Conexant Systems Private Limited, Hyderabad, Hyderabad V. DCIT, Circle-1(2), Hyderabad, Hyderabad

MA 38/Hyd/2019

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 9628 (ITAT-HYDERABAD)
• Duration Of Justice: 2 month(s) 15 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 03-07-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-A
• Assessment Year: 2005-2006
• Appeal Filed On: 18-04-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Assessee Lawyers: A RAMPURAWALA
• Keywords: Related party transaction; Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A , HYDERABAD BEFORE S MT P. MADHAVI DEVI , JUDICIAL MEMBER AND SHRI S . RIFAUR RAHMAN , ACCOUNTANT MEMBER M.A. NO. 38/HYD/2019 (IN ITA NO. 1 694 /HYD/201 6 ASSESSMENT YEAR: 20 05 - 06 ) CONEXANT SYSTEMS PVT. LTD., HYDERABAD. PAN AA ACF2723N VS. DY . COMMISSIONER OF INCOME - TAX, CIRCLE 1 ( 2 ), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : S HRI A. RAMPURAWALA REVENUE BY : SHRI Y.V.S.T. SAI DATE OF HEARING : 1 4 / 0 6 /201 9 DATE OF PRONOUNCEMENT : 03 / 0 7 /201 9 O R D E R PER S. RIFAUR RAHMAN, A.M . : TH IS MISCELLANEOUS APPLICATION IS FILED BY THE ASSESSEE U/S 254(2) OF THE INCOME TAX ACT SEEKING RECTIFICATION/MODIFICATION OF THE ORDER OF THE TRIBUNAL DATED 26 /1 2 /2018 IN ITA NO. 1694 /HYD/201 6 . 2. IN THE M.A., THE ASSESSEE STATED THAT THE GRAVE PREJUDICE HAS BEEN CAUSED TO THE ASSESSEE ON ACCOUNT OF INADVERT ENTLY RETAINING THE FOLLOWING COMPARABLE COMPANIES THAT FAILED RELATED PARTY TRANSACTION TO SALES >25% FILTER: 1. SAKSOFT LTD., 2. COMPUCON SOFTWARE LTD. (SEG.) 3. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 2.1. FURTHER, IN THE MA, THE ASSESSEE SUB MITTED THAT THE APPLICATION OF THE RELATED PARTY TRANSACTION FILTER IS ELUCIDATED AS UNDER: 2 M.A.NO. 38/HYD/2019. CONEXANT SYSTEMS PVT. LTD., HYD. 1. SAKSOFT LTD. S.NO. NATURE OF TRANSACTION RELATED PARTIES AMOUNT (RS. IN LAKHS) ANNUAL REPORT REFERENCE 1 SALES WHOLLY OWNED SUBSIDIARIES 1,857.71 PAGE 42 2 RENT PAID ASSOCIATES 44.45 PAGE 42 3 REMUNERATION KMPS 74.90 PAGE 42 TOTAL VALUE OF RELATED PARTY TRANSACTIONS 1,977.06 SALES 2,628.83 RPT/SALES 75.21% 2. COMPUCOM SOFTWARE LTD. S.NO. NATURE OF TRANSACTION RELATED PARTIES AMOUNT (RS. IN LAKHS) ANNUAL REPORT REFERENCE 1 SERVICES RENDERED ENTERPRISES OVER WHICH THE KEY MANAGEMENT PERSONNEL EXERCISES SIGNIFICANT INFLUENCE 976.65 PAGE 21 2 SERVICES RENDERED - DO - 5.44 PAGE 21 3 SERVICES RECEIVED ASSOCIATES 580.97 PAGE 21 4 RENT INCURRED KMP 0.78 PAGE 21 5 RENT INCURRED ENTERPRISES OVER WHICH THE KEY MANAGEMENT PERSONNEL EXERCISES SIGNIFICANT INFLUENCE 2.14 PAGE 21 6 RENT EARNED KMP 2.00 PAGE 21 7 REMUNE - RATION KMP 8.40 PAGE 21 TOTAL VALUE OF RELATED PARTY TRANSACTIONS 1,576.38 SALES 2,680.18 RPT/SALES 58.82% 3 M.A.NO. 38/HYD/2019. CONEXANT SYSTEMS PVT. LTD., HYD. 3. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. S.NO. NATURE OF TRANSACTION RELATED PARTIES AMOUNT (RS. IN LAKHS) ANNUAL REPORT REFERENCE 1 EXPORTS - SERVICES THE LAXMI GROUP INC. 332.15 PAGE 45 2 EXPORTS - SERVICES MARUTHI CONSULTING INC. 1,426.02 PAGE 45 3 REMUNERATION G.K. MURALIKRISHNA 3.00 PAGE 45 TOTAL VALUE OF RELATED PARTY TRANSACTIONS 1,761.17 SALES 6,648.16 RPT/SALES 26.49% REFERRING TO THE ABOVE TABLES, THE ASSESSEE STATED IN THE MA AS UNDER : 15. THUS, AS ALL THE ABOVE COMPANIES HAVE RELATED PARTY TRANSACTIONS IN EXCESS OF 25%, THESE COMPANIES BE REJECTED AS COMPARABLE. 