M/s Broadcom Communications Technologies Private Limited , Bangalore V. Additional Commissioner of Income Tax Special Range-1 , Bangalore

ITA 349/BANG/2019

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 2747 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 25-02-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN
• Section: 207; 13

Judgement Text

IT TP A 349 OF 2019 M/S. LSI INDIA RESEARCH & DEVELOPMENT PRIVATE LIMIT ED BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: BANGALORE BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO. 349/BANG/2019 ASSESSMENT YEAR: 2010-11 M/S. LSI INDIA RESEARCH & DEVELOPMENT PRIVATE LIMITED (IN THE CASE OF ERSTWHILE BROADCOM COMMUNICATIONS TECHNOLOGIES PRIVATE LIMITED, SINCE MERGED) S1, WIPRO ELECTRONIC CITY SPECIAL ECONOMIC ZONE DODDATHOGUR VILLAGE BEGUR HOBLI ELECTRONIC CITY, BANGALORE-560 100 PAN NO : AACCB8136B VS. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 4(1)(1) BANGALORE APPELL ANT RESPONDENT APPELLANT BY : SHRI SHARATH RAO, A.R. RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, D.R. DATE OF HEARING : 12.03.2020 DATE OF PRONOUNCEMENT : 17.03.2020 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 28.12.2018 PASSED BY THE ASSESSING OFFI CER FOR IT TP A 349 OF 2019 M/S. LSI INDIA RESEARCH & DEVELOPMENT PRIVATE LIMIT ED BANGALORE PAGE 2 OF 6 ASSESSMENT YEAR 2010-11 IN PURSUANCE OF DIRECTIONS GIVEN BY LD DISPUTE RESOLUTION PANEL (DRP). 2. THIS IS SECOND ROUND OF PROCEEDINGS. IN THE FIRST ROUND, THE TRIBUNAL HAD RESTORED CERTAIN ISSUES TO THE DRP AND ACCORDINGLY, THE IMPUGNED ASSESSMENT ORDER CAME TO BE PASSED. 3. THOUGH THE ASSESSEE HAS RAISED SEVERAL GROUN DS, THE LD A.R PRESSED GROUND NO.4 ONLY BEFORE US AND IN THIS REGA RD, HE HAS ALSO MADE NECESSARY ENDORSEMENT IN THE GROUNDS OF APPEAL . IN GROUND NO.4, THE ASSESSEE IS SEEKING EXCLUSION OF FOUR COM PARABLE COMPANIES. 4. THE LD A.R SUBMITTED THAT THE ASSESSEE IS PR OVIDING CAPTIVE SOFTWARE DEVELOPMENT SERVICES TO ITS AE. THE TURNO VER OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION WAS RS.31 .09 CRORES. THE ASSESSEE HAS ADOPTED TNMM METHOD AS MOST APPROPRIAT E METHOD AND THE PROFIT LEVEL INDICATOR (PLI) ADOPTED BY THE ASSESSEE WAS OPERATING PROFIT/OPERATING COST (OP/OC). THE PLI O F THE ASSESSEE WAS 11.86%. IN THE PRESENT APPEAL, THE ASSESSEE SEE KS EXCLUSION OF FOLLOWING COMPARABLE COMPANIES:- (A) LARSEN & TOUBRO INFOTECH LTD (B) PERSISTENT SYSTEMS LTD (C) INFOSYS LTD (D) ICRA TECHNO ANALYTICS LTD. 5. THE LD A.R SUBMITTED THAT THE THREE COMPANIES, VIZ., LARSEN & TOUBRO INFOTECH LTD, PERSISTENT SYSTEMS LTD AND INF OSYS LTD ARE REQUIRED TO BE EXCLUDED ON TURNOVER FILTER, AS THEI R TURNOVER IS MORE THAN TEN TIMES OF THE ASSESSEES TURNOVER. IN SUPP ORT OF THIS PROPOSITION, HE PLACED HIS RELIANCE ON THE DECISION RENDERED BY THE CO-ORDINATE BENCH OF TRIBUNAL IN THE CASE OF KBACE TECHNOLOGIES P LTD (ITA NO.3198/BANG/2018 DATED 29-01-2020). IT TP A 349 OF 2019 M/S. LSI INDIA RESEARCH & DEVELOPMENT PRIVATE LIMIT ED BANGALORE PAGE 3 OF 6 6. IN RESPECT OF ICRA TECHNO ANALYTICS LTD, THE LD A.R SUBMITTED THAT THE LD DRP HAS EXCLUDED THIS COMPANY IN THE FI RST ROUND OF PROCEEDINGS. ACCORDINGLY HE SUBMITTED THAT THE LD DRP SHOULD NOT HAVE TAKEN DIFFERENT VIEW IN THE SECOND ROUND. HE SUBMITTED THAT THE DRP HAS TAKEN THE VIEW THAT THIS COMPANY HAS RE CEIVED SUBSTANTIAL INCOME FROM PROVISION OF SERVICES AND T HE REVENUE FROM SALES IS NEGLIGIBLE. HOWEVER, THE FACT REMAINS THA T THIS COMPANY IS PROVIDING MULTIPLE TYPES OF SERVICES WHICH COMPRISE S OF SOFTWARE DEVELOPMENT, SOFTWARE CONSULTANCY, ENGINEERING SERV ICES, WEB DEVELOPMENT, WEB HOSTING ETC., AND NO SEGMENTAL INF ORMATION IS AVAILABLE IN RESPECT OF EACH OF THE SEGMENT. HENCE THE CO-ORDINATE BENCH HAS HELD, IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA (P) LTD (2016)(70 TAXMANN.COM 299)(BANG.) THAT THIS COMPANY AS NOT COMPARABLE FOR A CAPTIVE SOFTWARE DEVELOPMENT SERVI CE PROVIDER. 7. ON THE CONTRARY, THE LD D.R SUBMITTED THAT TU RNOVER FILTER CANNOT BE A RELEVANT CRITERIA TO REJECT A COMPANY AS NOT C OMPARABLE AND IT WAS SO HELD BY THE CO-ORDINATE BENCH IN THE CASE OF SOCIETE GENERALE GLOBAL SOLUTION CENTRE P LTD VS. DCIT (2012)(53 SOT 159)(20 TAXMANN.COM 715). ACCORDINGLY HE SUBMITTED THAT TH E TURNOVER FILTER SHOULD NOT BE APPLIED. 8. WE HEARD RIVAL CONTENTIONS AND PERUSED THE R ECORD. WITH REGARD TO THE APPLICATION OF TURNOVER FILTER, THE LD A.R P LACED HIS RELIANCE ON THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN T HE CASE OF KBACE TECHNOLOGIES PVT LTD (SUPRA), WHEREIN THE CO-ORDINA TE BENCH HAS HELD AS UNDER:- 7. AS FAR AS INCLUSION OF 5 COMPANIES LISTED ABOVE WHICH ARE PART OF THE FINAL COMPARABLE COMPANIES CHOSEN BY TH E TPO ARE IT TP A 349 OF 2019 M/S. LSI INDIA RESEARCH & DEVELOPMENT PRIVATE LIMIT ED BANGALORE PAGE 4 OF 6 CONCERNED, WE FIND THAT THE TURNOVER OF THESE COMPA NIES IS 10 TIMES GREATER THAN THE TURNOVER ITA NO.3189/BANG/20 18 OF THE ASSESSEE WHICH IS ONLY A SUM OF RS.18,79,48,280 . THE TURNOVER OF INFOSYS LTD. IS RS.44,431 CRORES, THAT OF L&T INFOTECH LTD. IS RS.4,644 CRORES, MINDTREE LTD. 303 2 CRORES, PERSISTENT SYSTEMS LTD. 1084 CRORES & THIRDWARE SOL UTIONS LTD. 207 CRORES. IT HAS BEEN HELD BY THE HON'BLE KA RNATAKA HIGH COURT IN THE CASE OF ACUSYS SOFTWARE (I) P. LTD. V. ITO IN ITA NO.223/2017, JUDGMENT DATED 14.8.2018 THAT IF T HE TURNOVER OF THE COMPARABLE COMPANY IS LESS OR MORE THAN 10 TIMES THE TURNOVER OF ASSESSEE, THEN IT CANNOT BE C ONSIDERED AS A COMPARABLE COMPANY. IN THE LIGHT OF THE AFORESAID DECISION OF THE HON'BLE HIGH COURT, WE ARE OF THE VIEW THAT THE AFORESAID 5 COMPANIES SHOULD BE EXCLUDED FROM THE LIST OF COMPA RABLE COMPANIES. WE HOLD AND DIRECT ACCORDINGLY. THE LD D.R HAS PLACED HIS RELIANCE ON THE DECISION RENDERED BY ANOTHER CO-ORDINATE BENCH IN THE CASE OF SOCIETE G ENERALE GLOBAL SOLUTION CENTRE P LTD (SUPRA), WHEREIN ANOTHER CO-O RDINATE BENCH HAD EXPRESSED THE VIEW THAT THE TURNOVER FILTER IS NOT TO BE APPLIED IN RESPECT OF COMPANIES PROVIDING SERVICES. HOWEVER, IN THE CASE OF KBACE TECHNOLOGIES P LTD, THE CO-ORDINATE BENCH HAS FOLLOWED THE BINDING DECISION RENDERED BY HONBLE KARNATAKA HIGH COURT IN THE CASE OF ACUSYS SOFTWARE (I) P LTD, (SUPRA) WHEREIN IT WAS HELD THAT IF THE TURNOVER OF THE COMPARABLE COMPANY IS LESS OR M ORE THAN 10 TIMES THE TURNOVER OF ASSESSEE, THEN THE SAME CANNO T BE CONSIDERED AS A COMPARABLE COMPANY. IN THE INSTANT CASE, THE TURNOVER OF THE COMPANIES SOUGHT TO BE EXCLUDED IS GIVEN BELOW:- (A) LARSEN & TOUBRO INFOTECH LTD - 1,777 CRORES (B) PERSISTENT SYSTEMS LTD - 504 CRORES (C) INFOSYS LTD - 21,140 CRORES. IT TP A 349 OF 2019 M/S. LSI INDIA RESEARCH & DEVELOPMENT PRIVATE LIMIT ED BANGALORE PAGE 5 OF 6 WE HAVE NOTICED EARLIER THAT THE TURNOVER OF THE AS SESSEE HEREIN WAS RS.31.09 CRORES. SINCE THE TURNOVER OF THE ABOVE S AID THREE COMPANIES IS MORE THAN TEN TIMES OF THE ASSESSEES TURNOVER, FOLLOWING THE DECISION OF HONBLE KARNATAKA HIGH CO URT REFERRED ABOVE, WE DIRECT THE AO/TPO TO EXCLUDE THE ABOVE SA ID THREE COMPANIES. 9. WITH REGARD TO THE ICRA TECHNO ANALYTICS LT D., WE NOTICE THAT THE LD DRP HAD EXCLUDED THE SAME DURING THE FIRST R OUND OF PROCEEDINGS. WE FURTHER NOTICE THAT THE CO-ORDINAT E BENCH HAS EXCLUDED THIS COMPANY IN THE CASE OF ELECTRONICS FO R IMAGING INDIA P LTD (SUPRA) WITH THE FOLLOWING OBSERVATIONS:- 13. WE SHALL DEAL WITH EACH COMPARABLE WHICH HAS BEEN DISPUTED BY THE REVENUE ONE BY ONE AS UNDER:- (1) ICRA TECHNO ANALYTICS LTD. (SEG) 14. AT THE OUTSET, WE NOTE THAT APART FROM HAVING THE RELATED PARTY REVENUE AT 20.94% OF THE TOTAL REVENUE, THIS COMPANY WAS ALSO FOUND TO BE FUNCTIONALLY NOT COMPARABLE WI TH SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE ASSESSEE. THE D RP HAS GIVEN ITS FINDING AT PAGES 13 TO 14 AS UNDER: 'HAVING HEARD THE CONTENTION, ON PERUSAL OF THE ANN UAL REPORT, IT IS NOTICED BY US THAT THE SEGMENTAL INFORMATION IS AVAILABLE FOR TWO SEGMENTS I.E., SERVICES AND SALES. HOWEVER, IT IS EVIDENT FROM THE ANNUAL REPORT THAT THE SERVICE SEGMENT COM PRISES OF SOFTWARE DEVELOPMENT, SOFTWARE CONSULTANCY, ENGINEE RING SERVICES, WEB DEVELOPMENT, WEB HOSTING, ETC. FOR WH ICH NO SEGMENTAL INFORMATION IS AVAILABLE AND THEREFORE, T HE OBJECTION OF THE ASSESSEE IS FOUND ACCEPTABLE. ACCORDINGLY, A SSESSING OFFICER IS DIRECTED TO EXCLUDE THE ABOVE COMPANY FR OM THE COMPARABLES.' 15. WE FIND THAT THE FACTS RECORDED BY THE DRP IN RESP ECT OF BUSINESS ACTIVITY OF THIS COMPANY ARE NOT IN DISPUT E. THEREFORE, WHEN THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVIT IES OF SOFTWARE DEVELOPMENT AND CONSULTANCY, ENGINEERING S ERVICES, WEB DEVELOPMENT & HOSTING AND SUBSTANTIALLY DIVERSI FIED ITSELF IT TP A 349 OF 2019 M/S. LSI INDIA RESEARCH & DEVELOPMENT PRIVATE LIMIT ED BANGALORE PAGE 6 OF 6 INTO DOMAIN OF BUSINESS ANALYSIS AND BUSINESS PROCE SS OUTSOURCING, THEN THE SAME CANNOT BE REGARDED AS FU NCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE WHO IS RENDERI NG SOFTWARE DEVELOPMENT SERVICES TO ITS AE. 16. IN VIEW OF THE ABOVE FACTS, WE DO NOT FIND ANY ERR OR OR ILLEGALITY IN THE FINDINGS OF THE DRP THAT THIS COM PANY IS FUNCTIONALLY NOT COMPARABLE WITH THAT OF A PURE SOF TWARE DEVELOPMENT SERVICE PROVIDER. ACCORDINGLY, FOLLOWING THE DECISION RENDERED BY THE CO-ORDINATE BENCH, WE DIRECT EXCLUSION OF ICRA TECHNO ANALYTICS LTD. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE I S PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 17.03.2020. SD/- (BEENA PILLAI) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 17 TH MARCH, 2020. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.