Appeal details
Counselvise Citation
[2019] 116 COUNSELVISE.COM (IT) 6821 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 3 month(s) 20 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
26-07-2019
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Assessment Year
2010-2011
Appeal Filed On
06-04-2015
Judgement Text
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.572/BANG/2015 ASSESSMENT YEAR : 2010-11 M/S TRIDENT MICROSYSTEMS INDIA PVT. LTD., #2924, THIRD FLOOR, 14 TH CROSS, K.R ROAD, BSK II STAGE, BENGALURU-560 070. PAN AADCN 1348 L. VS. THE DY. COMMISSIONER OF INCOME-TAX CIRCLE-5(1)(1), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI SURESH MUTHUKRISHNAN, C.A RESPONDENT BY : MISS NEERA MALHOTRA, CIT (DR) DATE OF HEARING : 22.07.2019 DATE OF PRONOUNCEMENT : .07.2019 O R D E R PER B.R BASKARAN, ACCOUNTANT MEMBER THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINS T THE ORDER PASSED BY THE AO U/S 143(3) R.W.S 144C(13) OF THE A CT FOR ASST. YEAR 2009-10 IN PURSUANCE OF DIRECTIONS GIVEN BY LD DISP UTE RESOLUTION PANEL. 2. THOUGH THE ASSESSEE HAS RAISED MANY GROUNDS IN T HE FORM OF GROUNDS OF APPEAL, ADDITIONAL GROUNDS OF APPEAL AND AMENDED GROUNDS OF APPEAL, YET THE LD AR, AT THE TIME OF HE ARING SUBMITTED THAT HE IS PRESSING GROUND NO.3.7, 3.8, AND 3.11 OF AMENDED IT(TP)A NO.572/BANG/2015 PAGE 2 OF 9 GROUNDS OF APPEAL AND ADDITIONAL GROUNDS OF APPEAL, WHICH RELATE TO THE FOLLOWING ISSUES:- (A) EXCLUSION OF 2 COMPARABLE VIZ., 1) ICRA TECHNO ANALYTICS LTD., 2) 2) M/S KALS INFORMATION SYSTEMS LTD., (B) INCLUSION OF ONE COMPARABLE, VIZ. M/S GOLD STONE TECHNOLOGIES LTD. (C) ADDITIONAL GROUND WHICH RELATE TO THE MI STAKE IN ADOPTION OF SEGMENTAL COST FOR THE PURPOSE OF COMPUTING PROFITS OF THE ASSESSEE. 3. THE ASSESSEE COMPANY IS ENGAGED BY M/S TRIDENT MICROSYSTEMS (FAR EAST) LIMITED (TMFE) AND TRIDENT MICROSYSTEM S (HONGKONG) LIMITED, (TMKH) TO PROVIDE SOFTWARE RESEARCH AND DEVELOPMENT (R&D) SERVICES AND SALES AND MARKETING SUPPORT SERV ICES, RESPECTIVELY. BOTH ARE ASSOCIATED ENTERPRISES OF TH E ASSESSEE COMPANY. DURING THE YEAR, THE ASSESSEE PROVIDED S ERVICES TO TMFE, IN PURSUANCE OF AGREEMENT ENTERED WITH IT FOR PROVISION OF SOFTWARE R&D SERVICES. THE ASSESSEE ADOPTED TNMM M ETHOD AS MOST APPROPRIATE METHOD AND COMPUTED PLI BY TAKING OP/OC WHICH WORKED OUT TO 8.1%. THE TPO FINALLY SELECTED 11 COMPARABLES WHOSE MEAN MARGIN WORKED OUT TO 22.71%. AFTER GIVING DEDUCTION FOR WORKING CAPITAL ADJUSTMENT OF 1.98%, THE TPO DETERMINED THE MEAN MARGIN OF COMPARABLES AT 20.73% . ACCORDINGLY HE PROPOSED ADJUSTMENT OF 234.37 LAKHS. THE LD DRP REJECTED 6 COMPARABLES ON THE BASIS OF TURNOVER FIL TER AND CONFIRMED 5 COMPARABLES. IT(TP)A NO.572/BANG/2015 PAGE 3 OF 9 4. IT IS PERTINENT TO NOTE THAT THE REVENUE HAD CHA LLENGED THE EXCLUSION OF 6 COMPARABLES BY LD DRP BY FILING APP EAL BEFORE THE TRIBUNAL AND THE SAME HAS BEEN DISMISSED BY THE COO RDINATE BENCH, VIDE ITS ORDER DATED 29/6/2015 PASSED IN IT( TP)A NO.192/BANG/2015. 5. IN THE PRESENT APPEAL THE ASSESSEE SEEKS EXCLUSI ON OF 2 COMPARABLES AND INCLUSION OF 1 COMPARABLE. THE COM PARABLE COMPANIES SOUGHT TO BE EXCLUDED BY THE ASSESSEE ARE M/S ICRA TECHNO ANALYTICS LTD., AND KALS INFORMATION SYSTEMS LTD. THE LD AR SUBMITTED THAT BOTH THE ABOVE SAID COMPARABLE CO MPANIES HAVE BEEN HELD TO BE NOT GOOD COMPARABLES FOR SOFTWARE D EVELOPMENT SEGMENT BY THE COORDINATE BENCH IN THE CASE OF M/S APPLIED MATERIALS INDIA PVT. LTD. IN IT(TP)A NO.180/BANG/20 15 DATED 28/2/2016. ACCORDINGLY HE SOUGHT FOR EXCLUSION OF ABOVE SAID TWO COMPARABLES. 6. ON THE CONTRARY, THE LD DR SUBMITTED THAT THE LD DRP HAS EXCLUDED CERTAIN COMPARABLES ONLY ON THE BASIS OF T URNOVER CRITERIA AND IT DID NOT DISCUSS ANYTHING ON THE FUNCTIONAL D IFFERENCE. 7. WE HEARD THE RIVAL CONTENTIONS ON THIS ISSUE AND PERUSED THE RECORD. WE NOTICED THAT THE COORDINATE BENCH OF TR IBUNAL, IN THE CASE OF APPLIED MATERIAL INDIA PVT. LTD. (SUPRA), H AS FOLLOWED THE DECISION RENDERED BY ANOTHER COORDINATE BENCH IN TH E CASE OF DCIT VS. ELECTRONICS FOR IMAGING PVT. LTD., (70 TAXMANN. COM 299 BANGALORE). WE NOTICED THAT THE COORDINATE BENCH H AS HELD BOTH THE ABOVE COMPANIES ARE LIABLE TO BE EXCLUDED FOR T HE YEAR UNDER IT(TP)A NO.572/BANG/2015 PAGE 4 OF 9 CONSIDERATION. FOR THE SAKE OF CONVENIENCE, WE EXT RACT BELOW RELEVANT OBSERVATIONS MADE IN THE ORDER PASSED BY C O-ORDINATE BENCH IN THE CASE OF APPLIED MATERIAL INDIA PVT. LT D. (SUPRA):- 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE GONE THROUGH THE MATERIAL AVAILABLE ON RECORD AND THE TRIBUNAL ORDER ON WHICH RELIANCE HAS BEEN PLACED BY THE ID. AR OF THE ASSESSEE. FOR THE SAKE OF READY REFERENCE, WE REPRODUCE PARA-13 TO 33 OF THIS TRIBUNAL ORDER:- '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 WITH SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE ASSESSEE. THE DRP HAS GIVEN ITS FINDING AT PAGES 13 TO 14 AS UNDER:- 'HAVING HEARD THE CONTENTION, ON PERUSAL OF THE ANNUAL REPORT, IT IS NOTICED BY US THAT SEGMENTAL INFORMATION IS AVAILABLE FOR TWO SEGMENTS I.E., SERVICES AND SALES. HOWEVER, IT IS EVIDENT FROM THE ANNUAL REPORT SERVICE SEGMENT COMPRISES OF SOFTWARE DEVELOPMENT, SOFTWARE CONSULTANCY, ENGINEERING SERVICES, WEB DEVELOPMENT, WEB HOSTING, ETC. FOR WHICH NO SEGMENTAL INFORMATION IS AVAILABLE AND THEREFORE, THE OBJECTION OF THE ASSESSEE IS FOUND ACCEPTABLE. ACCORDINGLY, ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE ABOVE COMPANY FROM THE COMPARABLES.' 15. WE FIND THAT THE FACTS RECORDED BY THE DRP IN RESPECT OF BUSINESS ACTIVITY OF THIS COMPANY ARE NO T IN DISPUTE. THEREFORE, WHEN THIS COMPANY IS IT(TP)A NO.572/BANG/2015 PAGE 5 OF 9 ENGAGED IN DIVERSIFIED ACTIVITIES OF SOFTWARE DEVELOPMENT AND CONSULTANCY, ENGINEERING SERVICES, WEB DEVELOPMENT & HOSTING AND SUBSTANTIALLY DIVERSIFIED ITSELF INTO DOMAIN OF BUSINESS ANALYSIS AND BUSINESS PROCESS OUTSOURCING, THEN THE SAME CANNOT BE REGARDED AS FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE WHO IS RENDERING SOFTWARE DEVELOPMENT SERVICES TO ITS AE. 16. IN VIEW OF THE ABOVE FACTS, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH THAT OF A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER.) 2.. (3)KALS INFORMATION SYSTEMS LTD. 1. THE ASSESSEE RAISED OBJECTIONS AGAINST THIS COMPANY ON THE GROUND THAT THIS COMPANY IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE AND FURTHER, THIS COMPANY CONSISTS OF STPI UNIT AND ALS O HAVING A TRAINING CENTRE ENGAGED IN TRAINING OF SOFTWARE PROFESSIONALS ON ONLINE PRODUCTS. THUS, WHEN THIS COMPANY IS HAVING REVENUE FROM SOFTWARE SERVICES AS WELL AS SOFTWARE PRODUCT, THE SAME CANNOT BE CONSIDERED AS COMPARABLE WITH SOFTWARE DEVELOPMENT SERVICE PROVIDING COMPANY. 22. THE DRP HAS DIRECTED THE AO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES BY TAKING NOTE OF THE FACT THAT THERE WERE INVENTORIES IN THE BOOK S OF ACCOUNTS OF THIS COMPANY WHICH SHOWS THAT THIS COMPANY IS IN THE SOFTWARE PRODUCT BUSINESS. FURTHER, BY FOLLOWING THE DECISION OF THIS TRIBUNAL IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA LTD. V. DCIT, ITA NO. 10541BAN G/20 11 DATED 23.11.2012, THIS COMPANY WAS FOUND TO BE NOT COMPARABLE WITH THAT OF THE ASSESSEE. 23. WE HAVE HEARD THE ID. DR AS WELL AS ID. AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD. IT(TP)A NO.572/BANG/2015 PAGE 6 OF 9 DR HAS NOT DISPUTED THE FACT THAT COMPARABILITY OF THIS COMPANY HAS BEEN EXAMINED BY THIS TRIBUNAL IN A SERIES OF DECISIONS INCLUDING IN THE CASE OF TRILOGY E- BUSINESS SOFTWARE INDIA LTD. (SUPRA). WE FURTHER NOTE THAT IN THE BALANCE SHEET OF THIS COMPANY AS ON 31.3.2010, THERE ARE INVENTORIES OF RS.60,4 7,977. THEREFORE, WHEN THIS COMPANY IS IN THE BUSINESS OF SOFTWARE PRODUCTS, THE SAME CANNOT BE COMPARED WITH A PURE SOFTWARE DEVELOPMENT SERVICES PROVIDER. ACCORDINGLY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED FINDINGS OF THE DRP.' ACCORDINGLY, FOLLOWING THE ABOVE SAID DECISION REND ERED BY COORDINATE BENCH, WE DIRECT THE AO TO EXCLUDE BOTH THE COMPARABLES REFERRED ABOVE. 8. THE ASSESSEE HAS PRAYED FOR INCLUSION GOLD STONE TECHNOLOGIES LTD. THE LD AR SUBMITTED THAT THE TPO HAS EXCLUDED THIS COMPANY ONLY FOR THE REASON THAT THE FOREX EA RNING TO SALES RATIO WAS LESS THAN 75%. INVITING OUR ATTENTION TO THE COPY OF FINANCIALS OF M/S GOLD STONE TECHNOLOGIES LTD., TH E AR SUBMITTED THAT THE EXPORT SALES OF THE ASSESSEE IS 20.75 CROR ES OUT OF THE TOTAL EARNING OF 24.04 CRORES AND HENCE FOREX EARNING TO SALES IS MORE THAN 75%. ACCORDINGLY HE SUBMITTED THAT THE REASON ING GIVEN BY THE TPO FOR EXCLUDING THIS COMPARABLE COMPANIES IS WRONG. ACCORDINGLY HE PRAYED FOR INCLUSION OF THIS COMPARA BLE. 9. ON THE CONTRARY, THE LD DR SUBMITTED THAT THE TP O, IN PAGE 14 OF ITS ORDER HAS EXTRACTED INFORMATION OBTAINED FROM THE WEBSITE OF THE ABOVE SAID COMPANY, WHICH ELABORATES THE DET AILS RELATING TO ITS OPERATIONS. BASED ON THE SAME, THE TPO HAS OBS ERVED THAT M/S IT(TP)A NO.572/BANG/2015 PAGE 7 OF 9 GOLD STONE TECHNOLOGIES IS AN INDUSTRY LEADER WITH PRODUCTS AND ANALYTICS PLOTFORMS. FURTHER THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT IT IS ENGAGED IN ITES SERVICES. ACCORDI NGLY THE LD DR SUBMITTED THAT THE TPO HAS EXCLUDED THIS COMPARABLE , NOT ONLY ON THE REASONING THAT THE EXPORT EARNING IS LESS THAN 75% BUT ALSO FOR THE REASON THAT THIS IS HAVING PRODUCT PLATFORM. F URTHER IT IS SEEN THAT THIS COMPANY IS ENGAGED IN PROVIDING ITES SERV ICES PROVIDING SOLUTION SUCH AS SOFTWARE SUPPORT, SOFTWARE MAINTEN ANCE, BUSINESS PROCESS OUTSOURCING ETC. ACCORDINGLY, THE LD DR SU BMITTED THAT THE ITES COMPANY CANNOT BE CONSIDERED AS COMPARABLE COM PANY FOR SOFTWARE DEVELOPMENT COMPANY. 10. IN THE REJOINDER, THE LD AR SUBMITTED THAT THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT WORK ONLY WHICH IS EVIDENT FROM DISCUSSION MADE AT PAGE 9 OF THE ANNUAL REPORT. 11. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. SINCE NEW FACTS ARE BEING BROUGHT BEFORE US, WE ARE OF THE VIEW THAT THE ELIGIBILITY OF THIS COMPANY TO BE CONSIDERED AS A VALID COMPARABLE REQUIRES EXAMINATION AT THE END OF AO/TP O. ACCORDINGLY WE RESTORE THIS ISSUE TO THE FILE OF TH E AO/TPO FOR EXAMINING IT AFRESH AFTER AFFORDING ADEQUATE OPPORT UNITY OF BEING HEARD TO THE ASSESSEE. 12. IN THE ADDITIONAL GROUND OF APPEAL, THE ASSESSE E HAS STATED THAT THE TPO HAS ERRED IN ADOPTING INCORRECT SEGMEN TAL COST FOR DETERMINING PROFITS OF SOFTWARE R&D SERVICES. IT(TP)A NO.572/BANG/2015 PAGE 8 OF 9 13. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. WE NOTICED THAT THE TPO HAS MADE SEGMENTAL ANALYSIS OF SOFTWARE R&D DIVISION AND SALES AND MARKETING DIVISION. WHILE DOING SO, THE TPO HAS APPORTIONED UNALLOCATED COST OF 19 LAK HS BETWEEN BOTH THE DIVISIONS. THIS HAS RESULTED IN INCREASE O F COST RELATING TO SOFTWARE R & D DIVISION. THE CASE OF THE LD AR APP EARS TO BE THAT THE OPERATING EXPENSES RELATING TO SOFTWARE R&D DIV ISION SHOULD ALONE BE CONSIDERED FOR ARRIVING AT THE PROFIT. 14. IN OUR VIEW, THE TPO WAS JUSTIFIED IN APPORT IONING THE UNALLOCATED COST BETWEEN BOTH THE DIVISIONS FOR THE PURPOSE OF ARRIVING AT SEGMENTAL PROFITS. ACCORDINGLY, WE DO NOT AGREE WITH THE CONTENTIONS OF THE ASSESSEE. ACCORDINGLY WE REJECT THIS GROUND OF THE ASSESSEE. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH JULY, 2019. SD/ - (BEENA PILLAI) JUDICIAL MEMBER SD/ - (B.R BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED, 26 TH JULY, 2019. / VMS / 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 A SST. REGISTRAR, ITAT, BANGALORE. IT(TP)A NO.572/BANG/2015 PAGE 9 OF 9 1. DATE OF DICTATION 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR.P.S .. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER .. 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S. .. 6. DATE OF UPLOADING THE ORDER ON WEBSITE.. 7. IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO .. DICTATION NOTE ENCLOSED . 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. DATE ON WHICH ORDER GOES FOR XEROX & ENDORSEMENT 10. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 11. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER . 12. THE DATE ON WHICH THE FILE GOES TO DISPATCH SEC TION FOR DISPATCH OF THE TRIBUNAL ORDER . 13. DATE OF DESPATCH OF ORDER. ..
