Vildirect: IncomeTax-caselaws-2017-VIL-1528-ITAT-DEL

2017-VIL-1528-ITAT-DEL

Income Tax Appellate Tribunal DELHI

ITA No1263 /Del/2015

Date: 08.12.2017

FREESCALE SEMICONDUCTOR INDIA PVT LTD.

DCIT, CIRCLE-9 (2) , NEW DELHI

For The Assessee : Shri SD Kapila And Adv Shri SS Maurya, Adv.
For The Revenue : Shri Amrender Kumar, Sr. DR And Shri Kumar Pranav, Sr. DR

BENCH

SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER

JUDGMENT

PER PRASHANT MAHARISHI, A. M.

1. The assessee is a company engaged in the business of designing of semi conductor products, software and electronic systems and providing sales and technical support services. It is providing services to its Associated Enterprise and is wholly owned subsidiary of Freescale Semiconductor Inc. USA. It has a Software Technology Park Unit at Noida and Bangalore. The assessee is also receiving remuneration based on the contractual low-end chip designing services based on agreement on cost plus model. During the year the assessee has entered into two kind of international transaction as under:-

a. Provision of software development services Rs. 2188461983/-

b. Provision of market support services Rs. 37410881/-

2. According to the transfer pricing study report submitted by the assessee, the assessee has the functions of software development segment as per page No. 176 of the paper book. According to that assessee is carrying on in activity from its Noida unit and Bangalore unit with regard to the low end chip design/software development services. Assessee is provided with the detailed specification from the group companies and based on these specifications received from the above company the assessee perform functions are related to development of software that can be embedded in the semiconductor chips. The complete initialization of the process the group companies conceptualize the product and create the architectural design specification. Thereafter a part of the development functions is outsourced to the free scale Indian assessee and other group companies. According to the assessee it carries on low-level chip designing and develop the software tools/applications. It does not have any research and development activities but only provides captive service is based on complete and detailed specifications provided by the group. It also follows a quality review process at each stage of the writing and integration of the Internet protocol. However, it is not exposed to the risk arising out of the quality failure or failure to meet the timelines. It has its normal assets and it does not carry much risk as compared with an independent enterprise. This functional profile remains undisputed.

3. In the transfer pricing documentation of software development services, assessee was selected as the tested party and Transaction Net Margin Method (TNMM) was adopted as the Most Appropriate Method (MAM). The assessee selected 9 comparables whose average profit margin was 11.73% slecting OP/TC as the Profit level indicator (PLI) and therefore, the margin earned by the assessee of 10.61% on Profit Level Indicator (PLI) of operating profit to Operating cost and therefore, international transactions of software development was treated at arm‟s length.

4. In market support services the assessee selected 5 comparables whose average margin was 7.37% as against taxpayers margin of 6.14 % and therefore, the international transaction of market support services was stated to be a arm‟s length.

5. The ld Transfer Pricing Officer rejected the transfer pricing study report. For software development services he carried out fresh search applying different filters and accordingly selected a set of 16 comparables whose arithmetic mean of the margin was 25.94% Therefore, on the software development services of Rs. 2158119855/-, he proposed an adjustment of Rs. 297434495/-.

6. For marketing support services of Rs. 36872941/-- he used the 5 comparables their adjusted PLI of operating profit to operating cost was determined 21.65/- therefore, he made an addition of Rs. 5389308/--.

7. Therefore, he proposed an adjustment on account of software development services of Rs. 297434495/- and on marketing support services of Rs. 5389308/- making the total adjustment of Rs. 302823803/- by order dated 16.01.2014 passed u/s 92CA(3) of the Act by the Adl CIT(Transfer Pricing)-I(2), New Delhi. The ld Assessing Officer passed draft assessment order incorporating the above adjustment to the returned income of Rs. 180911965/- as per ROI filed on 29/9/2010.

8. The assessee preferred objection before the ld Dispute Resolution Panel-1, New Delhi who passed the direction u/s 144C(5) of the Act on 12.12.2014. The ld Dispute Resolution Panel directed the ld Assessing Officer/TPO to modify the adjustment on account of transfer pricing from Rs. 302823803/- to Rs. 259842195/- . Consequently the ld Assessing Officer passed the assessment order u/s 143(3) read with section 144C of the Act on 30.1.2015 determining total taxable income of the assessee at Rs. 440753890/-. Therefore, aggrieved, the assessee has raised the following grounds of appeal in ITA No. 1263/Del/2015 for the Assessment Year 2010-11 before us:-

“1. That on the facts and in the circumstances of the case and in law, the order passed by the learned Assessing Officer (“Ld. AO”) is bad in law and void ab-initio.

2. That on facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. Dispute Resolution Panel (“DRP”) erred in making an addition of Rs. 25,98,42,195 under section 92 of the Act by re-computing the arm‟s length price of the international transactions in Software Development Segment (SDS) and Market Support Segment (MSS).

3. The Ld. AO/Ld. TPO/Ld. DRP erred in:

3.1 Not accepting the quantitative filters applied by the Appellant in its transfer pricing documentation & fresh search and has instead applied certain modified quantitative filters which lack valid basis;

3.2 Rejecting the companies finally selected by the Appellant as comparable in both the segments;

3.3 Selecting companies which are not comparable in terms of function, assets andnrisk profile as also companies with abnormally high turnover or margin.

3.4 Not providing benefit of economic adjustment on account of difference risk profile in arriving at the arm‟s length mean margin for both the segments;

3.5 Wrongly computing the margin of some of the comparables.

4. The Ld. AO/ Ld. TPO/Ld. DRP considered the current year (i.e. financial year 2009-10) data for comparability despite the fact that at the time of comparison done by the Appellant, data for financial year 2009-10 was not available within the public domain.

5. The Ld. AO/ Ld. TPO/Ld. DRP erred in not appreciating the fact that the Assessee is a company incorporated under the provisions of the Companies Act, 1956 and enjoying the tax holiday benefits conferred under the tax holiday benefits as per the Software Technology Park of India (herein after referred to as “STPI”) Scheme.

6. On the facts and circumstances of the case, the Ld. AO has erred both in facts and in law in initiating penalty proceedings under section 271 (1 )(c) of the Act.

7. That the Ld. AO erred in facts and in law in charging and computing interest under section 234B and 234D of the Act.”

9. At the time of hearing before us the Ld. authorised representative stated that assessee is contesting inclusion of Infinete data system, Infosys limited, E-infochips private limited in software development support system . He also contested that Sonata software limited does not cross the filter of 25% of Related Party transaction (RPT) adopted by the Ld. transfer pricing officer and therefore it should also be excluded. In marketing support services it is contesting for exclusion of the TSR Darashaw Ltd and global procurement consultant Ltd. He submitted that assessee does not raise any other claim other than exclusion of above comparables from the comparability analysis with respect to both the segments.

10. With respect to Infinite data systems private limited assessee objecting it on functional dissimilarity, services to single customer, abnormal supernormal profits, fluctuating trends and significant intangibles. The above objection of the assessee was rejected by the Ld. transfer pricing officer stating that assessee has not demonstrated how the services to a single customer is not comparable to it as assessee services are also to its single associated enterprise only. With respect to the functional dissimilarity same was also rejected. Other issues with respect to abnormal margins, supernormal growth have also been rejected. He also rejected the contention of the assessee that company owns significant intangibles in the form of software. Similar arguments were also advanced before us by the Ld. authorised representative stating that the Infinite data systems private limited should be excluded from the comparability analysis. For this he relied on the decision of the coordinate bench in ITA No. 1051/KOL/2015 for assessment year 2009 – 10 dated 19-10-2016 wherein at para No. 8.3 the above comparable was excluded from the comparability analysis in case of a Labvantage solutions private limited,.

11. The Ld. departmental representative vehemently objected to the claim of the Ld. authorised representative about exclusion of the above comparables stating that Ld. transfer pricing officer as well as the Ld. DRP has given adequate reasons for inclusion of the above comparable. It was further stated that Ld. authorised representative has not challenged it on the functional analysis with of comparable as well as of the assessee and therefore the above comparable cannot be excluded.

12. We have carefully considered the rival contentions and also perused the functional profile of the assessee as well as of the comparable with respect to the software development services which has been mentioned earlier. According to the assessee , comparable company is providing services of technical consulting, design and development of software, maintenance system integration, implementation, testing and infrastructure management services. These services except infrastructure management services have also been referred to a technical support services in revenue recognition portion and has a software technical consultancy services in segment reporting portion of the annual report. According to the assessee all the services are in the nature of the software development services. The Ld. transfer pricing officer as well as the ld. DRP panel has rejected the objection of the assessee stating that this is functionally comparable with the assessee. Assessee neither design and develop a software but is providing a low end chip services where infrastructure and architect everything is provided by the group company. It does not have any research and development activities whereas in the case of the comparable company it provides that services to Fujitsu services Ltd and also maintains and design and develop a software. In view of this this comparable company cannot be said to be in the same functions as it is performed by the assessee. In view of this we direct the Ld. transfer pricing officer/AO to exclude the above comparable company as its functions are quite different with the functions performed by the assessee.

13. The Ld. AR has also objected against the inclusion of the Einfo chips Bangalore Ltd. Assessee has objected before the Ld. transfer pricing officer that this company is functionally not comparable, segmental data are not available, it has abnormal supernormal profits, it has the fluctuating trends, it has a significant intangibles and fails 10% RPT Filter, the Ld. transfer pricing officer rejected the claim of the assessee stating that annual report of the above comparable company shows that it is functionally comparable as it develops software for its clients and do not perform any IT enabled services. The Ld. dispute resolution panel also confirmed the action of the Ld. transfer pricing officer. The Ld. authorised representative reiterated the same arguments which were raised before the Ld. lower authorities. Over and above ld AR relied up on decision of the coordinate bench in ITA No. 1051/KOL /2015 for assessment year 2009 – 10 dated 19 – 10 – 2016 wherein in para No. 8.2 the above comparable company was excluded.

14. The Ld. departmental representative vehemently submitted that the Ld. transfer pricing officer and the Ld. dispute resolution panel has given enough reasons for inclusion of the above comparable and the Ld. authorised representative could not state anything further that how the order of the Ld. transfer pricing officer and the Ld. dispute resolution panel is erroneous but merely citing a decision does not help the case of the Ld. authorised representative as it was compared with the functions of the that appellant in that case.

15. We have carefully considered the rival contention. From the business profile of the above company it is evident that it is engaged in the IT and IT enabled services. Further as stated in the order of the coordinate bench at para No. 8.2 in ITA No. 1051/Kol/2015 that segmental information is not available in case of IT and ITES services provided by the above comparable. The assessee has further stated that it is providing the wide range of services such as software, firmware, hardware, field programmable gate array, application specific integrated circuits quality assurance and testing. The Ld. transfer pricing officer himself has stated that the reference to the website of the company is not of much help as it may not have information which pertain to the assessment year 2010 – 11. We have carefully perused the balance sheet of the E info chips Bangalore Ltd provided to us at page No. 637 – 654 of the paper book wherein it was noted that at page No. 651 the earnings of the assessee was shown to be software development services and consultancy charges. In item No. 9 it is stated that the company is engaged in development and maintenance of computer software , production and sale of software. At page No. 652 while giving the segmental information, it was also maintained that the company is primarily engaged in software development and IT enabled services which is considered as the only one reportable segments and therefore there is no segmental information available with respect to the software development activities as well as IT enabled services. In view of this the above comparable is required to be excluded from the comparability analysis of the software development service segment of the assessee. Accordingly we direct the Ld. transfer pricing officer to exclude E info chips Bangalore Ltd.

16. The 3rd comparable is contested by the Ld. authorised representative is with respect to the Infosys limited which has already been excluded in the case of the assessee for earlier years following the decision of the Hon‟ble Delhi High Court. The assessee reiterated the same submission with respect to exclusion of the above comparable as submitted before ld Transfer Pricing Officer. It was the contention of the assessee that it has a huge brand value, it has huge turnover, and its „Finacle‟ Software is a leading product in banking industry. Therefore, it was submitted that it is functionally different and has significant R&D. The ld Transfer Pricing Officer and the ld Dispute Resolution Panel rejected the above contention. Before us, the ld AR submitted that this comparable should be excluded in view of the decision of Hon'ble Delhi High Court in case of Agnity India Technologies Ltd 262 CTR 291. He further stated that this comparable has been excluded in the case of the assessee for AY 2007-08 by the coordinate bench.

17. The ld DR relied upon the orders of the lower authorities. The ld DR could not point out that why we should not follow the decision in the assessee‟s own case without there being any change pointed out, hence, we respectfully follow the decision of the coordinate bench in assessee‟s own case for AY 2007-08 and directs the ld Transfer Pricing Officer to exclude the above comparable.

18. The 4th comparable contested by the Ld. authorised representative is with respect to the Sonata software limited stating that it breaches RPT filter adopted by the Ld. transfer pricing officer. He referred to the page number 769 2836 of the balance sheet of the comparable company showing that its RPT is higher than the filter. The similar objection was raised by the Ld authorised representative with respect to the earlier years wherein we have set aside this comparable to the file of the Ld. transfer pricing officer for verification of the claim of the assessee with respect to related party transactions. Therefore accordingly the assessee is directed to produce before the Ld. is assessing officer/transfer pricing officer computation of the related party transactions and AO may verify the same and if it is found in accordance with the claim of the assessee then above comparable company may be excluded. Otherwise, no interference is required in respect of the above comparable.

19. Coming to the market support services of the company assessee is contesting the 2 comparables (i) TSR darswhwa Limited and (ii) Global procurement Consultants Limited. The assessee reiterated the same arguments which were raised before the Ld. transfer pricing officer and the Ld. dispute resolution panel about the functional dissimilarity of the above comparables with the functions performed by the assessee. However the Ld. lower authorities rejected the contention of the assessee. The same arguments were advanced before us by the Ld. authorised representative.

20. The marketing and sales support services rendered by the assessee are tabulated at page No. 24 of the transfer pricing documentation is study of the assessee. According to that services provided by an Indian entity in monitoring and analysing the Indian market, it collects information such information pertaining to market trends, key policy changes in the industry etc provided to the core group companies. It has its in nutshell the group companies in identifying customers and provides market related information. It acts as a coordinator between the group companies and the customers located in India with respect to the sales of the groups products and solutions in India. The employees of the assessee further supports technical support to various customers during the development of any product or application in India.

21. First coming to the comparability analysis with respect to TSR Darashaw Ltd whose annual accounts are provided by the assessee in paper book at page No. 1237 – 1278. The above companies engaged in the business of payroll processing, traditional registry system, and record management systems etc. Therefore, mainly the comparable company is engaged in the business of registrar and transfer of shares, records management, and payroll processing. This comparable has been selected by the Ld. Transfer Pricing Officer, which is engaged in three segments such as registrar and transfer agent activity, records management activity and pay roll and trust fund activity. According to the Ld. Transfer Pricing Officer and Ld. Dispute Resolution Panel, this is a good comparable. However, the Ld. Authorised Representative submitted that this company is engaged in Share Registry Services and other support services. Further as per annual report of the company, it is primarily engaged in provision of share registry and related financial services and therefore, cannot be compared with the Assessee, a captive market support service provider. It is also contended that company has earned a high profit margin of 41.86% during the FY 2009-10. The Ld. Authorised Representative placed reliance in this regard on the decision of Delhi ITAT in case of Microsoft Corporation India (P.) Ltd vs. DCIT, ITA 5766/Del/2011. We have carefully considered the rival contention and perused the balance sheet of the company, which is placed the paper book, which says that it is mainly engaged in the business of registrar and share transfer agent. As per segment reporting shows, that out of the total turnover of 1089.53 Lakhs and Rs. 116.36 Lacs of the turnover goes to the registry and share transfer agent business and Records management services. The functions to be performed with respect to the registry and share transfer agent are altogether dissimilar to the functions to be performed by a procurement advisor like Assessee. It is also not the case of the revenue that only some of the segment of the comparable is required to be considered, but the Ld. Transfer Pricing Officer has considered the whole of the company as functionally comparable to the Assessee with which we disagree. Therefore, we direct the Ld. Transfer Pricing Officer/AO to exclude this comparable for being functionally dissimilar.

22. The next comparable contested is Global procurement consultants Ltd. The Ld. Transfer Pricing Officer has included this comparable and according to him this company acts as the clients' representative in taking on the total responsibility of procurement by providing a comprehensive range of procurement related advisory services and allied activities for projects in India and abroad. The main functions of the company are preparing and reviewing technical specifications, estimation of costs, selection of vendors, inspection and expediting, quality control and time management. The Ld. authorized representative has contested that this Company is engaged in business of shipping logistics, payment and accounting, know-how transfer (training) and bid support services which are not similar to services provided by the Assessee. It also renders financial advisory services. It was further contested that it has abnormal and volatile margins. The Assessee has submitted the balance sheet of the company, which is placed at page No. 1279-1323 of the paper book. According to the revenue model of the company, it is providing services of procurement advisory services and back-office support to the regional procurement officers of the World Bank reviewing their technical specification of the goods planned to be procured. The major earning of the company is from consultancy services in these areas only. On perusing the functional profile of this comparable company, we are of the view that functions performed by this comparable company are comparable with the functions performed by the Assessee. Hence, we reject the argument of the Ld. Authorised Representative of the functional dissimilarity of this comparable.

23. Accordingly appeal filed by the assessee is partly allowed with respect to comparables in software development segment directing ld TPO /AO

a. to exclude Infosys Limited , Infinite data Systems Limited and E info chips Bangalore Limited from Software development segment

b. To reexamine the claim of the assessee of Sonata Software limited not passing the filter of related party transactions

c. To exclude TSR Darshwa limited from marketing support services Segment

24. As there were no other grounds pressed by the ld AR before us other than adjudicated above, hence, we dismiss remaining grounds of appeal.

25. In the result, appeal of the assessee for AY 2010-11 is partly allowed accordingly.

26. Order pronounced in the open court on 08/12/2017.

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