Sandisk India Device Design Centre Private Limited, Bengaluru V. Joint Commissioner Of Income Tax, Special Range-6, Bangalore

ITA 288/BANG/2021

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 1399 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Assessment Year: 2016-2017
• Appeal Filed On: 27-06-2021

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI. LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(TP)A No. 288/Bang/2021 Assessment Year : 2016-17 M/s. SanDisk India Device Design Centre Pvt. Ltd., Survey No. 143/1, Amani Bellandur Khane Village, Prestige Excelsior, Prestige Tech Park, Marathalli – Sarjapur Outer ring Road, Kadubeesanahalli, Varthur Hobli, Bangalore – 560 103. PAN: AAICS9204M Vs. The Joint Commissioner of Income-tax (OSD), Circle 6 (1)(1), Bangalore. APPELLANT RESPONDENT Assessee by : Shri Ajay Roti, CA Revenue by : Dr. Manjunath Karkihalli, CIT DR Date of Hearing : 25-05-2022 Date of Pronouncement : 30-06-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against final assessment order passed by National e-assessment centre, New Delhi on 30.04.2021 for A.Y. 2016-17 on following grounds of appeal: “The grounds stated hereunder are independent of and without prejudice to one another. The Appellant submits as under: Page 2 of 32 IT(TP)A No. 288/Bang/2021 1. Assessment and reference to the Learned TPO are bad in law 1.1. The National e-Assessment Centre ('the NeAC'), erred in not providing an opportunity of being heard to SanDisk India Device Design Centre Private Limited (The Appellant' or 'the Company' or 'SanDisk India') before making a reference to the Additional Commissioner of Income-tax, Transfer Pricing — 2(2) ['the Learned Transfer Pricing Officer' or 'the Ld. TPO']. 1.2. The Hon'ble Dispute Resolution Panel ('Hon'ble Panel') Hon'ble Panel erred in upholding the order of the NeAC , which is bad on facts and in law, and is in violation of the principles of natural justice. The NeAC has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. Accordingly, the order passed by the Ld. TPO/NeAC is without jurisdiction. 2. Fresh comparability/ benchmarking analysis is liable to be quashed 2.1. The Hon'ble Panel erred in upholding the order of the Ld. TPO/NeAC , wherein the Ld. TPO erred in arbitrarily rejecting the Transfer Pricing Documentation maintained by the Appellant as per the provisions of Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (The Rules'), on account of mere difference of interpretation in selection of filters, is without any basis. 2.2. The Hon'ble Panel erred in upholding the order of the Ld. TPO/NeAC , wherein the Ld. TPO erred in law while interpreting the provisions of Rule 10E3(5) and Rule 10CA of the Income-tax Rules, 1962 ('the Rules') and proceeding to conduct a fresh benchmarking analysis. 2.3. The Hon'ble Panel erred in upholding the order of the Ld. TPO/ NeAC , wherein the Learned TPO conducted a fresh comparability/ benchmarking analysis using "non- contemporaneous" data and substituted the Appellant's analysis with the fresh benchmarking analysis on her own conjectures and surmises. Therefore, the Appellant prays that the fresh benchmarking analysis conducted by the Ld. TPO is liable to be quashed. 2.4. The Hon'ble Panel erred in upholding the order of the Ld. TPO/ NeAC wherein the Ld. TPO disregarded the fact of non-availability of contemporaneous data in public domain at the time of preparation of transfer pricing study by the Appellant. Further, the Ld. TPO also disregarded the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant. Page 3 of 32 IT(TP)A No. 288/Bang/2021 3. Application of arbitrary filters to arrive at a fresh set of companies as comparables 3.1. The Hon'ble DRP erred in upholding the action of the Learned TPaNeAC in applying the following arbitrary filters to arrive at companies as comparables to the Appellant. without establishing functional comparability: 3.1.1. Application of non-financial services to sales more than 75% as against other operating income to sales more than 50% applied by the Appellant; 3.1.2. Application of export services to sales more than 75% as against 25% applied by the Appellant; and 3.1.3. Application of persistent loss-making filter. 4. Turnover criteria 4.1. The Hon'ble Panel erred in upholding the action of the Ld. TPO/ NeAC in arbitrarily accepting companies without considering the turnover and size of the Appellant and such comparable companies. 5. Significant research and development ('R&D') activity 5.1. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in selecting the following companies which undertake significant R&D activities as comparable to the Appellant, without considering the functions performed of the Appellant: 5.1.1. Larsen and Toubro Infotech Limited: 5.1.2.Nihilent Limited: 5.1.3.Persistent Systems Limited; and 5.1.4. Infosys Limited. 6. Onsite filter 6.1. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in rejecting the Appellant's arguments on application of onsite filter to exclude the following companies in the software development services segment, that have significant onsite operations unlike the Appellant, which is an offshore service provider: 6.1.1. Larsen and Toubro Infotech Limited: 6.1.2. Nihilent Limited: 6.1.3. Thirdware Solution Limited; 6.1.4. Aspire Systems India Private Limited; and 6.1.5. Infosys Limited. 7. Data obtained under section 133(6) of the Act 7.1. The Hon'ble Panel erred in upholding the action of the Ld. TPO/ NeAC, where the data obtained under section Page 4 of 32 IT(TP)A No. 288/Bang/2021 133(6) of the Act for Nihilent Limited, was not shared with the Appellant during the course of the transfer pricing proceedings and without appreciating the fact that no opportunity was provided to the Assessee for rebutting the said information. 