TMI Blog2019 (2) TMI 2022X X X X Extracts X X X X X X X X Extracts X X X X ..... that the company s operations predominantly relate to providing systems integration and software development services in the information technology field. So, all these facts go to prove that Tata Elxsi is functionally dissimilar vis- -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) - We are of the considered view that E-Infochips being a product and semiconductor engineering services 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- -vis the taxpayer, hence ordered to be excluded. INFINITE DATA SYSTEMS PVT. LTD. (INFINITE) - We are of the considered view that Infinite is functionally dissimilar vis- -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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2010-11 on the grounds inter alia that :- Transfer Pricing 1. On the facts and in law, the learned Transfer Pricing Officer (hereinafter referred to as 'Ld. TPO'), the learned Assessing Officer (hereinafter referred to as 'Ld. AO') and the Hon'ble Dispute Resolution Panel ('DRP') have erred in making an adjustment of ₹ 64,734,446 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&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for computing the interest on overdue receivables from its AEs. 15. On facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in grossly misinterpreting the requirement of 'contemporaneous' data in the Rule 10B(4) by necessarily using current year data (i.e. financial year 2009-10), thereby breaching the principles of natural justice and impossibility 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 consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Associated Enterprises (AEs) by the taxpayer and proposed the total adjustment of ₹ 9,76,08,271/- on account of transfer pricing adjustment. 5. The taxpayer carried the matter before the ld. DRP by way of filing objections who has ordered to exclude one comparable, namely, Infosys Limited, from the final set of comparables, by partly allowing the objections made by the ld. TPO. 6. In compliance to the order passed by the TPO/DRP, AO framed the assessment u/s 143 (3) read with section 144 of the Act at an income of ₹ 21,41,72,020/- by making addition on account of transfer pricing adjustment of ₹ 8,83,67,496/- and by making addition of ₹ 135/- and ₹ 9,336/- on account of find penalty and business expenditure respectively. 7. Feeling aggrieved, the taxpayer 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited . TPO also proposed adjustment of ₹ 2,36,33,050/- on account of receivables due from the AEs by the taxpayer which has not been disturbed by the ld. DRP. 11. The ld. AR for the taxpayer in order to compress the controversy had sought exclusion of 5 comparables viz. (i) Persistent Systems Ltd., (ii) Tata Elxsi Ltd., (iii) E-Infochips Bangalore Ltd., (iv) Infinite Data Systems Pvt. Ltd. (v) Zylog Systems Ltd. and also disputed ALP determined by ld. TPO/DRP on receivables. We would dispose of the issues ground-wise as under. GROUND NO.1 12. Ground No.1 being general in nature needs no adjudication. GROUNDS NO.5, 8, 9, 10, 11, 12, 15, 16, 17 13. Grounds No.5, 8, 9, 10, 11, 12, 15, 16 17 are dismissed having not been pressed during the course of arguments. GROUND NO.18 14. Ground No.18 being premature needs no specific findings TRANSFER PRICING GROUNDS GROUNDS NO.2, 3, 4, 6 7 15. Comparability of aforesaid companies viz. (i) Persistent Systems Ltd., (ii) Tata Elxsi Ltd., (iii) E-Infochips Bangalore Ltd., (iv) Infinite Data Systems Pvt. Ltd. (v) Zylog Systems Ltd., vis- -vis taxpayer for benchmarking the interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sualization, high performance computing, storage and strategic partnerships with world-leading technology providers. 19. Perusal of the Director s Report, available at pages 490 491 of the paper book, shows that Tata Elxsi s IP related sale saw good traction during the year especially in the broadband wireless area and the company has developed IP related to Wimax and is already working on development of IP and reference designs for LTE, which is an upcoming standard for 4G wireless. 20. Software development and services segment constitutes Product Design Services (Design Development of Hardware and Software), Innovation Design Engineering (Mechanical Design with a focus on Industrial Design) and Visual Computing Labs Division (Animation and Special Effects). 21. Ld. DR for the Revenue, to retain Tata Elxsi as a valid comparable, contended that in the earlier year, Tata Elxsi was excluded on the ground that it was into product but there is no sale of product. It is also contended that taxpayer is also designing IP. 22. However, we are of the considered view that the taxpayer is not the owner of IP which is a captive software development service provider whereas, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E-Infochips Bangalore Ltd. 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11 Annual Report Income Income from Software Services 240,278,099 148,676,474 430,466,481 451,181,724 Variation in Stock of Finished Goods 1,790,766 604,113 - - Other Income 27,878 643 23,323 - Total Income 242,096,743 149,281,230 430,489,804 451,181,724 Expenditure Software Development Expenses 122,517,471 130,050,892 206,674,788 297,136,212 Raw Material Consumed 4,683,651 1,464,005 - - Administrative Expenses 44,184,354 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 by the taxpayer before the ld. DRP, as is evident from page 293 of the paper book, but it has not controverted the functional dissimilarity pointed out by the taxpayer. 30. As per revenue recognition given in annual report at page 82 of the annual report paper book, it is mentioned that Infinite primarily derived its revenue from technical support and infrastructure management services. Moreover, it is a single customer company operating on Build, Operate and Transfer business model. 31. Infinite has already been ordered to be excluded from the final set of comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, we are of the considered view that Infinite is functionally dissimilar vis- -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- -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; having significant AMP spent; it incurred R D expenses. When we examine annual report of the Zylog under the head Our Strengths it shows that Zylog offered a value to their customers and marked place through value added Research Development, Product Enginee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxpayer. CORPORATE TAX GROUND NO.19 37. AO/DRP had disallowed severance cost of ₹ 6,67,62,386/- incurred by the taxpayer during the financial year 2008-09 also. Identical issue has undisputedly been set aside to AO by the coordinate Bench of the Tribunal qua AY 2008-09by returning following findings :- 11. We have heard both the parties and perused all the relevant documents. It is pertinent to note that the assessee company made payment of the severance cost during the Financial Year 2008-09. However, as per the letter dated 06.03.2009 produced by the Assessee it was seen that the employee's were to be relieved from service on 30.04.2009. Therefore, the liability to pay the severance/ notice pay etc. accrued to the assessee company in A.Y. 2010-11 as per the version of the Assessing Officer. From the records and from the Assessment Order it is not clear as to when the severance cost has been crystallized. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Thus, Ground No. 18 of assessee's ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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