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Income Tax Appellate Tribunal, DELHI BENCH “I-1”: NEW DELHI
Before: SHRI BHAVNESH SAINI & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
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. 2645184314/- b. Provision of market support services Rs. 44294086/- 2. 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 13 comparables whose average profit margin was 9.80% on the cost and therefore, the margin earned by the assessee of 10.24% on Profit Level Indicator (PLI) of operating Freescale Semiconductor India Pvt Ltd Vs. DCIT, , /Del/2015 (Assessment Year: 2009-10 )
profit to total cost and therefore, international transactions of software development was treated at arm‟s length.
In market support services the assessee selected 5 comparables whose average margin was 7.27% as against taxpayers margin of 9.24% and therefore, the international transaction of market support services was stated to be a arm‟s length.
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 five new comparables and rejected six comparables of the assessee and thus a set of 12 comparables whose arithmetic mean of the margin was 24.44% as against the taxpayer‟s margin of 10.24%. Therefore, on the software development services of Rs. 2645184314/-, he proposed an adjustment of Rs. 241332135/-.
For marketing support services of Rs. 44294086/- he rejected all the taxpayers comparables but used the 8 comparables out of 10 comparables of last year and their adjusted PLI of operating profit to operating cost was determined 18.90% whereas, the taxpayers margin was 9.24% therefore, he made an addition of Rs. 3181324/-. Therefore, he proposed an adjustment on account of software development services of Rs. 241332135/- and on marketing support services of Rs. 3181324/- making the total adjustment of Rs. 244513459/- by order dated 16.01.2013 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 wherein, against returned income of Rs. 263939531/- as per ROI filed on 25.09.2009, assessee was assessed at Rs. 244513459/-.
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 20.12.2013. The ld Dispute Resolution Panel directed the ld Assessing Officer/TPO to modify the adjustment on account of transfer pricing from Rs. 244513459/- to Rs. 330636502/- by including the impact of working capital adjustment and foreign exchange gain and losses to be treated as non operating items. Consequently the ld Assessing Officer passed the assessment order u/s 143(3) read with section 144C of the Act on 21.02.2014 determining total taxable income of the assessee at Rs. 594576033/-. Therefore, Freescale Semiconductor India Pvt Ltd Vs. DCIT, , /Del/2015 (Assessment Year: 2009-10 )
aggrieved, the assessee has raised the following grounds of appeal in Assessment Year 2009-10 before us:- “I. Transfer Pricing Grounds 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. a) The Ld. DRP erred on facts and circumstances of the case in determining the arm’s length adjustment to the Appellant’s international transactions from Associated Enterprises (“AEs”) and thereby resulting in the enhancement of by Rs. 8,61,23,043 of income as per draft assessment order by making total TP adjustment of 33,06,36,502 as against adjustment of Rs. 24,45,13,459 made by the Ld. TPO. 2 b) The order u/s 144C resulting in enhancement of income is illegal as it is in breach of principles of natural justice and it is contrary to the provisions of section 144C(II) of the Act.
3. The Ld. AO/Ld. TPO erred on facts and in law in the assessment of the arm's length price of the Appellant's international transaction by wrongly computing the margins of comparable companies and wrong selection of comparables for both Software Development Segment (“SDS”) and Market Support Services (“MSS”) segments. 4. a) The Ld. AO/ Ld. TPO erred in rejecting the filters and comparables selected by the Assessee in the TP documentation by applying new additional/modified quantitative filters for both SDS and MSS segments, which lacked valid and cogent reasoning. b) The DRP has incorrectly assumed that assessee had applied 30% RPT filter, whereas THE assessee had applied filter of RPT transactions of 10% of total turnover. c) While applying the floor filter of turnover of Rs. 1 crore, the DRP has erred in not applying filter of appropriate upper ceiling upper ceiling which is contrary to the decision of Special Bench of the Tribunal in the case of Quark Systems.
5. The Ld. AO/ Ld. TPO erred in rejecting the fresh benchmarking study conducted by the assessee for both the segments.
6. The Ld.AO/Ld.TPO erred in accepting companies which were functionally not comparable to the assessee for both the segments.
7. With regard to the SDS Segment, Ld.AO/TPO, erred in accepting companies which were functionally not comparable to the Assessee.
8. With regard to the MSS segment, the Ld. TPO, after rejecting the comparability analysis conducted by the Assessee in its TP documentation, and fresh benchmarking analysis conducted during the course of assessment proceedings, did not conduct a valid benchmarking exercise and determined the arm’s length price based Freescale Semiconductor India Pvt Ltd Vs. DCIT, , /Del/2015 (Assessment Year: 2009-10 ) on previous year’s comparable set. Thus, the TPO replaced a valid and scientific benchmarking study with his own arbitrary analysis.
9. The Ld. AO/TPO erred in denying the economic adjustment for the difference in risk profile of the Assessee vis a vis comparable companies for both the segment.
The Ld. AO/ Ld. TPO considered the current year (i.e. financial year 2008-09) data for comparability despite the fact that at the time of comparison done by the Assessee, data for financial year 2008-09 was not available within the public domain.
The Ld. AO/ Ld. TPO did not appreciate 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 Thus, there is no motive on the part of the Assessee to shift the profits to any other jurisdiction. Hence the case of the Assessee falls squarely within the ambit of aforementioned principle.
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.”
At the outset the ld Authorised Representative submitted that it is contesting three comparables in software segment namely (1) Bodhtree Consulting Ltd, (2) Infosys Ltd, (3) Sonata Software Ltd. With respect to each of the comparables the submission of the ld AR and ld DR and our finding are as under:- i. Infosys Ltd 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. 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 Freescale Semiconductor India Pvt Ltd Vs. DCIT, , /Del/2015 (Assessment Year: 2009-10 )
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. ii. Bodhtree Consulting Ltd With respect to this comparable, it was stated that it has a huge turnover and it was following different accounting method by recognizing revenue only when software is developed and billed. Against this, the assessee company follows the cost plus model . It was further stated that the comparable has fluctuating margins. He further relied on various decisions of the coordinate benches wherein, the above comparable was excluded. The ld Departmental Representative submitted that this is the comparable selected by the assessee and further while contesting before the ld DRP could not show that how the accounting policy could have impacted its profitability. Therefore, it should not have been excluded. We have carefully considered the rival contentions. On this aspect the above, comparable is not selected by the assessee himself, as it is apparent from para No. 3.3 of the order of the ld Assessing Officer where the above comparables have been rejected on qualitative grounds by the assessee that it is functionally not comparable. However, the ld TPO has included the same holding that it passes all filters and is a software developer therefore, a suitable comparable. Before us, the ld AR has contested the above comparable stating that it has a different accounting policy but could not show how it has impacted the profitability. Further, it was also not shown that how the unreliable results could be the basis for its exclusion. Further, it was stated that it owns several tools for data integration and ERP applications. The identical issue arose before us in assessee‟s own case for Assessment Year 2008-09, wherein we have set aside this comparable back to the file of the ld AO/ TPO with a direction to the assessee to show how the accounting policies of the comparable company has impacted the profitability of the comparable. With similar direction, we set aside the issue of exclusion of this comparable to the file of the ld TPO to decide the issue on the merits of the claim of the assessee. Further, in this year assessee has also contested its functional dissimilarity and therefore, in the interest of justice, the assessee may be given opportunity to explain the issue of exclusion of this comparable.
Freescale Semiconductor India Pvt Ltd Vs. DCIT, , /Del/2015 (Assessment Year: 2009-10 ) iii. Sonata Software Ltd This comparable was earlier rejected by the assessee on the ground that it is functionally different however, the ld Assessing Officer/ TPO included the same stating that the above company is a software developer and passed all filters and hence, it is a suitable comparable. Before the ld TPO assessee objected stating that its related party transactions are more than the filters adopted by the TPO. The TPO rejected the same. Before the ld DRP assessee reiterated the above claim. The ld DRP held that the RPT of the comparable is 14.65%, within the overall limit of 25%. The assessee has given us a chart at page No. 1345 wherein, according to the assessee out of total revenue of Rs. 2435768787/- consist of revenue of Rs. 974395270/- pertaining to related party resulting into 40% transactions of Revenue with the related party. Further, with respect to the expenses it agrees that it has only 13.44% of expenses with related parties. The ld DR vehemently contested and stated that related party chart submitted by the assessee is incorrect as it also includes the receivables. We have carefully considered the rival contentions. The assessee has shown us page No. 1149, which is the annual accounts of the Sonata Software Ltd for the year ended on 31.03.2009, wherein in note no. 15 the related party transactions are tabulated. The assessee showed us the other related parties of Sonata Information Technology Ltd where the deputation expenses were incurred by that company which is subsidiary of Sonata Software Ltd. Furthermore, the chart shown before us at Page 1345 of the paper book also included in the above revenue chart the receivables from various subsidiaries. The above details of related party transaction as per Schedule 14 of the annual account of Sonata Software Ltd as well as the chart submitted before us are not matching. Further, assessee is also including the balance-sheet items such as receivables in the working of the filters, which is not permissible. Further, the RPT filter adopted by the ld TPO of 25% on sales as well as expenditure (combined) is to be applied on the related party transactions adopted by the comparable. The assessee cannot use the different yardstick. In view of this, we direct the assessee to demonstrate before the ld TPO that it crosses the RPT filter of 25%. If the ld TPO finds that it breaches the RPT filter then it deserves to be excluded. Otherwise, no interference is called for with respect to this comparable.
Freescale Semiconductor India Pvt Ltd Vs. DCIT, , /Del/2015 (Assessment Year: 2009-10 )
Another grievance of the assessee is that ld DRP has directed ld TPO to compute the margins of the comparables as per Safe Harbour Rules. The ld AR , aggrieved, has stated that ld DRP has directed to compute the margins of the comparable companies in market support services as per the guidelines provided by the Safe Harbor notification dated 18.09.2013 relating to the items to be considered as operating expenses and operating income. The assessee has objected to this stating that direction of the ld DRP is devoid of any merit because the DRP has not issued any notice. Further, according to the direction of the ld DRP, the ld TPO has applied it to the market support services as well as software development services though; the directions were with respect to market support services. It was further stated that as stated by the CBDT in Circular No. 5 dated 03.06.2010 the above rules comes into effect from Assessment Year 2010-11 and does not apply to the impugned assessment year.
The ld DR vehemently supported the orders of the ld DRP and stated that the Safe Harbour Rules are just guidance and therefore, they should be made applicable retrospectively. 10. We have carefully considered the above contentions and also perused CBDT Circular No. 5 dated 03.06.2010 wherein, it has been specifically mentioned that the above amendment by introduction of section 92CB which empowers the board to make safe harbour rules could be applicable in respect of Assessment Year 2010-11, Further corrigendum No. 5/ 2010 dated 30.09.2010 was issued wherein, it has been stated that in para No. 38.03 for the date “1st October 2009” the following date shall be read “1st April 2009”. However, despite this it has not amended that safe harbor rules shall be applicable for AY 2009-10. Circular No 5 dated 3/6/2010 states as under :-
“38. Power of Board to make Safe Harbour Rules 38.1 In India, Transfer pricing rules were introduced in 2002, since then the number of cases identified for audit and the transfer pricing adjustments locked up in disputes have increased. 38.2 In order to reduce the number of transfer pricing audits and prolonged disputes a new section 92CB has been inserted to provide that the determination of arm's length price under section 92C or section 92CA shall be subject to safe harbour rules.
Freescale Semiconductor India Pvt Ltd Vs. DCIT, , /Del/2015 (Assessment Year: 2009-10 )
38.3 Applicability.-The above amendment has been made applicable with effect from 1st October, 2009 and will accordingly apply in respect of assessment year 2010-11 and subsequent years.” Subsequent to that on 30.9.2010 a corrigendum was issued as under :- Explanatory Notes to the Provisions of the Finance (No. 2) Act, 2009 – Corrigendum to Circular No. 5/2010, dated 3- 6-2010 CORRIGENDUM NO. 5/2010 [F.NO.142/13/2010- SO(TPL)], DATED 30-9-2010 In partial modification of Circular No. 5 of 2010, dated June 3, 2010, (i) in para 37.5 (page 333) of the said Circular, for the lines "The above amendment has been made applicable with effect from 1st April, 2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years." the following lines shall be read "The above amendment has been made applicable with effect from 1st October, 2009 and shall accordingly apply in relation to all cases in which proceedings are pending before the Transfer Pricing Officer (TPO) on or after such date." (ii) in para 38.3 (page 333), for the date "1st October, 2009", the following date shall be read "1st April, 2009". On reading of the above circular with the corrigendum it is apparent that though the date of applicability stated in para no 38.3 is amended to 1-4- 2009 from 1-10-2009, however its applicability with respect to assessment year remains the same i.e. AY 2010-11. Therefore, we are of the opinion that safe harbor Rules are applicable as per the Circular of CBDT, which is binding on all subordinate authorities. The ld DRP is not correct in directing TPO to compute margins as per the Safe harbor Rules for AY 2009-10. Therefore, we direct the ld TPO to examine margins computed by the assessee and if they are found in accordance with the law then it should be accepted.