Income Tax Appellate Tribunal - Bangalore
Open-Silicon Research Private ... vs Deputy Commissioner Of Income Tax, ... on 17 May, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH : BANGALORE
BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER
AND
MS. PADMAVATHY S, ACCOUNTANT MEMBER
IT(TP)A No. 965/Bang/2022
Assessment Year : 2011-12
M/s. Open Silicon
Research Pvt. Ltd.,
The Deputy
11/1 & 12/1, Maruthi
Commissioner of
Infotech Centre,
Income Tax,
Indiranagar-
Circle - 3(1)(1),
Koramangala,
Vs. Bengaluru.
Bengaluru - 560 071.
PAN: AAACO5915B
APPELLANT RESPONDENT
Assessee by : Shri Prashanth .G.S, CA
Revenue by : Shri D.K. Mishra, CIT (DR)
Date of Hearing : 13-03-2023
Date of Pronouncement : 17-05-2023
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal is filed by assessee against the final assessment order dated 31.07.2022 passed by the Ld.DCIT, Circle - 3(1)(1), Bangalore u/s. 143(3) r.w.s. 254 of the Act on following grounds of appeal:
Page 2 of 21IT(TP)A No. 965/Bang/2022 Page 3 of 21 IT(TP)A No. 965/Bang/2022 Page 4 of 21 IT(TP)A No. 965/Bang/2022
2. Brief facts of the case are as under:
2.1 The assessee filed a return of income for A.Y. 2011-12 on 30.09.2011 by declaring an income of Rs.20,33,860/-. The case was selected for scrutiny and notice u/s. 143(2) was issued and duly served on the assessee. The assessment was completed Page 5 of 21 IT(TP)A No. 965/Bang/2022 u/s. 143(3) r.w.s. 144C vide order dated 31.12.2015 by determining an income of Rs. 3,10,54,429/-. 2.2 Aggrieved by this order, the assessee preferred an appeal before the Hon'ble ITAT. The Hon'ble ITAT vide its order in IT(TP)A No. 149/Bang/2016 and IT(TP)A No. 244/Bang/2016 dated 06.07.2018 remanded the TP issues to the file of the Ld.TPO and dismissed the revenue's appeal in respect of deduction u/s. 10A. 2.3 As the Hon'ble ITAT remanded the TP issues, the Ld.AO did not follow the procedure under the Act. This Tribunal observed that, as per para 3.5 of instruction 3/2016 dated 10.03.2016 it is mandatory to refer the case to TPO. Accordingly, in the remand proceeding, reference to TPO u/s. 92CA of the act was made for determination of ALP with the prior approval of Pr.CIT. The Ld.TPO vide order u/s. 92CA(3) of the IT Act dated 29.01.2021, determined adjustments to ALP at Rs.3,37,74,987/-.
Accordingly, Rs. 3,37,74,987/- was proposed to be added as transfer pricing adjustments in the hands of the assessee. 2.4 The Ld.TPO also recharacterised assessee to be carrying out research and development services, as against a routine software developer.
Aggrieved by the order u/s. 92CA dated 27.09.2021, assessee filed objections before the DRP.
2.5 The DRP upheld the observations of the Ld.TPO in respect of characterising assessee to be a research and development services provider to its AE. The DRP thus upheld the ALP of the transaction benchmarked by the Ld.TPO using additional filter of R&D. Page 6 of 21 IT(TP)A No. 965/Bang/2022 2.6 Based on the directions of the DRP, the Ld.AO passed the impugned assessment order by making addition to the extent of Rs.3,37,74,987/-.
2.7 Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal.
3. At the outset, the Ld.AR submitted that assessee only wishes to argue Ground nos. 4,7 and 9 raised in the grounds of appeal. He submitted that Ground nos. 1-3, 5-6, 8 and 13 are general in nature, therefore do not require adjudication.
4. Ground no. 4 raised by the assessee is against recharacterising it to be a R&D service company. The Ld.AR filed the service agreement between assessee and its AE, which is placed at pages 237 - 256 of the paper book Vol-2. He submitted that the nature of services rendered by the assessee as per clauses 4.1 and 4.2 that reads as under:
"4.1 The Service Provider shall provide design engineering and methodology development services to Open-Silicon. The Service Provider shall, as requested by Open-Silicon from time to time, provide R&D services in design, manufacturing, packaging, test and methodology areas. In addition to the above, Service Provider will provide the following specific services to Open-Silicon:
ASIC Design and Development Development and automation of Design methodologies ASIC testing services Package design services Technology and CAD research 4.2 The Service Provider undertakes to provide the Services, according to internationally accepted standards as required by Open-Silicon from time to time, in accordance with the terms and conditions contained herein and as per the requirements of each Designated Project which will be undertaken to further establish, expand, and maintain the success of Open-Silicon products and services."Page 7 of 21
IT(TP)A No. 965/Bang/2022 4.1 He submitted that the identified services rendered by assessee has been more particularly listed as per annexure which is as under.
"Identified service
1. The service provider shall provide software development services to open silicon for Layout of silicon chips.
2. The service provider shall provide all kind of software support for the layout of silicon chips.
3. The service provider shall carryout maintenance of software by fixing issues and performing corrective actions.
4. The service provider shall provide general IT system development, programming. and updates for the existing software programmes.
5. The service provider shall perform services based on dedicated team as an offshore development centre for Open silicon.
6. The service provider shall provide support services for open-silicon or its clients or application management services for open-silicon or its clients."
4.2 It is the submissions of the Ld.AR that, the assessee is thus a routine software development services provider to its AE, and cannot be characterised as a research and developer company. 4.3 In support of the above, the Ld.AR took us through the functional profile of assessee as per the TP study which has been placed at pages 200-204 of paper book. For sake of convenience, the same are scanned and reproduced hereunder.
Page 8 of 21IT(TP)A No. 965/Bang/2022 Page 9 of 21 IT(TP)A No. 965/Bang/2022 Page 10 of 21 IT(TP)A No. 965/Bang/2022 Page 11 of 21 IT(TP)A No. 965/Bang/2022 4.4 Referring to the risks assumed by assessee reproduced hereinabove, the Ld.AR submitted that, the assessee being a contract service provider is compensated for all the services it undertakes and does not assume any R&D risk. He submitted that, assessee is a contract service provider and provides services strictly as per the Agreement with AE. He thus submitted that, recharacterisation of assessee by the Ld.AO/TPO as R&D company is incorrect and assessee should be considered as a routine software development service provider. 4.5 On the contrary, the Ld.DR submitted that, in the first round of appeal, the assessee was recharacterised by the Ld.TPO to be providing engineering design and services and held the nature of services to be KPO. This analysis was carried out based on the employee details provided by the assessee. He submitted that assessee is into research and development activities for its AE and from the list of employees provided by the assessee itself it was verifiable that they were knowledgeable in integrated chip design, engineering. Most of the employees were senior design engineers. The Ld.DR thus submitted that, the Ld.TPO rightly recharacterised assessee and correctly applied the R&D filter to identify appropriate comparables. He placed reliance on the observations of the DRP/TPO in respect of the same. We have perused the submissions advanced by both sides in the light of records placed before us.
4.6 We have perused the service agreement in great detail. We note that, in the process of development of software as per the requirement and need by the AE, the intangible that arises out of the research carried out by the assessee is owned by Open Page 12 of 21 IT(TP)A No. 965/Bang/2022 Silicon Inc. as per clause (7) of the agreements. Clause 7 of the agreement also categorically reveals the assessee is a captive service provider though rendering research and development services. Merely because assessee has sufficient infrastructure or qualified employees / professionals to fulfil the requirement as per the projects designated by the AE cannot lead to the conclusion that it is a risk bearing research and development service provider. In the transfer pricing study, the entire risk pertaining to project and operation is borne by Open Silicon Inc. Even the technology risk in the development of the project is borne by the AE. The assessee is only undertaking manpower risk, as it has to identify qualified personnel who could render the services to the satisfaction of the AE. The Ld.TPO or the DRP do not dispute assessee is remunerated at cost+markup at 10%. Rule 10TA of the IT Rules defines a contract and research and development services relating to software development wholly and partly includes research and development and producing of new theorems etc. Based on the above, we are of the considered opinion that assessee though renders research and development services to its AE in the process and fulfilling the designated contract, cannot be characterised as a KPO relating to software development. It is still a contract service provider who is remunerated on cost+ 10% markup and does not own any intangibles that is generated in the process of rendering of services. Assessee thus needs to be characterised as a captive service provider.
Accordingly, we allow ground no. 4 raised by assessee.
Page 13 of 21IT(TP)A No. 965/Bang/2022
5. Ground no. 7 raised by assessee is in respect of application of upper limit of turnover in respect of following comparables and seeking its exclusion.
a) Infosys Ltd.
b) Larsen & Toubro Infotech Ltd.
c) Mindtree Ltd.
d) Persistent Systems Ltd.
e) Tata Elxsi Ltd.
5.1 We have already discussed the FAR analysis of assessee hereinabove. Based on the same we shall carry out the comparability analysis in respect of the comparables sought for exclusion in this ground by the assessee.
5.2 The Ld.AR submitted that the comparables sought for exclusion have turnover exceeding Rs. 200 crores as under:
It is submitted that the Ld.TPO erred in not applying a cap on upper limit on the turnover while selecting the companies comparable to the assessee. In this regard, it is submitted that application of turnover filter is a relevant criterion in choosing comparable companies. It is submitted that the difference in the scale of operations has a direct impact on the profitability. The concept of economies of scale wherein, an increase in the size and scale of the operations leads to a decrease in the long run average cost of each unit or each service project delivered. Therefore, per unit fixed cost of a small-scale company would be much higher than that of a medium/large size organisation. 5.3 Further, it is submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. It is submitted that the Page 14 of 21 IT(TP)A No. 965/Bang/2022 turnover of the assessee in rendering SWD services is Rs.23,06,05,731/-. This being so, the Ld.TPO ought to have applied the upper turnover filter while selecting companies comparable to the assessee. In this regard, the Ld.AR placed reliance on the decision of Coordinate Bench of this Tribunal in case of Autodesk India (P) Ltd. V. DCIT reported in (2018) 96 taxmann.com 263. Further reliance is placed on the decision of this Hon'ble Tribunal in MWYN Tech Private Ltd. by order dated 31.10.2022 passed in IT(TP)A No. 753/Bang/2022. On application of the turnover filter of 1-200 crores, the Ld.AR submitted that, following comparables deserves to be excluded for having high turnover as against assessee under SWD segment:
S.No. Name of the comparables Turnover
1. Infosys Ltd. 2,53,85,00,00,000
2. Larsen & Toubro Infotech Ltd. 23,31,81,22,096
3. Mindtree Ltd. (seg.) 8,78,30,00,000
4. Persistent Systems Ltd. (Seg) 6,10,12,70,000
5. Tata Elxsi Ltd (seg) 3,58,19,85,000
5.4 On the contrary, the Ld.DR relied on the orders of the authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
5.5 The assessee seeks exclusion of above listed comparable companies on failing the turnover filter. It is submitted that the Ld.TPO in selecting comparables applied filter of companies with turnover of more that one Crore however failed to apply the upper turnover limit. This Tribunal has been consistently applying the Page 15 of 21 IT(TP)A No. 965/Bang/2022 turnover filter for the purpose of choosing comparable companies.
5.6 On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of coordinate bench of this Tribunal in the case of Dell International Services India (P) Ltd. Vs. DCIT reported in (2018) 89 Taxmann.com 44, wherein this Tribunal took note of the decision of the another decision of coordinate bench of this Tribunal in the case of Sysarris Software Pvt.Ltd. Vs. DCIT reported in (2016) 67 Taxmann.com 243. This Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015, 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 down in the case of Pentair Water (supra) should be adopted.
5.7 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.Page 16 of 21
IT(TP)A No. 965/Bang/2022 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." 5.8 This Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT reported in (2018) 96 Taxmann.com 263, took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7 of the decision held as that high turnover is a Page 17 of 21 IT(TP)A No. 965/Bang/2022 ground for excluding companies as not comparable with a company that has low turnover. Following were the relevant observations:
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 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 CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 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.
17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed.
Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was Page 18 of 21 IT(TP)A No. 965/Bang/2022 rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co- ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).
In view of the above, the aforesaid companies under SWD segment are directed to be excluded for failing turnover filter.
Accordingly, ground no. 7 raised by assessee stands allowed.
6. Ground no. 9 is towards seeking exclusion of E-Infochips Ltd. on functional dissimilarities.
6.1 It is the contention of the Ld.AR that this company does not satisfy the service revenue filter of more than 75% as applied by the Ld.TPO and therefore cannot be included. The Ld.TPO however in the first round of appeal held and observed about E- Infochips Ltd., as under:
Page 19 of 21IT(TP)A No. 965/Bang/2022 "The Company is engaged in development of software as per the specific requirements of clients. However, the company has developed its expertise in ASIC System area and embedded software area." The company is engaged in the development and maintenance of computer software and software development consulting. Though the annual report talks of hardware division, it is seen from the website of the company that it is integral to the software designing that the company renders to its clients and there is no separate division as such. In the Income schedule of the annual report, the breakup of the software development revenue is give along with IT consultancy services. The hardware segment is nothing but maintenance to the IT enabled services forming 15% of the total income of the year.
"Revenue from the software development recognized as per the terms of relevant agreements / development contracts."
Further, as per the AR- Details principal products and services SOFTWARE SERVICES- Rs 22,11,35,689 and Computer hardware-Rs 3,92,48,562, which comes to 88% of the turnover. Thus, considered as comparable." 6.2 The Ld.AR however relied on Coordinate Bench of this Tribunal in case of DCIT vs. Herbalife International India (P.) Ltd. reported in (2019) 111 taxmann.com 244 wherein this comparable has been held to be not satisfying the service revenue filter. 6.3 On the contrary, the Ld.DR relied on the orders passed by the authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
6.4 We note that Coordinate Bench of this Tribunal in case of DCIT vs. Herbalife International India (P.) Ltd. (supra) observed and held as under:
"14. We have perused submissions advanced by both sides in light of records placed before us.
It is observed that this Tribunal in case of Autodesk India Pvt Ltd. vs ACIT (supra) excluded E- Infochips Ltd., by following view taken by this Tribunal in case of Comscop Network (India) Pvt.Ltd. Limited vs ITO in IT (TP) A/Bang/2016 dated 22/02/17 wherein, this company was excluded for reason that, there is no segmental Page 20 of 21 IT(TP)A No. 965/Bang/2022 information regarding diverse functions performed by this company and that there was major fluctuation in its profits, which influenced turnover of this company. Further it is observed that in case of DCIT vs M/s CGI Information Systems and management consultations private limited in ITA No. 502/bang/2016 for assessment year 2011-12 vide order dated 06/04/18 dealt with identical objection raised by Ld. CIT DR before as under:
24. As far as ground No. 4 raised by revenue is concerned, the said ground of appeal is weak and any event comparability of companies that were excluded by the DRP were on valid grounds contemplated by the relevant statutory provisions of the act and rules. As far as ground No. 5 in revenue's appeal is concerned, the revenue seeks to challenge the exclusion of AE Infotech Ltd. On the ground that it failed direct software service income filter at 75%. At the outset, the assessee submits that E Infotech Ltd was excluded by the DRP on the ground that: (i) no segmental information is regarding its diverse functions is available; (ii) it failed the software service income filter and 75%; (iii) there were major fluctuations in profit and turnover every years which seems to be influenced by extraordinary/peculiar circumstances; and (iv) there is a presence of inventory (page 10 and 11 of the DRP's directions). The revenue, in its appeal has challenged its exclusion only on the 2nd ground. In other words, the revenue has not challenged its exclusion on the other grounds stated hereinabove and thus its exclusion on these grounds have attained finality and cannot be disturbed by this Hon'ble Tribunal. Even otherwise, we are of the view that the DRP rightly arrived at the finding that companies software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for the year. Thus the above action of the DRP in rejecting the above companies correct."
From the above, it is observed by this Tribunal consistently in various decisions for AY:2011-12 held that this company does not satisfy service income filter being 7.5%. We therefore, do not see any reason to set aside this company to Ld.TPO.
In the facts before us, revenue is challenging exclusion of this comparable as DRP recorded finding in respect of service income being less than 75%. Other factual dissimilarities considered by DRP regarding extraordinary event and no segmental information available, has not been challenged before us (page 11 of DRP order). Therefore, respectfully following view taken by coordinate Page 21 of 21 IT(TP)A No. 965/Bang/2022 bench of this Tribunal in DCIT vs M/s CGI Information Systems and management consultations private limited (supra), we direct Ld. TPO to exclude this company." 6.5 The above facts could not be disputed by the Ld.DR. 6.6 We therefore direct exclusion of this comparable from the final list.
Accordingly, ground no. 9 raised by assessee stands allowed.
7. Ground no. 14 is consequential in nature and therefore do not require any adjudication.
Accordingly, the appeal filed by assessee stands allowed in respect of the limited issues argued by the Ld.AR. In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 17th May, 2023.
Sd/- Sd/-
(PADMAVATHY S) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 17th May, 2023.
/MS /
Copy to:
1. Appellant 2. Respondent
3. CIT 4. DR, ITAT, Bangalore
5. Guard file
By order
Assistant Registrar,
ITAT, Bangalore