M/s Logitech Engineering & Design India Private Limited, Chennai V. DCIT, Bangalore

ITA 287/BANG/2015

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8487 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 03-01-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 03-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VISHAL KALSA
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction

Judgement Text

IT(TP)A.287 & 127/BANG/2015 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU BENCH 'A', BENGALURU BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI. S. JAYARAMAN, ACCOUNTANT MEMBER I.T(TP).A NO.287/BANG/2015 (ASSESSMENT YEAR : 2010-11) M/S. LOGITECH ENGINEERING & DESIGN INDIA P. LTD, (ERSTWHILE M/S. LIFESIZE COMMUNICATION P. LTD), PLOT NO.TS140, BLOCK 2 & 9, ELNET SOFTWARE CITY, RAJIV GANDHI SALAI, TARAMANI, CHENNAI 600 013 .. APPELLANT PAN : AABCL2081A V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 4(1)(1), BENGALURU .. RESPONDENT I.T(TP).A NO.127/BANG/2015 (ASSESSMENT YEAR : 2010-11) DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 4(1)(1), BENGALURU .. APPELLANT V. M/S. LOGITECH ENGINEERING & DESIGN INDIA P. LTD, (ERSTWHILE M/S. LIFESIZE COMMUNICATION P. LTD), PLOT NO.TS140, BLOCK 2 & 9, ELNET SOFTWARE CITY, RAJIV GANDHI SALAI, TARAMANI, CHENNAI 600 013 .. RESPONDENT ASSESSEE BY : SHRI. VISHAL KALSA, CA REVENUE BY : SMT. PREETI GARG, CIT-DR HEARD ON : 03.01.2017 PRONOUNCED ON : 03.03.2017 O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER : THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE AGAINST THE ORDER PASSED BY THE DCIT, CIRCLE -4(1)( 1), BENGALURU, IT(TP)A.287 & 127/BANG/2015 PAGE - 2 DT.23.12.2014, IN PURSUANCE TO THE DIRECTIONS OF TH E DRP, FOR THE ASSESSMENT YEAR 2010-11. 02. M/S. LOGITECH ENGINEERING & DESIGNS INDIA P. L TD IS THE SUCCESSOR OF THE ERSTWHILE LIFESIZE COMMUNICATIONS P. LTD WHICH IS A 100 % SUBSIDIARY OF LIFESIZE COMMUNICATIONS INC. THE ASSESSEE IS A CAP TIVE SERVICE PROVIDER AND HAS BEEN SET UP AS A CAPTIVE OFF SHORE SOFTWARE DEVELOPMENT CENTRE FOR CATERING TO THE NEEDS OF THE LIFESIZE GROUP. LIFES IZE INDIA IS RESPONSIBLE FOR THE RESEARCH, SOFTWARE DEVELOPMENT AND SUPPORT SERV ICES FOR LIFESIZE INCS PRODUCTS AND SERVICES. 03. THE ASSESSEE BENCH MARKED THE SOFTWARE DEVELOP MENT SERVICES SELECTING TRANSACTIONAL NET MARGIN METHOD (TNMM') A S THE MOST APPROPRIATE METHOD AND USING NET OPERATING MARGINS BASED ON COS T ('NCP) AS THE PROFIT LEVEL INDICATOR ('PLI). ON A SET OF 4 COMPARABLES , IT ARRIVED THE AVERAGE NCP AT 13.01 PERCENT. SINCE IT HAD EARNED NCP OF 14.34% IN THIS SEGMENT, IT CONSIDERED ITS TRANSACTIONS ARE AT ARM' S LENGTH. HOWEVER, OUT OF 4 COMPARABLES SELECTED BY THE ASSESSEE , THE TPO REJECTED 3 OF THEM AND INTRODUCED 10 ADDITIONAL COMPARABLES AND DETERMINED THE AVERAGE MARGIN AT 22.71%. AFTER GIVING WORKING CAPITAL ADJUSTMENT OF 1.98%, THE TPO PROCEEDED TO MAKE AN ADJUSTMENT OF RS.72,25,614 FOR THE SOFTWARE DEVELOPMENT SERVICES. AGGRIEVED, THE ASSES SEE FILED ITS OBJECTIONS BEFORE THE DRP. THE DRP UPHELD THE ACTION OF THE T PO IN NOT ACCEPTING THE COMPARABLES CHOSEN BY THE ASSESSEE . OUT OF 11 COMP ARABLES CHOSEN BY THE TPO , THE DRP REJECTED; 6 COMPARABLES ON TURNOVER FILTER, 2 COMPARABLES IT(TP)A.287 & 127/BANG/2015 PAGE - 3 ON RPT FILTER, 2 COMPARABLES ON NON AVAILABILITY OF SEGMENTAL RESULTS AND RETAINED ONLY ONE COMPARABLE. IT