DCIT, New Delhi V. M/s. Freescale Semiconductor India (P) Ltd., New Delhi

ITA 1266/DEL/2011

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4740 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-10-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I1
• Next Hearing Date: 08-06-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 11-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Transfer pricing; International transaction

Judgement Text

1 ITA NO. 1266/DEL/2011 IN THE INCOME TAX APPELLA TE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER I.T.A .NO. 1266/DEL/2 011 (A.Y 2005-06) DCIT CIRCLE-11(1), ROOM NO. 312, C. R. BUILDING NEW DELHI (APPELLANT) VS FRESSCALE SEMICONDUCTOR INDIA (P) LTD. F-40, NDSE NEW DELHI AAACZ1978P (RESPONDENT) APPELLANT BY SH. SANJAY I. BARA, CIT DR RESPONDENT BY SH. TARANDEEP SINGH, ADV ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ASS ESSMENT ORDER DATED 08/12/2008 PASSED U/S 143(3)/144C/92CA (4) OF THE I NCOME TAX ACT, FOR ASSESSMENT YEAR 2005-06. 2. 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 ARMS LENGTH PRICE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.64,83,213/- ON ACCOUNT OF PROVISION FOR EXPENSES. 3. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF DESIGNING OF SEMICONDUCTOR PRODUCTS, SOFTWARE AND ELECTRONIC SYS TEMS AND PROVIDING SALES DATE OF HEARING 22.10.2018 DATE OF PRONOUNCEMENT 29.10.2018 2 ITA NO. 1266/DEL/2011 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 AC T 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 DETAIL S CALLED FOR. IN THIS CASE, A REFERENCE WAS MADE TO THE ADDL. CIT (TPO-I), NEW DE LHI FOR DETERMINING ARMS LENGTH PRICE U/S 92CA(3) IN RESPECT OF INTERNATIONA L TRANSACTION ENTERED INTO BY THE ASSESSEE DURING F.Y. 2004-05. THE ISSUE WAS EXA MINED 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/-. A CCORDINGLY, THE ASSESSEE WAS ASKED TO EXPLAIN WHY THE DIFFERENCE IN BOOK VAL UE OF INTERNATIONAL TRANSACTION AND THE ARMS LENGTH PRICE WORKED OUT B Y TPO VIDE ORDER U/S 92CA(3) DATED 8-10-2008 AMOUNTING TO RS. 11,96,61,3 58/- 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 OFFIC ER MADE AN ADDITION OF RS. 11,96,61,358/- ON ACCOUNT OF DIFFERENCE IN THE VALU E OF INTERNATIONAL TRANSACTIONS AND THE ARMS LENGTH PRICE OF THE TRAN SACTIONS 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 AR E 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 O F 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 DIS ALLOWED. THE ASSESSEES REPRESENTATIVE ATTENDED AND SUBMITT ED THAT THE MISCELLANEOUS LIABILITIES REPRESENT FULL AND FINAL SETTLEMENT OF EMPLOYEES AND THE PAYMENT TO THE EXTENT OF RS. 58,84,639/- WAS MA DE IN JUNE, 2005. THE 3 ITA NO. 1266/DEL/2011 ASSESSING OFFICER HELD THAT THE ASSESSEES REPRESEN TATIVE MERELY MADE A SETTLEMENT BUT NO EVIDENCE TO SUBSTANTIATE THE CLAI M WAS FURNISHED. THUS, THE ASSESSING OFFICER OBSERVED THAT THE ENTIRE LIABILIT Y TO THE EXTENT OF RS. 64,83,213/- WAS REVERSED IN SUBSEQUENT YEAR WHICH C LEARLY PROVES THAT THE LIABILITY IN RESPECT OF MISCELLANEOUS EXPENSES TO T HE 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. 4. BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BEFOR E THE CIT (A) AND CIT(A) PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. 5. THE LD. DR RELIED UPON THE ORDER OF THE TPO & AS SESSMENT ORDER. THE LD. DR SUBMITTED THAT THE ASSESSEE COMPANY IS ENGAG ED IN THE SPECIFIC WORK THAT OF WORK PERTAINING TO CHIP DESIGNING I.E. DEVE LOPING 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 SU CH AS MULTIPLE YEAR DATA, THE TPO HAS RIGHTLY SELECTED THE COMPARABLES THAT OF IN FOSYS TECHNOLOGY LTD. AND SATYAM COMPUTERS. AS REGARDS DELETION OF AN ADDITIO N OF RS. 64,83,213/- ON ACCOUNT OF PROVISION FOR EXPENSES, THE ASSESSING OF FICER RIGHTLY MADE ADDITION AS THERE WAS NO EVIDENCE TO SUBSTANTIATE THE CLAIM OF THE ASSESSEE COMPANY. 6. 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 T AXMAN 539 (DEL. HC) IV) ACIT VS. MAERSK GLOBAL SERVICE CENTRE (INDIA) ( P) LTD. 133 ITD 543 (MUM TRI.) 4 ITA NO. 1266/DEL/2011 V) TEVAPHARM (P) LTD. VS. ACIT 50 SOT 150 (MUM TRI. ) VI) CARLYLE INDIA ADVISORS (P) LTD. VS. ACIT 53 SO T 267 (MUM TRI.) VII) ST MICROELECTRONICS (P) LTD. VS. CIT 15 ITR 41 0 (DEL. TRI.) VIII) ST MICROELECTRONICS PVT. LTD. VS. CIT 2016-TI I-15-HC-DEL-TP (DEL. HC) AS REGARDS GROUND NO. 2, THE LD. AR SUBMITTED AS PE R RULE 27 OF THE INCOME TAX ACT, 1961 THAT THE CLAIM OF THE ASSESSEE COMPAN Y RELATING TO SECTION 10A HAS TO BE KEPT OPEN BY THE REVENUE AUTHORITIES. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. AS REGARDS GROUND NO. 1 OF THE REVENUES A PPEAL, FROM THE PERUSAL OF THE RECORDS IT CAN BE SEEN THAT THE COMPARABLES WHI CH WERE SELECTED BY THE TPO ARE FUNCTIONALLY DIFFERENT. THE CIT (A) HELD AS UNDER:- I HAVE GONE THROUGH THE ABOVE SUBMISSION OF THE APP ELLANT AND HAVE ALSO GONE THROUGH THE TP DOCUMENTATION SUBMITTED BY THE APPEL LANT. ON PERUSAL OF THE ABOVE I AM OF THE VIEW THAT TPO HAS WITHOUT FOLLOWING A SCI ENTIFIC SEARCH METHODOLOGY ACCEPTED ONLY TWO COMPANIES INFOSYS AND SATYAM AS C OMPARABLE 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 INTANG IBLES, CANNOT BE COMPARED TO A LIMITED RISK ENTITY OPERATING ON A FULL COST PLUS B ASIS. THIS VIEW IS ALSO SUPPORTED BY THE RULINGS PROVIDED BY HONBLE ITAT FURTHER, ON A CAREFUL CONSIDERATION OF THE ORDER, IT TRANSPIRES THAT THE TPO HAS NOT PROVIDED ANY SUP PORTING OR EVIDENCE FOR HIS REJECTION OF THE COMPARABILITY ANALYSIS AS CONDUCTE D BY THE APPELLANT, UNDER TNMM, IN ITS TP DOCUMENT AND SUBMISSIONS. THE TPO HAS APP ARENTLY MADE HIS FINDING BASED ON HIS READING OF FREESCALE INDIA BEING A HI GH END SERVICE PROVIDER. HOWEVER, THE TPO HAS NOT RECORDED ANY REASONS FOR R EJECTING ALL THE COMPANIES OTHER THAN SATYAM AND INFOSYS. HE HAS DONE SO WITHOUT EVA LUATING 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. SAT YAM AND INFOSYS. THUS, THE APPROACH ADOPTED BY THE TPO WHEREIN, HE HAS SELECTE D 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 APPELLAN T. 5 ITA NO. 1266/DEL/2011 THE APPELLANT DURING THE COURSE OF ASSESSMENT PROCE EDINGS HAD CONDUCTED FRESH BENCHMARKING BASED ON THE UPDATED (FOR FY 2005-06) FINANCIALS AVAILABLE WHEREIN, IT SELECTED 32 COMPARABLE COMPANIES WITH MEAN MARGIN O F 9.64%. THE COMBINED MARGIN (INCLUDING MARKETING SUPPORT SEGMENT) EARNED BY THE APPELLANT WAS 10.22%. IN VIEW OF THE ABOVE THE ARMS 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 TPOS COMPARABLES ARE NOT RELEVANT AT ALL AND THE FRESH BENCHMARKING COND UCTED 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. 8. AS REGARDS GROUND NO. 2, THE CIT (A) HELD AS UND ER:- ISSUE 10: THIS GROUND RELATES TO THE ACTION OF TH E A.O IN NOT ALLOWING THE DEDUCTION U/S 10A OF THE I.T ACT, 1961 FOR ADDI TIONS 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 APPEA L IN QUANTUM OF ADDITIONS, THIS GROUND OF APPEAL BECOME INFURCUTOUS AND IS NOT DEAL T IN THIS ORDER. THE LD. AR SUBMITTED THAT THE ASSESSEE COMPANY IS C OMING UNDER THE PURVIEW OF SECTION 10A ENTITLEMENT. THOUGH THIS ISSUE IS NO T ADDRESSED BY THE CIT(A) ON MERIT, YET THE SAME REQUIRES CONSIDERATION AS THE A SSESSEE COMPANY IS ENTITLED TO CLAIM BENEFIT UNDER SECTION 10A IN THE RESPECTIV E APPLICABLE YEARS. THUS, WITH THESE FINDINGS WE DISMISS GROUND NO. 2 OF THE REVENUES APPEAL. 10. IN RESULT, THE APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH OCTOBER, 2018 . SD/- SD/- (N. K. BILLAIYA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 29/10/2018 R. NAHEED * 6 ITA NO. 1266/DEL/2011 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE OF DICTATION 23 .10.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 23 .10.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 2 9 .10.2018 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 2 9 .10.2018 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 2 9 .10.2018 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER