Flextronics Technologies (India) Private Limited, Kancheepuram V. ACIT, CHENNAI

ITA 1195/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5772 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-12-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 28-06-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 02-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MUKESH BUTANI SMT RU G
• Keywords: Related party transaction; Depreciation

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , D B ENCH, CHENNAI . , ! ' . #$ , % & BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ I.T.A.NO.1195/MDS/2016 ( / ASSESSMENT YEAR: 2011-12) M/S. FLEXTRONICS TECHNOLOGIES (INDIA) PVT. LTD., (APPEAL FILED BY FLEXPOWER INDIA PRIVATE LIMITED, THAT HAS MERGED INTO FLEXTRONICS TECHNOLOGIES (INDIA) PVT. LTD), PLOT NO.3, PHASE II, SIPCOT INDUSTRIAL PARK, SANDAVELLURE C VILLAGE, SRIPERUMPUDUR TALUK, KANCHEEPURAM DIST. 602 106 VS THE ACIT, CORPORATE CIRCLE 2(1), CHENNAI 34. PAN: AABCF1543R ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SHRI MUKESH BUTANI, ADVOCATE /RESPONDENT BY : SMT. RUBY GEORGE, CIT /DATE OF HEARING : 27.11.2017 !' /DATE OF PRONOUNCEMENT : 04.12.2017 / O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED IN PURSUANCE OF THE DIRECTIONS OF THE LD. ME MBERS OF THE DISPUTE RESOLUTION PANEL U/S.143(3) R.W.S 144C(5) O F THE ACT DATED 30.12.2015 FOR THE ASSESSMENT YEAR 2011-12. 2 ITA NOS.1195/MDS/2016 2. THE ASSESSEE HAS RAISED 19 GROUNDS RUNNING TO 4 PAGES HOWEVER THE LD.AR ON THE DIRECTIONS OF THE BENCH SU BMITTED THE CONCISE GROUNDS WHICH ARE SUMMARIZED AS FOLLOWS: (I) THE LD.AO, TPO, DRP HAVE ERRED IN MAKING ADJUST MENT WITH RESPECT TO EMPLOYEE COST AND DEPRECIATION OF T HE COMPARABLE COMPANIES. (II) DESPITE THE DIRECTIONS OF THE MEMBERS OF THE DRP THE LD.DCIT IN HIS ORDER GIVING EFFECT HAS ERRED IN TRE ATING FOREIGN EXCHANGE FLUCTUATIONS AS NON-OPERATING ITEM FOR COMPUTING THE NET MARGIN. (III) THE LD.TPO AS WELL AS THE LD.DCIT IN HIS ORDE R GIVING EFFECT TO THE DIRECTIONS OF THE MEMBERS OF THE DRP HAS ERRED IN EXCLUDING, MISCELLANEOUS INCOME AND REVENU E GENERATED FROM SALE OF SCRAP, WHILE COMPUTING THE P LI OF THE ASSESSEE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE PARENT COMPANY OF THE ASSESSEE IS SINGAPORE BASED FLEXTRONICS GROUP O F COMPANIES. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF ELECTRONIC MANUFACTURING SERVICE PROVIDER AND AL SO ENGAGED IN ASSEMBLING ELECTRONICS COMPONENTS IN THE PRINTED CI RCUIT BOARD FOR MOBILE CHARGERS. IN THE TP DOCUMENTATION THE ASSES SEE COMPANY 3 ITA NOS.1195/MDS/2016 HAD ADOPTED TNMM AS MOST APPROPRIATE METHOD AND COM PUTED ITS PLI BY DIVIDING OPERATING PROFIT VIZ., CASH PRO FIT BY OPERATING INCOME MULTIPLIED BY 100 (OP/OI * 100). THE ASSESS EE COMPANY HAD IDENTIFIED SEVEN COMPANIES AS COMPARABLE COMPAN IES BY ADOPTING CERTAIN SEARCH CRITERIA WITH RESPECT TO IT S AE TRANSACTION. THE FILTERS ADOPTED BY THE ASSESSEE COMPANY WERE AS FOLLOWS: I. ELECTRONIC EQUIPMENT/SEMICONDUCTOR EQUIPMENTS/PCBS . II. COMPANIES FOR WHICH SUFFICIENT FINANCIAL INFORMATIO N WAS NOT AVAILABLE FOR THE F.Y. 2008-09, F.Y. 2009-10 AND F. Y. 2010-11. III. SALES NOT GREATER THAN ZERO. IV. THE RATIO OF MANUFACTURING INCOME/TOTAL INCOME LESS THAN 10%. V. COMPANIES UNDERGOING BUSINESS RESTRUCTURING. VI. COMPANIES WHOSE SEGMENTAL INFORMATION IS NOT AVAILA BLE. VII. COMPANIES WITH DIFFERENT SCALE OF OPERATIONS. VIII. COMPANIES REPORTING PERSISTENT OPERATING LOSSES AND IX. COMPANIES ENGAGED IN SIGNIFICANT RELATED PARTY TRAN SACTIONS. THE LD.TPO ON EXAMINING THE SEARCH CRITERIA ADOPTED BY THE ASSESSEE COMPANY OPINED THAT CERTAIN FILTERS ARE NO T RELEVANT BECAUSE OF THE FOLLOWING REASONS:- SL.NO. SEARCH CRITERIA REMARKS OF THE TPO 1. COMPANIES FOR WHICH SUFFICIENT FINANCIAL INFORMATION WAS NOT AVAILABLE FOR THE F.Y. 2008-09, F.Y. 2009-10 AND F.Y. 2010-11. TO COMPUTE THE ALP THE DATA RELEVANT FOR RESPECTIVE FINANCIAL YEAR HAS TO BE USED. MOREOVER UNDER SECTION 92CA(3) THE TPO IS ENTITLED TO CONSIDER MATERIAL AVAILABLE IN PUBLIC DOMAIN RELEVANT FOR THE FY DURING TP ASSESSMENT, THOUGH NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF TP STUDY. HENCE, THIS FILTER IS NOT AN APPROPRIATE FILTER. 4 ITA NOS.1195/MDS/2016 2. SALES NOT GREATER THAN ZERO THE COMPANIES HAVING TURN OVER LESS THAN 1 CRORE HAS TO BE REJECTED AS THE OPERATIONS OF THESE COMPANIES IS HIGHLY INFLUENCED BY SHAREHOLDERS AND DIRECTORS. 3. COMPANIES WITH DIFFERENT SCALE OF OPERATIONS. AS PER VARIOUS JUDICIAL PRONOUNCEMENTS THE COMPANIES HAVING TURNOVER 5 TO 10 TIMES CAN BE CONSIDERED AS COMPARABLE. 4. COMPANIES ENGAGED IN SIGNIFICANT RELATED PARTY TRANSACTIONS. THE ASSESSEE HAS NOT APPLIED THE QUANTUM OF RPT. THE COMPANIES HAVING RPT MORE THAN 25% HAS TO BE REJECTED. THE LD.TPO ALSO OPINED THAT GAIN OR LOSS ARI SING OUT OF FOREIGN EXCHANGE FLUCTUATIONS HAS TO BE EXCLUDED WH ILE COMPUTING THE PLI. THEREAFTER THE LD.TPO BASED ON HIS INDEPE NDENT SEARCH SELECTED 10 COMPANIES AS THE COMPARABLE COMPANIES W HICH INCLUDED SEVEN COMPANIES SELECTED BY THE ASSESSEE. FURTHER THE LD.TPO ARRIVED AT THE CONCLUSION THAT THE COMPARABL E COMPANIES HAVE UNDERUTILIZED CAPACITY IN TERMS OF EMPLOYEE CO ST AND ALSO EXCESS DEPRECIATION WHICH REDUCE THE PROFIT OF THE COMPARABLE COMPANIES. THEREAFTER THE LD.TPO WORKED OUT THE AVE RAGE EMPLOYEE COST TO OPERATING INCOME OF COMPARABLE COM PANIES AT 11.45% AS AGAINST ASSESSEES RATIO OF 7.22%. FURTH ER THE RATIO OF DEPRECIATION TO OPERATING INCOME OF COMPARABLE COMP ANIES WAS WORKED OUT AT RS.4.79% AS AGAINST THE ASSESSEES RA TIO OF 1.79%. 5 ITA NOS.1195/MDS/2016 SINCE THERE WAS A WIDE DISPARITY THE LD.TPO MADE TH E RELEVANT ADJUSTMENTS WHILE COMPUTING THE PLI OF THE COMPARAB LE COMPANIES. 4. ON APPEAL, THE LD.MEMBERS OF THE DRP GAVE DIRECT IONS TO TREAT THE GAIN/LOSS ARISING OUT OF THE FOREIGN EXCH ANGE FLUCTUATION AS THE OPERATING INCOME/LOSS IN RESPECT OF THE ASSE SSEE COMPANY AS WELL AS THE COMPARABLE COMPANIES WHILE DETERMINI NG THE ALP PROVIDED THERE IS NO ELEMENT OF FORWARD CONTRACT. 5. FURTHER THE LD.MEMBERS OF THE DRP OBSERVED IN TH EIR ORDER THAT THERE ARE CERTAIN FILTERS WHICH THE ASSESSEE C OMPANY HAD NOT APPLIED AND THEREFORE IT WAS INCUMBENT TO CURE THE SAME WHILE COMPUTING THE ALP. THE LD.MEMBERS OF THE DRP FURTHE R OBSERVED THAT THE COMPUTATION OF ALP BY THE LD.TPO IS APPROP RIATE BECAUSE THE ADJUSTMENTS WERE MADE WITH PROPER VALID REASONING AND EXPLANATIONS. 6. AT THE OUTSET THE LD.AR SUBMITTED BEFORE US THAT THE CAPACITY UTILIZATION IN THE CASE OF THE ASSESSEE CO MPANY IS LESS THAN THE OTHER COMPARABLE COMPANIES. TO DRIVE HIS P OINT HE REFERRED TO PAGE NO.155 OF THE PAPER BOOK, WHEREIN THE AVERAGE CAPACITY UTILIZATION OF THE COMPARABLE COMPANIES WA S WORKED OUT 6 ITA NOS.1195/MDS/2016 AT 84.03%. IT WAS FURTHER SUBMITTED THAT THE CAPAC ITY UTILIZATION OF THE ASSESSEE COMPANY IS 79.18%. IT WAS THEREFORE A RGUED THAT THE ADJUSTMENT HAS TO BE MADE ONLY BY INCREASING TH E PROFIT MARGIN OF THE ASSESSEE COMPANY AND NOT BY INCREASIN G THE PROFIT MARGIN OF THE COMPARABLE COMPANIES. WHEN THESE ARGU MENTS WERE PUT BEFORE THE LD.DR HE COULD NOT CONTROVERT T O THE SUBMISSION MADE BY THE LD.AR BECAUSE THE CAPACITY U TILIZATION WORKED OUT BY THE ASSESSEE COMPANY COULD NOT BE DIS PUTED. THE CAPACITY UTILIZATION WORKED OUT BY THE ASSESSEE COM PANY IS REPRODUCED HEREIN BELOW FOR REFERENCE:- SL.NO. NAME OF THE COMPANY INSTALLED CAPACITY PRODUCTION CAPACITY UTILIZATION (%) 1 AKASAKA ELECTRONICS LIMITED 7,20,000 4,82,024 66. 95 2 BBC FUBA INDIA LIMITED 23,400 19,818 84.69 3 CIRCUIT SYSTEMS (INDIA) LIMITED FLEXIBLE CAPACITY 56,249 100 4 FINE LINE CIRCUITS LIMITED 31,000 22,520 72.65 5 CENTUM ELECTRONICS LIMITED* - - 100 6 PRECISION ELECTRONICS LIMITED 20,500 15,921 77.66 7 AISHWARYA TECHNOLOGIES AND TELECOM LIMITED* - - 100 8 BLG ELECTRONICS LIMITED 40,000 31,350 78.38 9 EPITOME COMPONENTS LIMITED* - - 100 10 SULAKSHANA CIRCUITS LIMITED 43,200 25,897 59.95 AVERAGE 84.03 * IT IS PERTINENT TO NOTE THAT AS THESE COMPANIES HAV E NOT REPORTED IN THE ANNUAL REPORT, ANY UNDER-UTILISATION OF CAPACITY. HENCE, THESE COMPAN IES ARE CONSIDERED TO BE OPERATING AT NORMAL CAPACITY LEVELS. 7 ITA NOS.1195/MDS/2016 7. AFTER HEARING BOTH SIDES, WE FIND MERIT IN THE S UBMISSION OF THE LD.AR. FROM THE ABOVE MENTIONED FACTS IT IS OBV IOUS THAT THE CAUSE OF HIGHER EMPLOYMENT COST OF THE COMPARABLE C OMPANIES COMPARED WITH THE ASSESSEE COMPANY CANNOT BE ATTRIB UTABLE TO THEIR LEVEL OF CAPACITY UTILIZATION. HOWEVER NOTHIN G FURTHER IS BROUGHT BEFORE US BY BOTH THE PARTIES TO EXPLAIN TH E REASONS FOR THE HIGHER EMPLOYEE COST INCURRED BY THE COMPARABLE COMPANIES THOUGH IT IS ACCEPTED BY BOTH THE PARTIES THAT THOS E COMPANIES ARE COMPARABLE COMPANIES. IN THESE CIRCUMSTANCE THE VER Y FACT THAT THE EMPLOYEE COST INCURRED BY THE COMPARABLE COMPAN IES BEING HIGHER THAN THE ASSESSEE COMPANYS EMPLOYEE COST, B RINGS DOUBT INTO OUR MINDS, AS TO WHETHER ACTUALLY THE COMPARAB LE COMPANIES ACCEPTED BY THE ASSESSEE COMPANY AND THE REVENUE AR E APPROPRIATE FOR COMPUTING THE ALP. IT IS AN ACCEPTA BLE PROPOSITION THAT NORMALLY EMPLOYEE COST WILL BE HIGHER WHEN SKI LLED LABOUR IS DEPLOYED IN THE FUNCTIONING OF THE ENTITIES. IN NOR MAL CIRCUMSTANCES AND BUSINESS CONDITIONS THERE CANNOT BE ANY OTHER REASON TO HOLD OTHERWISE. IN SUCH SITUATION IT CAN BE SAFELY PRESUMED THAT THE NATURE OF WORK CARRIED OUT BY THE ASSESSEE COMPANY MIGHT NOT REQUIRE MUCH SKILL THAN THE WORK CARRIED OUT BY THE COMPARABLE COMPANIES. IF THAT BEING SO THE COMPARABLE COMPANIES ADOPTED BY THE ASSESSEE COMPAN Y AND 8 ITA NOS.1195/MDS/2016 THE REVENUE CANNOT BE STRICTLY VIEWED AS COMPARABLE COMPANIES. FURTHER FROM THE MATERIALS PRODUCED BEFORE US WE DO NOT FIND ANY FUNCTIONAL ANALYSIS CARRIED OUT WITH RESPECT TO THE EMPLOYEE COST WHILE EXAMINING THE INTRICACIES OF THE ASSESSEE COM PANY AND THE COMPARABLE COMPANIES WHILE ARRIVING AT THE ALP. THE ISSUE WITH RESPECT TO ADJUSTMENT TOWARDS DEPRECIATION ALSO STA NDS ON THE SAME FOOTING. THEREFORE WE ARE OF THE VIEW THAT TH E ENTIRE MATTER WITH RESPECT TO THE COMPARABLE COMPANIES IS REQUIRE D TO BE EXAMINED AFRESH BY THE ASSESSEE AS WELL AS THE LD.R EVENUE AUTHORITIES. HENCE, WE HEREBY REMIT THE MATTER BAC K TO THE FILE OF LD.TPO FOR DE-NOVA CONSIDERATION. ACCORDINGLY GROUND NO. 2(I) IS DISPOSED OFF. 8. WITH RESPECT TO THE ISSUE OF ADJUSTMENT TOWARDS FOREIGN EXCHANGE FLUCTUATIONS, THE LD.MEMBERS OF THE DRP RE LYING ON THE DECISION OF THE TRIBUNAL IN THE CASE SAPLAB INDIA P VT. LTD. (2010- TII-44-ITAT-BANG-TP) DIRECTED THE LD.TPO TO TREAT T HE GAINS/LOSS ARISING OUT OF THE FOREIGN EXCHANGE FLUCTUATIONS IN RESPECT OF THE ASSESSEE COMPANY AS WELL AS THE COMPARABLE COMPANIE S AS OPERATING INCOME/LOSS WHILE DETERMINING THE ALP, PR OVIDED THE ASSESSEE COMPANIES AS WELL AS THE COMPARABLE COMPAN IES HAS NOT INDULGED IN FORWARD CONTRACTS. HOWEVER ON PERUS ING THE ORDER 9 ITA NOS.1195/MDS/2016 GIVING EFFECT TO THE DIRECTIONS OF THE LD.DRP AS PO INTED OUT BY THE LD.AR WE FIND THAT THE LD.DCIT HAS OMITTED TO CONSI DER THE SAME WHILE COMPUTING THE ALP. SINCE THE LD.MEMBERS OF T HE DRP HAD ONLY FOLLOWED THE DECISION OF THE TRIBUNAL WE HEREB Y DIRECT THE LD.TPO TO COMPLY WITH THE ABOVE MENTIONED DIRECTION OF THE LD.MEMBERS OF THE DRP WHILE COMPUTING THE ALP IN TH E CASE OF THE ASSESSEE COMPANY. ACCORDINGLY GROUND NO.2(II) IS DISPOSED OFF. 9. THE LD.AR FURTHER ALLEGED BEFORE US THAT THE LD. TPO AS WELL AS THE LD.DCIT IN THEIR ORDER GIVING EFFECT TO THE DIRECTIONS OF THE MEMBERS OF THE DRP HAS EXCLUDED THE MISCELLANEO US INCOME AND REVENUE GENERATED FROM THE SALE OF SCRAP WHILE COMPUTING THE PLI OF THE ASSESSEE. HE ARGUED STATING THAT BOTH TH E MISCELLANEOUS INCOME AND THE SALE OF SCRAP ARE DIRE CTLY ATTRIBUTABLE TO THE OPERATING INCOME OF THE ASSESSE E AND HENCE THEY SHOULD BE TAKEN INTO ACCOUNT FOR THE PURPOSE O F COMPUTING THE PLI OF THE ASSESSEE. WE FIND MERIT IN THE SUBM ISSION OF THE LD.AR. HOWEVER IT IS PERTINENT TO MENTION THAT THE NATURE OF MISCELLANEOUS INCOME AND THE REVENUE GENERATED FROM SALE OF SCRAP HAS TO BE VERIFIED WHETHER IT IS ACTUALLY THE CONSTITUENT OF THE OPERATING PROFIT BECAUSE IF THE SCRAP SOLD IS NOT T HE RESIDUE 10 ITA NOS.1195/MDS/2016 ATTRIBUTABLE WITH RESPECT TO THE MANUFACTURING OPER ATIONS THEN THE SAME CANNOT BE TAKEN AS A CONSTITUENT OF THE OPERAT ING INCOME. SO IS THE CASE WITH RESPECT TO MISCELLANEOUS INCOME . FOR EXAMPLE, SALE OF SCRAP RESULTING FROM ANY FIXED ASS ET OF THE ASSESSEE COMPANY CANNOT BE TAKEN AS A CONSTITUENT O F OPERATING INCOME. SIMILARLY MISCELLANEOUS INCOME NOT CONNECTE D WITH THE BUSINESS ACTIVITIES OF THE ASSESSEE COMPANY CANNOT BE TAKEN AS A CONSTITUENT OF THE OPERATING INCOME. SINCE THE REAL NATURE OF MISCELLANEOUS INCOME AND REVENUE ARISING OUT OF THE SALE OF SCRAP IS NOT BEFORE US, WE ARE OF THE CONSIDERED VIEW THA T THIS ISSUE IS ALSO TO BE LOOKED INTO AFRESH. THEREFORE WE HEREBY REMIT THESE ISSUES ALSO BACK TO THE FILE OF LD.TPO IN ORDER TO PASS APPROPRIATE ORDER BASED ON OUR OBSERVATIONS MADE HEREIN ABOVE. ACCORDINGLY GROUND NO.3 IS DISPOSED OFF. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES AS INDICATED HEREIN ABOVE. ORDER PRONOUNCED ON 04 TH DECEMBER, 2017 AT CHENNAI. SD/- SD/- ( ! ' . #$ ) ( . ) ( DUVVURU RL REDDY ) ( A. MOHAN ALANKAMONY ) # $% /JUDICIAL MEMBER $% / ACCOUNTANT MEMBER 11 ITA NOS.1195/MDS/2016 &# /CHENNAI, '$ /DATED 04 TH DECEMBER, 2017 RSR $ )* +* /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. . ( )/CIT(A) 4. . /CIT 5. */0 1 /DR 6. 0 /GF