DCIT, Bangalore V. M/s NXP Semi Conductors India Pvt. Ltd., Bangalore

ITA 524/BANG/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7680 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2020
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 22-03-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NEERA MALHATRA
• Keywords: Transfer pricing; International transaction; Set aside
• Section: 13; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI B.R. BASKARAN , ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO.306/B/2015 ASSESSMENT YEAR : 20 11 - 12 APPELLANT RESPONDENT M/S NXP INDIA PRIVATE LIMITED, PLOT NO 1A,4 TH PHASE INFORMATION TECHNOLOGY PARK, NAGAWARA VILLAGE, KASABA HABIL ,NAGAWARA BANGALORE 560 0 45 . PAN NO : AADCP9454H VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 5(1)(1). 2 ND FLOOR, BMTC BUILDING,80 FT ROAD, KORAMANGALA, BANGALORE - 560095. ITA NO. 524/B/2016 ASSESSMENT YEAR : 20 11 - 12 APPELLANT RESPONDENT THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 5(1)(1). 2 ND FLOOR, BMTC BUILDING,80 FT ROAD, KORAMANGALA, BANGALORE - 560095 VS. M/S NXP INDIA PRIVATE LIMITED, PLOT NO 1A,4 TH PHASE INFORMATION TECHNOLOGY PARK, NAGAWARA VILLAGE, KASABA HABIL,NAGAWARA BANGALORE 560 0 45 . ITA NO. 306/B/201 6 ITA NO. 524/B/2016 A.Y:2011 - 12 2 PAN NO : AADCP9454H . ASSESSEE BY : SHRI NAGESHWAR RAO ADVOCATE REVENUE BY : MS. NEERA MALHATRA ,CIT DR DATE OF HEARING : 28.11.2019 DATE OF PRONOUNCEMENT : 22.01.2020 O R D E R PER BEENA PILLAI JUDICIAL MEMBER P RESENT APPEALS HAVE BEEN FILED BY ASSESSEE AS WELL AS REVENUE AGAINST FINAL ASSESSMENT ORDER DATED 28/01/16 PASSED BY LD. DCIT CIRCLE 5 (1) (1), BANGALORE FOR ASSESSMENT YEAR 2011 - 12 . BRIEF FACTS OF THE CASE ARE AS UNDER: 2. ASSESSEE IS A COMPANY AND IS ENGAGED IN BUSINESS OF SOFTWARE DEVELOPMENT AND FILED ITS RETURN OF INCOME FOR YEAR UNDER CONSIDERATION ON 3 0/11/11 DECLARING INCOME OF RS. 18,38, 27,713/ - . RETURN WAS PROCESSED UNDER SECTION 143 (1) OF THE ACT AND STATUTORY NOTICES UND ER SECTION 143 (2) ALONG WITH QUESTIONNAIRE WAS ISSUED TO ASSESSEE. 2.1. LD.AO OBSERVED THAT , ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES FOR MORE THAN RS. 15 CRORES. ITA NO. 306/B/201 6 ITA NO. 524/B/2016 A.Y:2011 - 12 3 ACCORDINGLY , REFERENCE TO LD. TPO WAS MADE FOR DETERMINATION OF CORRECT ARMS LENGTH PRICE. 2.2. ON RECEIPT OF REFERENCE, LD.TPO CALLED FOR ECONOMIC DETAILS OF INTERNATIONAL TRANSACTION ENTERED INTO BY ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. AS PER TP DOCUMENTATIONS FILED BY ASSESSEE, IT CATERS TO FOUR TECHNOLOGY ARE AS - RADIO - FREQUENCY IDENTIFICATION DEVICE (RFID) AND MULTIFUNCTIONAL DEVICES. LD.TPO OBSERVED THAT ASSESSEE HAD ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTION: PARTICULARS AMOUNT RECEIVED (IN RUPEES) AMOUNT PAID (IN RUPEES) SOFTWARE DEVELOPMENT SERVICES 1,03,76,57,721/ - ORDER GATHERING SERVICES 10,38,72,357/ - RECEIPT OF SERVICES 22,32,80,160/ - 2.3. LD. TPO OBSERVED THAT ASSESSEE COMPUTED ARMS LENGTH PRICE BY USING FOLLOWING 22 COMPARABLES INVOLVED IN SOFTWARE DEVELOPMENT SERVICES BY APPLYING TNMM AS MOST APPROPRIATE METHOD. ASSESSEE USED OP/OC AS PLI . ASSESSEE COMPUTED ITS MARGIN AT 6.36%. S.NO. NAME OF COMPARABLES MARGINE 1. AKSHAY S OFTWARE T ECHNOLOGIES LTD 1.30% 2. CG - VAK SOFTWARE AND E XPORTS LTD - 4.21% 3. GOLDSTONE T ECHNOLOGIES LTD - 10.67% ITA NO. 306/B/201 6 ITA NO. 524/B/2016 A.Y:2011 - 12 4 4. HALIOS MATHESON I NFORMATION T ECHNOLOGY LTD 9.24% 5. LGS G LOBAL LTD 6.45% 6. ASCENT S OFTWARE I NTERNATIONAL LTD - 9.66% 7. R.S SOFTWARE (INDIA) LTD 8.65% 8. R SYSTEMS I NTERNATIONAL LTD 6.56% 9. AZTECS OFT LTD 1.75% 10. CALIBREPOINT B USINESS S OLUTIONS LTD - 5.42% 11. CAT T ECHNOLOGIES LTD 16.72% 12. KPIT CUMMINS INFOSYSTEMS LTD 7.34% 13. LARSEN AND TOUBRO INFOTECH LTD 12.82% 14. MARVERICK S YSTEMS LTD 7.02% 15. MINDTREE LTD 6.25% 16. PERSISTENT S YSTEMS LTD 18.97% 17. SAV AN T ECHNOLOGIES LTD 12.80% 18. THINKSOFT G LOBAL S ERVICES LTD 6.64% 19. THI RDWARE S OLUTIONS LTD 16.29% 20. ZYLOG S YSTEMS LTD . 12.08% 21. SASKE N COMMUNICATIONS LTD . 19.09% 22. EVOKE TECHNOLOGIES PVT. LTD. 16.61% ARITHMETIC MEAN 7.15% AS AVERAGE MARGIN OF COMPARABLES WAS 7.15%, ASSESSEE HELD THE INTERNATIONAL TRANSACTION TO BE AT ARMS LENGTH. ITA NO. 306/B/201 6 ITA NO. 524/B/2016 A.Y:2011 - 12 5 2.4. LD.AO REJECTED MOST OF THE COMPARABLES SELECTED BY ASSESSEE BY APPLYING VARIOUS FILT ERS AND SHORTLISTED FOLLOWING FINAL SET OF COMPARABLES WITH 13 COMPARABLES HAVING AN AVERAGE MARGIN OF 22.82%. S.NO. NAME OF COMPARABLES MARGINE 1. ACROPETAL TECHNOLOGIES LTD 31.98% 2. E - ZEST SOLUTIONS 21.03% 3. E - INFOCHIPS LTD 56.44% 4. EVOKE 8.11% 5. ICRA TECHNO ANALYTICS LTD 24.83% 6. INFOSYS LTD 43.39% 7. R.S SOFTWARE (INDIA) LTD 8.65% 8. MINDTREE LTD (SEG) 10.66% 9. PERSISTENT SYSTEMS AND SOLUTIONS LTD 22.12% 10. PERSISTENT SYSTEMS LTD 22.84% 11. SASKENCOMMUNICATIONS TECHNOLOGIES LTD 24.13% 12. TATA ELXI LTD (SEG) 20.91% 13. LARSEN AND TOUBRO INFOTECH LTD 19.83% ARITHMETIC MEAN 24.82% LD.TPO, THUS COMPUTED PROPOSED ADJUSTMENT AT RS.29,89,22,549/ - . 2.5. LD. AO RESTRICTED WORKING CAPITAL ADJUSTMENT TO 1.63%. HE ALSO DENIED ANY RISK ADJUSTMENT FOR THE REASON THAT ASSESSEE FAILED TO ITA NO. 306/B/201 6 ITA NO. 524/B/2016 A.Y:2011 - 12 6 ESTABLISH THE DIFFERENCE IN RISK LEVEL OF THE TESTED PARTY AND UNCONTROLLED COMPARABLES AND THAT NO REASONABLY ACCURATE ADJUSTMENTS COULD BE MADE FOR WANT OF A SCIENTIFIC METHOD FOR COMPUTING THE QUANTUM OF RISK ADJUSTMENT. AGGRIEVED BY PROPOSED ADJUSTMENT, ASSESSEE RAISED OBJECTIONS BEFORE DRP . 2.6. ASSESSEE RAISED OBJECTIONS REGARDING FILTERS APPLIED BY LD.TPO; COMPANIES WITH DIFFERENT ACCOUNTING PERIOD WERE NOT CONSIDERED COMPANIES WITH EMPLOYEE COST LESS THAN 25% WERE REJECTED; COMPANIES WITH EXPORT SALES LESS THAN 75% OF OPERATING REVENUE WAS REJECTED. DRP UPHELD THESE FILTERS. 3. DRP WHILE CONSIDERING THE OBJECTIONS RAISED BY ASSESSEE EXCLUDED COMPARABLES BEING E - ZEST SOLUTIONS, INFOSYS LTD., PERSISTENT SYSTEMS, TATA ELXSI LTD. AS REGARDS THE WORKING CAPITAL ADJUSTMENT RESTRICTING IT TO 1.63%, DRP UPHELD THE SAME. HOWEVER, AS REGARDS RISK ADJUSTMENT, DRP DIRECTED LD.TPO TO P ROVIDE 1% ADJUSTMENT TO THE AVERAGE MARGIN TOWARDS RISK DIFFERENTIAL. DRP FURTHER DISALLOWED PROVISION OF DOUBTFUL ADVANCES CREATED BY ASSESSEES AMOUNTING TO RS. 4,93,66,601/ - TO BE NOT IN ACCORDANCE WITH ACCOUNTING PRINCIPLES . DRP ALSO DISALLOWED SUM OF RS.15,77,76, 840/ - BEING PROVISION FOR DOUBTFUL ADVANCES (THAT IS PROVISION ON SERVICE TAX REFUND RECEIVABLE) CREATED BY ASSESSEE AS NOT QUALIFYING FOR EXPENDITURE UNDER SECTION 37 OF THE ACT. ITA NO. 306/B/201 6 ITA NO. 524/B/2016 A.Y:2011 - 12 7 4. ON RECEIPT OF DRP DIRECTIONS, LD.AO PASSED FINAL ASSESSMENT ORDER DETERMINING ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION FROM AE AFTER MAKING ADJUSTMENT OF RS.27,56,53,609/ - . LD. AO ALSO ADDED PROVISION OF DOUBTFUL ADVANCES CREATED BY ASSESSEE TO THE EXTENT OF RS.4,93,66,601/ - AND RS.15,77,76,840/ - BEING EXCESS OF SERVICE TAX LIABILITY WHICH WAS ANTICIPATED TO BE REFUNDED BY SERVICE TAX AUTHORITY, BY HOLDING IT TO BE NOT IN ACCORDANCE WITH PRINCIPLES OF ACCOUNTING . AGGRIEVED BY ADDITION S MADE BY LD.AO IN IMPUGNED ASSESSMENT ORDER, ASSESSEE AS WELL AS REVENUE FILED APPEAL BEFORE THIS TRIBUNAL . 6. AT THE OUTSET , LD. AR SUBMITTED THAT DRP FAILED TO ADJUDICATE O BJECTION NO. 9 RAISED BY ASSESSEE , WHEREIN ASSESSEE OBJECTED TO ACTION OF LD.TPO I N CONSIDERING OPERATING MARGIN AND COST , BY TAKING INTO CONSIDERATION ENTITY LEVEL REVENUE , INSTEAD OF SEGMENTAL LEVEL OPERATING REVENUE AND OPERATING COST. HE SUBMITTED THAT THE ONLY DISPUTED SEGMENT BY LD. TPO WAS IN RESPECT OF SOFTWARE DEVELOPMENT SERVIC ES FOR WHICH THE REVENUE RECEIVED BY ASSESSEE WAS RS.1,03,76,57,721/ - , WHEREAS , LD.TPO CONSIDERED OPERATING COST AT RS.1,16,92,93,471/ - , WHICH IS THE ENTITY LEVEL COST, AS IS CLEAR FROM PAGE 4 OF ORDER PASSED BY LD.TPO . LD. AR ALSO SUBMITTED THAT WHILE SELECTING THE COMPARABLES, LD.TPO CONSIDERED SEGMENTAL INFORMATION AND COMPARED IT WITH ASSESSEE ON AN ENTITY LEVEL. THIS HAS BEEN UPHELD BY DRP WITHOUT ADJUDICATING THE OB JECTION RAISED BY ASSESSEE. ITA NO. 306/B/201 6 ITA NO. 524/B/2016 A.Y:2011 - 12 8 6.1. LD.AR ALSO SUBMITTED THAT UPHOLDING WORKING CAPITAL ADJUSTMENT BEING RESTRICTED AT 1.63% IS AGAINST VIEW TAKEN BY VARIOUS DECISIONS OF THIS TRIBUNAL . HE SUBMITTED THAT LD. TPO IS DUTY BOUND TO GIVE ADJUSTMENT BASED ON DIFFER ENCE IN ECONOMIC, GEOGRAPHICAL CONDITION, COMPARED WITH THAT OF ASSESSEE IN ACTUAL IS WITHOUT ANY. HE HAS PLACED RELIANCE UPON VARIOUS DECISIONS OF COORDINATE BENCHES OF THIS T RIBUNAL WHERE, TPO HAS BEEN DIRECTED TO PROVIDE WORKING CAPITAL ADJUSTMENT BY TA KING ACTUAL DATA , WITHOUT PUTTING ANY UPPER LIMIT. 6.2. ALSO, LD.CIT.DR SUBMITTED THAT , DRP WHILE EXCLUDING CERTAIN COMPARABLES DID NOT CARRY OUT FAR ANALYSIS. SHE ALSO SUBMITTED THAT DRP PROVIDED RISK ADJUSTMENT AT 1% ON AD HOC BASIS WITHOUT HAVING A SCIE NTIFIC APPROACH. SHE SUBMITTED THAT THERE ARE VARIOUS FACTORS THAT NEEDS TO BE CONSIDERED FOR PROVIDING RISK ADJUSTMENT WHICH ASSESSEE HAS TO ESTABLISH IN ITS CASE HAVING REGARDS TO THE COMPARABLES FINALLY SELECTED. SHE SUBMITTED THAT , ORDER PASSED BY DRP ON ALL THESE ISSUES ARE VERY CRYPTIC. 7. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. WE HAVE PERUSED ORDER PASSED BY LD. TPO AND DRP IN GREAT DETAIL. THE CONTENTIONS RAISED BY BOTH SIDES ARE FOUND TO BE TRUE. IT IS OBSERVED THAT LD. TPO HAS CONSIDERED ENTITY LEVEL REVENUE AS WELL AS COST FOR COMPUTING MARGIN OF ASSESSEE WHICH WAS COMPARED WITH THE SEGMENTAL MARGIN OF COMPARABLES. THIS IS IN TOTAL CONTRADICTION TO TRANSFER PRI C ING LAW LAID DOWN BY LEGISLATURE. DRP F AILED TO ITA NO. 306/B/201 6 ITA NO. 524/B/2016 A.Y:2011 - 12 9 ADJUDICATE THIS OBJECTION RAISED BY ASSESSEE HAVING TO TRANSFER PRIC ING RULES ENVISAGED IN THE A CT/ R ULES. DRP IN A CRYPTIC MANNER UPHELD ACTION OF LD.TPO TO BE JUSTIFIED. 7.1. IT IS ALSO OBSERVED THAT COMPARABLES THAT WERE OBJECTED BY ASSESSEE HAS NOT BEEN DEALT WITH INDEPENDENTLY. AS REGARDS THE COMPARABLES THOUGH DRP EXCLUDED CERTAIN COMPARABLES AS WELL AS UPHELD INCLUSION OF REMAINING COMPARABLES, HAS NOT GIVEN PROPER REASONI NG FOR ITS EXCLUSION/INCLUSION. IT IS OBSERVED THAT CERTAIN COMPARABLES CANNOT BE CONSIDERED IN CASE OF A CAPTIVE SERVICE PROVIDER LIKE ASSESSEE. FROM THE TRANSFER PRICING DOCUMENT PLACED IN THE PAPER BOOK AT PAGE 614, IT IS OBSERVED THAT ASSESSEE IS NOT I NVOLVED IN ANY OF THE STRATEGIC FUNCTIONS AND IS ONLY UNDERTAKING PRELIMINARY TACTICAL MANAGERIAL FUNCTIONS. ASSESSEE ALSO DOES NOT UNDERTAKE ANY MARKETING/BUSINESS DEVELOPMENT ACTIVITY. FURTHER IT IS OBSERVED THAT ASSESSEE DO NOT UNDERTAKE ANY KEY RISKS. BASED UPON THE ABOVE IN OUR VIEW THE COMPARABLES NEEDS TO BE REVISITED. WE ALSO NOTE THAT WORKING CAPITAL ADJUSTMENT HAS BEEN RESTRICTED BY LD.TPO AND UPHELD BY DRP AT 1.63% WHICH IS CONTRARY TO PROVISIONS OF TRANSFER PRI C ING RULES. AS HELD BY VARIOUS DECI SIONS OF COORDINATE BENCHES OF THIS TRIBUNAL , WE DIRECT LD.TPO TO RECOMPUTE WORKING CAPITAL ADJUSTMENT IN ACTUAL, AND TO CONSIDER THE SAME FOR PURPOSES OF COMPUTING ARMS LENGTH MARGIN. 7.2. AS REGARDS THE RISK ADJUSTMENT ON AD HOC BASIS AT 1%, IT IS OBSE RVED THAT THERE IS NO SCIENTIFIC MANNER WHICH HAS BEEN APPLIED BY DRP. ASSESSEE IS A LOW RISK BEARING COMPANY AND THEREFORE WHILE ITA NO. 306/B/201 6 ITA NO. 524/B/2016 A.Y:2011 - 12 10 COMPUTING RISK ADJUSTMENT RISKS ASSUMED BY THE COMPARABLES FOR EARNING REVENUE IN THE PARTICULAR SEGMENT NEEDS TO BE ANALYSED. ASSESSEE IS DIRECTED TO PROVIDE FOR NECESSARY DETAILS IN RESPECT OF ALL THE COMPARABLES FINALLY SELECTED. LD.AO/TPO SHALL THEN COMPUTE THE RISK AS ADJUSTMENT IN ACCORDANCE WITH LAW. 7.3. IN THE LIGHT OF AFORESTATED OBSERVATIONS A ND DIRECTIONS, THE TRANSFE R PRIC ING ISSUES RAISED BY ASSESSEE IS SET ASIDE TO LD.AO/TPO . LD.AO/TPO IS DIRECTED TO PASS A DETAILED ORDER BY CONSIDERING ALL THE SUBMISSIONS ADVANCED BY ASSESSEE IN RESPECT OF EACH OBJECTIONS RAISED THEREIN. LD.AO/TPO SHALL GRANTED PROPER OPPORTUNITY T O ASSESSEE OF BEING REPRESENTED AS PER LAW. ACCORDINGLY, GROUNDS 1 - 10 IN ASSESSEES APPEAL ON TRANSFER PRICING ISSUES STANDS ALLOWED FOR STATISTICAL PURPOSES. 8. INSOFAR AS REVENUES APPEAL IS CONCERNED ALL ISSUES RAISED ARE REGARDING TRANS FER PRICING ADJU STMENT , WHICH HAS BEEN SET ASIDE TO LD.AO/TPO WHILE DECIDING ASSESSEES APPEAL. ACCORDINGLY, ALL GROUNDS RAISED BY REVENUE ARE ALSO SET ASIDE TO DRP FOR STATISTICAL PURPOSES. 9. GROUND NO. 11 - 12 OF ASSESSEES APPEAL ASSESSEE IS CHALLENGING DISALLOWANCE OF PROVISION FOR DOUBTFUL ADVANCES THAT IS PROVISION FOR SERVICE TAX REFUND RECEIVABLE AMOUNTING TO RS.4,93,66,601/ - . BOTH PARTIES SUBMITTED THAT THE ISSUE MAY BE SET ASIDE TO LD. AO/TPO FOR VERIFICATION AND TO CONSIDER THE CLAI M IN ACCORDANCE WITH LAW. ITA NO. 306/B/201 6 ITA NO. 524/B/2016 A.Y:2011 - 12 11 ACCORDINGLY , THESE GROUNDS RAISED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. 10. GROUND NOS. 13 - 14 ARE CONSEQUENTIAL IN NATURE THEREFORE DO NOT REQUIRE ANY ADJUDICATION. 11. GROUND NO.15 IS PRELIMINARY AT THIS STAGE. INSOFAR AS ADDITIONAL GROUND RAISED BY ASSESSEE IS CONCERNED IT BECOMES ACADEMIC AT THIS STAGE AND HENCE NOT CONSIDERED. IN THE RESULT , APPEAL FILED BY ASSESSEE AS WELL AS , REVENUE STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND JANUARY, 2020 SD/ - SD/ - ( B.R.BASKARAN ) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE. DATED: 22.01.2020 COPY TO: 1. APPELLANTS 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.