M/S MICROSHIP TECHNOLOGY INDIA PRIVATE LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4(1)(2), BANGALORE

Date of Hearing : 10-03-2021 Date of Pronouncement : 14-06-2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against order dated 21/12/2018 passed by the Ld.DCIT Circle 4(1)(2) under section 143(3) read with section 254 of the Act, on following grounds of appeal: “The grounds mentioned herein by the Appellant are without prejudice to one another.

1. That the order of the learned Deputy Commissioner of Income-tax, Circle - 4(1)(2), Bangalore ('learned AU'), dated December 21, 2018, to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed.

2. That the Dispute Resolution Panel ('learned DRP') erred in not appreciating that the order of the learned Assistant Commissioner of Income-tax (Transfer Pricing) - 2(1)(1), Bangalore ('learned TPO') passed under Section 92CA of the Income-tax Act, 1961 ('the Act') is contrary to law and thus liable to be quashed.

3. That on facts and in the circumstances of the case, in the first round of assessment, the learned DRP/ AO/ TPO erred in making an upward adjustment to the transfer price of the Appellant's international transactions of INR 29,885,102 in respect of software development services and INR 6,354,054 on acount ofmarketing support services. Vide the order of the Income Tax Appellate Tribunal ('ITAT'), dated October 27, 2017, the entire TP matter was remanded back to the file of learned DRP and learned TPO with specific adjudication. In lieu of this order, the learned DRP/ AU! TPO erred in retaining an upward adjustment of INR 26,366,448 in respect of Appellant's software development services and confirming the adjustment of INR 6,354,054 on account of marketing support services. Grounds for software development services 4. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development services, the learned DRP/ AO/ TPO erred in: 4.1. Rejecting the Transfer Pricing ('TP') documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence. 4.2. Rejecting the comparability analysis carried out by the Assessee in the TP documentation and in conducting a fresh comparability analysis for the software development services based on the application of additional filters in determining the arm's length price. 4.3. Using data, which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation. 4.4. Not considering the multiple year/prior year data of comparable companies while determining the arm's length price in relation to the Assessee's international transactions with its AEs. 4.5. Re-adjudicating and disregarding its own directions dated November 28, 2014, wherein the following comparable companies were rejected by the learned DRP based on functional differences: a) Infosys Limited b) Mindtree Limited c) Persistent Systems Limited d) Sasken Communication Technologies Limited e) Tata Elxsi 4.6. Disregarding certain filters applied by the Appellant in selection of the comparable companies at the time of TP documentation.

4.7. Including the following companies even though they are functionally different from operational profile of the Appellant (not considering submissions made by appellant: a) Infosys Limited; b) Kals Information Systems Limited c) Sasken Communication Technologies Limited d) Tata Elxsi 4.8. Excluding the following companies even though they are functionally comparable to the Appellant and passes all the filters applied by the learned TPO in its order: a) Akshay Software Technologies Limited b) LGS Global Limited 4.9. Not making appropriate adjustments under Rule ioB: a) Differences in accounting practices and depreciation rates adopted by Appellant and companies identified by him as comparable b) Underutilisation of capacity by Appellant c) Employees Stock Option Plan ('ESOP') charged by the parent company of INR 300.84 lakhs evaluated on the Black Scholes method in terms of US generally accepted accounting principles d) Risk profit between the Appellant and the comparable companies 4.10 roviding negative working capital adjustment to account for differences in the working capital between the Assessee and the comparable companies. (Tax Effect: INR 8,961,956) Grounds for marketing support services 5. On facts and in the circumstances of the case, the learned DRP/AO/TPO erred in: 5.1. Stating in its directions that Appellant has not made any submissions against the adjustment made by the learned TPO for the marketing support services and accordingly not providing any specific adjudication on the comparable companies selected by the learned TPO; 5.2. Rejecting the Transfer Pricing ('TP') documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence. 5.3. Rejecting the comparability analysis carried out by the Assessee in the TP documentation and in conducting a fresh comparability analysis for the software development services based on the application of additional filters in determining the arm's length price. 5.4. Using data, which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation. 5.5. Not considering the multiple year/prior year data of comparable companies while determining the arm's length price in relation to the Appellant's international transactions with its AEs.

5.6. ncluding the following companies even though they are functionally different from operational profile of the Appellant: a) Asian Business Exhibition & Conferences Limited b) HCCA Business Services Private Limited c) Hindustan Housing Co. Limited d) Killick Agencies & Marketing Limited GAppellantExcluding the following companies even though they are functionally comparable to the and passes all the filters applied by the learned TPO in its order: a) ICRA Management Consulting Services Limited (Tax Effect: INR 2,159,743) Grounds for ESOP expenses 6. The learned AO/ TPO's action of eliminating the employee stock compensation cost from the gross income is erroneous 'and based on wrong appreciation of facts. The revenue of the Appellant is that charged commercially by the Appellant to its associated concern. While the revenue would continue to be INR 290,053,589 of software development services unit and INR 54,523,003 of marketing support services unit as commercially charged, adjustment for employee stock compensation cost should be made only from the total costs. The action of the AO/TPO in subtracting employee stock compensation cost from the gross income is erroneous. (Tax Effect: INR 25,384,607) 7. Without prejudice to the ground no. 6, the learned TPO erred in considering incorrect revenue while reducing the same from the software development and marketing support units. (Tax Effect: INR 3,496,416) 8. The learned AO/ DRP erred in not allowing deduction for a sum of INR 1,99,91,400 representing cost of ESOP/ RSUs debited to the Company by its parent consequent to stock options/ restricted stock units issued by them to its employees and claimed by the Company in the revised return of income. The learned AU! DRP erred in not appreciating that the said amount is an employee compensation expenditure and has been expended wholly for the purpose of business. (Tax Effect: INR 67,95,077/-) 9. That the learned AO erred in levying interest under Section 234 B of the Act of INR 7,142,540. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal.” Brief facts of the case are as under: 2. The assessee is engaged in the business of manufacturing and marketing of semiconductor components. It filed its return of income on 13/10/2010 declaring total income of Rs.4,52,25,320/-. Subsequently, the case was selected for scrutiny as assessee’s international transaction exceeded Rs. 15 crores.

Software development service segment: 4. It is observed that, assessee used TNMM as the most appropriate method and computed its margin at 12% by using OP/TC as PLI. Is it is observed that, assessee used 11 comparables with average margin of 13.86%. The Ld.TPO dissatisfied with the comparables selected by assessee applied certain filters and shortlisted final set of 11 comparables with arithmetic mean of 22.71%. Marketing support service segment:

Assessee provides designing services in accordance with the specifications received from the AE and the designing and development services rendered by assessee comprises of designing development which includes logic/circuit/layout design, application support which includes application notes and CAD system support for designs. Marketing support service segment. 14.2 Under this segment assessee provides services to the AE in Ireland for different product lines from its office live identification of potential customers for microchip Ireland, suggesting the suitability of microchip Ireland’s products based on the OEMs requirement, provision of application support to the users design engineers by microchip India technical team, providing product training to prospective customers and conducting seminars, coordination with distribution channels and factory to facilitate delivery of large orders of OEMs, obtaining and maintaining literature and other potential materials required for promoting the Ireland’s product, or promotional or marketing activities driven by microchip Ireland are executed by assessee. 14.3 Assets owned: At page 287 and 290 of paper book it has been submitted that assessee owns tangible assets without which it cannot function list of it has been noted that assessee owns some amount of computer software is which is necessary for its functioning of business however does not own any non routine valuable intangible assets.

14.4 Risks assumed It has been submitted in the TP study that assessee does not bear any credit risk, capacity utilisation risks, contract risk, price risk, market risk. It only bears a minimum amount of service liability risk and foreign exchange fluctuation risk. Based on the above we shall undertake the comparability analysis of the comparables alleged for inclusion/exclusion under both the segments.

289/219 taxman 26, the principle of judicial discipline etc , following the Bombay High Court decision upheld the DRP order in excluding 6 companies, from the list of comparables chosen by the TPO, on the basis of turnover and size. Following it , we uphold the DRP order in excluding the above 6 companies, from the list of comparables chosen by the TPO, on the basis of turnover and size. Thus, the corresponding grounds of the Revenue fail.

There is nothing on record brought by the Ld. CIT DR in order to distinguish the above observation/findings by this tribunal. Accordingly respectfully following the aforestated view we direct Ld.AO to exclude these comparables from the finalist.

by assessee stands allowed. Ground No. 5.6

17. This ground has been raised by assessee for exclusion of Asian Business Exhibition and Conferences Ltd., HCCA Business Services Pvt.Ltd, Hindustan Housing Company Ltd., Killick Agencies and Marketing Ltd., on the ground that, they are functionally not similar with that of assessee under marketing support service segment. The Ld.Counsel has placed reliance on the decision of DCIT vs Electronics for Imaging India Pvt Ltd (supra) and ARM Embedded Technologies Pvt.Ltd vs ITO in IT(TP)A No.1225/B/2016 by order dated 19/07/2019 for assessment year 2010-11. She submitted that these comparables have been excluded for various reasons by this Tribunal. 17.1 On the contrary, the Ld.CIT.DR relied on the observations of DRP are not authorities below. 17.2 We have perused submissions advanced by both sides in the light of records placed before us. 17.3 We have also perused the decision relied by the Ld.Counsel referred to herein above. We note that this Tribunal in similar circumstances considered these comparables were serving as under: “(1) HCCA Business Services Pvt. Ltd.

17.4 There is nothing on record brought by the Ld. CIT DR in order to distinguish the above observation/findings by this Tribunal. Accordingly respectfully following the aforestated view we direct Ld.AO to exclude these comparables from the finalist. Ground No. 5.7 18. This ground has been raised by assessee seeking inclusion of ICRA Management Consulting Services Ltd. 18.1 The Ld.Counsel submitted that, this company is engaged in providing support services and is functionally comparable with that of assessee. She placed reliance on Hon’ble Mumbai Tribunal in case of IIMLH Advisors Ltd. vs DCIT in by order dated 20/06/2018 for assessment year 2010-11. In our view this comparable needs to be remanded to the Ld. AO/TPO for reconsideration in accordance with the observations of Hon’ble Mumbai Tribunal in IIMLH Advisors Ltd. vs DCIT (supra). Accordingly this ground raised by assessee stands allowed for statistical purposes.

18. Ground No.8 is in respect of the disallowance of deduction of ESOP expenses. 18.1 The Ld.Counsel submitted that during the year under consideration assessee had remitted an amount of Rs.19,91,400/- to its AE representing cost of ESOP bone by a foreign insurance of stock option to the employees of assessee. It has been submitted that the claim was raised by way of revised return which was not granted by the Ld.AO. 18.2 The Ld.CIT DR relied on orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. 18.3 It was further submitted that, the observations of the CIT(A) that by issue of ESOP, the foreign parent company at Denmark was benefited will be no ground to disallow a legitimate business expenditure of the Assessee which was employee cost of the Assessee. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of Sassoon J. David & Co. (P.) Ltd. v. CIT reported in (1979) 1 Taxman 485 , wherein Hon'ble supreme Court took the view that, if the assessee incurred any expenditure in the course of its business, voluntarily and without necessity, but if it is incurred for promoting the business and to earn profit, deduction u/s. 37(1) of the Act has to be allowed. The Hon'ble Court further held that, the fact that somebody other than the assessee is also benefited by the expenditure, should not come in the way of expenditure being allowed as deduction. 18.4 Further, Hon'ble Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT reported in (1987) 30 Taxman 467), following the Hon'ble Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. (supra), held that the fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed as deduction u/s. 37(1) of the Act. 18.5 Even the Direct Tax Notification No.323 dated 11.10.2011, was issued in exercise of powers conferred u/s. 17(2) of the Act. The Central Government in the aforesaid Notification specified guidelines, which need to be followed when shares are allotted under ESOP scheme. In clause (6) of the aforesaid guidelines, the Central Govt., has laid down that, where shares of a parent company are issued under an ESOP, the company issuing ESOP has to give the required particulars to the Chief Commissioner of Income-tax ("CCIT") with an English translation of the plan or scheme, if the same is in a language other than English. It was pointed out that the assessee duly complied with the aforesaid guidelines and filed the ESOP scheme with the CCIT as on 05.12.2005. 18.6 The Ld.Counsel drew our attention to the observations of the Ld.CIT(A) in para _____ of his order, and observed that, the arrangement by which the assessee issued the shares at a discount to its employees of the parent company under an ESOP and paid the difference between the issue price and the fair market value of the shares as reimbursement to the parent company was a mechanism to pass on the liability to the Indian company only to enable the Indian company to avail of the tax deduction under the Act. It was submitted that, no such inference whatsoever had been drawn by the CCIT, pursuant to the assessee filing the required details of ESOP. With regard to the observations of the Ld.CIT(A) that capital expenditure of the parent company was being cloaked in the garb of revenue expenditure of the affiliate in India, it was pointed out that there was an actual cash outflow from the assessee to the parent company and that there was no arrangement to pass on the capital expenses of the parent company as revenue expenses of the affiliate in India. The observations of the Ld.CIT(A) in this regard are based on surmises and suspicion.

18.7 Further, the Ld.Counsel submitted that, the issue stands squarely covered by assessee’s own case in IT(TP)A no. 267 & 87/B/2019 for assessment year 2009-10 by order dated 28/8/2019. Copy of the decision is placed at page 1124 of the paper book. This Tribunal observed as under:- 18.8 Respectfully following the above, we hold it to be revenue expenditure, eligible to be allowed under section 37 of the Act. Accordingly, this ground raised by assessee stands allowed. In the result appeal filed by assessee stands partly allowed. Order pronounced in the open court on 22nd June, 2021 Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 22nd June, 2021. /Vms/ Copy to: