M/s. Marvell India Private Limited, Bangalore V. The Deputy Commissioner Of Income Tax,Circle- 4(1)(2), Bangalore

ITA 2577/BANG/2019

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9949 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 10-10-2022
• Assessment Year: 2015-2016
• Appeal Filed On: 19-12-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 28; 143(3); 144C; 143(2); 13; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.2577/Bang/2019 Assessment year : 2015-16 Marvell India Pvt. Ltd., Tower D, 10 th & 11 th Floors, Global Technology Park, Marathahalli Sarjapur Outer Ring Road, Bellandur, Bengaluru – 560 103. PAN: AAECM 5559R Vs. The Deputy Commissioner of Income Tax, Circle 4(1)(2), Bengaluru. APPELLANT RESPONDENT Appellant by : Shri Mukesh Butani, Advocate Respondent by : Shri Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. Date of hearing : 11.10.2022 Date of Pronouncement : 21.10.2022 O R D E R Per Padmavathy S., Accountant Member This appeal is against the order of ACIT, Circle 4(1)(2), Bangalore passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 196 [the Act] dated 24.10.2019 for the assessment year 2015-16. IT(TP)A No.2577/Bang/2019 Page 2 of 27 2. The assessee is the wholly owned subsidiary of Marvel International Ltd., Bermuda (MIL) and is engaged in the provision of design and development of software. The assessee also renders services relating to design, testing and customer support of integrated circuits. The assessee filed return of income for AY 2015-16 on 30.11.2016 declaring a total income of Rs.14,42,00,570. The case was selected for scrutiny and a notice u/s. 143(2) was duly served on the assessee. A reference was made to the Transfer Pricing Officer (TPO) for determination of arm’s length transactions of the assessee with its Associated Enterprises [AE]. The TPO determined a TP adjustment of Rs.14,23,45,600. The AO passed draft assessment order incorporating the TP adjustment. The AO also made an addition u/s. 28(iv) with regard to the assets received by the assessee from its AE free of cost/loan basis for an amount of Rs.71,55,525. 3. Aggrieved, the assessee filed its objections before the DRP and the DRP gave marginal relief to the assessee whereby the TP adjustment was reduced to Rs.11,44,36,603 and the addition made by the AO towards assets received free of cost / loan basis was confirmed by the DRP. The assessee is in appeal before the Tribunal against the final assessment order passed by the AO pursuant to the directions of the DRP. 4. During the course of hearing, the ld. AR pressed for only the following grounds:- IT(TP)A No.2577/Bang/2019 Page 3 of 27 “Ground No. 8: Turnover filter should have an upper limit 8. The learned DRP / AO / TPO has erred in not excluding uncontrolled comparables having turnover more than Rs. 200 crores despite several rulings of this Hon'ble Tribunal, have upheld the application of turnover filter and thereby excluded companies whose turnover exceeds more than Rs. 200 crores. The learned DRP / AO / TPO has erred in law and facts by not rejecting following companies that fail turnover filter of INR 200 crore: • Thirdware Solutions Limited • Aspire Systems (India) Private Limited • Nihilent Technologies Limited • R S Software (India) Limited • Cybage Software Private Limited • Tata Elxsi Limited • Persistent System Limited • Mindtree Limited • Larsen and Turbo Infotech Limited • Infosys Limited Ground No. 13: Rejection of additional comparable companies requested for inclusion by the Appellant during the course of TP assessment proceedings 13. The learned DRP / AO / TPO has erred in law and on facts in rejecting the following comparable companies requested for inclusion by the Appellant during the course of TP proceedings: • Minvesta Infortech Limited • Akshay Software Technologies Limited • Sasken Communication Technologies Limited • Evoke Technologies Limited • Helios & Matheson IT Bangalore Limited • TVS Infotech Limited • New Age Bizsoft solutions Pvt Limited • I2T2 India Limited IT(TP)A No.2577/Bang/2019 Page 4 of 27 Ground No. 20: Corporate tax adjustment of INR 71,55,525 20.1. The learned DRP / AO has erred in law and in facts, by considering the receipt of tangible assets for free of cost and on loan basis during the year from group companies as taxable under Section 28(iv) of the Act as 'Profit and gains of business or profession'. 20.2. The learned DRP / AO has erred in facts, by considering the value of tangible assets received for free of cost and on loan basis by the Appellant during the AY 2015-16 to be INR 71,55,525. The AO has erred in not considering the submissions made by the Appellant in this regard.” 5. During the course of hearing the ld AR pressed for the inclusion of only the following companies raised in Ground 13 above • Akshay Software Technologies Limited • Evoke Technologies Limited • I2T2 India Limited 6. During the year under consideration, the assessee has entered into the following international transactions:- Particulars Paid/Payable Received/ Receivable As per TP document Purchase of assets 4100583 4100583 Provision of software development of services 1092854334 1092854334 Reimbursement of expenses 1224043 1224043 Reimbursement of RSU & ESOP related educations 25424944 25424944 ESSP contribution remittance 39150370 39150370 Free of cost goods (assessable value) 4910810 4910810 7. The assessee has applied Transactional Net Margin Method [TNMM] as the most appropriate method. The Operating Profit to IT(TP)A No.2577/Bang/2019 Page 5 of 27 Operating Cost ratio has been taken as the Profit Level Indicator. The financials of the taxpayer as per TP study are given below:- Particulars Amount in Rs Income Export of Software 1092854334 Foreign Exchange Gain (Net) 7726297 Total Operating Income 1100580631 Expenses Employee costs 522643046 Other Expenses 361081986 Depreciation 92114044 Total Operating . Expenses 975839076 Total Operating Profit 124741555 OP/OC 12.78% O P / O R 11.33% 8. The assessee has chosen 8 comparables as under:- Company name Weighted Average NCP (percent) Melstar Information Technologies Ltd. -5.28 Lycos Internet Limited (earlier known as Ybrant Digital Limited) 12.38 CG-VAK Software & Exports Ltd. 12 38 . R Systems International Ltd. 18.54 Bells Softech Ltd 19.29 Helios & Matheson information technology Ltd 19.62 Larsen & Toubro Infotech Limited 24.88 R S Software (India) Ltd 25.29 35 th Percentile 12.38 Median 18.91 65 th Percentile 19.62 9. The assessee’s margin of 12.78% from provision of software development services is between the 35 th to 65 th percentile of the IT(TP)A No.2577/Bang/2019 Page 6 of 27 weighted average margin of the comparables and therefore the assessee concluded that the international transaction is within the arm’s length. 10. The TPO rejected the comparables chosen by the assessee and applied new filters to select fresh comparables. The TPO thus arrived at the final set of comparable companies in the SWD segment as listed below:- S.No. Financial Year wise OP/OC (%) Company Name 2014-15 2013-14 2012-13 Average 1 Kals Information Systems Ltd 5.77 16.94 13.51 11.88 2 E-Zest Solutions Ltd 12.59 15.80 Fails Export Filter 14.05 3 CG-VAK Software & Exports Ltd. 19.87 13.81 22.07 18.50 4 Tata Elxsi Ltd. (Seg) 23.33 22.02 11.24 19.34 5 Rheal Software Pvt . Ltd. 2.76 36.64 No data in Public Domain 19.88 6 Mindtree Ltd. 20.55 21.18 19.75 20.55 7 Larsen & Toubro Infotech Ltd. 24.22 23.54 25.10 24.21 8 R S Software (India) Ltd. 32.66 24.14 17.44 24.82 9 Infobeans Technologies Ltd. 20.70 41.95 29.22 29.91 10 Persistent Systems Ltd. 31.11 35.44 28.20 31.69 11 Nihilent Technologies Ltd . 29.19 35.72 No data in Public Domain 32.21 12 Aspire Systems (India) Pvt. Ltd. 30.98 38.04 No data in Public Domain 34.18 13 Integ Software Pvt. Ltd. 31.16 45.00 Fails Employe e cost 37.90 14 Infosys Ltd. 40.29 36.28 39.25 38.59 15 Thirdware Solution Ltd. 43.69 44.68 32.65 41.12 16 Cybage Software Pvt. Ltd. 68.17 68.82 60.81 66.27 35th Percentile 20.55% Median 27.37% 65th Percentile 32.21% IT(TP)A No.2577/Bang/2019 Page 7 of 27 11. The TPO computed the TP adjustment based on the weighted margin of the revised comparables as below:- SWD SEGMENT Particulars Formula Amount (in Rs. Lacs) Taxpayers operating revenue OR 1,10,05,80,631 Taxpayers operating cost OC 97,58,39,076 Taxpayers operating profit OP 12,47,41,555 Taxpayers PLI PLI=OP/OC 12.78% 35th Percentile Margin of comparable set 20.55% Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 27.37% Arm's Length Price ALP=(1+M)* OC 1,24,29,26,231 Price Received OR 1,10,05,80,631 Shortfall being adjustment ALP-OR 14,23,45,600 12. Aggrieved, the assessee raised its objections before the DRP. The DRP gave the following directions to the TPO. 1. To include Sasken Communication Technologies Ltd. as the company has provided segmental information for its revenue from software services and products. 2. To examine the annual report and data furnished by the assessee and include Daffodil Software Ltd. as comparable if it passes all filters of the TPO. 13. Accordingly the TPO recalculated the TP adjustment to arrive at the revised adjustment of Rs.11,44,36,603. 14. Ground No.8 relates to application of turnover filter by the TPO. The ld AR submitted that the TPO has applied the lower turnover filter while choosing the fresh comparable companies but failed to apply the IT(TP)A No.2577/Bang/2019 Page 8 of 27 upper turnover filter. The ld AR submitted that the turnover of assessee for the year under consideration is Rs.108 crores and that by applying the upper turnover filter Rs. 200 crores, the following companies need to be excluded. In this regard, the ld. AR presented a table with the turnover details of the comparable companies :- Sl. No. Company name Turnover In INR Crores 1. Tata Elxsi Ltd. 781.85 2. Mindtree Ltd. 3,547.40 3. Persistent Systems Ltd. 1,242.50 4. Nihilent Technologies Ltd. 267.80 5. Aspire Systems (India) Pvt. Ltd. 230.81 6. Infosys Ltd. 47,300 7. Thirdware Solutions Ltd. 230.08 8. Cybage Software Pvt. Ltd. 622.26 9. R S Software (India) Ltd. 345.51 10. Larsen & Toubro Infotech Ltd. 4,744.40 15. The ld. DR submitted that the application of upper turnover filter has been consistently held by the Tribunals and therefore ld DR did not raise any objection in this regard . We have heard the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in the case BORQS Software Solutions Pvt. Ltd., IT(TP)A No. 310/Bang/2021 dated 25.10.2021 has considered the issue of TPO failing to apply upper turnover filter and has excluded the following comparable companies on this ground. The relevant observation of the Hon'ble ITAT is as under: - “8. As far as Ground No. 8.7 is concerned, the relevant provisions of the Act in so far as comparability of international transaction with a IT(TP)A No.2577/Bang/2019 Page 9 of 27 transaction of similar nature entered into between unrelated parties, provides as follows: 10B . Determination of arm's length price under section 92C.—(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) to (d)........ (e)transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f)........ (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with IT(TP)A No.2577/Bang/2019 Page 10 of 27 an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 9. A reading of rule 10B(1)(e)(iii) of the Rules read with sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 10. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is IT(TP)A No.2577/Bang/2019 Page 11 of 27 found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: ♦ None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or ♦ Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 11. As far as comparability of companies listed as (a) to (g) in Grd.No.8.7 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs. 200 Crores and the Assessee's turnover is only Rs. 24,71,71,242/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs. 1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India (P.) Ltd. v. Dy. CIT [2017] 82 taxmann.com 167 wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. The Assessee has raised Grd.No.4 before the Tribunal challenging the aforesaid view of the DRP. IT(TP)A No.2577/Bang/2019 Page 12 of 27 12. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the Assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon’ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): “41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet’s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- “9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparable companies. This shows that there is a limit for the lower end for identifying the comparable companies. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various IT(TP)A No.2577/Bang/2019 Page 13 of 27 benches of the Tribunal, when companies which arc loss making are excluded from comparable companies, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study.” 42. The Assessee’s turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon’ble High Courts of Bombay and Delhi and both are nonjurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference.” 13. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted IT(TP)A No.2577/Bang/2019 Page 14 of 27 by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have IT(TP)A No.2577/Bang/2019 Page 15 of 27 to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 14. In view of the aforesaid decision, we hold that companies listed in Sl.No.