M/s. Flextronics Technologies (India) Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 1398/BANG/2010

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9387 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 9 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 05-11-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 07-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRESCILLA SINGSIT
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH- A, BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER SHRI S JAYARAMAN, ACCOUNTANT MEMBER IT(TP)A NO.1398 /BA NG/2010 (ASST. YEAR 2006-07) FLEXTRONICS TECHNOLOGIES (INDIA) PVT. LTD., PLOT 3, PHASE II, SIPCOT INDUSTRIAL PARK, SANDAVELLUR C VILLAGE, SRIPERUMBUDUR TALUK, KANCHEEPURAM DISTRICT, TAMIL NADU-602 106. . APPELLANT VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-11(3), BENGALURU. . RESPONDENT APPELLANT BY : SHRI AJIT KUMAR JAIN, CA RESPONDENT BY : SMT. PRESCILLA SINGSIT, DR DATE OF HEARING : 27-7-2016 DATE OF PRONOUNCEMENT : 21-09-2016 O R D E R PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF DY. COMMISSIONER OF INCOME-TAX, BENGALURU DATED 5/1 0/2010 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 ELECT RONIC MANUFACTURING SOFTWARE SUPPORT AND IT ENABLED SERVI CES. THE RETURN OF INCOME FOR THE ASST. YEAR 2006-07 WAS FIL ED 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 MANUFACT URING ACTIVITY AS WELL AS IT ENABLED SERVICES. 3. THE ASSESSEE OBJECTED TO THE DRAFT ASST. ORDER P ASSED 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 TOWARD S MANUFACTURING SEGMENT BY THE TPO ARE 9 IN NUMBER WH ICH 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., 6. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT T HE ASSESSEE HAS NO OBJECTION IN TAKING AS COMPARABLES THE FOLLO WING COMPANIES: 1. BCC FUBA INDIA LTD., 2. SULAKSHANA CIRCUITS LTD. 3. CIRCUIT SYSTEMS (INDIA) LTD., 4. KARNATAKA HYBRID MICRO DEVICES 5. NAINA SEMICONDUCTORS LTD., 6. PRECISION ELECTRONICS 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 PROTOT YPE MANUFACTURING SERVICES AND ALSO MANUFACTURES ULTRAS OUND SCANNERS LA 100-PRO. PCBS IS ONE OF THE RAW MATERIA L USED BY THE COMPANY FOR MANUFACTURING. - THE TPO HIMSELF HAD REJECTED ONE COMPANY SELECTED B Y THE ASSESSEE (RUTTONSHA) CONTENDING THAT IT WAS INT O MANUFACTURE OF RECTIFIERS, WHICH IS ONE OF THE MANY COMPONENTS USED IN MANUFACTURE OF PCBS. 8. FLEXTRONICS IS ENGAGED IN THE MANUFACTURE OF PRI NTED CIRCUIT BOARD ASSEMBLY WHICH HAS APPLICATION IN THE TELECO M, INDUSTRIAL ELECTRONICS AND CONSUMER PRODUCT SEGMENT. IT ALSO OPERATES A SHARED SERVICES DIVISION FOR PROVIDING BACK OFFICE SERVICE S RELATING TO ACCOUNTS PAYABLE PROCESSING AND HUMAN RESOURCES REC ORD MAINTENANCE. WHEREAS RANGSONS ELECTRONICS PVT. LTD ., IS ENGAGED IN SUB ASSEMBLY FOR ULTRA SOUND SCANNER WHICH WAS P OINTED OUT BY THE LD COUNSEL AT PAGE 559 OF THE PAPER BOOK FROM T HE 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 HE NCE RANGSON ELECTRONICS PVT. LTD., CANNOT BE TAKEN AS COMPARABL E WITH THE ASSESSEE COMPANY WHICH MANUFACTURES ULTRA SOUND SC ANNER. THE OPERATING SALES IS AT 6.26% FOR THE ASST. YEAR 2005 -06. 9. WITH RESPECT TO SPEL SEMICONDUCTOR LTD., THE AS SESSEE SUBMITTED THAT IT IS FUNCTIONALLY DIFFERENT AS IT I S 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 COUN SEL FOR THE ASSESSEE SUBMITTED THAT THIS COMPANY CANNOT BE REJE CTED MERELY BECAUSE IT IS A LOSS MAKING COMPANY. THE ASSESSEE ITSELF IS MAKING LOSSES IN ITS MANUFACTURING SEGMENT. IT IS NOT A P ERSISTENT LOSS MAKING COMPANY AS SEEN FROM THE ANNUAL REPORT AND T HE COMPANY DOES NOT INCURRED BOOK LOSS IN EARLIER YEAR I.E IN ASSESSMENT YEAR 2005-06. FOR THIS PROPOSITION, THE LD COUNSEL RELI ED ON THE FOLLOWING DECISIONS: 1. SUMITOMO CHEMICAL INDIA PVT. LTD., ITA NO.3077/M/2012 & 7461/M/2013 2. ADVANCE POWER DISPLAY SYSTEMS LTD., ITA NO.6732/MUM/2011 & 6524/MUM/2011 11. THE LD COUNSEL POINTED OUT TO PAGE 143 OF THE P APER BOOK 1, WHEREIN 3 YEARS MARGIN OF FINE LINE CIRCUITS LTD., HAS BEEN REPRODUCED. IT WAS ALSO SUBMITTED THAT IN THE SUBS EQUENT YEAR I.E ASST. YEAR 2007-08, FINE LINE CIRCUITS LTD., WAS CO NSIDERED AS COMPARABLE AND THE TPO HAS ACCEPTED THE SAME AS THE RE WAS NO ADJUSTMENT MADE IN SUBSEQUENT YEARS IN THE MANUFACT URING 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. 12. WE ARE CONVINCED WITH THE ARGUMENT OF THE LD CO UNSEL AND DIRECT THE AO/TPO TO INCLUDE FINE LINE CIRCUITS AS A COMPARABLE. WE ARE ALSO OF THE OPINION THAT RANGSONS ELECTRONIC S PVT. LTD., AND SPELL SEMICONDUCTOR LTD., ARE TO BE EXCLUDED BY THE AO/TPO FROM THE LIST OF COMPARABLES AS THEY ARE FUNCTIONALLY DI FFERENT. GLOBAL SHARED SERVICES CENTER (GSSC) SEGMENT : 13. THE TPO CONSIDERED THE FOLLOWING 13 COMPANIES A S COMPARABLE: IT(TP)A NO.1398/B/10 8 SL. NO. COMPANY NAME SALES (RS.CR.) OP TO 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 KNOW N AS NUCLEUS NETSOFT & GIS(INDIA) LTD 5.68 34.52 8 GOLDSTONE INFRATECH LTD (SEG.) EARLIER KNOWN AS GOLDSTONE TELESERVICES LTD) 5.03 29.01 9 SPANCO LTD(SEG.)(EARLIER KNOWN AS SPANCO TELESYSTEMS & SOLUTIONS LTD) 82.32 20.86 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 ADDI TIONAL GROUND, WHICH IS AS FOLLOWS:- THE LD TPO HAS, IN HIS FRESH STUDY, ERRED IN FINALI ZING 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 GOLDS TONE TELESERVICES LTD.) AND APEX KNOWLEDGE SOLUTIONS PVT . LTD. AS COMPARABLE TO THE APPELLANT DESPITE THE SAM E FAILING TO MEET THE LEGALLY ACCEPTABLE CRITERIA FOR COMPARABILITY. THE HONBLE DRP HAS ALSO ERRED IN CONFIRMING THE ORDER OF THE TPO IN THIS REGARD. 15. THE LEARNED COUNSEL FOR THE ASSESSEE PRESSED ON LY FOR EXCLUSION OF VISHAL INFORMATION TECHNOLOGIES LTD., AND DID NOT PRESS FOR EXCLUSION OF THE OTHER COMPARABLES MENTIO NED IN THE ADDITIONAL GROUND. 16. WITH RESPECT TO VISHAL INFORMATION TECHNOLOGIES LTD., THE ISSUE IS COVERED BY THE EARLIER DECISION OF THE TR IBUNAL IN ITA IT(TP)A NO.1398/B/10 10 NO.1559/BANG/2012 AND ALSO ITA NO.1219/BANG/2011, W HEREIN IT IS HELD AS UNDER:- 8.7 VISHAL INFORMATION TECHNOLOGIES LTD.(CORAL HUB LTD.) THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT T HIS COMPANY DOES NOT QUALIFY THE EMPLOYEES FILTER OF 25 % ADOPTED BY THE TPO. HE HAS POINTED OUT THAT THIS CO MPANY HAS OUTSOURCED ITS ACTIVITIES AND THEREFORE, BEING A DIFFERENT BUSINESS MODEL TO A ROUTINE ITES PROVIDER, CANNOT B E CONSIDERED AS A GOOD COMPARABLE. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE FOLLOWING DECISI ONS: I. RAMPGREEN SOLUTIONS PVT. LTD.(TS-387-HC-2015-TP) II. FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. (IT A NO.1086/BANG/2011) III. STREAM INTERNATIONAL PVT. L TD.(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 ORD ER OF THE AUTHORITIES BELOW. 8.7.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS W ELL AS RELEVANT MATERIAL ON RECORD. WE NOTE THAT THE COMPA RABILITY OF THIS COMPANY WITH ITES PROVIDING SERVICE PROVIDE R HAS BEEN EXAMINED BY THE TRIBUNAL IN VARIOUS CASES AS R ELIED UPON BY THE LEARNED AR OF THE ASSESSEE. IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. (SUPRA) IT HA S 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 A SSESSEE'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 APPLICABL E 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 APPLICAB LE TO ITES SEGMENT, WHERE COMPARABLY LESS EMPLOYEES ARE EMPLOYED. IN THE ITES SEGMENT, THE ENTIRE WORK IS T O BE DONE BY THE EMPLOYEES AND, THEREFORE, EVEN THOUGH T HEY MAY BE LESS SKILLED COMPARED TO SOFTWARE DEVELOPMEN T SEGMENT, THE NUMBER OF EMPLOYEES WOULD DEFINITELY B E MORE AND THUS THE EMPLOYEE COST WOULD BE HIGH AND T HUS APPLICATION OF EMPLOYEE COST FILTER TO THE IT1ES SE CTOR 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 VIE W HAS BEEN TAKEN BY THE TRIBUNAL IN THE OTHER DECISIO NS. WE IT(TP)A NO.1398/B/10 12 FURTHER NOTE THAT THE HONBLE HIGH COURT IN THE CAS E OF RAMPGREEN SOLUTIONS PVT. LTD. (SUPRA) HAS ALSO DECI DED THIS ISSUE IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLE. 17. 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 HONBLE DRP HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE LD ASSESSING OFFICERS 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. 19. THE LD COUNSEL FOR THE ASSESSEE HAS RELIED UPON THE DECISION OF CIT VS. YOKOGAWA INDIA LTD., AND OTHERS. HENCE RE SPECTFULLY IT(TP)A NO.1398/B/10 13 FOLLOWING THE DECISION OF THE COORDINATE BENCH OF T HE TRIBUNAL DATED 30.4.2014 IN THE CASE OF CIT VS. BIOCON LTD., IN IT A NO.248, 368 TO 371 & 1206/2010 WHEREIN THE DECISION OF CIT VS. YOK OGAWA INDIA LTD., HAS BEEN DEALT WITH, WE ARE OF THE VIEW THAT THE CLAIM MADE BY THE ASSESSEE DESERVES TO BE ACCEPTED. WE DIRECT TH E TPO ACCORDINGLY. 20. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 2 1ST SEPTEMBER, 2016 . SD/- SD/- (S JAYARAMAN) (ASHA VIJ AYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE DATED : 21/09/2016 VMS COPY TO :1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED 4.THE CIT(A) CONCERNED 5.DR 6.GF BY ORDER ASST. RE GISTRAR, ITAT, BANGALORE