TaxTMI 
TaxTMI 
2015 (11) TMI 1723
X X X X Extracts X X X X
X X X X Extracts X X X X
....rivate Limited ('AMD R&D'). AMD R&D is engaged in rendering of research, design and development services to ATI Canada in connection with the development of consumer technologies. ATI Technologies has entered into research and development agreement with ATI Canada and ATI Barbados dated April 2005. 2.2 AMD Group was founded on 1st May 1969 by a group of former Fairchild semiconductor executives. The AMD group began as a manufacturer of logic chips, and entered the RAM chip business in 1975. AMD US is a part of the AMD Group, based out of Sunnyvale, California, United States. AMD US develops computer processors and related technologies for commercial and consumer markets. The main products of AMD US includes microprocessors, motherboard chipsets, embedded processors and graphics processors for servers, workstations and personal computers, and processor technologies for handheld devices, digital television, and game consoles. Some of the platforms and technologies developed by AMD Group are - AMD chipsets: AMD Live; AMD Quad FX Platform; Commercial Platform; Desktop Platforms; Embedded systems; Flash technology and Mobile platforms. 2.3. During the relevant FY, assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....TPO was not justified in selecting companies like Infosys and L&T Infotech as comparables as the turnover of these companies exceeded more than Rs. 1000 crores. Accordingly, TPO was directed to exclude these two companies from the list of comparables for the purpose of calculating ALP of international transactions. Similarly, DRP has also excluded M/s Mind Tree, as this company had extraordinary events like mergers and acquisitions during the year. By considering the various orders of ITAT, DRP directed TPO to exclude such companies which had extraordinary events like mergers and acquisitions. Accordingly, TPO/AO was directed to exclude the said three companies from the list of comparables finally selected by TPO. 3.2 DRP considered the submissions of assessee as against variable cost of depreciation among various comparable companies vis-à-vis the assessee. Since, assessee estimated the life span of the assets to 3 years and 5 years, depreciation cost risen very high whereas in the comparable cases, it is very less and total average comes to 5.18% whereas the percentage of depreciation to the total cost in the assessee came to 11.35%. DRP has accepted assessee's contenti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... circumstances of the case, the Hon'ble DRP was not justified in directing the TPO to consider PBIT/Cost as the PLI without appreciating the fact that TNMM is less sensitive to the cost differences and therefore no such adjustments are warranted. (iv) In the facts and on the circumstances of the case, the Hon'ble DRP was not justified in directing the TPO to consider PBIT/Cost as the PLI without appreciating the fact that eliminating the depreciation on assets like building from the Cost without eliminating the alternative expenditure like rent paid for the building taken on lease from the cost would be prejudicial." 6. In short, revenue is in appeal before us against allowing the depreciation to be part of variable cost among various comparable companies and direction of DRP to AO for excluding Infosys, L&T and Mindtree as comparables. 7. Ld. DR submitted that DRP is not correct in excluding three companies i.e. L&T, Infosys and Mindtree as the same are functionally comparable. 8. Ld. AR submitted that use of higher turnover filter has an impact on the comparables. He relied on the following case laws: 1. E-gain Communication Pvt. Ltd. (ITAT Pune....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as below: Table showing percentage of depreciation to the total expenditure of the comparable companies and the appellant Sl.No. Particulars Depreciation INR in crores Total expenditure excluding depreciation INR in crores Percentage of depreciation to total expenditure (A) (B) (C=A/B) AMD Research & Development Centre India Pvt. Ltd. 11.59 90.54 12.80% Comparable companies 1. Avani Cimcon Technologies Ltd. 0.16 2.74 5.73% 2. CAT Technologies Ltd. 0.92 7.21 12.80% 3. Com-U-Learn Tech India Ltd. 0.93 11.93 7.77% 4. E-Infochips Bangalore 0.79 24.98 3.15% 5. Evoke Technologies Pvt. Ltd. 0.15 9.16 1.68% 6. E-Zest Solutions Ltd. 0.38 8.48 4.50% 7. Kals Information Systems Ltd. (Seg.) 0.10 1.79 5.51% 8. Kuliza Tech 0.22 7.87 2.78% 9. Persistent Systems 32.50 386.97 8.40% 10. Persistent Systems & Solutions Ltd. (merged) 0.24 5.99 3.98% 11 RS Software (India) Ltd. 7.12 147.28 4.83% 12 Sasken Communication Techno....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onsidered view, the method of depreciation adopted by the various comparable companies has an impact on the operating result of the respective comparable companies, which is highlighted in the above charts. The assessee company's percentage of depreciation to total expenditure is 12.80% whereas the mean of the comparable companies are 5.26%. We notice, there is considerable impact on the operating result. Hence, we agree with the DRP that the depreciation should be considered for evaluating the operating results of the comparables. 9.6 In the result, revenue ground No. 4 is dismissed. 10. In the result, the revenue appeal is dismissed. 11. Now we deal with the assessee's appeal. 12. Aggrieved with the order of AO in arriving TP adjustment at Rs. 5,72,74,207 without giving opportunity to assessee for such TP adjustment and finalizing the assessment order, assessee is in appeal before us raising the following grounds of appeal: "1. On the facts and in the circumstances of the case and in contrary to law, the final assessment order ('the Order') issued under section 143(3) read with section ('r.w.s.') 144C of the Income-tax Act, 1961 ('the Act&....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ansactions towards providing IT services to its Associated Enterprises. 6.2 The Ld. AO/Ld. TPO erred and the Hon'ble ORP further erred in upholding the order of the Ld. AO/Ld. TPO in calculating the profit margin (net cost plus) of the Appellant by including certain non operating expenses such as loss on sale of assets and sub-lease expenses, treating the same to be in the nature of operating expenditure. 6.3 The Ld. AO/Ld. TPO erred and the Hon'ble DRP further erred in upholding the order of the Ld. AO/Ld. TPO in conducting the fresh search and the same is liable to be quashed as the companies selected were based on arbitrary filters. 6.4 The Ld. AO/Ld. TPO and the Hon'ble DRP erred on facts in arbitrarily accepting the following comparable companies that were functionally not comparable, have abnormal profits, have peculiar economic circumstances/extraordinary situations, have significant intangibles, have high on-site development expenditure, have research and development activities, holds significant inventory, as compared to the Appellant: i) Comp-U-Learn Tech India Limited; ii) Kals Information Systems Limited; ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....issued by mandatory AS prescribed in Companies (Accounting Standard) Rules, 2006 and the relevant provisions of Companies Act, 1956. c) Refer profit and loss a/c of E-Infochips at page 1261 of paper book. Income from software Rs. 430,466,481 Software development expenses Rs. 206,674,788 13.2 With reference to the segment information at page 1269 of paper book (part of annual reports of the company), the company is primarily engaged in software developments and IT enabled services. Whereas assessee is engaged in the business of research, design and development of application solutions for semi conductor services. We find that the company E-Infochips has been held to be functionally not comparable to the assessee. 14. With regard to ground No. 4, of assessee's cross-appeal, ld. AR submitted that as per section 92C(2) of the Act, assessee is eligible for tolerance margin of 5%.. He has relied on the decision of ITAT, Delhi Bench in case of M/s IHG IT Services (India) Pvt. Ltd. Vs. ITO in ITA No. 5890/Del/2010 wherein the Tribunal held as under: "13. Coming back to the provisions of the income-tax Act, we are of the opinion that after the retrospecti....