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TMI Blog2016 (9) TMI 1483X X X X Extracts X X X X X X X X Extracts X X X X ..... i [2011 (8) TMI 782 - KARNATAKA HIGH COURT]. Lower deduction u/s 10A - profits of the software (STPI) unit as 297,319,880/- instead of 181,072,777/- - Held that:- We direct the TPO to correct the error which has crept in while computing deduction u/s 10A and take the profit of software unit at 181,072,777/- Market risk adjustment - Held that:- As decided in INTELLINET TECHNOLOGIES INDIA (P.) LTD. VERSUS INCOME-TAX OFFICER, WARD-11(2), BANGALORE [2012 (6) TMI 237 - ITAT BANGALORE] in principle, risk adjustment must be granted, if warranted in the facts of the case, for bringing the comparables on par with the assessee company. Following the above decision and of the co-ordinate bench (supra), we also hold that in principle, the assessee may be granted risk adjustment, if so required in the peculiar facts of the case for bringing the comparable companies on par with the assessee. However, the quantum of risk adjustment to be granted, if any, is remanded back to the file of the TPO. The TPO is directed to examine the details of the quantitative computation of risk adjustment and attendant details submitted by the assessee justifying its claim for risk adjustment and to take into accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is in appeal before us. 8. The assessee has filed the following grounds of appeal. 1. The learned Dispute Resolution Panel ('DRP') and the learned Director of Income Tax (Transfer Pricing -IV), Bangalore ('Transfer Pricing Officer' or 'TPO') grossly erred in law and facts of the case in determining the arm's length price ('ALP') of the international transaction of the appellant of ₹ 1,590,777,300/- received on account of provision of software development services and proposing a transfer pricing adjustment of ₹ 229,813,929/-. 2. That on the facts and circumstances of the case, the learned DRP erred in upholding the rejection of transfer Pricing ('TP') documentation by the learned TPO without appreciating the contentions, arguments, and evidentiary data put forward by the Appellant during the course of the proceedings before them, and in doing so have grossly erred: in rejecting Cost Plus Method as the most appropriate method and accepting Transactional Net Margin Method as the most appropriate method. in upholding the rejection of comparability analysis carried in the TP documentation and conducting a fresh comparability analysis carried in the TP document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re product development like Megasoft Limited, Flextronics Software Systems Limited, KALS Information Systems Limited, Avani Cimcon Technologies Limited, Lucid Software Limited, Ishir Infotech Limited, E-zest Solutions Limited, Persistent Systems Limited and R Systems International Limited which are functionally not comparable to the assessee's business. 2.12 In accepting Accel Transmatics Limited as a comparable company even though the company had sold its intellectual property and earned income from royalty. 2.13 In upholding the actions of the learned TPO in accepting Celestial Labs Limited as a comparable company eventhough it is a contract research company which also engaged in bio-informatics and hence functionally dissimilar to the assessee. 2.14 In upholding the actions of the learned TPO in accepting companies like Megasoft Limited, Flextronics Software Systems Limited and Helios & Matheson Information Technology Limited which have abnormal/fluctuating profit margins. In doing so the learned DRP have disregarded the various jurisdictional ITAT rulings in case of SAP LABS India Pvt Ltd. Vs. ACIT (reference ITA No.398/Bang/2008), E-Gain Communication Private Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot appreciating that the Honorable Supreme Court in the assessee's own case for the assessment years 2000-01 and 2001-02, vide order dated 9th September, 2010, has set aside the order of the Karnataka High Court (supra) and requested the High Court to decide the case on merits. 7.4 The learned AO erred in not observing that since the Honorable Supreme Court (supra) has set aside the order of the Karnataka High Court (supra), the decision of the Honorable Incometax Appellate Tribunal in the assessee's own case for the assessment years 2000-01 and 2001- 02, wherein it has been held that the amount paid by the appellant to its parent company was not in the nature of royalty and no tax was required to be deducted at source, would continue to hold good. 7.5 The learned AO ought to have appreciated that the EDA software licenses are purchased by Infineon Technologies AG Germany, the ultimate parent company of the appellant, from the vendors as a standard off-the-shelf product and are not transferred to the appellant company. The appellant company only uses the licenses owned by Infineon Technologies AG, Germany. 7.6 The learned AO ought to have appreciated that the payments made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l turnover in order to compute the deduction under section 10A. Further, recently the High Court of Karnataka has decided the matter in favour of the assessee in the case of Honeywell Technologies Solutions Lab Pvt.Ltd. (ITA No.820 of 2009). 8.6 The learned AO erred in computing deduction under section 10A by erroneously considering the profits of the software (STPI) unit as ₹ 297,319,880/- instead of ₹ 181,072,777/- thereby resulting in a lower deduction under section 10A. 9. Interest 9.1 The learned AO erred in levying interest of ₹ 48,314,743/- under section 234B of the Act. The Appellant submits that the levy of interst is consequential in nature. The appellant craves to leave/to add to/to alter/to amend/to rescind/to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal. 9. The TPO adopted TNMM method. The segmental details pertaining to software development service and BPO services are as under:- Particulars Software Research & Development & Information technology Marketing Support services TOTAL Operating Income(*) 1360963371 15424364 1376387735 Operating Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . KALS Information Systems Limited Functionally dissimilar 10. Lucid Software Ltd., Functionally dissimilar 11. Megasoft Ltd 1.Functionally dissimilar 2.Margin to be computed at segmental level and not entity level 3.Abnormally high margins 12. Persistent Systems Limited Functionally dissimilar 13 RS Software (India) Ltd., Different financial year end 14. Tata Elexi Limited (Segment) Functionally dissimilar 15. Wipro Ltd (seg) 1. Functionally dissimilar 2. Industry leader - large economies of scale; and 3. Presence of intangibles 12. We find that the above companies, which the assessee has chosen to request for exclusion/rejection, are covered by the decision of Hewlett-Packard (India) Globalsoft Pvt. Ltd., (Supra). Hence, respectfully following the decision of the coordinate Bench, we direct the TPO to exclude all of them. 13. The assessee has raised the following additional ground: The appellant submits that Thirdware as referred in Ground No. 2.11.1 was selected as a comparable by the Ld. TPO to the software development services rendered by the appellant at the time of transfer pricing assessment proceedings. Based on the recent judicial pronouncement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be disallowed under Section 40(a)(i) of the Act as has been held by the Hon'ble High Court of Karnataka in the case of Samsung Electronics Co. Ltd. & Others (Kar) in ITA No.2808 of 2005 dt.15.10.2011 and to which case the assessee was also a party (ITA No.1264 & 1265/06). In this view of the matter, the Assessing Officer made the disallowance of ₹ 11,25,95,270 under Section 40(a)(i) of the Act. On appeal, the DRP upheld the decision of the Assessing Officer who then made the disallowance in the final order of assessment. It is against these findings of the authorities below, that the assessee is before us in this appeal. In the course of hearings before us, the learned Authorised Representative for the assessee fairly conceded that this issue is covered against the assessee and in favour of Revenue by the decision of the Hon'ble High Court of Karnataka in the case of Samsung Electronics Co. Ltd. (supra), relied on by the A.O./DRP, and to which case the assessee was also party before the Hon'ble High Court. Respectfully following the decision of the Hon'ble High Court of Karnataka in the case of Samsung Electronics Co. Ltd. (supra) which has also been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies should be adjusted for difference in depreciation cost of comparable companies and tested party. 29. With respect to market risk adjustment, the learned counsel for the assessee relied on the decision of Intellinet Technologies Pvt. Ltd., in ITA No.1237/Bang/2010 which has been followed in the case of Infineon Technologies India Pvt. Ltd., in IT(TP) No.1670/Bang/2012. The assessee contends that it is a low risk service provider whereas the comparable companies chosen by the TPO are risk bearing entities and hence the difference in the risk profile needs to be adjusted for proper comparability. The assessee also submits that the details of the computation of the risk adjustment has also been submitted. In support of its contentions for being allowed risk adjustment, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Intellinet Technologies India Pvt. Ltd. in ITA No.1217/Bang/2010 and Bearing Point Business Consulting Pvt. Ltd. in ITA No.1124/Bang/2011. We find that the co-ordinate bench of this Tribunal in the cases of Intellinet Technologies India Pvt. Ltd. (supra) and Bearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being submitted now; why it is necessary to accept the same; why this claim was not raised earlier; computation of quantum, etc. In the absence of these details, such an additional ground would have no meaning and not being maintainable ought to be dismissed summarily. 9.4 We have heard both parties and considered the rival submissions. We find force in the submissions of the learned Departmental Representative. Whether an adjustment towards depreciation is warranted or not may be, issue of principle. But whether the principle needs to be applied to a particular case or not would depend on the peculiar facts of that case. It cannot be anybody's case that an adjustment has to be necessarily granted whenever and wherever there is difference in depreciation between the tested party and the comparables. An adjustment for difference in depreciation is a valid principle for comparability, but whether this case entails such an adjustment has to be examined in the light of the particular facts of the case. Hence, the additional ground raised by the assessee is as much as issue of fact as it is of principle. 19.5 Before us, the assessee has not been able to adduce any reason as to why ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, age of the assets, etc. and therefore adjustment towards depreciation can be granted only if there are operational differences that affect comparability. We remit the issue of depreciation as raised by the assessee in the additional grounds (supra) to the file of the Assessing Officer / TPO with direction to examine and consider the claim for adjustment towards depreciation in the light of our observations from paras 19.3 to 19.8 of this order and to dispose the matter expeditiously after affording adequate opportunity of being heard to the assessee. It is ordered accordingly." 12.3 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.com Pvt. Ltd. (supra), we admit the additional ground raised for grant of depreciation adjustment and remit the matter to the file of the TPO to consider and examine the assessee's claim for adjustment towards depreciation in the light of the Tribunal's observations at paras 19.4 to 19.8 of the order of the co-ordinate bench (supra) after affording the assessee adequate opportunity of being heard and to submit details/explanations required, which shall be duly considered. It is ordered accor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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