TaxTMI 
TaxTMI 
2019 (2) TMI 2022
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....734,446 to the value of international transactions pertaining to provision of software development services by the Appellant under Section 92CA(3) of the Income-Tax Act, 1961 ('the Act'). 2. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in violating the provisions of Rule 10B(2) by selecting certain alleged comparable companies without considering the differences in the functions performed, assets employed and risks assumed by the Appellant vis-a-vis these companies, thereby resorting to cherry picking of comparables. 3. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in violating the provisions of Rule 10B(2) by alleging E-Infochips Bangalore Ltd. as a comparable to the Appellant. 4. On facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in contravening the provisions of Rule 10B(1)(e)(ii) by alleging Infinite Data System Pvt. Ltd. as a comparable to the Appellant. 5. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP violated the provisions of Rule 10B(2) by alleging Sonata Software Ltd as a comparable to the Appellant. 6. On the facts and in law, the Ld. TP....
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....y of performance. 16. On facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in law and on the facts in not allowing appropriate adjustments under 10B(1)(e)(iii) and Rule 10B(3) to III account for differences in risk profile of the comparables vis-a-vis the Appellant. 17. On facts and in law, the Ld. AO/ Ld. TPO erred in not granting the benefit of reduction/ variation of 5 percent from the arithmetic mean while determining the arm's length price to the Appellant as per the proviso to section 92C(2) of the Act. 18. On facts and in law, the Ld. AO / Ld. TPO and the Hon'ble DRP has erred in proposing to initiate penalty proceedings under Section 271 (1) (c) of the Act. Corporate Tax 19. That on facts and in law the Ld. AO and Hon'ble DRP has erred in not considering the Appellant's plea for providing allowance of 'Severance Cost' of Rs. 66,762,386 incurred by the Appellant during the Financial Year 2008-09." 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : Mentor Graphics (India) Pvt. Ltd. (Mentor India), the taxpayer provides software product development support and quality analysis suppor....
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....xpayer has come up before the Tribunal by way of filing the present appeal. 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. Our ground-wise findings are as under. 9. Undisputedly, the TNMM with OP/OC as MAM applied by the taxpayer has not been disputed by the TPO. It is also not in dispute that the TPO has also not disputed the functional profile and margin of the taxpayer of 15.03% for software development services. Ld. TPO on the basis of its TP analysis in order to determine the transfer pricing adjustment of international transactions entered into by the taxpayer with its AEs, chosen 19 comparables having average of 24.04% and proposed TP adjustment of Rs. 7,39,75,221/-, which are as under :- S.NO. Name of the Company OP/OC 1. Akshay Software Technologies Ltd. -1.07% 2. C T I L Ltd. 18.11% 3. E-Infochips Bangalore Ltd. 71.38% 4. Evoke Tech 18.56% 5. E-Zest Solutions 18.66% 6. Infinite Data System Private Limited 88.25% 7. Infosys Limited 45.47% 8. Larsen & Toubro Inf....
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....pages 63 to 79 of the paper book, on ground of non-availability of segmental data. So, we are of the considered view that Persistent is not a valid comparable, hence ordered to be excluded. TATA ELXSI LTD. (TATA ELXSI) 18. Tata Elxsi is again taxpayer's own comparable which the taxpayer has sought to be excluded on ground of functional dissimilarity. Perusal of annual report, available at pages 482, 483, 484 & 485 of the paper book, goes to prove that business units of "Tata Elxsi" consist of Product Design Services (PDS) to provide full service embedded software, hardware and system design programmes for a variety of technology products. PDS has core domain and technology expertise in VLSI design, embedded software, multimedia, networking and wireless communications; Industrial Design and Engineering (IDE) supporting global corporations in the area of new brand/product introduction from concept to market its expertise lies in the areas of consumer insights, product/service innovation, industrial design, functional prototyping and mechanical engineering; it also engages in brand development and retail design; Visual Computing Labs (VCL) is an award winning production studio, off....
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....ata Elxsi is functionally dissimilar vis-à-vis the taxpayer being engaged in the development of specialized/niche product, hence ordered to be excluded being not a valid comparable. E-INFOCHIPS BANGALORE LTD. (E-INFOCHIPS) 23. This is TPO's comparable which the taxpayer has sought to exclude on grounds of functional dissimilarity, it being engaged in product and semi-conductor engineering services; its segmental information is not available; it has abnormal deviation in profit margin indicating significant difference in risk profile which is unlike a software development company. 24. Perusal of page 18 of the annual report shows that EInfochip is primarily engaged in software development and IT Enabled Services (ITES) which is considered as the only reportable business segment as per Accounting Standard -17. E-Infochip is also engaged in product and semi-conductor engineering services having 500 products for key verticals like aerospace and defence, security and surveillance, consumer devises, medical devices, retail and e-commerce and software technology. E-Infochip in its research and development activities is also engaged in development of software as per the specific....
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....ces having 500 products for key verticals like aerospace and defence, security and surveillance, etc., having huge intangibles which increases its brand value and its segmental financials are not available, is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. INFINITE DATA SYSTEMS PVT. LTD. (INFINITE) 29. The taxpayer sought to exclude Infinite on grounds of functional dissimilarity that it drives revenue from technical support and infrastructure services; that it has abnormally high margin having exceptional growth in business operation over the last four years i.e. 908% in sales over the previous year; that "Infinite" signed an agreement (Built, Operate and Transfer mode) with Fujitsu Services Limited to set up Global Delivery Centers in India to provide offshore delivery capabilities to Fujitsu and Fujitsu's associated companies. Perusal of the functional profile of Infinite, available at page 13 of the paper book, shows that it provides solutions that encompass technical consulting, design & development of software, maintenance, systems integration, implementation, testing and infrastructure management services. This objection was taken b....
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....nd infrastructure management services. So, in view of the matter, we are of the considered view that Infinite is not a suitable comparable vis-à-vis assessee company, hence ordered to be excluded." 32. So, in view of what has been discussed above, we are of the considered view that Infinite is functionally dissimilar vis-à-vis taxpayer having been into providing solutions that encompass technical consulting, design and development of software maintenance, systems integration, implementation, testing and infrastructure management services. Furthermore, Infinite has entered into Build, Operate and Transfer (BOT) agreement with Fujitsu Services Limited to set up global delivery centers in India to provide offshore capabilities to Fujitsu and Fujitsu's associated companies. It has also shown exceptional growth in business operation in the last four years i.e. 908% growth rate over the previous year. So, Infinite cannot be a valid comparable vis-à-vis the taxpayer, hence ordered to be excluded. ZYLOG SYSTEMS LTD. (ZYLOG) 33. The taxpayer sought to exclude Zylog on ground of its diversified operation; having substantial brand value and intangible assets; ha....