REJECTED THE AS SESSEES OBJECTIONS ON THE WORKING CAPITAL ADJUSTMENT ALSO. 04. IN RESPECT OF PROVISION OF MARKET SUPPORT SERVI CES, THE ASSESSEE BENCHMARKED THIS TRANSACTION SELECTING TNMM AS THE MOST APPROPRIATE METHOD AND USING RETURN ON ASSET EMPLOYED ('ROAE') AS THE PLI. ON A SET OF 4 COMPARABLES, IT ARRIVED THE AVERAGE ROAE AT 20.79 PERCENT. SINCE, IT HAD EARNED ROAEE AT 21.66% IN RESPECT OF THIS SEGMENT , IT CONSIDERED THAT ITS TRANSACTIONS ARE AT ARM'S LENGT H. HOWEVER, THE TPO REJECTED ALL THE 4 COMPARABLES CHOSEN BY THE ASSES SEE, INTRODUCED 4 ADDITIONAL COMPARABLES AND DETERMINED THE ARM'S LEN GTH MEAN MARGIN AT 17.21%. ACCORDINGLY, THE TPO PROCEEDED TO MAKE AN A DJUSTMENT OF RS.72,25,514 FOR THE SOFTWARE DEVELOPMENT SERVICES. AGGRIEVED, THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP. THE D RP UPHELD THE ACTION OF THE TPO IN NOT ACCEPTING THE COMPARABLES CHOSEN BY THE ASSESSEE . OUT OF THE 4 COMPARABLES CHOSEN BY THE TPO, THE DRP REJECT ED; 2 COMPARABLES ONE ON RPT FILTER AND THE OTHER ON NON AVAILABILIT Y OF SEGMENTAL RESULTS AND RETAINED THE BALANCE 2 COMPARABLES. AGGRIEVED, THE ASSESSEE FILED THIS APPEAL. ITS EFFECTIVE GROUNDS ARE AS UNDER : IT(TP)A.287 & 127/BANG/2015 PAGE - 4 IT(TP)A.287 & 127/BANG/2015 PAGE - 5 05. AGGRIEVED BY THE DRP ORDER, THE REVENUE ALSO FI LED AN APPEAL WITH FOLLOWING GROUNDS : IT(TP)A.127/BANG/2015 BY THE REVENUE : THE DRP UPHELD THE INCLUSION FOR THE REASON THAT DU RING THE A Y 2010-11, THERE IS NO OTHER ACTIVITY OTHER THAN SOFTWARE DEVE LOPMENT. HOWEVER, THE IT(TP)A.287 & 127/BANG/2015 PAGE - 6 ASSESSEE SUBMITTED THAT THIS COMPANY IS FUNCTIONALL Y DIFFERENT AND CANNOT BE COMPARED WITH PROVISION OF SOFTWARE DEVELOPMENT SER VICES AS IT IS : (A) ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE AND SALE OF SOFTWARE PRODUCTS. (B) ENGAGED IN SALE OF SOFTWARE PRODUCTS AS IT IS CLEAR FROM THE INVENTORY SHOWN IN THE BOOKS OF ACCOUNTS. KALS IS HAVING SIGN IFICANT INVENTORY COMING TO 27% OF ITS CURRENT ASSETS. INVENTORY HELD BY KAL S IS INR 60,47977. (C) SEGMENTAL INFORMATION IS PROVIDED FOR PRIMARY BUSIN ESS SEGMENTS (A) SALE OF APPLICATION SOFTWARE AND (B) TRAINING. NO S EGMENTALS FOR SOFTWARE DEVELOPMENT SERVICES AVAILABLE RELIANCE IS PLACED ON THE FOLLOWING DECISIONS WHERE IN KALS HAS BEEN HELD AS NOT A COMPARABLE TO THE PROVISION OF SOFTWARE DEVE LOPMENT SERVICES. MERCEDES-BENZ RESEARCH & DEVELOPMENT INDIA (P ) LTD . VS ACIT: ITA NO. 291 & 427/BANG/2015 OBOPAY MOBILE TECHNOLOGY INDIA (P.) LTD VS DCIT (20 16] 157 LTD 983 (BANG) DCIT VS ELECTRONICS FOR IMAGING INDIA (P) LTD ITA N O. 212/BANG/2015 APTEAN SOFTWARE INDIA (P.) LTD. VS ITO (TA NO 392 & 592/BANG/2015 DCIT VS IKANOS COMMUNICATION INDIA (P) LTD. ITA NO. 137/BANG/2015 DCLT VS APPLIED MATERIALS INDIA (P.) LTD.: ITA NO.1 80/BANG/2015 RADISYS INDIA (F) LTD. VS ITO ITA NO 345 & 371ARIG/ 2015 06. ON THE SOFTWARE DEVELOPMENT SERVICES SEGMENT, T HE A R PLEADED FOR EXCLUSION OF ONE COMPARABLE AND INCLUSION OF 2 COM PARABLES. THE GIST OF HIS SUBMISSIONS IS EXTRACTED AS UNDER : 1. KALS INFORMATION SYSTEM LTD (SEG) : IT(TP)A.287 & 127/BANG/2015 PAGE - 7 2 & 3. RS SOFTWARE (INDIA) LTD & THINKSOFT GLOBAL SERVICES LTD : THE DRP , SUO MOTO , REJECTED THE RPT FILTER OF 25 % ADOPTED BY THE TPO AND APPLIED THE RPT FILTER AT 0% AND REJECTED THESE COMPARABLES HOLDING THAT THE RPT IS ABOVE 0%. THE ASSESSEE SUBMITTED TH AT IT