Income Tax Appellate Tribunal - Bangalore
Deputy Commissioner Of Income Tax, ... vs Amd India Private Limited, Bangalore on 17 October, 2025
IT(TP)ANos.1858 & 2031/Bang/2024
AMD India Pvt. Ltd., Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL
"C''BENCH: BANGALORE
BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER
AND
SHRI KESHAV DUBEY, JUDICIAL MEMBER
IT(TP)A No.1858/Bang/2024
Assessment Year : 2013-14
AMD India Private Limited
(Formerly known as AMD Research
and Development Centre India Pvt.
Ltd.) DCIT
No.102 & 103, EPIP Vs. Circle-1(1)(1)
Whitefield Bengaluru
Bengaluru 560 066
PAN NO :AABCC3447R
APPELLANT RESPONDENT
IT(TP)A No. 2031/Bang/2024
Assessment Year : 2013-14
DCIT AMD India Private Limited
Circle-1(1)(1) Vs. Bengaluru 560 066
Bengaluru
APPELLANT RESPONDENT
Appellant by : Sri Padam Chand Kincha, A.R.
Respondent by : Dr. Divya K.J., D.R.
Date of Hearing : 22.07.2025
Date of Pronouncement : 17.10.2025
ORDER
PER KESHAV DUBEY, JUDICIAL MEMBER:
These cross appeals at the instance of the assessee and revenue are directed against the order of the ld. CIT(A)-12, Bangalore, dated 31.7.2024 vide DIN &Order No.ITBA/APL/S/250/2024-25/1067193694(1) passed u/s 250 of the Income Tax Act, 1961 (in short "The Act") for the assessment year 2013-14.
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 2 of 47
2. The brief facts of the case are that the assessee company is engaged in the business of providing software development services in the field of design of semi-conductor products and application solutions to its associated enterprise. These services are provided on cost plus basis.
2.1 The assessee company filed its return of income for the Assessment year 2013-14 on 27.11.2013 declaring total income of Rs.21,34,01,430. The said return was thereafter selected for the scrutiny by issuance of notice under section 143(2) of the Act. Various details called for were filed by the Assessee.
2.2 During the AY 2013-14, the Assessee had rendered Software Development Services amounting to Rs.168,92,48,762/- to its AE. The Assessee selected Transactional Net Margin Method ("TNMM") as the most appropriate method to justify the price charged for the Software Development Services rendered to its AE. After carrying out a methodical search process on Prowess and Capitaline plus database, the Assessee company selected 6(six) companies as comparable. The operating profit to operating cost was adopted as the PLI. As the margin earned by the Assessee from rendering services to AE (i.e. 12 %) was within the arms-length range of margins earned by comparables (i.e. 12.55%), the international transaction with AE was considered to be at arm's length.
2.3 A reference under section 92CA of the Act was made to the Transfer Pricing Officer ('TPO') to determine ALP of international transactions. The TPO while passing the order under section 92CA on 31.10.2016 had selected 9 companies as comparable to the Assessee. The average margin of the comparables was computed at 19.96 %. The TPO gave working capital adjustment of 1.54 % and the final arm's length margin was computed at 18.42 %. Accordingly, the TP adjustment of Rs. 10,42,47,726/- was made IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 3 of 47 with respect to software development services rendered to AE.
2.4 Further, the TPO observed that the Assessee company has receivables amounting to Rs. 63,75,93,900/-. The TPO held that the receivables from AE are international transactions. Further the TPO held that since receivables are not received within the stipulated time, it requires notional interest adjustment. The arm's length interest has been adopted at 14.45%. Accordingly, the notional interest on receivables is computed at 9,21,32,319/-. Accordingly, the TPO made total TP adjustment of Rs.19,63,80,045/-.
2.5 The AO passed the draft assessment order. Since, the Assessee intended to file an appeal to the ld. CIT(A)/NFAC, the AO passed the final assessment order on 08.02.2017 incorporating the TP adjustment. The AO had also made an adjustment amounting to Rs.7,73,50,917/- towards the capital assets received by the Assessee free of cost from AE for testing purposes on the ground that it constitutes benefit to the Assessee u/s 28(iv) of the Act.
3. Aggrieved by the final assessment order passed, the Assessee preferred an appeal before the ld. CIT(A)/NFAC.
4. The ld. CIT(A)/NFAC passed the order u/s 250 on 31.07.2024 by partly allowing the appeal of the Assessee. With respect to TP adjustment for software development services, the ld. CIT(A)/NFAC directed for exclusion of 4(four)comparable and directed to adopt Cash PLI. Thus, the international transaction in the software development segment were concluded to be at arm's length. Accordingly, the ld. CIT(A)/NFAC did not adjudicate on the inclusion of comparable proposed by the Assessee. With respect to notional interest on receivables, the ld. CIT(A)/NFACheld that once working capital adjustment is made, no separate adjustment can be made for notional interest on receivables. Further, with respect to assets received on returnable basis, the ld. CIT(A)/NFAC held that IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 4 of 47 only 12% of the cost of asset can be considered as benefit under section 28(iv) of the Act.
5. Again being aggrieved by the Order of ld. CIT(A)/NFAC), the Assessee company has filed the present appeal before this Tribunal. The Revenue has also filed Cross Appeal before this Tribunal.
6. First, we take up the revenue's appeal in IT(TP)A No.2031/Bang/2024 wherein the revenue has raised the following grounds of appeal:
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 5 of 47 IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 6 of 47
7. At the outset there is a delay of 23 days in filing the appeal by the revenue. The ld. D.R. drew our kind attention to a letter dated 22.10.2024 requesting for condoning the short delay of 23 days as extracted below for ease of reference and convenience:
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 7 of 47 7.1. Perused the record and having heard ld. Counsels for the respective parties, it is perceived that the explanation offered in the condonation application is plausible and "sufficient cause" being shown by the revenue, which prevented them from filing the appeal within the specified period and accordingly, we inclined to condone the short delay and admit the appeal of the revenue for adjudication.
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 8 of 47
8. Now first we take up the Ground No.1 of Revenue Appeal and Ground No.5 of Assessee Appeal i.e. Fixed Assets Received Free of Cost for Testing Purposes-
8.1. While going through the assessment order we take note of the fact that the AO made an addition of Rs.7,73,50,917/- towards the capital assets received by the Assessee free of cost from its AE for testing purpose on the ground that it constitutes benefit to the Assessee u/s 28(iv) of the Act. The ld. CIT(A) has held that had the AE not provided the assets free of cost to the Assessee, the Assessee would have purchased the same from the AE and subsequently claimed reimbursement with a markup of 12% as the Assessee is a cost-plus entity. Accordingly, the ld. CIT(A) restricted the addition to 12% of the cost in respect of fixed assets received free of cost from the AE.
8.2 Before us, the AR of the Assessee has submitted that it has not received any benefit from the items supplied by the AE on returnable basis for the testing purposes. These items were provided solely for testing the software. The Assessee acted in accordance with the instructions of AE in relation to usage of these items. The use of such assets was merely incidental to the testing of the software. The AR of the Assessee submitted that the assets are received for testing purposes and it has not received any benefit to be taxable u/s 28(iv). Further the Assessee has no ownership of the assets. The AR of the assessee drew our attention to the Invoices (Placed at pages 668 to 699 of PB-I) & submitted that the assets were received for testing purposes and value is given in the invoice only for Custom duty purposes.
8.3 The AR of the Assessee has also relied on decisions in the IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 9 of 47 case of M/s Samsung R&D Institute India - Bangalore Pvt Ltd. vs JCIT [IT(TP)A No. 625/Bang/2020) (Bangalore ITAT)] and M/s Tesco Bengaluru Pvt. Ltd. vs JCIT (IT(TP)A No.2898/Bang/2018) (Bangalore ITAT) for AY 2014-15 and (IT(TP)A No.2387/Bang/2019) (Bangalore ITAT) for AY 2015-16, wherein it is held that assets received for testing purposes are not taxable u/s 28(iv) as there is no benefit on use of such assets.
8.4 The learned DR heavily relied on the order of the AO and submitted that the ld. CIT(A) erred in law in restricting the addition to 12% of total addition made u/s 28(iv) of the Act by applying the markup on impugned assets received free of cost.
8.5 We have heard the rival submissions & perused the material available on record. As demonstrated by the invoice copies filed by the assessee, the assets were received for testing purposes and value is given in the invoice only for custom duty purposes. The Assessee acted in accordance with the instructions of AE in relation to usage of these items. Further, the Assessee has no ownership of the assets. When the assets are received for testing purposes, there is no specific benefit that arises to the assessee with respect to usage of those assets. We are of the considered opinion that once the Assets have to be used only for testing purposes, which is one of the services rendered by the assessee to the associated enterprises there is no benefit derived by the assessee out of those assets. The addition is made by the AO only based on presumption and the AO has not demonstrated what benefit was received by the Assessee by use of such assets. We are also of the considered opinion that the assets are used in the process of rendering services.
8.6 Further, our view is supported by the decision of the Bangalore tribunal in the case of (supra) Samsung R&D Institute India - Bangalore Pvt Ltd. vs JCIT. The relevant extract of the decision are as below:
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 10 of 47
"9. During the course of assessment the AO noticed that the assessee has received assets free of cost from AEs located outside India to whom the assessee is providing software development services. The assets received free of cost included testing board, cameras, accessories and testing equipments etc. The assessee submitted before the AO that the assessee is a capive service provider and for providing these services the assessee receives some of the assets free of cost so that the development of software and the subsequent testing can be carried out as per the requirements of SECL and other AEs. The assessee further submited that the equipments are imported free of cost for the purpose of real time testing and calibration of software on the actual hardware and compatibility of software modules vis-a-vis the existing hardware and recommending changes to the hardware thereof. The assessee also submits a detailed note before the AO explaining how the various assets imported free of cost have been used for testing the software developed by the assessee. The assessee accordingly submitted that no addition can be made u/s. 28(iv) of the Act towards import of assets free of cost since the assessee is not deriving any benefit from the import of assets free of cost. The AO, however, did not accept the submission of the assessee and held that : -
"4.6. In the instant case, the assets received from clients and put to use in business are benefits arising from business. The assessee has quoted few case laws to state that this is a capital receipt and should not be taxed u/s. 28(iv). None of the case laws quoted by the assessee discuss facts similar to the assessee's case. However, many judgements by the Hon'ble ITAT support the stand taken by the AO. For instance, in the case of Priyanka Chopra, the Mumbai bench of ITAT stated that where the assessee received a watch worth Rs. 40 lakhs as gift from company for which she had undertaken advertisements and promotional activities on remuneration basis, income tax authorities were justified in making addition of said gift to assessee's income as perquisite under section 28(iv). The watch received by Smt Priyanka Chopra was a capital asset; yet it was a benefit to her arising from her profession. 4.6.1 In the case of Servall Engineering Works, the Chennai bench of Hon'ble ITAT held that where assessee could not furnish any details regarding so-called advance said to be received from various parties against supplies made to them nor could produce any material regarding expenditure incurred in executing any such order, addition was to be made. In the instant case, the assessee failed to furnish relevant material/documents to demonstrate the actual nature of assets received free of cost. 4.7 Consequently, the goods received free of cost from clients (who are also Associated Enterprises) are being adjudged as benefit arising from business and added u/s. 28(iv) of IT Act."
10. On further appeal the CIT(A) upheld the addition made by the AO by holding that: - "17.1 Having considered the submissions, and on perusal of the details filed, it is noted that various computer hardware assets have been received free of cost during the Financial Year 2014-15. Though it was claimed that the assets have been received on free of cost basis from its AEs, the Appellant failed to submit any documentation to understand the terms and conditions of such unusual arrangement, if any. During the appeal proceeding, the appellant was specifically asked to show how such free of cost IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 11 of 47 assets have been disclosed in the audited financials of its AEs and in its own books. However, the appellant could not produce such documents for verifications Some stray information filed indicate that few assets have been returned back to the AE, whereas majority of these free of cost assets have been destroyed during the yearand afterwards. It is also noted that as per the Intercompany invoices, payment has to be made within 30 days. This is contrary to the contention that they have been sent on free of cost basis. Hence, I concur with the reasoning of the Ld AO that these are perquisites / benefits arising to the Appellant during business u/s 28(i)(iv) of the IT Act. The Appellant raised a plea that as these assets are capital in nature, hence it is not taxable u/s 28(i)(iv). I am unable to accept such a plea, as there is nothing on record to take a view that these assets were held as capital. A plain reading of Section 28(i)(iv) read with section 2(24) would show that there is no bar in receiving benefit/perquisite in the form of an asset. The requirement of the section 28(i)(iv) is that it should be a benefit or perquisite, whether convertible into money or not, which requirement is satisfied in the facts of the case. It is also noted that the ratio laid down by the Apex court decision in the case of CIT vs. TV Sundaram lyengar& Sons (222 ITR 344) and the High Court's decisions in Solid Containers Ltd vs. DCIT (308 ITR 417), Logitronics Pvt. Ltd vs. CIT (333 ITR 386), would squarely apply to the facts of this case. Therefore, I am inclined to uphold the view of the Ld. Assessing officer and accordingly the impugned disallowance is upheld. Ground dismissed."
11. The ld AR argued that -
No 'benefit' to the Assessee.
(i) The equipments are given to the Assessee by the AE's, so that the software developed is compatible with the products developed by the AEs. If the software developed is not compatible with the product of the AE, the AE would be facing the risks associated thereto. Therefore, there is no benefit arising to the Assessee.
(ii) It is submitted that under Section 28(iv) of the Act, the 'benefit' accrued has to result in some kind of perquisite to the Assessee and if there is no perquisite arising to the Assessee, the provisions of Section 28(iv) of the Act cannot be invoked. Reliance in this regard is placed on the decision of the Mumbai Bench of this Hon'ble Tribunal in the case of David Dhawan v.
Deputy Commissioner of Income-tax (Reported in [2005] 2 SOT 311 (Mum.)) (para 9 at pages 4-5). It is submitted that there is no perquisite arising to the Assessee from the AEs providing the equipments.
(iii) It is undisputed that the Assessee is a captive service provider and the only customers of the Assessee are its AEs (please see pages 2-3 of the assessment order). That being the case, there can be no allegation of the Assessee benefitting from the equipments by utilizing it in its business otherwise.
(iv) IT(TP)A Nso. 625 & 641/Bang/2020 Samsung R&D Institute India - Bangalore Pvt. Ltd. Moreover, it is submitted that the Assessing Officer has not specifically pointed out as to what benefit is being derived by the Assessee. In para 4.4 of the order, the Assessing Officer has only made out a vague allegation that the purpose of giving the assets free of cost is for the Assessee to avoid income tax/customs cost, which is wholly erroneous and baseless. The equipments being brought in for rendering services which are export, customs IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 12 of 47 duty is not leviable. Further, there is no income-tax being avoided as a result of the equipments being made available free of cost. It is submitted that at the threshold, it is for the Assessing Officer to demonstrate what benefit is being derived by the Assessee, and in the absence thereof, no addition can be made under Section 28(iv) of the Act.
'Benefit' should be in the nature of income.
(v) It is submitted that section 28(iv) of the Act is intended to stand attracted to cases where there is circumvention of income by receiving the same in other forms. Reliance in this regard is placed on the decision of the Mumbai Bench of this Hon'ble Tribunal in the case of Helios Food Improvers (P.) Ltd. v. Deputy Commissioner of Income-tax (Order dated 28.02.2007 passed by the Mumbai Bench of this Hon'ble Tribunal in ITA No. 1748/Mum/2003) (para 16 at page 6).
(vi) It is submitted that in the present case, a transaction between the Assessee and its AE would be an international transaction, which is required to be undertaken at arm's length. Therefore, there cannot be an allegation of the Assessee accepting income in other forms, as the same would be in contravention of the transfer pricing provisions.
(vii) In any event, since the Assessee is compensated at a cost plus mark up in respect of the software development services rendered by it, there cannot be an allegation of the above manner.
The benefit, if any should be irretrievable:
(viii) It is submitted that the benefit or perquisite contemplated under the section means an irretrievable benefit arising to an assessee. In this regard, reference may be made to the decisions of the Mumbai Bench of this Hon'ble Tribunal in the cases of Helios Food (supra) (para 16 at page 6); and Rupee Finance & Management (P.) Ltd. v. Assistant Commissioner of Income-tax (Order dated 05.02.2007 passed by the Mumbai Bench of this Hon'ble Tribunal in ITA No. 3264/Mum/2006) (paras 8.3-8.4 at pages 11-12).
(ix) In the present case, the equipments made available to the Assessee are largely either returned to the AEs/ destroyed by the Assessee, and thus does notrepresent any irretrievable benefit being given to the Assessee. The details of the return/destruction are available at pages 119 182 of the paperbook. The Assessee has also filed additional evidence, furnishing further documents demonstrating the same.
(x) Further reliance is placed on the Circular No. 12/2022 dated 16.02.2022 issued by the Central Board of Direct Taxes, providing guidelines for removal of difficulties under Section 194R(2) of the Act. In the context of whether tax at source under Section 194R is required to be deducted (i.e., on benefit / perquisite arising to an assessee) in a case where a product of a manufacturing company is given to a social media influencer for promotion of the product on social media, the CBDT has inter alia clarified that "if the product is returned to the manufacturing company after using for the purpose of rendering service, then it will not be treated as a benefit/perquisite for the purposes of section 194R of the Act. However, if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the Act."
12. The ld DR on other hand vehemently argued that the assessee has derived indirect benefit from the import of assets free of cost and hence the provisions IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 13 of 47 of section 28(iv) would get attracted. The ld DR further submitted that considering that the assessee is billing the AEs at cost plus mark up basis, had these assets been bought by incurring cost then the income which is directly linked to the cost would be more to that extent. Therefore the ld DR argued that the income foregone by the assessee by importing the assets free of cost would attract the provisions of section 28(iv) of the Act. The ld DR further argued that these assets have been used in the business of the assessee for testing the software developed and there is definitely a benefit to the assessee which is deriving income from export of such software. 13. We heard the parties and perused the material on record. The Assessee is a captive services provider undertaking software development services exclusively for its AEs. The software development is carried out by the Assessee based on the specific requirements of the AEs, in relation to the products offered by the Group, such as telecom systems, home and office appliances, computer systems, mobile devices, networking and other similar products. For providing these services, certain articles such as network equipments, printers and accessories, SD cards and data storages are given to the assessee by its AEs for the purpose of testing and calibration of software on to the actual hardware and to check the compatibility of software modules vis-a-vis the existing hardware. These assets are given by the AEs free of cost since the software cannot be tested in third party equipments and as per the submissions of the assessee these assets are either returned are destroyed. It is also submitted that since these assets are testing equipments they cannot be used for the purpose of business by the assessee other than for testing the software. The revenue's contention is that these assets are used for the purpose of the business of the assessee and therefore the assessee is deriving benefit which is to be taxed under section 28(iv) of the Act.
14. It is apposite now to look at the provisions of section 28(iv) before proceeding further -
Profits and gains of business or profession.
28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",--
(i) to (iii) ***
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession
15. From the plain reading of the section it is clear that if a benefit in the nature of income is arising from business the same shall be taxable under the head profits and gains from business or profession. Therefore the limited question before us is whether import of assets free of cost for testing purposes is a benefit in the nature of income arising from the business of software development to the assessee. It is relevant to note here the following observations of the Mumbai Bench of the Tribunal in the case of Helios Food Improvers (P.) Ltd. vs DCIT (ITA No.1748/Mum/2003 dated 28.02.2007 "16. ****** Further, the words "benefit" or "perquisite" have been used in this sub-section, which have to be read together and would draw colour from each other. Normally, the term "perquisite" denotes meeting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person and from the very beginning, the person providing such facilities or concessions IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 14 of 47 knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or right of that person. In this view of the matter, the word "benefit" has also to be interpreted in the same manner i.e. at the time of execution of the business transaction, the one party should give to the other party some irretrievable benefit or advantage. ***** We are further of the opinion that provisions of Section 28(iv) can be applied in a number of situations but the bottom-line or crucial fact would always be circumvention of income by taking or receiving income in other forms.***"
16. Therefore the test for a benefit to be taxed under section 28(iv) as laid down in the above decision is that the benefit should irretrievable and that the benefit is received with an intention to circumvent income. For example a person is selling a product at a discounted price and is getting a gift or other benefit from the purchaser then the value of such gift or benefit is to be treated as business income under section 28(iv) since the benefit received has a direct nexus to the discounted price which is shown as the business income. In the case law relied on by the revenue in the case of Priyanka Chopra (supra) there was a direct nexus to professional services rendered by the said assessee being brand Ambassador of NDTV Toyota Greenathon and the car received by the assessee and therefore the Tribunal held that receipt of car is to be taxed as business income under section 28(iv). Further the benefit extended should be irretrievable in nature i.e. the benefit should be made available to the recipient to be enjoyed / used permanently.
17. In the light of the above legal position, we will now look at the facts in assessee's case here. The assessee received certain equipments free of cost for the purpose of testing the compatibility of the software developed by the assessee in those equipments. It is an undisputed fact that these equipments are either returned or destroyed once the testing is completed (refer relevant observations of the CIT(A) in this regard). Accordingly there is no dispute that the impugned assets are not made available to the assessee permanently to give any benefit of enduring nature as the assets are either returned or destroyed. Further considering the nature of asset and the purpose for which it is imported, there is merit in the contention that these assets in isolation cannot be used for any purpose to derive any benefit since these are testing equipments or prototypes. Now coming to the issue of whether the import of assets free of cost is resulting in a benefit in the nature of income to the assessee, it is relevant to check if the impugned transaction would have otherwise resulted in a benefit in the nature of income to the assessee. The assessee is in the business of providing software development services to its AEs only. The arm's length pricing of the said services have already been tested by the TPO and the dispute on the pricing is resolved through MAP with the competent authorities of India and Korea wherein the cost of indirect benefits received by the assessee should have been embedded while arriving at the margin. Therefore it cannot be alleged that the price charged towards the software development services is reduced/adjusted by the assessee against the benefit of assets imported free of cost to justify addition under section 28(iv) and that the revenue has not brought anything on record to substantiate such a contention. Even assuming that there is nexus between the price charged towards rendering of services and import of assets free of cost the addition in our view could be done through a TP adjustment towards price charged for IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 15 of 47 software development and in assessee's case the price is already agreed under MAP. Therefore there is no justification for making the addition under section 28(iv) again on the ground that had there been a cost paid towards import of these assets the same would have resulted in increased income to the assessee since the billing is done on cost plus basis.
18. In view of these discussion we are of the view that the AO is not correct in making addition under section 28(iv) of the Act given that the assets imported free of cost for testing purposes are either returned or destroyed by the assessee and that the pricing towards software development services rendered are agreed under MAP."
8.7 Respectfully following the above decision of the co-ordinate bench, we direct the AO to delete the entire addition of Rs.7,73,50,917/- as made u/s 28(iv) of the Act. Accordingly this ground of Appeal of the assessee is allowed & the ground of the revenue is dismissed.
9. Now we take up the Revenue Grounds No.2 to 10 on the Comparable selected by TPO. These Grounds of Appeal of Revenue challenge the exclusion of Persistent Systems, Infobeans Technologies, L&T Infotech and Mindtree by CIT(A). We now deal with each of the comparables.
(A) Persistent Systems Ltd. 9.1 The TPO has concluded that the company is engaged in rendering Software Development Services and selected this
company has a comparable. The CIT(A) rejected Persistent Systems ltd as a comparable on the ground that it is functionally different relying on the decision in the case of Dell International Services India Pvt. Ltd. v ACIT (IT(TP)A No.2846/Bang/2017) for AY 2013-
14. 9.2 The learned DR relied on the Order of the TPO but could not point our why decision in the case of Dell International (supra) should not be followed. The assessee submitted that its turnover is IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 16 of 47 Rs.173.07 crores and Persistent's turnover is Rs. 996.75 crores, which exceeds the threshold of Rs.200 crores as set by the Bangalore Tribunal in the case of Autodesk India P Ltd v DCIT [96 taxmann.com 263]. The assessee further submitted that Persistent is functionally different as it is engaged in 3 different business lines viz., 'Product Engineering Services', 'Platforms & Solutions' and 'IP and related business'. Therefore, Persistent is not a pure software development company. It is submitted that Persistent has High R&D Expenditure. There is no segmental P&L available and thus decision of CIT(A) of rejecting this company as functionally different should be upheld. The learned AR has relied on the annual report at Pg 596-602, 605, 607, 611 of PB-I. The assessee further submitted that this company is rejected in its own case for various years and latest for AY 2018-19 [Para 16 to 16.3 on Pg No. 773 to 780 of Paper Book-II]. The assessee submitted that Persistent is also held to be functionally different in Arctern Consulting Pvt Ltd [IT(TP)A No 2747/B/2017] for AY 2013-14 and Metric stream Infotech (India) P Ltd v DCIT [IT(TP)A No 1418 & 2735/B/2017], both for AY 13-14.
9.3 We have heard the rival contentions. We find that the turnover of persistent systems Limited is ₹996.75 crores, which is higher than the Rs. 200 crores turnover filter as set by various Tribunal decisions. In the case of Autodesk India P Ltd v DCIT [96 taxmann.com 263], it was held as below "17. The first issue to be decided in Revenue's appeal is the application of turnover filter for exclusion of companies that are otherwise found to be functionally comparable. The Grievance of the revenue in this regard is projected in Gr.No.2 of the Grounds of appeal raised by the revenue in its appeal. The basic facts to be noticed with regard application of turnover filter are that the Assessee's turnover for the relevant previous year was Rs.10.65 crores. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the Assessee before the CIT(A) was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 17 of 47 excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The CIT(A) agreed with the submission of the Assesseeand he excluded the following 5 companies whose turnover was above Rs.200 Crores from the list of comparable companies, viz., (i) Flextronics Ltd., (ii) L & T Infotech Ltd., (iii) M/s. Infosys Technologies Ltd., (iv) Satyam Computer Services Ltd., (v) iGate Global Solutions Ltd. The CIT(A) in coming to the above conclusion placed reliance on the decision of the ITAT Bangalore in the case of Genisys Integrating Systems (India) (P) Ltd. v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 (Bang.) wherein it was held when there is a limit for the lower end for identifying the comparable companies, there is no reason why there should not be an upper limit also, as size matters in business. 17.1 The learned DR submitted that high turnover is not a relevant criterion to regard a company as not comparable, so long as the two companies are functionally comparable. If functions by two companies are identical then they have to be regarded as comparable. According to him therefore the CIT(A) was not justified in excluding 5 companies on the ground that their turnover was above Rs.200 Crores and cannot be compared with the Assessee whose turnover was around Rs.10.65 Crores. In support of his contention the learned DR placed reliance on the following decisions:
Sl. Name of the case Citation Relevant No paragrap . h 1. NTT DATA Global [2016] 69 taxmann.com 23 & 24 Delivery Services Ltd. v. 7 (Bang. - Trib.) Asstt. CIT 2. LSI Technologies India [2016] 70 taxmann.com 14.3 Pvt. Ltd. v. ITO 189 (Bang. - Trib.) 4. Societe Generale Global [2016] 69 taxmann.com 10 Solution Centre (P.) Ltd. v. 336 (Bang. - Trib.) Dy. CIT 5. Willis Processing Services [2013] 30 tamann.com 47 (I) (P.) Ltd. v. Dy. CIT 350/57 SOT 339 (Mum.) 6. Capgemini India (P.) Ltd. [2015] 58 taxmann.com 4.3 v. Asstt. CIT 175/232 Taxman 149 (Bom.)
17.2 The learned DR also filed before us a note contending that in software industry, size has no influence on the margins earned by an entity. According to him economies of scale are relevant only in capital intensive companies which have substantial fixed assets in the form of plant and machinery. According to him, in software industry, size does not matter, what matters is the human capital. According to him application of the filter of turnover might be justified for excluding companies with low turnover of say Rs.1 crore or less because the IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 18 of 47 margin earned by these companies might widely fluctuate due to narrow capital base and lack of competitive strength, lack of operational efficiencies and also lack of human resources. They also escape the eyes of regulators. He drew our attention to the turnover and profit margins of company Infosys Technologies Ltd. For FY 1997 to 2010 and submitted that in FY 1997 the company had turnover of Rs.139 Crores and its profit margin was 34.95% whereas in FY 2010 its turnover was Rs.21140 crores but its profit margin was only 44.91%. According to him therefore the profit margins hover between 35% and 40% over the period of 15 years and therefore high turnover does not necessarily mean high profit margins. He also gave a chart showing turnover and margin of 20 companies in the IT-BPO industry for three years. According to him the chart would show that for the same range of turnover companies earned different profit margins. Therefore according to him there is no relation between the margins earned and the turnover of a company. According to him software industries operate on the basis of cost plus margin of profits and therefore turnover would be irrelevant and have no impact of the profit margins. His further submission was that under Rule 10B(3) of the Income Tax Rules, 1962 (Rules) it is only functions performed, assets employed and the risks assumed that are relevant criteria for comparison and turnover is not a prescribed criterion for the purpose or comparison. He fairly admitted that there are differences of opinion amongst various benches of the Tribunal on the application of turnover filter and that some Benches have held that high turnover was relevant criteria for excluding comparable companies. His prayer in the alternative was for constitution of a special bench to resolve the conflict. 17.3 Per Contra the learned counsel for the Assessee submitted that ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. v. Dy. CIT [2018] 89 taxmann.com 44 order dated 13.10.2017, considered the various aspects of application of turnover filter for excluding companies and has noted that the first decision rendered on application of this filter was in the case of Genisys Integrating Systems (I)(P) Ltd. (supra) rendered on 5.8.2011. In the case of Dell International Services India (P) Ltd. (supra), the tribunal took note of a divergent view expressed by ITAT Bangalore Bench in the case of Robert Bosch Engg. and Business Solutions Ltd. v. Dy. CIT ITA No.1519/Bang/2013 order dated 13.9.2017 after considering the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India (P.) Ltd. v. Dy. CIT [2017] 82 taxmann.com 167 (Delhi - Trib.), that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The Tribunal in the case of Dell International (supra) also took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software (P.) Ltd. v. Dy. CIT [2016] 67 taxmann.com 243 (Bang. - Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India (P.) Ltd. (supra) and the decision to the contrary in the case of CIT v. Pentair Water India (P.) Ltd. [2016] 69 taxmann.com 180/381 ITR 216 (Bom.) wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 19 of 47 down in the case of Pentair Water India (P.) Ltd. (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra):
'41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:--
"9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study."
42. The Assessee's turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are non- jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference.' 17.4 His submission was that the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India (P.) Ltd. (supra) was not on the application of turnover filter. He brought to our notice that the relevant substantial question of law in the case of Christcapital decided by the IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 20 of 47 Hon'ble Delhi High Court was (i) whether comparables can be rejected on the ground that they have exceptionally high profit margins as compared to the Assessee in Transfer Pricing Analysis.(ii) Whether factors like differential functional and risk profile coupled with high degree of volatility in operating profit margins is sufficient ground to reject comparables for transfer pricing analysis. In answering the above question, the Hon'ble Court however at page 218 of the report (the said decision is Chryscapital Investment Advisors India (P.) Ltd. (supra)) observed that the mere circumstance that a company- otherwise confirming to the stipulations in rule 10B(2) of the Rules in all details, presenting a peculiar feature- such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The Court further observed that the Transfer Pricing officer, first, has to be satisfied that such differences do not "materially affect the price .......... or cost". Secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. According to him therefore the observations of the Hon'ble Delhi High Court in so far as it relates to application of turnover filter are obiter dictum. Obiter dictum though is entitled to a weight cannot be equated with ratio decidendi of a case. In support of his contention as above, he relied on the decision of the Hon'ble Supreme Court in the case of Director of Settlements A.P. v. M.R. Apparao [2002] 4 SCC 638. Countering the submission of the learned DR that the decision of the Hon'ble Bombay High Court rendered in the case of Pentair (supra) is not ratio decidendi as it was merely dismissal of appeal u/s.260A of the Act on the ground that no substantial question of law arose for consideration, learned counsel drew our attention to the decision of the Bombay High Court in the case of Pentair water India (P.) Ltd. (supra) paragraph 9, wherein the Hon'ble Bombay High Court after referring to a decision of the Hon'ble Delhi High Court rendered in the case of CIT v. Agnity India Technologies (P) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26 (Delhi), clearly observed that turnover is obviously a relevant fact to consider the comparability. Our attention was also drawn to paragraph-3 of the decision rendered in the case of Pentair (supra) wherein the department specifically contended that the Tribunal erred in holding that size and turnover of a company are deciding factors for treating a company as comparable. According to him therefore it was not a case of merely dismissal of appeal u/s.260A of the Act as unadmitted on the ground that no substantial question of law arose for consideration but was precedent in so far as the Hon'ble Court has expressed a clear opinion on the issue.
17.5 The learned counsel for the Assessee also drew our attention to a decision of the Hon'ble Delhi High Court rendered in the case of Pr. CIT v. New River Software Services (P) Ltd. [2017] 85 taxmann.com 302 wherein the Hon'ble Delhi High Court followed the decision of the Hon'ble Bombay High Court rendered in the case of Pentair (supra) and held that Infosys BPO was rightly excluded as not being a comparable company. Our attention was also drawn by him to a decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Mercer Consulting (I) (P) Ltd. [2016] 76 taxmann.com 153/390 ITR 615 wherein the Hon'ble Court held that a giant company cannot be compared with a company which was a captive service provided assuming limited risks.
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 21 of 47 17.6 As far as the decisions of the Tribunal rendered on the application of turnover filter that are contrary to the decision rendered in the case of Genisys Integrating Systems (supra), the first submission of the learned counsel for the Assessee was that those decisions were rendered at a later point of time and were to be regarded as per incurium since these decisions were also rendered by a bench of equal strength and either the subsequent decisions refused to follow or were rendered in ignorance of an earlier binding precedent. He submitted that if a bench of equal strength differs with a view taken earlier, the proper course for them is to make a reference to larger bench. They cannot refuse to follow a binding decision. If they do so, the decisions so rendered have to be regarded as per incurium. Even if they are rendered in ignorance of the earlier binding precedent, they have to be regarded as per incurium. In this regard the learned counsel for the Assessee placed reliance on the decisions of Hon'ble Supreme Court in the case of Union of India v. Raghubir Singh AIR 1989 SC 1933, Union of India v. S.K. Kapoor [2011] 4 SCC 589 and Sundeep Kumar Bafna v. State of Maharashtra [2014] 16 SCC 623. In the aforesaid decisions the Hon'ble Supreme Court held that in a situation where there are conflicting decisions of High Court on an issue which are irreconcileable and pronounced by judges of co-equal strength, then the earlier view has to be followed as the later decision has to be regarded as per incuriam. The Hon'ble Supreme Court in the case of Sundeep Kumar Bafna (supra) held that a decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench and when High Courts encounter two or more mutually irreconcilable decisions of the Supreme Court cited at the Bar, the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam. The following were the relevant observations of the Hon'ble Supreme Court:
"19. It cannot be over-emphasised that the discipline demanded by a precedent or the disqualification or diminution of a decision on the application of the per incuriam rule is of great importance, since without it, certainty of law, consistency of rulings and comity of Courts would become a costly casualty. A decision or judgment can be per incuriam any provision in a statute, rule or regulation, which was not brought to the notice of the Court. A decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench; or if the decision of a High Court is not in consonance with the views of this Court. It must immediately be clarified that the per incuriam rule is strictly and correctly applicable to the ratio decidendi and not to obiter dicta. It is often encountered in High Courts that two or more mutually irreconcilable decisions of the Supreme Court are cited at the Bar. We think that the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam."
It was therefore submitted by him that the earliest view rendered by the ITAT Bangalore Bench in the case of Genisys Integrating (supra) should be followed. 17.7 We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 22 of 47 case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee."
9.4 Thus, we are of the considered opinion that this company fails turnover filter. Even otherwise, Persistent systems ltd is not a pure software development company. We find that Persistent is engaged in product development and product design services and has revenue from licensing of software products/IP. It has also incurred expenses on R&D. The Tribunal in the case of Dell International Services (supra) has held as below:
Persistent Systems Limited:
"9. The ld. A.R. submitted that the Assessee objected to the inclusion of this company on the ground that it is functionally incomparable due to various reasons, which was not appreciated by the TPO and the DRP. 9.1 The ld. A.R. submitted that this company is functionally dissimilar to it as it is engaged in software products, services and technology innovation. The company primarily focuses on rendering end-to-end software product development services to IT product companies and offers complete product life cycle services. The company focuses on next generation technology centered on four main themes- Cloud computing, Analytics, Social enterprise and Enterprise Mobility. The company also focuses on establishing a strong IP IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 23 of 47 portfolio and the IP led business of the company saw a significant boost during the year under consideration due to two product acquisitions by its subsidiaries. Further, during the year under consideration, the company also concluded a contract to take over IBM's TNPM product road map, which would help the company strengthen its position in relation to the IP led business. As per the press release of the Company, the company launched Pax Pharma - a compliance-based Design to Print (D2P) automation solution designed specifically for pharmaceutical packaging and product lifecycle management. The company also announced the launch of its newly developed AppExchange application in 2012 from which it is evident that the Company has been launching application and products throughout the year which is not comparable to the Assessee. Also, the company focuses on licensing and sale of products.
9.2 The ld. A.R. further submitted that the company also undertakes significant research and development operations, approved by the government, as evidenced by intangible assets capitalized by the company, and has spent Rs. 27.87 million in FY 2012-13 towards Research and Development activity. Such Research and Development costs have also been capitalized owing to future economic benefits arising out of the same. Therefore, this company cannot be compared to the Assessee who is engaged in the provision of routine IT services. The company also renders significant on-site services suggesting that it adopts a business model different from that of the Assessee, and therefore it ought to be excluded from the final list of comparables. Further, the company reports its segmental details on the basis of type or class of customers and geography and not on the basis of services rendered. Therefore, she submitted that in the absence of segmental details with respect to its software development services segment being made available, the company cannot be held as a comparable to the Assessee. Further, this company has been consistently excluded from the final list of comparables in cases of assessee's placed similarly to the Assessee.
9.3 In this regard, she placed reliance on the decisions of this Tribunal in the cases of (i) Dell International Services India Private Limited (for the merged entity Sonicwall Info Security Private Limited) v. ACIT (reported in [2022] 140 IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 24 of 47 taxmann.com 259 (Bangalore - Trib.)); and (ii) NXP India Pvt. Ltd. v. DCIT (reported in [2020] 116 taxmann.com 421 (Bangalore - Trib.)) and the decision of the Hyderabad Bench of this Tribunal in EPAM Systems India (P.) Ltd. v. ACIT (reported in [2018] 100 taxmann.com 335 (Hyd-Trib), where in the cases of similarly placed assessees, this company was directed to be excluded. Further reliance is placed on the decision of the Hon'ble Delhi High Court in the case of PCIT v. Cashedge India Pvt. Ltd. (Order dated 04.05.2016 passed by the Hon'ble High Court of Delhi in ITA No. 279/2016) wherein, in the case of a similarly placed assessees, the exclusion of the company came to be upheld. Therefore, this company ought to be excluded from the final list of comparables.
10. The ld. D.R. relied on the order of ld. DRP.
11. We have heard the rival submissions and perused the materials available on record. We are of the opinion that this comparable has been considered by the coordinate bench of this Tribunal in the case of NXP India Pvt. Ltd. vs. DCIT cited (supra), wherein held as under:
"23. As discussed in earlier year, Persistent Systems Limited is engaged in product engineering services, platforms and solutions, IP and related business, which is functionally different from assessee's case and it has earned revenue from R & D activities. Persistent Systems Limited also owns intellectual properties. Further, segmental data is not available as seen from the Notes forming part of financial statements under the head "Revenue from operations (net)", placed at paper book page No.1260 and it has net income from sale of software services as discussed in earlier year. It is also to be noted that Persistent Systems Limited is considered as a comparable by various orders of the Tribunal in the following case of NXP Semiconductor Private Limited [IT(TP)A No.1634/Bang/2014 for assessment year 2009-2010. Vide order dated 22.07.2015, the Tribunal observed as under:-
"13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that a co-ordinate bench of this Tribunal in the assessee's own case (supra) for Assessment Year 2008-09 has held that this company being engaged in product development and product design and analysis service is IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 25 of 47 functionally different from a pure software service provider and therefore excluded it from the list of comparables for software development services;
holding as under at para 17.3 of its order:-
"17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly."
13.4.2 Following the decision of the co-ordinate bench of this Tribunal in the assessee's own case (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different (viz. being engaged in product development and product design services) from the assessee in the case on hand which is rendering software development services. It is ordered accordingly." 23.1 Therefore, Persistent Systems Limited cannot be compared with the assessee's case. Accordingly, we direct the TPO to exclude the said company from the list of comparables, with the similar directions given in the above order of the Tribunal (supra)." 11.1 In view of the above order of the Tribunal, taking a consistent view, we direct the AO/TPO to exclude this company M/s. Persistent Systems Ltd. from the list of comparables."
9.5 Thus, taking a consistent view, we direct the TPO to exclude Persistent systems Limited from the final list of comparable.
(B) Infobeans Technologies Ltd 9.6 The TPO has concluded that the company has revenue only
from Software Services. The CIT(A) rejected the company as IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 26 of 47 functionally different relying on the decision of M/s Emerson Electric Co. Pvt Ltd. vs. ACIT and Skillnet Solutions India Pvt Ltd.
9.7 The learned DR relied on the Order of the TPO in support of inclusion of this company as comparable. The assessee submitted that Infobeansis functionally different as it is not a pure software development company. It is submitted that it is a global technology solutions provider offering services in the areas of Product engineering, dual-shore development, staff augmentation, outsourced product development, custom web and mobile applications, content management systems implementation, etc. It is engaged in diversified business activity and is not pure software development company. It is submitted that Infobeans should be rejected as functionally different. The assessee relied on the decisions in the case of Skillnet Solutions India Pvt Ltd. v DCIT (ITA No.6570/Mum/2017) (Mumbai ITAT) for AY 2013-14 [Para 4 to 8 on Pg No. 755 - 757 of Paper Book-II] andAssessees own case for AY 2018-19[Para 19 on Pg No. 782 to 783 of Paper Book-II]. The ITATrelied on the Tribunal decision in Assessee's own case for AY 2016-17. Thus, the assessee submitted that it is clear that Infobeans is being consistently excluded as comparable on the ground that it is functionally different.
9.8 We have heard the rival contentions. From the details given in the paper book, we find that this company is engaged in diversified business activities and is not into pure software development service provider like the assessee. A diversified service provider cannot be compared with pure software service provider unless segmental details are available. This view is also supported by the decision in the case of Skillnet Solutions India (supra) wherein it is held as below:
"4. The learned Counsel for the assessee submitted, Infobeans Technologies Ltd. being engaged in diversified activities and the segmental results not being IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 27 of 47 available in public domain, cannot be compared to a routine software development service provider like the assessee. In support of such contention, learned Counsel for the assessee relied upon the following decisions:-
i) 5. M/s. Pubmatic India Pvt. Ltd. v/s ACIT, ITA no.655/Pun./2017 dated 09.03.2018;
ii) M/s. Emerson Electric Co. India Pvt. Ltd. v/s ACIT, ITA no. 6098 & 531/Mum./2018, dated 14.06.2019;
iii) M/s. Abhay India Pvt. Ltd. v/s ACIT, ITA no.7290/Del./2018 dated 24.09.2019.
5. The learned Departmental Representative strongly relied upon the observations of the Transfer Pricing Officer and learned DRP.
6. We have considered rival submissions in the light of the decisions relied upon and perused materials on record. As could be seen from the facts on record, the assessee operates in a single segment of providing routine software development services to its AE. Whereas, Infobeans Technologies Ltd. is providing a range of services, such as, automation engineering, service now, UX and UI, customized software, storage and virtualization, data mining, data modeling, statistical analysis, machine learning technique, etc. Considering the fact that Infobeans Technologies Ltd. is engaged in diversified activities and segmental details are not available, the Tribunal, Pune Bench, in Pubmatic India Pvt. Ltd. (supra) has held that this company cannot be treated as comparable. In case of M/s. Emersion Electric Co. India Pvt. Ltd. (supra) which is for the very same assessment year, the Co ordinate Bench following the decision rendered in case of Pubmatic India Pvt. Ltd. (supra) has held that Infobeans Technologies Ltd. cannot be considered as comparable to a routine software development service provider. The same view was again expressed by the Tribunal, Delhi Bench, in M/s. Abhay India Pvt. Ltd. (supra). Keeping in view the consistency in the decisions of the Tribunal with regard to the comparability of Infobeans Technologies Ltd. with a routine software development service provider, we hold that this company cannot be a comparable to the assessee. Accordingly, we direct the Assessing Officer to remove this company from the list of comparables and determine the arm's length price.
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 28 of 47
7. Considering the submissions of the learned Counsel for the assessee that with the removal of Infobeans Technologies Ltd. assessee's margin would be within arm's length even accepting the rest of the comparables, we do not intend to dwel upon the other grounds raised by the assessee, as, they have become academic insofar as the present appeal is concerned.
8. In the result, appeal is partly allowed".
9.9 Similarly, the Tribunal in Assessee's own case for AY 2018-19 has held as below with respect to exclusion of Infobeans Technologies Ltd has held as below:
"Infobeans Technologies Ltd.
19. It was submitted that this Company is functionally different as it is engaged in providing diversified services in the areas of Product engineering, Digital Transformation and Automation and DevOps for clients across the globe. It is not a pure software development company. He relied on the decision of the Tribunal assessee's own case for AY 2016-17 in IT(TP)A Nos. 238/Bang/2021 (supra) and other following decisions, in which it is held that Infobeans is into diversified software services and cannot be considered as a comparable to pure software development companies like the Appellant:-
• M/s. NTS Technology Services Pvt Ltd. (TS-239-ITAT-2023 Bang-TP for AY 18-19) • M/s Radisys India Limited (TS-823-ITAT-2022Bang-TP) for AY 2017-18 • ADP Pvt. Ltd., Hyderabad vs DCIT-1(1), Hyderabad [2022] 135 taxmann.com 44 (Hyderabad - Trib.) for AY 2016-17 18.1 The ld. DR relied on the orders of lower authorities. 18.2 We have considered the rival submissions and perused the material on record. We note from the financial statements placed at page 1830-1837 of PB that the company's overview is as under:-
"Our company is leading playing in offering, Product engineering, Digital Transformation and Automation and DevOps for clients across the globe. With two state-of-the-art facilities in India, the CMMI level 3 certified company caters to Fortune 500 clients in USA, Germany and Middle East markets. The IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 29 of 47 Company caters to a wide range of segments in the industry, including Healthcare, Compliance, Storage and Virtualization, Media and Publishing and eCommerce. The company's efficient operations professional team of over 700+ employees and high customer-focus has enabled it to grow blue-chip client base with high amount of repeat business."
18.3 On going through the above activity, the company is functionally different from the assessee. Further, we note from the financial statements that the revenue is generated from sale of services but not from sale of products. We therefore direct the AO/TO to exclude this company from the comparables."
9.10 Taking a consistent view in line with the above decisions, we direct the TPO to exclude Infobeans technologies from the list of final comparables.
(C) Larsen and Toubro Infotech Ltd 9.11 The TPO has concluded that the company is engaged in rendering Software Development Services and therefore comparable. The CIT(A) has rejected the company as functionally different relying on the decision in the case of Dell International Services (supra).
9.12 The learned DR relied on the Order of the TPO but could not point our why decision in the case of Dell International (supra) should not be followed. The assessee submitted that its turnover is Rs.173.07 crores and L&T Infotech's turnover is Rs. 3613.42 crores, which exceeds the threshold of Rs.200 crores as set by the Bangalore Tribunal in the case of Autodesk India P Ltd v DCIT [96 taxmann.com 263]. The assessee further submitted that L&T Infotech is not a pure software development company as it is engaged in providing diversified services and has Company has Substantial Onsite operations of 41.37% as against 100% offshore operations of the Assessee. The assessee has placed reliance on the decisions in the case of Dell International Services India Pvt. Ltd. v IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 30 of 47 ACIT (IT(TP)A No.2846/Bang/2017) (Bangalore ITAT) for AY 2013- 14 - [Para 6 to 8.1 on Pg 709 to 712 of Paper Book-II], Assessees own case for AY 2018-19 [Para 15 to 16.3 on Pg No. 772 to 780 of Paper Book-II], Arctern Consulting Pvt Ltd IT(TP)A No 2747/B/2017 for AY 2013-14 [Pg 15 to 17 of the decision] and Metricstream Infotech (India) P Ltd v DCIT IT(TP)A No 1418 & 2735/B/2017 [Pg 6 to 11 of the decision].
9.13 We have heard the rival contentions. L&T Infotech has turnover of Rs. 3613.42 crores, which is very high compared to assessee turnover of Rs. 173.07 crores. Tribunal and High Court have consistently held that such large companies cannot be compared to small software companies like the assessee. Thus, L&T Infotech should be rejected as comparable as failing upper turnover filter. Further, from the details given in the paper book, we find that this company is engaged in diversified business activities and is not into pure software development service provider like the assessee. A diversified service provider cannot be compared with pure software service provider unless segmental details are available. This view is also supported by the decision in the case of Dell International Services (supra), wherein it is held that as below:
"Larsen & Toubro Infotech Limited:
6. The ld. A.R. submitted that this company was selected by the TPO and objected to by the Assessee on the basis that it was functionally incomparable to the Assessee on various counts.
6.1 She submitted that this company is a global IT services and solutions provider. It is involved in a diverse range of activities from application development, architectural services, BPO, consulting, enterprise integration, infrastructure management services, integrated engineering services, mobility services, oracle services, SAP services etc., which is not comparable to the Assessee which is engaged in the business of rendering routine software development services. Additionally, the company is involved in resale of IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 31 of 47 products and derives revenues from this activity. During the year under consideration, the company re-organized its business into three segments:
6.2 She submitted that as there are no details made available in respect to the software development services, the company cannot be held as a comparable to the Assessee. In the show cause notice dated 11.08.2016, the TPO acknowledged the fact that the company re organized its business and renders product engineering services.
6.3 Further, she submitted that the company is also into trading in products and owns several intangibles and enjoys significant brand value. The company develops in-house intangibles and owns proprietary software products. Some of the products developed and owned by the company are Unitrax (R), ACCURUSI, Service First TM. Further, as a result of high brand value, the company enjoys a high bargaining power in the market. The company has also incurred significant expenses in foreign currency amounting to 41.37% of its total sales which suggests that the company operated on a business model different from that of the Assessee. This company has been consistently excluded from the final list of comparables in cases of assessees similar to the Assessee. 6.4 In this regard, the ld. A.R. placed reliance on the decisions of this Tribunal in the cases of (i) Dell International Services India Private Limited (for the merged entity Sonicwall Info Security Private Limited) v. ACIT (reported in [2022] 140 taxmann.com 259 (Bangalore - Trib.)); and (ii) NXP India Pvt. Ltd.
v. DCIT (reported in [2020] 116 taxmann.com 421 (Bangalore - Trib.)) and the decision of the Hyderabad Bench of this Tribunal in EPAM Systems India (P.) Ltd. v. ACIT (reported in [2018] 100 taxmann.com 335 (Hyd-Trib), where in the cases of similarly placed assessees, the company was directed to be excluded. In IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 32 of 47 view of the above, she submitted that this company ought to stand excluded from the final list of comparables. 7. The ld. D.R. relied on the order of ld. DRP.
8. We have heard the rival submissions and perused the materials available on record. We are of the opinion that this comparable has been considered by the coordinate bench of this Tribunal in the case of NXP India Pvt. Ltd. vs. DCIT cited (supra), wherein held as under:
"22. The learned AR relied on the order of the co-ordinate Bench in the case of M/s. Metric Steam Infotech (India) Pvt. Ltd. v. DCIT in IT(TP)A No.1418 & 2735/Bang/2017 for the assessment year 2013-2014, order dated 27.02.2019, wherein the Tribunal held as under:-
"11. As far as L&T Infotech Ltd. and Persistent Systems Ltd. are concerned, our attention was drawn to the decision of ITAT Hyderabad Bench in the case of M/s. EPAM Systems (I) P. Ltd. v. ACIT, ITA No.2122/Hyd/2017 for AY 2013- 14, order dated 20.11.2017. Vide para 12 of the decision, the Tribunal took the view that Persistent Systems Ltd. was into software products and software solutions and no segmental details were available and therefore the profit margin in the software development services segment could not be compared with the assessee's profit margin. As far as L&T Infotech Ltd. is concerned, the Tribunal vide para 17 of the aforesaid order came to a similar conclusion to hold that L&T Infotech should not be regarded as a comparable company. In the light of judicial precedents which remain uncontroverted, we are of the view that the aforesaid two comparable companies should be excluded from the list of comparable companies."
22.1 It was also brought to our notice that in earlier year, Larsen & Toubro Infotech Limited has incurred expenditure on "cost of brought out items for resale at Rs.27,10,89,274 for which he drew our attention to the financial statement of Larsen & Toubro Infotech Limited placed at paper book page No.1081, which is absent in the case of present assessee. He also submitted that it has huge intangible assets and brand value in software at Rs.143,61,95,196 and it has intangible asset in the form of business rights to the tune of Rs.153,42,45,196 as shown in the Fixed Assets as on 31.03.2013 placed at paper book page No.1078. Being so, in our opinion, it cannot be compared with IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 33 of 47 the assessee's case. Accordingly, we direct the TPO to exclude the same from the list of comparables."
8.1 In view of the above order of the Tribunal, taking a consistent view, we direct the AO/TPO to exclude this company M/s. Larsen & Toubro Infotech Ltd. from the list of comparables."
9.14 Thus, taking consistent view with the Tribunal decisions, we direct that L&T Infotech be rejected from the final list of comparables.
(D) Mindtree Ltd 9.15 The TPO has concluded that the company is engaged in rendering Software Development Services. The CIT(A) rejected the company as it fails upper turnover filter observing that the turnover of this company is Rs. 2,361 crores.
9.16 The learned DR relied on the Order of the TPO and submitted that turnover filter should not be applied. The assessee submitted that its turnover is Rs.173.07 crores and Mindtree's turnover is Rs. 3613.42 crores, which exceeds the threshold of Rs.200 crores as set by the Bangalore Tribunal in the case of Autodesk India P Ltd v DCIT [96 taxmann.com 263]. The assessee further submitted that Mindtree is functionally different as it is not a pure software development company. It is engaged in rendering diversified services even under the IT Services segment. These services include business process management, infrastructure management, digital business, SAP services, product engineering, etc. The assessee relied on the decision in the case of Arctern Consulting Pvt Ltd v DCIT IT(TP)A No 2747/B/2017 for AY 2013-14.
9.17 We have heard the rival contentions & perused the material on record. Mindtree has turnover of Rs. 2361 crores, which is very high compared to assessee turnover of Rs. 173.07 crores. Tribunal and High Court have consistently held that such large companies cannot be compared to small software companies like the assessee.
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 34 of 47 Thus, Mindtree should be rejected as comparable as failing upper turnover filter of Rs. 200 crores. Further, from the details given in the paper book, it is clear that Mindtree is into diversified activities and is not pure software development company. This view is supported by the decision in the case of Arctern Consulting Pvt Ltd v DCIT (supra) wherein it is held as below:
"(d) Mindtree Ltd.
This comparable has been included by Ld.TPO the final list. Ld.AR submitted that it is functionally not similar with that of assessee. It is submitted that assessee engaged in providing services such as Agile, analytics and information management, application development and maintenance, business process management, business technology consulting, Cloud, Digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. It is further been submitted that this company does not have segmental information on the basis of which revenue earned from different verticals could be identified. This company also owns huge intangibles and therefore deserves to be excluded.
On the contrary Ld. CIT DR placed reliance upon orders passed by authorities below.
We have examined the annual reports of this company and it is observed that this company carries out research and development activities and has created large intangibles. Under such circumstances we do not find this company to be comparable with that of a captive service provider like assessee. We therefore direct the Ld. AO/TPO to exclude this comparable from the final list."
9.18 Thus, we also direct the TPO to exclude Mindtree as a comparable.
10. Now we take the Revenue Ground No. 11 to 14 i.e. Treating the Provision for Bad and doubtful debts as non-operating cost.
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 35 of 47 10.1 While computing the operating margins of CG-VAK Software and Exports Ltd, the learned CIT(A) directed the TPO to recompute the margins of the said company by considering provision for bad and doubtful debts as part of operating cost. Revenue is in appeal against such directions.
10.2 The Assessee submitted that the provision for bad and doubtful debts is normal business expenses linked to sales and should be treated as part of operating costs. The Assessee relies on the decisions in the case of M/s. ACI Worldwide Solutions Pvt. Ltd. v. DCIT [IT(TP)A. No. 1893/Bang/2017] and Intercontinental Hotels Group (India) (P.) Ltd. v. DCIT [2021] 126 taxmann.com 313 (Delhi - Trib.).
10.3 We have heard the rival contentions & perused the material available on record. We are of the considered opinion that the Provision for bad and doubtful debts is normal business expenses linked to sales and should be considered as operating in nature. This view is supported by various decisions. The tribunal in the case of ACI Worldwide Solutions (supra) it is held as below:
"8. As far as the exclusion of provision of bad and doubtful debts from the operating cost of the comparable companies is concerned, the learned Counsel for the assessee brought to our notice that while considering the international transaction in the distribution segment, the TPO has himself considered provision for bad and doubtful debts as part of the operating expenditure and by the same logic he should have treated provision for bad and doubtful debts as part of the operating cost in the hands of the comparable companies also. As far as the software development segment of the assessee is concerned, there is no provision for bad and doubtful debts. The learned Counsel for the assessee filed before us copy of the decision of the Hon'ble Karnataka High Court in the case of Principal CIT Vs. Business Process Outsourcing India Pvt. Ltd., (2018) taxcorp (DT) 73195 (HC Karnataka) wherein in an appeal against the order of the Tribunal holding that provision for bad and doubtful debts should be IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 36 of 47 considered as part of the operating expenditure, the Hon'ble High Court confirmed the order of the Tribunal and dismissed the appeal of the Revenue as one not giving rise to any substantial question of law.
9. In the light of the aforesaid decision, we are of the view that provision for bad and doubtful debts should be treated as operating expense while computing the PLI OP/OC of the comparable companies which ultimately remains for comparison. We hold and direct accordingly."
10.4 Thus, the ld. CIT(A) direction to treat provision for bad and doubtful debts as part of operating cost is upheld and Revenue appeal grounds 11 to 14 are dismissed.
11. Now we take the Revenue Ground No. 15 to 16 with regard to Notional Interest on Receivables along with the assessee Grounds 3 & 4 for adjudication.
11.1 These Grounds of Appeal of Revenue challenge the decision of the learned CIT(A) regarding notional interest on trade receivables. The ld. CIT(A) held that once working capital adjustment is made, no separate adjustment can be made for notional interest on receivables. The ld. CIT(A) further directed to adopt LIBOR + 300 bps for receivables outside working capital adjustment. Revenue is in appeal against such directions.
11.2 The Assessee submitted that working Capital under TNMM subsumes adjustment for notional interest for Receivables as it factors in the receivable & payable position of both the Assessee and comparables. Infact, the TPO has computed working capital adjustment in the TP Order. Thus, no separate adjustment is to be made for receivables. The Assessee submitted that in its own case for AY 18-19, the tribunal has held separate adjustment cannot be made for notional interest on receivables if working capital adjustment is made under TNMM. Admittedly, in this case the TPO IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 37 of 47 has given working capital adjustment and therefore no separate adjustment can be made for notional interest on receivables.
11.3 The Tribunal in AMD India Pvt Ltd. v ACIT (IT(TP)A No. 775/Bang/2022) (Bangalore ITAT) for AY 2018-19 has held as below.
"36. Ground No.12 & 13 - Notional interest on trade receivables:
The ld. AR reiterated the submissions made before the lower authorities and further submitted that the trade receivables is not an international transaction and while adopting TNMM it takes care of all adjustments. Therefore, no separate adjustment should be made for notional interest on trade receivables. He further submitted that lower authorities have adopted 30 days credit period without considering any comparable companies. The ld. AR further submitted that credit period should be based on debt turnover ratio of final comparables. The ld. DRP directed the TPO to recompute the interest adjustment by adopting SBI short term deposit interest rate after granting 30 days credit period and has restricted the interest till 31.3.2018. Accordingly the TPO has interest adjustment of Rs.10,41,85,660 which is not correct. He further stated that even if receivable is to be regarded as a separate international transaction, it is closely linked transaction as per Rule 10A(d). The ld. AR submitted that 90 days may be considered as reasonable credit period. Therefore the transaction of receivables has to be evaluated along with price received for services. 36.1 The ld. DR relied on the order of lower authorities and submitted that the TPO has discussed the issue in detail. He further submitted that interest on receivables is a separate international transaction as held by various courts, therefore the contention of the assessee cannot be accepted. He submitted that the asse is contending that bills have been realized within 180 days and the TPO noted that such long delayed payment is not allowable and restricted to 30 days.
36.2 Considering the rival submissions, we note that in assessee's own case for AY 2016-17 & 2017-18 (supra), similar issue was decided in assessee's own case by coordinate Bench of the Tribunal as under::-
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 38 of 47 "23.5 We have heard both the parties and perused the material on record. After considering the order of the lower authorities, we are of the view that the notional interest on receivable is an international transaction, therefore this argument of the assessee is rejected. The TPO has applied 6 months LIBOR + 300 basis points whereas the ld. DRP has directed for applying SBI fixed deposit rate. During the course of hearing, it was brought to the notice of both the parties that while calculating the notional interest on receivables, 6 months LIBOR + 300 basis points beyond the credit period shall be considered by the TPO for giving effect on this issue.
36.3 Following the above decision in assessee's own case (supra), we hold that notional interest on receivables is an international transaction. In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the working capital adjustment (WCA) subsumes the outstanding receivables, no separate characterization is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be LIBOR + 300 basis points by considering a credit period of 60 days. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings."
11.4 The ld. CIT(A) has followed the above directions and thus there is no need to interfere with same. Accordingly, the Revenue grounds are dismissed.
12. Now we deal with the Revenue Ground No. 17 to 19 - Cash Profit Level Indicator
12.1 The Assessee submitted that its depreciation rates are significantly higher than those of comparable companies. This leads to a higher depreciation charge in the Profit & Loss account, impacting profit margins and resulting in an inconsistent comparison with other companies. The Assessee submitted that its IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 39 of 47 depreciation cost in the software segment is around 5.72%, compared to an average of 4.05% for comparable companies. Given the impact of variations in asset types, technology, and investment levels, the Assessee submitted that cash profit margin is a more accurate basis for comparison in its case and same has been consistently applied for all the years. The CIT(A) has allowed the Cash PLI and the Revenue is in appeal on the issue.
12.2 The Assessee has relied on the following decisions in its own case wherein adopting of Cash PLI was directed:
• The Assessees own case for AY 2018-19 in IT(TP)A No.775/Bang/2022 [Para 34 to 34.4 on Pg No.814 - 817 of Paper Book-II].
• The Assessees own case for AY 2016-17 and AY 2017-18 in IT(TP)A No.238/Bang/2021 and 262/Bang/2022.
• The Assessees own case for AY 2010-11 in IT(TP)A
No.242/Bang/2015.
12.3 We have heard the rival contentions & perused the material available on record. In AY 2018-19, the tribunal held as below in assessee's own case:
"34. Ground No.7(i) & 11(1) : The ld. AR submitted that Cash PLI or depreciation should be granted. The details were submitted before the TPO and DRP. He further submitted that depreciation claimed by the assessee is substantially more than the comparable companies/ sector industry norms. The depreciation cost is around 4.07% which is higher than the average of 3 years of final comparables which is at 3.21%. He relied on the following decision in support of its contention:
• Assessee's own case for AY 2016-17 in IT(TP)A No.s 238/Bang/2021 & AY 2017-18 in IT(TP)A No.s 238/Bang/2021 IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 40 of 47 • PCIT v Novell Software Development India (P.) Ltd [2021] 126 taxmann.com 29 (Karnataka) - The Karnataka HC directed to exclude depreciation from operating cost.
34.1 In AY 2010-11, the ITAT in assessee's own case has upheld the direction of DRP to grant depreciation adjustment -
34.2 Considering the rival submissions, similar issue in assessee's own case for AY 2016-17 & 2017-18 (supra) was decided by coordinate Bench of the Tribunal as under::-
"17.4 In assessee's own case for AY 2010-11, [2015] 64 taxmann.com 468 (Hyd. - Trib.) the Hyderabad Tribunal on this issue held as under :- "
9.3 As regards ground No. 4, Ld. AR submitted that depreciation adopted by assessee was at higher side due to the fact that the estimated life of the assets are 3 years and 5 years. The cost of depreciation is high compared to other comparable companies. He submitted that the depreciation shall be excluded from the variable cost of all the comparable companies including assessee to determine the ALP. He relied on the following case laws:
1. BA Continuum India (P.) Ltd. TS-490-HC-2014 (TELandAP)-TP
2. BA Continuum India (P.) Ltd. v. Asstt. CIT [2013] 40 taxmann.com 311 (Hyd.)
3. Market Tools Research India (P.) Ltd. v. Asstt. CIT [2013] 32 taxmann.com 358/[2014] 150 ITD 296 (Hyd.) 9.4 Ld. AR also submitted the comparative tables on depreciation as below:
..............
..............
9.5 In our considered view, the method of depreciation adopted by the various comparable companies has an impact on the operating result of the respective comparable companies, which is highlighted in the above charts. The assessee company's percentage of depreciation to total expenditure is 12.80% whereas the mean of the comparable companies are 5.26%. We notice, there is considerable impact on the operating result. Hence, we agree with the DRP that the depreciation should be considered for evaluating the operating results of the comparables.
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 41 of 47 11.3 In the result, revenue ground No. 4 is dismissed." 34.3 Further, the jurisdictional High Court in the case of PCIT v Novell Software Development India (P.) Ltd [2021] 126 taxmann.com 29 (Karnataka) while considering similar issue held as follows:-
"7. Now we may advert to the third substantial question of law. Rule 10B of the Income-tax Rules, 1962 provides the method in which comparability analysis is to be conducted under transactional net margin method. Under sub-clause (i) of rule 10B(l)(e), the net profit margin realized by the tax payer from an international transaction is computed having regard to the relevant base that is costs incurred and sales effected, etc. Under sub- clause (ii) of rule 10B(l)(e), the net profit margin is realized by an unrelated enterprise/comparable company is computed having regard to the same relevant base as was selected in sub clause (i). Sub-clause (iii) of said Rule specifies that before a comparison of net margins realized under sub-clauses (1) and (ii) is done, the net margin realized under sub-clause
(ii) must be adjusted to take into account the differences which could materially affect the net profit margin in the open market. So also, in terms of Rule 10B(3), an uncontrolled transaction shall be considered comparable if none of the differences between the comparable companies and the controlled transaction are likely to materially affect the profit arising from such transactions in the open market or reasonably accurate adjustments can be made to eliminate the material effect of such differences. Since the respondent has a policy of charging a higher rate of depreciation as compared to the companies selected by the TPO, there is a definite impact on the net margins of the respondent as compared to the comparable companies. Thus, there is a need for making an adjustment to eliminate the differences in the accounting policies of the appellant and the comparable companies, in terms of the above Rules, especially given that in the bench marked international transaction is the sales by a captive service provider to its associated enterprises, on which depreciation would have no bearing and thus can be excluded altogether.
8. The Tribunal, by placing reliance on the Hyderabad Bench of the Tribunal in the case of MARKET RESEARCH TOOLS PVT. LTD. has held IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 42 of 47 that the Dispute Resolution Panel erred in directing to exclude depreciation from the cost of tax payer as well as comparables. The aforesaid finding cannot be said to be perverse warranting interference of the Court in this appeal.
9. In view of preceding analysis, the third substantial question of law is answered against the revenue and in favour of the assessee."
17.6 Respectfully following the above decisions, we direct the AO/TPO to adopt the Cash PLI. Theses grounds are allowed."
34.4 Considering the above decision in assessee's own case (supra), we direct the AO/TPO to consider the cash PLI/depreciation in terms of decision of Tribunal in assessee's own case for AY 2016-17 & 2017-18 (supra).
12.4 Similarly, in Assessees own case for AY 2016-17 and AY 2017-18 IT(TP)A No.238/Bang/2021 and 262/Bang/2022 it is held as below:
"17.2 The assessee has made common submissions with regard to Cash PLI in both SWD and MSS segments. The ld. AR submitted that it was contended before the TPO that either Cash PLI should be adopted or depreciation adjustment should be granted, which was however rejected by the TPO and there is no discussion on this aspect in the TP order. Before the DRP, the Appellant made detailed submissions on why cash PLI should be adopted (Pg 1082 to 1091 of Paper Book I for Software Segment & Pg 1144 to Pg 1146 of Paper Book I for Marketing Segment). The DRP upheld the action of TPO. 17.3 In this regard, the ld. AR submitted that the rate of depreciation charged by the assessee is substantially more than the comparable companies/sector industry norms. The assessee's depreciation cost to the total cost is around 5.91%, which is higher than the weighted average for 3 years of final comparables, which is at 3.51% and invited attention to the computation at Pg 1938 of Paper Book I and also, the detailed margin computation at Pg 397 & 398 of Paper Book I. It was contended that Cash PLI should be adopted for PLI computation and relied on the following decisions:-
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 43 of 47 • PCIT v Novell Software Development India (P.) Ltd [2021] 126 taxmann.com 29 (Karnataka) wherein the Karnataka HC directed to exclude depreciation from operating cost.
• Assessee's own case for AY 2010-11 wherein the ITAT in has upheld the direction of DRP to grant depreciation adjustment - [Para 9.3 to 9.5 of the order]. & AY 2011-12 & AY 2012-13 The DRP has accepted the Cash PLI adjustment as sought by the assessee.
17.4 In assessee's own case for AY 2010-11, [2015] 64 taxmann.com 468 (Hyd.
- Trib.) the Hyderabad Tribunal on this issue held as under :- "9.3 As regards ground No. 4, Ld. AR submitted that depreciation adopted by assessee was at higher side due to the fact that the estimated life of the assets are 3 years and 5 years. The cost of depreciation is high compared to other comparable companies. He submitted that the depreciation shall be excluded from the variable cost of all the comparable companies including assessee to determine the ALP. He relied on the following case laws:
1. BA Continuum India (P.) Ltd. TS-490-HC-2014 (TELandAP)-TP
2. BA Continuum India (P.) Ltd. v. Asstt. CIT [2013] 40 taxmann.com 311 (Hyd.)
3. Market Tools Research India (P.) Ltd. v. Asstt. CIT [2013] 32 taxmann.com 358/[2014] 150 ITD 296 (Hyd.) 9.4 Ld. AR also submitted the comparative tables on depreciation as below:
..............
..............
9.5 In our considered view, the method of depreciation adopted by the various comparable companies has an impact on the operating result of the respective comparable companies, which is highlighted in the above charts. The assessee company's percentage of depreciation to total expenditure is 12.80% whereas the mean of the comparable companies are 5.26%. We notice, there is considerable impact on the operating result. Hence, we agree with the DRP that the depreciation should be considered for evaluating the operating results of the comparables. 11.6 In the result, revenue ground No. 4 is dismissed."
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 44 of 47 17.5 Further, the jurisdictional High Court in the case of PCIT v Novell Software Development India (P.) Ltd [2021] 126 taxmann.com 29 (Karnataka) while considering similar issue held as follows:
"7. Now we may advert to the third substantial question of law. Rule 10B of the Income-tax Rules, 1962 provides the method in which comparability analysis is to be conducted under transactional net margin method. Under sub-clause (i) of rule 10B(l)(e), the net profit margin realized by the tax payer from an international transaction is computed having regard to the relevant base that is costs incurred and sales effected, etc. Under sub- clause (ii) of rule 10B(l)(e), the net profit margin is realized by an unrelated enterprise/comparable company is computed having regard to the same relevant base as was selected in sub clause (i). Sub-clause (iii) of said Rule specifies that before a comparison of net margins realized under sub-clauses (1) and (ii) is done, the net margin realized under sub-clause
(ii) must be adjusted to take into account the differences which could materially affect the net profit margin in the open market. So also, in terms of Rule 10B(3), an uncontrolled transaction shall be considered comparable if none of the differences between the comparable companies and the controlled transaction are likely to materially affect the profit arising from such transactions in the open market or reasonably accurate adjustments can be made to eliminate the material effect of such differences. Since the respondent has a policy of charging a higher rate of depreciation as compared to the companies selected by the TPO, there is a definite impact on the net margins of the respondent as compared to the comparable companies. Thus, there is a need for making an adjustment to eliminate the differences in the accounting policies of the appellant and the comparable companies, in terms of the above Rules, especially given that in the bench marked international transaction is the sales by a captive service provider to its associated enterprises, on which depreciation would have no bearing and thus can be excluded altogether.
8. The Tribunal, by placing reliance on the Hyderabad Bench of the Tribunal in the case of MARKET RESEARCH TOOLS PVT. LTD. has held that the Dispute Resolution Panel erred in directing to exclude IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 45 of 47 depreciation from the cost of tax payer as well as comparables. The aforesaid finding cannot be said to be perverse warranting interference of the Court in this appeal.
9. In view of preceding analysis, the third substantial question of law is answered against the revenue and in favour of the assessee."
17.6 Respectfully following the above decisions, we direct the AO/TPO to adopt the Cash PLI. Theses grounds are allowed."
12.5 Respectfully following a consistent view, we hold that the cash PLI be adopted and Revenue grounds of appeal 17 to 19 are accordingly dismissed.
13. Now, we take up the assessee's appeal in IT(TP)A No.1858/Bang/2024, in which the assessee has raised the following grounds of appeal:
IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 46 of 47 IT(TP)A Nos.1858 & 2031/Bang/2024 AMD India Pvt. Ltd., Bangalore Page 47 of 47
14. The Ground No.1 as raised by the assessee is general & does not require any adjudication.
14.1 Further, with regard to ground No. 2 relating to TP adjustment in software development segment the Assessee contended before the ld.CIT(A) that certain companies should be included in the final list of comparables. However, since the margin of Assessee was at ALP after holding in favour of Assessee on exclusion of comparable selected by the TPO, the ld.CIT(A)/NFAC has not adjudicated on the inclusion of comparable proposed by Assessee. Since, we have dismissed the grounds of Revenue, there is no need to adjudicate this ground of the assessee appeal.
15. In the result the appeal of the Revenue is dismissed & the appeal of the assessee is partly allowed.
Order pronounced in the open court on 17th Oct, 2025
Sd/- Sd/-
(Waseem Ahmed) (Keshav Dubey)
Accountant Member Judicial Member
Bangalore,
Dated 17th Oct, 2025.
VG/SPS
Copy to:
1. The Applicant
2. The Respondent
3. The CIT
4. The DR, ITAT, Bangalore.
5 Guard file
By order
Asst. Registrar,
ITAT, Bangalore.