Income Tax Appellate Tribunal - Bangalore
M/S. Applied Materials India Private ... vs Deputy Commissioner Of Income Tax, ... on 13 May, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : BANGALORE
BEFORE SHRI. B. R. BASKARAN, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
IT(TP)A No.2687/Bang/2017
Assessment Year : 2013 - 14
Applied materials India Pvt. Deputy Commissioner of
Ltd., Income Tax Circle - 1(1)(1),
Unit 5, 3rd Floor, Explorer Bengalore.
Building, International tech Vs.
park, White field,
Bengalore-560 001.
PAN - AAECA2635C
APPELLANT RESPONDENT
Appellant by : Smt. Tanmayee Rajkumar, Advocate
Respondent by : Shri Muzaffar Hussain, CIT (DR)
Date of Hearing : 05-03-2020
Date of Pronouncement : 13-05-2020
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal has been filed by assessee against final assessment order dated 12/10/2017 passed by Ld.DCIT Circle- 1(1)(1), Bangalore, under section 143 (3) read with section 144C of the Act for assessment year 2012-13 on following grounds of appeal:
Page 2 of 29IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14
1. Order! Directions bad in law and on facts 1.1 The order passed by the Deputy Commissioner of Income Tax, Circle 1(1)(1) ['Ld. AO'], under section 143(3) read with section 144C of the Income-tax Act, 1961 ('the Act'), is bad in law and on facts and is in violation of the principles of natural justice.
Without prejudice to the generality of the above, the order issued by the Ld. AO is bad in law in so far as the fact that the Ld. AO did not issue to Applied Materials India Private Limited ('the Appellant or 'the Company'), a show cause notice as per proviso to section 92C(3) of the Act. 1.2 The Ld. AO has erred in law in making a reference to the Deputy Commissioner of Income Tax (Transfer Pricing) - 1(1)(1) ['Ld. TPO'], inter alia without recording an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. Accordingly, the order passed by the Ld. TPO is without jurisdiction.
1.3 The final assessment order passed by the Ld. AO is without jurisdiction, inter alia, in so far as it purports to give effect to invalid directions of the Dispute Resolution Panel ('Ld. Panel'). 1.4 The order passed by the Ld.AO is without jurisdiction, inter alia, in so far as it incorporates the adjustment proposed in an invalid order passed by the Ld. TPO.
2. The Ld. Panel and Ld. AO/ Ld. TPO has erred in justifying the motive of shifting of profits On the facts and in the circumstances of the case and in law, the Ld. Panel and Ld. AO/ Ld. TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in the international transaction, which is a pre-requisite condition to make any adjustment under the provisions of Chapter X of the Act. The Ld. Panel erred in upholding the same.
3. Determination of arm's length price of international transactions 3.1 The Ld. Panel and Ld. AO/ Ld. TPO erred in rejecting the value of the international transaction of provision of software development services, as recorded in the books of account, as the arm's length price. 3.2 The Ld. Panel and Ld. AO/ Ld. TPO erred in determining a new arm's length price in substitution of the arm's length price as determined by the Appellant.
3.3 The Ld. AO/ U. TPO erred in law in holding that the fresh comparability analysis using non- contemporaneous data conducted by the Ld. TPO and further substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. The Ld. Panel erred in upholding the same.
3.4 The U. AO/ Ld. TPO erred and the Ld. Panel further erred in confirming use of data which was not contemporaneous and which was not available Page 3 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 in the public domain at the time of conducting the transfer pricing study by the Appellant.
3.5 The Ld. AO/ Ld. TPO erred in rejecting and the U. Panel further erred in confirming non- application of multiple-year data while computing the margins of alleged comparable companies as such data had an influence in determining the transfer pricing policy of the Appellant.
4. Determination of Net Cost Margin of the Appellant The Ld.AO/Ld.TPO had erred on facts and in law in not appreciating that the sub-contracting charges incurred by the Appellant represents arm's length consideration and was thereby required to be considered as pass- through cost and that the same thus ought to have been excluded from the Appellant's operating costs and income while computing the arm's length price. The Ld. Panel erred in confirming the same.
5. Comparability Analysis adopted by the Ld.TPO for determination of arm's length price 5.1 The Ld.AO/Ld.TPO grossly erred and the Ld. Panel erred in confirming the benchmarking of transaction of provision of software development services by the Appellant with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk assumed by the Appellant vis-à-vis the companies selected as being comparable. 5.2 The Ld.AO/Ld.TPO erred in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant without establishing functional comparability and the Ld. Panel also erred in confirming the same.
5.3 The Ld.AO/Ld.TPO erred in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. The Ld. Panel also erred in confirming the same.
5.4 The Ld. Panel erred in upholding the action of the Ld.AO/Ld.TPO in not applying the turnover filter at the upper limit so as to reject the high turnover companies selected by the Ld.AO/Ld.TPO. 5.5 The Ld.AO/Ld.TPO, while applying the said turnover filter at the lower limit so as to reject companies having turnovers less than INR 1 crore in FY 2012-13, erred in not applying the said filter at the upper end so as to reject high turnover companies as well. The Ld. Panel also erred in confirming the same.
5.6 The Ld.AO/Ld.TPO grossly erred in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and in arbitrarily applying a 25% related party criteria in accepting / rejecting comparables, while also rejecting the Appellant's ground for application of the related party transaction filter at a threshold of 10% or 15% of sales. The Ld. Panel also erred in confirming the same. Accordingly, basis application of 15% related party filter, ICRA Techno Analytics Limited, Persistent Systems Page 4 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 Limited and Larsen & Toubro Limited ought to be excluded from the list of comparables.
5.7 The Ld.AO/Ld.TPO grossly erred in arbitrarily rejecting companies having software development services income less than 75% of total operating revenues. The Ld. Panel also erred in confirming the same. 5.8 The Ld.AO/Ld.TPO erred in arbitrarily rejecting companies having export service incomes less than 75% of total sales and the Ld. Panel also erred in confirming the same.
5.9 The Ld.AO/Ld.TPO erred in rejecting companies having employee cost less than 25% of turnover and the Ld. Panel also erred in confirming the same.
5.10 The Ld.AO/Ld.TPO also erred in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2013) and in inconsistently applying such filter, and the Ld. Panel also erred in confirming the same. 5.11 The Ld.AO/Ld.TPO also erred in erroneously computing the margins of companies identified as comparable by the Ld. TPO. The Ld.Panel erred in upholding the same.
5.12 The Ld.AO/Ld.TPO/Ld.Panel erred in arbitrarily not including Akshay Software Technologies Ltd, Helios & Matheson Information Technology Ltd., R Systems International Ltd., and Ybrant Digital Limited in the list of comparables despite these companies being functionally comparable to the Appellant and having passed all the filters applied by the Ld.TPO and upheld by the Ld. Panel. The Ld. Panel also erred in confirming the same. 5.13 The AO/Ld. TPO erred in rejecting Ybrant Digital Limited on account of non-availability of data in Prowess / Capitaline database and in public domain, despite the annual report being available. The Ld. Panel erred in confirming the same.
5.14 The Ld.AO/Ld.TPO erred in including CG VAK Software Exports Limited, Mindtree Limited, Persistent Systems Limited and Larsen and Turbo Limited in the list of comparables despite these companies being functionally incomparable to the Appellant. The Ld. Panel erred in confirming the same.
5.15 The Ld.AO/Ld.TPO erred in not appreciating the fact that Larsen & Toubro Infotech Limited and Persistent Systems Limited were held by the Hon'ble Tribunal to be functionally incomparable to the Appellant in the earlier assessment years, i.e. AYs 2010-11 and 2011-12, and that, therefore, they ought to be excluded from the list of comparables for this assessment year as well as they continue to be functionally incomparable to the Appellant.
5.16 In directing the exclusion of Tech Mahindra Ltd. from the list of comparables, the Ld. Panel erred in not accepting the other contentions put forth by the Appellant for exclusion of the said company as well.
Page 5 of 29IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 5.17 The Ld.AO/Ld.TPO erred in considering Provision for Doubtful Debts as a non-operating item while computing the margins. The Ld. Panel erred in upholding the same.
5.18 The Ld.AO/Ld.TPO erred in considering data obtained u/s 133(6). The Ld. Panel erred in upholding the actions of the TPO.
6. Non-allowance of appropriate adjustment to the comparable companies by the Ld. Panel and Ld.AO/Ld.TPO 6.1 The Ld.AO/Ld.TPO erred in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (i) accounting practices, (ii) marketing expenditure, (iii) research and development expenditure, (iv) working capital, and (v) risk profile between the Appellant and the comparable companies.
6.2 The Ld.AU/Ld.TPO also erred in not granting an adequate opportunity to the Appellant before making an adjustment on account of negative working capital.
6.3 The Ld.Panel and AU/TPO erred in making a negative working capital adjustment without appreciating the fact that the Appellant is a captive service provider and does not bear any working capital risks.
7. Variation of 3% from the arithmetic mean The Ld.AO/Ld.TPO erred in not granting the benefit of the proviso to Section 92C(2) of the Act to which the Appellant is entitled.
8. Reduction in amount of income-tax depreciation claimed on computer peripherals 8.1 The Ld.Panel and the Ld.AO erred in restricting the depreciation on computer peripherals by applying a rate of 15% instead of applicable rate of 60% claimed by the Appellant and thereby disallowing its claim for depreciation to the extent of Rs. 299,010/-. 8.2 The Ld.Panel and the Ld.AO erred in not treating computer peripherals as part of 'computers' for computing depreciation under Section 32 of the Act.
8.3 Without prejudice to Ground No.8.1 above, the Ld.AO erred in computing the amount of depreciation on such computer peripherals to be disallowed by considering the relevant assets as having been put to use for more than 180 days, although the relevant assets were put to use for less than 180 days during the relevant previous year.
9. Non-grant of Minimum Alternate Tax ('MAT') credit The Ld.AO erred in not following the directions of the Ld. Panel by not allowing the set-off of brought forward MAT credit under section 115JAA of the Act while computing the income-tax liability under the normal provisions of the Act.
10. Interest under section 234B of the Act The Ld.AO erred in computing interest under section 234B of the Act at INR 76,207,120.
11. Initiation of penalty proceedings Page 6 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 The Appellant submits that based on the facts and circumstances of the case, there was no basis for the Ld. AO to initiate proceedings under Section 274 read with Section 271(1)(c) of the Act.
12. Relief 12.1 The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. 12.2 The Appellant desires leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of objections, at any time before or during the hearing of the Appeal. The Appellant submits that the above grounds are independent of and without prejudice to one another.
Brief facts of the case are as under:
2. Assessee is a company and filed its return of income for year under consideration on 29/11/2013 declaring total income of Rs.37,11,50,990/-. The case was selected for scrutiny and notice under section 143(2) was duly served on assessee calling for various details in connection with the return filed. Representative of assessee appeared before Ld.AO in response to statutory notices and filed various details. Ld.AO observed that assessee had entered into international transaction with associated enterprise exceeding Rs.15 crores and accordingly the case was referred to Transfer Pricing officer to determined arm's length price of the transaction.
Upon receipt of reference under 92C of the Act, Ld.TPO called upon assessee to file economic details of international transaction in Form 3 CEB, in respect of international transaction and between assessee and its associated enterprises.
3. Ld.TPO observed that, assessee was engaged in rendering software development service to Applied Inc. It was also observed that assessee employed services of 3rd party service provider for Page 7 of 29 IT(TP)A No.2687/Bang/201 /Bang/2017 A. Y: 2013 - 14 subcontracting specific part of their work. L Ld.TPO TPO observed that assessee ssee had following international transaction:
4. Ld.TPO observed that assessee used TNMM as most appropriate method and OP/OC as PLI, for determining arms length margin of international transaction representing software development services provided serv services to associated enterprise and 10.6%.
10.6% It was observed that assessee used following 7 comparables with an average margin of 12.47%:
S.no. Particulars Margin
1. Akshay Software Technologies Ltd. 6.76
2. Evoke Technologies Pvt.Ltd. 7.88
3. Helios & Matheson Information Technology ltd. 18.98
4. RS Software (India) ltd. 16.61
5. R Systems International ltd. 7.62
6. Sasken Communication Technologies Ltd 17.58
7. Ybrant Digital Ltd. 11.90
Mean Margin 12.47
Page 8 of 29
IT(TP)A No.2687/Bang/201
/Bang/2017
A. Y: 2013 - 14
5. After analysing various submissions advanced by assessee, Ld.TPO accepted 1 comparable and rejected 6 comparables by applying various filters as under:
6. Final set of comparables considered by Ld.TPO are as under:
S.No Name of the Company Margine
1 CG-VAK
VAK Software Exports Ltd 20.54
2 ICRA Techno_Analytics Ltd. 17.10
3 Larsen and Toubro Infotech Ltd. 26.06
4 Mindtree Ltd. (seg.) 18.19
5 Persistent Systems Ltd. 28.27
6 RS Software (India) Pvt. Ltd. 17.41
7 Tech Mahindra Ltd. (seg.) 18.72
AVERAGE MARK
MARK-UP 20.90
7. Further, while computing PLI of assessee, Ld.TPO was of the view that subcontracting charges of Rs.81,29,78,005/- during relevant Page 9 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 financial year, paid by assessee to 3rd parties towards provision of software development services, formed part of assessee's operating cost. He thus included subcontracting charges in operating cost, thereby increasing assessee's margin to 15.38%. Ld.TPO thus proposed the adjustment in the hands of assessee being difference between recomputed margin of assessee and the average margin of comparables finally selected by assessee at Rs.27,56,77,176/-.
Aggrieved by proposed adjustment by Ld.TPO, assessee raised objections before DRP.
8. Before DRP assessee filed various details in support of its contentions against inclusion of subcontracting charges as operating cost in the hands of assessee as well as wrong selection of comparables under software development service segment by Ld.TPO.
8.1. DRP after considering the contentions of assessee rejected the contention of assessee that subcontracting charges should be excluded for computing margin of software development services in the hands of assessee. DRP also rejected assessee's contention in respect of objections regarding exclusion/inclusion of comparables. However, DRP accepted that tech Mahindra Ltd ought to be excluded on the ground that it expanded its business through various acquisitions which had a material effect on its profitability. Thus upon DRP's directions comparables that remained for computing arm's length margin were as under:
Page 10 of 29IT(TP)A No.2687/Bang/201 /Bang/2017 A. Y: 2013 - 14
9. Upon receipt of DRP directions, Ld.AO passed final assessment order by reworking the TP adjustment in accordance with DRP directions at Rs.28,36,84,461/ Rs.28,36,84,461/-. Ld.AO further observed that assessee claimed depreciation at the rrate ate of 60% in respect of following items by treating it as computers which are as under:
Total addition made by Ld.AO in the hands of assessee amounted to be Rs.65,51,34,461/-..
Aggrieved d by order of Ld.AO, assessee is in appeal before us now.
10. It has been submitted that Ground No. 1-2 are general in nature and therefore do not require any adjudication. He also is submitted that Grounds 3, 5.1 5.1-5.11, 5.13, 5.16-5.18, 5.18, 6, 7, 10-11 10 are not pressed at the instructions of assessee. Accordingly these grounds stands dismissed Page 11 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 10.1. Ld.AR submitted that, assessee wish to press and argue certain grounds. Ld.AR thus restricted his arguments to Ground No. 4, 5.12, 5.14, 5.15, 8 and 9, as under.
11. Ground No. 4:
11.1. This ground relates to the claim of assessee that subcontracting charges paid to 3rd parties should not be considered in the operating profit while computing assessee's margin.
Ld.AR submitted that this issue has been considered by this Tribunal in preceding assessment years being assessment year 2011-12 and 2012-13 in assessee's own case, in IT(TP)A No. 17/B/2016 by order dated 21/09/2016 and IT(TP)A No. 1838/B/2016 by order dated 05/02/2020, respectively against assessee.
11.2. Ld.CIT DR placed reliance upon the orders passed by this Tribunal in assessee's own case in preceding assessment years. 11.3. We have perused submissions advanced by both sides in light of records placed before us. It is observed that this issue now stands settled against assessee in assessee's own case wherein this Tribunal decided by making following observations. We refer to and rely upon observations by this Tribunal in assessee's own case for 2012-13 (supra):
"10. We heard the learned Departmental Representative on this issue and perused the record. We noticed that identical issue was considered by the co- ordinate Bench of the Tribunal in assessee's own case for assessment year 2011-2012 in IT(TP)A No.17/Bang/2016 dated 21.09.2016 and the same has been decided against the assessee with the following observations:-Page 12 of 29
IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 "7. We have considered the rival submissions as well as the relevant material on record. Undisputedly, the assessee is charging a mark up on the software development services provided to the AE being captive service provider.
Therefore the assessee is not acting as an agent or distributor of the AR but is a provider of services of its own. It is not the case of rendering services of an agent without any value addition but the assessee is providing software development services to the AE and charging margin on the same. Therefore the cost on the software development activity is incurred by the assessee and charging the AE on the said services with a mark up of 10% on cost. The cost of sub-contracting in software development services is also charged with 10% mark up to the AE. When the margin on the cost of sub-contracting charges is part of the operating revenue of the assessee then only the cost of subcontracting activity cannot be excluded as pass through. It would amount to artificially inflate the margins of the assessee on the other revenue from the services other than subcontracting activity. In any case, pass through cost can be considered only when the activity of providing services to the AE does not involve value addition on the part of the AE. The decision of the Delhi Benches of the Tribunal in the case of DCIT Vs. Cheil Communications India Pvt. Ltd (supra) would not help the case of the assessee as in the said case the activity of the assessee was only a distributor without any value addition. It is pertinent to note that outsourcing cost in software development services activity is part and parcel of cost of providing the service to the AE and cannot be separated from the operating cost and operating revenue of the said segment of services. Accordingly, the cost of software development services cannot be treated in this fashion as claimed by the assessee. Hence we do not find any merit or substance in the contention raised by the assessee on this issue."
11.3. It has been submitted by both sides that there is no change in facts relating to this claim and the consistent view has been taken by coordinate bench in the preceding assessment years. Respectfully following the view taken by this Tribunal in assessee's own case, we reject the claim of assessee.
Accordingly this ground stands dismissed.
12. Before we undertake comparability analysis, it is sine qua non to understand functions carried out by assessee, assets employed and risks assumed in provision of software development service to its associated enterprise.
Page 13 of 29IT(TP)A No.2687/Bang/201 /Bang/2017 A. Y: 2013 - 14 A. Functions In TP study, at page 398 it has been submitted that assessee provides software devel development and support upport services to Applied Inc. In this regard assessee employed services of 3rd party service providers (eg: Tata consultancy services, Satyam Computer services, ASM Technologies echnologies Ltd etc etc.,)) for sub contracting specific part of their work. Core activities of software development cycle are conducted in house by assessee and a part of non non-core core activities are subcontracted to third--party service provider. At page 403 summary of role le played by assessee and the contractor's in development cycle has been een summarised as under:
Process in software Applied
Sub- Contractors
Development Life Cycle Materials India
Sow
High Level Designing
Quality Assurance
Engineering
Testing
Bug-fixing
Quality Assurance
Export
It has been submitted that activities like development (coding), engineering, bug fixing are sub contracted. It is also been submitted that assessee along with subcontractors work together as one team and render services to the U.S. AE.
Page 14 of 29IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 B. Assets employed:
It has been submitted that assessee do not own any routine valuable intangible assets and any intangible created during the performance of such software development services would be owned by the U.S. AE.
C. Risks assumed:
It has been submitted that assessee bears limited risk such as foreign exchange risk, technology risk and human capital risk. It has been submitted that assessee is insulated from majority of business risk and is engaged in rendering services as per the requirement and specifications provided by U.S.AE. It has been submitted that assessee invoices its AE on a cost plus basis and the cost base in the present case includes charges paid to third-party service providers and the overheads incurred by these third-party service provider as well as assessee. Characterisation:
Assessee, based upon above FAR, has characterized itself as a limited risk bearing captive service provider. Based upon the above characterisation, we shall undertake alleged comparables for inclusion/exclusion by assessee. 12.1. Ground No. 5.12:
This ground has been raised by assessee against exclusion of following comparables in the final list:
• Akshay Software Technologies Ltd.
• Helio and Matheson Information Technology Ltd.Page 15 of 29
IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 • R Systems International Ltd.
a) Akshay Software Technologies Ltd.
Ld.AR submitted that this comparable was selected by assessee in the TP study and has been rejected by Ld.TPO on functional dissimilarities. It has been submitted that Ld.TPO relied upon response received from this company to the notice under section 133 (6) of the Act, wherein, this company is stated to be engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas.
Ld.AR submitted that assessee had them on stated before authorities below that this company was involved in software development activities and thus was comparable to assessee. He referred to page 1630-1649 wherein annual report of this company has been placed in paper book. He submitted that revenue earned by this comparable is software services for which segmental information is are available. Note 29 at page 1647 reveals that this company earns foreign currency from export of software services. On the contrary, Ld.CIT.DR submitted that, it is an accepted position that this company is providing ERP products and services. Further, it is also an admitted position that this company is operating in variance segments including software product however the segmental information available is only as income from software services. Ld.CIT DR referred to decision of this Tribunal in case of M/s.Metric stream Infotech (India) private limited vs DCIT in ITA (TP) Page 16 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 A No. 1418 and 2735/B/2017 for assessment year 2013-14 wherein this comparable has been upheld for exclusion. We have perused submissions advanced by both sides in light of records placed before us.
We also perused decision relied upon by Ld.CIT DR in case of M/s Metricstream Infotech (India) Pvt.Ltd (supra),. It is noted that this Tribunal excluded this comparable for the reason that nature of services are doubtful. Before us, Ld.AR has not been able to establish correct nature of business carried out by this company or provide with segmental information is in respect of various services provided by this company to its clientele. The background of this company mentioned at page 1643 suggests that it is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas. However in the profit and loss account note 20 reveals that income from software services forms the major part of revenue generation which is supported by note 29 wherein, assessee has earned in foreign currency from export of software services. On combined reading of these it is clear that assessee has no doubt earnings from rendering of services services outside India, however it is uncertain whether the entire revenue amounting to Rs.19,83,23,358/- is from export of software services. Further, it is noted that this comparable was excluded for not having segmental details in assessee's own case for assessment year 2011-12 by order dated 21/09/2016 (supra).
Page 17 of 29IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 Under such circumstances we are unable to appreciate the argument advanced by Ld.AR for inclusion of this comparable. Respectfully following the view taken by this Tribunal in case of M/s Metricstream Infotech (India) Pvt.Ltd (supra), we uphold exclusion of this comparable.
Accordingly this comparable deserves to be excluded from finalist.
b) Helio and Matheson Information Technology Ltd. & R Systems International Ltd.
These comparables have been selected by assessee but has been rejected by Ld.TPO due to different accounting year. Both assessee as well as revenue seeks inclusion of this company in the final list.
We have perused submissions advanced by both sides in light of records placed before us.
Merely because comparable has a different year ending, cannot lead to the conclusion, of it being non-comparable with that of assessee. In the event quarterly results are available and the same can be extrapolated, this comparable should be considered. We therefore, set aside Helio and Matheson Information Technology Ltd. and R Systems International Ltd., which are admittedly functionally similar with assessee Ld.AO/TPO is directed to consider quarterly report and extrapolate the same for purposes of comparing its margin with assessee.
Accordingly, we set aside these comparables to Ld.AO/TPO.
Page 18 of 29IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 Accordingly, these grounds stands partly allowed. 12.2. Ground No. 5.14-5.15 These grounds have been raised by assessee against inclusion of following comparables:
• CG Vak Software Exports Ltd.
• Mindtree Ltd.
• Persistent Systems Ltd.
• Larsen and Toubro Infotech Ltd.
a) CG Vak Software Exports Ltd.
This company has been included by Ld.TPO since revenue from software services is Rs.8.55 crores as compared to the BPO segment being Rs.14.43 Lacs. The Ld.AR submitted that, admittedly this company earns revenue from 2 segments being, software development services and BPO services. However Ld.TPO considered entire revenue at entity level. It has been submitted that, there is no segmental details available. Ld.AR submitted that, in assessee's own case for assessment year 2012-13 this comparable was excluded for being functionally different by Ld.TPO himself.
On the contrary, Ld.CIT DR submitted that this comparable has got segmental details in respect of software development services as well as BPO services which is apparent from the annual reports placed at page 1173-1222 of paper book. Referring to page 1202, Ld.CIT DR submitted that Ld.TPO has considered software service Page 19 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 segment for comparing with assessee in the present facts of the case.
We have perused submissions advanced by both sides in light of records placed before us.
It is observed from the annual report at page 1198 revels that this company recognises income from software development services, products. Further we note that total revenue from operations at page 1196 is Rs.8,69,20,713/- , whereas page 1209 shows revenue from operations to be Rs.23,05,27,224/-. At both these pages for break up of revenue from operations reference is to scheduled 3.01 schedule 3.01 at page 1202 that revels break up of revenue from operations being software services amounting to Rs.8,54,77,282/- and revenue from business process outsourcing services amounting to Rs.14,43,431/-, totalling to Rs.8,69,20,713/-. Also from the notes to the accounts forming part of the annual report we do not find any details regarding stock. It is therefore unable to ascertained is any revenue has been earned by this company from sale of products. This is supported by scheduled 2.06 being the schedule for fixed assets at page 1200.
We find there is some discrepancy in the reporting of revenue from operations in the annual report raised in paper book as mentioned hereinabove. Admittedly, both sides do not dispute the functional similarity. In the synopsis submitted by Ld.AR, it is been mentioned that, directors report at page 9 of annual report discloses the company is into outsourced product development. We have perused Page 20 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 the relevant page in the annual report placed before us and we do not find any such statement being made by directors. Under such circumstances we find it fit and proper to set aside this comparable back to Ld.AO/TPO. Ld.AO/TPO shall verify details/discrepancies mentioned hereinabove. Assessee is granted full liberty to file requisite details in support of its contention which shall be verified by Ld.AO/TPO before considering it in the finalist. Accordingly this comparable is set aside to Ld.AO/TPO.
b) 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. Ld.AR referred to page 1259, 268, 1273, 1291, 1297, 1299, 1334, 1335, 1337,and 1347 in support. On the contrary Ld. CIT DR placed reliance upon orders passed by authorities below.
Page 21 of 29IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 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.
c) Persistent Systems Ltd It has been submitted that this comparable has been included by Ld.TPO even though it was objected by assessee for functional dissimilarities. Ld.AR submitted that this company is engaged in both product and development of software development services and therefore cannot be compared to a contract software development service provider like assessee. It is also been submitted that there are significant research and development expenditure that resulted in global patents and company owns significant intangibles which has either been developed or have been acquired from 3rd parties as a part of growth strategy. Ld.AR submitted that on these para meters this comparable cannot be compared to a limited service provider like that of assessee. Further it has been submitted that this comparable stood excluded by decisions of this Tribunal in assessee's own case for assessment year 2011-12 and 2012-13(supra).
On the contrary, Ld.CIT.DR submitted that, in case of CGI Information Systems and management Consultants Pvt.Ltd vs DCIT Page 22 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 reported in (2019) 101 taxman.com 294, this Tribunal set aside this comparable to the file of Ld.TPO for fresh decision. She submitted that in case of CGI Information Systems and management consultants Pvt.Ltd.,(supra) this Tribunal relying upon the case of Advice America software development Centre (P) Ltd reported in (2018) 94 Taxmann.com 179 and observations made therein. She thus submitted that this comparable should be sent back to Ld.TPO for verification.
We have perused submissions advanced by both sides in light of records placed before us. We have also perused decisions relied upon by Ld. CIT.DR in order to understand the reasoning been this Tribunal for setting aside this comparable to Ld.TPO. Admittedly, this comparable provides services across the entire life- cycle of software development which enables them to work for a wide range of customers. From the annual report of this company is also observed that this company earns income from royalty fee and is engaged in development of products which is not at all comparable with the services provided by assessee to its associated enterprise. Respectfully following the consistant view in decisions of this Tribunal in assessee's own case for assessment year 2011-12 and 2012-13(supra) and the discussions herein above for revelant year, we hold this company to be not a good comparable in assessee's case.
Accordingly we direct this comparable to be excluded from finalist.
Page 23 of 29IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14
d) Larsen and Toubro Infotech Ltd:
Ld.AR submitted that this comparable was included by Ld.TPO in finalist, and objected by assessee for various reasons. Ld.AR submitted that this company earns revenue from software solutions and products without there being segmental details available. It has been submitted that Ld.TPO has accepted that this company deals and products but still has included in the list of comparables to be compared with a contract software service provider like assessee. This comparable also owns huge intangibles and incurs expenditure to maintain the brand name which has earned 8 supernormal profits during the year. Further it has been submitted that this comparable stood excluded by decisions of this Tribunal in assessee's own case for assessment year 2011-12 and 2012- 13(supra).
On the contrary, Ld.CIT.DR submitted that in case of CGI Information Systems and Management Consultants Pvt.Ltd vs DCIT reported in (2019) 101 taxman.com 294, this Tribunal has set aside this comparable to the file of Ld.TPO for fresh decision. She submitted that in case of CGI Information Systems and Management Consultants Pvt Ltd (supra) this Tribunal relying upon the case of Advice America Software Development Centre (P) Ltd reported in (2018) 94 Taxmann.com 179 and observations made therein. She thus submitted that this comparable should be sent back to Ld.TPO for verification.Page 24 of 29
IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 We have perused submissions advanced by both sides in light of records placed before us. We have also perused decisions relied upon by Ld. CIT DR in order to understand the reasoning been this Tribunal for setting aside this comparable to Ld.TPO. There is no doubt that this comparable ease a software development service provider. However, this comparable owns intangibles unlike assessee who is a contract service provider that functions in accordance with and guidelines given by its associated enterprises. Even though assessee is also involved in software development life cycle, the contribution that it makes in the development is very limited to the extent of certain research activities and support services that it does at the behest of its associated enterprises. In our view this comparable undertakes complete responsibility of the entire life-cycle involved in a software development whereas assessee participates only to a limited extent on behalf of its associated enterprises at their behest. Whatever functions are performed by assessee in providing it services under this segment is very limited as compared to this comparable. In our considered opinion the Ltd functions performed by assessee cannot be compared to a full-fledged software development service provider like this company. Respectfully following the consistant view in decisions of this Tribunal in assessee's own case for assessment year 2011-12 and 2012-13(supra) and the discussions herein above for revelant year, we hold this company to be not a good comparable in assessee's case.
Page 25 of 29IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 On the basis of above, we direct the Ld.AO/TPO to exclude this company from final list.
Accordingly, this ground stands partly allowed.
13. Ground no.8:
This ground has been raised by assessee against disallowance of depreciation claimed at the rate of 60% on racks, Xerox machine and accessories, batteries and stabiliser. Ld. AO disallowed the claim and granted 15% depreciation for the reason that they are not integral part of computers which has been upheld by DRP. 13.1. Ld.AR submitted that these machines are required for keeping computer peripherals and integral parts of the computer and ought to be granted depreciation at the rate of 60%. 13.2. On the contrary learn CIT DR submitted that the machinery is listed are not required to run the computer and can function independently without being attached to a computer. He thus submitted that these machines do not therefore fall into the category of peripherals attached to the computer. He thus supported the orders passed by authorities below. 13.3. We have perused submissions advanced by both sides in light of records placed before us.
Undoubtedly machines like racks, batteries stabilisers can function without a computer and is attachable to any other electrical appliances. Therefore these machines do not form part of computer peripherals. Insofar as the Xerox machine is concerned, it is an ascertained able at this stage whether these machines could be Page 26 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 exclusively and independently used without being attached to a computer as such kinds of Xerox machines do exist. Assessee has also not been able to establish details of accessories that has been categorised to be forming part of computer peripherals. 13.4. Accordingly we set aside this issue back to Ld.AO/TPO for verifying the actual use and nature of Xerox machines and the accessories that has been considered as computer peripherals. In the event it is ascertained able that these accessories and Xerox machines could not be independently used but could only be used on being attached to computer 60% depreciation should be allowed. Insofar as racks, batteries and stabilisers are concerned these do not fall within the category of computer peripherals and we uphold the depreciation being allowed only at 15%.
Accordingly this ground raised by assessee stands partly allowed.
14. Ground No. 9This ground is been raised by assessee for not granting MAT credit. It has been submitted that for year under consideration, assessee filed its return of income declaring total income of Rs.37,11,50,990/- under normal provisions of the Act. Assessee had claimed mat of Rs.6,03,57,367/-being credit bought forward as on 01/04/2013. It has been submitted that Ld.AO failed to grant the credit that was available to assessee. On raising objections before DRP, DRP directed Ld.AO to verify the claim and allow the Page 27 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 same if found eligible. It has been submitted that while passing final assessment order Ld.AO failed to grant the credit. 14.1. Ld.CIT.DR submitted that it may be sent back to Ld.AO for due verification and for considering the claim in accordance with law.
14.2. We have perused submissions advanced by both sides in light of records placed before us.
14.3. It is observed that Ld.AO has not verified the claim and has denied it to assessee. We direct Ld.AO to verify the claim of assessee and if found eligible the same should be granted to assessee in accordance with law.
Accordingly this ground raised by assessee stands allowed for statistical purposes.
In the result, appeal filed by assessee stands partly allowed as indicated hereinabove.
Order pronounced in the open court on 13th May, 2020.
Sd/- Sd/- (B. R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 13th May, 2020. /Vms/* Page 28 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order Assistant Registrar, Income-Tax Appellate Tribunal. Bangalore. Page 29 of 29 IT(TP)A No.2687/Bang/2017 A. Y: 2013 - 14 Date Initial 1. Draft dictated on On Dragon Sr.PS 2. Draft placed before author -05-2020 Sr.PS 3. Draft proposed & placed -05-2020 JM/AM before the second member 4. Draft discussed/approved by -05-2020 JM/AM Second Member. 5. Approved Draft comes to the 20-05-2020 Sr.PS/PS Sr.PS/PS 6. Kept for pronouncement on -05-2020 Sr.PS 7. Date of uploading the order -05-2020 Sr.PS on Website 8. If not uploaded, furnish the -- Sr.PS reason 9. File sent to the Bench Clerk -05-2020 Sr.PS 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk. 12. Date of dispatch of Order. 13. Draft dictation sheets are No Sr.PS attached