HAS BEEN HELD BY COURTS IN VARIOUS DECISIONS THAT 0% RPT OF THE C OMPARABLE PRICE IS AN IMPOSSIBLE SITUATION AND THEREFORE, A REASONABLE TO LERANCE RANGE FOR RELATED PARTY TRANSACTIONS CAN BE CONSIDERED FOR SE LECTING COMPARABLES. ACCORDINGLY, IT HAS BEEN HELD THAT RPT UP TO 25% IS CONSIDERED REASONABLE IN THE FOLLOWING CASES. PHILIPS SOFTWARE CENTRE PRIVATE LTD VS ACIT TTJ 721 (BANGALORE) SONY INDIA PRIVATE LIMITED VS DCIT: [2008]114 ITD 4 48 (DELHI) GLOBAL LOGIC INDIA (P) LTD. VS DCIT: [2013] 56 SOT 373 (DELHI) ACTIS ADVISERS PVT. LTD. VS DCIT: ITA NO 5277 & ITA NO. 958/DEL/2012 ACIT VS HAPAG LLOYD GLOBAL SERVICES (P) LAD ITA NO 8499/ MUM/2010 THYSSENKRUPP INDUSTRIES INDIA (P) LTD. VS .&.CIT[20 13)154 TTJ 689 (MUM) WE HEARD THE RIVAL SUBMISSIONS. AS SUBMITTED BY THE ASSESSEE, KALS INFORMATION SYSTEM LTD (SEG) HAS BEEN REJECTED AS A COMPARABLE TO THE MERE PROVIDER OF SOFTWARE DEVELOPMENT SERVICES LI KE THIS ASSESSEE AS IT IS FUNCTIONALLY DIFFERENT IN THE ABOVE CASES AND HENC E THE TPO/AO IS DIRECTED TO EXCLUDE IT. IN CONNECTION WITH THE COMPARABLES R S SOFTWARE (INDIA) LTD & THINKSOFT GLOBAL SERVICES LTD, THEIR RPT IS 0.9 6% & 11.09% , RESPECTIVELY. THIS TRIBUNAL HAS HELD IN VARIOUS DEC ISIONS THAT 15% RPT FILTER IS PROPER. ACCORDINGLY , WE DIRECT THE TPO/AO INC LUDE THESE COMPANIES AS COMPARABLE. 07. IN RESPECT OF THE REVENUES APPEAL, THE DR SUBM ITTED ON THE LINES OF THE GROUNDS OF APPEAL. THE AR OF THE ASSESSEE OPPOS ED THEM. THE SUMMARY OF AR S CONTENTIONS IS EXTRACTED AS UNDER : 1. ICRA TECHNO ANALYTICS LTD (SEG) : IT(TP)A.287 & 127/BANG/2015 PAGE - 8 THE DRP REJECTED THIS COMPARABLE ON THE GROUND THAT SEGMENTAL INFORMATION IS NOT AVAILABLE. THE ASSESSEE SUBMITTED THAT THE G ROUND RAISED BY THE DEPARTMENT IS NOT ACCORDANCE WITH THE DIRECTIONS OF THE DRP AS THE SAID COMPARABLE WAS NOT REJECTED ON TURNOVER FILTER BUT ON ACCOUNT OF ABSENCE OF SEGMENTAL INFORMATION. IN ICRAS ANNUAL REPORT, THE SEGMENTAL INFORMATION IS AVAILABLE FOR TWO SEGMENTS I.E. SERVICES AND SALES. IT IS ALSO EVIDENT THAT THE SERVICE SEGMENT COMPRISES OF SOFTWARE DEVELOPMENT, SOFTWARE CONSULTANCY, ENGINEERING SERVICES, WEB DEVELOPMENT, WEB HOSTING, ETC FOR WHICH NO SEGMENTAL INFORMATION IS AVAILABLE. THEREFORE, THIS COMPARABLE IS CORRECTLY REJECTED. 2. PERSISTENT SYSTEMS & SOLUTIONS LTD : THE DRP REJ ECTED THIS COMPARABLE ON THE GROUND THAT SEGMENTAL INFORMATION IS NOT AVAILA BLE. THE ASSESSEE SUBMITTED THAT THE GROUND RAISED BY THE DEPARTMENT IS NOT ACCORDANCE WITH THE DIRECTIONS OF THE DRP AS THE SAID COMPARABLE WA S NOT REJECTED ON TURNOVER FILTER BUT ON ACCOUNT OF ABSENCE OF SEGMEN TAL INFORMATION. THIS COMPANY PROVIDES SUPPORT IN SOFTWARE DEVELOPMENT, C ONSULTANCY AND SYSTEM INTEGRATION SERVICES. THE DRP HELD THAT THE COMPANY HAS SHOWN RECEIPTS FROM SALE OF SOFTWARE SERVICES AND PRODUCTS WITHOUT ANY SEGMENTAL INFORMATION FOR EACH BEING SEPARATELY PROVIDED. THUS, IN ABSENCE OF SEGMENTAL INFORMATION, THE COMPANY CANNOT BE RETAINED AS A COMPARABLE. ON THE ABOVE COMPARABLES, RELIANCE IS PLACED ON THE FOLLOWING CASES: - DCIT VS IKANOS COMMUNICATIONS (ITA NO. 137/BANG/2015 (AY 2010-11) - ACIT VS BROADCOM INDIA RESEARCH PRIVATE LIMITED: [2016] 49 ITR(T) 79 (BANGALORE) [AY 2010-11] DCIT VS ELECTRONICS FOR IMAGING PVT. LIMITED: ITA N O. 212/BANG/2015 (AY 2010-11) - BEARING POINT BUSINESS CONSULTING PVT LTD. - ITA NO. 1124/BANG/2011 - DCIT VS PMC - SIERRA INDIA PVT. LTD : IT(TP)A NO. 882/BANG/203 - LAM RESEARCH VS DC IT: IT(TP)A NO 1437/BANG/2014 - TELCORDIA TECHNOLOGIES INDIA (P.) LTD. VS DCIT: I TA NO. 1692 (MUM) OF 2014. IT(TP)A.287 & 127/BANG/2015 PAGE - 9 WE HEARD THE RIVAL SUBMISSIONS. AS SUBMITTED BY THE ASSESSEE, THE DRP REJECTED THEM NOT ON TURNOVER FILTER BUT ON ACC OUNT OF ABSENCE OF SEGMENTAL INFORMATION. WE DO NOT FIND ANY INFIRMITY IN THE DRP ORDER AND HENCE ON THESE GROUNDS THE REVENUES APPEAL FAIL. 08. ON THE FOLLOWING COMPARABLES, THE AR SUBMITTED THAT THE APPELLANTS TURNOVER IS JUST 13.23 CRORES, WHILE THE TURN OVER OF EACH OF THE COMPARABLE IS MULTIPLE TIMES HIGHER (SAY FROM 28 T IMES TO 1601 TIMES HIGHER) THAN ITS TURNOVER AND HENCE THE DRP CORRECT LY EXCLUDED THEM. THE SUMMARY OF AR S CONTENTIONS ON EACH OF THE COMPARA BLE IS EXTRACTED AS UNDER : 1 . INFOSYS LTD : THE DRP REJECTED THIS COMPARABLE ON THE GROUND THAT THE TURNOVER OF THE COMPANY IS VERY HIGH, INR 21,140 CR ORES WHICH IS 1601 TIMES THE TURNOVER OF THE ASSESSEE FROM ITES BUSINESS . T HE ASSESSEE SUBMITTED THAT INFOSYS IS AN INDUSTRIAL GIANT WITH AN EXTREM ELY HIGH TURNOVER AND HAS SUBSTANTIAL INTANGIBLE ASSETS. THE SIZE, FUNCTIONS PERFORMED, STAGE OF BUSINESS CYCLE, AND GROWTH CYCLE OF INFOSYS IS NOT COMPARABL E WITH THE ASSESSEE WHICH IS A LOW RISK CAPTIVE SERVICE PROVIDER AND RELIED ON DCIT VS IKANOS COMMUNICATIONS: ITA NO. 137/BANG/201 5 (AY 2010-11) ACIT VS BROADCOM INDIA RESEARCH PRIVATE LIMITED: [2 016] 49 ITR(T) 79 (BANGALORE) [AY 2010-11] BEARING POINT BUSINESS CONSULTING PVT. LTD. - ITA N O- 1124/BANG/2011 DCIT VS ELECTRONICS FOR IMAGING PVT. LIMITED: ITA N O. 212/BANG/2015 (AY 2010-11) INSILICA SEMICONDUCTORS INDIA PVT. LTD. VS ITO: [20 12]53 SOT 157 (BANGALORE) LOGICA PVT. LTD. VS ACIT: IT(TP)A NO. 1621&1664 (BA NG) OF 2014 ORANGE BUSINESS SERVICES INDIA SOLUTIONS (P.) LTD. VS DCII: ITA NO. 869 IT(TP)A.287 & 127/BANG/2015 PAGE - 10 (DELHI) OF 2016 24/7 CUSTOMER.COM PVT. LTD : ITA NO. 227/BANG/2010 DCIT VS PMC - SIERRA INDIA PVT. LTD. : LT(TP)A NO. 882/BANG/2013 LAM RESEARCH VS DCIT: IT(TP)A NO. 1437/BANG/2014 TELECORDIA TECHNOLOGIES INDIA PVT. LTD. VS ACII: [2 012] 137 ITD 1 (MUMBAI) CIT VS AGNITY INDIA TECHNOLOGIES (P.) LTD: [2013] 2 62 CTR 291 (DELHI) 2. LARSEN & TURBO INFOTECH LTD : THE DRP REJECTED T HIS COMPANY ON THE GROUND THAT THE TURNOVER OF THE COMPANY IS VERY HIG H I.E. INR 1,777 CRORES WHICH IS 134 TIMES THE TURNOVER OF THE ASSESSEE FRO M ITES BUSINESS AND THEREFORE IT WAS CORRECTLY EXCLUDED FROM THE LIST OF COMPARABLES. RELIANCE IS PLACED ON THE FOLLOWING DECISIONS: - SYSARRIS SOFTWARE (P.) LTD. VS SCIT ITA NO. 1360/ BANG/2011 - ITO VS M/S. VENDIO TECHNOLOGIES (K) PVT. LTD: ITA NO.1374/BANG/2011 3. MINDTREE LTD (SEG) : THE DRP REJECTED THIS COMPA NY ON THE GROUND THAT THE TURNOVER OF THE COMPANY IS VERY HIGH IE INR 698 CR ORES WHICH IS 53 TIMES THE TURNOVER OF THE ASSESSEE FROM ITES BUSINESS AND TH EREFORE IT WAS CORRECTLY EXCLUDED FROM THE LIST OF COMPARABLES. RELIANCE IS PLACED ON THE FOLLOWING DECISION: - BEARING POINT BUSINESS CONSULTING P LTD. - ITA NO .1124/BANG/2011 - LAM RESEARCH VS DCIT: IT(TP)A NO 1437/BANG/2014 4. PERSISTENT SYSTEMS LTD : THE DRP REJECTED THIS C OMPANY ON THE GROUND THAT THE TURNOVER OF THE COMPANY IS VERY HIGH I.E. INR 5 04 CRORES WHICH IS 38 TIMES THE TURNOVER OF THE ASSESSEE FROM ITES BUSINESS AN D THEREFORE IT WAS CORRECTLY