VISHAY SEMICONDUCTOR INDIA P.LTD ( FORMERLY KNOWN AS VISHAY SEMICONDUCTOR INDIA LTD ),MUMBAI vs. ASST CIT CIR 8(3), MUMBAI

1. The captioned appeal by assessee for Assessment Year [AY] 2008-09 contest the final assessment order passed by Ld. Assistant Commissioner of Income Tax-Circle 8(3), Mumbai [AO] u/s 143(3) read with Section 144C pursuant to the directions of Ld. Dispute Resolution Vishay Semiconductor India Private Limited Assessment Year 2008-09 Panel [DRP]. During hearing, the following effective grounds of appeal have been urged before us: - I. Grounds of objections in respect of transfer pricing adjustment …….. 4.Ground of Objection 4- Rejection of certain companies identified by the Appellant in the transfer pricing report Erred in rejecting certain comparable companies from the set of comparable identified by the Appellant in its transfer pricing report 5.Ground of Objection 5- Non consideration of correct operating margins of comparable companies adopted in the TP Order Erred in considering incorrect operating margin of comparable companies adopted in the Order 6.Ground of Objection 6- Non exclusion of provision for inventory obsolescence from the operating cost of the Appellant. Erred on facts and in circumstances of the case and in law by not excluding INR 61,825,865/- pertaining to provision for inventory obsolescence (being non-operating in nature) from the operating cost of the Appellant for AY 2008-09 7.Ground of Objection 7-Treating loss on sale of fixed assets as operating in nature for the purpose of computing operating margins of the Appellant Erred in treating INR 3,905,868 pertaining to loss on sale of fixed assets as operating in nature for the purpose of computing operating margins of VSIPL for AY 2008-09, and accordingly not considering correct operating margin of VSIPL 8.Ground of Objection 8-Non-consideration of risk adjustment Erred on the facts and circumstances of the case and in law by comparing full- fledged risk bearing entities with the Appellant, without making any adjustment on account of differences between the risk profile of comparable companies vis-à-vis the Appellant. 9.Ground of Objection 9- Transfer pricing adjustment without giving benefit of +/-5 per cent as available under erstwhile proviso to section 92C(2) Erred in computing the arm’s length price as the mean arm’s length price determined, without taking into account the lower 5 percent variation from the mean arm’s length price determined II. Grounds of objections in respect of disallowances/additions other than transfer pricing adjustment ……… 11. Ground of Objection 11- Non consideration of additional deduction on account of depreciation on projector and not granting of relief for disallowance of provisions in earlier year Erred on the facts and circumstances of the case and in law by not granting additional deduction on account of depreciation on projector (as a result of approach followed in assessment proceedings for AY 2004-05) amounting to Rs.6,851 and not granting relief for disallowance of provisions disallowed in earlier year amounting to Rs.27,92,198. 2.1 Facts in brief are that assessee being resident corporate assessee engaged in manufacturing and trading of semiconductor devices Vishay Semiconductor India Private Limited Assessment Year 2008-09 including DIP bridge rectifiers was assessed u/s 143(3) at Rs.23.76 Crores after certain Transfer Pricing [TP] adjustment of Rs.16.13 Crores & Stock Obsolescence adjustment of Rs.2.58 Crores as against revised returned income of Rs.5.04 Crores e-filed by the assessee on 29/03/2010. The primary subject matter of this appeal is TP adjustment made in the computation of income. 2.2 During assessment proceedings, the International Transactions carried out by the assessee with its Associated Enterprises [AE] as reported in Form 3CEB were referred for determination of Arm’s Length Price [ALP] u/s 92CA(1) to Ld. Transfer Pricing Officer [TPO] on 12/05/2010. The issue under appeal is related with determination of ALP of goods exported by the assessee amounting to Rs.86.73 crores (net of sales return) to its AE situated in Italy. Majority of the sale turnover achieved by the assessee in the impugned AY was by way of export to its AE situated in Italy. 2.3 The assessee adopted Transactional Net Margin Method [TNMM] method to benchmark these transactions with operating Profit / Total Cost [OP/TC] as the Profit Level Indicator [PLI], the assessee being the tested party. The assessee’s PLI came to 6.90% as against mean PLI of 9.49% of 15 comparables as selected by the assessee in its TP study and therefore, the same being within the tolerance range of +/-5%, the transactions were claimed to be at Arm’s length Price [ALP]. The prime dispute under appeal is related with computation of correct PLI reflected by the assessee and selection / rejection of certain comparables. 2.4 As noted by Ld. TPO, the assessee was engaged in the business of labor assisted assembly process of semi-conductor devices of Vishay Semiconductor India Private Limited Assessment Year 2008-09 different types which were mainly used in general power management applications. Semi-conductor manufacturing involved two phases of production-Wafer Fabrication and Assembly. The assessee was primarily an assembler of semi-conductor devices such as rectifiers, discrete and modules which were essentially low technology activity involving manual labor operations. The specialized nature of business activity carried out by the assessee shall have bearing on selection / rejection of certain comparables as discussed by us in succeeding paragraphs. The nature of business, as per assessee’s submissions, which is extracted by Ld. TPO in his order, is as follows:- Semiconductor manufacturing involves two phases of production wafer fabrication and assembly process. Wafer fabrications requires a sequence of process steps that expose silicon wafers to chemicals that change their electrical properties. The chemicals are applied in patterns that define cell or circuits within numerous individual devices termed ‘die’ or ‘chips’ on each wafer. VSIL is engaged in the assembly process of manufacturing of semiconductor devices. The process followed by VSIL in arriving at its end produce (i.e. semiconductor devices of different types) is described as below:- • VSIL procures raw material of different types to be used in the manufacturing process of semiconductor devices. • Depending upon the nature of semiconductor devices to be manufactured, various types of raw material procured are manually assembled (i.e. process of manual assembly or dice pre-soldiering) • The pre-soldiering dice undergoes through a furnace brazing process. Brazing is a metal joining process whereby a filter metal is heated above and distributed between two or more close fitting parts by capillary action. Furnace blazing is a semi automatic process whereby the metal joining process takes place in furnace. • The devices are manually assembled and each manually assembled device undergoes a furnace brazing process. • Depending upon the semiconductor device to be manufactured instead of the process of furnace brazing, the process of compression or wire bonding is also performed (compression is a metal joining process whereby metals are bonded using high pressure / force and wire bonding is the process of making interconnections using metals like aluminum or copper. • The resultant product then undergoes testing for quality processes, labeling and packing before being sold to the customer.

Aggrieved, the assessee raised objections against the same with little success before Ld. DRP vide directions u/s 144C(5) dated 24/09/2012. The submissions made by the assessee against the draft Vishay Semiconductor India Private Limited Assessment Year 2008-09 assessment order could not find favor before Ld. DRP and the stand of lower authorities on most of the issues has been confirmed by Ld. DRP. Accordingly, incorporating the aforesaid directions u/s 144C(5) of Ld. DRP, final assessment order dated 30/10/2012 has been passed, which has further been contested before us by the assessee by way of present appeal.

The Ld. Authorized Representative [AR], by way of written submissions and with the help of tabular chart, has assailed the additions made by lower authorities and placed reliance on several judicial pronouncements to support the various submissions. The same has been controverted by Ld. Departmental Representative [DR]. Vehement arguments have been adduced by both the representatives qua computation of assessee’s PLI and selection / rejection of comparables. 5.1 We have carefully perused the rival contentions and perused relevant material on record. Upon due consideration, we find that whole controversy primarily revolves around computation of assessee’s PLI and selection / rejection of nine comparables besides some minor issues. 5.2 First, we deal with computation of assessee’s PLI. So far as the adjustment of loss on sale of fixed assets is concerned, we find that Ld. DRP has concurred with the stand of the assessee that the same do not form part of operating cost. At the same time, the Ld. AO was directed to verify the claim of the assessee and was further directed to exclude the said item while arriving at PLI of the comparables. However, in the absence of requisite submissions / computations made by assessee, the Vishay Semiconductor India Private Limited Assessment Year 2008-09 said adjustment has not been made in the final assessment order. Therefore, at the outset, we direct Ld. AO to carry out the said adjustment in computing the assessee’s PLI as well as PLI of the comparables with a direction to the assessee to provide the requisite details in this regard. Ground Number 7 of the appeal stand allowed for statistical purposes. 5.3 The second adjustment pertains to provision for stock obsolescence adjustment while computing assessee’s operating margin. The assessee, in its TP study, treated the provision for inventory obsolescence of Rs.6.18 Crores as non-operating in nature and accordingly computed the assessee’s PLI as 6.90%. The assessee submitted that it had revised the estimates for determining the provision for inventory obsolescence in accordance with Group Policy and management estimates and accordingly, the said amount has been charged to the Profit & Loss Account. The same being non-recurring item due to change in inventory valuation policy, was non-operating in nature. However, not convinced, Ld. TPO treated the same as operating expenditure and revised assessee’s PLI to -1.05% by making following observations:- 6.4 The assessee’s plea is not acceptable. It was not demonstrated that this provision is included in the operating cost enumerated above. There is no mention of this in the annual report. Hence the OP/TC is worked out to be as follows:- Op. Revenue 87,49,42,147 Op. Cost 88,42,05,285 Loss 92,63,138 OP/TC -1.05% The Ld. DRP has confirmed the stand of Ld. TPO by making following observations:-

It is also not explained whether such provision has been made for the first time and as an extraordinary measure. This does not appear to be so from the note No. 14 which states that the company has revised the estimates, in this year. It appears that in the industry obsolescence is quick and therefore, provisions have to be made. If this is a regular feature, then such expenditure for provision should also be debited in the accounts of the comparable companies which manufacture similar products. The assessee has not proved that such expenditure is unique to its own case and that such provision does not occur in the comparable cases, in such event only, a suitable adjustment or even exclusion could be necessary. Without the relevant details, it would not be proper to exclude such provision from the operating cost, as claimed by the assessee. 5.4 The Ld. AR, drawing our attention to the financial statements, Directors’ Report and other documents placed in the paper-book, has reiterated the contentions. It has been submitted that the impugned provision was non-recurring in nature as there was change in stock valuation policy during the impugned AY and the same one time extra- ordinary event and therefore the provisions were non-operating in nature. Per Contra, Ld. DR submitted that stock valuation was part and parcel of the assessee’s operations and the assessee in subsequent Vishay Semiconductor India Private Limited Assessment Year 2008-09 years has treated similar provisions as operating in nature and therefore, the action of lower authorities was justified. 5.5 So far as the observations of the lower authorities are concerned, upon perusal of financial statements, we find that aforesaid provision has not been directly debited by the assessee in the Profit & Loss Account under any of the following heads:- Purchase of Traded Goods Personnel Cost Operating & Other Expenses Financial Expenses Depreciation The only head under which this adjustment could be made by the assessee was ‘Material Consumed’, the details of which are available at Schedule No.

Prima facie, it appears that the adjustment of this item has been made while arriving at Stock valuation of raw material / finished goods/work-in-progress at year end. The item-wise details of the same has been placed on page numbers 1025 to 1059, the perusal of which reveal that the assessee has identified each and every item of the stock and arrived at figures thereof and written off the same while valuing the closing stock. At the same time, the assessee, in computation of income, has added back this item treating the same as provisions and claimed an amount of Rs.2.58 Crores against the same on account of stock actually destroyed by the assessee out of these items before filing of return of income. The pleadings made by the assessee reveal that the deduction of Rs.2.58 Crores has been allowed to the assessee in subsequent years. These factors, in our opinion, are not at tandem with each other and require re-appreciation. The lower authorities had also rejected the Vishay Semiconductor India Private Limited Assessment Year 2008-09 assessee’s stand primarily by noticing that the said item was not debited in the Profit & Loss Account. This issue remains unaddressed before us also and the factual matrix is not clear. Therefore, the issue is remitted back to the file of Ld. AO / TPO for appreciation of the factual matrix and re-adjudicate the same with a direction to the assessee to demonstrate / substantiate his stand in this regard. In principle, we are of the opinion that stock valuation is done in accordance with policy adopted by the management in this regard and the same constitute part and parcel of assessee’s trading operations only particularly when assessee was technology driven company and exposed to this kind of risk in normal course of business. Resultantly, Ground No. 6 stands allowed for statistical purposes.

Ground No. 5 is related with adoption of correct margins of comparables adopted by Ld. TPO. In this regard, Ld. AR seeks endorsement of Ld. DRP directions only. As evident from the order of Ld. TPO, the assessee vide its letter dated 29/04/2011 pointed out errors in margins of the comparables adopted by the Ld. TPO which were not considered while arriving at the adjustment. The Ld. DRP, vide para-30 directed Ld. TPO to consider the submissions of the assessee and make necessary rectifications. Needless to add that errors, if any, which have crept into while computing margins of the comparables are to be rectified and therefore, Ld. TPO is directed to consider the submissions of the assessee forthwith in this regard. Ground No. 5 stand allowed for statistical purposes. 7.1 In Ground No. 4, the assessee is aggrieved by rejection of nine comparables selected by him in his TP study. The prime argument of Ld.

Ground Number 9 is related with benefit of +/-5% in terms of erstwhile proviso to Section 92C(2) which has been rejected by Ld. DRP in terms of Board’s Circular No. 142/13/2010-SO (TPL) dated 30/09/2010. Prima facie, the said circular applies to pending proceedings as on 01/10/2009. Therefore, since the matter of comparable has already been remitted back to the file of Ld. AO / TPO, at the moment, we can only direct the lower authorities to grant adjustments / concessions, which are available to the assessee within the framework of law while determining ALP of the transactions as aforesaid. This ground stand allowed for statistical purposes.

By way of Ground No. 11, the assessee is seeking endorsement of Ld. DRP’s directions which are related with depreciation on projectors and allowance of provisions disallowed in earlier years. We find that directions to verify the same has already been provided by Ld. DRP vide Para No. 54 of its directions. By endorsing the same, we direct the Ld. AO to verify the claim of the assessee in the light of submissions made before Ld. DRP. This ground stands allowed for statistical purposes.

Adjustment to international txns. General in Nature 2. & 3. Contemporaneous & single year data Not Pressed 4. Rejection of Assessee’s Comparables Allowed for statistical purposes 5. Non consideration of correct margins Allowed for statistical purposes 6. Inventory Obsolescence Allowed for statistical purposes 7. Nature of Loss on Fixed Assets Allowed for statistical purposes 8. Non consideration of Risk Adjustment Dismissed 9. Benefit of +/-5% Allowed for statistical purposes 10. Destruction of Stock Not Pressed 11. Depreciation on Projector & Deduction Allowed for statistical purposes of provisions disallowed in earlier years