ST Microelectronics Pvt. Ltd., New Delhi V. Addl.CIT, Special Range- 8, New Delhi

ITA 4396/DEL/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4223 (ITAT-DELHI)
• Duration Of Justice: 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Assessment Year: 2012-2013
• Appeal Filed On: 03-07-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S D KAPILA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 92D; 37(1); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 , NEW DELHI BEFORE SH. N. K. SAINI, AM AND SH. KULDIP SINGH , JM ITA NO. 4396 /DEL/2017 : ASSTT. YEAR : 2012 - 13 ST MICROELECTRONICS PVT. LTD., D - 28, SOUTH E XTENSION, PART - I, NEW DELHI - 110049 VS ADDL. COMMISSIONER OF INCOME TAX, SPECIAL RANGE - 8, NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. A A ACS3406M ASSESSEE BY : SH. S. D. KAPILA, ADV. REVENUE BY : SH. H. K. CHOUDHARY, CIT DR DATE OF HEARING : 05 .10 .201 7 DATE OF PRONOUNCE MENT : 03 .01 .201 8 ORDER PER N. K. SAINI, AM : THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 25.05.2017 PASSED BY THE AO U/S 14 3(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 2. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL: 1. THAT THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP') ERRED IN FACT AND LAW BY UPHOLDING THE ADJUSTMENT PROPOSED BY TH E ADDITIONAL COMMISSIONER OF INCOME TAX - SPECIAL RANGE - 8, NEW DELHI ('LEARNED AO')/ LEARNED TRANSFER PRICING OFFICER ('LD. TPO') WHEREIN THE LD, AO/ LD, TPO HAS HELD THAT THE APPELLANT'S INTERNATIONAL TRANSACTION OF PROVISION OF DESIGN IMPLEMENTATION AND MAINTENANCE WITH RESPECT TO INTEGRATED CIRCUIT ('I/CS') AND SOFTWARE DEVELOPMENT SERVICES WITH ITS ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 2 ASSOCIATED ENTERPRISES ('AES') DOES NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME TAX ACT, 1961 ('THE ACT') AND THEREBY MADE AN ADJUSTMEN T OF INR 20,52,63,184 AND IN DOING SO HAVE GROSSLY ERRED BY: 1.1. NOT GIVING EFFECT TO DIRECTIONS OF THE LD. DRP IN THE CONTEXT OF GRIEVANCES RAISED IN GROUNDS NO. 1.2 AND 1.3, HEREIN BELOW; 1.2 ERRONEOUSLY INCLUDING AMOUNT OF INR 3,33,10,161 PERTAINING TO ESOPS TWICE IN THE OPERATING COST BASE OF THE APPELLANT; 1.3 BY TREATING FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS A NON - OPERATING ITEM WHILE COMPUTING OPERATING MARGIN OF THE APPELLANT AND OF THE COMPARABLE COMPANIES; 1.4. DISREGARDING THE ARM'S LENG TH PRICE ('ALP') DETERMINED BY THE APPELLANT IN THE TRANSFER PRICING ('TP') DOCUMENTATION MAINTAINED BY IT, IN TERMS OF SECTION 92D OF THE ACT, BY NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT AND CONDUCTING A FRESH ECONOMIC ANALYSIS AND IN PARTICULAR MODIFYING/REJECTING THE FILTERS APPLIED BY THE APPELLANT; 1.5. THE LD. TPO ERRED IN LAW IN APPLYING CERTAIN INCORRECT FILTERS FOR SELECTING COMPARABLES, WHICH IS CONTRARY TO THE DECISIONS OF THE JURISDICTIONAL HIGH COURT OF DELHI; 1.6. EXCL UDING CERTAIN COMPARABLES CONSIDERED BY THE APPELLANT IN ITS TP DOCUMENTATION/ FRESH SEARCH ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 3 ON ARBITRARY/ FRIVOLOUS GROUNDS EVEN THOUGH THEY AR E COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED; 1.7 REJECTING/ NOT INCLUDING CERTAIN COMPANIES AS COMPARABLE, WHICH ARE OTHERWISE FUNCTIONALLY SIMILAR, MERELY ON THE GROUND THAT THEY FOLLOW ACCOUNTING YEAR OTHER THAN FINANCIAL YEAR; 1.8. NOT APPROPRIATELY CONSIDERING THE FUNCTIONS, ASSETS AND RISK PROFILE OF THE COM PANIES USED FOR COMPARISON WITH THE APPELLANT, THEREBY INCLUDING IN THE FINAL COMPARABLE SET CERTAIN COMPANIES WITH COMPLETELY DIFFERENT FUNCTIONAL PROFILE; 1.9. COMMITTING ERRORS IN THE COMPUTATION OF THE OPERATING PROFIT MARGINS OF THE APPELLANT AND OF THE COMPARABLES SELECTED FOR BENCHMARKING THE INTERNATIONAL TRANSACTION; 1.10. INTRODUCING COMPANIES IN THE FINAL COMPARABLE SET THAT SIGNIFY HIGH ELEMENT OF RISK AS OPPOSED TO THE APPELLANT WHO IS A CAPTIVE SERVICE PROVIDER BEARING LIMITED RISK AND ALSO NOT ACCEPTING THE RISK ADJUSTMENT CARRIED OUT BY THE APPELLANT EVEN THOUGH THE LD. TPO HAD PROPOSED TO GRANT THE SAME IN THE SHOWCAUSE NOTICE; 1.11. NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCE IN CAPACITY UTILIZATION OF THE APPELLANT VIS - A - V IS THE ALLEGED COMPARABLES; 1.12. COMPUTED THE ARM'S LENGTH RANGE AT 3 PERCENT INSTEAD OF 5 PERCENT WHICH WAS THE PRESCRIBED ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 4 RANGE APPLICABLE FOR THE RELEVANT AY AS PER PROVISO TO SECTION 92C(2) OF THE ACT; 1.13. DIS - REGARDING JUDICIAL PRONOUNCEMENTS IN UNDERTAKING THE TP ADJUSTMENT; 1.14. IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1 )(C) OF THE ACT. THE ABOVE GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT PRAYS FOR LEAVE TO ADD, ALTER, AMEND AND/ OR MODIFY ANY GROUND OF APPEAL AT OR BEFORE THE HEARING OF THE APPEAL. THE APPELLANT PRAYS FOR APPROPRIATE RELIEF BASED ON THE SAID GROUND OF APPEAL AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. THE LD. COUNSEL FOR THE ASSESSEE ARGUED GROUND NOS. 1.2, 1. 3 AND 1.7 ONLY. 4. AT THE FIRST INSTANCE, WE WILL DEAL WITH GROUND NO. 1.7, THE GRIEVANCE OF THE ASSESSEE VIDE THIS GROUND RELATES TO THE REJECTION/NON - INCLUSION OF CERTAIN COMPANIES AS COMPARABLE WHICH WERE OTHERWISE FUNCTIONALLY SIMILAR , ON THE GROUND T HAT THEY FOLLOW ACCOUNTING YEAR OTHER THAN FINANCIAL YEAR. 5. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE COMPANY WAS INCORPORATED IN INDIA AND IS A SUBSIDIARY OF ST MICROELECTRONICS PTE. LTD. THE ASSESSEE FILED THE RETURN OF ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 5 INCOME ON 28.11.2012 DE CLARING AN INCOME OF RS.49,16,03,970/ - . LATER ON, THE CASE WAS SELECTED FOR SCRUTINY. THE AO , IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE REFERRED THE MATTER TO THE TPO U/S 92CA(3) OF THE ACT. THE OPERATING PROFIT MARGIN (OP/OC) W AS COMPUTED BY THE ASSESSEE IN THE TP STUDY AT 11.54%, T HE AVERAGE MEAN MARGIN OF THE COMPARABLES WAS COMPUTED AT 11.17%. ACCORDINGLY, ON THE BASIS OF TESTED PARTY OPERATING PROFIT MARGIN ON COST OF 11.54%, THE INTERNATIONAL TRANSACTIONS HAD BEEN CONSIDERE D TO BE AT ARM S LENGTH IN THE TP DOCUMENTATION. DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO, A FRESH SEARCH WAS CALLED FOR AND THE ASSESSEE HAD GIVEN THE FOLLOWING COMPARABLES: NO. COMPANY NAME WORKING CAPITAL ADJUSTED MARGIN (OP/OC%) I. AKSHAY SOF TWARE TECH. LTD. 11.86 II. CG VAK SOFTWARE & EXPORTS LTD. (SEG.) - 14.62 III. CAT TECHNOLOGIES - 4.41 IV. CTIL LTD. 10.50 V. CIGNITI TECHNOLOGIES LTD. 8.02 VI. EVOKE TECHNOLOGIES 12.81 VII. HELIOS MATHESON INFORMATION TECHNOLOGY LTD. 12.41 VIII. INFOM ILE TECHNOLOGIES LTD. 5.08 IX. LARSEN AND TOUBRO INFOTECH LTD. 23.65 ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 6 X. PRISM INFORMATICS LTD. 12.77 XI. RS SOFTWARE (INDIA) LTD. 16.39 XII. THINKSOFT GLOBAL LTD. 12.74 XIII. MINDTREE INDIA LTD. 16.16 XIV. PERSISTENT SYSTEMS LTD. 24.93 XV. R SYSTEMS INTERNATIONAL LTD. 3.09 XVI. SASKEN COMMUNICATION LTD. 17.70 XVII. CALIBER POINT BUSINESS SOLUTIONS LTD. 5.11 XVIII . YBRANT DIGITAL LTD. (LGS GLOBAL LTD.) 19.35 XIX. ZYLOG SYSTEMS LTD. 27.59 ARITHMETIC MEAN 10.53% 6. HOWEVER, THE TPO ACCEPTED FEW OF THE COMPARABLES AND ALSO REJECTED ANOTHER COMPARABLES SELECTED BY THE ASSESSEE. FINALLY, FOLLOWING 14 COMPARABLES WERE SELECTED BY THE TPO: S. NO. COMPARABLES MARGINS I. AKSHAY SOFTWARE TECH. LTD. 7.77% II. CIGNITI TECHNOLOGIES LTD. 8.28% III. EVOKE T ECHNOLOGIES 11.57% IV. LARSEN AND TOUBRO INFOTECH LTD. 23.79% V. RS SOFTWARE (INDIA) LTD. 15.43% VI. MINDTREE INDIA LTD. 19.19% VII. PERSISTENT SYSTEMS LTD. 26.92% VIII. SASKEN COMMUNICATION LTD. 14.58% IX. YBRANT DIGITAL LTD. (LGS GLOBAL LTD.) 19.34 % X. ZYLOG SYSTEMS LTD. 33.01% XI. ACROPETAL TECHNOLOGIES LTD. (SEG.) 17.75% XII. INFOSYS LTD. 42.15% XIII. SPRY RESOURCES PVT. LTD. 33.59% XIV. E - ZEST SOLUTIONS LTD. 17.51% AVERAGE 20.78% ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 7 7. THE TPO PROPOSED AN ADJUSTMENT OF RS.29,14,20,630 IN HIS ORDER DATED 24.10.2016. THEREAFTER, THE AO PASSED THE DRAFT ASSESSMENT ORDER. AGAINST THE DRAFT ASSESSMENT ORDER PASSED BY THE AO , THE ASSESSEE RAISED OBJECTION S BEFORE THE LD. DRP AND SUBMITTED THAT THE TPO REJECTED THE COMPARABLE M/S R SYSTEMS INTERNATI ONAL LTD. ON A FRIVOLOUS GROUND THAT THE FINANCIAL YEAR OF THE COMPANY ENDED IN DECEMBER 2011 AND BY DOING SO HE HAD NOT FOLLOWED THE JUDICIAL PRECEDENCE THAT A FUNCTIONALLY COMPARABLE COMPANY CANNOT BE REJECTED MERELY BECAUSE IT HAD A DIFFERENT FINANCIAL YEAR, ESPECIALLY WHEN THE AUDITED QUARTERLY FINANCIALS OF THE COMPANY WERE AVAILABLE. THE ASSESSEE ALSO ASKED FOR THE EXCLUSION OF M/S INFOSYS TECHNOLOGIES LTD. AND M/S LARSEN & TOUBRO INFOTECH LTD. ON ACCOUNT OF HIGH TURNOVER, INTANGIBLES , DIFFERENT BUSIN ESS MODULES, SIGNIFICANT BRANDING ETC. THE LD. DR P DIRECTED TO EXCLUDE THE ABOVE SAID COMPARABLES ON ACCOUNT OF DIFFERENCE IN FAR. THE ASS ESSEE ALSO SOUGHT EXCLUSION OF M /S PERSISTENT SYSTEMS LTD., M/S SASKEN COMMUNICATION TECHNOLOGIES LTD., M/S ZYLOG SYST EMS LTD. HOWEVER, THE LD. DRP AFTER CONSIDERING THE FAR OF THE COMPARABLES WAS OF THE VIEW THAT THERE WAS NOT ANY SUBSTANTIVE VARIATION TO MERIT EXCLUSION OF THESE ENTITIES. THEREFORE, THOSE WERE DIRECTED TO BE RETAINED. THE ASSESSEE ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 8 ALSO OBJECTED TO THE R EJECTION OF THE FOLLOWING COMPARABLES BY THE TPO IN ITS FINAL SET , THE LD. DRP DIRECTED AS UNDER: ASSESSEE COMPARABLE TPO ASSESSEE DRP DIRECTIONS 1. CG - VA K SOFTWARE & EXPORTS LTD. (SOFTWARE SEG.) ( CG - VAK ) IN V IEW OF THE PERSISTE NT LOSSES AND UNDER UTILIZATION OF HUMAN ASSETS, FOR WHICH NO AD JUSTMENT CAN BE MADE, THIS COMPANY IS REJECTE D. BUSINESS CIRCUMSTANCES SUCH AS INCURRING LOSSES CANNOT BE SOLE GROUND FOR REJECTION OF A COMPARABLE COMPANIES. IT FAL LS A VALID F ILTER, H ENCE VALIDI T Y EXCLUDED. 2 THINKS OFT GLOBAL SERVICES LIMITED ( THINKSOFT ) 'THE COMPANY IS FUNCTIONALLY DIFFERENT AS IT IS A LOW EN D SOFTWARE SERVICE PROVIDER, NOT COMPARABLE TO ASSESS EE HIGH END FUNCTIONS.' THE COMPANY GENERATES MAJORITY REVENUE FROM SOFTWAR E SERVICES WHILE OTHER SERVICES FORM A SMALL PART. IT IS ENGAGED IN PROVIDING SOFTWARE TESTING SERVICES WHICH IS FUNCTIONALLY SIMILAR TO THE AS SESSEE'S SOFTWARE DEVELOPMEN T SERVICES. THE TP O HAS POINTED OUT SIGNIFICANT FUNCTIONAL DIFFERENCES. THE PANEL A GREES WITH THE SAME. ASSESSEE COULD NOT BRING OUT FACTS CORRECTLY TO COUNTER THE TPO FINDINGS. 3 CTIL LTD. ( CTIL ) THI S C OMPANY FAILS THE EMPLOYEE COST FILTER THE ASSESSEE IN THE FORM 35A (PAGE 74 - 77) HAS DETAILED ITS CONTENTION AGAINST THE APPLICATION OF THE SAID FILTER. ON THE BAAS OF THE SAME, IT IS PRAYED THAT THIS COMPARABLE SHOULD BE ACCEPTE D. IT FAILS A VALID FILTE R ADOPTED BY THE TPO. HENCE ACTION OF THE TPO IS UPHELD. 4 CALIBER POINT BUSINESS SOLUTIONS LIMITED (CALIBER POINT) THE COMPANY IS FUNCTIONALLY DIFFERENT AS IT GENERATES INCOME MAINLY FROM BPO SERVICES. FURTHER, THIS COMPANY IS FAILING THE DIFFERENT FINANCIAL ENDING FILTER. IT SEGMENT OF CALIBER IS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES. SINCE, CALIBER IS F UNCTIONALLY COMPARABLE TO THE ASSESSEE' S IT SHOULD BE INCLUDED IN TH E C OMPARABLES SET . IN RELATION TO DIFFERENT FINANCIAL ENDING FILTER, THE ASSESSE E REFERS TO ITS CONTENTION AGAINST THE APPLICATION OF THE SAID THE TPO HAS POINTED OUT SIGNIFICANT F UNCTIONAL DIFFERENCES. PANEL AGREES WITH THE SAME, ASSESSEE COULD NOT BRING OUT FACTS CORRECTLY TO COUNTER THE TPO FINDINGS. IT ALSO FAILS A VALID FILTER ADOPTED BY THE TPO. HENCE ACTION OF THE TPO IS UPHELD. ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 9 FILLER RAISED IN THE FORM 35A (PAGE 51 - 60 OF FORM 35 A). 8. THEREAF TER, THE TPO BY CONSIDERING THE DIRECTIONS OF THE LD. DRP WORK ED OUT THE ADJUSTMENT AT RS. 22,52,63,184/ - VIDE ORDER DATED 25.05.2017 AND ON THE SAME DATE THE AO PASSED THE ASSESSMENT ORDER BY MAKING AN ADDITION OF RS.22,52,63,184/ - ON ACCOUNT OF ARM S LENG TH PRICE OF THE INTERNATIONAL TRANSACTION. 9. NOW THE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE QUARTERLY FINANCIAL DATA IN RESPECT OF THE COMPARABLES WAS AVAILABLE. THEREFORE, THE TPO/AO SHOULD HAVE MADE THE PROPER ADJUST MENT AND CONSIDERED THE COMPARABLE, NAMELY, M/S SR SYSTEMS LTD. THE RELIANCE WAS PLACED ON THE JUDGMENT OF HON BLE DELHI HIGH COURT IN THE CASE OF MCKINSEY KNOWLEDGE CENTRE INDIA PVT. LTD. VS CIT - II IN ITA 217/2014 (COPY OF THE SAID ORDER IS FURNISHED WHIC H IS PLACED AT PAGE NOS. 1812 TO 1825 OF THE ASSESSEE S COMPILATION). 10. IN HIS RIVAL SUBMISSIONS, THE LD. DR STRONGLY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 10 11. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL A VAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS NOTICED THAT ON A SIMILAR ISSUE RELATING TO DIFFERENT FINANCIAL YEAR, THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT - II VS MCKINSEY KNOWLEDGE CENTRE INDIA PVT. LTD. IN ITA 217/2014 VIDE ORDER DAT ED 27.03.2015 HELD AS UNDER: 14. THE REVENUE IS IN APPEAL BEFORE THIS COURT QUESTIONING THE ADMISSIBILITY OF THE ABOVE MENTIONED COMPARABLES WHILE COMPUTING ARM S LENGTH PRICE REGARDING THE IT SUPPORT SERVICES AFTER THE TPO AND AO REJECTED THE ABOVE MENTI ONED COMPANIES BUT WAS LATER ALLOWED BY THE CIT (A) AND ITAT. WHILE THE AO HAD CONFIRMED THE FINDINGS OF THE TPO, THE LD. CIT(A) AFTER CONSIDERING THE ASSESSEE'S SUBMISSIONS ACCEPTED ALL THE FOUR COMPANIES REJECTED BY THE TPO. THE REVENUE SUBMITS THAT FORT UNE INFOTECH LTD. WAS CORRECTLY REJECTED BY TPO BECAUSE THE COMPANY HAD DIFFERENT FINANCIAL YEAR ENDING ON DECEMBER, 2006, WHEREAS ASSESSEE S FINANCIAL YEAR ENDED ON MARCH, 2006. THERE IS NOTHING SHOWN TO THE COURT THAT SUPPORTS THE REVENUE S ARGUMENT THAT THE ITAT FELL INTO ERROR IN HOLDING THAT IF A COMPARABLE IS FOLLOWING DIFFERENT FINANCIAL YEAR THEN THE SAME CANNOT BE INCLUDED IN THE LIST OF COMPARABLES SELECTED FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. THEREFORE, THE ITAT HAS HELD THAT IF THE CO MPARABLE IS FUNCTIONALLY SAME AS THAT OF TESTED PARTY THEN SAME CANNOT BE REJECTED MERELY ON THE GROUND THAT DATA FOR ENTIRE FINANCIAL YEAR IS NOT AVAILABLE. IF FROM THE AVAILABLE DATA ON RECORD, THE RESULTS FOR FINANCIAL YEAR CAN REASONABLY BE EXTRAPOLATE D THEN THE COMPARABLE CANNOT BE EXCLUDED ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 11 SOLELY ON THE GROUND THAT THE COMPARABLES HAVE DIFFERENT FINANCIAL YEAR ENDINGS. 12. WE , THEREFORE, BY KEEPING IN VIEW THE RATIO LAID DOWN IN THE AFORESAID REFERRED TO CASE, RESORTED THIS ISSUE BACK TO THE FILE OF THE TPO/AO WITH THE DIRECTION TO INCLUDE THE AFORESAID COMPARABLE, IF FROM THE AVAILABLE DATA ON RECORD, T HE RESULTS FOR FINANCIAL YEAR CAN REASONABLY BE EXTRAPOLATED. 13. VIDE GROUND NO. 1.2, THE GRIEVANCE OF THE ASSESSEE RELATES TO THE INCLUSION OF THE AMOUNT OF RS.3,33,10,161/ - PERTAINING TO ESOPS TWICE IN THE OPERATING COST BASE OF THE ASSESSEE. 14. THIS ISSUE WAS AGITATED BY THE ASSESSEE BEFORE THE LD. DRP BY STATING THAT CERTAIN EXPENSES WERE CONSIDERED TWICE, THUS, RENDERING THE RESULTS SPURIOUS. IT WAS STATED THAT THE TPO HAD ERRONEOUSLY INCLUDED AN AMOUNT OF RS.3,33,10,161/ - PERTAIN ING TO ESOP TWICE IN THE OPERATING COST BASE OF THE ASSESSEE AND DUE TO THIS REASON, THE COST COMPUTED BY THE TPO IS COMING TO RS.3,49,42,05,612/ - WHICH WAS MORE THAN THE AMOUNT APPEARING IN THE FINANCIALS AT RS.3,46,08,95,451/ - . AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, T HE LD. DRP DIRECTED THE TPO TO EXAMINE THE CASE AND, IF THERE WAS DOUBLE IMPACT OF THE ESOPS VALUE, THE ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 12 SAME SHOULD HAVE BEEN CORRECTED. HOWE VER, IT APPEARS THAT THE SAID DIRECTION OF THE LD. DRP WAS NOT COMPLIED BY THE TPO AND THE AO PASSED THE IMPUGNED ORDER WITHOUT MAKING ANY CORRECTION IN THE ADJUSTMENT PROPOSED BY THE TPO. 15. NOW THE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSE E DREW OUR ATTENTION TOWARDS PAGE NO. 318 OF THE ASSESSEE S PAPER BOOK WHICH IS THE COPY OF THE NOTES TO FORM 3CEB WHEREIN IN PARA 5, IT HAS BEEN STATED THAT ST MICROELECTRONICS N. V. HAS TRANSFERRED SHARES TO EMPLOYEES OF THE ASSESSEE AND HAS CHARGED RS. 3,33,10,161/ - ON ACCOUNT OF THE SAME , THIS TRANSACTION HAS BEEN CLOSELY LINKED TO THE PROVISION OF INTEGRATED CIRCUIT DESIGN AND SOFTWARE DEVELOPMENT SERVICES BY THE COMPANY FOR WHICH IT HAS DETERMINED THE ARM S LENGTH PRICE USING THE TNMM AS THE MOST APPR OPRIATE METHOD . OUR ATTENTION WAS ALSO DRAWN TOWARDS PAGE NO. 325 OF THE ASSESSEE S COMPILATION WHICH IS THE COPY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES ON ACCOUNTS FOR THE YEAR ENDED 31.03.2012 WHEREIN IN PARA 1.05, THE EMPLOYEES BENEFIT COST HAS B EEN MENTIONED AND IT HAS BEEN STATED THAT COMPANY ACCOUNTS FOR THE STAFF BENEFITS TO ITS EMPLOYEES ARE ON AN ACCRUAL BASIS. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AMOUNT OF RS.3,33,10,161/ - WAS DELETED FROM THE LIABILITY AND THEREAFTER LIABILI TY AT THE ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 13 END OF THE YEAR WAS DETERMINED. A REFERENCE WAS MADE TO PAGE NO. 338 OF THE ASSESSEE S PAPER BOOK WHICH IS THE W ORKING OF THE LIABILITY OF ESOP . IT WAS CONTENDED THAT DESPITE OVERWHELMING EVIDENCE AS PER THE AUDITED FINANCIAL STATEMENT AND IN THE FORM 3CEB SUPPORTING THE ASSESSEE S CONTENTION , NONE OF WHICH HAD BEEN QUESTIONED BY THE TPO WHO HAD AGAIN LOADED THE EXPENSES WITH ESOP LIABILITY , DESPITE THE FACT THAT IT WAS ALREADY INCLUDED IN THE EXPENSES CHARGED TO PROFIT AND LOSS ACCOUNTS IN ACCORD ANCE WITH THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANT . IT WAS STATED THAT THE TPO HAD MADE THIS ADDITION WITHOUT CONSIDERING THE DOCUMENTARY EVIDENCES DULY CERTIFIED BY THE AUDITORS. THEREFORE, THE ADDITION OF RS.3,33,10,161/ - MAY BE DELETED FROM THE COST BASE TAKEN BY THE TPO AND IF IT HAS BEEN DONE THAN NO ADJUSTMENT IS REQUIRED ON ACCOUNT OF TRANSFER PRICE WHICH WILL COME WITH IN THE RANGE OF 5%. 16. IN HIS RIVAL SUBMISSIONS THE LD. DR STRONGLY SUPPORTED THE ORDERS OF THE AUTHORITI ES BELOW. 17. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT APPEARS THAT THE DIRECTIONS ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 14 GIVEN BY THE LD. DRP HAS NOT BEEN APPRECIATED BY THE TPO IN RIGHT PER SPECTIVE. IT ALSO APPEARS THAT THE TPO WITHOUT APPRECIATING THE DOCUMENTARY EVIDENCES FURNISHED BY THE ASSESSEE MADE THIS ADDITION IN THE COST BASE TAKEN BY HIM. WE, THEREFORE, BY CONSIDERING THE TOTALITY OF THE FACTS, SET ASIDE THIS ISSUE BACK TO THE FILE OF THE TPO TO BE ADJUDICATED AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 18. THE NEXT ISSUE VIDE GROUND NO. 1.3 RELATES TO THE TREATMENT OF THE FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS A N ON - OPERATING ITEM WHILE COMPUTING THE OPERATING MARGIN OF THE ASSESSEE AND OF THE COMPARABLES COMPANIES. 19. AS REGARDS TO THE ABOVE ISSUE, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T IT IS NOW COVERED AGAINST THE R EVENUE AND IN FAVOUR OF THE ASSESSE E BY THE JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF PR. CIT, DELHI - I VS AGILIS INFORMATION TECHNOLOGIES INTERNATIONAL (I) PVT. LTD. IN ITA NO. 907/2015, ORDER DATED 08.02.2016. A REFERENCE WAS MADE TO PAGE NOS. 1774 & 1775 OF THE ASSE SSEE S COMPILATION WHICH IS THE COPY OF THE SAID ORDER. THE RELIANCE WAS ALSO PLACED ON THE JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF PR. CIT, DELHI - 1 VS ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 15 AMERIPRISE INDIA PVT. LTD. (COPY OF THE SAID ORDER WAS FURNISHED WHICH IS PLAC ED AT PAGE NOS. 1772 & 1773) AND OF THE HON BLE APEX COURT IN THE CASE OF CIT VS WOODWARD GOVERNOR INDIA (P) LTD. (2009) 312 ITR 254 (SC). 20. IN HIS RIVAL SUBMISSIONS, THE LD. DR SUBMITTED THAT AS PER RULE 10B OF THE INCOME TAX RULES OF S AFER H ARBO U R N OTIFICATION DATED 18.09.2013, T HE TPO WAS JUSTIFIED IN TREATING INCOME/LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION AS NON - OPERATING COST. 21. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON THE RECORD, IT I S NOTICED THAT ON A SIMILAR ISSUE, THE HON BLE SUPREME COURT IN THE CASE OF CIT VS WOODWARD GOVERNOR INDIA P. LTD. (SUPRA) HELD AS UNDER: LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF THE BALANCE - SHEET IS AN ITEM OF EXPENDITURE UNDER SECTION 37(1) OF THE INCOME - TAX ACT, 1961. 22. NOW THIS ISSUE HAS BEEN SETTLED BY THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF PR. CIT, DELHI - I VS AMERIPRISE INDIA PVT. LTD. (SUPRA) WHEREIN IT HAS BEEN HELD AS UNDER: ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 16 3. THE QUESTION SOUGHT TO BE URGED BY THE REVENUE IS WHETHER THE ITAT WAS CORRECT IN DIRECTING THE FOREIGN EXCHANGE GAIN/LOSS TO BE CONSIDERED AS AN ITEM OF O PERATING REVENUE/COST. 4. THE ITAT HAS IN THE IMPUGNED ORDER NOTED THE FACT THAT THE F OREIGN EXCHANGE GAIN EARNED BY THE ASSESSEE IS IN RELATION TO THE TRADING ITEMS EMANATING FROM THE INTERNATIONAL TRANSACTIONS. SINCE THE FOREIGN EXCHANGE LOSS DIRECTLY RESULTED FROM TRADING ITEMS, IT COULD NOT BE CONSIDERED AS A NON - OPERATING LOSS. FURTHER , IT IS NOTED BY THE DISPUTE RESOLUTION PANEL THAT THE SERVICE AGREEMENT BETWEEN THE ASSOCIATED ENTERPRISE (AE) AND THE ASSESSEE STATED THAT FOR THE SPECIFIED PRODUCTS AND SERVICES PROVIDED BY THE ASSESSEE, IT SHALL RAISE INVOICES ON AMERIPRISE USA ON THE BASIS OF A COST PLUS PRICING METHODOLOGY. THE ITAT WAS THEREFORE RIGHT IN HOLDING THAT THE AO WAS NOT JUSTIFIED IN CONSIDERING THE FOREIGN EXCHANGE LOSS AS A NON - OPERATING COST. 23. A SIMILAR VIEW HAS ALSO BEEN TAKEN IN THE CASE OF PR. CIT, DELHI - I VS AGILIS INFORMATION TECHNOLOGIES INTERNATIONAL (I) PVT. LTD. (SUPRA) WHEREIN IT HAS BEEN HELD AS UNDER: 3. IT IS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT RELIANCE PLA CED BY THE REVENUE ON THE SAFE H ARBOUR NOTIFICATION DATED 18 TH SEPTEMBER 2 013 WILL BE OF NO AVAIL TO THE REVENUE SINCE THAT NOTICE IS PROSPECTIVE IN NATURE. IT IS SEEN THAT BY THE ORDER DATED 6 TH JANUARY 2016 IN ITA NO. 17/2016 (PR. COMMISSIONER OF INCOME TAX - 3 VS FINSERV INDIA PVT. LTD.), THIS COURT HAS ACCEPTED THE ABOVE PLEA OF THE ASSESSEE. EVEN OTHERWISE, THE DECISIONS REFERRED TO ITA NO. 4396/DEL/2017 ST MICROELECTRONICS PVT. LTD. 17 BY THE ITAT IN THE IMPUGNED ORDER ON THE ISSUE ALSO ANSWER THE QUESTION IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 24. IN VIEW OF THE ABOVE, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSE E AND AGAINST THE DEPARTMENT. 25 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . (ORDER PRONOUNCED IN THE COURT ON 03 /01/2018 ) SD/ - SD/ - ( KULDIP SINGH ) (N. K. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 03 /01/2018 *SUBODH* COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(APPEALS) 5 . DR: ITAT ASSISTANT REGISTRAR