(a) to (g) of Grd.No.8.7 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies.” 16. We notice that in the above decision the Tribunal has excluded the comparable companies based on the upper turnover filter of Rs.200 crores. In assessee’s case from the table submitted, it is evident that the turnover all 10 comparable companies is more than Rs.200 crores. Therefore respectfully following the aforesaid decision of the Tribunal, we hold that the companies having more than 200 crores turnover need to be excluded. We accordingly direct the TPO to exclude these companies while recomputing the ALP. 17. Through ground No.13, the assessee contended the rejection of additional comparable companies requested for inclusion during the course of TP assessment proceedings. Out of the list of comparable companies, the ld. AR during the course of hearing, pressed for IT(TP)A No.2577/Bang/2019 Page 16 of 27 inclusion of Akshay Software Technologies Lt., Evoke Technologies Ltd. and I2T2 India Ltd. The rest of the inclusions are not pressed and dismissed accordingly. 18. The TPO rejected the inclusion of Akshay Software on the ground that the company has incurred significant foreign branch expenditure. The DRP while rejecting the inclusion of Akshay Software has held that the company is engaged in professional services and procurement implementation and support of ERP products which involves personnel from professional domain and technology or software domain. Therefore, such services cannot be strictly said to be software services as non-software personnel may play a dominant role in the implementation of ERP. The company has described that it had rendered professional charges in Dubai indicate that it pertains to non- software services or it is also possible that it may be a mix of software services and professional services. As the segmental information is not available for the same, the DRP held that this company is not functionally comparable to the assessee and rejected the claim of the assessee for inclusion. 19. The ld AR submitted that the company is engaged in professional IT services and therefore comparable with the assessee. The ld. AR also submitted that there is no rationale for assuming a different model on account of incurring foreign branch expenditure to hold that the company is not functionally comparable. IT(TP)A No.2577/Bang/2019 Page 17 of 27 20. In this regard the ld. AR relied on the decision of the coordinate Bench of the Tribunal in the case of M/s. Cypress Semiconductor Technology India P. Ltd. IT(TP)A No. 2427/Bang/2019. 21. The ld DR supported the order of the lower authorities. 22. We have heard the rival submissions and perused the material on record. We notice that the coordinate Bench in Cypress Semiconductor Technology (supra) has considered the issue of inclusion of Akshay Software Technologies Ltd. and held that – “18. As far as ground No.4.9 raised by the assessee is concerned, in this ground, the assessee is seeking inclusion of Akshay Software Technologies Limited, celstream Technologies Limited,12T2 India Limited. in the list of comparables. “(a) Akshay Software Technologies Limited: (i) This company was selected by the assessee and came to be rejected by the TPO for the reasons that (i) the company is engaged in providing professional services, procurement. installation, implementation, support and maintenance of ERP products and services: and (ii) it incurred significant foreign branch expenses indicating that the operating model was different from that of the Appellant. and the DRP upheld its exclusion. (ii) It was submitted that firstly, perusal of the functions of the company listed in its annual report shows that the company is functionally similar to the assessee. The website of the company states that the company is engaged in rendering IT services; which are in the nature of MVO and caters to the needs of corporate bodies, banks and financial institutions. Further, it was submitted that the income from commission and sale of software licenses constitutes a meagre 0.5% of the total revenue and therefore the same would not have any impact on the profitability of the company. It was submitted that the exclusion of this company on the basis that it incurs foreign branch expenses indicating that the business model adopted by it is different IT(TP)A No.2577/Bang/2019 Page 18 of 27 is erroneous as the TPO did not apply the on-site development filter. Therefore the action of the DRP is arbitrarily rejecting Akshay on this count, without first applying the filter at a uniform threshold across all companies is erroneous and unsustainable. In any event, it was submitted that there is no difference in the business model adopted by the company and the Appellant, and without prejudice, it was submitted that the difference if at all, would not have any impact on the profitability of the company. Reliance was placed on the decision of this Hon’ble Tribunal in EMC Software and Services India Pvt. Ltd. v. JCIT [2020] 115 taxmann_com 293 (Bangalore —Trib). (iii) We have considered the submissions and we find that in the decision cited by the learned Counsel for the assessee, after noticing the same submissions as detailed above, the Tribunal remanded the question of comparability of this company to AO/TPO for fresh examination. Following the said order, we remand the issue to the AO/TPO to consider the comparability of this company afresh as directed by the Tribunal in the said decision. 23. Respectfully following the above decision of the Tribunal we remit the issue of to the AO/TPO to consider the comparability of this company afresh while recomputing the ALP. 24. With regard to inclusion of I2T2 the TPO rejected the company by stating that no RPT information is available in the annual report of the company and therefore quantitative filters cannot be applied. The DRP upheld the decision of the TPO by stating that the annual report of the company do not disclose RPT which is a crucial information. 25. The ld AR submitted that the company is functionally comparable to the assessee and this fact is not being disputed by TPO and DRP. The ld. AR also submitted that if the annual report of the company does not mention about RPT, then the assessee cannot be held responsible to prove a fact relating a third party which may or IT(TP)A No.2577/Bang/2019 Page 19 of 27 may not exist. The Ld AR further submitted that this company is held to be comparable in the decision of the coordinate bench M/s. Cypress Semiconductor Technology (supra). 26. We heard the rival submissions. We notice that the in the case of M/s. Cypress Semiconductor Technology (supra), the coordinate bench of the Tribunal has held that - (c) I2T2 India Limited: (i) The companies came to be rejected by the TPO for the reason that information regarding its related party transactions was not available in the annual report. The DRP further upheld the exclusion. (ii) It was submitted that if there is no disclosure with respect to the RPT made in the annual report. the presumption out to be that there is no RPT transaction. Further, it was submitted that these companies render SWD services and are functionally comparable to the assessee. This company also passes all the filters applied by the TPO. It was submitted that in cases of similar placed companies. this company is included in the final list of comparables. Reliance in this regard was placed on the decision of this Hon’ble Tribunal in the case of LG Soft India Pvt. Ltd. v. DOT (Order dated 28.05.2019 passed by this Hon'ble Tribunal in IT(TP)A No. 3122/Bang/20 I 8 for the assessment year 2014-15). (iii) We have considered the submission. We find that on identical submissions, this Tribunal in the case cited by the learned Counsel for assessee directed inclusion of 12T2 Company in the list of comparable companies with the following observations: "12. We find force in the contentions of the Ld A.R. If the Annual report of this company does not mention about Related Party transactions, then the assessee cannot be held responsible to prove a fact relating to a third party. which may or may not exist. We notice front the Auditors Report of I2T2 India Ltd that the auditor in para 5(b) of Annexure to the Auditors' report has mentioned as under:- IT(TP)A No.2577/Bang/2019 Page 20 of 27 "There are no transactions that are made at prices exceeding 14.5 lakhs in respect of any party who is covered under section 301 of the Act during the financial year." Hence, in the absence of any specific information, there is merit in the contentions of the assessee that the above said company might not have had related party transactions during the year under consideration. Accordingly we do not agree with the reasoning given by Ld DRP for excluding this company as a comparable. Accordingly we direct the AO/TPO to include this company." 20. Following the said decision, we direct inclusion of this company in the list of comparable companies.****** ” 27. Respectfully following the above decision of the Tribunal we direct the AO to include I2T2 India Limited as a comparable while recomputing the ALP. 28. The TPO rejected the inclusion of Evoke Technologies Ltd. on the basis that the financials of the company has also included the financials of the financial branch which is unaudited and therefore the data is unreliable. The DRP confirmed the decision of the TPO by stating that as per the geographical segment information, revenue from India was given to be 4783.42 lakhs and that the revenue from US was given to be 777.45 lakhs. Thus the export turnover constitutes only 16.25% of the total revenue and therefore cannot be considered as comparable. 29. We have considered the rival submissions and perused the material on record. We notice that the coordinate Bench in the case of Mindteck India Ltd. (supra) has considered the issue of inclusion of Evoke Technologies P. Ltd. and held that – IT(TP)A No.2577/Bang/2019 Page 21 of 27 “21. As far as the plea of the assessee for inclusion of Evoke Technologies Pvt. Ltd. is concerned, this company was rejected by the TPO on the ground that the financials of this company includes figures from outside branches which are unconnected. The DRP agreed with the view of the TPO. The learned Counsel for the assessee placed reliance on the decision of the ITAT, Hyderabad Bench in the case of Infor India P. Ltd. Vs. DCIT (2019) 109 taxmann.com 435 (Hyderabad – Tribunal ) wherein it was held that availability unaudited accounts cannot be the reason to reject the comparability of the company which satisfies all filters. Reliance was also placed on the decision of the ITAT, Bengaluru Bench in the case of Zynga Game Network India Pvt. Ltd. Vs. DCIT in IT(TP)A No.2573/Bang/2019, order dated 23.03.2021 for Assessment Year 2015-16 in which the comparability of this company was remanded to the TPO for fresh consideration. We are of the view that the comparability of this company has to be remanded to the TPO for fresh consideration in the light of the decision brought to our notice as above.” 30. Considering the facts being identical for the year under consideration, we respectfully follow the decision of the coordinate Bench and remit the issue to the TPO for consideration in the light of the decision stated above. 31. Through ground No.20, the assessee is contending the addition made on account of receipt of fixed assets received free of cost / on loan basis. The AO noticed from Note 9 of audited financials that the assessee has received assets free of cost amounting to Rs.1.23 crores and assets on loan basis amounting to Rs.1.7 crores as on 31.3.2015. The AO was of the view that since the assessee has received free of cost assets during the year and therefore provisions of section 28(iv) is attracted. The assessee made the following submissions before the AO:- “During the A.Y 2015-16, the company obtained certain assets from its Group Affiliates and third parties in relation to project assignment for IT(TP)A No.2577/Bang/2019 Page 22 of 27 testing, analyzing and validating the software developed at the premises of the company. These products are used to carry out the process of testing the software and are returned to the Group Affiliates and third parties upon the completion of the respective project. The company had received tangible assets amounting to INR 1,603,519 free of cost and INR 5,552,006 on loan basis during the AY 2015-16 towards testing, analyzing and validating of software. Further, where some of these assets become unusable at the end of the testing, the same will be discarded and not returned back. We have attached copy of invoices, import/ customs documents, STPI documents and re-export documents which demonstrate that these assets have been sent back to the Group Affiliates and the third parties. .............. Notwithstanding and without prejudice to our aforementioned grounds, we humbly submit that the assets being capital in nature cannot be taxed under section 28(iv) of the Act.” 32. The AO rejected the submissions of the assessee and proceeded to make addition by holding that – “4.3 The submission of the assessee has been carefully considered and after examination it is rejected for the following reasons: i. Section 28(iv) of the IT Act stipulates that the following income shall be chargeable to income tax under the head "Profit and Gains from Business or Profession." The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. ii. Clause (iv) of Section 28 makes "the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession" as income chargeable to income tax under the head "Profits and Gains from Business or Profession". Therefore, it is not the actual receipt of money, but the receipt of a benefit or perquisite, which has a monetary value, whether such benefit or perquisite is convertible into money or not, is covered by section 28(iv). IT(TP)A No.2577/Bang/2019 Page 23 of 27 iii. The assessee has received a benefit in the nature of receipt of tangible assets of Rs.71,55,525 (Rs.1,603,519 of free of cost asset and Rs.5,552,006 of assets on loan basis) during the AY 2015-16 which is arising from business of the assessee. iv. The receipt of assets free of cost would certainly tantamount to receipt of a benefit. Hence, in view if the above-mentioned reasons, benefit received by the company under section 28(iv) of the IT Act is Rs.71,55,525/- and the same is being added to income of the assessee. Reliance is placed on decision of Hon'ble High Court of Madras in the case of CIT Vs. Ramaniyam Home Pvt. Ltd. [2016] 384 ITR 530 (Madras) dated 22/04/2016.” 33. The DRP confirmed the addition by holding that – “18.1 Having considered the submissions, and on perusal of the details filed, we note that assets worth Rs.71.55 lakhs have been received free of cost during the year. Though it was claimed that the assets have been received on free of cost or on loan basis, the assessee failed to submit any documentation to understand the terms and conditions of such loan arrangement, if any. The invoices and relevant documents were not produced to substantiate that these assets were obtained on loan basis or free of cost, and from whom it was obtained. It was also claimed that the assets were obtained on loan basis for carrying out some tests and would be returned back. However, no evidence was placed on record to show that such assets have been returned back to the so-called lender. In the absence of documentation, we are unable to accept any of the pleas raised by the assessee. Hence, we concur with the reasoning of the AO that these are perquisites/benefits arising to the assessee arising the course of its business u/s 28(i)(iv) of the IT Act. The assessee raised a plea that as these assets are capital in nature, and it is not taxable u/s 28(i)(iv). We are unable to accept such a plea, as there is nothing on record to take a view that these assets were held as capital. A plain reading of Section 28(i)(iv) read with section 2(24) would show that there is no bar in receiving benefit/perquisite in the form of an asset. The requirement of the section 28(i)(iv) is that it should be a benefit or perquisite, whether convertible into money or not, which requirement is satisfied in the facts of the case. We also note that the ratio laid down by the Apex court decision in the case of CIT vs. TV Sundaram Iyengar & Sons (222 ITR 344) and the High Court's decisions in Solid Containers Ltd vs. DCIT (308 ITR 417), Logitronics Private Limited vs. CIT (333 IT(TP)A No.2577/Bang/2019 Page 24 of 27 ITR 386), would squarely apply to the facts of this case. Therefore, we are inclined to uphold the view of the Assessing officer and accordingly the impugned disallowance is upheld.” 34. Before us, the ld. AR reiterated the submissions made before the lower authorities. The ld. AR also brought to our notice that the issue is covered by the decision of coordinate Bench in assessee’s own case for AY 2014-15 (IT(TP)A No.3082/Bang/2018. 35. The ld DR also relied on the same decision in assessee’s own case and brought to our attention that the Hon’ble Tribunal has restricted the relief to the extent to which the assessee has been able to prove that the assets have been re-exported. The ld DR prayed for a similar direction for the year under consideration also. 36. We heard the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in assessee’s own case (supra) has considered a similar issue and held that– 5. Ground No.19 is in respect of addition made under section 28 (iv) of the Act by considering receipt of tangible asset for free of cost as on loan basis from group companies. Ld.Counsel filed written submission in support of his arguments advanced on the issue on 09/08/18. It has been submitted that assessee had received tangible assets worth Rs.32,20,147/- as free of cost towards testing, analysing and validating of software from its group entity is before it’s finalisation. It has been submitted that these assets are used for assessing the functioning of the software that is testing, analysing and validation, developed by assessee and is no way connected with income earning mechanism. He placed reliance upon a chart wherein the breakup IT(TP)A No.2577/Bang/2019 Page 25 of 27 of assets received free of cost has been tabulated. It has been submitted that it is Marvell Semiconductor Inc has given the assets on loan basis. Ld. counsel submitted that assets were received only for testing analysing and validation of software and they had no relation to the core business of assessee. He placed reliance upon the decision of Hon’ble Supreme Court in case of Excel industries reported in 358 ITR 295, wherein following CIT vs shoes Kariwala pass an company reported in 46 ITR 114, Hon’ble Supreme Court laid out following principles: • there must be an income on which tax is to be levied an income tax is a tax on income • tax cannot be levied on hypothetical/notional income. 5.1 Ld.Counsel thus submitted that for section 28 (iv) to be applicable income should accrue to assessee. He submitted that in the present facts of the case, machines were taken on loan only for purposes of carrying out testing analysing and validating of the software. On the contrary Ld.CIT DR submitted that in the activity pertaining to the business without any cost to the benefit. Therefore section 28 (iv) has been rightly applied by the Ld.AO. He further brought attention to the assessment order wherein apart from assets being taken on loan from its sister concern, tangible asset has been received from another company called Rohde & Schwaez Gmbh & Co.KG Germany. It has been submitted by Ld.CIT DR that value of the tangible asset taken on loan from this company was valued at Rs.70,22,257/-. Further Ld.CIT DR submitted that certain equipment have been re-exported by assessee for which details have been submitted whereas for some others no details are available to establish that these equipments were re-exported. 5.2 We have perused the submissions advanced by both sides in the light of the records placed before us. We have also perused the submissions filed by assessee on 09/08/19. 5.3 Assessee has filed import certificate of capital goods from Rohde & Schwaez Gmbh & Co.KG Germany valued at Rs.70,22,257/- and re- IT(TP)A No.2577/Bang/2019 Page 26 of 27 export of the same on 25/04/16. On a query being raised by this Bench, Ld.Counsel could not provide any details of re-export of equipments taken on loan from Marvell Semiconductor Inc., USA; Marvell Israel Ltd, Marvell Canada Corporation, Canada; Marvell Asia PTE Ltd, Singapore, being parent company of assessee. Unless assesse is able to establish that equipments so received on loan from its AE’s have been re-exported, by way of cogent materials on record, argument advanced by Ld.Counsel cannot be accepted. For section 28 (iv) to be applicable income taxable must be referable to benefit or perquisite arising from business. Assessee is unable to establish that equipments taken on loan from its parent company has been re-exported back and therefore, has been unable to rebut to observation of Ld. AO/TPO that those equipments were retained by assessee for purposes of its business. Under such circumstances we are unable to hold that no benefit accrued to assessee in the form of equipment that have been received on loan free of cost. We are therefore inclined to grant relief to assessee only to the extent of Rs.70,22,257/- being equipments re-exported to Rohde & Schwaez Gmbh & Co.KG Germany and confirm balance addition being value of equipments taken on loan free of cost from its associated enterprises. 37. We also notice that the DRP has upheld the addition mainly on the ground that the assessee has not produced invoices and other relevant documents to substantiate that the assets have been received on loan basis / free of cost and also no evidence was produced that the assets have been returned to the lender. We further notice that with regard to assets received from Quantum data International, the assessee had submitted before the DRP that the customs has wrongly recorded the assets received as replacement for defective assets imported earlier as assets received free of cost. This fact has not been considered or verified by the DRP. In view of this discussion, we remit the issue back to the AO to verify the invoices and other relevant documents that IT(TP)A No.2577/Bang/2019 Page 27 of 27 would substantiate the assessee’s claim and decide the issue in accordance with law. The AO is directed to keep in mind the decision rendered by the coordinate bench of the Tribunal in assessee’s own case while deciding the issue. The assessee is directed to produce all the relevant documents and cooperate with the proceedings. It is ordered accordingly. This ground is allowed for statistical purposes. 38. In the result, the appeal by the assessee is partly allowed. Pronounced in the open court on this 21 st day of October, 2022.. Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 21st October, 2022. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.