AMD Research & Development Centre India Private Limited, Hyd, Hyderabad V. DCIT, Circle-1(1), Hyderabad, Hyderabad

ITA 275/HYD/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98694 (ITAT-HYDERABAD)
• Duration Of Justice: 8 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 09-09-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 19-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T VENKAT REDDY
• Assessee Lawyers: RAGHUNATHAN S
• Keywords: Depreciation; Transfer pricing; International transaction; Retrospective amendment
• Section: 92C; 143(3); 92D; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 275/HYD/2015 ASSESSMENT YEAR: 2010-11 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD., HYDERABAD. PAN AABCC 3447 R VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 1(1), HYDERABAD. (APPELLANT) (RESPONDENT) S.A. NO. 22/HYD/2015 (IN ITA NO. 275/HYD/2015 ASSESSMENT YEAR: 2010-11) AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD., HYDERABAD. PAN AABCC 3447 R VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 1(1), HYDERABAD. (APPELLANT) (RESPONDENT) ITA NO. 242/HYD/2015 ASSESSMENT YEAR: 2010-11 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 1(1), HYDERABAD. VS. AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD., HYDERABAD. PAN AABCC 3447 R (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAGHUNATHAN S REVENUE BY : SHRI T. VENKAT REDDY DATE OF HEARING 09-09-2015 DATE OF PRONOUNCEMENT 20-11-2015 O R D E R PER S. RIFAUR RAHMAN, A.M.: THE APPEAL BY REVENUE AND CROSS APPEAL BY ASSESSEE ARE AGAINST THE ASSESSMENT ORDER PASSED U/S 143(3) READ WITH SECTION 144C(5) OF THE IT ACT, 1961. THE APPEALS PERTAIN TO AY 2010-11. 2 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. 2. BRIEFLY THE FACTS OF THE CASE ARE, AMD RESEARCH & DEVELOPMENT INDIA PVT. LTD., IS A COMPANY ENGAGED IN THE BUSINE SS OF RESEARCH, DESIGN AND DEVELOPMENT OF APPLICATION SOLUTIONS FOR SEMI CONDUCTOR PRODUCTS. ASSESSEE IS A SUBSIDIARY OF ATI CANADA W HICH IS A GROUP COMPANY OF AMD US. AMD US ACQUIRED ATI CANADA IN 20 06, PURSUANT TO WHICH ATI TECHNOLOGIES INDIA PRIVATE LI MITED (ATI TECHNOLOGIES') CHANGED ITS NAME TO AMD RESEARCH & D EVELOPMENT CENTER INDIA PRIVATE LIMITED ('AMD R&D'). AMD R&D I S ENGAGED IN RENDERING OF RESEARCH, DESIGN AND DEVELOPMENT SERVI CES TO ATL CANADA IN CONNECTION WITH THE DEVELOPMENT OF CONSUM ER TECHNOLOGIES. ATI TECHNOLOGIES HAS ENTERED INTO RES EARCH AND DEVELOPMENT AGREEMENT WITH ATI CANADA AND ATI BARBA DOS DATED APRIL 2005. 2.2 AMD GROUP WAS FOUNDED ON 1 ST MAY 1969 BY A GROUP OF FORMER FAIRCHILD SEMICONDUCTOR EXECUTIVES. THE AMD GROUP B EGAN AS A MANUFACTURER OF LOGIC CHIPS, AND ENTERED THE RAM CH IP BUSINESS IN 1975. AMD US IS A PART OF THE AMD GROUP, BASED OUT OF SUNNYVALE, CALIFORNIA, UNITED STATES. AMD US DEVELOPS COMPUTER PROCESSORS AND RELATED TECHNOLOGIES FOR COMMERCIAL AND CONSUMER MA RKETS. THE MAIN PRODUCTS OF AMD US INCLUDES MICROPROCESSORS, MOTHER BOARD CHIPSETS, EMBEDDED PROCESSORS AND GRAPHICS PROCESSORS FOR SER VERS, WORKSTATIONS AND PERSONAL COMPUTERS, AND PROCESSOR TECHNOLOGIES FOR HANDHELD DEVICES, DIGITAL TELEVISION, AND GAME CONS OLES. SOME OF THE PLATFORMS AND TECHNOLOGIES DEVELOPED BY AMD GROUP A RE - AMD CHIPSETS: AMD LIVE; AMD QUAD FX PLATFORM; COMMERCIA L PLATFORM; DESKTOP PLATFORMS; EMBEDDED SYSTEMS; FLASH TECHNOLO GY AND MOBILE PLATFORMS. 