16. THE INDIAN TRANSFER PRICING REGULATIONS REQUIRE THAT FOR THE PURPOSE OF DETERMINATION OF THE ARM'S LENGTH PRICE, THE CONT ROLLED TRANSACTION HAS TO BE COMPARED WITH AN UNCONTROLLED TRANSACTION. THIS WOULD MEAN THAT IN THE CASE OF AN INDIAN SUBSIDIARY OF A FOREIGN COMPANY SAY Y PRIVATE LIMITED, BEING A CAPTIVE SERVICE PROVIDER AND RENDERING 100% OF THE SERVICES TO THE PARENT C OMPANY, THE COMPARISON CANNOT BE WITH COMPANIES WHICH ARE SUBSIDIARIES LIKE Y PRIVATE LIMITED. THIS IS FOR THE REASON THAT THE OTHER COMPANY TRANSACTIONS ARE ALSO CONTROLLED. THE COMPARISON HAS TO BE WITH ANOTHER COMPANY WHICH HAS RELATED PARTY TRANSACTION S LESS THAN 25% OF SALES. 17. THE APPELLANT PLACES RELIANCE ON RULE 1OB(L)(E) OF THE RULES WHICH LAYS DOWN HOW TNMM SHOULD BE APPLIED. RULE 1OB(L)(E) HAS BEEN REPRODUCED HEREWITH FOR YOUR GOODSELFS READY REFERENCE: ' 10 B. (1) FOR THE PURPOSES OF SUB - SECTI ON (2) OF SECTION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY; - (A) . 4 M.A.NO. 38/HYD/2019. CONEXANT SYSTEMS PVT. LTD., HYD. (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, - (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INC URRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB - CLAUSE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTER NATIONAL TRANSACTION [OR THE SPECIFIED DOMESTIC TRANSACTION] AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB - CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB - CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTIC TRANSACTION)' 18. AS EVIDENT FROM THE ABOVE, IN APPLICATION OF TNMM, AN UNCONTROLLED TRANSACTION HAS TO BE COMPARED WITH THE TRANSACTION OF THE TAXPAYER (THE CONTROLLED TRANSACTION). IF A PARTICULAR ENTITY PREDOMINANTLY HAS TRANSACTIONS WITH ITS AE (CONTROLLED TRANSACTION) IN EXCESS OF A CERTAIN THRESHOLD PERCENTAGE, THE ENTITY CANNOT BE SAID TO BE AN UNCONTROLLED COMPARABLE. 19 IN THIS REGARD, THE APPLICANT SUBMITS THAT IT IS A WELL SETTLED PRINCIPLE THAT THE COMPANIES HAVING 'RELATED PARTY TRANSACTIONS' OF MORE THAN 25% OF THE 'SALES VALUE' BE REJECTED. IN THIS REGARD, THE APPLICANT PLACE RELIANCE ON JUDGEMENT PRONOUNCED BY THE HON'BLE DELHI HIGH COURT IN T HE CASE OF PCITVS. ORACLE (OFSS) BPO SERVICE PVT. LTD. (ITA 124/2018) WHEREIN THE HON'BLE HC HAD OPINED THAT - 'THE COURT IS OF THE OPINION THAT THERE IS NO MERIT IN THE ` REVENUE'S ARGUMENTS. THE RPT FILTER, IS RELEVANT AND FITS 5 M.A.NO. 38/HYD/2019. CONEXANT SYSTEMS PVT. LTD., HYD. IN WITH THE OVERALL SCHEME OF A TRANSFER PRICING STUDY WHICH IS PREMISED PRIMARILY ON COMPARING LIGHT ENTITIES HAVING SIMILAR IF NOT IDENTICAL FUNCTIONS. THEREFORE, IF A PARTICULAR ENTITY PREDOMINANTLY HAS TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISE - IN EXCESS OF A CERTAIN THRESHOL D PERCENTAGE, ITS PROFIT MAKING CAPACITY MAY RESULTED IN A DISTORTED PICTURE, EITHER WAY. IN THESE CIRCUMSTANCES, THE ITAT, IN THE PRESENT CASE, FOLLOWED A PREVIOUS PRECEDENT AND WAS OF THE OPINION THAT A BROAD THRESHOLD FIGURE OF 25% RPT IN THE CASE OF CO MPARABLES WAS ESSENTIAL. APPLYING THAT RATIONALE, THE I TAT EXCLUDED SOME COMPARABLES LISTED IN THE TPO'S REPORT. THERE IS NO ERROR OF LAW PER SE IN THIS APPROACH.' 20. THIS STAND OF THE HON'BLE DELHI HC WAS AFFIRMED BY HON'BLE SUPREME COURT (DIARY NO(S)32 469/2018; [TS - 1248 - SC - 2018 - TP]). 21. FURTHER, THE ASSESSEE PLACES RELIANCE ON VARIOUS JURISDICTIONAL HON'BLE TRIBUNAL RULINGS WHEREIN SIMILAR APPROACH HAS BEEN UPHELD BY THE TRIBUNAL - NEBULAE TECHNOLOGIES PRIVATE LIMITED VS. DCIT ( I TA NO. 2114/HYD/201 1) UNITED ONLINE SOFTWARE DEVELOPMENT (INDIA) PVT. LTD. VS. THE ITO (ITA NO. 1480 /HYD/ 2010) NESS INNOVATIVE BUSINESS SERVICES P. LTD. VS. DCIT (ITA NO. 472/HYD/2011) ADAPTECH IN DIA (P) LTD. VS. THE ITO (ITA NO. 481/HYD/2011) HYUNDAI MOTORS INDIA ENGINEERING P. LTD. VS. THE ITO (ITA.NO.1850/HYD/2012) CORDYS SOFTWARE INDIA P. LTD., (FORMERLY CORDYS R&D (INDIA) P. LTD. VS. DCIT (ITA NO. 1451/HYD/201 0 ) TNS INDIA PVT. LTD. VS . ADDITIONAL CIT (ITA NO. 108/HYD/2011) INTERNATIONAL SPECIALTY PRODUCTS (I) PVT. LTD. VS. ITO (ITA NO. 218/HYD/2014) 22. BASED ON ALL THE FACTS MENTIONED ABOVE AND AVAILABLE JUDICIAL PRECEDENCE, THE APPLICANT HUMBLY SUBMITS THAT THE ORDER OF THE HON' BLE TRIBUNAL SUFFERS FROM MISTAKE APPARENT FROM RECORD AND THEREFORE, MAY BE CALLED AND RECTIFIED TO THE EXTENT DISCUSSED ABOVE. 6 M.A.NO. 38/HYD/2019. CONEXANT SYSTEMS PVT. LTD., HYD. 2 .2 IN VIEW OF THE AFOREMENTIONED FACTS AND CIRCUMSTANCES, THE ASSESSEE PRAYED THAT THIS MISCELLANEOUS APPLICATION UNDER SECT ION 254(2) OF THE ACT MAY KINDLY BE ADMITTED AND ADJUDICATED UPON, TO SUITABLY AND FAVOURABLY AMEND THE IMPUGNED ORDER UNDER CONSIDERATION, SO AS TO EXCLUDE COMPANIES FAILING 'RPT TO SALES' FILTER AND DIRECT THE RE - COMPUTATION OF ARM'S LENGTH PRICE ACCORDI NGLY. 3. ON THE OTHER HAND, LD. DR SUBMITTED THAT THERE IS NO MISTAKE APPARENT ON RECORD AND CANNOT REVIEW THE ORDER U/S 254(2) OF THE ACT. 4. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. AFTER CONSIDERING THE SUBMISSIONS MADE BY THE RIVAL PARTIES, WE ARE INCLINED TO RECALL OUR ORDER DATED 26/12/2018 FOR FRESH HEARING ON THE POINTS RAISED BY THE ASSESSEE IN THE MA. ACCORDINGLY, WE DIRECT THE REGISTRY TO POST THE APPEAL FOR FRESH HEARING ON THE ISSUES RAISED BY THE ASSESSEE IN THE MA. 5. IN THE RESULT, MA FILED BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 3 RD JULY , 201 9 . SD/ - SD/ - (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED: 3 RD JULY, 201 9 KV C OPY TO: - 1) M/S CONEXANT SYSTEMS PVT. LTD., 6 - 3 - 249/3/1, SSK BUILDING, 2 ND FLOOR, RANGA RAJU LANE, NAVEEN NAGAR, ROAD NO. 1, BANJARA HILLS, HYDERABAD 34 2) D C IT, CIRCLE 1 ( 2 ) , HYDERABAD 3) CIT(A) 1, HYD. , BENGALURU 4) PR. CIT 1 , HYDERABAD. 5 ) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABAD. 6 ) GUARD FILE 7 M.A.NO. 38/HYD/2019. CONEXANT SYSTEMS PVT. LTD., HYD. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER