TaxTMI 
TaxTMI 
2015 (4) TMI 803
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....ompany, formerly known as Phillips Semi-conductors India Pvt. Ltd. was incorporated on 18.7.2006 as a 100% EOU set up under the STPI Scheme; is a private limited company registered in India and is a subsidiary of NXP BV, a Netherlands company. For Assessment Year 2008-09, the assessee filed its return of income declaring income of Rs. 32,37,84,304. The return was processed under Section 143(1) of the Act and the case was taken up for scrutiny. 2.2 In the period under consideration, the assessee had reported the following international transactions :- Provision of Software Development Services Rs.253,89,24,193. Provision of Order Gathering Services. Rs.13,80,51,438 Purchase of assets. Rs.37,73,264 Receipt of Services. Rs.17,75,56,409 Reimbursement of expenses (received) Rs.81,01,426 In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arm's Length Price ('ALP') of these international transactions, after obtaining necessary approval from the CIT-III, Bangalore. The TPO vide order under S....
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....mponents and computer server racks (or 19 inch heavy racks) as 'plant and machinery' instead of 'computers' and consequently applying lower rate of depreciation of 15% on the adjusted opening balance, resulting in a disallowance of Rs. 11,337,971. 3.3 Separately, the learned AO has treated the additions to networking equipments, appearing in 'computer' block as 'plant and machinery' and consequently applying lower rate of depreciation of 15% resulting in a disallowance of Rs. 533,667. Transfer pricing matters 4. The learned AO / Transfer Pricing Officer ("TPO") have erred, in law and in facts, in making an addition of Rs. 20,53,68,934 to the total income of the Appellant on account of adjustment in the arm's length price of the software development services transaction entered by the Appellant with its associated enterprise. 5. The learned AO / TPO have erred, in law and in facts, in disregarding the economic analysis undertaken by the Appellant without proper justification and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international trans....
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....computing the arm's length price without giving benefit of +/- 5 percent under the proviso to section 92C of the Act. Common grounds of appeal relating to corporate tax and transfer pricing matters. 13. The learned AO erred in levying interest of Rs. 3,76,27,691 and Rs. 428,083 u/s 234B and 234D of the Act respectively. 14. The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act." 3.2 The assessee filed additional grounds of appeal vide letter dt.19.12.2013 on the issue of depreciation on goodwill arising out of acquisition of business under slump sale agreement. 3.3 In the course of appellate proceedings, the assessee filed submissions in paper books in support of the grounds of appeal raised and also a compendium of case laws, on which the assessee placed reliance. 4. The grounds raised at S.Nos.1 & 2, are general in nature and not being specifically urged before us, are dismissed as infructuous. CORPORATE TAX 5.1 The Grounds raised at S.Nos.3.1 to 3.3, relate to the claim of depreciation on net working equipment. In the course of appellate proceedings, the Assessing Officer noticed from Form 3CD that while the....
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....g heard to the Assessee. Before DRP the Assessee has explained the nature of the components and racks on which depreciation was claimed at 60% and as to how they were in the nature of "Computers". These submissions have not been considered by the DRP. In the circumstances, we are of the view that this issue also requires to be examined afresh by the AO after due opportunity to the Assessee of being heard to the Assessee. We hold and direct accordingly. The relevant ground of appeal is treated as allowed for statistical purpose." 5.3.2 Following the above decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra), we remand the issue back to the file of the Assessing Officer for fresh consideration, after affording the assessee adequate opportunity of being heard and to file details / submissions required. It is ordered accordingly. Consequently, the Grounds at S.Nos.3.1 to 3.3 are treated as allowed for statistical purposes only. TRANSFER PRICING ISSUES (Ground Nos.4 to12) 6.1 In the course of proceedings before us, the learned Authorised Representative submitted a chart explaining the assessee's position regar....
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....O, no adjudication on the above grounds 8 to 12 are necessary. 7.1 As per the T.P. Study carried out by the assessee, for the software development service segment, adopting TNMM as the Most Appropriate Method ('MAM') and taking itself as the tested party, the assessee selected a set of 23 companies as comparables with an average profit margin of 14.84% on cost. The assessee's list of comparables, as per its T.P. Study, are as under :- Sl.No. Name of the Company Weighted average of operating profits on operating costs (%) 1. Akshay Software Technologies Limited 6.60 2. Aztecsoft Limited 18.16 3. Goldstone Technologies Ltd. 11.50 4. Helios & Matheson Information Technology Ltd. 38.40 5. Indium Software (India) Ltd. 11.09 6. Infosys Technologies Ltd. 39.96 7. KPIT Cummins Infosystems Ltd. 13.20 8. Lanco Global Systems Ltd. 13.28 9. L & T Infotech Ltd. 11.35 10. Maars Software International Ltd. 15.58 11. Melstar Information Technologies Ltd. 3.46 12. Mindtree Limited 16.98 13. Persistent Systems Pvt. Ltd. 24.34 14. Quintegra Solutions Ltd. 15.18....
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....d relevant to Assessment Year 2008-09. 7.3 As mentioned in the pre-paras of this order, in the course of proceedings before us, the learned Authorised Representative submitted that he would make and put forth arguments / contentions only on the issue of comparability or otherwise of individual companies, which in the assessee's opinion are incorrectly included or excluded by the TPO in the final set of comparable companies. In this context, the learned Authorised Representative also submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected or rejected by the TPO as comparable companies to the assessee. 8.1 The learned Authorised Representative submitted that the following three companies are liable to be rejected as comparables as they are functionally different from the assessee; based on the rulings in the decisions of co-ordinate benches of this Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra); Curram Software International Pvt. Ltd. (supra) and Yodlee Infotech Pvt. Ltd. (supra). These companies are :- (i) Avani Cincom Technologies. (ii) Celestial Biolabs Ltd. ....
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....ftware India Pvt. Ltd. (ITA No.1054/Bang/2011 dt.23.11.2012) ii. Curram Software International Pvt. Ltd. (ITA No.1280/Bang/2012 dt.31.7.2013) for A.Y. 2008-09. 9.3 The learned Departmental Representative supported the orders of the authorities below for inclusion of this company in the list of comparables. 9.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited by the assessee. We find that a co-ordinate bench of this Tribunal in the case of M/s. Curam Software International Pvt. Ltd. in ITA No.1280/Bang/2012 dt.31.7.2013 for Assessment Year 2008-09, has remanded the matter of examination of the comparability of this company to the file of the Assessing Officer / TPO afresh; holding as under at para 9.5.1 to 9.5.2 of its order :- " 9.5.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the informat....
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....ee, in our view, has not demonstrated that the facts of Triology E-Business Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly." 9.4.2 Following the above cited decision of the co-ordinate bench of ITAT, Bangalore in the case of Curram Software International Pvt. Ltd. (supra), we direct the Assessing Officer / TPO to examine the comparability of this company afresh by considering the observations made by the Tribunal in paras 9.5.1 to 9.5.3 of the cited order (reproduced supra). The Assessing Officer / TPO is directed to....
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....ding the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of the Tribunal in the case of M/s. 3DPLM software Solutions Ltd. (supra), for Assessment Year 2008-09 has held that this company be excluded from the list of comparables; holding as under at paras 9.4.1 and 9.4.2 of its order :- " 9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO's order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Ap....
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....oftware products, unlike the assessee who is only a software service provider to its AEs. It was also submitted that this company was rejected as a comparable to a software service provider by the decision of a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd (supra). The learned Authorised Representative prayed that in view of the above cited decision (supra), this company be excluded from the list of comparables. 11.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final list of comparables. 11.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09 has excluded this company as a comparable, observing that it was developing software products and was not purely a software service provider and at para 10.4 thereof it was held as under :- "10.4 We have heard both parties and perused and carefully considered the material on re....
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....he assessee in the case on hand as its activities are diversified. It commands substantial brand value, owns IPRs and is a market leader in software development activities, whereas the assessee is merely a software service provider which does not possess any brand value, owns any IPRs or intangibles. In support of the assessee's arguments, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench in the case of Curram Software International Pvt. Ltd. (supra) and M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the final list of comparables, as it is functionally different from the assessee. 12.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final set of comparables. 12.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09 had held that this company be excluded f....
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....ovider and therefore it ought to be excluded from the list of comparables. The learned Authorised Representative prayed that in view of the above, the company should be excluded from the list of comparables in the case on hand. 13.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final list of comparables. 13.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company ought to be excluded from the list of comparables holding as under at paras 12.4.1 and 12.4.2 of its order, which is extracted hereunder :- "12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of....
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.... and services segment; namely product design, innovation design engineering and visual computing labs, as is reflected in the Annual Report of the company and is not a pure software development service provider like the assessee. The learned Authorised Representative also submitted that the co-ordinate benches of this Tribunal in the cases of Curram Software International Pvt. Ltd. (supra) and M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 have held that this company is to be excluded from the list of comparables for a software service provider. The learned Authorised Representative prays that in view of the above, this company be excluded from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company as a comparable. 14.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that since this company being predominantly engaged in product des....
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....of functions like product designing services and not purely software development services like the assessee in the case on hand. It is ordered accordingly. 15. Bodhtree Consulting Ltd. 15.1 This company has been selected as a comparable by the TPO. The assessee has objected to the inclusion of this company as a comparable, both before the DRP and this Bench, on the grounds that this company is functionally different as it has software products and a hybrid service business model. In the proceedings before us, the learned Authorised Representative placed reliance on the decision of the co-ordinate benches of this Tribunal in the cases of Mindtech (India) Ltd. (supra) and CISCO Systems (India) Pvt. Ltd., in IT(TP)A No.271/Bang/2014 dt.14.8.2014, both for Assessment Year 2009-10, wherein this company was excluded from the list of comparables. It was submitted by the learned Authorised Representative that though these cited decisions were rendered for Assessment Year 2009-10, the facts and circumstances of the case are similar for Assessment Year 2008-09 as well and applies to the year under consideration. The learned Authorised Representative prays that in view of the above, thi....
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....e case of CISCO Systems (India) Pvt. Ltd. (supra) at para 26.1 is extracted hereunder :- " 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the 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 ....
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....ssessee. The learned Authorised Representative submitted that this company was excluded from the list of comparables by the order of a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) holding that this company is to be excluded from the list of comparables since it provides KPO services which are not comparable to pure software development services providers. The learned Authorised Representative prayed that in view of this, this company ought to be excluded from the list of comparables. 16.4.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had excluded this company from the list of comparables holding that this company is into rendering of product development services and high end technical services in the category of KPO Services and therefore cannot be considered as comparable to an assessee rendering purely software development services. The relevant portion of the order of the co-ordinate bench at para 14.4 thereof is as under :- "14.4 We have heard the riv....
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....egmental profit and loss account for software development services and product development services; (ii) the co-ordinate bench of this Tribunal in its order in M/s. 3DPLM Software Solutions Ltd. (supra) has held that this company, which is into product development and sale of licenses, be omitted as a comparable in respect of those companies rendering purely software development services. The learned Authorised Representative contends that in view of the above, this company ought to be excluded from the list of comparables to the assessee in the case on hand who is into purely software development services. 17.2 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 17.3.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the set of comparables to a pure software development service provider since this company is functionally different as it is engaged in product development and earns revenue from s....
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....O. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record; including the judicial decision cited and placed reliance upon. We find that the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company has to be excluded from the list of comparables for software development service providers as it is engaged in software product development and the relevant observations of the order at para 16.3 thereof is extracted hereunder :- "16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supr....
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....ised Representative submitted that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the list of comparables to a purely software development service provider on the grounds of functional difference and therefore prayed that in the case on hand also, this company ought to be excluded from the list of comparables since the assessee is only rendering software development services. 19.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 19.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company being engaged in product development and product design and analysis service is functionally different from a pure software service provider and therefore excluded it from the list of comparables for software development services; holding a....
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....nate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09. The learned Authorised Representative prayed that in view of the above, this company ought to be excluded from the list of comparables. 20.4.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company be excluded from the list of comparables for software development service providers, holding as under at paras 18.3.1 to 18.3.3 thereof :- "18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade....
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....ned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, has held that this company is to be excluded from the list of comparables as it has RPT of 18.3%. In view of the above, the learned Authorised Representative prayed that this company be excluded from the list of comparables. 21.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparables. 21.4.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra), has excluded this company from the list of comparables holding as under at para 19.3 thereof :- "19.3 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 has excluded this company from the set of comparables for the reason that RPT is in exc....
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....ese two companies (supra) and also for KPIT Cummins Infosystems Ltd. In this view of the matter, we deem it fit to restore the issue of the comparability of the above three companies back to the file of the TPO to examine the computation given by the assessee in this regard and to decide the issue afresh after affording the assessee adequate opportunity of being heard and to make submissions in the matter, which shall be duly considered before a decision is taken. It is ordered accordingly. 23. Ground No.11 : Risk Adjustment. 23.1 In the Ground at S.No.11, the assessee submits that it has a limited risk profile vis-à-vis the comparable companies selected by the TPO and contends that the TPO ought to have allowed appropriate adjustments for differences between the risk profile of the assessee and the companies selected as comparables. It was submitted that it is essential for appropriate risk adjustments to be made to bridge the disparities in the risk profile between a risk free entity like the assessee and risk bearing entities among the comparables selected by the TPO. The learned Authorised Representative submitted that in similar factual positions, co-ordinate benc....
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....e following ground :- " 1. The learned Assessing Officer has erred in law, and in fact, in not allowing depreciation on goodwill as per Section 32(1)(ii) of the Income-tax Act, amounting to Rs. 255,799,740 i.e. 25% of the total goodwill amounting to Rs. 1,023,198,958, which arose on account of acquisition of the semiconductor business of Philips Electronics India Limited under a slump sale arrangement by executing a Business Transfer Agreement." 26.2 In appellate proceedings before us, it was submitted that the same issue was before the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 and the Tribunal had remanded the matter back to the file of the Assessing Officer for adjudication afresh. 26.3 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter and have perused and carefully considered the submissions on record on this issue. We find that the same issue was before the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08. In its order in IT(TP)A No.1174/Bang/2011 dt.14.11.2014, the co-ordinate bench of this Tribunal had admit....