2.3. DURING THE RELEVANT FY, ASSESSEE AS PER 3CEB R EPORT, DISCLOSED THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH IT AE S: 1. ATI TECHNOLOGY ULC CANADA - RS. 102,66,46,782 2. ADVANCED MICRO DEVICES INC. - RS. 12,15,09,54 0 3 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. 2.4 FINANCIALS OF THE ASSESSEE DURING THE FY 2009-1 0: 1. OPERATING REVENUE RS. 114,81,56,322 2. OPERATING COST RS. 103,36,55,531 3. OPERATING PROFIT RS. 11,45,00,791 4. OP/OR (%) 9.97% 5. OP/OC (%) 11.07% 2.5 ASSESSEE HAS TAKEN 16 COMPARABLES OUT OF WHICH THE TRANSFER PRICING OFFICER (TPO) HAS REJECTED 9 AND ACCEPTED S IX COMPANIES AS COMPARABLES. 2.6 THE FINAL COMPARABLES SELECTED BY TPO WITH THEI R OP TO OC ARE AS UNDER: S.NO. NAME OF THE COMPARABLE COMPANY OP/OC 1 AVANI CIMCON TECHNOLOGIES LTD. 3.39 2 CAT TECHNOLOGIES LTD. 13.04 3 COMP-U-LEARN TECH INDIA LTD. 19.96 4 E-INFOCHIPS BANGALORE LTD. 72.32 5 EVOK TECH 18.61 6 E-ZEST SOLUTIONS LTD. 22.1 7 INFOSYS TECHNOLOGIES LTD. 45.44 8 KALS INFORMATION SYSTEMS LTD. (SEG) 22.05 9 KULIZA TECH. 25.92 10 L&T INFOTECH LTD. 19.97 11 MINDTREE LTD. (SEG.) 20.47 12 PERSISTENT SYSTEMS & SOLUTIONS LTD. (MERGED) 11.37 13 RS SOFTWARE (INDIA) LTD. 9.88 14 SASKEN COMMUNICATION TECHNOLOGIES LTD. 25.23 15 TATA ELXSI LTD. (SEG.) 17.24 16 THINKSOFT GLOBAL SERVICES LTD. 11.22 17 ZYLOG SYSTEMS LTD. 18.62 18 PERSISTENT SYSTEMS LTD. 31.57 TOTAL 408.4 ARITHMETIC MEAN 22.69 2.7 AFTER COMPARING THE AVERAGE MARGINS OF THE COMP ARABLES TO THE FINANCIALS OF THE ASSESSEE, THE TPO COMPUTED THE AD JUSTED ARMS LENGTH MARGIN AS UNDER: ARMS LENGTH MARGIN 22.69% LESS: WCA (-)1.52% ADJUSTED ARMS LENGTH MARGIN 24.21% 4 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. 2.8 ACCORDINGLY, THE TPO WHO PASSED AN ORDER U/S 92 CA(3) OF THE ACT ON 13/01/2014, RECOMMENDED ADJUSTMENT OF RS. 13 ,78,14,524, WHICH WAS LATER RECTIFIED U/S 154 TO RS. 13,46,10,1 92 IN RESPECT OF INTERNATIONAL TRANSACTIONS. THE SAME WAS INCORPORA TED BY THE AO IN THE DRAFT ASSESSMENT ORDER. ASSESSEE PREFERRED A PE TITION BEFORE THE DRP RAISING VARIOUS OBJECTIONS. 3. THE DRP HAS GIVEN PARTIAL RELIEF TO ASSESSEE AS UNDER: 3.1 AS FAR AS THE COMPARABLE COMPANIES ARE CONCERNE D, DRP CONSIDERED THE OBJECTIONS OF ASSESSEE AND FOUND THA T THE TPO WAS NOT JUSTIFIED IN SELECTING COMPANIES LIKE INFOSYS A ND L&T INFOTECH AS COMPARABLES AS THE TURNOVER OF THESE COMPANIES EXCE EDED MORE THAN RS. 1000 CRORES. ACCORDINGLY, TPO WAS DIRECTED TO E XCLUDE THESE TWO COMPANIES FROM THE LIST OF COMPARABLES FOR THE PURP OSE OF CALCULATING ALP OF INTERNATIONAL TRANSACTIONS. SIMILARLY, DRP HAS ALSO EXCLUDED M/S MIND TREE, AS THIS COMPANY HAD EXTRAORDINARY EV ENTS LIKE MERGERS AND ACQUISITIONS DURING THE YEAR. BY CONSID ERING THE VARIOUS ORDERS OF ITAT, DRP DIRECTED TPO TO EXCLUDE SUCH CO MPANIES WHICH HAD EXTRAORDINARY EVENTS LIKE MERGERS AND ACQUISITI ONS. ACCORDINGLY, TPO/AO WAS DIRECTED TO EXCLUDE THE SAID THREE COMPA NIES FROM THE LIST OF COMPARABLES FINALLY SELECTED BY TPO. 3.2 DRP CONSIDERED THE SUBMISSIONS OF ASSESSEE AS A GAINST VARIABLE COST OF DEPRECIATION AMONG VARIOUS COMPARA BLE COMPANIES VIS--VIS THE ASSESSEE. SINCE, ASSESSEE ESTIMATED T HE LIFE SPAN OF THE ASSETS TO 3 YEARS AND 5 YEARS, DEPRECIATION COST R ISEN VERY HIGH WHEREAS IN THE COMPARABLE CASES, IT IS VERY LESS AN D TOTAL AVERAGE COMES TO 5.18% WHEREAS THE PERCENTAGE OF DEPRECIATI ON TO THE TOTAL COST IN THE ASSESSEE CAME TO 11.35%. DRP HAS ACCEPT ED ASSESSEES CONTENTION BY CONSIDERING THE DECISIONS OF COORDIN ATE BENCHES AT HYDERABAD, WHICH ARE LISTED BELOW: 1. M/S BA CONTINUUM INDIA PVT. LTD. 2. MARKET TOOLS RESEARCH PVT. LTD. 5 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. 