7.2. NeAC The Hon'ble Panel erred in upholding the action of the Ld. TPO/ NeAC , wherein the Ld. TPO stated that the decision of selecting comparables were arrived at after appropriately communication to the Appellant, without appreciating the fact that the following comparables are not comparable to the Appellant based on the data obtained under section 133(6) of the Act: 7.2.1.Persistent Systems Limited; 7.2.2.Infobeans Technologies Limited; 7.2.3.Thirdware Solutions Limited; and 7.2.4.Cybage Software Private Limited 7.3. Without prejudice to the above, the Hon'ble Panel erred in upholding the action of the Ld. TPO/ NeAC in considering data obtained under section 133(6) of the Act for establishing functional comparability with the Appellant, without providing an opportunity of rebutting such data based on cross examining the companies providing such data. 8. Working Capital adjustment 8.1. The Hon'ble Panel erred in upholding the action of the Learned TPO/ NeAC in not allowing appropriate working capital adjustment considering the functional and operational profile of the Appellant vis-à-vis the comparable companies. 9. Risk adjustment 9.1. The Hon'ble Panel erred in upholding the action of the Ld. TPO/ NeAC in not providing appropriate risk adjustment without appreciating the fact that there are differences in the risk profile of the Appellant vis-a-vis comparable companies. 10. Software Development Services segment 10.1. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in accepting the following companies as functionally comparable to the Appellant. 10.1.1. Larsen and Toubro lnfotech Limited; 10.1.2. Nihilent Limited; 10.1.3. Inteq Software Private Limited; 10.1.4. Persistent Systems Limited; 10.1.5. Infobeans Technologies Limited; 10.1.6. Thirdware Solution Limited; 10.1.7. lnfosys Limited; Page 5 of 32 IT(TP)A No. 288/Bang/2021 10.1.8. Aspire Systems (India) Private Limited; and 10.1.9. Cybage Software Private Limited; 10.2. Without prejudice to the above, the Ld. TPO/ NeAC erred in not rectifying the margin of Nihilent Limited, Aspire Systems (India) Private Limited, Infosys Limited, Thirdware Solution Limited and Cybage Software Private Limited while passing the final assessment order. 10.3. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in accepting Infosys Limited, Nihilent Limited and Larsen and Toubro Infotech Limited even though there are certain extra-ordinary events such as acquisition/ peculiar economic circumstances during the relevant FY 2015-16. 10.4. The Hon'ble DRP erred in upholding the approach of the Ld. TPO/ NeAC in computing the quantum of related party transactions and accepting Persistent Systems Limited and Aspire Systems (India) Private Limited as passing the related party transactions filter. 10.5. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in excluding Goldstone Technologies Limited, on the basis that it fails persistent loss filter; 10.6. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in excluding Akshay Software Technologies Limited, on the basis that it is not functionally comparable to the Appellant; 10.7. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in excluding R System International Limited, on the basis that it has different financial year ending, without considering its functional comparability; 10.8. The Hon'ble DRP erred in excluding E-Zest Solution Limited and Sybrant Technologies Limited, on the basis that the companies do not form part of the search process, without appreciating the fact that both the companies were forming part of the search process of the Ld. TPO. 11. Interest on External Commercial Borrowings 11.1. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in disregarding the analysis performed by the Appellant on the external commercial borrowings obtained during FY 2014-15 and the payment of interest on such external commercial borrowing. 11.2. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in not considering that the interest paid is within the threshold specified by the Reserve Bank of India (RBI') and is at arm's length. 11.3. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in conducting a fresh benchmarking Page 6 of 32 IT(TP)A No. 288/Bang/2021 analysis of the transaction of interest paid on External Commercial Borrowings (`ECIT) and disregarding the defects in such benchmarking analysis. 11.4. Without prejudice to the above, the Hon'ble DRP/ erred in upholding the action of the Ld. TPO/ NeAC in not considering the correct benchmarking analysis conducted by the Appellant using the search process adopted by the Ld. TPO in the show cause notice. 12. Marketing support services segment 12.1. The Hon'ble DRP erred in upholding the action of the Ld. TPO, wherein the marketing support services provided by the Appellant was re-characterised as a commissionaire/ agent model, without any basis and by disregarding the submissions made by the Appellant with respect to its functions; 12.2. The Hon'ble DRP erred in upholding the action of the Ld. TPO in disregarding the submissions of the Appellant and re-characterising the marketing support services on the basis of the assessment order passed in FY 2014-15. 12.3. The Hon'ble DRP erred in upholding the action of the Ld. TPO in conducting the fresh benchmarking analysis after recharacterizing the functions of the Assessee, thereby selecting 9 comparables, with the profit level indicator being Gross Profit /Sales and proposing an adjustment of INR 495,858,516 at an arm's length rate of 9.76% as Commission rate method; 12.4. Without prejudice to the above, the Hon'ble DRP erred in upholding the action of the Ld. TPO in selecting a combination of two methods, i.e., Resale Price Method and Other Method as the most appropriate method while undertaking the benchmarking analysis. 12.5. Without prejudice to the above grounds 11.1 to 11.3, the Hon'ble DRP erred in upholding the action of the Ld. TPO in applying incorrect quantitative filters while undertaking the fresh benchmarking analysis. 12.6. The Hon'ble DRP erred in upholding the action of the Learned TPO/ NeAC in accepting the following companies as functionally comparable to the Appellant. 12.6.1. NGRT Systems Private Limited; 12.6.2. Bhatia Communications & Retail (India) Limited; 12.6.3. Creative Peripherals & Distribution Limited; 12.6.4. Prime Retail India Limited 12.6.5. Cyrix Infotech Private Limited 12.6.6. Khosla Electronics Private Limited 12.6.7. Zicom Electronic Security Systems Limited 12.6.8. Ample Technologies Private Limited 12.6.9. Advanced Telemedia Private Limited Page 7 of 32 IT(TP)A No. 288/Bang/2021 12.7. Without prejudice to the contentions of the Appellant on the recharacterization, the Ld. TPO erred in not providing the relief for the incremental revenue of MSS (relating to share based compensation cost) already offered to tax by the Assessee. 13. Free of cost assets: 13.1. The Hon'ble Panel erred in upholding the action of the NeAC in treating the value of free of cost assets received by the Appellant as perquisites/ benefits arising to the Appellant under section 28(iv) of the Act and bringing the same to tax. 13.2. Without prejudice to the above, the Hon'ble Panel erred in not providing depreciation on the value of free of cost assets be imputed. Further, the Appellant prays that such depreciation be considered as a part of the operating cost base only for the limited purpose of computing markup in the software development segment of the Appellant. 14. Disallowance of salaries paid, and reimbursements of expenses made towards seconded employees 14.1. The Hon'ble Panel erred in upholding the action of the NeAC in disallowing a sum of INR 102,281,802 on account of non-deduction of taxes under section 195 of the Act, without appreciating the fact that the Appellant had submitted that appropriate taxes have been deducted with respect to the above. 14.2. Without prejudice to the above, the NeAC erred in computing the disallowance as INR 102,281,802 by adding the salaries on which taxes were deducted by SanDisk India i.e., INR 65,587,265 and also the reimbursement of INR 36,694,537 which are already included in the sum of INR 65,587,265. 15. Disallowance of bonding and debonding charges 15.1. The Hon'ble Panel erred in upholding the action of the NeAC that payment made towards bonding and debonding charges are capital in nature and disallowing such expense under section 37 of the Act. 15.2. Without prejudice to the above, the Appellant prays that if such bonding and debonding charges were to be considered as capital in nature, then appropriate depreciation ought to be provided as an allowance. 16. Deduction under Chapter VI - A of the Act 16.1. The NeAC erred in not considering a deduction of INR 640,000 under Chapter VI-A of the Act, while computing the taxes in the final assessment order. Page 8 of 32 IT(TP)A No. 288/Bang/2021 17. Short credit of self-assessment taxes 17.1. The NeAC erred in not granting full credit of the self- assessment taxes paid during FY 2015-16 and in considering an amount of INR 43,552,715 as against INR 65,661,684. 18. Short credit of advance tax 18.1. The NeAC erred in not granting full credit of the advance tax paid by the Appellant and in considering an amount of INR 107,170,000 as against INR 171,254,000. 19. Non-grant of credit of dividend distribution tax 19.1. The NeAC erred in not granting credit for the dividend distribution taxes and levying interest, while computing the taxes in the final assessment order. 20. Interest under section 234B of the Act 20.1. The NeAC has erred in law and on facts in levying interest under section 234B of the Act. 21. Initiation of Penalty Proceedings 21.1. The NeAC erred in initiating penalty proceedings under section 271 of the Act. 22. Relief 22.1. The Appellant prays that directions be given to grant all such relief arising from the preceding grounds as also all reliefs consequential thereto. 22.2. The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, at any time before or during the hearing of the appeal.” 2. Brief facts of the case are as under: 2.1 Assessee is found to be engaged in the business of designing, developing and manufacturing data storage solutions in a variety of form factors using their flash memory, proprietary controller and firmware technologies. For year under consideration, assessee filed its return of income on 30.11.2016 declaring total income of Rs.60,43,93,000/-. The case was selected for scrutiny and statutory notices were issued to assessee. In response to the notices, assessee filed the relevant details as called for. The Ld.AO observed that assessee had entered into international transactions Page 9 of 32 IT(TP)A No. 288/Bang/2021 exceeding Rs. 15 crores. Accordingly, the case was referred to the transfer pricing officer. 2.2 On reference received by the Ld.TPO under 92CA, the Ld.TPO called upon assessee to furnish the economic details of the international transaction in form 3CEB. From the details filed, the Ld.TPO observed that following the international transaction entered into by assessee. 2.3 The Ld.TPO observed that the following were the segmental break-up of incremental revenue and corresponding cost: 2.4 The Ld.TPO observed that, the assessee reported international transactions in respect of Software Development Service (SWD), IT Enabled Services (ITeS) and Market Support Services (MSS). The Page 10 of 32 IT(TP)A No. 288/Bang/2021 arm's length price of the international transactions in SWD/ITeS/MSS segments provided to the associated enterprises (AE) has been determined by applying Transactional Net Margin Method (TNMM), stating to be the most appropriate method in the facts and circumstances of the case. The operating profit to operating cost ratio has been taken as the profit level indicator (PLI) in TNMM analysis. 2.5 The Ld.TPO on verifying the details agreed with the arms length margin, computed in respect of ITES segment which was at 18%. However, he disputed the transfer pricing study by assessee in respect of software development segment and marketing support segment. 2.6 Marketing support segment: In respect of marketing support segment, the Ld.TPO recharacterised assessee as sales agent and held that assessee should have been reimbursed with sales commission. Accordingly, the Ld.TPO after shortlisting the list of 9 comparables determined the average margin at 9.76%. The Ld.TPO was of the opinion that, the assessee was involved in entrepreneurial activities and was not merely providing support services to its foreign AEs for marketing in India. The Ld.TPO therefore characterised the assessee to be carrying out that sales promotion and marketing exercises. The Ld.TPO held assessee to be an agent of parent company in effecting sales. 2.7 Referring to the final assessment order passed in assessee’s own case for A.Y. 2015-16, the Ld.TPO observed as under: Page 11 of 32 IT(TP)A No. 288/Bang/2021 “ 2.8 The Ld.TPO thus proposed an adjustment of Rs.49,58,58,516/- by applying commission rate method in respect of the MSS segment. 2.9 Software Development segment: In SWD segment, the Ld.TPO rejected the comparables and the filters applied by assessee. He observed that assessee used 7 comparables, by using OP/PC as PLI, and computed average Page 12 of 32 IT(TP)A No. 288/Bang/2021 margin at 15%. Following were the comparables selected by assessee . 2.10 The Ld.TPO thereafter applying various filters finalised the following 17 comparables with an average margin of 25.64%. S.No. Company Name Financial Year wise OP/OC (%) 2015-16 2014-15 2013-14 Average 1 Kals Information Systems Pvt. Ltd. 3.97% 5.77% 16.94% 8.60% 2 E-Zest Solutions Limited 7.65% 11.80% 14.88% 10.87% 3 Rheal Software Pvt. Ltd. 3.20% 2.76% 36.64% 14.50% 4 Sybrant Technologies Private Limited 16.10% 13.88% 15.26% 14.74% 5 Harbinger Systems Pvt. Limited 12.69% 17.18% No Data in Public Domain 15.06% Page 13 of 32 IT(TP)A No. 288/Bang/2021 6 C G-V A K Software & Exports Ltd. 19.60% 19.87% 13.81% 18.50% 7 R S Software (India) Ltd. -2.09% 32.75% 24.14% 20.87% 8 Larsen & Toubro Infotech Ltd. 26.29% 24.22% 23.54% 24.83% 9 Orion India Systems Private Limited 26.08% 25.14% No Data in public domain 25.64% 10 Nihilent Ltd. 15.94% 29.19% 35.72% 26.36% 11 Inteq Software Pvt. Ltd. 7.53% 32.14% 45.00% 1 28. 20% 12 Persistent Systems Ltd. 26.92% 31.34% 35.64% 30.89% 13 lnfobeans Technologies Ltd. 34.98% 20.78% 41.95% 32.42% 14 Thirdware Solution Ltd. 23.89% 44.39% 44.68% 36.90% 15 Infosys Ltd. 38.22% 41.30% 36.28% 38.61% 16 Aspire Systems (India) Pvt. Ltd. 34.26% 47.56% 38.04% 39.28% 17 Cybage Software Pvt. Ltd. 62.90% 68.68% 68.82% 66.45% 35th Percentile 18.50% Median 25.64% 65th Percentile 30.89% 2.11 He thus proposed an adjustment of Rs.35,49,09,827/- under the software development segment. While computing the margin, the Ld.TPO did not grant the Working Capital Adjustment also rejected risk adjustment by following various decisions of Coordinate Bench of this Tribunal. 2.12 ECB Loan: Further, the Ld.TPO observed that assessee had availed ECB loan from its AE during the year under consideration and has paid interest during the year at 4.5 & 4.875% amounting to Rs.13,57,80,102/-. The Ld.TPO observed that, the interest transaction was bench marked by the assessee using the other method, and noted that, the only justification provided by assessee for the interest rate was that, it was that a regulatory framework laid down by RBI. The Ld.AO was not satisfied with the justification offered by the assessee, and was of the opinion that the assessee has not benchmarked the interest paid on ECB loan to the AE correctly. Page 14 of 32 IT(TP)A No. 288/Bang/2021 2.13 He thus passed detailed discussion in the transfer pricing order, considered average value coupon rate as determined from comparable loan transaction to be at 3.74 for the comparables. The Ld.TPO thus computed or proposed adjustment at Rs.2,72,41,922/- in respect of the interest paid on ECB loan by the assessee. 2.14 Thus the total adjustment proposed by the Ld.TPO are as under: 2.15 On receipt of the Ld.TPO, the Ld.AO passed draft assessment order by making further addition which are as under. 1. Assets received free of cost or on loan from AE disallowed u/s. 28(iv) – Rs.57,89,38,923/- 2. Payment made to expats disallowed as FIS / FTS disallowed u/s. 40(a)(i) – Rs.10,22,81,802/- 3. Bonding and debonding charges disallowed u/s. 37 – Rs.19,51,209/-. 2.16 Against the draft assessment order, assessee filed objections before the DRP. 2.17 The DRP partly considered the objections of the assessee wherein certain comparables sought for exclusion by assessee were excluded however certain comparables were also excluded by the DRP suo moto. In respect of the other issues alleged on transfer pricing adjustments, the DRP upheld the observation of Page 15 of 32 IT(TP)A No. 288/Bang/2021 the Ld.TPO. On the issues of corporate tax addition, the additions proposed in the draft assessment order were also upheld by the DRP. 2.18 On receipt of the draft assessment order, the Ld.AO passed impugned order by making addition of Rs.2,24,07,01,345/-, to the taxable income as per return of income filed by the assessee. 2.19 Aggrieved by the final assessment order passed, assessee has filed present appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that Ground nos. 1 and 4 are general in nature and do not require independent adjudication. 4. Ground nos. 5 – 7 is in respect of the comparables sought for exclusion by assessee under software development service segment. 5. Ground no. 8 is on not allowing the Working Capital Adjustment. 6. Ground no. 9 is on risk adjustment sought by assessee. At the outset, the Ld.AR submitted that assessee did not wish to press this issue and therefore the same is rejected. 7. Ground nos. 10.1 – 10.4 are connected with Ground nos. 5-7 and therefore need not be separately adjudicated. 8. Ground no. 10.5 is in respect of suo moto excluding Goldstone Technologies Ltd. by DRP. 9. Ground nos. 10.6 – 10.8 are not pressed by assessee and therefore are rejected. 10. Ground no. 11 is on the adjustment computed in respect of interest on ECB loans. 11. Ground no. 12 is in respect of recharacterising assessee as an agent under the marketing support services segment. Page 16 of 32 IT(TP)A No. 288/Bang/2021 12. Ground no. 13.1 is not pressed by assessee and therefore rejected. Only issue argued by the Ld.AR is on ground no. 13.2 seeking depreciation on the assets that have been supplied by the AE. 13. Ground no. 14 is in respect of the reimbursement of the expenses. 14. Ground no. 15 is in respect of disallowance of debonding charges. 15. Ground nos. 16-19 are issues wherein the Assessing Officer is to be directed for verifying the claim in accordance with the evidences filed by the assessee. 16. Ground nos. 20 & 21 are consequential in nature. 17. Ground nos. 5 – 7 and Ground nos. 10.1 – 10.4 17.1 Before we undertake the comparability analysis, it is sine qua non to understand the functions performed by the assessee under the software development services segment. Software Development segment Functions performed SanDisk India is engaged in rendering software development services to its AEs. The conceptualization of product is done by Corporate engineering (‘CE’) in US. CE understands the needs of the existing customers and prospective customers through marketing channels and forecasts the revenue. The software development team designs and develops the product based on inputs received from the CE. Once the product is developed and approved by various teams, such product passes series of internal testing and the bugs identified, if any are fixed. Page 17 of 32 IT(TP)A No. 288/Bang/2021 Activities performed in India  The RPG team in India stitches the various components required for the final product as per blue prints provided by the Associated Enterprises.  After the proto type is developed, it is quality tested and a compatibility check is undertaken. The equipment used in the labs for quality check and compatibility check are normally various kinds of end products like cameras, mobile phones. The functions are performed by RPG team in India are based on specifications received from US. The team in India is supported by 709 (approx.) employees and approximately 500 contractors. Assets The following sections provide an overview of the significant capitalized and non-capitalized assets employed by the AEs in the transaction group provision of software development services, ITES Services and Marketing Support services. A total overview about the capitalized assets is presented in the financial statement of the related parties. For the purposes of the analysis, the significant assets are subdivided in tangible and intangible assets below. Any business requires assets (tangible or intangible) without which it cannot carry out its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important Intangible Assets SanDisk India does not own or develop significant intangible assets and it also does not undertake any significant design and Page 18 of 32 IT(TP)A No. 288/Bang/2021 development activities on its account that leads to development of non-routine intangibles. SanDisk India uses computer software to carry out its business activities. Tangible Assets SanDisk India employs necessary tangible assets required in respect of the above mentioned functions. Page 19 of 32 IT(TP)A No. 288/Bang/2021 Risks undertaken Page 20 of 32 IT(TP)A No. 288/Bang/2021 Entity characterisation SanDisk India only performs software development, ITeS and MSS activities and does not perform the key decision making functions including but not limited to market research, product ideation, process development, etc. All strategic decisions are undertaken Page 21 of 32 IT(TP)A No. 288/Bang/2021 by its AEs. AEs of SanDisk India assigns work to development centres, including the Company and is responsible for monitoring its activities, providing the management/ strategic oversight and directions. SanDisk India does not assume any risk associated with the activities it undertakes. All primary risks such as the market risk, contract risk, credit risk, etc. are borne by its AEs. SanDisk India does not bear the cost of software development, ITeS and MSS segment. The entire cost of the operations is passed on to its AEs as cost incurred by SanDisk India is reimbursed by its AEs along with an arm's length mark-up. Based on the above, SanDisk India can be characterized as a service provider bearing insignificant risk. 17.2 Based on the above, we shall undertake the comparability analysis of the alleged comparables sought for exclusion by assessee. 