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TMI Blog2021 (8) TMI 1358X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. CIT.DR could not establish anything contrary to observations of this Tribunal reproduced hereinabove. Respectfully following aforestated view, we do not find any infirmity in exclusion of these comparables by DRP. Addition in respect of advertisement expenses - re-allocation of expenses from the Non-STPI unit to the STPI units - HELD THAT:- As Tribunal, in assessee's own case for AY 2009-10 [ 2015 (8) TMI 1447 - ITAT BANGALORE] deleted identical addition made on account of re-allocation of expenses from the Non-STPI to the STPI unit as they wew made without any basis. Revenue has not been able to establish any factual difference in the year under consideration with that of AY 2009-10. Respectfully following the same we do not find any infirmity in the view taken by the Ld.CIT(A). Deduction u/s 10A - reducing the expenditure incurred in travel, telecommunicaiton etc. from export turnover and toatl turnover for compulting deduction - HELD THAT:- Admitedly this issue stands settled by Hon ble Supreme Court in case of HCL Technologies Ltd. [ 2018 (5) TMI 357 - SUPREME COURT ] Respectfully following the same, we do nto find any infirmtiy in the view taken by Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time of complying with the transfer pricing documentation requirements; 5. The learned CIT(A) has erred in law and facts by upholding action of AO!TPO in not making suitable adjustments to account for differences in the risk profile of the Appellant vis- -vis the comparables; Software Development Services Transaction 6. The order of the learned CIT(A) is based on incorrect facts, which are not relevant for Assessment Year ( AY ) 2011-12 but relevant to AY 2010-11; 7. The learned CIT(A) has erred in law and facts by upholding the action of AO/ TFO in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters: 7.1 The learned CIT(A) has erred, in law and in facts, by upholding AO/ TPO action of rejecting certain comparable companies identified by the Appellant using export earnings greater than 75% of the sales as a comparability criterion. 7.2 The learned CIT(A) has erred, in law and in facts, by upholding AO/ TPO action of rejecting certain comparable companies identified by the Appellant for having different accounting year (i.e. companies having account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efit of working capital adjustment has been provided for software development services transaction; General grounds 11 The learned CIT(A) has erred, in law and facts, in confirming the imposition of interest of INR 27,215,433 and INR 1,515,775 under Section 234B and 234D respectively of the Act by the learned AO. 12 The learned CIT(A) has erred, in law and facts, in holding that initiation of penalty proceedings under section 271(1)(c) of the Act by the learned AO is consequential in nature. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law. ITA No.736/Bang/2017 1. The order of the Commissioner of Income Tax(Appeals) - 12, Bangalore, is opposed to the law and not on the facts and circumstances of the case. 2. Whether, on the facts and in the circumstances of the case, the CIT(A) is justified in law in deleting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) of the Act and had been selected for scrutiny. Assessee was served with notice for assessment. 2.1 Ld.AO observed that assessee is a company engaged in business of software development. As assessee entered into international transaction with its associated enterprise, issue was referred to Ld.TPO under section 92CA of the Act. On receipt of reference, Ld.TPO issued notice to assessee calling upon to file economic details of international transaction between assessee and AE in Form-3CEB. From details filed by assessee, Ld.AO observed that assessee had following international transaction with its AE: Particulars Software development services Marketing support services Total Value of international transactions (in Rs.) 2,56,37,23,450 11,86,62,180 2,68,23,85,630 2.2 Ld.TPO observed that assessee used TNMM as most appropriate method and OP/OC as PLI and determined margin to be 11.96% for software and hardware development service segment. It was observed that assessee used following 16 comparables with an average margin of 12.84%. Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3. In respect of Marketing Support Service Segment, assessee computed its margin at 8.74%. It used following 9 comparables with average margin of 6.68%. Assessee thus held its transaction to be at arms length. SI No. Comparable Weighted Average OP/OC 1 I D C (India) Ltd 11.27% 2 Access India Advisors Ltd 6.62% 3 E D C I L (India) Ltd (Segmental) 3.80% 4 HT Music Entertainment Co. Ltd 3.98% 5 I C R A Management Consulting Services Limited 4.72% 6 India Tourism Development Corporation Ltd (Segmental) -1.28% 7 Indus Technical Financial Consultants Ltd 9.53% 8 Inhouse Productions Limited (Segmental) 4.25% 9 Inmacs Management Services Ltd 17.22% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c Mean 18.25% 2.4.4. The Ld.TPO thus proposed adjustment at Rs.1,03,77,006/- 3. On receipt of the order passed under section 92CA of the Act, the Ld.AO passed draft assessment order. In the draft assessment order apart from transfer pricing adjustment, the 3.1. Ld.AO proposed following additions:- (i) Reallocation of the advertising expenses among all the four units of the Assessee in ratio of their turnover. As a result, the Ld.AO made an addition of Rs 1,22,93,684/- to the total income of the Assessee. (ii) Reduction of the expenditure incurred on travel and communication incurred by the Assessee in foreign currency only from the export turnover and not from the total turnover for the purpose of computation of deduction u/s 10 of the IT Act. Based on the same the Ld.AO disallowed deduction u/s 10A of Rs.1,83,76,105/- and added the same back to the total income of the Assessee. 3.2. Assessee vide letter dated 23/9/2015 intimated the Ld.AO about its preference to file an appeal before the Ld.CIT(A). The Ld.AO thus passed the final assessment order u/s 143(3) r.w 144C of the Act thereby computing total income in the hands of assessee at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24.13% 23.69% 6 Evoke Technologies Private Ltd 8.11% 7.28% 7 Acropetal Technologies Ltd (seg) 23.67% 19.83% 8 e-Zest Solutions Ltd 21.03% 18.20% 9 E- infochips Ltd 56.44% 55.12% 10 I C R A Techno Analytics Ltd 24.83% 22.02% 11 Persistent Systems Solutions Ltd 21.51% 19.79% 4.7. The Ld.CIT(A) deleted the additins made by the Ld.AO under corporate tax issues. 5. Aggreived by the order of Ld.CIT(A), both assessees as well as revenue are in appeal before us. We first take up appeal filed by revenue. 5.1. Ground No.1 is general in nature and do not require adjudication. 5.2. Ground No.2 is in respect of deleting the addition made in respect of advertisment expenes. The Ld.AR submitted that, the software development activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor (PL) in TNMM analysis. The TPO has made an independent analysis of the international transactions of the Marketing Support Services segment by comparing the Net margins under TNMM. The mean margin of the comparables shows a operating profit on cost at 10% (Please see Annexure - E). The taxpayer's margin is not less than the TPO's margin. Hence the transaction is treated as having been made at arm's length. 45. It is thus clear from the order of TPO that non-STP unit of the assessee rendered services exclusively to NVIDIA Singapore and none of the other STP-units had the benefit of those services. This aspect has not been considered by the CIT(A) at all. On the other hand, the CIT(A) as well as the 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 conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see carries out research and development for its associated enterprises. From the trans-apprising study at page 871 of paper book we note that assessee performs functions limited to project management and quality control under the supervision of its AE s. It does not undertake any marketing activity with respect to the products that are delivered to the customer and does not perform the conceptualising and design of the products deliverable to the customer Assets owned at page 877 of the paper book we note that the assets employed by assessee are tangible assets being office equipment furniture fixtures data processing equipments etc. Risks assumed In terms of SWD segment and in respect of marketing support service segment, assessee undertakes only foreign exchange risk. Assessee has thus been characterised to be a contract service provider who is compensated on a cost +12% basis on all cost incurred by it in provision of research and development services. And in respect of marketing support service segment assessee is compensated on cost plus basis on the cost incurred excluding foreign exchange loss/gain. 10.4 Based on the above categorisation we shall now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany was rightly directed to be excluded by the DRP on the above basis and further contended that even otherwise, this company is not functionally comparable to the Assessee. As already stated, we do not wish to go into this aspect as this company goes out of comparability on other reasons. 10.6 Further, Ld.AR alleged that, Acropetal is functionally not similar with a contract service provider like assessee. This observation could not be dislodged by Ld.CIT.DR. We also note that, Acropetal Technologies has been held to be into products and that RPT is at 18.66% which is beyond the marginal limit of 15% for year under consideration, by this Tribunal, in case of Electronics for Imaging India Pvt.Ltd for assessment year 2011-12 reported in [2017] 85 taxmann.com 124. We therefore do not find any this comparables to be functionally similar with assessee. Respectfully following the aforesaid decisions, we direct exclusion of Acropetal Technologies M/s.E-Infochips: 10.7 The Ld.AR placed reliance upon decision of coordinate bench of this Tribunal in case of Electronics for Imaging India Pvt.Ltd for assessment year 2011-12 reported in [2017] 85 taxmann.com 124 wherein, E- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 10.11 From the above, it is observed by this Tribunal consistently in various decisions for A.Y: 2011-12 held that, this company does not satisfy service income filter being 75%. We therefore, do not see any reason to set aside this company to Ld.TPO. 10.12 Therefore, respectfully following view taken by coordinate bench of this Tribunal in DCIT vs M/s CGI Information Systems and Management Consultations Pvt.Ltd. (supra), we direct Ld. TPO to exclude this company. Respectfully following the aforesaid decisions, we direct exclusion of E Infochips Ltd., ICRA Techno Analytics Ltd., E-Zhest Solutions Ltd., 10.13 It has been submitted by Ld.CIT.DR that, DRP erred in directing exclusion of ICRA Techno Analytics Ltd on the ground th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r; of DRP; about exclusion of these 3 '' comparables and 'direct the AO/TPO to include these three in final list of comparables. 9. Now we decide about the remaining 6 comparables excluded by DRP and 4 comparables retained by DRP but for which the assessee is seeking exclusion. Out of these 6 comparables excluded by DRP, one comparable ICRA Techno Analytics Ltd. is having RPT in excess of 15% and therefore, for this reason alone, this comparable has to be excluded although DRP has excluded it for a different reason that it is having various activities and segmental data are not available. We uphold its exclusion on account of RPT filter. Exclusion of Acropetal Technologies Ltd. (Seg) is covered in favour of the assessee by the same tribunal order rendered in the case of Applied materials India Pvt. Ltd. v. ACIT (Supra). Respectfully following the same, we uphold its exclusion. Exclusion of 1) e - Zest Solutions Ltd., 2) Infosys Ltd., 3) Larsen Toubro Infotech Ltd., 4) Persistent Systems Solutions Ltd., 5) Persistent Systems Ltd., 6) Sasken Communication Technologies Ltd. and 7) Tata Ebcsi Ltd. are also covered in favour of the assessee by the same tribunal ord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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