Atheros India LLC, CHENNAI V. DDIT, CHENNAI

ITA 932/CHNY/2014

• Counselvise Citation: 93221714 RSA 2014
• Duration Of Justice: 1 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-07-2015
• Appeal Filed By: Assessee
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 15-04-2014
• Court: TRIBUNAL
• Department Lawyers: JOE SEBASTIAN
• Assessee Lawyers: R M NARAYANAN
• Keywords: Transfer pricing; Working capital adjustments

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , . !' , # $ % [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ] ./ I.T.A.NO.932/MDS/2014 / ASSESSMENT YEAR : 2009-10 M/S ATHEROS INDIA LLC. 11 TH FLOOR TVH AGNITIO PARK 141, OMR, KANDANCHAVADY CHENNAI 600 096 VS. THE DY. DIRECTOR OF INCOME- TAX INTERNATIONAL TAXATION I CHENNAI [PAN AADCA 1396 D] ( &' / APPELLANT) ( ()&' /RESPONDENT) / APPELLANT BY : SHRI R.M. NARAYANAN, CA /RESPONDENT BY : SHRI JOE SEBASTIAN, CIT / DATE OF HEARING : 20 - 0 5 - 2015 ! / DATE OF PRONOUNCEMENT : 17 - 0 7 - 2015 /ORDER PER N.R.S.GANESAN, JUDICIAL MEMBER BEING AGGRIEVED BY THE ADJUSTMENT MADE BY THE ASS ESSING OFFICER CONSEQUENT TO THE DIRECTION OF THE DISPUTE RESOLUTION PANEL, THE ASSESSEE FILED THIS APPEAL FOR ASSESSMENT YEAR 2009 -10. 2. SHRI R.M. NARAYANAN, LD. REPRESENTATIVE FOR THE AS SESSEE SUBMITTED THAT THE ASSESSEE IS A SUBSIDIARY OF M/S ANTHEROS ITA NO.932/14 :- 2 -: TECHNOLOGY LTD, A COMPANY REGISTERED IN BERMUDA. T HE BUSINESS OF THE ASSESSEE-COMPANY IS TESTING OF CHIPS. ACCORDIN G TO THE LD. REPRESENTATIVE, THE CHIPS WILL BE MANUFACTURED BY T HE PARENT COMPANY AND ONLY FOR THE PURPOSE OF TESTING THE CHIPS, THE ASSESSEE-COMPANY WAS ESTABLISHED IN INDIA. THE LD. REPRESENTATIVE S UBMITTED THAT THE ASSESSEE AFTER TRANSFER PRICING STUDY ELABORATELY A ND BY PLACING RELIANCE ON THE COMPARABLE CASES, DETERMINED THE PR OFIT LEVEL INDICATOR AT 7.42%. HOWEVER, THE TPO DETERMINED THE PLI AT 22.76%. THE LD. REPRESENTATIVE SUBMITTED THAT THE ASSESSEE HAS ADOPTED TRANSACTION NET MARGIN METHOD FOR THE PURPOSE OF DE TERMINING THE ARMS LENGTH PRICE. THE ASSESSING OFFICER ALSO ACC EPTED THE TNMM METHOD ADOPTED BY THE ASSESSEE. HOWEVER, THE DRP IS CONFINED TO SELECTION OF COMPARABLES FOR THE PURPOSE OF DETERMI NING THE ALP UNDER THE PROVISIONS OF THE INCOME-TAX ACT. REFERRING TO PAGE 7 OF THE ORDER OF THE TPO, THE LD. REPRESENTATIVE SUBMITTED THAT O UT 14 COMPANIES SELECTED BY THE ASSESSEE AS COMPARABLE CASES, SEVE N COMPANIES WERE REMOVED AS RPT IS MORE THAN 26% AND FIVE COMPANIES WERE REMOVED AS TURNOVER WAS MORE THAN ` 100 CRORES. THE REMAINING TWO COMPANIES WERE TAKEN AS A BASIS BY THE TPO TO DETER MINE THE PLI AT 22.76%. REFERRING TO ONE OF THE COMPARABLE NAMELY, M/S COMPUCOM SOFTWARE LTD, THE LD. REPRESENTATIVE SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DISSIMILAR AND DESERVES TO BE EXCLUDED SINCE ONLY 18% OF ITA NO.932/14 :- 3 -: ITS TOTAL REVENUE RELATES TO SOFTWARE DEVELOPMENT. THE ASSESSEE BY TAKING THE ENTIRE TOTAL TURNOVER, HAS WRONGLY INCLU DED IN THE TRANSFER PRICING STUDY. ACCORDING TO THE LD. REPRESENTATIVE , MERELY BECAUSE THE ASSESSEE INCLUDED M/S COMPUCOM SOFTWARE LTD IN THE LIST OF COMPARABLES, THAT DOES NOT MEAN THAT THE SAME HAS T O BE TAKEN AS A COMPARABLE BUT IT WAS FUNCTIONALLY DISSIMILAR. ACC ORDING TO THE LD. REPRESENTATIVE, M/S COMPUCOM SOFTWARE LTD IS ENGAG ED IN THE BUSINESS OF SOFTWARE DEVELOPMENT, GENERATES POWER B Y WINDMILL AND LEARNING SOLUTIONS. THEREFORE, ACCORDING TO THE LD . REPRESENTATIVE, M/S COMPUCOM SOFTWARE LTD CANNOT BE TAKEN AS A COMPARAB LE EVEN THOUGH THE SAME WAS WRONGLY INCLUDED BY THE ASSESS EE AS ONE OF THE COMPARABLE. THE LD. REPRESENTATIVE PLACED HIS RELI ANCE ON THE DECISION OF CHANDIGARH SPECIAL BENCH IN DCIT VS QUARK SYSTE MS PVT. LTD, 38 SOT 307. SIMILARLY, THE ASSESSEE HAS ALSO OBJECTE D TO THE INCLUSION OF M/S BODHREE CONSULTING LTD AS COMPARABLE. ACCORDIN G TO THE LD. REPRESENTATIVE, THE PLI FOR THE PAST FIVE YEARS WAS 13.20%. HOWEVER, FOR THE YEAR 2009, IT WAS 68.72%. THE AVERAGE PLI FOR THE NEXT FOUR YEARS IS 0.47%. PLACING RELIANCE ON THE DECISION O F DELHI BENCH OF THIS TRIBUNAL IN ADOBE SYSTEMS INDIA (P) LTD VS ACIT I.T .A.NO.5043/ DEL/2010, THE LD. REPRESENTATIVE SUBMITTED THAT THE COMPANY WHICH HAS SHOWN ABNORMAL PROFIT HAS TO BE EXCLUDED FROM T HE COMPARABLE CASES. THE LD. REPRESENTATIVE ALSO SUBMITTED THAT THE LOSS MAKING ITA NO.932/14 :- 4 -: COMPANY CANNOT BE EXCLUDED FROM THE COMPARABLE CASE S. WHAT IS REQUIRED IS FUNCTIONAL SIMILARITY HAS TO BE ASCER TAINED. REFERRING TO THE COMPUTATION, THE LD. REPRESENTATIVE SUBMITTED THAT THE TPO ARRIVED AT THE ALP OF ALL COMPARABLE CASES AFTER EXECLUDING FO REIGN EXCHANGE FLUCTUATION. HOWEVER, WHILE COMPUTING THE ASSESSEE S PLI HE HAS NOT EXCLUDED THE FOREIGN EXCHANGE FLUCTUATION. THIS LE ADS TO A INCONSISTENCY IN THE COMPARABLE CASES. 3. REFERRING TO THE COMPUTATION OF ADJUSTMENT ON ACCOU NT OF INTEREST ON WORKING CAPITAL, THE LD. REPRESENTATIVE SUBMITTED THAT WHILE ADJUSTING THE PLI OF COMPARABLES IN RESPECT OF WORK ING CAPITAL INTEREST, THE TPO ADJUSTED THE PERCENTAGE USING THE FORMULA O F NWC/COST. ACCORDING TO THE LD. REPRESENTATIVE, THE DENOMINATO R IS THE COST FOR THE PURPOSE OF OPERATING COSTS EXCLUDING THE WORKING CA PITAL INTEREST. ACCORDING TO THE LD. REPRESENTATIVE, FOR THE PURPOS E OF MAKING ADJUSTMENT OF WORKING CAPITAL AGAINST THE PLI HAS T O BE ARRIVED AT AS OPERATING PROFIT EXPRESSED AS A PERCENTAGE ON SALES . HOWEVER, WHEN THE EXPRESSION OF PLI IS BASED ON THE OPERATING COS TS, ALL THE COSTS WHICH ARE CONSIDERED IN ARRIVING AT THE OPERATING P ROFIT SHOULD ALSO BE CONSIDERED IN THE OPERATING COSTS USED IN THE DENOM INATOR. ON A QUERY FROM THE BENCH WHEN THE ASSESSING OFFICER SAY S IN THE DRAFT ASSESSMENT ORDER THAT THE ASSESSEE IS ENGAGED IN T HE BUSINESS OF DEVELOPING SEMICONDUCTOR SYSTEM SOLUTION FOR WIRELE SS COMMUNICATION ITA NO.932/14 :- 5 -: PRODUCTS, HOW THE ASSESSEE CLAIMS THAT IT IS ENGAG ED ONLY IN TESTING OF CHIPS MANUFACTURED BY ITS PARENT COMPANY, THE LD. R EPRESENTATIVE SUBMITTED THAT THE ASSESSEE IS ENGAGED ONLY IN TES TING OF CHIPS MANUFACTURED BY ITS PARENT COMPANY AND IT HAS NO OT HER FUNCTION. ON A QUERY FROM THE BENCH WHETHER THIS WAS TAKEN UP BE FORE THE DRP BY WAY OF OBJECTION, THE LD. REPRESENTATIVE SUBMITTED THAT AN OBJECTION WAS FILED BEFORE THE ASSESSING OFFICER AGAINST THE DRAFT ASSESSMENT ORDER WHICH WAS REFERRED TO DRP. HOWEVER, THIS MAT TER WAS NOT SPECIFICALLY RAISED. 4. ON THE CONTRARY, SHRI JOE SEBASTIAN, LD. DEPARTMENT AL REPRESENTATIVE SUBMITTED THAT THE FUNCTION OF THE ASSESSEE AS PER THE DRP IS DEVELOPMENT OF SOFTWARE, SOFTWARE TESTING AN D TECHNICAL ENGINEERING SUPPORT TO AN ASSOCIATED ENTITY SITUATE D IN BERMUDA. HOWEVER, THE ASSESSING OFFICER IN THE DRAFT ASSESSM ENT ORDER SAYS THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEVELOP ING SEMICONDUCTOR SYSTEM SOLUTION FOR WIRELESS COMMUNICATION PRODUCTS . THE TPO ALSO FINDS THAT THE FUNCTION OF THE ASSESSEE IS SOFTWAR E DEVELOPMENT, TESTING, VERIFICATION OF HARDWARE/SOFTWARE DESIGN A ND QUALITY CONTROL. THE TPO ALSO FINDS THAT THE ASSESSEE-COMPANY IS A C APTIVE SERVICE PROVIDER TO ITS ASSOCIATE ENTERPRISES. REFERRING TO THE COMPARABLE M/S COMPUCOM SOFTWARE LTD THE LD. DR SUBMITTED THAT THE ASSESSEE HAS TAKEN THE PLI PERCENTAGE BY TAKING THE ENTIRE TURNOVER AT ITA NO.932/14 :- 6 -: 23.36%. HOWEVER, THE TPO AFTER REFERRING TO THE SE GMENT RELATED TO SOFTWARE SERVICES FOUND THAT THE PLI WAS 42.36%. T HE TPO HAS ALSO TAKEN SEVEN MORE COMPANIES AS COMPARABLES INCLUDING M/S BODHREE CONSULTING LTD. IN FACT, M/S BODHREE CONSULTING LT D DECLARED THE PLI AT 63.69%. ACCORDING TO THE LD. DR, THE DRP AFTER CONSIDERING THE FUNCTION OF THE RESPECTIVE COMPANIES AND SEGMENT-WI SE PROFIT, FOUND THAT IN THE CASE OF M/S COMPUCOM SOFTWARE LTD , THE COMPARABLE WAS SELECTED BY THE ASSESSEE ITSELF THEREFORE, IT CAN NOT NOW GO BACK AND SAY THAT THE COMPANY IS NOT A COMPARABLE ONE. REFE RRING TO INCLUSION OF M/S BODHREE CONSULTING LTD, THE LD. DR SUBMITTED THAT THE SAID COMPANY IS FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE AND THE PROFIT SHOWN IS NOT ATTRIBUTABLE TO ANY SPECIFIC RE ASON. THEREFORE, THE DRP FOUND THAT IT IS A COMPARABLE ONE. REFERRING T O THE COMPUTATION OF PLI BY THE TPO BY EXCLUDING THE FOREIGN EXCHANGE FLUCTUATION AND THE OPERATING COST, THE LD. DR SUBMITTED THAT THE D RP, AFTER CONSIDERING THE DETAILS AVAILABLE ON RECORD FOUND T HAT FOREIGN EXCHANGE FLUCTUATION HAS TO BE EXCLUDED. THEREFORE, ACCORDI NG TO THE LD. DR THERE IS NO INFIRMITY IN THE ORDER OF THE LOWER AUT HORITY. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. IT I S NOT IN DISPUTE THAT THE ASSESSEE, AFTER TRANSFER PRICING STUDY, MADE A DJUSTMENT BY ADOPTING TNMM METHOD. THERE IS NO DISPUTE ABOUT TH E METHOD ITA NO.932/14 :- 7 -: ADOPTED BY THE ASSESSEE. THE ONLY DISPUTE IS WITH REGARD TO COMPARABLE CASES. FOR THE PURPOSE OF SELECTING THE COMPARABLE CASES, FIRST OF ALL WE HAVE TO SEE THE FUNCTIONAL SIMILARI TY OF THE COMPANIES. IN THE CASE BEFORE US, THE ASSESSING OFFICER IN THE DR AFT ASSESSMENT ORDER FOUND THAT THE ASSESSEE IS ENGAGED IN THE BUSINES S OF DEVELOPING SEMICONDUCTOR SYSTEM SOLUTION FOR WIRELESS COMMUNIC ATION PRODUCTS. THE ASSESSING OFFICER HAS ALSO FOUND THAT IT IS EFF ECTED BY WIRELESS SYSTEMS EXPERTISE WITH HIGH PERFORMANCE RADIO FREQU ENCY, MIXED SIGNAL AND DIGITAL SEMI CONDUCTOR DESIGN SKILLS TO PROVIDE HIGHLY INTEGRATED CHIPSETS THAT CAN BE MANUFACTURED ON LOW COST PROCE SS. HOWEVER, THE TPO FOUND THAT THE ASSESSEES FUNCTION IS SOFTWARE DEVELOPMENT, TESTING, VERIFICATION OF HARDWARE/SOFTWARE DESIGN A ND QUALITY CONTROL. THE TPO ALSO FOUND THAT THE ASSESSEE-COMPANY IS CAP TIVE SERVICE PROVIDER TO ITS ASSOCIATE ENTERPRISE. WE FIND THAT THE DRP PROCEEDED ON THE PRESUMPTION THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT, SOFTWARE TESTING AND TECHNICAL ENGINEE RING SUPPORT TO AN ASSOCIATED ENTITY SITUATED IN BERMUDA. THE ASSESS EE NOW CLAIMS THAT IT IS NOT DEVELOPING ANY SOFTWARE BUT THE FUNCTION OF THE ASSESSEE IS ONLY TESTING THE CHIPS DEVELOPED BY ITS PARENT COMP ANY. THERE IS A LARGE DIFFERENCE BETWEEN DEVELOPMENT OF SOFTWARE AN D TESTING OF CHIPS DEVELOPED BY THE PARENT COMPANY. WHEN THE ASSESSE E CLAIMS THAT THE ASSESSEES FUNCTION IS ONLY TESTING OF THE CHI PS THEN IT IS NOT KNOWN ITA NO.932/14 :- 8 -: HOW THE LOWER AUTHORITY CAME TO THE CONCLUSION THAT SOFTWARE DEVELOPMENT AND SOFTWARE TESTING ARE THE BUSINESS O F THE ASSESSEE. THEREFORE, THE FUNCTION OF THE ASSESSEE HAS TO BE FIRST DETERMINED BEFORE SELECTING THE COMPARABLE CASES. SINCE THE F ACTS ARE NOT CLEAR WITH REGARD TO FUNCTION PERFORMED BY THE ASSESSEE WHETHER IT IS SOFTWARE DEVELOPMENT OR SIMPLY TESTING THE CHIPS MA NUFACTURED BY THE PARENT COMPANY, THE MATTER NEEDS TO BE RECONSIDERED BY THE ASSESSING OFFICER. IN OTHER WORDS, FOR THE PURPOSE OF SELECTING COMPARABLES, FUNCTIONALLY SIMILAR COMPANIES HAVE TO BE SELECTED. SINCE THE FUNCTION OF THE ASSESSEE ITSELF IS UNIDE NTIFIABLE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT IT IS FOR THE ASS ESSING OFFICER TO EXAMINE THE MATTER AND BRING ON RECORD THE FUNCTION OF THE ASSESSEE . ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES AR E SET ASIDE AND THE ENTIRE ISSUE IS REMITTED BACK TO THE FILE OF THE AS SESSING OFFICER. THE ASSESSING OFFICER SHALL FIND OUT THE FUNCTION OF TH E ASSESSEE AND THEREAFTER DETERMINE THE ALP BY SELECTING THE COMPA RABLES AS SIMILAR TO THAT OF THE ASSESSEE-COMPANY. IT IS ALSO OPEN T O THE ASSESSING OFFICER TO REFER THE MATTER AGAIN TO THE DRP ON THE BASIS OF THE FUNCTION THAT WAS ACTUALLY PERFORMED BY THE ASSESS EE. WITH THE ABOVE OBSERVATIONS, THE APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. ITA NO.932/14 :- 9 -: 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH OF JULY, 2015, AT CHENNAI. SD/- SD/- ( . !' ) (A. MOHAN ALANKAMONY) # / ACCOUNTANT MEMBER ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER #$ / CHENNAI %& / DATED:17 TH JULY, 2015 RD &' ()*) / COPY TO: 1 . / APPELLANT 4. + / CIT 2. / RESPONDENT 5. ),- . / DR 3. +/' / CIT(A) 6. -01 / GF