17.3 At the outset, the Ld.AR submitted that the above comparables have been considered by Coordinate Bench of this Tribunal, Hon’ble Hyderabad Tribunal as well as Hon’ble Mumbai Tribunal in other cases having similar facts it is also been submitted by Ld.AR that these comparables do not satisfy the turnover filter that has been applied by the Ld.TPO and at the outset deserves to be eliminated. The Ld.AR referring to the annual reports, placed in the paper books filed before this Tribunal reveals that turnover is more than Rs.200 crores and does not match even 10 times the turnover of assessee. The Ld.AR thus submitted that applying either the turnover filter of Rs. 1 crore to Page 22 of 32 IT(TP)A No. 288/Bang/2021 Rs. 200 crores or 10 times the assessee’s turnover to 1/10 th , these comparables deserves to be excluded. 17.4 It is also submitted that these comparables are not functionally similar with that of the assessee as has been observed by Coordinate Bench of this Tribunal in following cases: 1. Decision of Hon’ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT in ITA No. 1379/M/2021 by order dated 25.02.2022 for A.Y. 2016-17. 2. Decision of Hon’ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. vs. DCIT in ITA-TP.No. 198/Hyd/2021 by order dated 06.10.2021 for A.Y. 2016-17. 3. Decision of Coordinate Bench of this Tribunal in case of OLF (India) Software Pvt. Ltd. vs. ACIT in IT(TP)A No. 182/Bang/2021 by order dated 28.09.2021 for A.Y. 2016-17. 17.5 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 17.6 We have perused the submissions advanced by both sides in the light of records placed before us. 17.7 He placed reliance on the decision of Coordinate Bench of this Tribunal in case of OLF (India) Software Pvt. Ltd. vs. ACIT (supra) wherein this Tribunal following its decision in case of LSI India research development (P.) Ltd. vs. DCIT reported in [2021] 124 taxmann.com 83, excluded Persistent Systems Ltd., L&T Infotech Ltd., Thirdware Solutions and Infosys Ltd. by observing as under: “3.2 This Tribunal in LSI India research development (P.) Ltd. v. DCIT (supra) observed in respect of persistent systems, L & T Infotech, Thirdware Solutions, Infosys Ltd. as under: 16. As far as the challenge by the assessee on exclusion of aforesaid 5 companies in ground No. 2(f), the ld. counsel for the assessee has brought to our notice a decision of Page 23 of 32 IT(TP)A No. 288/Bang/2021 Bangalore Bench of ITAT for the very same Assessment Year 2014-15 in the case of LG Soft India (P.) Ltd. v. DCIT [IT(TP) Appeal No. 3122 (Bang.) of 2018, dated 28-5-2019]. In this order rendered in a case of assessee rendering SWD services such as the assessee, the Tribunal excluded 3 out of 5 companies referred to in the earlier paragraph and remanded 1 company for fresh consideration with the following observations:- "5. The Ld A.R submitted that M/s Infosys Ltd, M/s Persistent Systems Ltd and M/s Thirdware Solutions Ltd have been excluded by the co-ordinate bench in the assessee's own case in AY 2008-09 in IT(TP)A No. 1673/Bang/2012. 6. We notice that the co-ordinate bench has excluded M/s Infosys Ltd in AY 2008-09 by following the decision rendered by another co-ordinate bench in the case of 3DPLM Software Solutions Ltd (IT(TP)A No. 1303/Bang/2012 dated 28-11-2013, wherein the decision rendered in the case of Triology E Business Software India P Ltd (ITA No. 1054/Bang/2011) was followed and it was held that M/s Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break-up of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Infosys Ltd. 7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s Persistent Systems Ltd is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Persistent Systems Ltd. We also notice that in AY 2008-09, the co-ordinate bench has excluded M/s Thirdware Solutions Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd. (supra), where in it was held that M/s Thirdware solutions Ltd is engaged in product development and earns revenue from sale of licenses and Page 24 of 32 IT(TP)A No. 288/Bang/2021 subscription. Further, the segmental details were not available. 8.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Thirdware Solutions Ltd. 17. As far as exclusion of Larsen & Toubro Infotech Ltd., is concerned, the Tribunal in the very same case of LG Soft (P.) Ltd. (supra) in another order dated 27-9-2019 in MP No. 95/Bang/2019 held that exclusion of Larsen & Toubro Infotech Ltd., was omitted to be adjudicated in the original order dated 28-5-2019 passed by the Tribunal referred in the earlier paragraph and held that Larsen & Toubro Infotech Ltd., is also not a comparable company because there were extraordinary events that occurred in the relevant previous year and that it possessed brand and intangibles and there was no segmental information of sub-contracting expenses”. 