TMI Blog2016 (9) TMI 1483X X X X Extracts X X X X X X X X Extracts X X X X ..... TPI) unit as ₹ 297,319,880/- instead of ₹ 181,072,777/- - Held that:- We direct the TPO to correct the error which has crept in while computing deduction u/s 10A and take the profit of software unit at ₹ 181,072,777/- Market risk adjustment - Held that:- As decided in INTELLINET TECHNOLOGIES INDIA (P.) LTD. VERSUS INCOME-TAX OFFICER, WARD-11(2), BANGALORE [2012 (6) TMI 237 - ITAT BANGALORE] in principle, risk adjustment must be granted, if warranted in the facts of the case, for bringing the comparables on par with the assessee company. Following the above decision and of the co-ordinate bench (supra), we also hold that in principle, the assessee may be granted risk adjustment, if so required in the peculiar facts of the case for bringing the comparable companies on par with the assessee. However, the quantum of risk adjustment to be granted, if any, is remanded back to the file of the TPO. The TPO is directed to examine the details of the quantitative computation of risk adjustment and attendant details submitted by the assessee justifying its claim for risk adjustment and to take into account the same along with all the relevant material before deciding on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Aggrieved, the assessee is in appeal before us. 8. The assessee has filed the following grounds of appeal. 1. The learned Dispute Resolution Panel ( DRP ) and the learned Director of Income Tax (Transfer Pricing IV), Bangalore ( Transfer Pricing Officer or TPO ) grossly erred in law and facts of the case in determining the arm s length price ( ALP ) of the international transaction of the appellant of ₹ 1,590,777,300/- received on account of provision of software development services and proposing a transfer pricing adjustment of ₹ 229,813,929/-. 2. That on the facts and circumstances of the case, the learned DRP erred in upholding the rejection of transfer Pricing ( TP ) documentation by the learned TPO without appreciating the contentions, arguments, and evidentiary data put forward by the Appellant during the course of the proceedings before them, and in doing so have grossly erred: in rejecting Cost Plus Method as the most appropriate method and accepting Transactional Net Margin Method as the most appropriate method. in upholding the rejection of comparability analysis carried in the TP documentation and conducting a fresh comparabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned TPO in accepting companies engaged in the provision of software product development like Megasoft Limited, Flextronics Software Systems Limited, KALS Information Systems Limited, Avani Cimcon Technologies Limited, Lucid Software Limited, Ishir Infotech Limited, E-zest Solutions Limited, Persistent Systems Limited and R Systems International Limited which are functionally not comparable to the assessee s business. 2.12 In accepting Accel Transmatics Limited as a comparable company even though the company had sold its intellectual property and earned income from royalty. 2.13 In upholding the actions of the learned TPO in accepting Celestial Labs Limited as a comparable company eventhough it is a contract research company which also engaged in bio-informatics and hence functionally dissimilar to the assessee. 2.14 In upholding the actions of the learned TPO in accepting companies like Megasoft Limited, Flextronics Software Systems Limited and Helios Matheson Information Technology Limited which have abnormal/fluctuating profit margins. In doing so the learned DRP have disregarded the various jurisdictional ITAT rulings in case of SAP LABS India Pvt Ltd. Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are required to be withheld at source on payments made to non-residents. 7.3 The learned AO erred in not appreciating that the Honorable Supreme Court in the assessee s own case for the assessment years 2000-01 and 2001-02, vide order dated 9th September, 2010, has set aside the order of the Karnataka High Court (supra) and requested the High Court to decide the case on merits. 7.4 The learned AO erred in not observing that since the Honorable Supreme Court (supra) has set aside the order of the Karnataka High Court (supra), the decision of the Honorable Incometax Appellate Tribunal in the assessee s own case for the assessment years 2000-01 and 2001- 02, wherein it has been held that the amount paid by the appellant to its parent company was not in the nature of royalty and no tax was required to be deducted at source, would continue to hold good. 7.5 The learned AO ought to have appreciated that the EDA software licenses are purchased by Infineon Technologies AG Germany, the ultimate parent company of the appellant, from the vendors as a standard off-the-shelf product and are not transferred to the appellant company. The appellant company only uses the licenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmunication, freight and insurance expenses are reduced from the export turnover then the same would also have to be reduced from the total turnover in order to compute the deduction under section 10A. Further, recently the High Court of Karnataka has decided the matter in favour of the assessee in the case of Honeywell Technologies Solutions Lab Pvt.Ltd. (ITA No.820 of 2009). 8.6 The learned AO erred in computing deduction under section 10A by erroneously considering the profits of the software (STPI) unit as ₹ 297,319,880/- instead of ₹ 181,072,777/- thereby resulting in a lower deduction under section 10A. 9. Interest 9.1 The learned AO erred in levying interest of ₹ 48,314,743/- under section 234B of the Act. The Appellant submits that the levy of interst is consequential in nature. The appellant craves to leave/to add to/to alter/to amend/to rescind/to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal. 9. The TPO adopted TNMM method. The segmental details pertaining to software development service and BPO services are as under:- Parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006 and 21.11% in 2007; 4.Revenue from the software services is 27.60% of the total operating revenue ch which is much less than the 75% threshold. 2. Avani Cimcon Techno-logies Ltd Functionally dissimilar 3. Celestial Labs Ltd Functionally dissimilar 4. E Zest Solutions Ltd., Functionally dissimilar 5. Flextronics Software Systems Ltd (Segment) Functionally dissimilar 6 Helios Matheson Information Technology Ltd., 1.Functionally dissimilar 2. Abnormal Margin fluctuations 7. Infosys Limited 1. Functionally dissimilar 2. Presence of Brand 3. High Margin and 4. Industry leader large economies of scale 8. Ishir Infotech Ltd Functionally dissimilar 9. KALS Information Systems Limited Functionally dissimilar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Mindtree Consulting Limited 7. Quintegra Solutions Ltd 8. RS Software (India) Ltd 9. Sasken Communications Limited (Segment) 10. SIP Technologies Exports Limited 16. Thus, we direct the TPO to reject the 15 companies as stated above in para 11, accept the 10 companies as stated in para 15 and reject 1 company (Thirdware Solution Ltd.,) as stated in para 14 and rework the ALP of the assessee. 17. With respect to the remaining grounds of appeal filed, the following observations are to be taken into account. 18. Ground No. 1, 2 are general. 19. Ground No.2.1 to 2.4 conceptual. 20. Ground No.2.2 to 2.8 and 2.15 to 2.16, 3, 4, 5 and 6 are not pressed. 21. Ground No. 7 to 7.6 are with respect to corporate tax disallowance of project specific costs amounting to ₹ 158,395,739 u/s 40(a)(ia) of the Act. 22. This issue is covered by the decision of the tribunal in the assessee s own case in ITA No.1670/Bang/2012, wherein it has been held as under:- 10.1 This Ground is in respect of the disallowance of project specific costs amounting ₹ 11,25,95,270 u/s 40(a)(i) of the Act. In the course of assessment proceedings, the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt in while computing deduction u/s 10A and take the profit of software unit at ₹ 181,072,777/- 28. Additional ground Nos.5.1 and 6.1 are as under: Ground 5.1 Market risk adjustment The appellant submits that the Hon ble DRP members and learned AO ought to have granted market risk adjustment to the appellant: * The Hon ble DRP members and the learned AO have grossly erred in accepting the learned TPO s rejection of market risk adjustment submitted by the appellant. * The Hon ble DRP and the learned AO have erred in not appreciating the difference in the functional profile that exists between the appellant who functions in the role of a captive service provider vis-avis the independent unrelated comparable companies who operate in the capacity of entrepreneurial entities. * The Hon ble DRP members and the learned AO erred in concluding that the market risk adjustment will be nullified against the existence of single customer and political risks. Ground No.6.1 - Depreciation Adjustment The appellant submits that it should be granted Depreciation adjustment. * The depreciation cost as a percentage of the cost of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al before deciding on the percentage of risk adjustment to be allowed, if any, in accordance with law. It is ordered accordingly. Consequently, Ground Nos.3 4 are treated as allowed for statistical purposes. 30. We direct the Assessing Officer to follow the above order in assessee s own case (Supra) and rework the Market risk adjustment. 31. With respect to depreciation adjustment allowance of depreciation adjustment, the learned counsel for the assessee relied on the decision of tribunal in the assessee s own case (supra) for the asst. year 2008-09. 19.2 The assessee in the grounds raised sought adjustment towards depreciation on the ground that the depreciation cost as a percentage of the gross block of the assessee was 25% as against 10% for the comparable and hence this difference needs to be adjusted for comparability. During the proceedings, on being specifically asked, the learned counsel for the assessee stated that this ground was not raised before the TPO and CIT (Appeals) but prayed that the same be admitted for adjudication as it was a legal issue. 19.3 The learned Departmental Representative submitted that he has, prima facie, no objection to admiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence in depreciation is due to any reason like capacity utilization, etc. The difference in depreciation could be due to many reasons as different companies have their own accounting problems in the matter of fixed assets and depreciation on the basis of technical estimates made of useful life of the assets. Depreciation provided under the Income Tax Rules or the minimum depreciation provided under the Companies Act may not be really exhibiting the actual position. Over a period of time, the difference of depreciation provided under different methods would almost be the same except for marginal difference. In the written down value (WDV) method, the depreciation for the initial year would be more, whereas in straight line method, depreciation in the initial years would be less. However, at the end of the day, the depreciation off sets each by itself. 19.8 In the interest of equity and natural justice, we feel constrained to admit the additional ground raised by the assessee on the issue of depreciation. However, mere claim for an adjustment will serve no purpose unless it is backed by proper details. The additional ground states that the depreciation of the assessee is a rat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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