3. M/S QUALCORE LOGIC LTD. 3.3 AO HAD GIVEN EFFECT TO THE ABOVE DIRECTIONS OF DRP AND ARRIVED AT TP ADJUSTMENT OF RS. 5,72,74,207, WHICH WAS ASSE SSED TO TAX. 4. AGGRIEVED WITH THE ORDER OF DRP, THE REVENUE IS IN APPEAL BEFORE US. 5. GROUNDS RAISED BY REVENUE ARE AS FOLLOWS: 1. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE ORP IS NOT JUSTIFIED IN DIRECTING THE A.O TO DELETE TWO OF TH E COMPARABLE COMPANIES WITHOUT PROVING HOW THE FUNCTIONAL PROFILE OF THE SE COMPANIES DIFFER WITH THE FUNCTIONAL PROFILE OF THE COMPARABLE COMPANIES . 2. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP IS NOT JUSTIFIED IN DIRECTING THE A.O TO DELETE LARSEN & TOURBO INFOTECH LTD COMPANIES ON THE GROUND OF HAVING HIGH TURNOVER WH ICH IS CONTRARY TO RULE 10B(2) WHICH PRESCRIBES COMPARABILITY OF INTE RNATIONAL TRANSACTIONS WITH UNCONTROLLED TRANSACTIONS WITH REFERENCE TO F UNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED. 3. (I) IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BIE DRP WAS NOT JUSTIFIED IN REJECTING M/S. MINDTREE LTD ON TH E MERE ASSUMPTION THAT ACQUISITION/MERGER HAS AN IMPACT WITHOUT PROVING THAT IT HAS REALLY IMPACTED THE PROFIT MARGIN AND HOW THE COMPANY BE CAME FUNCTIONALLY DIFFERENT. (II) IN THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE HON'BLE ORP WAS NOT JUSTIFIED IN REJECTING M/S MINDTREE LTD STATIN G THAT ACQUISITION/MERGER IS AN EXTRA-ORDINARY EVENT IGNORING THE FACT THAT THE COMPANY WAS CONSIDERED AT SEGMENTAL LEVEL AND EVEN IF THE SAME IS CONSIDERED TO BE TRUE, STILL THE MERGER/ACQUISITION DOES NOT INFLUE NCE SEGMENTAL RESULTS. 4. (I) IN THE FACTS AND ON THE CIRCUMSTANCES OF TH E CASE, THE HON'BLE DRP WAS NOT JUSTIFIED IN DIRECTING THE TPO TO CONSIDER PBIT/COST AS THE PLI IGNORING THE FACT THAT SOFTWARE INDUSTRY BEING HUM AN INTENSIVE, THE IMPACT OF DEPRECIATION IS INSIGNIFICANT. (II) IN THE FACTS AND ON THE CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP WAS NOT JUSTIFIED IN DIRECTING THE TPO TO CONSIDER PBI T/COST AS THE PLI WITHOUT PROVING HOW THE DEPRECIATION INFLUENCED THE MARGIN S WHEN THE TAXPAYER IS WORKING ON COST PLUS MODEL. (III) IN THE FACTS AND ON THE CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP WAS NOT JUSTIFIED IN DIRECTING THE TPO TO CONSIDER PBIT/COST AS THE PLI WITHOUT APPRECIATING THE FACT THAT TNMM IS LESS SE NSITIVE TO THE COST DIFFERENCES AND THEREFORE NO SUCH ADJUSTMENTS ARE WARRANTED. (IV) IN THE FACTS AND ON THE CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP WAS NOT JUSTIFIED IN DIRECTING THE TPO TO CONSIDER PBIT/COST AS THE PLI WITHOUT APPRECIATING THE FACT THAT ELIMINATING TH E DEPRECIATION ON ASSETS LIKE BUILDING FROM THE COST WITHOUT ELIMINA TING THE ALTERNATIVE EXPENDITURE LIKE RENT PAID FOR THE BUILDING TAKEN ON LEASE FROM THE COST WOULD BE PREJUDICIAL. 6 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. 6. IN SHORT, REVENUE IS IN APPEAL BEFORE US AGAINST ALLOWING THE DEPRECIATION TO BE PART OF VARIABLE COST AMONG VARI OUS COMPARABLE COMPANIES AND DIRECTION OF DRP TO AO FOR EXCLUDING INFOSYS, L&T AND MINDTREE AS COMPARABLES. 7. LD. DR SUBMITTED THAT DRP IS NOT CORRECT IN EXCL UDING THREE COMPANIES I.E. L&T, INFOSYS AND MINDTREE AS THE SAM E ARE FUNCTIONALLY COMPARABLE. 8. LD. AR SUBMITTED THAT USE OF HIGHER TURNOVER FIL TER HAS AN IMPACT ON THE COMPARABLES. HE RELIED ON THE FOLLOW ING CASE LAWS: 1. E-GAIN COMMUNICATION PVT. LTD. (ITAT PUNE) 2. QUARK SYSTEMS PVT. LTD., (ITAT CHANDIGARH) 3. AGINITY INDIA TECHNOLOGIES (ITAT DELHI) 4. DELOITTEE CONSULTING P. LTD. (ITAT HYDERABAD 5. GENESYS INTEGRATING SYSTEMS IP LTD., (ITAT BANG ALORE) 9. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD AS WELL AS THE DECISIONS CITED BY LD. AR. 9.1 THE ISSUE OF CAPPING OF UPPER FILTER HAS BEEN D ECIDED IN FAVOUR OF THE ASSESSEE IN VARIOUS CASE LAWS. FOR THE RECOR D, WE ARE QUOTING BELOW JUDGMENT IN THE CASE OF 24/7 CUSTOMER.COM (P) LTD. VS. DCIT, 158 TTJ (BLORE)94, THE TRIBUNAL VIDE PARA 14.3 HAS HELD AS UNDER: 14.3 WE HAVE HEARD BOTH PARTIES, CAREFULLY CONSIDER ED THE SUBMISSIONS MADE, JUDICIAL DECISION RELIED ON AND THE MATERIAL ON RECORD. THE TRIBUNAL IN THE CASE OF GENYSYS INTEGRATING SYSTEMS (INDIA) PV T. LTD. (SUPRA) HELD THAT ONLY COMPANIES WITHIN THE TURNOVER RANGE OFRS.1 CR ORE TO RS.200 CRORES SHOULD BE TAKEN INTO CONSIDERATION FOR THE T.P.STU DY. WE ARE OF THE CONSIDERED VIEW THAT THE CITED CASE SQUARELY APPLI ES TO THE ASSESSEE'S CASE AS THE TURNOVER OF THE ASSESSEE BEING APPROXIMATEL Y RS. 66 CRORES FALLS WITHIN THE RANGE OF RS.1 CRORE TO RS.200 CRORES. T HEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF GENYSYS INTEGRATING SYSTEMS (INDIA) PVT LTD. (SUPR A), WE DIRECT THE ASSESSING OFFICER / TPO THAT ONLY THOSE COMPANIES HAVING A TURNOVER OFRS.1 CRORE TO RS.200 CRORES BE TAKEN AS COMPARABLE COMP ANIES AND TO CONSEQUENTLY EXCLUDE WIPRO BPO LTD WHICH HAS A TUR NOVER OF RS.322 CRORES IN THE RELEVANT PERIOD. 9.2 IN THE RESULT, REVENUE GROUNDS 1, 2 & 3 ARE DIS MISSED. 7 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. 9.3 AS REGARDS GROUND NO. 4, LD. AR SUBMITTED THAT DEPRECIATION ADOPTED BY ASSESSEE WAS AT HIGHER SIDE DUE TO THE FACT THAT T HE ESTIMATED LIFE OF THE ASSETS ARE 3 YEARS AND 5 YEARS. THE COST OF DEPRECIATION I S HIGH COMPARED TO OTHER COMPARABLE COMPANIES. HE SUBMITTED THAT THE DEPRECI ATION SHALL BE EXCLUDED FROM THE VARIABLE COST OF ALL THE COMPARABLE COMPAN IES INCLUDING ASSESSEE TO DETERMINE THE ALP. HE RELIED ON THE FOLLOWING CASE LAWS: 1. BA CONTINUUM INDIA PVT. LTD., TS-490-HC-2014(TE LANDAP)-TP 2. BA CONTINUUM INDIA PVT. LTD., [2013] 40 TAXMANN .COM 311 (HYD.) 3. MARKET TOOLS RESEARCH INDIA PVT. LTD., [2013] 3 2 TAXMANN.COM 358 9.4 LD. AR ALSO SUBMITTED THE COMPARATIVE TABLES ON DEPRECIATION AS BELOW: TABLE SHOWING PERCENTAGE OF DEPRECIATION TO THE TOT AL EXPENDITURE OF THE COMPARABLE COMPANIES AND THE APPELLANT SL.NO. PARTICULARS DEPRECIATION INR IN CRORES TOTAL EXPENDITURE EXCLUDING DEPRECIATION INR IN CRORES PERCENTAGE OF DEPRECIATION TO TOTAL EXPENDITURE (A) (B) (C=A/B) AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. 11.59 90.54 12.80% COMPARABLE COMPANIES 1. AVANI CIMCON TECHNOLOGIES LTD. 0.16 2.74 5.73% 2. CAT TECHNOLOGIES LTD. 0.92 7.21 12.80% 3. COM-U-LEARN TECH INDIA LTD. 0.93 11.93 7.77% 4. E-INFOCHIPS BANGALORE 0.79 24.98 3.15% 5. EVOKE TECHNOLOGIES PVT. LTD. 0.15 9.16 1.68% 6. E-ZEST SOLUTIONS LTD. 0.38 8.48 4.50% 7. KALS INFORMATION SYSTEMS LTD. (SEG.) 0.10 1.79 5.51% 8. KULIZA TECH 0.22 7.87 2.78% 9. PERSISTENT SYSTEMS 32.50 386.97 8.40% 10. PERSISTENT SYSTEMS & SOLUTIONS LTD. (MERGED) 0.24 5.99 3.98% 11 RS SOFTWARE (INDIA) LTD. 7.12 147.28 4.83% 12 SASKEN COMMUNICATION TECHNOLOGIES LTD. 21.29 334.89 6.36% 13 TATA ELXSI LTD. (SEGMENTAL) 14.85 288.11 5.15% 8 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. 14 THINKSOFT GLOBAL SERVICES LTD. 1.28 67.04 1.91% 15 ZYLOG SYSTEMS LTD. 28.42 660.65 4.30% AVERAGE DEPRECATION RATE 5.26% TABLE SHOWING DEPRECIATION POLICY OF THE COMPARABLE COMPANIES AND THE APPELLANT SL.NO. PARTICULARS REMARKS A1E AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. DEPRECIATION AT AN ACCELERATED RATE I.E. HIGHER THAN THE RATE PRESCRIBED AS PER SCHEDULE XIV TO THE COMPANIES ACT, 1956. 1. AVANI CIMCON TECHNOLOGIES LTD. DEPRECIATION IS CHARGED UNDER WRITTEN DOWN METHOD. HENCE NOT SIMILAR. 2. CAT TECHNOLOGIES LTD. CHARGING OF DEPRECIATION IS DIFFERENT FROM THE ASSESSEE. HENCE NOT SIMILAR. 3. COM-U-LEARN TECH INDIA LTD. DEPRECIATION IS CHARGED UNDER WRITTEN DOWN METHOD. HENCE NOT SIMILAR. 4. E-INFOCHIPS BANGALORE DEPRECIATION IS CHARGED UNDER WRITTEN DOWN METHOD. HENCE NOT SIMILAR. 5. EVOKE TECHNOLOGIES PVT. LTD. DEPRECIATION IS CHARGED UNDER WRITTEN DOWN METHOD. HENCE NOT SIMILAR. 6. E-ZEST SOLUTIONS LTD. DEPRECIATION IS CHARGED UNDER WRITTEN DOWN METHOD. HENCE NOT SIMILAR. 7. KALS INFORMATION SYSTEMS LTD. (SEG.) DEPRECIATION IS CHARGED UNDER WRITTEN DOWN METHOD. HENCE NOT SIMILAR. 8. KULIZA TECHNOLOGIES PVT. LTD. CHARGING OF DEPRECIATION IS DIFFERENT FROM THE ASSESSEE. HENCE NOT SIMILAR. 9. PERSISTENT SYSTEMS DEPRECIATION POLICY IS SIMILAR. HOWEVER THE RATES IN RESPECT OF CERTAIN ASSETS ARE VARYING FORM THAT OF AMD. 10. PERSISTENT SYSTEMS & SOLUTIONS LTD. (MERGED) DEPRECIATION IS AT LOWER RATES. HENCE NOT SIMILAR. 11 RS SOFTWARE (INDIA) LTD. RATEAS AS PER SCHEDULE XIV TO THE COMPANIES ACT, 1956 (EXCEPT PLANT & MACHINERY IS DEPRECIATED @ 33.33%). HENCE NOT SIMILAR. 12 SASKEN COMMUNICATION TECHNOLOGIES LTD. DEPRECIATION POLICY IS SIMILAR. HOWEVER THE RATES IN RESPECT OF CERTAIN ASSETS ARE VARYING FORM THAT OF AMD. 9 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. 13 TATA ELXSI LTD. (SEGMENTAL) RATEAS AS PER SCHEDULE XIV TO THE COMPANIES ACT, 1956. HENCE NOT SIMILAR. 14 THINKSOFT GLOBAL SERVICES LTD. USEFUL LIFE DIFFERENT IN CERTAIN ASSETS. HENCE NOT SIMILAR. 15 ZYLOG SYSTEMS LTD. DEPRECIATION IS CHARGED UNDER WRITTEN DOWN METHOD. HENCE NOT SIMILAR. 9.5 IN OUR CONSIDERED VIEW, THE METHOD OF DEPRECIAT ION ADOPTED BY THE VARIOUS COMPARABLE COMPANIES HAS AN IMPACT ON T HE OPERATING RESULT OF THE RESPECTIVE COMPARABLE COMPANIES, WHIC H IS HIGHLIGHTED IN THE ABOVE CHARTS. THE ASSESSEE COMPANYS PERCENTAGE OF DEPRECIATION TO TOTAL EXPENDITURE IS 12.80% WHEREAS THE MEAN OF THE COMPARABLE COMPANIES ARE 5.26%. WE NOTICE, THERE IS CONSIDERABLE IMPACT ON THE OPERATING RESULT. HENCE, WE AGREE WIT H THE DRP THAT THE DEPRECIATION SHOULD BE CONSIDERED FOR EVALUATING TH E OPERATING RESULTS OF THE COMPARABLES. 9.6 IN THE RESULT, REVENUE GROUND NO. 4 IS DISMISSE D. 10. IN THE RESULT, THE REVENUE APPEAL IS DISMISSED. 11. NOW WE DEAL WITH THE ASSESSEES APPEAL. 12. AGGRIEVED WITH THE ORDER OF AO IN ARRIVING TP A DJUSTMENT AT RS. 5,72,74,207 WITHOUT GIVING OPPORTUNITY TO ASSESSEE FOR SUCH TP ADJUSTMENT AND FINALIZING THE ASSESSMENT ORDER, ASS ESSEE IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN CONTRARY TO LAW, THE FINAL ASSESSMENT ORDER ('THE ORDER') ISSU ED UNDER SECTION 143(3) READ WITH SECTION ('R.W.S.') 144C OF THE I NCOME-TAX ACT, 1961 ('THE ACT') BY LEARNED DEPUTY COMMISSIONER OF INCOME-TA X, CIRCLE 1(1), HYDERABAD ('LD. AO') DATED 19 JANUARY 2015 IS BAD ON FACTS AND IN LAW; VOID-AB-INITIO, INFRUCTUOUS AND IS LIABLE TO BE QUASHED AS THE SAID ORDER IS IN VIOLATION OF SECTION 144C(10) OF THE ACT, IN SO FAR, AS IT IS CONTRADICTORY TO AND IGNORANT OF THE DIRECTIONS IS SUED BY THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP'). 10 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN CONTRARY TO LAW, THE LD. AO ERRED IN MAKING TRANSFER PRICING ('TP') ADJUSTMENT OF RS. 5,72,74,207,THE ORDER OF THE LD. AO IS ERRONEOUS TO THE EXTENT OF NOT INCORPORATING THE BINDING DIRECTIONS OF THE HON'B LE DRP WHILE FINALIZING THE ORDER UNDER SECTION 143(3) R.W.S. 144C OF THE ACT. 3 WITHOUT PREJUDICE TO GROUND NO. 1 AND 2, THE LD. AO / LEARNED TRANSFER PRICING OFFICER ('LD. TPO') ERRED ON FACT S AND CIRCUMSTANCES OF THE CASE BY NOT PROVIDING THE WORKINGS FOR ARRIVI NG THE ARM'S LENGTH PRICE ('ALP') COMPUTED BY EXCLUDING THE DEPRECIAT ION COST, AS DIRECTED BY THE HON'BLE DRP AND THEREBY RAISING I NFRUCTUOUS DEMAND IN THE ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C . 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN CONTRARY TO LAW, THE LD. AO / LD. TPO ERRED IN NOT GRANTING TH E BENEFIT OF VARIATION OF 5 PERCENT WHILE DETERMINING THE ARM'S LENGTH P RICE TO THE APPELLANT AS PER THE PROVISO TO SECTION 92C(2) OF THE ACT. 5 THE LD. AO HAS GROSSLY ERRED ON FACTS AND IN LAW BY INITIATING PENALTY U/S. 271 (1 )(C) OF THE ACT MECHANICALLY A ND WITHOUT RECORDING ANY SATISFACTION FOR ITS INITIATION. 6 WITHOUT PREJUDICE TO GROUND NO. 1 TO 5, THE APPE LLANT RAISES THE FOLLOWING GROUNDS OF APPEAL: 6.1 THE LD. AO / LD. TPO ERRED AND THE HON'BLE ORP FURTHER ERRED IN UPHOLDING THE ORDER OF THE LD. AO / LD. TPO IN REJ ECTING THE DETAILED AND METHODICAL ECONOMIC ANALYSIS UNDERTAKEN BY TH E APPELLANT WITHOUT PROVIDING ANY COGENT REASONS FOR THE SAME AND WITHOUT APPRECIATING THE FACT THAT THE TP DOCUMENTATION A ND ANALYSIS MADE BY THE APPELLANT, WAS IN FACT, IS IN COMPLIANCE WITH THE PROVISIONS OF SECTION 92C AND 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 (THE RULES') AND THEREBY ERRED IN PROPOSING TP ADJUSTMENT AMOUNTING TO INR 13,46,10,192 UNDER SECTION 92CA ( 3) OF THE ACT, WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS TOWARDS PROVIDING IT SERVICES TO ITS ASSOCIATED ENTERPRISES. 6.2 THE LD. AO / LD. TPO ERRED AND THE HON'BLE ORP FURTHER ERRED IN UPHOLDING THE ORDER OF THE LD. AO / LD. TPO IN CA LCULATING THE PROFIT MARGIN (NET COST PLUS) OF THE APPELLANT BY INCLUDI NG CERTAIN NON- OPERATING EXPENSES SUCH AS LOSS ON SALE OF ASSETS AND SUB-LEASE EXPENSES, TREATING THE SAME TO BE IN THE NATURE OF OPERATING EXPENDITURE. 6.3 THE LD. AO / LD. TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN UPHOLDING THE ORDER OF THE LD. AO / LD. TPO IN CO NDUCTING THE FRESH SEARCH AND THE SAME IS LIABLE TO BE QUASHED AS THE COMPANIES SELECTED WERE BASED ON ARBITRARY FILTERS. 6.4 THE LD. AO / LD. TPO AND THE HON'BLE DRP ERRED ON FACTS IN ARBITRARILY ACCEPTING THE FOLLOWING COMPARABLE COM PANIES THAT WERE FUNCTIONALLY NOT COMPARABLE, HAVE ABNORMAL PROFITS , HAVE PECULIAR ECONOMIC CIRCUMSTANCES / EXTRAORDINARY SITUATIONS, HAVE SIGNIFICANT INTANGIBLES, HAVE HIGH ON-SITE DEVELOPMENT EXPENDI TURE, HAVE RESEARCH AND DEVELOPMENT ACTIVITIES, HOLDS SIGNIFICANT INV ENTORY, AS COMPARED TO THE APPELLANT: I) COMP-U-LEARN TECH INDIA LIMITED; II) KALS INFORMATION SYSTEMS LIMITED; III) SASKEN COMMUNICATION TECHNOLOGIES LIMITED; 11 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. IV) TATA ELXSI LIMITED; V) PERSISTENT SYSTEMS LIMITED; VI) E-INFOCHIPS BANGALORE LIMITED; VII) E-ZEST SOLUTIONS LIMITED; . VIII) EVOKE TECHNOLOGIES PRIVATE LIMITED; IX) KULIZA TECHNOLOGIES PRIVATE LIMITED; X) MINDTREE LIMITED 6.5 THE LD. AO / LD. TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN UPHOLDING THE ORDER OF THE LD. AO / LD. TPO IN USI NG NON CONTEMPORANEOUS DATA AND SUBSTITUTING THE SAME WIT H APPELLANT'S ANALYSIS AND FURTHER ERRED IN NOT CONSIDERING PROV ISO TO RULE 10B( 4) OF THE RULES BY NOT APPLYING THE MULTIPLE-YEAR DATA WHILE COMPUTING THE MARGIN OF COMPARABLE COMPANIES SO SELECTED, ON HI S OWN CONJECTURES AND SURMISES. 6.6 THE LD. AO / LD. TPO ERRED AND THE HON'BLE ORP FURTHER ERRED IN UPHOLDING THE ORDER OF THE' LD. AO / LD. TPO IN NO T ALLOWING APPROPRIATE ADJUSTMENTS UNDER RULE LOB OF THE RULE S TO ACCOUNT FOR INTER-ALIA, DIFFERENCES IN (A) MARKETING EXPENDIT URE ADJUSTMENT (B) RESEARCH AND DEVELOPMENT EXPENDITURE ADJUSTMENT A ND (C) RISK PROFILE BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIE S. 13. AT THE TIME OF HEARING BEFORE US THE LD. AR SUB MITTED THAT THE ASSESSEE IS PRESSING ONLY GROUND NOS. 3, 4 & 6.4 A ND 6.4(VI) (I.E. FOR EXCLUSION OF E-INFOCHIPS BANGALORE LTD.) AS A COMPA RABLE. THEREFORE, THE OTHER GROUNDS OF ASSESSEE ARE DISMISSED AS NOT PRESSED. 13.1 THE LD. AR SUBMITTED THAT E-INFOCHIPS BANGALOR E LTD. IS FUNCTIONALLY DIFFERENT AS DETAILED BELOW: A) REFER ANNUAL REPORTS OF E-INFOCHIPS UNDER SIGNI FICANT ACCOUNTING POLICIES, PAGE 1268 OF PAPER BOOK, 9. THE COMPANY IS ENGAGED IN THE DEVELOPMENT AND MAINTENANCE OF COMPUTER SOFTWARE. THE PRODUCTION AND SALES OF SO FTWARE CANNOT BE EXPRESSED IN ANY GENERIC UNIT. HENCE IT IS NOT P OSSIBLE TO GIVE THE QUANTITATIVE DETAILS OF SALES AND CERTAIN OT HER INFORMATION AS REQUIRED UNDER PARAGRAPH 3, 4C AND 4D OF PART-II OF SCHEDULE VI TO THE COMPANIES ACT, 1956. B) REFER ANNUAL REPORTS OF E-INFOCHIPS UNDER SIGNI FICANT ACCOUNTING POLICIES, PAGE 1269 OF PAPER BOOK. 16. SEGMENT INFORMATION INFORMATION ABOUT PRIMA RY SEGMENTS. THE COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVEL OPMENT AND IT ENABLED SERVICES WHICH IS CONSIDERED THE ONLY REPO RTABLE BUSINESS 12 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. SEGMENT AS PER ACCOUNTING STANDARD AS 17 SEGME NT REPORTING ISSUED BY MANDATORY AS PRESCRIBED IN COMPANIES (AC COUNTING STANDARD) RULES, 2006 AND THE RELEVANT PROVISIONS OF COMPANIES ACT, 1956. C) REFER PROFIT AND LOSS A/C OF E-INFOCHIPS AT PAG E 1261 OF PAPER BOOK. INCOME FROM SOFTWARE RS. 430,466,481 SOFTWARE DEVELOPMENT EXPENSES RS. 206,67 4,788 13.2 WITH REFERENCE TO THE SEGMENT INFORMATION AT P AGE 1269 OF PAPER BOOK (PART OF ANNUAL REPORTS OF THE COMPANY), THE COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMENTS AND IT E NABLED SERVICES. WHEREAS ASSESSEE IS ENGAGED IN THE BUSINESS OF RESE ARCH, DESIGN AND DEVELOPMENT OF APPLICATION SOLUTIONS FOR SEMI C ONDUCTOR SERVICES. WE FIND THAT THE COMPANY E-INFOCHIPS HAS BEEN HELD TO BE FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE. 14. WITH REGARD TO GROUND NO. 4, OF ASSESSEES CROS S-APPEAL, LD. AR SUBMITTED THAT AS PER SECTION 92C(2) OF THE ACT, AS SESSEE IS ELIGIBLE FOR TOLERANCE MARGIN OF 5%.. HE HAS RELIED ON THE D ECISION OF ITAT, DELHI BENCH IN CASE OF M/S IHG IT SERVICES (INDIA) PVT. LTD. VS. ITO IN ITA NO. 5890/DEL/2010 WHEREIN THE TRIBUNAL HELD AS UNDER: 13. COMING BACK TO THE PROVISIONS OF THE INCOME-TAX ACT, WE ARE OF THE OPINION THAT AFTER THE RETROSPECTIVE AMENDMENT TO THE SECOND PROVISO TO SECTION 92C(2) BY THE FINANCE ACT, 2012, THERE REM AINS NO AMBIGUITY THAT THE BENEFIT OF TOLERANCE MARGIN IS AVAILABLE ONLY WHEN THE VARIATION BETWEEN THE ARMS LENGTH PRICE AS DETERMINED UNDER SECTION 92C(1) AND THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION H AS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED THE TOLERANCE MARGIN. 15. HEARD BOTH THE SIDES. WE ARE OF THE VIEW THAT A SSESSEE IS ELIGIBLE FOR THE BENEFIT OF TOLERANCE LEVEL OF 5% W HILE DETERMINING ALP. 16. BASED ON THE ABOVE DISCUSSION ON DEPRECIATION, EXCLUSION OF E- CHIPS FROM COMPARABLES FOR ARRIVING AT THE ALP AND ELIGIBILITY OF TOLERANCE LEVEL OF 5% TO BE CONSIDERED FOR DETERMIN ING THE ALP, WE DIRECT THE AO TO CONSIDER THE ABOVE POINTS TO DETER MINE THE ALP. 13 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. ACCORDINGLY, THE AO IS DIRECTED TO COMPLETE THE ASS ESSMENT U/S 143(3) BY DETERMINING THE TAXABLE INCOME UNDER THE INCOME-TAX ACT. 17. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. 18. AS THE CORRESPONDING APPEAL OF THE ASSESSEE IN ITA NO. 275/HYD/2015 HAS BEEN ADJUDICATED BY US, THE S.A. F ILED BY THE ASSESSEE BECOMES INFRUCTUOUS AND, THEREFORE, THE SA ME IS DISMISSED AS INFRUCTUOUS. 19. TO SUM UP, REVENUES APPEAL IN ITA NO. 242/HYD/ 215 IS DISMISSED AND ASSESSEES APPEAL IN ITA NO. 275/HYD/ 2015 IS ALLOWED FOR STATISTICAL PURPOSE. THE S.A. FILED BY ASSESSEE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 20 TH NOVEMBER, 2015 SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACC OUNTANT MEMBER HYDERABAD, DATED: 20 TH NOVEMBER, 2015 KV COPY TO:- 1) AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD ., 8 TH FLOOR, BUILDING NO. 11, RAHEJA IT PARK MINDSPACE , SURVEY NO. 64, APIIC SOFTWARE LAYOUT, MADHAPUR, H YD 500 081. 2)DCIT, CIRCLE 1(1), AAYAKAR BHAVAN, HYDERABAD 3)DRP, HYDERABAD 4) TPO, HYDERABAD 5) DIT (INTERNATIONAL TAXATION), HYDERABAD 6) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 14 ITA NO. 275 & 242/HYD/2015 AMD RESEARCH & DEVELOPMENT CENTRE INDIA PVT. LTD. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S. 2. DRAFT PLACED BEFORE AUTHOR SR.P.S 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER VP 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S. 6. KEPT FOR PRONOUNCEMENT ON SR.P S. 7. FILE SENT TO THE BENCH CLERK SR.P.S. 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER