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Facts
The assessee, NXP India Private Limited, engaged in creating semiconductors and software, filed its return of income for AY 2014-15. The case was selected for scrutiny, and an international transaction with its associated enterprise was referred to the TPO for computing the Arm's Length Price (ALP).
Held
The Tribunal held that several comparable companies identified or rejected by the TPO/DRP were not functionally similar or did not meet the required criteria. The matter was restored to the TPO to recompute the ALP after including/excluding comparables and applying a tolerance range of +/- 1%.
Key Issues
Whether the transfer pricing adjustment made by the TPO/DRP is sustainable, particularly concerning the selection and rejection of comparable companies and the methodology used for determining ALP.
Sections Cited
143(2), 142(1), 144C(13), 144C(5), 133(6)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH, ‘H’: NEW DELHI
Before: SHRI PRAKASH CHAND YADAV & SHRI BRAJESH KUMAR SINGH
ORDER PER PRAKASH CHAND YADAV, JM
The present appeal of the assessee is arising out of the order of the Ld. Assessing Officer dated 29.10.20218 and relates to Assessment year 2014-15.
Brief facts of the case as coming out of the orders of the authorities below are that the assessee company engaged in the business of creating semiconductors, systems solutions and software that deliver better sensory experiences in mobile phones, personal media players, identification applications, cars and a wide range of other electronic devices. It has filed its Return of Income on 28.11.2014 declaring a total income of Rs.29,14,35,490/-. The case was selected for scrutiny and notices u/s. 143(2) dated 29.08.2015 and 142(1) 08.09.2017 were issued. In compliance, authorized representatives of the Assessee Company appeared on various dates and furnished relevant details. The Assessing Officer observing that the assessee has entered into international transaction with its AE, referred the matter to the learned Transfer Pricing Officer (in short ‘TPO’) for computing the Arm’s Length Price (in short ‘ALP’) of the international transaction with AE. The Ld. TPO vide its order dated 30.10.2017 made an upward adjustment of Rs.23,13,22,901/-.
Aggrieved with the order of the TPO, the assessee filed its objections before the Ld. Dispute Resolution Panel and assailed the draft assessment order of the Assessing Officer. The Ld. DRP reduced the TP adjustments to the tune of Rs.21,04,63,247/-. Thereafter, the Assessing Officer passed the final assessment order.
Aggrieved with the order of the Assessing Officer, the assessee has come up in appeal before us by raising the following grounds of appeal.
Based on the facts and circumstances of the case and in law, NP India Private Limited (hereinafter referred to as "NXP India" or the "Company" or the "Appellant"), reslly craves leave to prefer an appeal against the order passed by the Assistant Commissioner of Income-tax, Circle - 18(2), New Delhi (the "learned AO"), dated 29 October 2018 for the Assessment Year (AY") 2014-15, under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ("the Act") in pursuance of the directions issued by Dispute Resolution Panel ("Hon'ble DRP"), Bangalore dated 05 September 2018 under section 144C(5) of the Act (impugned order*) inter-alia on the following grounds:
That on the facts and circumstances of the case and in law: General 1. The impugned order and directions of the Hon'ble DRP are based on incorrect appreciation of facts and wrong interpretation of law and therefore, are bad in law.
2. The learned AO has erred in assessing the total income at INR 49,93,46,340 as against the returned income of INR 29,14,35,490 computed by the Appellant in its return of income for AY 2014-15.
3. The learned AO has erred in laws and in facts, in determining a sum of INR 10,76,56,487 as the balance tax (including interest) demand payable by the Appellant.
4. Transfer Pricing grounds 4.1 The learned DRP/AO/TPO erred in making an addition of INR 21,03,55, 133 to the total income of the Appellant on account of adjustment in the arm's length price (*ALP") of the provision of software development services transaction entered by the Appellant with its associated enterprise. 4.2 The learned DRP/AO/TPO have erred in law and facts by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("Rules") and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length. 4.3 The learned DRP/AO/TPO have erred in law and facts by determining the arm's length margin/ price using only FY 2013- 14 data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 4.4 The learned DRP/AO/TPO erred in rejecting certain comparable companies by applying the following quantitative and qualitative filters: a) for having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months); b) using employee cost greater than 25% of the total revenues as a comparability criterion; c) with export sales less than 75% of total sales vis-à-vis 25% of total sales used by the Appellant in the TP Study;
d) applying only the lower turnover filter of less than INR 1 crore as a comparability criterion and not applying a higher threshold limit for turnover filter; 4.5 The learned DRP/AO/TPO erred, in law and in facts, by exercising his powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes. 4.6 The learned DRP/AO/TPO erred, in law and in facts, by accepting/rejecting companies based on unreasonable comparability criteria: a) The learned DRP/AO/TPO erred, by accepting certain additional comparable companies by conducting a fresh independent search during TP assessment proceedings which are functionally dissimilar; • Infosys Ltd. • Thirdware Solution Limited b) The learned DRP/AO/TPO erred, by accepting certain additional comparable companies by conducting a fresh independent search during TP assessment proceedings which are functionally dissimilar; • Larsen & Toubro Infotech Ltd. • Mindtree Limited • Persistent Systems Limited (Seg) • RS Software (India) Limited • Cigniti Technologies Limited Although these companies were chosen as comparables in transfer pricing study, upon consideration of more details, these companies are found to be not comparable and should be excluded from the final set of comparables. c) The learned DRP/AO/TPO erred, by rejecting the following comparable company identified by the Appellant using export sales turnover greater than 75% of sales as a comparability creations: • TVS Infotech Limited d) The learned DRP/AO/TPO erred, by rejecting the following comparable company identified by the Appellant using non availability of financial data for financial year 2013-14 as a comparability criterion: • Infomile Technologies Limited e) The learned DRP/AO/TPO erred, by rejecting certain comparable companies selected by the Appellant in its TP documentation and comparable additionally included on the ground that they are functionally dissimilar; • Akshay Software Technologies Limited • Cat Technologies Limited • Evoke Technologies Private Limited • Lucid Software Limited • Maveric Systems Limited • Sasken Communication Technologies Limited • Sagarsoft India Limited 4.7 The learned DRP/AO/TPO erred, in law and in facts, by not making suitable adjustments to account for differences in working capital position of the Appellant vis-a-vis the comparables. 4.8 The learned DRP/AO/TPO erred, in law and in facts, by not making suitable adjustments on account of differences in the risk profile of the Appellant vis-a-vis the comparables, while conducting comparability analysis. 4.9 The learned DRP/AO/TPO have erred in law and facts by determining a transfer pricing adjustment on account of interest on outstanding receivables amounting to INR 1,08,114. 4.10 Without prejudice to our ground of objection 4.9 above, the learned DRP/AO/TPO have erred, in law and in facts, by not appreciating that the outstanding trade receivables from its AEs is arising from the provision of software development services transaction which is to be considered as closely linked to such transaction and should not be tested separately from arm's length perspective. 4.11 Without prejudice to our ground of objection 4.9 above, the learned DRP/AO/TPO have erred, in law and in facts, by re- characterizing the outstanding receivables as on 31 March 2014 as a separate international transaction.
4.12 Without prejudice to our ground of objection 4.10 above, the learned DRP/AO/TPO have erred, in law and in facts, by not considering that working capital adjustment appropriately takes into account the delayed/ outstanding receivable and separate TP adjustment is unwarranted.”
Grounds of appeal no.1 to 3 are general in nature and hence do not require any specific adjudication. In so far as the rest of grounds of appeal, the assessee has challenged the addition of Rs.21,03,55,133/- main plank of the arguments of the ld. Counsel for the assessee is that the learned TPO has wrongly selected comparables while conducting the TP study. The ld.
Counsel for the assessee filed a written submissions before the Bench and vehemently argued that the TPO has erred in including the following companies in the list of comparables in as much as these companies are not functionally similar to the assessee as well as they failed to qualify the various filters such as significant brand value investment, investment in R & D full fledge risk bearing entity etc. The name of the companies is mentioned herein below. i. Infosys Limited, ii. Larsent & Toubro Infotech Ltd. iii. Mindtree Limited iv. Persistent Systems Ltd. v. Thirdware Solutions Ltd. vi. R.S. Software (India) Ltd.
The ld. Counsel for the assessee has filed a brief synopsis, wherein, he has pointed out as to why these comparables are required to be excluded. Similarly, ld. counsel for the assessee argued that the ld. TPO has wrongly excluded the following companies from the list of comparables chosen by the assessee.
i. Sagarsoft India Limited, iii. CAT Technologies Limited iv. Lucid Software Limited
It is the contention of the ld. Counsel for the assessee that these companies are functionally similar of that of assessee and also qualifies various filters applicable in the case of the assessee.
The Ld. DR relied upon the orders of the authorities below.
We have heard the rival submissions and perused the materials available on record. We are of the view so far as the exclusion of comparables from the list of comparables is concerned we observe that comparables mentioned in para-6 of this order are not functionally similar to the assessee and the same are excluded by the Co-ordinate Bench of the Tribunal in assessee’s own case in and 2861/Bang/2017 for AYs 2012-13 and 2013-14 order dated 27.04.2020. The Co-ordinate Bench of the Tribunal while excluding these comparables from the list of TP study has observed as under:-
“5.3 Now the assessee has challenged for the exclusion of the following five comparables:- (i) Persystent Systems Limited (ii) Larsen & Toubro Infotech Limited (iii) Infosys Limited (iv) Genesys International Corporation Limited (v) Sasken Communication Technologies Limited”…………………………….
“6.2 Persistent Systems Limited having revenue of 8103.64 Million from software services and other income of 323.76 million from income from other sources. Assessment year 2012-2013 is an abnormal year of operation to Persistent Systems Limited, which is evident from the annual report placed on record by the assessee in its paper book. Further, Persistent Systems Limited is having intangibles to the tune of 2402.67 million as evident from its balance sheet ended on 31.03.2012. Being so, it is not comparable to assessee’s case”
Similarly, the coordinate bench has excluded the other comparables, for the sake of brevity we are not reproducing the findings of the ITAT with respect to other comparables.
Similarly, so far as the inclusion of comparables for the purpose of computing the ALP, we are of the view that comparable Sagarsoft India ltd is not akin to the functions of the present assessee and hence the same is not fit for inclusion, in respect of rest of the comparables, we observe that these are functionally similar with that of assessee and hence required to be included in the list of comparables for computing the ALP. It is pertinent to observe that these comparables have been also been approved by the ITAT in assessee’s own case in and 2861/Bang/2017 for AYs 2012-13 and 2013-14 order dated 27.04.2020. Therefore,we include these in the list of final comparables and restored the matter to the file of the TPO for computing the fresh ALP after inclusion and exclusion of the comparables as mentioned in this order. The TPO is directed to exclude the comparables as mentioned above and to include the comparables as pointed out by us and then compute the fresh ALP in accordance with law, further if the ALP after inclusion and exclusion, is within the tolerance range of + 1% then no adjustment is called for in this matter.
In the result, the appeal of the assessee is allowed as indicated above.
Order pronounced in the open court on 09th May, 2025.