3.3 There is nothing on record brought by the Ld.CIT.DR in order to establish that these are comparable with assessee that is a captive service provider which functions at the strict supervision and instructions by the AE’s. Further we note that turnover criteria has to be applied with an upper limit which is not been considered by the Ld. TPO. The TPO has applied less than 1 crore turnover limit to eliminate the comparables however it failed to apply upper limit considering the functions performed assets owned and risk assumed by assessee under this segment for the year under consideration.” 17.8 Before us, the Ld.AR has not been able to place anything on record contrary to the above observation. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Persistent Systems Ltd., L& T Infotech Ltd., Thirdware Solutions and Infosys Ltd. from the final list. 17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon’ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under: “Comparable Sought to be excluded by the assessee Aspire System India Pvt. Ltd. (Aspire) 40. The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment on the ground that it fails Related Party Transaction (RPT) filters as its RPT/ sales ratio is more than 25%. The assessee Page 25 of 32 IT(TP)A No. 288/Bang/2021 computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providing opportunity of being heard to the assessee. So this comparable is remitted back to the Ld. TPO to decide afresh.” “Nihilent Analytics Ltd. (Nihilent) 44. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No.405 of the paper book, wherein it is mentioned that it is engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc. 45. Perusal of the disclosure of enterprise’s reportable segment explanatory available at page No.A406 of the paper book shows that Nihilent is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No.A304, A405-A406 of the paper book shows that Nihilent has only one business segment and in the absence of segmental financials, as it is into diversified business, this company cannot be a valid comparable vis- à-vis assessee, who is a low risk entity working on cost + markup model. Hence, Nihilent is ordered to be excluded as a comparable. Nihilent Ltd. 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-à-vis assessee which is a routine software development service Page 26 of 32 IT(TP)A No. 288/Bang/2021 provider working on cost + markup model, hence ordered to be excluded.” “Infobeans Technologies Ltd. (Infobeans) 49. The assessee sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA). 50. Perusal of financials available at page A303, A418 to A421, Infobeans shows that it is into diversified services but its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee.” 17.10Perusal of the annual report, filed before us in respect of the above two comparables, we note that the segmental financials are not available in respect of Nihilent and Infobeans and the RPT in respect of Aspire Systems India Pvt. Ltd. is more than 25% being the threshold limit considered by the Ld.TPO. Nothing has been placed before us by the Ld.DR in order to take a different view. Respectfully following the Hon’ble Mumbai Tribunal, we direct the Ld.TPO to exclude Nihilent, Infobeans and Aspire Systems from the final set. 17.11 One more comparable alleged by assessee in ground no. 7.2.4 being Cybage Software Pvt. Ltd. has not been argued and therefore the same is not considered herein. Accordingly, ground nos. 5-7.2.3 and ground nos. 10-10.4 raised by assessee stands allowed as indicated hereinabove. Page 27 of 32 IT(TP)A No. 288/Bang/2021 18. Ground no. 8 The Ld.AR submitted that Working Capital Adjustment has not been granted to the assessee. After considering the submissions by both sides, we direct the Ld.AO/TPO to compute the Working Capital Adjustment on actuals in order to determine the arms length price of the transaction. Accordingly this ground raised by assessee stands allowed for statistical purposes. 19. Ground no. 10.5 19.1 The Ld.AR submitted that DRP suomoto excluded Goldstone Technologies Ltd. without having alleged by the assessee. He submitted that this comparable was accepted by the Ld.TPO and assessee. On the contrary, the Ld.DR submitted that DRP excluded this comparable since it was incurring persistent loss in the preceding two years. 19.2 We note that this issue needs to be verified by the revenue. Accordingly the Ld.TPO is directed to verify the submissions and to consider the claim in accordance with law. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 20. Ground no. 11 20.1 The Ld.TPO has computed adjustment in respect of interest paid by assessee on ECB loan provided by the AE. He submitted that the said rate is within the threshold limit as per the RBI and no adjustment is called for. Referring to the observations of Ld.TPO, the Ld.AR submitted that the TPO himself accepts that assessee has paid the interest to its AE between 4.5 and 4.8% whereas the RBI rate was determined to be six months LIBOR + Page 28 of 32 IT(TP)A No. 288/Bang/2021 500 basis points. However, he submitted that the TPO determined the comparable loan transaction at 3.74%. 20.2 On the contrary, the Ld.DR submitted that the rate applied by the Ld.AO is to be upheld. 20.3 We have perused the submissions advanced by both sides in the light of records placed before us. 20.4 We note that the Ld.TPO has carried out fresh benchmarking analysis without following the principles laid down by Hon'ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd. reported in (2015) 55 taxmann.com 523. 20.5 We direct the Ld.TPO to follow the principles laid down by this Tribunal in case of Cotton Naturals (supra), having referred to the rate applied by the assessee being within threshold limit as per the RBI Circular No. 12/2015-16 dated 01/07/2015 on ECB. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 21. Ground no. 12 is in respect of the recharacterising assessee as an agent under the marketing support service segment. The Ld.AR submitted that assessee performs routine marketing support functions and cannot be considered to be commission agent for the AE. He submitted that the Ld.TPO without considering the agreement entered into between the assessee and the AE for performing the marketing support services has recharacterised assessee to be an agent and proposed an adjustment by computing a margin of 9.76% which is less than the margin computed by the assessee under the segment. 21.1 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. Page 29 of 32 IT(TP)A No. 288/Bang/2021 21.2 We have perused the submissions advanced by both sides in the light of records placed before us. 21.3 We note that the Ld.TPO carried out recharacterisation of assessee without understanding the functions performed by the assessee under the marking support service segment. We are therefore of the opinion that this issue needs to be verified by the Ld.AO/TPO denovo. Assessee is directed to file all relevant information in support of its contention which shall be verified and considered by the Ld.AO/TPO in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes. 22. Ground no. 13.2 22.1 The Ld.AR submitted that assessee is seeking depreciation on the capital asset that was received from the AE. We therefore direct the Ld.AO to grant depreciation to the assets that stand capitalised by the Ld.AO in accordance with law. Accordingly ground no. 13 raised by assessee stands partly allowed. 23. Ground no. 14 is in respect of disallowance of salaries paid and reimbursement of expenses made towards seconded employees. The Ld.AR submitted that TDS has been deducted on the entire salary paid by assessee to the seconded employees and what is reimbursed is the payment which has been partly made by the AE to the families of such seconded employees. The Ld.AR submitted that though the 100% salary has been subjected to TDS assessee has paid only part of the salary to the seconded Page 30 of 32 IT(TP)A No. 288/Bang/2021 employees in India and balance of such salary has been reimbursed to the AE as the same has been paid by the AE to the employees. The Ld.AR submitted that all the details relevant in respect of the salaries and the TDS deduction which were submitted before the authorities below which has not been considered. He has placed reliance on the observation of Coordinate Bench of this Tribunal in case of M/s. Toyota Boshoku Automotive India Pvt. Ltd. vs. DCIT in IT(TP)A No. 1646/Bang/2017 by order dated 13.04.2022 and in the case of Goldman Sachs Services Pvt. Ltd. vs. DCIT in IT(IT)A Nos. 362 to 369 & 338 to 345/Bang/2020 by order dated 29.04.2022. Identical issue has been considered at length. 23.1 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 23.2 We have perused the submissions advanced by both sides in the light of records placed before us. 23.3 We note that the evidences filed by assessee has not been considered by the revenue authorities. 23.4 We therefore remand this issue to the Ld.AO to consider the claim in accordance with the decision of Coordinate Bench of this Tribunal in the above referred cases M/s. Toyota Boshoku Automotive India Pvt. Ltd. vs. DCIT (supra) Goldman Sachs Services Pvt. Ltd. vs. DCIT(supra) having regard to the evidences filed by the assessee. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes. Page 31 of 32 IT(TP)A No. 288/Bang/2021 24. Ground no. 15 – The Ld.AR submitted that the bonding and debonding charges were disallowed for not furnishing the evidences as has been observed by the DRP. He submitted that assessee may be alternatively granted depreciation on the assets. 24.1 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 24.2 We have perused the submissions advanced by both sides in the light of records placed before us. 24.3 We note that the bonding and debonding expenses have been incurred by assessee in respect of capital asset. Assessee is seeking depreciation on such charges as the same were disallowed u/s. 37 of the Act. The assessee has not filed any evidences in support of its claim however the Ld.AR has submitted that assessee may be provided an opportunity to substantiate the claim. We accordingly remand this issue to the Ld.AO to verify the evidences if any filed by the assessee and to consider the alternate claim of deprecation in accordance with law. 24.4 Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes. 25. Ground nos. 16-19 are in respect of certain deductions claimed under chapter VIA, short credit of self assessment and advance tax granted by the Ld.AO and non granting of dividend distribution tax credit to assessee. 25.1 We direct the Ld.AO to consider the claim in accordance with law having regard to the evidences filed by the assessee. Page 32 of 32 IT(TP)A No. 288/Bang/2021 Accordingly these grounds raised by assessee stands allowed for statistical purposes. 26. Ground nos. 20-21 are consequential in nature and therefore do not require any adjudication. 26.1 Apart from the above grounds that has been considered in this order, no other issues raised in the grounds of appeal have been argued and therefore are not being considered. In the result, the appeal filed by the assessee stands partly allowed as indicated hereinabove. Order pronounced in open court on 30 th June, 2022. Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 30 th June, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore