Income Tax Appellate Tribunal - Bangalore
Sandisk India Device Design Centre ... vs Deputy Commissioner Of Income Tax, ... on 9 May, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH : BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
M.P. No. 5/Bang/2024
(in IT(TP)A No. 301/Bang/2022)
Assessment Year : 2017-18
M/s. SanDisk India
Device Design Centre
Pvt. Ltd.,
Survey No. 143/1,
Amani Bellandur
The Deputy
Khane Village,
Commissioner
Prestige Excelsior,
of Income Tax,
Prestige Tech Park,
Circle 6 (1)(1),
Marathalli - Sarjapur
Vs. Bangalore.
Outer Ring Road,
Kadubeesanahalli,
Varthur Hobli,
Bangalore - 560 103.
PAN: AAICS9204M
APPELLANT RESPONDENT
Assessee by : Shri Nikhil K.P, CA
Shri Muthu Shankar,
Revenue by :
Addl. CIT -DR
Date of Hearing : 19-04-2024
Date of Pronouncement : 09-05-2024
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present miscellaneous petition has been filed by the assessee against the order of this Tribunal dated 13.10.2023 passed in IT(TP)A No. 301/Bang/2022 for A.Y. 2017-18.
Page 2 M.P. No. 5/Bang/2024 (in IT(TP)A No. 301/Bang/2022)
2. In para 2 - 3 of the miscellaneous Petition, the assessee submitted as under:
"2. Ground No. 16.3:
16.3 The Hon'ble DRP erred in upholding the action of the Ld. TPO/NFAC in excluding informed Technologies Limited on the basis that there is no documentation and basis for selection of the said comparable, without considering the fact that the said comparable was rejected on account of failing service income filter of 75% applied by the Ld. TPO:
a. The Appellant vide Ground No. 16.3 of its appeal raised its contention against exclusion of Informed Technologies Limited, on the basis that it does not fail the services income filter of 50% as applied by the Appellant. Further the said comparable was rejected by the Ld. TPO on account of failing the services income filter of 75% applied by the Ld. TPO, however, the Hon'ble DRP has excluded the said comparable on the basis that there is no documentation and basis for selection of the said comparable.
b. The Hon'ble Tribunal in its order has stated that Informed Technologies Limited was excluded by the Ld. TPO as there was no documentation and that this comparable was failing the service income filter of more than 75%.
c. The Hon'ble Tribunal has also instructed the Ld. TPO to verify the annual reports and consider the filters applied by the Ld. TPO for verification, in order to consider the said comparable for inclusion in the final set.
d. While the Hon'ble Tribunal has directed as above, the Hon'ble Tribunal has not adjudicated on the objection raised by the Appellant that Hon'ble DRP has excluded the said comparable on the basis that there is no documentation and basis for selection of the said comparable. Further, the Hon'ble Tribunal has not adjudicated on application of 50% service income filter as applied by the Appellant. We request the Hon'ble Tribunal to consider the arguments of the Appellant and provide its directions accordingly.
3. Ground No. 16.4:
16.4 The Hon'ble DRP erred in upholding the action of the Ld. TPO/NFAC in excluding Cosmic Global Limited and Page 3 M.P. No. 5/Bang/2024 (in IT(TP)A No. 301/Bang/2022) Allsec Technologies Limited, on the basis that it fails export income filter.
a. The Appellant vide Ground No. 16.4 of its appeal raised its contention against exclusion of Cosmic Global Limited and Allsec Technologies Limited, on the basis that it does not fail the export income filter of 25% as applied by the Appellant.
b. The Hon'ble Tribunal in the order mentioned that Cosmic Global Limited and Allsec Technologies Limited has been excluded by the Ld. TPO as it failed export income filter Further, the Hon'ble Tribunal mentioned that , as per the Authorised Representative of the Assessee, these comparable passes all the relevant filters applied by the Ld. TPO.
c. While the Hon'ble Tribunal has instructed the Ld. TPO to verify the annual reports and consider the filters applied by the Ld. TPO for inclusion of the said comparable, the Hon'ble members have not adjudicated on the objection raised by the Appellant that the export income filter of 25% applied by the Appellant should be applied and not 75% as applied by the Ld. TPO."
3. The Ld.DR on the contrary submitted that the filters applied by the Ld.TPO are based on the OECD Guidelines. We have perused the submissions advanced by both sides in light of records placed before us.
4. The assessee is seeking a direction to apply export turn over filter of 25% applied by the assessee in the TP study, as against 75% applied by the Ld.TPO.
5. We note that the Ld.TPO rejected the two comparable companies as they failed export revenue filter. This Tribunal in para 11.2 remanded the comparable companies sought for inclusion to the Ld.TPO for necessary verification the export Page 4 M.P. No. 5/Bang/2024 (in IT(TP)A No. 301/Bang/2022) Turnover filter based on the annual reports as there is no functional dissimilarities noted by the Ld.TPO. The Ld.AR submitted that this Tribunal did not adjudicate the issue raised in Ground.16.3 & 16.4, wherein the assessee challanged application of export turnover filter of 75%. We accordingly adjudicate the grounds as under. Following paragraph along with final conclusion as given herein shall be read after para 11.2 at page 56 of the Tribunal's order:
"11.3 In Ground.16.3 & 16.4, the assessee also challenges application of export turnover filter of 75%.
11.4 We have considered the arguments advanced by both sides in light of the records placed before us.
11.4.1 Admittedly the assessee before this Tribunal is an 100 % EOU. In so far as whether export filter of 75% should be applied or can be it lowered down, OECD Guidelines, for computation of ALP needs to be considered. As per OECD Guidelines, ALP may vary across different markets even for transactions involving the same property or services. In order to achieve comparability it requires that, the markets in which the independent and associated enterprises operate are comparable, and that differences do not have a material effect on price or that appropriate adjustments can be made.
11.4.2 Thus what emerge from OECD Guidelines and income tax are:
Page 5 M.P. No. 5/Bang/2024 (in IT(TP)A No. 301/Bang/2022)
1. The operating markets should be same or similar in the case of taxpayer and the comparable.
2. Differences in overall economic development, purchase power parity, business model, cost arbitrage and also level of competition need to be considered.
11.4.3 It is thus clear that comparable company should have substantial export activity as the assessee before us is 100% EOU. With such understanding, the export filter should not be kept at lower level. Companies need to be selected having substantial export.
11.4.4 Therefore, the submission of the assessee to consider the export turnover filter at 25% as done in TP study is not acceptable. The comparables that will fall into the search cannot have minimum export income in order to achieve comparability as per the OECD guidelines.
We therefore do not find any force in the arguments of the Ld.AR on this issue and the same is rejected. Accordingly Ground Nos. 16.3 & 16.4 stands partly allowed.
Accordingly this issue raised on para 3 of the MP stands allowed.
6. The Ld.AR in para 4 of the miscellaneous petition submitted as under:
Page 6 M.P. No. 5/Bang/2024 (in IT(TP)A No. 301/Bang/2022) a. The Appellant vide Ground No. 6,19 and 20 of its appeal, during the course of the hearing, contended that:
i. Assets received free of cost were primarily in the nature of testing equipment, which were used for rendering services, accordingly, depreciation ought not be imputed notionally for computing mark-up.
ii. Without prejudice to the above, if there were to be any adjustment on assets received free of cost, adjustment should be restricted to the arm's length margin on notional depreciation computed as per the Companies Act and the notional depreciation should not be added to the operating cost base of the Company.
iii. Without prejudice to the above, in case the notional depreciation was to be added to the operating cost base of the Company, then appropriate tax depreciation should also be granted to the Company. Further, given that the Ld. TPO has already made an adjustment on free of cost asset; accordingly treating the same as benefit or perquisite under section 28(iv) of the Act would lead to double adjustment. Hence the same shall be deleted.
b. The Hon'ble Tribunal in its order has mentioned the following while concluding on ground no. 6, 19 and 20. i. The TPO increased the operating cost base by computing notional depreciation at 60% on the cost of the assets received free of cost and allocating them between the three segments based on the operating revenue. Accordingly, the margin under each segment reduced. The Hon'ble Tribunal held that this approach by the TPO are not based on sound principles of transfer pricing adjustments. The Hon'ble Tribunal has instructed that while computing the margins and ALP of assessee, the depreciation as per schedule to Companies Act, is to be included as an element of operating cost and not 60% as computed by the TPO.
ii. The Hon'ble Tribunal has directed the TPO to consider the aforesaid adjustment under the software development segment.
iii. The Hon'ble Tribunal held that the double adjustment made in respect of the assets received free of cost treating it as Page 7 M.P. No. 5/Bang/2024 (in IT(TP)A No. 301/Bang/2022) income under section 28(iv) of the Act as well is not acceptable. Hence the Hon'ble Tribunal instructs the AO that the adjustment made treating assets received as free of cost as income under section 28(iv) of the Act should be deleted as the same has been considered in the transfer pricing adjustment.
iv. Hon'ble Tribunal in its order has mentioned that ground no. 6 (Imputing notional depreciation for transfer pricing mark-up purposes) and ground no. 19 (assets received free of cost treated as income under section 28(iv) of the Act) stands dismissed and ground no. 20 stands allowed (depreciation allowance on assets received free of cost).
7. On perusal of the records and the view taken by this Tribunal in paras 6.6 to 6.8, we note that the conclusion deserves modification. Henceforth at the end of para 6.8 at page 31 of the impugned order the result of the grounds shall be read as under:
"Accordingly, ground nos. 6, 19 and 20 stands allowed as indicated hereinabove."
Accordingly the rectification sought in para 4 of the MP stands allowed.
In the result, the miscellaneous petition filed by the assessee stands allowed.
Order pronounced in the open court on 09th May, 2024.
Sd/- Sd/-
(CHANDRA POOJARI) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 09th May, 2024.
/MS /
Page 8
M.P. No. 5/Bang/2024
(in IT(TP)A No. 301/Bang/2022)
Copy to:
1. Appellant 2. Respondent
3. CIT 4. DR, ITAT, Bangalore
5. Guard file 6. DRP-2, Bangalore
By order
Assistant Registrar,
ITAT, Bangalore