE, AS IT IS A LSO IN THE SOFTWARE DEVELOPMENT SERVICES. THE BANGALORE TRIBUNAL AFTER DUE ANALYSI S OF EACH OF THE ABOVE COMPARABLES DIRECTED EXCLUSION OF AVANI CIMCON TE CHNOLOGIES LTD., CELESTIAL LABS LTD., E-ZEST SOLUTIONS LTD, FLEXTRONICS SOFTWA RE SYSTEMS LTD (SEG), HELIOS & MATHESON INFORMATION TECHNOLOGY LTD, INFOSYS TECH NOLOGIES LTD, ISHIR INFOTECH LTD, KALS INFORMATION SYSTEMS LTD, LUCID S OFTWARE LTD, PERSISTENT SYSTEMS LTD, AND WIPRO LTD (SEG), FROM THE LIST OF COMPARABLES. COMPARABILITY OF M/S. TATA ELXSI LTD (SEG), IS REMI TTED BACK TO THE TPO/AO FOR CONSIDERATION AFRESH AS PER LAW. WE ALSO DIRECT TH AT MEGASOFT LTD, SHALL BE CONSIDERED FOR INCLUSION ONLY AFTER SEGMENTATION OF ITS RESULTS. FOLLOWING THEABOVE DECISION, WE DIRECT THAT TPO/AO TO COMPLY ACCORDINGLY. CORRESPONDING GROUNDS OF APPEAL ARE TREATED AS PART LY ALLOWED. 5. THE NEXT ISSUE IS WHILE COMPUTING DEDUCTION U/S . 10B, THE ASSESSING OFFICER REDUCED RS. 9,65,410/- INCURRED TOWARDS VSN L LEASE LINE CHARGES/INTERNET CHARGES FROM EXPORT TURNOVER ALO NE AND DID NOT REDUCE FROM THE TOTAL TURNOVER. IN THIS REGARD, THOUGH TH E ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP, THE DRP DID NOT ADJUDICA TE THE MATTER SPECIFICALLY. THE AR RELYING ON THE SPECIAL BENCH DECISION OF CHE NNAI TRIBUNAL IN THE CASE :-6-: ITA NO. 2155/CHNY/2011 OF ITO VS SAK SOFT LTD, 313 ITR [AT] 353 CHENNAI SB , PLEADED THAT THE VSLN LEASE LINE CHARGES/INTERNET CHARGES BE EXCLUDED FRO M THE TOTAL TURNOVER ALSO. 6. WE HEARD THE RIVAL SUBMISSIONS. ON THE FACTS AN D CIRCUMSTANCES, THIS ISSUE IS REMITTED BACK TO THE AO FOR A FRESH EXAMIN ATION. THE AO AFTER AFFORDING ADEQUATE OPPORTUNITY TO THE ASSESSEE SHAL L APPLY THE ABOVE DECISION, IF THE FACTS AND CIRCUMSTANCES ARE PARI MATERIA WIT H THE CASE OF SAK SOFT LTD., SUPRA. CORRESPONDING GROUNDS OF APPEAL ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 7. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON WEDNESDASY, THE 04 TH DAY OF APRIL, 2018 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) !' /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) ' /ACCOUNTANT MEMBER /CHENNAI, 1 /DATED: 04 TH APRIL, 2018 JPV '*2343 /COPY TO: 1. &/ APPELLANT 2. *+& /RESPONDENT 3. 5 ) (/CIT(A) 4. 5 /CIT 5. 3* /DR 6. 7 /GF