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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI N. K. BILLAIYA & MS SUCHITRA KAMBLE
ORDER
PER SUCHITRA KAMBLE, JM
This appeal is filed by the Revenue against the Assessment Order dated 08/12/2008 passed u/s 143(3)/144C/92CA (4) of the Income Tax Act, for Assessment Year 2005-06.
The grounds of appeal are as under:- “1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs. 11,96,61,358/- on account of arm’s length price.
2. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs.64,83,213/- on account of provision for expenses.”
The assessee company is engaged in the business of designing of semiconductor products, software and electronic systems and providing sales
and technical support services. The assessee filed its return of income on 31- 10-2005 showing the total income of Rs. 16,08,406/-. The case was selected for scrutiny and the notice u/s 143(2) of the IT Act was issued and served on the assessee on 27-9-2006. In response to notice u/s 143(2) of the IT Act, the CA of the Assesse attended and furnished the details called for. In this case, a reference was made to the Addl. CIT (TPO-I), New Delhi for determining arm’s length price u/s 92CA(3) in respect of international transaction entered into by the assessee during F.Y. 2004-05. The issue was examined by the Addl. CIT(TPO-1) New Delhi. The difference in book value of the international transaction was worked out at Rs. 11,96,61,358/-. Accordingly, the assessee was asked to explain why the difference in book value of international transaction and the arm’s length price worked out by TPO vide order u/s 92CA(3) dated 8-10-2008 amounting to Rs. 11,96,61,358/- should not be brought to tax. The assessee vide its letter dated 05-12-2008 reiterated what has been stated before the TPO. The Assessing Officer made an addition of Rs. 11,96,61,358/- on account of difference in the value of international transactions and the arm’s length price of the transactions in view of the reasons stated by the TPO in his order u/s 92CA(3) dated 8-10-2008. During the course of assessment proceedings, the assessee was asked to furnish the details of liability as shown in the balance sheet. From the details furnished it was observed by the Assessing Officer that there are miscellaneous expenses liabilities to the extent of Rs. 64,83,213/- which has been reversed in the next year. The assesee was therefore asked to explain as below:
“Miscellaneous expenses liabilities to the extent of Rs. 64,83,213/- has been debited which is reversed in next year but the liabilities has not been crystallized during the year, why it should not disallowed.
The assessee’s representative attended and submitted that the miscellaneous liabilities represent full and final settlement of employees and the payment to the extent of RS. 58,84,639/- was made in June, 2005. The Assessing Officer held that the assessee’s representative merely made a settlement but no evidence to substantiate the claim was furnished. Thus, the Assessing Officer observed that the entire liability to the extent of Rs. 64,83,213/- was reversed in subsequent year which clearly proves that the liability in respect of miscellaneous expenses to the extent of Rs. 64,83,213/- had not been crystallized during the year. The same was therefore disallowed and added to the total income of the assessee.
Being aggrieved, the assessee filed appeal before the CIT (A) and CIT(A) partly allowed the appeal of the assessee.
The Ld. DR relied upon the order of the TPO & Assessment Order. The Ld. DR submitted that the assessee company is engaged in the specific work that of work pertaining to chip designing i.e. developing a part of software which aids in manufacturing integrated Circuits for use in wireless/networking application. Thus, it is not a low level work but a high end work. The Ld. DR further submitted after applying all the filters such as multiple year data, the TPO has rightly selected the comparables that of Infosys Technology Ltd. and Satyam Computers. As regards deletion of an addition of Rs. 64,83,213/- on account of provision for expenses, the Assessing Officer rightly made addition as there was no evidence to substantiate the claim of the assessee company.
The Ld. AR relied upon the order of the CIT (A) as well as the following case laws:
i) CIT vs. Agnity India Technologies Pvt. Ltd. 2013 TII-12-HC-Del-TP (Del. HC) ii) Capital IQ Information Systems (India) (P) Ltd. vs. DCIT (2013) 32 taxman.com 21 (Hyd Tri.) iii) CIT vs. Mentor Graphics (Noida) (P) Ltd. 215 Taxman 539 (Del. HC) iv) ACIT vs. Maersk Global Service Centre (India) (P) Ltd. 133 ITD 543 (Mum Tri.) v) Tevapharm (P) Ltd. vs. ACIT 50 SOT 150 (Mum Tri.) vi) Carlyle India Advisors (P) Ltd. vs. ACIT 53 SOT 267 (Mum Tri.) vii) ST Microelectronics (P) Ltd. vs. CIT 15 ITR 410 (Del. Tri.) viii) ST Microelectronics Pvt. Ltd. vs. CIT 2016-TII-15-HC-DEL-TP (Del. HC)
As regards Ground No. 2, the Ld. AR submitted as per Rule 27 of the Income Tax Act, 1961 that the claim of the assessee company relating to Section 10A has to be kept open by the Revenue authorities.
We have heard both the parties and perused the material available on record. As regards Ground No. 1 of the Revenue’s appeal, from the perusal of the records it can be seen that the comparables which were selected by the TPO are functionally different. The CIT (A) held as under:- “I have gone through the above submission of the Appellant and have also gone through the TP Documentation submitted by the Appellant. On perusal of the above I am of the view that TPO has without following a scientific search methodology accepted only two companies Infosys and Satyam as comparable to the Appellant. I have considered the submission of the appellant in this regard and I am of the view that companies like Infosys and Satyam, which have huge and diversified business operations and presence of significant brand intangibles, cannot be compared to a limited risk entity operating on a full cost plus basis. This view is also supported by the rulings provided by Hon’ble ITAT Further, on a careful consideration of the order, it transpires that the TPO has not provided any supporting or evidence for his rejection of the comparability analysis as conducted by the Appellant, under TNMM, in its TP document and submissions. The TPO has apparently made his finding based on his reading of Freescale India being a “high end” service provider. However, the TPO has not recorded any reasons for rejecting all the companies other than Satyam and Infosys. He has done so without evaluating their comparability in terms of their functional and risk profile, further the TPO has also not analysed the differences in the risk profile as well as the size and the nature of operations of the Appellant with his two selected comparable i.e. Satyam and Infosys. Thus, the approach adopted by the TPO wherein, he has selected only two comparable companies without adopting a logical search process cannot be considered as a valid transfer pricing analysis. In view of the same I am inclined to accept the comparability analysis as conducted by the appellant.
The appellant during the course of assessment proceedings had conducted fresh benchmarking based on the updated (for FY 2005-06) financials available wherein, it selected 32 comparable companies with mean margin of 9.64%. The combined margin (including marketing support segment) earned by the appellant was 10.22%. In view of the above the arm’s length price charged by the appellant is accepted and transfer pricing addition made by the TPO ought to be deleted.”
Thus, the CIT(A) has given an extensive finding as to TPO’s comparables are not relevant at all and the fresh benchmarking conducted by the assessee company is relevant. Therefore, there is no need to interfere with the findings of the CIT(A). Ground No. 1 is dismissed.
As regards Ground No. 2, the CIT (A) held as under:- “ISSUE 10: This ground relates to the action of the A.O in not allowing the deduction u/s 10A of the I.T Act, 1961 for additions referred in Ground 3 & 4. Ground No. 3 & 4 is about disallowance of expenses which are submitted as entitled to deduction. As the appellant is allowed the appeal in quantum of additions, this ground of appeal become infurcutous and is not dealt in this order.
The Ld. AR submitted that the assessee company is coming under the purview of Section 10A entitlement. Though this issue is not addressed by the CIT(A) on merit, yet the same requires consideration as the assessee company is entitled to claim benefit under Section 10A in the respective applicable years. Thus, with these findings we dismiss Ground No. 2 of the Revenue’s appeal. 10. In result, the appeal of the Revenue is dismissed. Order pronounced in the Open Court on 29th OCTOBER, 2018.