Conexant Systems Pvt.Ltd., Hyd, Hyderabad V. DCIT, Circle-1(2), Hyd, Hyderabad

ITA 464/HYD/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2622 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 31-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J SIRI KUMAR
• Keywords: Transfer pricing
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 464/HYD/2016 ASSESSMENT YEAR: 2011-12 CONEXANT SYSTEMS PRIVATE LIMITED, HYDERABAD [PAN: AAACF2723N] VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(2), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI DHANESH BAFNA, AR FOR REVENUE : SHRI J. SIRI KUMAR, DR DATE OF HEARING : 10-01-2018 DATE OF PRONOUNCEMENT : 24-01-2018 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF THE ASSESSING OFFICER (AO) U/S. 143(3) R.W.S. 144C(1) O F THE INCOME TAX ACT [ACT]. THE ISSUES IN THIS APPEAL ARE WITH REFEREN CE TO TRANSFER PRICING ADJUSTMENTS MADE BY THE TRANSFER PRICING OFFIC ER [TPO] AS MODIFIED BY THE DISPUTE RESOLUTION PANEL [DRP]. 2. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS ENGAGE D IN THE BUSINESS OF DEVELOPING SOFTWARE DESIGN, DEVELOPM ENT AND MODIFICATION SERVICES RELATED TO SEMI-CONDUCTORS AND ALSO PROVIDES MARKETING AND TECHNICAL SUPPORT SERVICES WHICH ARE GEN ERALLY I.T.A. NO. 464/HYD/2016 :- 2 - : CATEGORIZED AS SOFTWARE DEVELOPMENT SERVICES. DUR ING THE YEAR, ASSESSEE HAS PROVIDED SERVICES TO ASSOCIATED ENTERPRI SE [AE] IN THE FORM OF SOFTWARE DESIGN AND DEVELOPMENT SERVICES AND REIMBURSEMENT OF EXPENSES ETC. THE APPELLANT HAS DISCL OSED OP/OC AT 12.78 AND HAS PROVIDED A TP REPORT, WHEREIN 12 COMPARABLE COMPANIES WERE SHORT LISTED, WHOSE PLI (OP ERATING PROFIT/OPERATING COST) WAS AT 12%. WHILE ARRIVING THE PLI AT 12.78%, ASSESSEE HAS SUO MOTTO MADE AN ADJUSTMENT OF RS. 46,87,630/- AND ARRIVED AT THE ABOVE PLI. AO HAS MOD IFIED THE COMPUTATION OF PLI AND ARRIVED AT 5.5%, ON WHICH AT PRE SENT THERE IS NO DISPUTE. WITH REFERENCE TO REVISED PLI IT WAS EX PLAINED THAT THIS WAS ARRIVED AT AFTER EXCLUDING SUO MOTTO ADJUSTMENT AND FOREIGN EXCHANGE LOSS ETC., DUE TO WHICH THERE WAS VAR IATION IN THE PLI. SINCE IT IS NOT IN DISPUTE, ASSESSEE ACCEPTS THE P LI AT 5.5%. TPO IN THE TP STUDY, REJECTED SOME OF THE COMPARABLE COMPANIES OF ASSESSEE AND SELECTED FINAL SET OF 17 COMPARABLE CO MPANIES, WHOSE PLI ARRIVED WAS AT 18.34% LEADING TO AN ADJUSTMENT O F RS. 2,21,03,914/-. 3. ASSESSEE HAS OBJECTED THE SELECTION OF COMPARABLES ON VARIOUS PARAMETERS BEFORE THE DRP AND DRP HAS ACCEPT ED SOME OBJECTIONS IN WHICH DRP EXCLUDED TEN COMPANIES OBJECTE D BY ASSESSEE AND ALSO EXCLUDING SUO MOTTO FOUR OTHER COMPARABLES, THEREBY ENHANCING THE ADJUSTMENT TO RS. 2,92,71,639/- (A FTER EXCLUDING SUO MOTTO ADJUSTMENT OF RS. 46,87,630/-). THE ORIGINAL 17 COMPARABLES SELECTED BY THE TPO ARE AS UNDER: I.T.A. NO. 464/HYD/2016 :- 3 - : SL.NO NAME OF THE COMPARABLE C OMPANY 1 ACROPETAL TECHNOLOGIES LIMITED (SEG) 2 AKSHAY SOFTWARE TECHNOLOGIES LTD 3 CTIL LTD 4 EVOKE TECHNOLOGIES PVT. LTD 5 E - ZEST SOLUTIONS LTD 6 ICRA TECH NO ANALYTICS LTD 7 IGATE GLOBAL SOLUTIONS LTD 8 KALS INFORMATION SYSTEMS LTD (SEG) 9 LARSEN & TOUBRO INFOTECH LTD 10 MINDTREE LTD 11 PERSISTENT SYSTEMS & SOLUTIONS LTD 12 PERSISTENT SYSTEMS LTD 13 R S SOFTWARE (INDIA) LTD 14 SANKHYA INFOTECH LTD 1 5 SASKEN COMMUNICATION TECHNOLOGIES LTD 16 TATA ELXSI LTD 17 ZYLOG SYSTEMS LTD 4. AFTER EXCLUSION BY THE DRP, THE FOLLOWING THREE COMPARABLES ONLY SURVIVED: I. PERSISTENT SYSTEMS LTD., II. PERSISTENT SYSTEMS AND SOLUTIONS LTD., III. SASKEN COMMUNICATION TECHNOLOGIES LTD., 5. THE AO CONSEQUENT TO THE DIRECTION OF THE DRP, PASS ED THE IMPUGNED ASSESSMENT ORDER THEREBY MAKING THE ADJUS TMENT. THERE WAS ONE MORE ADJUSTMENT OF RS. 93,303/- AS INTER EST PAID ON THE EXTERNAL COMMERCIAL BORROWINGS, ON WHICH ISSUE I N EARLIER YEARS THE ISSUE WAS RESTORED TO THE FILE OF AO FOR VERI FICATION, BUT DUE TO SMALLNESS OF THE AMOUNT INVOLVED, ASSESSEE DID NOT PRESS FOR THE GROUND (GR. NO.3). I.T.A. NO. 464/HYD/2016 :- 4 - : 6. LD. COUNSEL APPEARING FOR ASSESSEE SUBMITTED THAT EVEN THOUGH VARIOUS SUB-GROUNDS ARE RAISED IN GR.NO. 2, A SSESSEE IS INTERESTED IN GROUNDS 2.6 AND 2.7, I.E., EXCLUSION O F TWO COMPANIES APPROVED BY THE DRP AND INCLUSION OF ONE COMPANY I.E ., EVOKE TECHNOLOGIES LTD. EXCLUDED BY THE DRP IN ITS ORDER. TH E OTHER COMPANIES WHICH WERE EXCLUDED BY THE DRP WERE ACCEP TED OR REJECTED BY VARIOUS ORDERS OF ITAT. HENCE, ASSESSEE IS NOT PRESSING FOR THE SAME. THE SUBMISSIONS OF LD. COUNSEL ON THE THREE COMPARABLES ARE AS UNDER: TO BE EXCLUDED: I. PERSISTENT SYSTEMS LTD: 6.1. THE ABOVE COMPANY IS ENGAGED IN PRODUCT DEVELO PMENT WHICH IS DIFFERENT FROM SOFTWARE DEVELOPMENT SERVICES . THE COMPANY IS ENGAGED IN DEVELOPMENT OF PRODUCTS. IT EA RNS REVENUE FROM LICENSING OF PRODUCTS, ROYALTY ON SALE OF PRODU CTS AS WELL AS INCOME FROM MAINTENANCE CONTRACTS. HOWEVER, NO SEGMEN TAL DETAILS ARE AVAILABLE. LD. COUNSEL PLACED RELIANCE ON THE FO LLOWING DECISIONS WHERE IN THIS COMPANY WAS EXCLUDED AS FUNC TIONALLY NOT SIMILAR: I. SAXO INDIA (P) LTD. VS. ACIT ITA NO. 6148/DEL/201 5 (PG. 16; PARA 15.1 15.2) AFFIRMED BY HON'BLE DELH I HIGH COURT IN ITA NO. 682/2016 (PG.4; PARA 10); II. PCIT VS. CASHEDGE INDIA P. LTD., - ITA NO. 279/2016 (HON'BLE DELHI HIGH COURT); III. ASSESSEES OWN CASE FOR AY. 2010-11 IN ITA NO. 264/HYD/2015 (PG. NOS. 6-10); I.T.A. NO. 464/HYD/2016 :- 5 - : IV. ELECTRONIC IMAGING INDIA (P) LTD., VS. DCIT AY. 2 011-12 ITA NO. 1506/BANG/2015 (PG. 9-10; PARA 8); V. SYMANTEC SOFTWARE & SERVICES INDIA (P) LTD., VS. DC IT AY. 2011-12 ITA NO. 614/MDS/2016 (PG. 6-7; PARA 9 - 10); VI. ACIT VS. BROADCOM INDIA RESEARCH (P) LTD., - AY. 20 10- 11 ITA NO. 348/BANG/2015 (PG.10; PARA 13.4); II. SASKEN COMMUNICATION TECHNOLOGIES LTD: 6.2. THE ABOVE COMPANY EARNS REVENUE FROM SOFTWARE SERVICES AS WELL AS SOFTWARE PRODUCTS. THOUGH THE BR EAKUP OF REVENUE BETWEEN THE SERVICES AND PRODUCTS IS AVAILAB LE, THE BREAKUP OF OPERATING COSTS AND THE NET PROFITABILITY BE TWEEN THE TWO SEGMENTS IS NOT AVAILABLE. LD. COUNSEL PLACED RE LIANCE ON THE FOLLOWING DECISIONS: I. SAXO INDIA (P) LTD. VS. ACIT ITA NO. 6148/DEL/201 5 (PG. 15-16; PARA 14.1 14.2) AFFIRMED BY HON'BLE D ELHI HIGH COURT IN ITA NO. 682/2016 (PG.4; PARA 10); II. ELECTRONIC IMAGING INDIA (P) LTD., VS. DCIT AY. 2 011-12 ITA NO. 1506/BANG/2015 (PG. 13; PARA 9); III. SYMANTEC SOFTWARE & SERVICES INDIA (P) LTD., VS. DC IT AY. 2011-12 ITA NO. 614/MDS/2016 (PG. 8; PARA 11- 12); IV. ACIT VS. BROADCOM INDIA RESEARCH (P) LTD., - AY. 20 10- 11 ITA NO. 348/BANG/2015 (PG.9-10; PARA 13.3); I.T.A. NO. 464/HYD/2016 :- 6 - : TO BE INCLUDED: III. EVOKE TECHNOLOGIES PVT. LTD: 6.3. LD. COUNSEL FOR ASSESSEE SUBMITTED THAT FIRSTLY, TH E FUNCTIONAL COMPARABILITY OF THE COMPANY HAS NOT BEEN DOUBTED BY THE TPO OR THE HON'BLE DRP. THE TOTAL REVENUE OF THE COM PANY HAS INCREASED BY 33% DURING THE CURRENT YEAR FROM 10.86 CRORES TO 14.48 CRORES AS AGAINST INCREASE IN TOTAL EXPENSES FRO M 9.03 CRORES TO 13.13 CRORES. THE INCREASE IN EXPENDITURE HAS TO BE SEEN VIS--VIS ITS EFFECT ON THE TURNOVER, WHICH IS SIGNIF ICANT IN THE CASE OF EVOKE TECHNOLOGIES P. LTD. INCREASE IN EXPENSES I S A NORMAL INCIDENCE OF EVERY BUSINESS CYCLE. THE ANNUAL REPOR T OF THE COMPANY NOWHERE INDICATES EXISTENCE OF ANY PECULIAR B USINESS CIRCUMSTANCES. IT WAS SUBMITTED THAT, UNLESS THE HIGH/LOW MARGIN IS ON ACCOUNT OF ABNORMAL/PECULIAR ECONOMIC CIRCUMS TANCES, THE COMPANY CANNOT BE EXCLUDED AS A COMPARABLE. LD. CO UNSEL PLACED RELIANCE ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CHYRSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD., VS. DCIT ITA NO. 417/2014. 6.4. LD. COUNSEL ALSO SUBMITTED THAT IN THE RECENT ORD ER OF B BENCH OF ITAT, HYDERABAD IN THE CASE OF ELECTRONI C ARTS GAMES (INDIA) PRIVATE LTD., VS. DY.CIT IN ITA NO. 325/HYD/2 016 DT. 29-12-2017 ALSO THESE TWO COMPARABLES MENTIONED AB OVE WERE EXCLUDED AND WITH REFERENCE TO EVOKE TECHNOLOGIES PV T. LTD., THE SAME WAS NOT ACCEPTED BY THE BENCH ONLY ON THE REASO N THAT ASSESSEE HAS ACCEPTED THE EXCLUSION IN A LATER YEAR. L D. COUNSEL, HOWEVER, REFERRED TO THE DETAILED ANNUAL REPORT OF EVO KE I.T.A. NO. 464/HYD/2016 :- 7 - : TECHNOLOGIES PVT. LTD., PG. NO. 436 TO 464 OF PAPER B OOK, TO SUBMIT THAT THIS COMPANY SATISFIES ALL THE PARAMETERS AS THAT OF ASSESSEE. 7. THE DRP HAS EXCLUDED THE SAID COMPANY BY STATING AS UNDER: EVOKE TECHNOLOGIES PVT. LTD (EVOKE) ASSESSEE IS IN AGREEMENT WITH LD. TPO BUT CORRECT M ARGIN TO BE CONSIDERED IT IS A WELL ESTABLISHED PRINCIPLE THAT FOR TRANSFER PRICING ANALYSIS, A COMPANY WHICH HAS SIGNIFICANT HIGH OR L OW MARGINS SHOULD NOT BE RETAINED AS COMPARABLES UNLESS ON PROBE IT IS FO UND THAT THERE ARE NO ABNORMALITIES/PECULIAR CIRCUMSTANCES DUE TO WHICH T HE MARGIN HAS BEEN INFLUENCED. THE HON'BLE DELHI HIGH COURT IN THE CAS E OF RAMPGREEN SOLUTIONS PVT LTD (ITA NO.102/2015) OBSERVED THAT .. A WIDE DEVIATION IN THE PLI AMONGST SELECTED COMPARABLES C OULD BE INDICATIVE THAT THE COMPARABLES SELECTED ARE EITHER MATERIALLY DISS IMILAR OR THE DATA USED IS NOT RELIABLE. THIS EXERCISE WOULD FAIL, IF A FACTOR, WHICH HAS A MATERIAL BEARING ON THE VALUE OF PROFITABILITY, AS THE CASE MAY BE DEPENDING ON METHOD USED IS IGNORE.' APPLYING THIS PRINCIPLE, IT IS NOTICED BY US THAT AFTER EXCLUSION OF THE COMPARABLES, THE MARGIN OF THE ABOVE COMPANY IS ABNORMALLY LOW AT 8.11% AS COMPARED TO A LL OTHER COMPARABLES SELECTED BY THE TPO. IT IS NOTICED BY U S FROM THE ANNUAL REPORT THAT EVEN THOUGH THE REVENUE HAS BEEN INCREA SED BY 33% AS COMPARED TO LAST YEAR, THE EXPENSES ON CONSULTANCY CHARGES DEBITED ARE INCREASED FROM RS. 9,57,480/- TO RS. 1,07,17,363/- I.E. BY 1.118%, WHICH CLEARLY INDICATES THAT THE LOW MARGIN DURING THE YE AR WERE DUE TO THE PECULIAR ECONOMIC CIRCUMSTANCES AND THEREFORE, IT W ILL NOT BE APPROPRIATE TO RETAIN THE ABOVE COMPANY AS COMPARABLE, ACCORDIN GLY WE DIRECT THE ASSESSING OFFICER TO EXCLUDE THIS COMPANY FROM THE COMPARABLES. IN VIEW OF THE EXCLUSION OF THE COMPANY FROM THE COMPARABLES, THE ISSUE OF MARGIN COMPUTATION BECOMES ACADEMIC IN NATURE AND THEREFOR E, WE DO NOT FIND ANY NECESSITY TO ISSUE THE SEPARATE DIRECTION ON TH IS ISSUE. 7.1. IT WAS SUBMITTED THAT THE CONSULTANCY CHARGES INCREASED WAS PART OF ADMINISTRATIVE EXPENDITURE AND IS COMPARABLE WITH THE INCREASE IN TURNOVER OF ASSESSEE- COMPANY THAT DOES NOT INDICATE PECULIAR ECONOMIC CIRCUMSTANCES. I T WAS SUBMITTED THAT THE COMPANY WHICH CAN BE COMPARED NOT ONLY ON FUNCTIONAL BASIS BUT ALSO ON ECONOMIC BASIS. THEREF ORE, THE SAME I.T.A. NO. 464/HYD/2016 :- 8 - : IS TO BE INCLUDED. IT WAS THE SUBMISSION THAT BY EXCLU DING THE ABOVE TWO COMPANIES AND INCLUDING THE COMPANY AS REQ UESTED, ASSESSEE PLI IS STILL LESS AND REQUIRE SOME ADJUSTMEN T. SINCE ASSESSEE-COMPANY HAS CLOSED ITS OPERATIONS IN INDIA A ND WANTED TO SETTLE THE MATTERS, LD. COUNSEL SUBMITTED FOR ADJUDICATION AS REQUESTED. 8. LD.DR, HOWEVER, RELIED ON THE ORDERS OF DRP AND SUBMITTED THAT DRP HAS CORRECTLY INCLUDED THE ABOVE COMPA NIES AND EXCLUDED EVOKE TECHNOLOGIES PVT. LTD. 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. AS SEEN FROM THE ORDERS PLACED ON RECORD AND ALSO CONSISTENT STAND TA KEN BY THE TRIBUNAL IN VARIOUS SUCH CASES, WE HAVE NO HESITATION IN EXCLUDING TWO COMPANIES, PERSISTENT SYSTEMS LTD., AND SASKEN COMMUNICATION TECHNOLOGIES LTD ON FUNCTIONALITY BASIS . AS FAR AS EVOKE TECHNOLOGIES PVT. LTD., IS CONCERNED, THIS COMPANY WAS ALSO ARGUED TO BE INCLUDED IN THE CASE OF ELECTRONIC ARTS GA MES (INDIA) PRIVATE LTD., VS. DY.CIT (SUPRA). BUT THE BENCH DID NOT ACCEPT ON THE REASON THAT ASSESSEE HAS ACCEPTED THE EXCLUSION IN A LATER YEAR. HOWEVER, AS POINTED OUT BY THE LD. COUNSEL, THIS COMP ANY IS FUNCTIONALLY SIMILAR TO ASSESSEE-COMPANY AND THE ANNU AL REPORT DOES NOT DISCLOSE ANY PECULIAR ECONOMIC CIRCUMSTANCE S AS STATED BY THE DRP. MOREOVER, THE SAID CONSULTANCY CHARGES W ERE SHOWN UNDER THE HEAD ADMINISTRATIVE EXPENDITURE AND THE INCRE ASE IN ADMINISTRATIVE EXPENDITURE IS PROPORTIONATE TO INCREASE IN TURNOVER. THEREFORE, WE ARE OF THE OPINION THAT EVOKE TECHNOLO GIES PVT. LTD., CAN BE INCLUDED AS A COMPARABLE COMPANY. I.T.A. NO. 464/HYD/2016 :- 9 - : 10. THEREFORE, ALLOWING THE ASSESSEE GROUNDS, WE DI RECT AO TO RE-WORKOUT THE ADJUSTMENT BY CONSIDERING ONLY TWO C OMPANIES I.E., PERSISTENT SYSTEMS LTD., AND EVOKE TECHNOLOGIES PVT. LTD. AO IS ALSO ADVISED THAT IN CASE THE ADDITION IS COMING LES S THAN THE SUO MOTTO ADJUSTMENT ALREADY MADE BY ASSESSEE AT RS. 46,87,630/- , THE SUO MOTTO ADJUSTMENT SHOULD BE ACCEPTED. SUBJECT TO ABOVE DIRECTION/VERIFICATION, ASSESSEES GROUNDS ON TP ADJU STMENT ARE CONSIDERED ALLOWED. 11. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH JANUARY, 2018 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEM BER HYDERABAD, DATED 24 TH JANUARY, 2018 TNMM I.T.A. NO. 464/HYD/2016 :- 10 -: COPY TO : 1. CONEXANT SYSTEMS PRIVATE LIMITED, 5 TH FLOOR, PIONEER TOWERS, PLOT NO. 16, SURVEY NO. 64/2, SOFTWARE UNIT S LAYOUT, MADHAPUR, HYDERABAD. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1( 2), HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP) 4. DIRECTOR OF INCOME TAX (IT & TP), HYDERABAD. 5. ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICI NG), HYDERABAD. 6. D.R. ITAT, HYDERABAD.