Assistant Commissioner of Income tax, Bangalore v. Nvidia Graphics Pvt Ltd, Bangalore

ITA 736/BANG/2017 | 2011-2012
Pronouncement Date: 31-08-2021 | Result: Allowed

Appeal Details

RSA Number 73621114 RSA 2017
Bench Bangalore
Appeal Number ITA 736/BANG/2017
Duration Of Justice 4 year(s) 5 month(s) 7 day(s)
Appellant Assistant Commissioner of Income tax, Bangalore
Respondent Nvidia Graphics Pvt Ltd, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 31-08-2021
Appeal Filed By Department
Order Result Allowed
Bench Allotted C
Tribunal Order Date 31-08-2021
Date Of Final Hearing 12-08-2021
Next Hearing Date 12-08-2021
Last Hearing Date 24-03-2020
First Hearing Date 09-01-2020
Assessment Year 2011-2012
Appeal Filed On 24-03-2017
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI. B. R. BASKARAN ACCOUNTANT MEMBER AND SMT. BEENA PILLAI JUDICIAL MEMBER ITA NO.736/BANG/2017 ASSESSMENT YEAR : 2011 12 THE ASST. COMMISSIONER OF INCOME-TAX CIRCLE-5(1)(1) BENGALURU. VS. M/S NVIDIA GRAPHICS PVT. LTD. NO.C-1 JACARANDA WING-A OUTER RING ROAD MANYATA EMBASSY BUSINESS PARK BENGALURU-560 045. APPELLANT RESPONDENT IT(TP)A NO.801/BANG/2017 ASSESSMENT YEAR : 2011 12 M/S NVIDIA GRAPHICS PVT. LTD. NO.C-1 JACARANDA WING-A OUTER RING ROAD MANYATA EMBASSY BUSINESS PARK BENGALURU-560 045. VS. THE COMMISSIONER OF INCOME-TAX (APPEALS)-5 BENGALURU. . APPELLANT RESPONDENT APPELLANT BY : SHRI CHAVALI NARAYAN C.A RESPONDENT BY : SHRI PRADEEP KUMAR CIT PAGE 2 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 DATE OF HEARING : 12-08-2021 DATE OF PRONOUNCEMENT : -08-2021 ORDER PER BEENA PILLAI JUDICIAL MEMBER PRESENT APPEALS HAS BEEN FILED BY ASSESSEE AS WELL AS REVENUE AGAINST ORDER DATED 02/12/2016 PASSED BY TH E LD.CIT(A) BNGALORE ON FOLLOWING GROUNDS OF APPEAL: ITA NO. 801/BANG/2017 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW NVIDIA GRAPHICS PRIVATE LIMITED (HEREINAFTER REFERRED TO A S 'APPELLANT') RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL AGAIN ST THE APPEAL ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (A PPEALS) - 5 [HEREINAFTER REFERRED TO AS THE 'LEARNED CIT(A)'] U NDER SECTION 250 OF THE INCOME-TAX ACT 1961 ('ACT') ON THE FOLLOWING GROUN DS: THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE ORDER OF THE LEARNED AO/ TPO IS BASED ON INCORR ECT INTERPRETATION OF LAW AND THEREFORE IS BAD IN LAW. THE LEARNED AO/TPO HAS ERRED IN LAW AND IN FACTS BY ASSESSING/ COMPUTING THE TOTAL INC OME AT INR 343 738 662 AND THE TOTAL NET TAX PAYABLE AS INR 91 851 777; TRANSFER PRICING GROUNDS 2. THE LEARNED AO! TPO HAVE ERRED IN MAKING AN ADDI TION OF INR 267 671 356 TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF ADJUSTMENT IN THE ARM'S LENGTH PRICE OF THE PROVISI ON OF SOFTWARE DEVELOPMENT SERVICES AND MARKETING SUPPORT SERVICES TRANSACTIONS ENTERED BY THE APPELLANT WITH ITS ASSOCIATED ENTERP RISES; THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS BY NOT ACCEPTING THE APPELLANT'S PLEA IN ENTIRELY AND CONFIRMING WITH TH E LEARNED AO/ TPO ON NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY T HE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULES 1962 ('RULES') FOR THE DETERMINATION OF THE ARM'S LENGTH PRICE IN CONNECTION WITH THE IMPUGNED INTERNATIONAL TRANSACT ION AND HOLDING THAT THE APPELLANT'S INTERNATIONAL TRANSACTION IS NOT AT ARM'S LENGTH; 4. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS BY UPHOLDING THE ACTION OF AD! TPO IN DETERMINING THE ARM'S LENGTH M ARGIN/ PRICE USING ONLY FY 2010-11 DATA WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMEN TATION REQUIREMENTS; 5. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS BY UPHOLDING ACTION OF AO!TPO IN NOT MAKING SUITABLE ADJUSTMENTS TO ACC OUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS--VIS THE COMPARABLES; SOFTWARE DEVELOPMENT SERVICES TRANSACTION PAGE 3 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 6. THE ORDER OF THE LEARNED CIT(A) IS BASED ON INCO RRECT 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 FAC TS BY UPHOLDING AO/ TPO ACTION OF REJECTING CERTAIN COMPARABLE COMPANIE S 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 FAC TS BY UPHOLDING AO/ TPO ACTION OF REJECTING CERTAIN COMPARABLE COMPANIE S IDENTIFIED BY THE APPELLANT FOR HAVING DIFFERENT ACCOUNTING YEAR (I.E . COMPANIES HAVING ACCOUNTING YEAR OTHER THAN MARCH 31 OR COMPANIES WH OSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS); 7.3 THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FAC TS BY UPHOLDING AO/ TPO ACTION OF REJECTING CERTAIN COMPARABLE COMP ANIES IDENTIFIED BY THE APPELLANT BY APPLYING EMPLOYEE COST GREATER THA N 25% OF THE TOTAL REVENUES' AS A COMPARABILITY CRITERION; 7.4 THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FAC TS BY UPHOLDING AO/ TPO ACTION BY REJECTING CERTAIN COMPARABLE COMPANIE S IDENTIFIED BY THE APPELLANT WHERE CONSOLIDATED RESULTS HAD BEEN USED FOR ANALYSIS. THE APPELLANT HAD CONSIDERED THE CONSOLIDATED RESULTS I N ONLY THOSE CASES WHERE THE INCOME OF THE INDIAN COMPANY CONSTITUTED MORE THAN 75% OF THE CONSOLIDATED COMPANY-WIDE/ SEGMENTAL REVENUES; 8. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS BY UPHOLDING AO/ TPO ACTION OF ACCEPTING CERTAIN COMPANIES BASED ON UNREASONABLE COMPARABILITY CRITERIA; 9. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS BY UPHOLDING AO/ TPO ACTION OF REJECTING CERTAIN COMPANIES BASED ON UNREASONABLE COMPARABILITY CRITERIA; MARKETING SUPPORT SERVICES TRANSACTION 10. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FAC TS BY NOT PROVIDING ANY SPECIFIC ADJUDICATION AGAINST ANY OF THE GROUND S REGARDING MARKETING SUPPORT SERVICES TRANSACTION WHICH THE ASSESSEE WIS HES TO RAISE AS FOLLOWS: 10.1 THE LEARNED TPOI AD HAVE ERRED IN LAW AND IN FACTS BY NOT PROVIDING THE SEARCH STRATEGY FILTERS AND BASIS ON WHICH THE COMPARABLE COMPANIES WERE SELECTED BY TPO; 10.2 THE LEARNED TPO/ AD HAVE ERRED IN LAW AND IN FACTS BY SUO MOTO REJECTING CERTAIN COMPARABLE COMPANIES SELECTED BY THE TPO IN THE SHOW CAUSE NOTICE AGAINST WHICH THE APPELLANT DID NOT R AISE ANY OBJECTIONS FOR EXCLUSION; 10.3 THE LEARNED TPO/ AD HAVE ERRED IN LAW AND IN FACTS BY REJECTING COMPANIES SELECTED BY APPELLANT IN TP DOCUMENTATION BASED ON PAGE 4 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 UNREASONABLE COMPARABILITY CRITERIA AND WITHOUT PRO VIDING ANY RATIONALE JUSTIFICATION; 10.4 THE LEARNED TPO/ AD HAVE ERRED IN LAW AND IN FACTS BY NOT PROVIDING THE MARGIN COMPUTATION OF THE FINAL SET O F COMPARABLE COMPANIES SELECTED BY THE TPO IN THE TIP ORDER; 10 5 THE LEARNED TPO/ AO HAVE ERRED IN LAW AND IN FACTS BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFEREN CES IN THE WORKING CAPITAL OF THE APPELLANT VIS--VIS THE COMPARABLES WHILE THE BENEFIT OF WORKING CAPITAL ADJUSTMENT HAS BEEN PROVIDED FOR SO FTWARE 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 TH E 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 GROUND S IS INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. THE APPELLANT CRAVES LEAVE TO ADD ALTER AMEND VA RY 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'B LE 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(APP EALS) - 12 BANGALORE IS OPPOSED TO THE LAW AND NOT ON THE FAC TS AND CIRCUMSTANCES OF THE CASE. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE THE CIT(A) IS JUSTIFIED IN LAW IN DELETING THE ADDITION MADE ON ACCOUNT OF ADVERTISEMENT EXPENSES CONSIDERING NON-STPI UNIT OF THE ASSESSEE COMPANY RENDERED SERVICES EXCLUSIVELY TO NVDIA SING APORE AND NONE OF THE OTHER STPI UNITS HAD THE BENEFIT OF THOSE SERVI CES EVEN THOUGH THE ADVERTISEMENT IS MADE IN INDIA EXCLUSIVELY FOR THE PRODUCTS OF NVDJA SINGAPORE IN INDIA. HOWEVER ALL THE GROUP COMPANIE S MAY ALSO BE BENEFITTED DUE TO INCREASE IN POPULARITY OF THE BRA ND AND THE COMPANY THROUGH MARKETING. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE CIT(A) ERRED IN LAW IN DIRECTING THE ASSESSING OFFICER TO REDUCE TH E EXPENDITURE INCURRED IN TRAVEL TELECOMMUNICATION ETC BOTH FROM THE EXP ORT TURNOVER AS WELL AS THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION O F DEDUCTION U/S.10A OF THE IT ACT WITHOUT APPRECIATING THE FACT THAT THE S TATUE ALLOWS EXCLUSION OF SUCH EXPENDITURE ONLY FROM THE EXPORT TURNOVER BY W AY OF SPECIFIC DEFINITION OF EXPORT TURNOVER AS ENVISAGED BY SUB-C LAUSE(4) OF EXPLANATION 2 BELOW SUB-SECTION 8 OF SECTION BA. ON THE OTHER H AND THERE IS NO SPECIFIC PAGE 5 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 PROVISION IN SECTION BOA WARRANTING EXCLUSION OF AB OVE EXPENSES FROM TOTAL TURNOVER ALSO. 4. WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW THE HON'BLE CIT(A) WAS JUSTIFIED IN SEEKING EXACT COMPA RABILITY WHILE SEARCHING FOR COMPARABLE COMPANIES OF THE ASSESSEE UNDER TNMM METHOD WHEREAS REQUIREMENT OF LAW AND INTERNATIONAL JURISP RUDENCE REQUIRE SEEKING SIMILAR COMPARABLE COMPANIES. 5. WHETHER THE HON'BLE CIT(A) WAS RIGHT IN NOT ACCE PTING THE QUANTITATIVE FILTERS AND QUALITATIVE FILTERS OF THE TPO AND APPLIED FUNCTIONAL MATRIX WHICH IS NARROWER THAN THE FUNCTIONALITY MAT RIX ORIGINALLY USED BY TPO. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED UP ON THE ORDER OF THE CIT(A) MAY BE REVERSED AND THAT ASSESSMENT ORDE R BE RESTORED. 7. THE APPELLANT CRAVES LEAVE TO ADD ALTER AMEND OR DELETE ANY OTHER GROUNDS ON OR BEFORE HEARING OF THE APPEAL. BRIEF FACTS OF THE CASE ARE AS UNDER: 2. NVIDIA GRAPHICS PVT LTD IS A SUBSIDIARY OF NVIDI A INTERNATIONAL INC. US. THE ASSESSEE PROVIDES SOFTWARE DEVELOPMEN T SERVICES AND MARKETING SUPPORT SERVICES TO ITS ASSOCIATED EN TERPRISES ('AES'). THE ASSESSEE FILED ITS RETURN OF INCOME ON 25/10/2011 DECLARING TOTAL INCOME OF RS.4 53 97 517/- UNDER NO RMAL PROVISIONS OF THE ACT. THE RETURN OF INCOME WAS PRO CESSED UNDER SECTION 143(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 ENGAG ED IN BUSINESS OF SOFTWARE DEVELOPMENT. AS ASSESSEE ENTER ED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTER PRISE ISSUE WAS REFERRED TO LD.TPO UNDER SECTION 92CA OF THE ACT. O N RECEIPT OF REFERENCE LD.TPO ISSUED NOTICE TO ASSESSEE CALLING UPON TO FILE ECONOMIC DETAILS OF INTERNATIONAL TRANSACTION BETWE EN ASSESSEE AND AE IN FORM-3CEB. FROM DETAILS FILED BY ASSESSEE LD.AO OBSERVED THAT ASSESSEE HAD FOLLOWING INTERNATIONAL TRANSACTION WITH ITS AE: PAGE 6 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 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 SER VICE SEGMENT. IT WAS OBSERVED THAT ASSESSEE USED FOLLOWI NG 16 COMPARABLES WITH AN AVERAGE MARGIN OF 12.84%. ASSES SEE THUS HELD ITS TRANSACTION TO BE AT ARMS LENGTH PRICE. SI NO. COMPARABLE WEIGHTED AVERAGE MARGIN 1 EVOKE TECHNOLOGIES PRIVATE LTD 20.05% 2 LARSEN & TOUBRO INFOTECH LTD 18.19% 3 MINDTREE LTD (SEGMENTAL) 12.08% 4 R S SOFTWARE (INDIA) LTD 11.99% 5 SASKEN C OMMUNICATION TECHNOLOGIES LT D 22.79% 6 PERSISTENT SYSTEMS LTD 23.91% 7 AKSHAY SOFTWARE TECHNOLOGIES LTD 4.58% 8 ANCENT SOFTWARE INTERNATIONAL LTD 6.83% 9 AZTECSOFT LTD (CONSOLIDATED) 6.80% 10 CALIBER POINT BUSINESS SOLUTIONS LTD (SEGMENTAL) -0.95% 11 CAT TECHNOLOGIES LTD 26.90% 12 CG - VAK SOFTWARE & EXPORTS LT D (SEGMENTAL) 0.31% 13 GOLDSTONE TECHNOLOGIES LTD 3.70% 14 HELIOS & MATHES ON INFORMATION TECHNOLOGY LTD 17.22% 15 K P I T CUMMINS INFOSYSTEMS LTD (CONSOLIDATED) 12.53% 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 PAGE 7 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 16 LGS GLOBAL LTD 14.53% 17 MAVERIC SYSTEMS LTD 14.50% 18 QUINTEGRA SOLUTIONS LTD -0.29% 19 R SYSTEMS INTERNATIONAL LT D (SEGMENTAL) 12.10% 20 SAVEN TECHNOLOGIES LTD (CONSOLIDATED SEGMENTAL) 17.52% 21 THINKSOFT GLOBAL SERVICES LTD 11.54% 22 THIRDWARE SOLUTIONS LTD 21.75% 23 ZYLOG SYSTEMS LTD 16.64% ARITHMETIC MEAN 12.84% 2.3. IN RESPECT OF MARKETING SUPPORT SERVICE SEGMEN T ASSESSEE COMPUTED ITS MARGIN AT 8.74%. IT USED FOLLOWING 9 COMPARABLES WITH AVERAGE MARGIN OF 6.68%. ASSESSEE THUS HELD I TS TRANSACTION TO BE AT ARMS LENGTH. SI NO. COMPARABLE WEIGHTED AVERAGE OP/OC 1 I D C (INDIA) LT D 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 TECHNICA L & FINANCIAL CONSULTANTS LTD 9.53% 8 INHOUSE PRODUCTIONS LIMITED (SEGMENTAL) 4.25% 9 INMACS MANAGEMENT SERVICES LTD 17.22% ARITHMETIC MEAN 6.68% PAGE 8 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 2.4 LD.TPO DISSATISFIED WITH ECONOMIC ANALYSIS FIL ED BY ASSESSEE FOR BOTH SEGMENTS CONDUCTED FRESH SEARCH AND BY AP PLYING VARIOUS FILTERS REJECTED COMPARABLES SELECTED BY AS SESSEE. 2.4.1. FOR SOFTWARE DEVELOPMENT SEGMENT THE LD.TPO ARRIVED AT FOLLOWING SET OF FOLLOWING 13 COMPARABLES WITH AVER AGE MARGIN OF 24.82% . SI. NO. COMPARABLE OP/OC (UNADJUST ED) 1 LARSEN & TOUBRO INFOTECH LTD 19.83% 2 MINDTREE LTD (SEGMENTAL) 10.66% 3 PERSISTENT SYSTEMS LTD 22.84% 4 R S (SOFTWARE) INDIA LTD 16.37% 5 SASKEN COMMUNICATION TECHNOLOGIES LTD 24.13% 6 EVOKE TECHNOLOGIES PRIVATE LTD 8.11% 7 ACROPETAL TECHNOLOGIES LTD (SEGMENTAL) 31.98% 8 E-ZEST SOLUTIONS LTD 21.03% 9 E- INFOCHIPS LTD 56.44% 10 I C R A TECHNO ANALYTICS LIMITED 24.83% 11 INFOSYS LTD 43.39% 12 PERSISTENT SYSTEMS & SOLUTIONS LTD 22.12% 13 TATA ELXSI LTD (SEGMENTAL) 20.91% ARITHMETIC MEAN 24.82% 2.4.2. HE THUS PROPOSED AN ADJUSTMENT OF RS.22 37 1 5 272/- UNDER SWD SEGMENT BEING RS.1 65 11 013/- BEING SHOR TFALL. 2.4.3. FOR MARKETING SUPPORT SERVICES THE LD.TPO S HORTLISTED FOLLOWING COMPARABLES WITH AVERAGE MARGIN OF 18.25% . SI NO. COMPARABLE MARGIN (UNADJUSTED) ASIAN BUSINESS EXHIBITION & CONFERENCE LTD 19 51% PAGE 9 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 CYBER MEDIA RESEARCH LTD 10.59% ICC INTERNATIONAL AGENCIES LTD 24.66% ARITHMETIC 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 92C A OF THE ACT THE LD.AO PASSED DRAFT ASSESSMENT ORDER. IN THE DRA FT ASSESSMENT ORDER APART FROM TRANSFER PRICING ADJUST MENT 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 TURNOV ER. AS A RESULT THE LD.AO MADE AN ADDITION OF RS 1 22 93 68 4/- 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 T HE LD.AO DISALLOWED DEDUCTION U/S 10A OF RS.1 83 76 10 5/- 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 L D.CIT(A). THE LD.AO THUS PASSED THE FINAL ASSESSMENT ORDER U/S 14 3(3) R.W 144C OF THE ACT THEREBY COMPUTING TOTAL INCOME IN THE HANDS OF ASSESSEE AT RS.34 37 38 662/-. PAGE 10 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 4. AGGRIEVED BY THE ORDER OF LD.AO ASSESSEE PREFERR ED APPEAL BEFORE THE LD.CIT(A). 4.1. BEFORE THE LD.CIT(A) ASSESSEE FILED ITS OBJECT IONS IN RESPECT OF CERTAIN COMPARABLES FOR EXCLUSION. ASSESSEES ALSO S OUGHT FOR INCLUSION OF CERTAIN COMPARABLES. THE LD.CIT(A) REJ ECTED THE TATA ELXSI LTD (SEG.) AND INFOSYS TECHNOLOGIES LTD. COMPARABLES STATING THESE TO BE FUNCTIONALLY DIFFER ENT BY RELYING ON VARIOUS JUDICIAL PRECEDENTS AS SUBMITTED BY THE APPELLANT. 4.2. THE LD.CIT(A) DIRECTED THE LD.AO/TPO TO TREAT FOREIGN EXCHANGE FLUCTUATION AS OPERATING IN NATURE WHILE COMPUTING THE OPERATING MARGIN OF APPELLANT AS WELL AS THE CO MPARABLE COMPANIES AS IT HAD DIRECT NEXUS WITH THE BUSINESS OF THE ASSESSEES. 4.3. THE ASSESSEE HAD OBJECTED FOR THE ACTION OF TH E LD.TPO/AO IN NOT PROVIDING THE SEARCH STRATEGY FILTER BASIS FOR SELECTION OF COMPARABLES AND SUO MOTO REJECTION OF CERTAIN COMPA RABLES WITHOUT PROVIDING ANY RATIONALE/JUSTIFICATION. THE LD.CIT(A) DID NOT ADJUDICATE ON ANY OF MATTERS WITH RESPECT TO TH E MARKETING SUPPORT SERVICES SEGMENT. 0N CORPORATE TAX ISSUES : 4.4. THE LD.CIT(A) DIRECTED THE LD.AO TO REDUCE THE EXPENDITURE INCURRED ON TRAVEL AND COMMUNICATION BOTH FROM THE EXPORT TURNOVER AND TOTAL TURNOVER FOR THE PURPOSE OF COMP UTATION OF DEDUCTION U/S 10A OF THE IT ACT BY FOLLOWING THE DE CISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD. (349 ITR 98) PAGE 11 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 4.5. THE LD.CIT(A) DELEATED THE ADDITION MADE ON AC COUNT OF RE- ALLOCATION OF ADVERTISEMENT EXPENSES BY CONSIDERING THE ORDER OF THE COORDINATE BENCH OF THIS TRIBUNAL IN FAVOUR OF THE ASSESSEE IN ITS OWN CASE FOR THE AY 2009-10. 4.6. COMPARABLES THAT WERE FINALLY RETAINED POST LD .CIT(A) ORDER AS UNDER:- SI. NO . COMPARABLE MARGIN (UNADJUSTED ) MARGIN (ADJUSTED) 1 LARSEN & TOUBRO INFOTECH LTD 19.70% 18.93% 2 MINDTREE LIMITED (SEG) 10.66% 8.53% 3 PERSISTENT SYSTEMS LTD 22.84% 20.83% 4 R S (SOFTWARE) INDIA LTD 16.37% 15.46% 5 SASKEN C OMMUNICATION TECHNOLOGIES LTD 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 ASSESS EES AS WELL AS REVENUE ARE IN APPEAL BEFORE US. WE FIRST TAKE UP APPEAL FILED BY REVENUE. PAGE 12 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 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 ACTIVITIES WERE UNDERTAKEN BY NVIDIA INDIA FROM ITS STPI REGIS TERED UNITS AT BANGALORE PUNE AND HYDERABAD. THE STPI UNITS AR E NOT ENGAGED IN ANY SALES AND MARKETING ACTIVITIES. 5.3. HE SUBMITTED THAT THE NON - STPI UNIT AT BANGA LORE IS ENGAGED IN PROVIDING ONLY MARKETING SUPPORT SERVICE S TO ITS GROUP COMPANIES OVERSEAS. IN RESPECT OF THIS MARKETING SU PPORT ACTIVITY THE ASSESSEE HAS ENTERED INTO SERVICE REPRESENTATIV E AGREEMENT WITH ITS GROUP COMPANY NVIDIA SINGAPORE. THE MARKE TING SUPPORT SERVICES INCLUDE PROMOTION OF PRODUCTS OF N VIDIA SINGAPORE IN INDIA. THE MARKETING UNIT WAS COMPENSA TED AT COST PLUS 8% BY NVIDIA SINGAPORE. 5.4. THE LD.AR SUBMITTED THAT SEPARATE SET OF ACCO UNTS WERE MAINTAINED FOR STPI AND NON-STPI UNIT AND EXPENDITU RE PERTAINING TO EACH UNIT IS CLEARLY IDENTIFIABLE AND IS DEBITED TO RESPECTIVE UNIT. IT WAS ALSO SUBMITS THAT THERE IS A CLEAR DEMARCATION OF EXPENSES AND INCOME BETWEEN STPI UNI T AND NON STPI UNITS AS DISCLOSED IN FORM 56F. ADVERTISEMENT EXPENSES AMOUNTING TO RS.1 43 69 419/- HAVE BEEN SHOWN UNDER THE NON STPI UNIT. 5.5. THE LD.AR THUS SUBMITTED THAT THE LD.AO STILL MADE ADDITION TO THE TOTAL INCOME OF THE ASSESSEE AS A RESULT OF RE-ALLOCATION OF EXPENSES FROM THE NON-STPI UNIT TO THE STPI UNITS. PAGE 13 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 5.6. THE LD.AR SUBMITTED THAT THE COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR AY 2009-10 DELETED ID ENTICAL ADDITION MADE ON ACCOUNT OF RE-ALLOCATION OF EXPENS ES FROM THE NON-STPI TO THE STPI UNIT AS THEY WEW MADE WITHOUT ANY BASIS. THIS TRIBUNAL IN ASSESSEES OWN CASE HELD AS UNDER :- 43. WE HAVE HEARD THE RIVAL SUBMISSIONS. PERUSAL O F THE ORDER U/S. 92CA OF THE ACT SHOWS THAT THE ISSUE WIT H REGARD TO PROVISION OF MARKETING SUPPORT SERVICES BY THE BANGALORE NON- STP UNIT TO NVIDIA SINGAPORE WAS SUBJECT MATTER OF TP ANALYSIS MADE BY THE ASSESSEE. 44. THE TPO CONSIDERED THE ANALYSIS DONE BY ASSESSE E AND HELD AS FOLLOWS:- '2.4 IN RESPECT OF MARKETING SUPPORT SERVICES THE TAXPAYER HAS EARNED AN OPERATING PROFIT MARGIN OF 10.18%. IN THI S SEGMENT THE TAXPAYER CONSIDERED 15 COMPARABLES UNDER TNMIM. THE AVERAGE OPERATING PROFIT MARGIN OF THESE 15 COMPARABLES IS ARRIVED AT 10.7 1% ON COST BY CONSIDERING THE WEIGHTED AVERAGE BASED O N THE THREE YEARS DATA I.E. FY 2006-07 FY 2007-08 AND FY 2008 -09 WHEREVER AVAILABLE. THE OPERATING PROFIT TO TOTAL COST RATIO IS TAKEN AS THE PROFIT LEVEL INDICATOR (PL) IN TNMM ANALYSIS. THE TPO HAS MADE AN INDEPENDENT ANALYSIS OF THE INT ERNATIONAL TRANSACTIONS OF THE MARKETING SUPPORT SERVICES SEGM ENT BY COMPARING THE NET MARGINS UNDER TNMM. THE MEAN MARG IN OF THE COMPARABLES SHOWS A OPERATING PROFIT ON COST AT 10% (PLEASE SEE ANNEXURE - E). THE TAXPAYER'S MARGIN IS NOT LESS TH AN 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 NVIDI A SINGAPORE AND NONE OF THE OTHER STP-UNITS HAD THE BENEFIT OF THOS E SERVICES. THIS ASPECT HAS NOT BEEN CONSIDERED BY THE CIT(A) AT ALL. ON TH E OTHER HAND THE CIT(A) AS WELL AS THE AO PROCEEDED ON THE ASSUMPTIO N THAT NON-STP UNIT AS WELL AS STP UNITS IN INDIA WOULD BENEFIT FROM TH E ADVERTISEMENT DONE FOR NVIDIA SINGAPORE. IT IS SEEN THAT NVIDIA SINGAP ORE HAS ACKNOWLEDGED THAT SOFTWARE PRODUCTS AND ADVERTISEME NT IS ATTRIBUTABLE TO THOSE PRODUCTS. NON-STP UNITS OF ASSESSEE ARE EN GAGED IN SOFTWARE DEVELOPMENT ACTIVITIES AND DO NOT ENGAGE IN SALES O R MARKETING ACTIVITIES OR SOFTWARE PRODUCT. IN THESE CIRCUMSTANCES WE FIN D MERIT IN THE CONTENTION OF ASSESSEE THAT ADVERTISEMENT EXPENSES APPORTIONED BY THE AO AND CONFIRMED BY THE CIT(A) WAS WITHOUT ANY BASI S. THE SAID ADDITION IS ACCORDINGLY DIRECTED TO BE DELETED. GRO UND NO. 11 BY THE ASSESSEE IS ALLOWED. 5.7. REVENUE HAS NOT BEEN ABLE TO ESTABLISH ANY FAC TUAL DIFFERENCE IN THE YEAR UNDER CONSIDERATION WITH THAT OF AY 200 9-10. PAGE 14 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 RESPECTFULLY FOLLOWING THE SAME WE DO NOT FIND ANY INFIRMITY IN THE VIEW TAKEN BY THE LD.CIT(A). ACCORDINGLY THIS GRUOND RAISED BY REVENUE STANDS DI SMISSED. 6. GROUND NO.3 IS IN RESPECT OF REDUCING THE EXPENDITURE INCURRED IN TRAVEL TELECOMMUNICAITON ETC. FROM EXP ORT TURNOVER AND TOATL TURNOVER FOR COMPULTING DEDUCITON U/S 10A OF THE ACT. ADMITEDLY THIS ISSUE STANDS SETTLED BY HONBLE SUPREME COURT IN CASE OF HCL TECHNOLOGIES LTD. REPORTED IN (2018) 93 TAXMAN.COM 33 . 6.1. RESPECTFULLY FOLLOWING THE SAME WE DO NTO FIN D ANY INFIRMTIY IN THE VIEW TAKEN BY LD.CIT(A). ACCORDINGLY THIS GROUND RAISED BY REVENUE STANDS DI SMISSED. ASSESSEES APPEAL: 7. THOUGH THERE WERE SEVERAL GROUNDS RAISED BY THE ASSESSEE IN THE MODIFIED GROUNDS OF APPEAL AT THE TIME OF HEAR ING THE LD.AR PRESSED FOR ADJUDICATION OF GROUND NO.8 ONLY. FOLLO WING ISSUE HAS BEEN ALLEDGED IN GROUND 8. 8. THE LD.AR SUBMITTED THAT GROUND NOS.1-3 & 9 ARE GENERAL IN NATURE. THEREFORE THESE GROUNDS NEED NOT BE ADJU DICATED. 9. GROUND NO.4-7 ARE NOT PRESSED BY THE LD.AR. ACCORDINGLY THESE GROUNDS ARE DISMISSED AS NOT PRESSED. 10. GROUND NO.8 THE ASSESSEE SEEKS EXCLUSION OF FOLLOWING COMPARABL ES: ACROPETAL TECHNOLOGIES LTD. E-ZEST SOLUTIONS LTD. E-INFOCHIPS LTD. AND ICRA TECHNO ANALYTICS LTD. 10.1 BEFORE WE UNDERTAKE THE COMPARABILITY ANALYSIS IT IS SINE QUA NON TO UNDERSTAND THE FUNCTIONS PERFORMED ASSETS OWNE D AND THE RISKS ASSUMED BY THIS ASSESSEE. PAGE 15 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 FUNCTIONS: 10.2 AS PER THE MASTER SERVICE AGREEMENT IT HAS BEE N OBSERVED BY THE LD.TPO THAT ASSESSEE PROVIDES RESEARCH AND DEVE LOPMENT SERVICES TO ITS AE FROM ITS BANGALORE PUNE AND HYDR ABAD FACILITIES. IT IS ALSO BEEN OBSERVED THAT IT PROVID ES MARKETING SUPPORT SERVICES TO NVIDA SINGAPORE PTE LTD. THE LD .TPO OBSERVED THAT ASSESSEE IS COMPENSATED ON COST PLUS MARKUP BASIS FOR THE PROVISION OF RESEARCH AND DEVELOPMENT SERVICES TO NVIDA INTERNATIONAL AND MARKETING SUPPORT SERVICES PROVIDED TO NVIDA SINGAPORE. 10.3 THE LD.TPO NOTED THAT ASSESSEE UNDER SOFTWARE DEVELOPMENT ASSESSEE CARRIES OUT RESEARCH AND DEVEL OPMENT FOR ITS ASSOCIATED ENTERPRISES. FROM THE TRANS-APPRISIN G STUDY AT PAGE 871 OF PAPER BOOK WE NOTE THAT ASSESSEE PERFOR MS FUNCTIONS LIMITED TO PROJECT MANAGEMENT AND QUALITY CONTROL U NDER THE SUPERVISION OF ITS AES. IT DOES NOT UNDERTAKE ANY MARKETING ACTIVITY WITH RESPECT TO THE PRODUCTS THAT ARE DELI VERED TO THE CUSTOMER AND DOES NOT PERFORM THE CONCEPTUALISING A ND DESIGN OF THE PRODUCTS DELIVERABLE TO THE CUSTOMER ASSETS OWNED AT PAGE 877 OF THE PAPER BOOK WE NOTE THAT THE ASSE TS EMPLOYED BY ASSESSEE ARE TANGIBLE ASSETS BEING OFFICE EQUIPM ENT 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 E XCHANGE RISK. ASSESSEE HAS THUS BEEN CHARACTERISED TO BE A CONTRA CT SERVICE PROVIDER WHO IS COMPENSATED ON A COST +12% BASIS ON ALL COST PAGE 16 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 INCURRED BY IT IN PROVISION OF RESEARCH AND DEVELOP MENT 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 UNDERTAKE THE COMPARABILITY ANALYSIS OF ASSESSEE WITH ALLEGED COMPARABLES SOUGHT FOR EXCLUSION. 10.5 WE NOTE THAT UNDER SIMILAR CIRCUMSTANCES THIS TRIBUNAL IN CASE OF DCIT VS CGI INFORMATION SYSTEMS REPORTED IN [2018] 93 TAXMANN.COM 9 OBSERVED AS UNDER: 19. ACROPETAL TECHNOLOGIES LIMITED - AS FAR AS EXCLUSI ON OF THIS COMPANY AS A COMPARABLE COMPANY IS CONCERNED IT IS SEEN FROM THE DIRECTIONS OF THE DRP AT PARAGRAPH 2.7 AT PAGE-9 T HAT THIS COMPANY WAS EXCLUDED ON THE GROUNDS THAT: (I) THE SEGMENTAL INFORMATION CONTAINING THE BREAK-UP OF ITS EXPORT SALES AND EMP LOYEE COSTS WAS NOT AVAILABLE AND IT WAS NOT POSSIBLE TO ASCERTAIN IF I T PASSED THE EXPORT EARNINGS AND/OR EMPLOYEE COSTS FILTERS; AND (II) A SUBSTANTIAL PORTION OF ITS SOFTWARE DEVELOPMENT ACTIVITIES HAVE BEEN OUTSO URCED ON SUB- CONTRACT AND IT COULD THEREFORE NOT BE RETAINED A S A COMPARABLE. THE DRP IN DIRECTING EXCLUSION OF THIS COMPANY FOLLOWED DECISION OF HYDERBAD BENCH OF ITAT IN THE CASE OF CAPITAL IQ IN FORMATION SYSTEMS (INDIA) (P.) LTD. V. DY. CIT (INTERNATIONAL TAXATIO N) [2013] 32 TAXMANN.COM 21/57 SOT 14 (URO) (HYD. - TRIB.). THE DRP ALSO OBSERVED THAT THIS COMPANY WAS PREDOMINANTLY DOING ON-SITE DEVELOPMENT OF SOFTWARE AND THEREFORE CANNOT BE COM PARED WITH A COMPANY WHICH DEVELOPS SOFTWARE OFF-SHORE. ONE OF T HE FILTERS APPLIED BY THE TPO WAS THAT COMPANIES WHERE EMPLOYEE COSTS ARE LESS THAN 25% OF TURNOVER CANNOT BE REGARDED AS COMPARABLE. I N THE ABSENCE OF SEGMENTAL INFORMATION IT WAS NOT POSSIBLE TO ASCER TAIN AS TO WHETHER THIS COMPANY PASSES THE TEST ADOPTED BY THE TPO HIM SELF FOR COMPARISON. THE LEARNED DR SUBMITTED THAT THE REQUI RED DATA CAN BE CULLED OUT FROM THE INFORMATION AVAILABLE IN THE PU BLIC DOMAIN OR BY RESORTING TO A PROCESS OF CALLING FOR INFORMATION F ROM THIS COMPANY U/S.133(6) OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS REGARD POINTED OUT THAT THE HON'BLE DELHI HIGH COUR T REJECTED A SIMILAR ARGUMENT BY THE REVENUE IN THE CASE OF PR. CIT V. S AXO INDIA (P.) LTD. [2016] 74 TAXMANN.COM 88/243 TAXMAN 411/397 IT R 160. IN THE CIRCUMSTANCES THIS COMPANY WAS RIGHTLY HELD BY THE DRP TO BE NOT COMPARABLE. WE ARE OF THE VIEW THAT ONCE A COMPANY BECOMES NOT PAGE 17 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 COMPARABLE FOR THE REASON THAT SEGMENTAL INFORMATIO N TO APPLY FILTERS WE NEED NOT CONSIDER ANY OTHER ASPECT OF COMPARABIL ITY. THE LEARNED COUNSEL FOR THE ASSESSEE MADE SUBMISSIONS BEFORE US THAT THIS COMPANY WAS RIGHTLY DIRECTED TO BE EXCLUDED BY THE DRP ON THE ABOVE BASIS AND FURTHER CONTENDED THAT EVEN OTHERWISE TH IS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE. AS ALREADY STATED WE DO NOT WISH TO GO INTO THIS ASPECT AS THIS COMPANY GOES OU T OF COMPARABILITY ON OTHER REASONS. 10.6 FURTHER LD.AR ALLEGED THAT ACROPETAL IS FUNC TIONALLY NOT SIMILAR WITH A CONTRACT SERVICE PROVIDER LIKE ASSES SEE. 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 BE YOND 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 COO RDINATE 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- INFOCHIPS LTD IS EXCLUDED FOR FAILING IN SERVICE INCOME FILTER. 10.8 THE LD.CIT DR SUBMITTED THAT LD.TPO WHILE ANA LYSING COMPARABLES OBSERVED THAT THIS COMPANY HAS REVENUE FROM SOFTWARE DEVELOPMENT UP TO 88%. SUBMITTED THAT PER CONTRA DRP OBSERVES THAT REVENUE EARNED BY THIS COMPANY IS LES S THAN 75% PAGE 18 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 AND THEREFORE CANNOT BE INCLUDED. SHE SUBMITTED THA T BASIS OF DRP TO HOLD THAT REVENUE IS LESS THAN 75% HAS NOT B EEN DEMONSTRATED AND THEREFORE NEEDS TO BE RECONSIDERED . 10.9 WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH S IDES IN LIGHT OF RECORDS PLACED BEFORE US. 10.10 IT IS OBSERVED THAT THIS TRIBUNAL IN CASE OF AUTODESK INDIA PVT LTD. VS ACIT IN ITA(TP)A NO.156/BANG/2016 FOR ASSESSMENT YEAR 2011-12 VIDE ORDER DATED 21/12/18 EXCLUDED E- INFOCHIPS LTD. BY FOLLOWING VIEW TAKEN BY THIS TRIBUNAL IN CASE OF COMSCOP NETWORK (INDIA) PVT.LTD. LIMITED VS ITO IN IT (TP) A/BANG/2016 DATED 22/02/17 WHEREIN THIS COMPANY WAS EXCLUDED FOR REASON THAT THERE IS NO SEGMENTAL INFORMATION REGARDING D IVERSE FUNCTIONS PERFORMED BY THIS COMPANY AND THAT THERE WAS MAJOR FLUCTUATION IN ITS PROFITS WHICH INFLUENCED TURNO VER OF THIS COMPANY. WE ALSO NOTE THAT THIS TRIBUNAL IN CASE OF DCIT VS CGI INFORMATION SYSTEMS (SUPRA) HAD ENCOUNTERED WITH AN IDENTICAL SITUATION FOR YEAR UNDER CONSIDERATION. THIS TRIBUN AL OBSERVED AS UNDER: 24. AS FAR AS GROUND NO. 4 RAISED BY REVENUE IS CONCER NED THE SAID GROUND OF APPEAL IS WEAK AND ANY EVENT COMPARABILIT Y OF COMPANIES THAT WERE EXCLUDED BY THE DRP WERE ON VALID GROUNDS CONTEMPLATED BY THE RELEVANT STATUTORY PROVISIONS OF THE ACT AND RULES. AS FAR AS GROUND NO. 5 IN REVENUES APPEAL IS CONCERNED THE REVENUE SEEKS TO CHALLENGE THE EXCLUSION OF E INFOTECH LTD. ON THE G ROUND THAT IT FAILED DIRECT SOFTWARE SERVICE INCOME FILTER AT 75%. AT TH E OUTSET THE ASSESSEE SUBMITS THAT E INFOTECH LTD WAS EXCLUDED B Y THE DRP ON THE GROUND THAT: (I) NO SEGMENTAL INFORMATION IS REGARD ING ITS DIVERSE FUNCTIONS IS AVAILABLE; (II) IT FAILED THE SOFTWARE SERVICE INCOME FILTER AND 75%; (III) THERE WERE MAJOR FLUCTUATIONS IN PRO FIT AND TURNOVER EVERY YEARS WHICH SEEMS TO BE INFLUENCED BY EXTRAOR DINARY/PECULIAR CIRCUMSTANCES; AND (IV) THERE IS A PRESENCE OF INVE NTORY (PAGE 10 AND 11 OF THE DRPS DIRECTIONS). THE REVENUE IN ITS AP PEAL HAS CHALLENGED ITS EXCLUSION ONLY ON THE 2 ND GROUND. IN OTHER WORDS THE REVENUE HAS NOT CHALLENGED ITS EXCLUSION ON THE OTHER GROUNDS S TATED HEREINABOVE AND THUS ITS EXCLUSION ON THESE GROUNDS HAVE ATTAIN ED FINALITY AND PAGE 19 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 CANNOT BE DISTURBED BY THIS HONBLE TRIBUNAL. EVEN OTHERWISE WE ARE OF THE VIEW THAT THE DRP RIGHTLY ARRIVED AT THE FIN DING THAT COMPANIES SOFTWARE DEVELOPMENT SERVICE REVENUE FOR FY 2010-11 WAS LESS THAN 75% OF ITS TOTAL OPERATING REVENUE FOR THE YEAR. TH US 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 BEIN G 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. (SUPR A) 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 THAT IT IS INTO DIVERSIFIED ACTIVITY AND NO SEGMENT AL DETAILS ARE AVAILABLE. IN RESPECT OF E-ZHEST SOLUTIONS LTD. LD.CIT DR SUBMITTED THAT DRP EXCLUDED THEM FOR FUNCTIONALLY N OT COMPARABLE. HE SUBMITTED SUPPORTING ORDER OF LD.TPO THAT THEY ARE PREDOMINANTLY INTO SOFTWARE DEVELOPMENT. 10.14 THE LD.CIT.DR THUS SUBMITTED THAT THESE COMPARABLES ARE INTO SWD AND IS FUNCTIONALLY SIMILA R WITH ASSESSEE AND DESERVES TO BE INCLUDED. 10.15 ON THE CONTRARY LD.AR RELIED ON DECISIONS OF COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF APPLIED MATERIAL INDIA PVT.LTD (SUPRA) IS FOLLOWED IN PLETHORA OF OTHER DECISIONS OF THI S PAGE 20 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 TRIBUNAL FOR EXCLUSION OF THESE COMPARABLES. HE SUBMITTED T HAT ALL THESE COMPARABLES HAVE BEEN EXCLUDED FROM DCIT VS. LSI INDIA RESEARCH PVT.LTD REPORTED IN (2017) 83 TAXMANN.COM 357 FOR ASSESSMENT YEAR 2011-12 BEING THE TRANSFEREE COMPA NY AS UNDER: 9. NOW WE DECIDE ABOUT THE REMAINING SIX COMPARABLES EXCLUDED BY THE DRP AND OTHER FOUR COMPARABLES RETAINED BY THE DRP FOR WHICH THE ASSESSEE IS SEEKING EXCLUSION. WE FIND THAT OUT OF THESE SIX CO MPARABLES EXCLUDED BY THE DRP ONE COMPARABLE I.E. ICRA TECHNO ANALYTICS LTD. IS HAVING RPT IN EXCESS OF 15% AND THEREFORE FOR THIS REASON ALONE THIS CO MPANY HAS TO BE EXCLUDED ALTHOUGH THE DRP HAS EXCLUDED IT FOR A DIFFERENT R EASON THAT IT IS HAVING VARIOUS ACTIVITIES AND THE SEGMENTAL DATA ARE NOT A VAILABLE. WE HOLD THIS EXCLUSION ON ACCOUNT OF RPT FILTER. IN FACT WE FIN D THAT PARA-8 & 9 OF THE TRIBUNAL ORDER RENDERED IN THE CASE COMMSCOPE NETWO RKS (INDIA) (P.) LTD. (SUPRA) IS RELEVANT IN RESPECT OF INCLUSION/EX CLUSION OF NINE COMPANIES DIRECTED TO BE EXCLUDED BY DRP AND ALSO IN RESPECT OF EXCLUSION OF FOUR COMPANIES WHICH WERE RETAINED BY DRP BUT IT WAS THE CONTENTION OF THE ASSESSEE FOR EXCLUSION THEREOF. WE THEREFORE RE-PR ODUCE PARA-8 & 9 OF THE TRIBUNAL ORDER FOR THE SAKE OF READY REFERENCE; '8. WE DECIDE THE ISSUE OF VARIOUS EXCLUSIONS AND INCLU SIONS IN THESE CROSS APPEALS. REGARDING INCLUSION OF 3 COMPARABLES OUT O F 9 COMPARABLES EXC LUDED BY DRP WE FIND THAT WHEN BOTH SIDES ARE SEEK ING INCLUSION OF THESE 3 COMPARABLES BEING 1 (EVOKE TECHNOLOGIES PVT LTD. 2) MINDTREE LTD. (SEG) AND 3) R S SOFTWARE (INDIA) LTD. AND THE IR INCLUSION IS PROPER AS PER THE TRIBUNAL ORDER RENDERED IN THE CASE OF APPL IED MATERIALS INDIA PVT. LTD. V. ACIT AS REPORTED IN TS-815- ITAT - 2016 WE REVERSE THE ORDER; 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 EXC LUDED BY DRP AND 4 COMPARABLES RETAINED BY DRP BUT FOR WHICH THE ASS ESSEE IS SEEKING EXCLUSION. OUT OF THESE 6 COMPARABLES EXCLUDED BY D RP ONE COMPARABLE ICRA TECHNO ANALYTICS LTD. IS HAVING RPT IN EXCESS OF 15% AND THEREFORE FOR THIS REASON ALONE THIS COMPARABLE HAS TO BE EX CLUDED ALTHOUGH DRP HAS EXCLUDED IT FOR A DIFFERENT REASON THAT IT IS H AVING 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 TRIBU NAL ORDER RENDERED IN THE CASE OF APPLIED MATERIALS INDIA PVT. LTD. V. AC IT (SUPRA ). RESPECTFULLY FOLLOWING THE SAME WE UPHOLD ITS EXCLUSION. EXCLUS ION 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 PAGE 21 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 COVERED IN FAVOUR OF THE ASSESSE E BY THE SAME TRIBUNAL ORDER RENDERED IN THE CASE OF APPLIED MATERIALS INDIA PVT. LTD. V. AC IT (SUPRA ). RESPECTFULLY FOLLOWING THE SAME WE UPHOLD THE EXCLUSION OF THES E SEVEN COMPARABLES ALSO. EXCLUSION OF E - INFOCHIPS LTD. IS COVERED IN FAVOUR OF THE AS SESSEE BY THE TRIBUNAL ORDER RENDERED IN THE CASE OF SAXO INDIA PVT. LTD. V. ACIT IN ITA NO 6148/DEL/2015 DATED 05.02.2016 PARA 10.1 & 10.2 AVAILABLE AT PAGES 221 TO 223. RESPECTFULLY FO LLOWING THE SAME WE UPHOLD ITS EXCLUSION. IN THIS MANNER WE UPHOLD THE EXCLUSION OF SIX COMPARABLES EXCLUDED BY DRP OUT OF 9 COMPARABLES EX CLUDED BY DRP AND EXCLUDE 4 COMPARABLES RETAINED BY DRP AND WE HA VE ALREADY HELD THAT OUT OF 9 COMPARABLES EXCLUDED BY DRP 3 HAVE T O COME BACK BEING 1.) EVOKE TECHNOLOGIES PVT LTD. 2) MINDTREE LTD. (SEG) AND 3) R S SOFTWARE (INDIA) LTD. NOW WE DECIDE ABOUT LGS GLOB AL LTD. AS PER THE TRIBUNAL ORDER RENDERED IN THE CASE OF APPLIED MATE RIALS INDIA PVT. LTD. V. ACIT (SUPRA ) THIS IS A GOOD COMPARABLE AND THEREFORE WE DIRE CT THE A.O. AN D TPO TO INCLUDE THIS COMPARABLE. SO THERE SHOULD BE 4 COMPARABLES IN THE FINAL LIST OF COMPARABLE AND ON THE BASIS OF THAT THE AO/TPO SHOULD WORK OUT THE ALP'. 10. AS PER THE ABOVE TWO PARAS REPRODUCED FROM THE OR DER OF THE TRIBUNAL RENDERED IN THE CASE COMMSCOPE NETWORKS (INDIA) (P. ) LTD. (SUPRA) WE FIND THAT IN THAT CASE THE TRIBUNAL HELD THAT OUT OF 9 COMPARABLES EXCLUDED BY DRP 3 HAVE TO COME BACK BEING 1) EVOKE TECHNOLOGIE S PVT. LTD. 2) MINDTREE LTD. (SEG) AND 3) R S SOFTWARE (INDIA) LTD . OUT OF REMAINING 10 COMPARABLE COMPANIES SELECTED BY TPO THE TRIBUNAL IN THAT CASE EXCLUDED. 9 COMPANIES BEING 1) ICRA TECHNO ANALYTICS LTD. 2) ACROPETAL TECHNOLOGIES LTD. (SEG) 3) E - ZEST SOLUTIONS LTD. 4) INFOSYS LTD. 5) LARSEN & TOUBRO INFOTECH LTD. 6) PERSISTENT SYSTEMS & SOL UTIONS LTD. 7) PERSISTENT SYSTEMS LTD. 8) SASKEN COMMUNICATION TE CHNOLOGIES LTD AND 9) TATA ELXSI LTD. HENCE IN THAT CASE ONLY FOUR C OMPANIES WERE LEFT IN THE FINAL LIST OF COMPARABLES BEING J) 1) EVOKE TECHNOL OGIES PVT. LTD. 2) MINDTREE LTD. (SEG) AND 3) R S SOFTWARE (INDIA) LTD . AND 4) LARSEN & TOUBRO INFOTECH LTD. 10.16 FROM THE ABOVE IT IS OBSERVED THAT ICRA TECH NO ANALYTICS LTD. E-ZHEST SOLUTIONS LTD. HAVE BEEN CO NSISTENTLY EXCLUDED BY THIS TRIBUNAL IN CASE OF A CAPTIVE SERVICE PROVIDER LIKE ASSESSEE. FURTHER LD.CIT.DR COULD NOT ESTABLISH ANY THING 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. PAGE 22 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS WE DIRECT EXCLUSION OF ICRA TECHNO ANALYTICAL LTD. AND E-ZHE ST SOLUTIONS LTD. 11. GROUND 10: THE ASSESSEE SEEKS EXCLUSION OF CERTAIN COMPARABLES UNDER MARKETING SUPPORT SERVICE SEGMENT . IT HAS BEEN SUBMITTED THAT THIS GROUND HAS NOT BEEN ADJUDI CATED BY THE LD.CIT(A) THOUGH THE SAME WAS RAISED. WE THEREFORE DIRECT WE THEREFORE REMAND THIS ISSUES BACK TO THE LD.CIT(A). LD.CIT(A) IS DIRECTED TO PASS A DETAILED ORDER AFTER CONSIDERING THE SUBMISSIONS ADVANCED BY ASSESSEE IN THE LIGHT OF EV IDENCES FILED IN ACCORDANCE WITH LAW. ACCORDINGLY THESE GROUNDS RAISED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. IN THE RESULT APPEAL FILED BY REVENUE STANDS DISMIS SED AND APPEAL FILED BY ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST AUG 2021 SD/- SD/- (B. R. BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL ME MBER BANGALORE DATED THE 31 ST AUG 2021. /VMS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE PAGE 23 OF 23 ITA NO.736 & IT(TP)A NO.801/BANG/2017 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR -08-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER -08-2021 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. -08-2021 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS -08-2021 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -08-2021 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -08-2021 SR.PS 8. IF NOT UPLOADED FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -08-2021 SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER. 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS