Income Tax Appellate Tribunal - Delhi
St Microelectronics Pvt. Ltd., New ... vs Addl.Cit, Special Range- 8, New Delhi on 3 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-2', NEW DELHI
Before Sh. N. K. Saini, AM and Sh. Kuldip Singh, JM
ITA No. 4396/Del/2017 : Asstt. Year : 2012-13
ST Microelectronics Pvt. Ltd., Vs Addl. Commissioner of Income Tax,
D-28, South Extension, Part-I, Special Range-8,
New Delhi-110049 New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AAACS3406M
Assessee by : Sh. S. D. Kapila, Adv.
Revenue by : Sh. H. K. Choudhary, CIT DR
Date of Hearing : 05.10.2017 Date of Pronouncement : 03.01.2018
ORDER
Per N. K. Saini, AM:
This is an appeal by the assessee against the order dated 25.05.2017 passed by the AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as the Act).
2. Following grounds have been raised in this appeal:
"1. That the Hon'ble Dispute Resolution Panel ("DRP") erred in fact and law by upholding the adjustment proposed by the Additional Commissioner of Income Tax - Special Range-8, New Delhi ("learned AO")/ learned Transfer Pricing Officer ("Ld. TPO") wherein the Ld, AO/ Ld, TPO has held that the Appellant's international transaction of provision of design implementation and maintenance with respect to integrated circuit ("I/Cs") and software development services with its 2 ITA No. 4396/Del/2017 ST Microelectronics Pvt. Ltd.
Associated Enterprises ("AEs") does not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 ("the Act") and thereby made an adjustment of INR 20,52,63,184 and in doing so have grossly erred by:
1.1. not giving effect to directions of the Ld. DRP in the context of grievances raised in Grounds no. 1.2 and 1.3, herein below;
1.2 erroneously including amount of INR 3,33,10,161 pertaining to ESOPs twice in the operating cost base of the Appellant;
1.3 by treating foreign exchange fluctuation gain/loss as a non-operating item while computing operating margin of the Appellant and of the comparable companies;
1.4. disregarding the arm's length price ("ALP") determined by the Appellant in the transfer pricing ("TP") documentation maintained by it, in terms of section 92D of the Act, by not accepting the economic analysis undertaken by the Appellant and conducting a fresh economic analysis and in particular modifying/rejecting the filters applied by the Appellant;
1.5. The Ld. TPO erred in law in applying certain incorrect filters for selecting comparables, which is contrary to the decisions of the jurisdictional High Court of Delhi;
1.6. excluding certain comparables considered by the Appellant in its TP documentation/ fresh search 3 ITA No. 4396/Del/2017 ST Microelectronics Pvt. Ltd.
on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed;
1.7 rejecting/ not including certain companies as comparable, which are otherwise functionally similar, merely on the ground that they follow accounting year other than financial year;
1.8. not appropriately considering the functions, assets and risk profile of the companies used for comparison with the Appellant, thereby including in the final comparable set certain companies with completely different functional profile;
1.9. committing errors in the computation of the operating profit margins of the Appellant and of the comparables selected for benchmarking the international transaction;
1.10. introducing companies in the final comparable set that signify high element of risk as opposed to the Appellant who is a captive service provider bearing limited risk and also not accepting the risk adjustment carried out by the Appellant even though the Ld. TPO had proposed to grant the same in the showcause notice;
1.11. not making suitable adjustments to account for difference in capacity utilization of the Appellant vis-a-vis the alleged comparables;
1.12. Computed the arm's length range at 3 percent instead of 5 percent which was the prescribed 4 ITA No. 4396/Del/2017 ST Microelectronics Pvt. Ltd.
range applicable for the relevant AY as per proviso to section 92C(2) of the act;
1.13. dis-regarding judicial pronouncements in undertaking the TP adjustment;
1.14. in initiating penalty proceedings under Section 271(1)(c) of the Act.
The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant prays for leave to add, alter, amend and/ or modify any ground of appeal at or before the hearing of the appeal.
The Appellant prays for appropriate relief based on the said ground of appeal and the facts and circumstances of the case."
3. The ld. Counsel for the assessee argued Ground Nos. 1.2, 1.3 and 1.7 only.
4. At the first instance, we will deal with Ground No. 1.7, the grievance of the assessee vide this ground relates to the rejection/non-inclusion of certain companies as comparable which were otherwise functionally similar, on the ground that they follow accounting year other than financial year.
5. Facts of the case in brief are that the assessee company was incorporated in India and is a subsidiary of ST Microelectronics Pte. Ltd. The assessee filed the return of 5 ITA No. 4396/Del/2017 ST Microelectronics Pvt. Ltd.
income on 28.11.2012 declaring an income of Rs.49,16,03,970/-. Later on, the case was selected for scrutiny. The AO, in respect of international transactions entered into by the assessee referred the matter to the TPO u/s 92CA(3) of the Act. The operating profit margin (OP/OC) was computed by the assessee in the TP study at 11.54%, the average mean margin of the comparables was computed at 11.17%. Accordingly, on the basis of tested party operating profit margin on cost of 11.54%, the international transactions had been considered to be at arm's length in the TP documentation. During the course of proceedings before the TPO, a fresh search was called for and the assessee had given the following comparables:
No. Company Name Working Capital adjusted Margin (OP/OC%) i. Akshay Software Tech. 11.86 Ltd.
ii. CG VAK Software & -14.62
Exports Ltd. (Seg.)
iii. CAT Technologies -4.41
iv. CTIL Ltd. 10.50
v. Cigniti Technologies Ltd. 8.02
vi. Evoke Technologies 12.81
vii. Helios Matheson 12.41
Information Technology
Ltd.
viii. Infomile Technologies 5.08
Ltd.
ix. Larsen and Toubro 23.65
Infotech Ltd.
6 ITA No. 4396/Del/2017
ST Microelectronics Pvt. Ltd.
x. Prism Informatics Ltd. 12.77
xi. RS Software (India) Ltd. 16.39
xii. Thinksoft Global Ltd. 12.74
xiii. Mindtree India Ltd. 16.16
xiv. Persistent Systems ltd. 24.93
xv. R Systems International 3.09
ltd.
xvi. Sasken Communication 17.70
Ltd.
xvii. Caliber Point Business 5.11
Solutions Ltd.
xviii Ybrant Digital Ltd. (LGS 19.35
. Global Ltd.)
xix. Zylog Systems Ltd. 27.59
Arithmetic Mean 10.53%
6. However, the TPO accepted few of the comparables and also rejected another comparables selected by the assessee. Finally, following 14 comparables were selected by the TPO:
S.No. Comparables Margins
i. Akshay Software Tech. Ltd. 7.77%
ii. Cigniti Technologies Ltd. 8.28%
iii. Evoke Technologies 11.57%
iv. Larsen and Toubro Infotech 23.79%
Ltd.
v. RS Software (India) Ltd. 15.43%
vi. Mindtree India Ltd. 19.19%
vii. Persistent Systems Ltd. 26.92%
viii. Sasken Communication Ltd. 14.58%
ix. Ybrant D igital Ltd. (LGS 19.34%
Global Ltd.)
x. Zylog System s Ltd. 33.01%
xi. Acropetal Technologies Ltd. 17.75%
(seg.)
xii. Infosys Ltd. 42.15%
xiii. Spry R esources Pvt. Ltd. 33.59%
xiv. E-Zest Solutions Ltd. 17.51%
Average 20.78%
7 ITA No. 4396/Del/2017
ST Microelectronics Pvt. Ltd.
7. The TPO proposed an adjustment of Rs.29,14,20,630 in his order dated 24.10.2016. Thereafter, the AO passed the draft assessment order. Against the draft assessment order passed by the AO, the assessee raised objections before the ld. DRP and submitted that the TPO rejected the comparable M/s R Systems International Ltd. on a frivolous ground that the financial year of the company ended in December 2011 and by doing so he had not followed the judicial precedence that a functionally comparable company cannot be rejected merely because it had a different financial year, especially when the audited quarterly financials of the company were available. The assessee also asked for the exclusion of M/s Infosys Technologies Ltd. and M/s Larsen & Toubro Infotech Ltd. on account of high turnover, intangibles, different business modules, significant branding etc. The ld.