EXCLUDED FROM THE LIST OF COMPARABLES. RELIANCE IS PLACED ON THE FOLLOWING CASES: - ION TRADING INDIA (P.) LTD VS ITO: 1035 (DELHI) O F 2015 (AY 2010-11) - BEARING POINT BUSINESS CONSULTING PVT. LTD. - ITA NO. 1 124/BANG/201 1 IT(TP)A.287 & 127/BANG/2015 PAGE - 11 - TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD: [2013 } 140 LTD 540 (BANGALORE) 5. SASKEN COMMUNICATION TECHNOLOGIES : THE DRP REJE CTED THIS COMPANY ON THE GROUND THAT THE TURNOVER OF THE COMPANY IS VERY HIGH I.E INR 402 CRORES WHICH IS 30 TIMES THE TURNOVER OF THE ASSESSEE FROM ITES BUSINESS AND THEREFORE IT WAS CORRECTLY EXCLUDED FROM THE LIST O F COMPARABLES. RELIANCE IS PLACED ON THE FOLLOWING CASES: - BEARING POINT BUSINESS CONSULTING PVT. LTD. - ITA NO.1124/BANG/2011 - DCIT VS KODIAK NETWORKS INDIA PVT LTD: ITA NO. 53 2/BANG/2013 - LAM RESEARCH VS DCIT: IT(TP)A NO. 1437/BANG/2014 - DCIT VS HELLOSOFT INDIA (P.) LTD: (2013] 23 ITR(T ) 1 (HYDERABAD) 6. TATA ELXSI LTD (SEG) : THE DRP REJECTED THIS COM PANY ON THE GROUND THAT THE TURNOVER OF THE COMPANY IS VERY HIGH I.E. INR 3 76.37 CRORES WHICH IS 28 TIMES THE TURNOVER OF THE ASSESSEE FROM ITES BUSINE SS AND THEREFORE IT WAS CORRECTLY EXCLUDED FROM THE LIST OF COMPARABLES. RE LIANCE IS PLACED ON THE FOLLOWING CASES: BEARING POINT BUSINESS CONSULTING PVT. LTD.: ITA NO .1124/BANG/2011 LAM RESEARCH VS DCIT : IT(TP)A NO-:1437/BANG/2014 HOWEVER, AGAINST THE APPLICATION OF THE TURNOVER FI LTER, THE DR RELIED ON THE DECISION OF THIS TRIBUNAL IN LSI TECHNOLOGIE S INDIA PRIVATE LTD & LSI RESEARCH & DEVELOPMENT P LTD IN IT (TP) A NO 1380 & 1381 /BANG/ 2010 FOR AY 2006-07 DT 13.5.2016. WE HEARD THE RIVAL SUB MISSIONS. IT IS SEEN THAT THE DRP REJECTED THE ABOVE COMPARABLES BASED O N THE TURNOVER FILTER, SIZE ETC RELYING ON VARIOUS TRIBUNAL DECISIONS VIZ BANGALORE, DELHI, HYDERABAD, MUMBAI AND PUNE. THIS TRIBUNAL IN THE CA SE OF OBOPAY MOBILE IT(TP)A.287 & 127/BANG/2015 PAGE - 12 TECHNOLGY INDIA P LTD IN IT(TP) A NOS 388 & 469/ BA NG/ 2015 DT 08.01.2016, AFTER CONSIDERING THE DELHI AND BOMBAY HIGH COURT DECISIONS IN CHRYSCAPITAL INVESTMENT ADVISORS INDIA P LTD 376 IT R 183(DEL), CIT VS PENTAIR WATER INDIA P LTD (MUMB) IN TAX APPEAL NO 1 8 OF 2015 AND AGNITY INDIA TECHNOLOGIES P LTD (DEL) 36 TAXMANN.COM 289/2 19 TAXMAN 26, THE PRINCIPLE OF JUDICIAL DISCIPLINE ETC , FOLLOWING TH E BOMBAY HIGH COURT DECISION UPHELD THE DRP ORDER IN EXCLUDING 6 COMPANIES, FRO M THE LIST OF COMPARABLES CHOSEN BY THE TPO, ON THE BASIS OF TURN OVER AND SIZE. FOLLOWING IT , WE UPHOLD THE DRP ORDER IN EXCLUDIN G THE ABOVE 6 COMPANIES, FROM THE LIST OF COMPARABLES CHOSEN BY THE TPO, ON THE BASIS OF TURNOVER AND SIZE. THUS, THE CORRESPONDING GROUNDS OF THE RE VENUE FAIL. 09. ON THE PROVISION OF MARKET SUPPORT SERVICES SEG MENT, THE ASSESSEE SOUGHT EXCLUSION OF BOTH THE COMPARABLES. THE SUMMARY OF ARS CONTENTIONS ON EACH OF THE COMPARABLE IS EXT RACTED AS UNDER : 1. CYBER MEDIA RESEARCH LTD : THE DRP UPHELD THE INCLUSION HOLDING THAT EXACT FUNCTIONALLY AKIN COMPARABLES ARE NOT EXPECTE D TO BE AVAILABLE. THE TPOS COMPARABLE IS FOUND TO BE FUNCTIONALLY VERY C LOSE TO THE ASSESSEE. HOWEVER, THE ASSESSEE PLEADED FOR EXCLUSION FOR THE FOLLOWING REASON : FUNCTIONALLY DIFFERENT : (A) COMPANY IS ENGAGED IN THE BUSINESS OF MARKET RESEAR CH AND MANAGEMENT CONSULTANCY WHICH IS IDENTIFIED AS THE ONLY PRIMARY BUSINESS SEGMENT. COMPANY IS AN INFORMATION TECHNOLOGY, RESEARCH AND ADVISORY FIRM. THE COMPANY EARNS ALL ITS INCOME FROM TECHNICAL RESEARC H AND SURVEY. (B) THE ASSET COMPOSITION OF CYBER MEDIA INCLUDES B OTH TANGIBLE AND INTANGIBLE ASSETS, WHILE THE ASSESSEES ASSET COMPO SITION COMPRISES OF ONLY TANGIBLE ASSETS. IT(TP)A.287 & 127/BANG/2015 PAGE - 13 RELIANCE IS PLACED ON THE CASE OF MICROSOFT CORPO RATION INDIA P. LTD V. DCIT [ITA.5766/DEL/2011] WHEREIN IT WAS HELD BY THE TRIB UNAL THAT THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE WITH THE INTER NATIONAL TRANSACTION OF PROVISION OF MARKETING SUPPORT SERVICES SINCE CYB ER MEDIA RESEARCH LTD, IS AN INFORMATION TECHNOLOGY RESEARCH AND ADVISORY FIR M WHICH EARNS ALL ITS INCOME FROM TECHNICAL RESEARCH AND SURVEY. 2. KILLICK AGENCIES : THE DRP UPHELD THE INCLUSION HOLDING THAT THE COMP ANY IS PROVIDING MARKETING RELATED SUPPORT SERVICES. T HE SEGMENT IN WHICH THE SERVICE IS PERFORMED IS NOT A RELEVANT FACTOR FOR D ECIDING CHOICE OF COMPARABLES. HOWEVER, THE ASSESSEE PLEADED FOR EXCL USION FOR THE FOLLOWING REASON : (A) COMPANY IS ACTING AS AN AGENT FOR VARIOUS FORE IGN PRINCIPALS FOR SALE OF DREDGERS, DREDGING EQUIPMENTS ETC., IT ALSO OFFERS PRE-SALES AND AFTER SALES SERVICES. APART FROM THIS, THE COMPANY IS INVOLVED IN EXPORTS OF MICRO SWITCHES, ENGINEERING ITEMS, ACCOUNTS, ITEMS AND HE AD SETS. (B) EXPORT INCOME OF THIS COMPANY IS LESS THAN 75% OF TOTAL REVENUE UNLIKE THE ASSESSEE WHICH EXPORTS ALL ITS SERVICES TO ITS AE. THIS FILTER HAS BEEN APPLIED BY THE TPO IN SOFTWARE DEVELOPMENT SERVICE S SEGMENT. RELIANCE IS PLACED ON BANGALORE TRIBUNAL DECISION I N THE CASE OF DCIT V. ELECTRONICS FOR IMAGING INDIA P. LTD [IT(TP)A.212/B ANG/2015], WHEREIN IT WAS HELD THAT KILLICK AGENCIES AND MARKETING LTD CANNOT BE CONSIDERED AS A VALID COMPARABLE TO PROVISION OF MARKETING SUPPORT SERVIC ES ON ACCOUNT OF DIFFERENCES MENTIONED AT POINT (A) AND (B). (C) THE METHOD OF DEPRECIATION USED BY KILLICK AGEN CIES AND MARKETING LTD IS WDV, AS AGAINST SLM USED BY THE ASSESSEE. RELIANCE IS PLACED ON THE FOLLOWING DECISIONS WHERE COURTS HAVE HELD THAT DEPRECIATION IS TO BE EXCLUDED WHEN THERE IS DIFFER ENCE ON ACCOUNT OF CALCULATION METHOD : - SCHEFENACKER MOTHERSON LTD V. ITO [(2009) 123 TTJ 509 (DEL) - PENTAIR WATER INDIA P. LTD V. ACIT [(2014) 164 TT J 502 (PANAJI] IT(TP)A.287 & 127/BANG/2015 PAGE - 14 10. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE RELEV ANT PORTION OF THE ORDER FROM THIS TRIBUNAL IN THE CASE OF DEPUTY COMM ISSIONER OF INCOME-TAX, CIRCLE-3(1)(2), BANGALORE V. ELECTRONICS FOR IMAGIN G INDIA (P.) LTD. FOR ASSESSMENT YEAR 2010-11 DATED 24.02.2016 IN IT(TP) A NO 212/ BANG/2015 IS EXTRACTED AS UNDER : (2) KILLICK AGENCIES & MARKETING LTD. 44. THE ASSESSEE OBJECTED AGAINST THIS COMPANY ON THE G ROUND THAT COMMISSION/SERVICE CHARGES INCOME OF THIS COMPANY I S RS. 2,19,00,000 OUT OF THE OPERATING REVENUE OF RS. 3,39,00,000. THERE FORE, THE COMMISSION/SERVICE CHARGES INCOME CONSTITUTE ABOUT 65% OF THE OPERATING REVENUE WHICH IS LESS THAN 75% OF THE OPERATING REV ENUE FILTER APPLIED BY THE TPO. IN THE ABSENCE OF SEGMENTAL RESULTS, THIS COMPANY WAS SOUGHT TO BE EXCLUDED FROM THE SET OF COMPARABLES. 45. THE DRP FOUND THAT THIS COMPANY CONDUCTS BUSINESS A S AN AGENT OF THE FOREIGN PRINCIPAL AND DEAL IN MARITIME EQUIPMENTS. FURTHER, THE RECEIPTS ARE MAINLY IN THE NATURE OF COMMISSION INCOME AND S ERVICE CHARGES. THEREFORE, THIS COMPANY WAS FUNCTIONALLY DISSIMILAR TO THAT OF ASSESSEE. 46. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CONS IDERED THE RELEVANT MATERIAL ON RECORD. 47. THE LD. DR HAS SUBMITTED THAT THE TPO HAS CONSIDERE D THE RELEVANT INFORMATION AS REPORTED IN THE ANNUAL REPORT OF THE COMPANY AND IT WAS FOUND THAT THIS COMPANY IS ACTING AS AN AGENT FOR V ARIOUS FOREIGN PRINCIPALS FOR SALE OF DREDGERS, DREDGING EQUIPMENT AND ALSO O FFERS AFTER SALES SERVICES. THEREFORE, THIS COMPANY WAS FOUND TO BE IN THE BUSINESS OF MARKETING SUPPORT SERVICES WHICH IS SIMILAR TO THE ASSESSEE. 48. ON THE OTHER HAND, THE LD. AR HAS SUBMITTED THAT TH IS COMPANY IS ENGAGED IN THE BUSINESS OF CONSTRUCTION EQUIPMENTS AND EART H MOVING MACHINERY AND IS NOT INTO MARKETING SUPPORT SERVICES. IT(TP)A.287 & 127/BANG/2015 PAGE - 15 49. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD, WE NOTE THAT IN THE PROFIT & LOSS ACCOUNT F OR THE YEAR UNDER CONSIDERATION, THIS COMPANY HAS SHOWN SALES (EXPORT OF RS. 1,18,00,000 AND COMMISSION/SERVICE CHARGES OF RS. 2,19,00,000. THEREFORE, EXPORT INCOME REVENUE OF THIS COMPANY IS LESS THAN 75% OF THE TOTAL REVENUE, A FILTER APPLIED BY THE TPO. ONCE THE TPO HAS APPLIE D A FILTER OF 75% OF EXPORT SALE, THEN THIS COMPANY WHICH FAILS THE FILT ER APPLIED BY THE TPO CANNOT BE CONSIDERED AS A GOOD COMPARABLE. FURTHER , WE NOTE THAT THIS COMPANY IS ENTIRELY IN A DIFFERENT ACTIVITY WITH TH AT OF THE ASSESSEE. UNDISPUTEDLY, THIS COMPANY IS ACTING AS AGENT FOR V ARIOUS FOREIGN PRINCIPALS FOR SALE OF DREDGERS, DREDGING EQUIPMENT, STEERABLE RUDDER PROPULSIONS AND OTHER EQUIPMENTS AND MACHINERIES. ACCORDINGLY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP AND DIRECT THE AO TO EXCLUDE THIS COMPANY FROM THE COMPARABLES. 11. THE RELEVANT PORTION OF ORDER OF THE DELHI TRIB UNAL IN MICROSOFT CORPORATION INDIA (P.) LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 6(1), NEW DELHI FOR ASSESSMENT YEAR 2007-08 DATED 3 0.06.2015 IS EXTRACTED AS UNDER : 27. WE FIND FORCE IN THE SUBMISSION ADVANCED BY THE LD. DR TO THE EXTENT OF IMPROPER EXAMINATION OF THE CASE DONE BY THE AUTHOR ITIES IN NOT PROPERLY APPRECIATING THE NATURE OF SERVICES PERFORMED BY TH E ASSESSEE IN THIS INTERNATIONAL TRANSACTION, WHICH LED TO THE ACCEPTA NCE OF IMPROPER COMPARABLES SELECTED BY THE ASSESSEE. IT IS HOWEVE R, CLEAR FROM THE ORDER OF THE TPO THAT HE WAS WELL AWARE WITH A DIST INCT INTERNATIONAL TRANSACTION OF PROVISION OF MARKETING SUPPORT SERVI CES, WHICH EXPRESSION HAS BEEN REPEATEDLY USED BY HIM IN THE ORDER. THUS , IT CAN BE SEEN THAT AFTER ELIMINATION OF THE ABOVE DISCUSSED FOUR COMPA NIES, THE ONLY TWO COMPANIES WHICH SURVIVE IN THE LIST OF COMPARABLES ARE IDC LTD. AND ICRA MANAGEMENT CONSULTING SERVICES LTD. ANNEXURE III TO THE TP STUDY REPORT INDICATES THE NATURE OF ACTIVITY CARRIED OUT BY THESE COMPANIES. IT(TP)A.287 & 127/BANG/2015 PAGE - 16 PAGE 390 OF THE PAPER BOOK GIVES THE NATURE OF BUSI NESS DONE BY IDC INDIA LTD., AS UNDER:- IDC (INDIA) LIMITED IS AN INFORMATION TECHNOLOGY (IT) RESEARCH & ADVISORY FIRM . THE COMPANY PROVIDES BUSINESS INSIGHTS TO PROVIDERS, BUILDERS AND USERS OF INFORMATION TECHNO LOGY. THE COMPANY IS FOCUSING ON GOTO-MARKETING (GTM) SERVICE S AS KEY AREA OF OPERATIONS. THE COMPANY EARNS ALL ITS INCOME IN THE FORM OF RESEARCH AND SURVEY INCOME . 28. AS REGARDS ICRA MANAGEMENT CONSULTING SERVICES LTD. , THE ASSESSEES TP STUDY REPORT DIVULGES THE NATURE OF ACTIVITY UNDERT AKEN BY THIS COMPANY AS UNDER:- ICRA MANAGEMENT CONSULTING SERVICES LTD., WAS INCO RPORATED IN 2005 WITH THE OBJECTIVE OF TAKING OVER THE ENTIRE B USINESS OF THE MANAGEMENT CONSULTING DIVISION OF ICRA LIMITED. TH E OPERATIONS PERTAINING TO THE ADVISORY SERVICES DIVISION OF ICRA LIMITED DURING FY 2005-06 HAVE BEEN TRANSFERRED TO ICRA MANAGEMENT CONSULTING SERVICES LTD. 29. A CAREFUL PERUSAL OF THE NATURE OF BUSINESS DONE BY IDC(INDIA) LTD. TRANSPIRES THAT THIS COMPANY IS AN INFORMATION TECH NOLOGY RESEARCH AND ADVISORY FIRM. THIS COMPANY EARNS ALL ITS INCOME I N THE FORM OF RESEARCH AND SURVEY. WE FAIL TO APPRECIATE AS TO HOW THIS C OMPANY CAN BE CONSIDERED AS COMPARABLE WITH THE INTERNATIONAL TRA NSACTION OF PROVISION OF MARKETING SUPPORT SERVICES RENDERED BY THE ASSE SSEE TO IS AE. SIMILAR IS THE POSITION REGARDING ICRA MANAGEMENT CONSULTIN G SERVICES LTD., WHICH IS PROVIDING ADVISORY SERVICES. IN OUR CON SIDERED OPINION, A COMPANY PROVIDING ADVISORY SERVICES CAN BE NO MATCH WITH A COMPANY PROVIDING ACTUAL MARKETING SUPPORT SERVICES. DESPI TE THIS CLEAR MISMATCH OF THE FUNCTIONAL PROFILE OF THE ASSESSEES INTERNA TIONAL TRANSACTION OF PROVISION OF MARKETING SUPPORT SERVICES WITH THE IT RESEARCH/ADVISORY SERVICES PROVIDED BY THESE TWO COMPANIES, WE ARE UN ABLE TO ACCEPT THE IT(TP)A.287 & 127/BANG/2015 PAGE - 17 CONTENTION OF THE LD. DR TO ORDER A DE NOVO ADJUDICATION. IT IS PATENT THAT THE ASSESSEE IN THE INSTANT APPEAL IS AGGRIEVED AGA INST THE INCLUSION OF THE AFORE DISCUSSED FOUR COMPANIES FROM A TOTAL SET OF SIX COMPANIES. IT HAS NO ISSUE WITH THE INCLUSION OF IDC LTD., AND IC RA MANAGEMENT CONSULTING SERVICES LTD. THE REVENUE IS NOT IN APP EAL BEFORE US. IN SUCH CIRCUMSTANCES, WE ARE UNABLE TO REMEDY THE SITUATIO N TO THE ADVANTAGE OF THE REVENUE INASMUCH AS IT IS THE TPO WHO HAS ACCEP TED THE COMPARABILITY OF THESE TWO COMPANIES WITH THE ASSES SEES MARKETING SUPPORT SERVICES. AS SUCH, OUR HANDS ARE TIED TO H OLD THAT THE TWO SURVIVING COMPANIES IN THE FINAL LIST OF COMPARABLE S WHICH ARE, IN FACT, NOT COMPARABLE, BE ALSO EXCLUDED AND A FRESH DETERMINAT ION OF THE ALP BE DONE. WE ARE, ERGO, LEAVING THIS ISSUE HERE ONLY W ITH THE HOPE THAT A BETTER AND MORE WISER ANALYSIS WILL BE DONE BY THE TPOS IN THE DAYS TO COME. THUS, THE ASSESSEE HAS MADE OUT A CASE FOR EXCLU SION OF BOTH THE ABOVE COMPARABLES. IN THE FACTS AND CIRCUMSTANCES, WE DIR ECT THE TPO/AO , TO CONDUCT A FRESH STUDY FOR DETERMINATION OF THE ALP FOR THIS SEGMENT. 12. THE NEXT ISSUE IS THAT THE DRP DID NOT GRANT T HE WORKING CAPITAL ADJUSTMENT THIS TRIBUNAL IN MOONG CONTROLS INDIA P LTD ITA 551/BANG/2015 AY 2010 DT 27.11.2015, HAS DIRECTED THE TPO TO ALL OW ACTUAL ADJUSTMENT TOWARDS THE DIFFERENCES IN THE OF WORKING CAPITAL P OSITION BETWEEN THE ASSESSEE AND THE ENTREPRENEURIAL COMPANIES SELECTED AS COMPARABLE. WE DIRECT THE TPO TO FOLLOW THIS DECISION. TO THIS EXTENT, THE ASSESSEES APPEAL GROUND IS ALLOWED. IT(TP)A.287 & 127/BANG/2015 PAGE - 18 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD DAY OF MARCH, 2017. SD/- SD/- (SUNIL KUMAR YADAV) (S. JAYARAMA N) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN* COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME TAX 4. THE COMMISSIONER OF INCOME TAX (A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR