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TMI Blog2015 (8) TMI 1447X X X X Extracts X X X X X X X X Extracts X X X X ..... AO proceeded on the assumption that non-STP unit as well as STP units in India would benefit from the advertisement done for NVIDIA Singapore. It is seen that NVIDIA Singapore has acknowledged that software products and advertisement is attributable to those products. Non-STP units of assessee are engaged in software development activities and do not engage in sales or marketing activities or software product. In these circumstances, we find merit in the contention of assessee that advertisement expenses apportioned by the AO and confirmed by the CIT(A) was without any basis. The said addition is accordingly directed to be deleted. - IT(TP)A No.1118/Bang/2014, IT(TP)A No.1087/Bang/2014 - - - Dated:- 14-8-2015 - SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER Revenue by : Shri Sunil Kumar Agarwal, Jt. CIT(DR) Assessee by : Shri Chavali Narayan, CA O R D E R Per N.V. Vasudevan, Judicial Member These are cross appeals by the Revenue and assessee against the order dated 26.6.2014 of the CIT(Appeals)-IV, Bangalore relating to assessment year 2009-10. ITA 1118/B/14 (Revenue s appeal) 2. First we shall take up for co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The grievance of the Revenue is that the decision of Hon'ble High Court of Karnataka in Tata Elxsi (supra) has not attained finality and a SLP by the department is pending before the Hon'ble Supreme Court. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. We therefore hold that the order of CIT(A) does not call for any interference and accordingly the same is confirmed. 9. Ground No.4 raised by the Revenue will be dealt with while dealing with grounds No.2 to 9 of the assessee s appeal. 10. In the result, the appeal by the Revenue is dismissed. 1087/B/14 (Assessee s appeal) 11. Ground No.1 is general in nature and calls for no specific adjudication. 12. In grounds 2 to 9, the assessee has challenged the action of the DRP in confirming the addition suggested by the TPO by way of adjustment of arm s length price (ALP) in respect of international transaction of rendering software development services by the assessee to its AE. In ground No.3 filed by the revenue the revenue has challenged the order of the CIT(A) whereby he held that forex loss/gain is operating in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Margin 1 Kals Information Systems Ltd 2,14,04,686 1,87.93,813 13.89% 2 Akshay Software Technologies Ltd. 12,23,21,483 11,31,49,350 8.11% 3 Bodhtree Consulting Ltd. 16,05,75,212 9,89,56,821 62.27% 4 R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97% 5 Tata Elxsi Ltd. (segmental) 3,78,43,03,000 3,14,63,15,000 20.28% 6 Sasken Communication Technologies Ltd. 4,05,31,20,000 3,18,69,97,000 27.91% 7 Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40% 8 Zylog Systems Ltd. 7,34,93,51,475 6,81,69,98,160 7.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the revenue, the revenue has challenged the order of the CIT(A) whereby he held that forex loss/gain is operating in nature and therefore has to be regarded as part of the operative income for the purpose of determining the profit margins of the Assessee as well as that of the comparable companies. It was the plea of the assessee before the CIT(A) that the TPO erred in not treating the foreign exchange fluctuation as part of the operating profits and adding the same to the income from software development services. The assessee specifically brought to the notice of the CIT(A) that the TPO while computing the operating margin, has not included the income from foreign exchange fluctuation on the ground that the same is non-operating in nature. The assessee brought to the notice of the DRP that the ITAT Bangalore Bench in the case of Trilogy EBusiness Software India Private Ltd. in ITA No.1054/Bang/2011, has held that foreign exchange gain/loss has to be considered as operating in nature. The Tribunal followed the decision rendered by the Bangalore Bench in the case of SAP Labs India Pvt. Ltd. v. ACIT, [2011] 44 SOT 156 (Bang). The CIT(A) agreed with the submissions of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open end to end web solutions software consultancy and design development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in AUTOLAY , a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the software products and services segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under Revenue recognition in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below: 26. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable. 27. As far as Persistent Systems Ltd., a comparable by the Assessee in his TP study but was objected to by the Assessee before TPO as not comparable, this Tribunal in the case of IT(TP) A.No.108(Bang) 2014 order dated 12.12.2014 in the case of Yodlee Infotech Pvt.Ltd. Vs. ITO held as follows:- 5.12 This Tribunal in the case of 3DPLM Software Solutions Ltd. Vs DCIT [IT(TP)A 1303/Bang/2012 dated 28-11-2013] had also held that Persistent Software Systems Pvt. Ltd., was in product designing services and into software product development. In the same decision it was also held that M/s. Infosys Technologies Ltd, had considerable intangibles like IPR, and was also into software product development. It was also held that M/s. Tata Elxsi Ltd., was de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the block of the building in the fixed assets and depreciation was claimed. According to the work-in progress in the books of the amalgamating entity also included building that was put to use by the amalgamating company in financial year 2006-07. The AO therefore re-worked the value of the building after reducing the depreciation for the F.Y. 2006-07 allowed to the amalgamating company and accordingly, disallowed the claim of excess depreciation. 33. Before the CIT(Appeals), it was submitted that during the F.Y. 2006- 07, the construction of the building was not complete and the value of the building was shown as capital work-in progress in the balance sheet of PPPL as on 31.03.2007. The construction of the building was completed in the month of April, 2007 and upon its completion, it was leased to the assessee company. Subsequently, the value of the said building was capitalized in the books of Nvidia India. 34. The CIT(Appeals) on consideration of the facts and circumstances of the case, observed that the sole issue was whether the building was put to use in the financial year 2006-07. He held that the assessee was not able to establish whether PPPL claimed depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. With this apportionment, the profit of the Non-STP unit has been increased by ₹ 11,254,190 and profit of the STP unit has decreased by an equivalent amount. 38. The Assessee submitted that the software development activity is undertaken by NVIDIA India from its STP registered units at Bangalore, Pune and Hyderabad. The STP units are not engaged in any sales and marketing activities. On the other hand, the Non - STP unit at Bangalore is engaged in providing only marketing support services to its group companies overseas. In respect of this marketing support activity, the assessee has entered into a Service Representative Agreement with its group Company, NVIDIA Singapore. For these services, the assessee is remunerated on a cost plus basis. Under the agreement with NVIDIA Singapore, the assessee undertakes advertising and promotion of NVIDIA Group products within India such as participating in trade shows and exhibitions and performing product presentations. The advertisement expenses of ₹ 24,377,106 referred by the AO in his order has been incurred by the assessee s Non-STP unit in the course of rendering the marketing support activities. 39. Further, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtioned to the Bangalore Hyderabad units. There is definitely some substance in the finding of the AO that such expenditure benefits all the group companies including the STPI units in India on account of increase in popularity of the brand and company via marketing, advertising and promotion of group products by way of trade shows, exhibitions and product presentations. Thus, in my view, the expenditure incurred requires to be apportioned among all units in India as debiting large part of the amount to the Non-STPI unit results in the serious distortion of profits among the STPI units. But I find that the AO has apportioned, on adhoc basis, a part, only to the Bangalore STPI unit. To add a sound basis to the apportionment the AO is directed to apportion the entire expenditure claimed by the Non-STPI unit as well as the STPI unit among all 4 units on turnover basis. It is ordered accordingly. 42. The ld. counsel for the assessee reiterated submissions made before the CIT(Appeals). The ld. DR relied on the order of CIT(Appeals). 43. We have heard the rival submissions. Perusal of the order u/s. 92CA of the Act shows that the issue with regard to provision of marketing suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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