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Income Tax Appellate Tribunal, BENCH- A, BANGALORE
Before: SMT. ASHA VIJAYARAGHAVANSHRI S JAYARAMAN
PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER :
This appeal by the assessee is directed against the order of Dy. Commissioner of Income-tax, Bengaluru dated 5/10/2010 and it pertains to the assessment year 2006-07.
IT(TP)A No.1398/B/10
2 2. The assessee is engaged in the business of electronic manufacturing software support and IT enabled services. The return of income for the asst. year 2006-07 was filed on 30/11/2006 declaring loss of Rs.5,29,35,074/-. The reference was made to TPO u/s 92CA to determine the arms length price of the international transactions relating to the manufacturing activity as well as IT enabled services.
3. The assessee objected to the draft asst. order passed by the AO confirming the directions of the DRP, the DCIT, Circle-11(3), Bangalore passed order u/s 143(3) r.w.s 144C of the Income-tax Act 1961.
4. The assessee aggrieved and hence this appeal.
5. The final comparables selected by the TPO towards manufacturing segment by the TPO are 9 in number which are as follows:-
1. Rangsons Electronics Pvt. Ltd.,
2. BCC Fuba India Ltd.,
3. Sulakshana Circuits Ltd., IT(TP)A No.1398/B/10
3 4. Circuit Systems (India) Ltd.,
5. Karnataka Hybrid Micro Devices
6. SPEL Semiconductor Ltd., 7. Naina Semiconductors Ltd.,
8. Precision Electronics Ltd., 9. Fine Line Circuits Ltd.,
The ld counsel for the assessee submitted that the assessee has no objection in taking as comparables the following companies:
1. BCC Fuba India Ltd.,
Circuit Systems (India) Ltd.,
Karnataka Hybrid Micro Devices
Naina Semiconductors Ltd., IT(TP)A No.1398/B/10
4 7. With respect to Rangsons Electronics Pvt. Ltd., the contentions of the assessee are as follows:-
- Functionally different. The company renders prototype manufacturing services and also manufactures Ultrasound scanners LA 100-Pro. PCBs is one of the raw material used by the company for manufacturing.
- The TPO himself had rejected one company selected by the assessee (Ruttonsha) contending that it was into manufacture of rectifiers, which is one of the many components used in manufacture of PCBs.
Flextronics is engaged in the manufacture of Printed Circuit Board Assembly which has application in the telecom, industrial electronics and consumer product segment. It also operates a shared services division for providing back office services relating to accounts payable processing and human resources record maintenance. Whereas Rangsons Electronics Pvt. Ltd., is engaged in sub assembly for Ultra Sound Scanner which was pointed out by the ld counsel at page 559 of the paper book from the notes forming IT(TP)A No.1398/B/10
5 part of the accounts for the financial year 2005-06 in the case of Rangsons Electronics Pvt. Ltd., Further we find at page 560 that with respect to Rangsons Electronics Pvt. Ltd., PCB’s come under the heading ‘CONSUMPTION OF RAW MATERIALS’. PCB is one of the components of Ultra Sound Scanner and hence Rangson Electronics Pvt. Ltd., cannot be taken as comparable with the assessee company which manufactures Ultra Sound Scanner. The operating sales is at 6.26% for the asst. year 2005-06.
With respect to SPEL Semiconductor Ltd., the assessee submitted that it is functionally different as it is into manufacturing of high end integrated circuits which is different from assembly of integrated circuits. The assessee took us through pg 322 and 354 of the paper book wherein it has been stated that SPEL Semiconductor Ltd., is a leading semiconductor assembly and test facility providing high quality integrated circuits packing solutions.
Hence, SPEL Semiconductor Ltd., has to be excluded from the list of comparable selected by the TPO.
IT(TP)A No.1398/B/10
6 10. With respect to Fine Line Circuits, the ld counsel for the assessee submitted that this company cannot be rejected merely because it is a loss making company. The assessee itself is making losses in its manufacturing segment. It is not a persistent loss making company as seen from the Annual Report and the company does not incurred book loss in earlier year i.e in assessment year 2005-06. For this proposition, the ld counsel relied on the following decisions:
Sumitomo Chemical India Pvt. Ltd., & 7461/M/2013
Advance Power Display Systems Ltd., & 6524/Mum/2011
The ld counsel pointed out to page 143 of the paper book 1, wherein 3 years margin of Fine Line Circuits Ltd., has been reproduced. It was also submitted that in the subsequent year i.e asst. year 2007-08, Fine Line Circuits Ltd., was considered as comparable and the TPO has accepted the same as there was no adjustment made in subsequent years in the manufacturing segment.
IT(TP)A No.1398/B/10
7 Hence, it was prayed that Fine Line Circuits Ltd., is to be included in the list of comparables.
We are convinced with the argument of the ld counsel and direct the AO/TPO to include Fine Line Circuits as a comparable.
We are also of the opinion that Rangsons Electronics Pvt. Ltd., and Spell Semiconductor Ltd., are to be excluded by the AO/TPO from the list of comparables as they are functionally different.
Global Shared Services Center (GSSC) Segment :
The TPO considered the following 13 companies as comparable:
IT(TP)A No.1398/B/10 Sl. Company Name Sales OP to No. (Rs.cr.) Total Cost% 1 Malpe eSolutions Ltd 7.43 32.66 2 Allsec Technologies Ltd 92.25 28.51 3 Datamatics Financial Services Ltd(Seg.) 2.31 24.99 4 Transworks Information Services Ltd 163.30 19.56 5 Cosmic Global Ltd (Seg.) 3.11 16.03 6 Vishal Information Technologies Ltd 25.64 48.03 7 Asit C Mehta Financial Services Ltd (Earlier known as 5.68 34.52 Nucleus Netsoft & GIS(India) Ltd 8 Goldstone Infratech Ltd (Seg.) Earlier 5.03 29.01 Known as Goldstone Teleservices Ltd)
9 Spanco Ltd(Seg.)(Earlier known as 82.32 20.86 Spanco Telesystems & Solutions Ltd)
10 Ace Software Exports Ltd 4.97 7.72 11 Apex Knowledge Solutions Pvt Ltd 4.92 20.48 12 Rs. Systems International Ltd (Seg.) 9.17 15.11 13 Flextronics Software Systems Ltd (Seg.) 21.41 14.54
Average 24.00 IT(TP)A No.1398/B/10
9 14. In this regard, the assessee has raised an additional ground, which is as follows:-
“The ld TPO has, in his fresh study, erred in finalizing the Transfer Pricing order by considering Maple eSolution Ltd., Datamatics Financial Services Ltd., Vishal Information Technologies Ltd., Asit C Mehta Finanical Services Ltd. [earlier known as Nucleus Netsfot & GIS (India) Ltd., (earlier known as Goldstone Teleservices Ltd.) and Apex Knowledge Solutions Pvt. Ltd. as comparable to the Appellant despite the same failing to meet the legally acceptable criteria for comparability. The Hon’ble DRP has also erred in confirming the order of the TPO in this regard.”
The learned counsel for the assessee pressed only for exclusion of Vishal Information Technologies Ltd., and did not press for exclusion of the other comparables mentioned in the additional ground.
With respect to Vishal Information Technologies Ltd., the issue is covered by the earlier decision of the Tribunal in ITA IT(TP)A No.1398/B/10
10 No.1559/Bang/2012 and also wherein it is held as under:-
8.7 Vishal Information Technologies Ltd.(Coral Hub Ltd.) The learned AR of the assessee has submitted that this company does not qualify the employees filter of 25% adopted by the TPO. He has pointed out that this company has outsourced its activities and therefore, being a different business model to a routine ITES provider, cannot be considered as a good comparable. In support of his contention, he has relied upon the following decisions: i. Rampgreen Solutions Pvt. Ltd.(TS-387-HC-2015-TP) ii. First Advantage Offshore Services Pvt. Ltd. (ITA No.1086/Bang/2011) iii. Stream International Pvt. Ltd.(ITA No.8290/ Mum/2011) iv. Goldman Sachs Services Pvt. Ltd. (ITA No.1423/Bang/2010) v. C3i Support Services Pvt. Ltd. (ITA No.2183/Hyd/2011) On the other hand, learned Departmental Representative has relied upon the order of the authorities below. 8.7.1 We have considered the rival submissions as well as relevant material on record. We note that the comparability of this company with ITES providing service provider has been examined by the Tribunal in various cases as relied upon by the learned AR of the assessee. In the case of First Advantage Offshore Services Pvt. Ltd. (supra) it has been held in para.35 as under:
IT(TP)A No.1398/B/10
11 “35. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee's own case for the assessment year 2006-07.
This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR's argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 425% of the total expenses, it cannot he said that the said filter is not applicable to ITES segment, where comparably less employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the IT1ES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter toexclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP. Similar view has been taken by the Tribunal in the other decisions. We IT(TP)A No.1398/B/10
12 further note that the Hon’ble High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has also decided this issue in favour of the assessee. Accordingly, we direct the AO to exclude this company from the list of comparable.
We direct the AO/TPO to re-compute the ALP after exclusion of the Vishal Information Technologies from the list of comparables.
18 Ground No.10 is as follows:-
”The Hon’ble DRP has erred in law and on facts in upholding the ld Assessing Officer’s conclusion on setting-off the profits of the Unit claiming deduction u/s 10A of the Act (“10 unit’) (GSSC unit) against the losses incurred by the non- 10A unit of the Appellant, without considering the correct legal position and the binding judicial precedents in this regard.”
The ld counsel for the assessee has relied upon the decision of CIT Vs. Yokogawa India Ltd., and Others. Hence respectfully IT(TP)A No.1398/B/10
13 following the decision of the coordinate bench of the tribunal dated 30.4.2014 in the case of CIT Vs. Biocon Ltd., in 368 to 371 & 1206/2010 wherein the decision of CIT Vs. Yokogawa India Ltd., has been dealt with, we are of the view that the claim made by the assessee deserves to be accepted. We direct the TPO accordingly.
In the result, the appeal is allowed for statistical purposes.
Order pronounced in the open court on 21st September, 2016.