Smart Microelectronics P. Ltd., V. Addl. CIT, Noida Range,

ITA 759/DEL/2006

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74002 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 10 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 21-01-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 06-03-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: SALIL GOYAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Condonation of delay

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM ITA NO.759/DEL/2006 ASSESSMENT YEAR : 2002-03 SMART MICROELECTRONICS PVT. LTD., (NOW FREESCALE CONDUCTOR PVT. LTD.), 5 TH FLOOR, EXPRESS TRADE TOWER, PLOT NO.15 & 16, SECTOR 16A, NOIDA (UP). PAN : AACC3892M VS. ADDL. CIT, NOIDA RANGE, NOIDA. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.M. GUPTA, ADVOCATE & SHRI SALIL GOYAL, CA DEPARTMENT BY : SHRI PEEYUSH JAIN, CIT, DR ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER PASSED BY THE CIT(A) ON 16.11.2005 IN RELATION TO THE ASSESSM ENT YEAR 2002-03 ITA NO.759/DEL/2006 2 2. THERE IS A DELAY OF 34 DAYS IN FILING THE APPEAL BEFORE THE TRIBUNAL. THE ASSESSEE HAS FILED APPLICATION FOR CONDONATION OF DELAY ALONG WITH THE AFFIDAVIT STATING THE REASONS FOR SUCH DELAY. WE ARE SATISFIED WITH SUCH REASONS. THE DELAY IS CONDONED AND ACCORDINGLY THE APPEAL IS ADMITTED FOR DISPOSAL ON MERITS. 3. THE ONLY ISSUE RAISED IN THIS APPEAL THROUGH VAR IOUS GROUNDS IS AGAINST ADDITION ON ACCOUNT OF THE TRANSFER PRICING ADJUSTMENT. 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF MOTOROLA INC., USA. MOTOROLA G ROUP IS ENGAGED IN PROVIDING INTEGRATED COMMUNICATIONS SOLUTIONS AND E MBEDDED ELECTRONIC SOLUTIONS. THE OPERATIONS OF THE GROUP INCLUDE SOFT WARE ENHANCED TELEPHONE, RADIO AND MESSAGING PRODUCTS, END TO END SYSTEMS FOR DELIVERY OF INTERACTIVE DIGITAL VIDEO AND VOICE DAT A SOLUTIONS, ETC. THE ASSESSEE PROVIDED CHIP DESIGNING SERVICES TO ITS PA RENT COMPANY DURING THE YEAR IN QUESTION FOR WHICH AN INTERNATIONAL TRA NSACTION OF PROVISION OF VLSI DESIGN/SOFTWARE DEVELOPMENT SERVICES WAS R EPORTED WITH VALUE OF RS.11,63,51,525/-. THE ASSESSEE ADOPTED T HE TRANSACTIONAL NET ITA NO.759/DEL/2006 3 MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THIS TR ANSACTION. THE PROFIT LEVEL INDICATOR (PLI) WAS TAKEN AS OPERATING PROFIT /TOTAL COST. THE ASSESSEE EARNED A MARGIN OF 11%. A SET OF FIVE COM PARABLES WAS SELECTED WITH THEIR MEAN MARGIN AT 11.06%. THAT IS HOW THE ASSESSEE DEMONSTRATED THAT ITS INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH PRICE. THE TPO REJECTED THE FIRST THREE COMPANIES OUT OF F IVE CHOSEN BY THE ASSESSEE, THEREBY RETAINING ONLY VISU CYBERTECH LTD ., AND VJIL CONSULTING LTD. HE COMPUTED THE WEIGHTED AVERAGE M ARGIN OF THESE TWO COMPANIES FOR THE FINANCIAL YEARS 1999-2000 AND 200 0-01 AT 18.05%. HE ALSO MADE SUPPLEMENTARY ANALYSIS-1 (QUANTITATIVE APPROACH). IN THIS ANALYSIS, HE CHOSE 60 COMPANIES AS COMPARABLE WITH THE MEAN MARGIN OF 19.17%. THE TPO FURTHER CARRIED OUT ANOT HER SUPPLEMENTARY ANALYSIS-2 (QUALITATIVE APPROACH) IN WHICH HE CHOSE FOUR COMPANIES AND DETERMINED AVERAGE MARGIN AT 34.21%. IT WAS, THERE FORE, OPINED THAT LEAST OF THESE THREE MARGINS, NAMELY, 18.05% ON THE BASIS OF TWO COMPARABLES SHORTLISTED FROM THE ASSESSEES LIST, W AS REQUIRED TO BE APPLIED. AS AGAINST THE ASSESSEES MARGIN OF 10.96 %, THE TPO PROPOSED ITA NO.759/DEL/2006 4 AN ADJUSTMENT @ 7.09% (18.05% - 10.96%) AMOUNTING T O RS.74,34,469/. THE LD. CIT(A) UPHELD THE VIEW TAKEN BY THE AUTHORI TIES BELOW, THEREBY SUSTAINING THE SAID ADDITION OF RS.74.34 LAC BY CON SIDERING THE ARMS LENGTH PRICE OF THIS TRANSACTION AT RS.12.37 CRORE. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL. IT CAN BE SEEN FROM THE TPOS WORKING THA T HE COMPUTED ARMS LENGTH MARGIN BY FINALLY CHOOSING THREE DIFFERENT V ERSIONS AND THEREBY RESTRICTING HIMSELF TO THE LOWEST PROFIT-GIVING VER SION, BEING THE SELECTION OF TWO COMPANIES OUT OF FIVE REPORTED BY THE ASSESS EE. THIS MECHANISM OF ASCERTAINING THE AVERAGE PROFIT MARGIN OF THE CO MPARABLE COMPANIES UNDER THREE DIFFERENT VERSIONS AND THEN RESTRICTING THE ALP TO THE LOWEST OF THESE THREE, HAS NO SANCTION OF LAW. THE TPO IS MANDATED TO DETERMINE THE ALP OF AN INTERNATIONAL TRANSACTION U NDER ONE VERSION ALONE. BE THAT AS IT MAY, SINCE THE TPO HAS ADOPTE D FIRST VERSION GIVING AVERAGE PROFIT MARGIN AT 18.05% AND THIS ASPECT HAS NEITHER BEEN CHALLENGED BY THE ASSESSEE NOR THE REVENUE HAS ASSA ILED IT, WE CLOSE THIS ISSUE HERE WITHOUT GOING DEEP INTO IT. ITA NO.759/DEL/2006 5 6. COMING TO THE ISSUE BEFORE US, IT IS RELEVANT TO MENTION THAT THE ASSESSEE HAS DISPUTED ONLY ONE ASPECT OF THE DETERM INATION OF ALP, BEING THE USE OF MULTIPLE-YEAR DATA. AS SUCH, ALL O THER ASPECTS OF THE DETERMINATION OF THE ALP ARE CONSIDERED AS HAVING A TTAINED FINALITY. CONFINING OURSELVES TO THE FIRST VERSION BY WHICH T HE TPO SELECTED TWO COMPANIES OUT OF THE FIVE REPORTED BY THE ASSESSEE, IT CAN BE SEEN THAT IN COMPUTING THE AVERAGE MARGIN AT 18.05%, THE TPO TOO K WEIGHTED AVERAGE OF THEIR PROFITS FOR THE FINANCIAL YEARS 19 99-2000 AND 2000-01. 7. RULE 10B(4) PROVIDES THAT : THE DATA TO BE USED IN ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH TH E INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO . THEN THERE IS A PROVISO TO SUB-RULE, WHICH STATES THAT : PROVIDED THAT DA TA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCI AL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD H AVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. THERE IS NOTHING ON RECORD OR PATENT FR OM THE ORDER OF THE ITA NO.759/DEL/2006 6 TPO THAT THE PROVISO IS APPLICABLE IN THE INSTANT C ASE. GOING BY THE MANDATE OF RULE (4) OF RULE 10B, IT IS MANIFEST TH AT ONLY THE CURRENT YEARS DATA IS TO BE CONSIDERED FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION. 8. WE APPRECIATE THAT THIS WAS THE FIRST YEAR WHE N TP REGULATION CAME INTO FORCE AND THERE WAS LACK OF CLARITY ON SEVERAL ASPECTS OF THE DETERMINATION OF THE ALP. MUCH WATER HAS FLOWN SINC E THEN. THERE ARE SEVERAL DECISIONS LED BY THE SPECIAL BENCH ORDER IN THE CASE OF AZTECH SOFTWARE TECHNOLOGY AND SERVICES LTD. VS. ACIT 294 ITR (AT) 32 (SB) (BANG.) IN WHICH IT HAS BEEN HELD THAT THE PROFIT MARGIN S HOULD ORDINARILY BE CONSIDERED FOR THE CURRENT YEAR ALONE AND NOT ON A MULTIPLE-YEAR BASIS. IN VIEW OF THE FACT THAT THE ALP IS REQUIRED TO BE DETERMINED ON THE BASIS OF THE CURRENT YEAR DATA ALONE AND THE AUTHORITIES HAVE APPLIED AND APPROVED MULTIPLE-YEAR DATA, WE SET ASIDE THE IMPUG NED ORDER AND SEND THE MATTER BACK TO THE FILE OF AO/TPO FOR A FRESH D ETERMINATION OF ALP OF THIS INTERNATIONAL TRANSACTION ON THE BASIS OF C URRENT YEAR DATA OF THE ASSESSEE AS WELL AS THE TWO COMPARABLES. ITA NO.759/DEL/2006 7 9. NO OTHER ISSUE WAS PRESSED BY THE LD.AR AGAINST THE COMPUTATION OF ALP. 10. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 22.01.201 5. SD/- SD/- [A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 22 ND JANUARY, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.