DRP directed to exclude the above said comparables on account of difference in FAR. The assessee also sought exclusion of M/s Persistent Systems Ltd., M/s Sasken Communication Technologies Ltd., M/s Zylog systems Ltd. However, the ld. DRP after considering the FAR of the comparables was of the view that there was not any substantive variation to merit exclusion of these entities. Therefore, those were directed to be retained. The assessee 8 ITA No. 4396/Del/2017 ST Microelectronics Pvt. Ltd.
also objected to the rejection of the following comparables by the TPO in its final set, the ld. DRP directed as under:
Assessee TPO Assessee DRP Directions comparable
1. CG-Vak Software "In view of the Business circumstances It falls a valid filter, & Exports Ltd. persistent losses and such as incurring losses Hence validity (Software seg.) under utilization of cannot be sole ground excluded.
('CG-VAK') human assets, for for rejection of a which no adjustment comparable companies. can be made, this company is rejected."
2 Thinksoft Global "The company is The company generates The TPO has Services Limited functionally different majority revenue from pointed out significant ('Thinksoft') as it is a Low end software services functional differences.
software service while other services The panel agrees with provider, not form a small part. It is the same. Assessee comparable to engaged in providing could not bring out facts Assessee high end software testing correctly to counter the functions." services which is TPO findings.
functionally similar to the Assessee's software development services.
3 CTIL Ltd. ('CTIL') This company fails the The Assessee in the It fails a valid filter employee cost filter Form 35A (page 74-77) adopted by the TPO.
has detailed its Hence action of the TPO
contention against the is upheld.
application of the said
filter. On the baas of
the same, it is prayed
that this comparable
should be accepted.
4 Caliber Point The company is IT segment of Caliber The TPO has pointed
Business Solutions Functionally different is engaged in the out significant
Limited (Caliber as it generates income provision of Software functional differences.
Point) mainly from BPO development services. panel agrees with the
services. Since, Caliber is same, Assessee could
Functionally not bring out facts
Further, this company comparable to the correctly to counter
is failing the different Assessee's it should be the TPO findings.
financial ending filter. included in the
comparables set. It also fails a valid filter
In relation to different adopted by the TPO.
financial ending filter, Hence action of the
the Assessee refers to its TPO is upheld.
contention against the
application of the said
9 ITA No. 4396/Del/2017
ST Microelectronics Pvt. Ltd.
filler raised in the Form
35A (Page 51-60 of
form 35A).
8. Thereafter, the TPO by considering the directions of the ld. DRP worked out the adjustment at Rs.22,52,63,184/- vide order dated 25.05.2017 and on the same date the AO passed the assessment order by making an addition of Rs.22,52,63,184/- on account of arm's length price of the international transaction.
9. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the quarterly financial data in respect of the comparables was available. Therefore, the TPO/AO should have made the proper adjustment and considered the comparable, namely, M/s SR Systems Ltd. The reliance was placed on the judgment of Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India Pvt. Ltd. Vs CIT-II in ITA 217/2014 (copy of the said order is furnished which is placed at page nos. 1812 to 1825 of the assessee's compilation).
10. In his rival submissions, the ld. DR strongly supported the orders of the authorities below.
10 ITA No. 4396/Del/2017ST Microelectronics Pvt. Ltd.
11. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is noticed that on a similar issue relating to different financial year, the Hon'ble Jurisdictional High Court in the case of CIT-II Vs Mckinsey Knowledge Centre India Pvt. Ltd. in ITA 217/2014 vide order dated 27.03.2015 held as under:
"14. The Revenue is in appeal before this Court questioning the admissibility of the above mentioned comparables while computing Arm's Length Price regarding the IT Support services after the TPO and AO rejected the above mentioned companies but was later allowed by the CIT (A) and ITAT. While the AO had confirmed the findings of the TPO, the Ld. CIT(A) after considering the Assessee's submissions accepted all the four companies rejected by the TPO. The revenue submits that Fortune Infotech Ltd. was correctly rejected by TPO because the company had different financial year ending on December, 2006, whereas Assessee's financial year ended on March, 2006. There is nothing shown to the court that supports the revenue's argument that the ITAT fell into error in holding that if a comparable is following different financial year then the same cannot be included in the list of comparables selected for benchmarking the international transaction. Therefore, the ITAT has held that if the comparable is functionally same as that of tested party then same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record, the results for financial year can reasonably be extrapolated then the comparable cannot be excluded 11 ITA No. 4396/Del/2017 ST Microelectronics Pvt. Ltd.
solely on the ground that the comparables have different financial year endings."
12. We, therefore, by keeping in view the ratio laid down in the aforesaid referred to case, resorted this issue back to the file of the TPO/AO with the direction to include the aforesaid comparable, if from the available data on record, the results for financial year can reasonably be extrapolated.
13. Vide Ground No. 1.2, the grievance of the assessee relates to the inclusion of the amount of Rs.3,33,10,161/- pertaining to ESOPs twice in the operating cost base of the assessee.
14. This issue was agitated by the assessee before the ld. DRP by stating that certain expenses were considered twice, thus, rendering the results spurious. It was stated that the TPO had erroneously included an amount of Rs.3,33,10,161/- pertaining to ESOP twice in the operating cost base of the assessee and due to this reason, the cost computed by the TPO is coming to Rs.3,49,42,05,612/- which was more than the amount appearing in the financials at Rs.3,46,08,95,451/-. After considering the submissions of the assessee, the ld. DRP directed the TPO to examine the case and, if there was double impact of the ESOPs value, the 12 ITA No. 4396/Del/2017 ST Microelectronics Pvt. Ltd.
same should have been corrected. However, it appears that the said direction of the ld. DRP was not complied by the TPO and the AO passed the impugned order without making any correction in the adjustment proposed by the TPO.
15. Now the assessee is in appeal. The ld. Counsel for the assessee drew our attention towards page no. 318 of the assessee's paper book which is the copy of the notes to Form 3CEB wherein in para 5, it has been stated that "ST Microelectronics N. V. has transferred shares to employees of the assessee and has charged Rs.3,33,10,161/- on account of the same, this transaction has been closely linked to the provision of integrated circuit design and software development services by the company for which it has determined the arm's length price using the TNMM as the most appropriate method". Our attention was also drawn towards page no. 325 of the assessee's compilation which is the copy of significant accounting policies and notes on accounts for the year ended 31.03.2012 wherein in para 1.05, the employees benefit cost has been mentioned and it has been stated that company accounts for the staff benefits to its employees are on an accrual basis. The ld. Counsel for the assessee submitted that the amount of Rs.3,33,10,161/- was deleted from the liability and thereafter liability at the 13 ITA No. 4396/Del/2017 ST Microelectronics Pvt. Ltd.
end of the year was determined. A reference was made to page no. 338 of the assessee's paper book which is the working of the liability of ESOP. It was contended that despite overwhelming evidence as per the audited financial statement and in the Form 3CEB supporting the assessee's contention, none of which had been questioned by the TPO who had again loaded the expenses with ESOP liability, despite the fact that it was already included in the expenses charged to profit and loss accounts in accordance with the guidance note issued by the Institute of Chartered Accountant. It was stated that the TPO had made this addition without considering the documentary evidences duly certified by the auditors. Therefore, the addition of Rs.3,33,10,161/- may be deleted from the cost base taken by the TPO and if it has been done than no adjustment is required on account of transfer price which will come within the range of ±5%.
16. In his rival submissions the ld. DR strongly supported the orders of the authorities below.
17. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that the directions 14 ITA No. 4396/Del/2017 ST Microelectronics Pvt. Ltd.
given by the ld. DRP has not been appreciated by the TPO in right perspective. It also appears that the TPO without appreciating the documentary evidences furnished by the assessee made this addition in the cost base taken by him. We, therefore, by considering the totality of the facts, set aside this issue back to the file of the TPO to be adjudicated afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee.
18. The next issue vide Ground No. 1.3 relates to the treatment of the foreign exchange fluctuation gain/loss as a non-operating item while computing the operating margin of the assessee and of the comparables companies.
19. As regards to the above issue, the ld. Counsel for the assessee submitted that it is now covered against the revenue and in favour of the assessee by the judgment of the Hon'ble Jurisdictional High Court in the case of Pr. CIT, Delhi-I Vs Agilis Information Technologies International (I) Pvt. Ltd. in ITA No. 907/2015, order dated 08.02.2016. A reference was made to page nos. 1774 & 1775 of the assessee's compilation which is the copy of the said order. The reliance was also placed on the judgment of the Hon'ble Jurisdictional High Court in the case of Pr. CIT, Delhi-1 Vs 15 ITA No. 4396/Del/2017 ST Microelectronics Pvt. Ltd.
Ameriprise India Pvt. Ltd. (copy of the said order was furnished which is placed at page nos. 1772 & 1773) and of the Hon'ble Apex Court in the case of CIT Vs Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC).
20. In his rival submissions, the ld. DR submitted that as per Rule 10B of the Income Tax Rules of Safer Harbour Notification dated 18.09.2013, the TPO was justified in treating income/loss on account of foreign exchange fluctuation as non-operating cost.
21. We have considered the submissions of both the parties and perused the material available on the record, it is noticed that on a similar issue, the Hon'ble Supreme Court in the case of CIT Vs Woodward Governor India P. Ltd. (supra) held as under:
"Loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under Section 37(1) of the Income-tax Act, 1961."
22. Now this issue has been settled by the Hon'ble Jurisdictional High Court in the case of Pr. CIT, Delhi-I Vs Ameriprise India Pvt. Ltd. (supra) wherein it has been held as under:
16 ITA No. 4396/Del/2017ST Microelectronics Pvt. Ltd.
"3. The question sought to be urged by the Revenue is whether the ITAT was correct in directing the foreign exchange gain/loss to be considered as an item of operating revenue/cost.
4. The ITAT has in the impugned order noted the fact that the foreign exchange gain earned by the Assessee is in relation to the trading items emanating from the international transactions. Since the foreign exchange loss directly resulted from trading items, it could not be considered as a non-operating loss. Further, it is noted by the Dispute Resolution Panel that the service agreement between the Associated Enterprise (AE) and the Assessee stated that for the specified products and services provided by the Assessee, it "shall raise invoices on Ameriprise USA on the basis of a cost plus pricing methodology." The ITAT was therefore right in holding that the AO was not justified in considering the foreign exchange loss as a non- operating cost."
23. A similar view has also been taken in the case of Pr. CIT, Delhi-I Vs Agilis Information Technologies International (I) Pvt. Ltd. (supra) wherein it has been held as under:
"3. It is pointed out by the learned counsel for the Assessee that reliance placed by the Revenue on the Safe Harbour Notification dated 18 th September 2013 will be of no avail to the Revenue since that notice is prospective in nature. It is seen that by the order dated 6 th January 2016 in ITA No. 17/2016 (Pr. Commissioner of Income Tax-3 Vs Finserv India Pvt. Ltd.), this Court has accepted the above plea of the Assessee. Even otherwise, the decisions referred to 17 ITA No. 4396/Del/2017 ST Microelectronics Pvt. Ltd.
by the ITAT in the impugned order on the issue also answer the question in favour of the Assessee and against the Revenue."
24. In view of the above, this issue is decided in favour of the assessee and against the department.
25. In the result, the appeal of the assessee is partly allowed for statistical purposes.
(Order Pronounced in the Court on 03/01/2018) Sd/- Sd/-
(Kuldip Singh) (N. K. Saini)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 03/01/2018
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5.DR: ITAT
ASSISTANT REGISTRAR