Income Tax Appellate Tribunal - Bangalore
Flextronics Technologies (India) ... vs Asst. Commissioner Of Income Tax, ... on 31 October, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT
AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
IT(TP)A No.576/Bang/2016
Assessment year : 2011-12
The Assistant Commissioner of Vs. M/s. Flextronics Technologies
Income Tax, (India) Pvt. Ltd.,
Circle 3(1)(1), Plot No.3, Phase II,
Bangalore. SIPCOT Industrial Park,
Sandavellure C Village,
Sriperumbudur District,
Tamil Nadu - 602 106.
PAN: AAACF 5248E
APPELLANT RESPONDENT
CO No.38/Bang/2017
[in IT(TP)A No.576/Bang/2016]
Assessment year : 2011-12
M/s. Flextronics Technologies Vs. The Assistant Commissioner of
(India) Pvt. Ltd., Income Tax,
Sandavellure C Village, Circle 3(1)(1),
Sriperumbudur District, Bangalore.
Tamil Nadu - 602 106.
PAN: AAACF 5248E
APPELLANT RESPONDENT
Revenue by : Shri C.H. Sundar Rao, CIT(DR-I), ITAT, Bengaluru.
Assessee by : Shri Ajit Kumar, CA
Date of hearing : 17.10.2018
Date of Pronouncement : 31.10.2018
IT(TP)A No.576/Bang/2016 &
& co No.38/Bang/2017
Page 2 of 12
ORDER
Per N.V. Vasudevan, Vice President IT(TP)A No.576/Bang/2016 is an appeal against the final order of assessment dated 28.01.2016 of the ACIT, Circle 3(1)(1), Bangalore passed u/s. 143(3) r.w.s. 144C of the Income-Tax Act, 1961 ["the Act"] for the assessment year 2011-12. The assessee has filed Cross Objection in CO No.38/Bang/2017 against the very same order of the CIT(Appeals).
2. Ground Nos. 1 to 10 raised by the revenue relates to determination of the arm's length price (ALP) in respect of an international transaction of rendering IT enabled services (ITes) by the assessee to its Associated Enterprise (AE).
3. The assessee is a subsidiary of Flextronics International Asia Pacific Ltd., Mauritius. The assessee provided back office services relating to finance and human resource functions, including accounts payable to assessee, remote server access, maintenance and management services, payroll processing, credit analysis, ledger maintenance, etc. for its affiliates worldwide. The price received by the assessee for providing such services was a sum of Rs.12,32,60,290. Since the transaction of rendering ITeS to its AE was an international transaction, the arm's length price (ALP) of the said transaction had to be determined in view of the provisions of section 92 of the Act.
4. The assessee in support of its claim that price received was at arm's length filed a TP analysis adopting TNMM as the most appropriate method of computing the ALP. The Profit Level Indicator (PLI) chosen for the purpose of comparison was OP to OC and the same was worked out by the assessee as follows:-
IT(TP)A No.576/Bang/2016 & & co No.38/Bang/2017 Page 3 of 12 Description Shared Services Total revenue 1,231,702,919 Total expenses 1,108,442,629 Net Profit 123,260,290 Net operating profit margin on cost (%) 11.12%
5. The assessee chose a set of 10 comparable companies whose average arithmetic mean at profit margins was less than the profit margin of the assessee and therefore the assessee claimed that the price paid in the international transaction was at arm's length. The TPO rejected all the comparable companies chosen by the assessee, except a company by name Cosmic Global Ltd. The TPO on his own chose 9 more comparable companies, and the profit margin of the 10 comparable companies finally chosen by the TPO was as follows:-
Sl. Name of the case Operating Operating OP/OC No. Income Cost 1 Accentia Technologies Ltd. 1,069,026,524 82,93,91,898 28.89% 2 Acropetal Technologies 494,399,332 38,97,06,574 26.86% 3 Cosmic Global Ltd. 62,496,615 5,69,15,360 9.81% 4 e4e Healthcare (Capitaline) 613,160,587 54,56,25,872 12.38% 5 I C R A Online Ltd. (seg) 156,691,000 11,67,49,267 34.21% 6 Jeevan Scientific Technology Ltd. 1,721,400,000 1,00,86,52,592 70.66% 7 Infosys BPO Ltd. 11,291,147,909 9,57,73,24,546 17.89% 8 Jindal Intellicom (Capitaline) 390,358,799 35,12,69,641 11.13% 9 Mindtree Ltd. (seg) 5,653,000,000 5,10,39,05,999 10.76% 10 iGate Global Solutions Ltd. 11,845,540,000 9,47,11,65,000 24.77%
6. After providing further working capital adjustment, the TPO computed the ALP of the international transaction and consequent thereon made addition to the total income as follows:-
IT(TP)A No.576/Bang/2016 & & co No.38/Bang/2017 Page 4 of 12 "12.4 Computation of Arms Length Price:
The arithmetic mean of the Profit Level Indicator is taken as the arms length margin. Please see Annexure B for details of PLI of the comparables. Based on this, the arms length price of the services rendered by the taxpayer to its AE(s) is computed as under:
IT ENABLED SERVICES
Arm's Length Mean Margin on cost 24.77%
Less: Working Capital Adjustment 1.47%
(As per Annex C)
Adjusted margin 23.30%
Operating cost 1,108,442,629
Arms Length Price (ALP) 123.30% of 1,366,709,762 Operating Cost Price received 1,231,702,919 Shortfall being adjustment u/s 92CA 135,006,843 The above shortfall of RS.135,006,843/- is treated as transfer pricing adjustment u/s 92CA in respect of software development segment of the taxpayer's international transactions."
7. Aggrieved by the order of TPO whose suggestion was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP. The DRP excluded 8 out of 10 comparables chosen by the TPO. The 2 companies that remained after exclusion of 8 out of 10 comparables chosen by the TPO were ICRA Online Ltd. and Jindal Telecom. The profit margin of these companies when compared with that of the assessee after providing for working capital adjustment was at arm's length and has been so recognised by the order of the TPO giving effect to the order of DRP. This order dated 22.01.2016 is at page 434 & 435 of the assessee's PB-I. IT(TP)A No.576/Bang/2016 & & co No.38/Bang/2017 Page 5 of 12
8. In the grounds of appeal, the revenue has challenged the exclusion of only one of the 8 comparables excluded by the order of DRP. The companies exclusion by the DRP which is challenged by the revenue in grounds 1 to 10 is M/s. Acropetal Technologies Ltd. For excluding this company, the DRP gave the following reasons:
"Acropetal Technologies Limited Having considered the submissions, on perusal of the annual report, it is noticed by us that the assessing officer has considered the revenue from the engineering design segment. Hon'ble ITAT, Bangalore in IT (TP)/A/1678/Bang/2012 in the case of Global E Business Operations, directed to exclude the above company by observing that 'we have considered the submission of the learned counsel for the assessee, on perusal of note no.15 of notes to accounts, which gives segmental revenue of this company, it is clear that the major source of the income for this company is from providing engineering design services and information technology services. The function performed by the engineering design services of the company cannot be considered as comparable to the ITES /BP0 function performed by the assessee. The performance of the engineering design services is regarded as providing high end services amongst the BPO which require high skill whereas the services performed by the assessee are routing low end ITES function. We therefore hold that this company could not have been selected as comparable, especially when it performs engineering design services which only a knowledge processing outsourcing (KPO) would do and not a business processing outsourcing (BPO).' Similar View was taken by Hon'ble Bangalore ITAT in the case of - Symphony Marketing Solutions India Pvt. Ltd. vs. ITO (IT (TP) A No. 1316/Bang/2012), held that Acropetal cannot be considered as comparable as it performs engineering design services accordingly we direct the assessing officer to exclude the company from the comparables The above company was directed to be excluded by the Hon'ble ITAT in assessee's own case for AY 2008-09."
IT(TP)A No.576/Bang/2016 & & co No.38/Bang/2017 Page 6 of 12
9. It is the plea of the revenue before us that there is no difference between the KPO and BPO and the reasons given by the DRP for excluding the company cannot be accepted.
10. The ld. Counsel for the assessee, on the other hand, submitted that the exclusion of this company by the DRP is fully justified and in this connection drew our attention to the Annual Report of this company which is at page 492 of PB-II filed by the assessee. Perusal of the Annual Report shows that this company has 4 divisions viz., Engineering Design Services, Healthcare, Enterprise Solutions and Infrastructure Solutions. Perusal of the order of TPO at page 25 shows that the TPO has considered engineering design services segment profit margin of this company for the purpose of comparison with the profit margins of the assessee company. The functions performed by the Engineering Design Services of this company are as follows:-
"Architectural, Structural, Electrical, Plumbing, Steel Detailing, External Utilities, Design Engineering."
11. The functions performed by the assessee, as we have already seen is back office services relating to finance and human resource functions, including accounts payable to assessee, remote server access, maintenance and management services, payroll processing, credit analysis, ledger maintenance, etc. for its affiliates worldwide. It is thus clear that the information technology services provided by the assessee cannot be compared with Engineering Design Services provided by Acropetal Technologies Ltd. Therefore, the conclusion that this company is not functionally comparable is found to be correct. We also find that this Tribunal in the case of Novo Nordisk (I) P. Ltd. in ITA 247/Bang/2016 has held that in the case of a company which was rendering similar ITeS as that of assessee it was held that Acropetal Technologies Ltd. cannot be IT(TP)A No.576/Bang/2016 & & co No.38/Bang/2017 Page 7 of 12 considered as a comparable in ITeS segment. Following were the relevant observations of the Tribunal in this regard.
"8.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that a co-ordinate bench of this Tribunal in the case of Swiss Re Shared Services (India) Pvt. Ltd., for asst. year 2011-12 (Supra) has examined in detail the comparability of this company as a comparable to that of a service provider of ITES services to its AE's and at6 para 21 to 24 thereof held as under:-
"21. Arguing exclusion of Acropetal Technologies Ltd, (seg), Ld. AR submitted that Acropetal Technologies Ltd, was rendering service in the field of engineering design fin- health-care enterprise solutions and IT infrastructure solutions. As per the Ld. AR, AO took the engineering design services done by Acropetal Technologies Ltd, as a comparable segment with ITES services of the assessee. Ld. AR pointed out that engineering design services rendered by M/s. Acropetal was entirely different from the type of services done by the assessee. Further according to him Hyderabad bench of the Tribunal in the case of Excellence Data Research P. Ltd v. ITO [17'A.159/1-Iyd12014, dt.31.07.2014 had held that Acropetal Technologies Ltd, was not a good comparable in the BPO segment. As per the Ld. AR M's. Excellence Data Research P. Ltd, was rendering back office data creation, content development and support services which were not comparable to what assessee was doing. Though the decision of the Hyderabad Bench was for A.Y. 2009-10, as per the Ld. AR, M/s. Acropetal Technologies Ltd, was doing the very same business during the relevant previous year also and therefore it could be considered as a good precedent.
22. Per contra, Ld. DR submitted that TPO had considered the argument of the assessee that BPO and KPO had to be distinguished. According to him, Acropetal Technologies Ltd, was giving engineering design services and the assessee was rendering insurance support services. Though these services did not fit in the same IT(TP)A No.576/Bang/2016 & & co No.38/Bang/2017 Page 8 of 12 mould, the level of expertise required stood more or less on the same pedestal. According to him, applying the yardsticks laid down by Hon'ble Delhi High Court in the judgment of Rampgreen Solutions P. Ltd (supra), Acropetal Technologies Lid. could be taken as a good comparable.
23. We have perused the orders and heard the rival contentions. There is no dispute that M/s. Acropetal was having at least three segments, namely, engineering design services, IT service and health care. TPO had taken engineering design service as a good comparable with that of the services done by the assessee. Engineering Design Services that were being rendered by Acropetal Technologies Lid, appears at page 8 of its annual report. It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural healthcare, engineering design and enterprise solutions. In our opinion, the type of services that was being provided by Acropetal Technologies Ltd, was not at all comparable with the type of services that the assessee was providing. It is also mentioned in the annual report of the said company that it was providing high end services in the engineering design services. No doubt as mentioned by the Ld DR, it may not be feasible to have comparables which fit in the exact mould as that of an assessee in TP analysis. However, when one company is giving sophisticated set of services which involves higher level of skill sets, and the other is doing it on a lower level, we cannot say that the former should be considered as a comparable to the latter. Though for a different year, comparability of Acropetal Technologies Ltd, (seg) had come up &fore Hyderabad bench of the Tribunal in the case of Excellence Data Research P. Ltd (supra). Observations of the Tribunal as it appears at para 18.1 reads as under 18.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in IT(TP)A No.576/Bang/2016 & & co No.38/Bang/2017 Page 9 of 12 engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end, by the coordinate bench of the Tribunal in the case of Hyundai "Motors India Engineering' (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company.
24. Considering all these, we are constrained to take a view that engineering design services segment of M's. Acropetal Technologies Ltd, (seg.), cannot be considered as a proper comparable for the TP study of the assessee.
8.3.2 Taking into consideration the facts and circumstances of the case and respectfully following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Swiss Re Shared Services (India) Pvt. Ltd., for asst. year 2011-12 (Supra), we hold that the engineering design services segment of Acropetal Technologies Ltd., is functionally different and hence cannot be considered as a good comparable to the assessee in the case on hand who is providing only ITES services to its AE's. The AO/TPO are, therefore, directed to exclude this company from the list of comparables in the case on hand."
12. For the reasons stated above, we uphold the order of DRP excluding Acropetal Technologies Ltd. from the list of comparable companies. Consequently ground Nos. 1 to 10 raised by the revenue are dismissed.
13. The next ground projected by the revenue in ground No.12 reads as follows:-
"xii) Whether on the facts and circumstances of the case, the DRP was right in following the ratio laid down by the Hon'ble Karnataka High Court in the case of CIT Vs M/s Yokogawa India Ltd., 341 ITR 385. Whether on the facts and circumstances of the case the DRP was right in holding that the deduction u/s 10B was IT(TP)A No.576/Bang/2016 & & co No.38/Bang/2017 Page 10 of 12 to be deducted from the income of the eligible unit i.e. before computing the gross total income."
14. As far as the aforesaid ground is concerned, the question is with regard to setting off of profits of 10A units against losses incurred by non- 10A units of the assessee. It was the plea of the assessee that as per the decision of the Hon'ble Karnataka High Court in the case of CIT v. Yokogawa India Ltd., 341 ITR 385 (Kar), income from STPI unit has to be excluded at source itself before arriving at gross total income and therefore the losses of non-STPI unit cannot be set off against income of STPI unit while computing relief u/s. 10A of the Act. This was not accepted by the AO but was accepted by the DRP. Aggrieved, the revenue has raised ground No.12 before the Tribunal.
15. At the time of hearing, it was brought to our notice that this issue is no longer res integra and has been settled by the Hon'ble Supreme Court in the case of Yokogawa India Ltd., 391 ITR 274 by its order dated 16.12.2016 and in the aforesaid decision the Hon'ble Supreme Court took the following view :-
"That from a reading of the relevant provisions of section 10A it is more than clear that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee.
This is also more than clear from the contemporaneous Circular No. 794, dated 9-8-2000.
If the specific provisions of the Act provide [first proviso to sections 10A(1); 10A(1A) and 10A(4)] that the unit that is contemplated for grant of benefit of deduction is the eligible IT(TP)A No.576/Bang/2016 & & co No.38/Bang/2017 Page 11 of 12 undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 9-8-2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, "immediately after the stage of determination of its profits and gains.
At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 would be premature for application. The deductions under section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression 'total income of the assessee' in section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in section 10A as 'total income of the undertaking'.
For the aforesaid reasons it is held that though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and' not at the stage of computation of the total income under Chapter VI. "
16. The effect of the aforesaid decision would be that the provision of set off and carry forward as contemplated under Chapter-VI of the Act would not be attracted and therefore intra head set off sought by seeking to rely on the provision of section 70(1) of the Act and seeking to restrict the deduction u/s 10A and 10AA of the Act to the extent of gross total income as contemplated u/s 80A(2) of the Act, cannot be sustained. We therefore hold that deduction u/s.10A of the Act has to be allowed without setting off the brought forward business losses and unabsorbed depreciation of non Sec.10A units before allowing the deduction under section 10A of the Act. In view of the aforesaid decision of the Hon'ble Supreme Court, we find no merit in ground No.12 raised by the revenue.
IT(TP)A No.576/Bang/2016 & & co No.38/Bang/2017 Page 12 of 12
17. In the result, the revenue's appeal is dismissed.
18. In view of the conclusion of the revenue's appeal, we are of the view that there is no need to adjudicate the ground raised by the assessee in its CO which basically relate to determination of ALP. Therefore, the assessee's CO is dismissed.
19. In the result, both the appeal by the revenue and the cross objection by the assessee are dismissed.
Pronounced in the open court on this 31st day of October, 2018.
Sd/- Sd/-
( INTURI RAMA RAO ) ( N.V. VASUDEVAN)
Accountant Member VICE PRESIDENT
Bangalore,
Dated, the 31st October, 2018.
/ Desai Smurthy /
Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A)
5. DR, ITAT, Bangalore. 6. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.