Freescale Semiconductor India Pvt Ltd New Delhi v. Dcit New Delhi

Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 1 P A G E Income Tax Appellate Tribunal Delhi Bench I 1 New Delhi Before Shri Bhavnesh Saini Judicial Member And Shri Prashant Maharishi Accountant Member Ita No 1263 Del 2015 Assessment Year 2010 11 Freescale Semiconductor India Pvt Ltd 13 Abul Fazar Road Bengali Market New Delhi Pan Aaacz 1978 P Vs Dcit Circle 9 2 Room No 405 Cr Building Ip Estate New Delhi Appellant Respondent Assessee By Shri Sd Kapila Adv Shri Ss Maurya Adv Revenue By Shri Amrender Kumar Sr Dr Shri Kumar Pranav Sr Dr Date Of Hearing 12 09 2017 Date Of Pronouncement 0 8 12 2017 O R D E R Per Prashant Maharishi A M 1 The Assessee Is A Company Engaged In The Business Of Designing Of Semi Conductor Products Software And Electronic Systems And Providing Sales And Technical Support Services It Is Providing Services To Its Associated Enterprise And Is Wholly Owned Subsidi Ary Of Freescale Semiconductor Inc Usa It Has A Software Technology Park Unit At Noida And Bangalore The Assessee Is Also Receiving Remuneration Based On The Contractual Low End Chip Designing Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 2 P A G E Services Based On Agreement On Cost Plus Model During The Y Ear The Assessee Has Entered Into Two Kind Of International Transaction As Under A Provision Of Software Development Services Rs 2188461983 B Provision Of Market Support Services Rs 37410881 2 According To The Transfer Pricing Study Report Submitted By The Assessee The Assessee Has The Functions Of Software Development Segment As Per Page No 176 Of The Paper Book According To That Assessee Is Carrying On In Activity From Its Noida Unit And Bangalore Unit With Regard To The Low End Chip Design Software Development Services Assessee Is Provided With The Detailed Specification From The Group Companies And Based On These Specifications Received From The Above Company The Assessee Perform Functions Are R Elated To Development Of Software That Can Be Embedded In The Semiconductor Chips The Complete Initialization Of The Process The Group Companies Conceptualize The Product And Create The Architectural Design Specification Thereafter A Part Of The Developm Ent Functions Is Outsourced To The Free Scale Indian Assessee And Other Group Companies According To The Assessee It Carries On Low Level Chip Designing And Develop The Software Tools Applications It Does Not Have Any Research And Development Activities But Only Provides Captive Service Is Based On Complete And Detailed Specifications Provided By The Group It Also Follows A Quality Review Process At Each Stage Of The Writing And Integration Of The Internet Protocol H Owever It Is Not Exposed To The Risk Arising Out Of The Quality Failure Or Failure To Meet The Timelines It Has Its Normal Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 3 P A G E Assets And It Does Not Carry Much Risk As Compared With An Independent Enterprise This Functional Profile Remains Undisputed 3 In The Transfer Pricing Documentation Of Software Development Services Assessee Was Selected As The Tested Party And Transaction Net Margin Method Tnmm Was Adopted As The Most Appropriate Method Mam The Assessee Selected 9 Comparables Whose Average Profit Margin Was 11 73 Slecting Op Tc As The Profit Level Indicator Pli And Therefore The Margin Earned By The Assessee Of 10 61 On Profit Level Indicator Pli Of Operating Profit To Operating Cost And Therefore International Transactions Of Software Development Was Treated At Arms Length 4 In Market Support Services The Assessee Selected 5 Comparables Whose Average Margin Was 7 3 7 As Against Taxpayers Margin Of 6 14 And Therefore The International Transaction Of Market Support Services Was Stated To Be A Arms L Ength 5 The Ld Transfer Pricing Officer Rejected The Transfer Pricing Study Report For Software Development Services He Carried Out Fresh Search Applying Different Filters And Accordingly Selected A Set Of 1 6 Comparables Whose Arithmetic Mean Of The Margi N Was 25 94 Therefore On The Software Development Services Of Rs 2158119855 He Proposed An Adjustment Of Rs 297434495 6 For Marketing Support Services Of Rs 36872941 He Used The 5 Comparables Their Adjusted Pli Of Operating Profit To Operatin G Cost Was Determined 21 65 Therefore He Made An Addition Of Rs 5389308 Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 4 P A G E 7 Therefore He Proposed An Adjustment On Account Of Software Development Services Of Rs 297434495 And On Marketing Support Services Of Rs 5389308 Making The Total Adjustm Ent Of Rs 302823803 By Order Dated 16 01 2014 Passed U S 92 Ca 3 Of The Act By The Adl Cit Transfer Pricing I 2 New Delhi The Ld Assessing Officer Passed Draft Assessment Order Incorporating The Above Adjustment To The Returned Income Of Rs 180911 965 As Per Roi Filed On 29 9 2010 8 The Assessee Preferred Objection Before The Ld Dispute Resolution Panel 1 New Delhi Who Passed The Direction U S 144 C 5 Of The Act On 12 12 2014 The Ld Dispute Resolution Panel Directed The Ld Assessing Officer Tpo To Modify The Adjustment On Account Of Transfer Pricing From Rs 302823803 To Rs 259842195 Consequently The Ld Assessing Officer Passed The Assessment Order U S 143 3 Read With Section 144 C Of The Act On 30 1 2015 Determining Total Taxable Income Of The Assessee At Rs 440753890 Therefore Aggrieved The Assessee Has Raised The Following Grounds Of Appeal In Ita No 1263 Del 201 5 For The Assessment Year 20 10 11 Before Us 1 That On The Facts And In The Circumstances Of The Case And In Law The Order Passed By The Learned Assessing Officer Ld Ao Is Bad In Law And Void Ab Initio 2 That On Facts And Circumstances Of The Case And In Law The Ld Ao Ld Tpo Ld Dispute R Esolution Panel Drp Erred In Making An Addition Of Rs 25 98 42 195 Under Section 92 Of The Act By Re Computing The Arms Length Price Of The International Transactions In Software Development Segment Sds And Market Support Segment Mss 3 The Ld Ao Ld Tpo Ld Drp Erred In Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 5 P A G E 3 1 Not Accepting The Quantitative Filters Applied By The Appellant In Its Transfer Pricing Documentation Fresh Search And Has Instead Applied Certain Modified Quantitative Filters Which Lack Valid Basis 3 2 Rejecting The Co Mpanies Finally Selected By The Appellant As Comparable In Both The Segments 3 3 Selecting Companies Which Are Not Comparable In Terms Of Function Assets Andnrisk Profile As Also Companies With Abnormally High Turnover Or Margin 3 4 Not Providing Benefi T Of Economic Adjustment On Account Of Difference Risk Profile In Arriving At The Arms Length Mean Margin For Both The Segments 3 5 Wrongly Computing The Margin Of Some Of The Comparables 4 The Ld Ao Ld Tpo Ld Drp Considered The Current Year I E Financial Year 2009 10 Data For Comparability Despite The Fact That At The Time Of Comparison Done By The Appellant Data For Financial Year 2009 10 Was Not Available Within The Public Domain 5 The Ld Ao Ld Tpo Ld Drp Erred In Not Appreciating The F Act That The Assessee Is A Company Incorporated Under The Provisions Of The Companies Act 1956 And Enjoying The Tax Holiday Benefits Conferred Under The Tax Holiday Benefits As Per The Software Technology Park Of India Herein After Referred To As Stpi Scheme 6 On The Facts And Circumstances Of The Case The Ld Ao Has Erred Both In Facts And In Law In Initiating Penalty Proceedings Under Section 271 1 C Of The Act 7 That The Ld Ao Erred In Facts And In Law In Charging And Computing Interest Under Section 234 B And 234 D Of The Act 9 At The Time Of Hearing Before Us The Ld Authorised Representative Stated That Assessee Is Contesting Inclusion Of Infinete Data System Infosys Limited E Infochips Private Limited In Software Development Support System He Also Contested That Sonata Software Limited Does Not Cross The Filter Of 25 Of Related Party Transaction Rpt Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 6 P A G E Adopted By The Ld Transfer Pricing Off Icer And Therefore It Should Also Be Excluded In Marketing Support Services It Is Contesting For Exclusion Of The T Sr Darashaw Ltd And Global Procurement Consultant Ltd He Submitted That Assessee Does Not Raise Any Other Claim Other Than Exclusion Of Abo Ve Comparables From The Comparability Analysis With Respect To Both The Segments 10 With Respect To Infinite Data Systems Private Limited Assessee Objecting It On Functional Dissimilarity Services To Single Customer Abnormal Supernormal Profits Fluctuati Ng Trends And Significant Intangibles The Above Objection Of The Assessee Was Rejected By The Ld Transfer Pricing Officer Stating That Assessee Has Not Demonstrated How The Services To A Single Customer Is Not Comparable To It As Assessee Services Are A Lso To Its Single Associated Enterprise Only With Respect To The Functional Dissimilarity Same Was Also Rejected Other Issues With Respect To Abnormal Margins Supernormal Growth Have Also Been Rejected He Also Rejected The Contention Of The Assessee Th At Company Owns Significant Intangibles In The Form Of Software Similar Arguments Were Also Advanced Before Us By The Ld Authorised Representative Stating That The In Finite Data Systems Private Limited Should Be Excluded From The Comparability Analysis For This He Relied On The Decision Of The Coordinate Bench In Ita No 1051 Kol 2015 For Assessment Year 2009 10 Dated 19 10 2016 Wherein At Para No 8 3 The Above Comparable Was Excluded From The Comparability Analysis In Case Of A Labvantage Solutions Private Limited Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 7 P A G E 11 The Ld Departmental Representative Vehemently Objected To The Claim Of The Ld Authorised Representative About Exclusion Of The Above Comparables Stating That Ld Transfer Pricing Officer As Well As The Ld Drp Has Given Adequate Reason S For Inclusion Of The Above Comparable It Was Further Stated That Ld Authorised Representative Has Not Challenged It On The Functional Analysis With Of Comparable As Well As Of The Assessee And Therefore The Above Comparable Cannot Be Excluded 12 We Have Carefully Considered The Rival Contentions And Also Perused The Functional Profile Of The Assessee As Well As Of The Comparable With Respect To The Software Development Services Which Has Been Mentioned Earlier According To The Assessee Comparable Compa N Y Is Providing Services Of Technical Consulting Design And Development Of Software Maintenance System Integration Implementation Testing And Infrastructure Management Services These Services Except Infrastructure Management Services Have Also Been Re Ferred To A Technical Support Services In Revenue Recognition Portion And Has A Software Technical Consultancy Services In Segment Reporting Portion Of The Annual Report According To The Assessee All The Services Are In The Nature Of The Software Developm Ent Services The Ld Transfer Pricing Officer As Well As The Ld Drp Panel Has Rejected The Objection Of The Assessee Stating That This Is Functionally Comparable With The Assessee Assessee Neither Design And Develop A Software But Is Providing A Low En D Chip Services Where Infrastructure And Architect Everything Is Provided By The Group Company It Does Not Have Any Research And Development Activities Whereas In The Case Of The Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 8 P A G E Comparable Company It Provides That Services To Fujitsu Services Ltd And Als O Maintains And Design And Develop A Software In View Of This This Comparable Company Cannot Be Said To Be In The Same Functions As It Is Performed By The Assessee In View Of This We Direct The Ld Transfer Pricing Officer Ao To Exclude The Above Compara Ble Company As Its Functions Are Quite Different With The Functions Performed By The Assessee 13 The Ld Ar Ha S Also Objected Against The Inclusion Of The Einfo Chips Bangalore Ltd Assessee Has Objected Before The Ld Transfer Pricing Officer That This Com Pany Is Functionally Not Comparable Segmental Dat A Are Not Available It Ha S Abnormal Supernormal Profits It Has The Fluctuating Trends It Has A Significant Intangibles And Fails 10 Rpt Filter The Ld Transfer Pricing Officer Rejected The Claim Of The Assessee Stating That Annual Report Of The Above Comparable Company Shows That It Is Functionally Comparable As It Develops Software For Its Clients And Do Not Perform Any It Enabled Services The Ld Dispute Resolution Panel Also Confirmed The Actio N Of The Ld Transfer Pricing Officer The Ld Authorised Representative Reiterated The Same Arguments Which Were Raised Before The Ld Lower Authorities Over And Above Ld Ar Relied Up On Decision Of The Coordinate Bench In Ita No 1051 Kol 2015 For As Sessment Year 2009 10 Dated 19 10 2016 Wherein In Para No 8 2 The Above Comparable Company Was Excluded 14 The Ld Departmental Representative Vehemently Submitted That The Ld Transfer Pricing Officer And The Ld Dispute Resolution Panel Has Given En Ough Reasons For Inclusion Of The Above Comparable And The Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 9 P A G E Ld Authorised Representative Could Not State Anything Further That How The Order Of The Ld Transfer Pricing Officer And The Ld Dispute Resolution Panel Is Erroneous But Merely Citing A Decision Does Not Help The Case Of The Ld Authorised Representative As It Was Compared With The Functions Of The That Appellant In That Case 15 We Have Carefully Considered The Rival Contention F Rom The Business Profile Of The Above Company It Is Evident That It I S Engaged In The It And It Enabled Services Further As Stated In The Order Of The Coordinate Bench At Para No 8 2 In Ita No 1051 Kol 2015 That Segmental Information Is Not Available In Case Of It And Ites Services Provided By The Above Comparable The A Ssessee Has Further Stated That It Is Providing The Wide Range Of Services Such As Software Firmware Hardware Field Programmable Gate Array Application Specific Integrated Circuits Quality Assurance And Testing The Ld Transfer Pricing Officer Himself Has Stated That The Reference To The Website Of The Company Is Not Of Much Help As It May Not Have Information Which Pertain To The Assessment Year 2010 11 We Have Carefully Perused The Balance Sheet Of The E Info Chips Bangalore Ltd Provided To Us At Page No 637 654 Of The Paper Book Wherein It Was Noted That At Page No 651 The Earnings Of The Assessee Was Shown To Be Software Development Services And Consultancy Charges In Item No 9 It Is Stated That The Company Is Engaged In Development And Mai Ntenance Of Computer Software Production And Sale Of Software A T Page No 652 While Giving The Segmental Information It Was Also Maintained That The Company Is Primarily Engaged In Software Development And It Enabled Services Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 10 P A G E Which Is Considered As The Only One Reportable Segments And Therefore There Is No Segmental Information Available With Respect To The Software Development Activities As Well As It Enabled Services In View Of This The Above Comparable Is Required To Be Excluded From The Comparab Ility Analysis Of The Software Development Service Segment Of The Assessee Accordingly We Direct The Ld Transfer Pricing Officer To Exclude E Info Chips Bangalore Ltd 16 The 3 Rd Comparable Is Contested By The Ld Authorised Representative Is With Respect T O The Infosys Limited Which Has Already Been Excluded In The Case Of The Assessee For Earlier Years Following The Decision Of The Hon Ble Delhi High Court The Assessee Reiterated The Same Submission With Respect To Exclusion Of The Above Comparable As Sub Mitted Before Ld Transfer Pricing Officer It Was The Contention Of The Assessee That It Has A Huge Brand Value It Has Huge Turnover And Its Finacle Software Is A Leading Product In Banking Industry Therefore It Was Submitted That It Is Functionally Different And Has Significant R D The Ld Transfer Pricing Officer And The Ld Dispute Resolution Panel Rejected The Above Contention Before Us The Ld Ar Submitted That This Comparable Should Be Excluded In View Of The Decision Of Honble Delhi High Court In Case Of Agnity India Technologies Ltd 262 Ctr 291 He Further Stated That This Comparable Has Been Excluded In The Case Of The Assessee For Ay 2007 08 By The Coordinate Bench 17 The Ld Dr Relied Upon The Orders Of The Lower Authorities The Ld Dr Could Not Point Out That Why We Should Not Follow The Decision In The Assessees Own Case Without There Being Any Change Pointed Out Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 11 P A G E Hence We Respectfully Follow The Decision Of The Coordinate Bench In Assessees Own Case For Ay 2007 08 And Directs The Ld Tr Ansfer Pricing Officer To Exclude The Above Comparable 18 The 4 Th Comparable Contested By The Ld Authorised Representative Is With Respect To The Sonata Software Limited Stating That It Breaches Rpt Filter Adopted By The Ld Transfer Pricing Officer He R Eferred To The Page Number 769 2836 Of The Balance Sheet Of The Comparable Company Showing That Its Rpt Is Higher Than The Filter The Similar Objection Was Raised By The Ld Authorised Representative With Respect To The Earlier Years Wherein We Have Set A Side This Comparable To The File Of The Ld Transfer Pricing Officer For Verification Of The Claim Of The Assessee With Respect To Related Party Transactions Therefore Accordingly The Assessee Is Directed To Produce Before The Ld Is Assessing Officer Tra Nsfer Pricing Officer Computation Of The Related Party Transactions And Ao May Verify The Same And If It Is Found In Accordance With The Claim Of The Assessee Then Above Comparable Company May Be Excluded Otherwise No Interference Is Required In Respect Of The Above Comparable 19 Coming To The Market Support Services Of The Company Assessee Is Contesting The 2 Comparables I Tsr Darswhwa Limited And Ii Global Procurement Consultants Limited The Assessee Reiterated The Same Arguments Which Were Raised Before The Ld Transfer Pricing Officer And The Ld Dispute Resolution Panel About The Functional Dissimilarity Of The Above Comparables With The Functions Performed By The Assessee However The Ld Lower Authorities Rejected The Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 12 P A G E Contention Of The Assesse E The Same Arguments Were Advanced Before Us By The Ld Authorised Representative 20 The Marketing And Sales Support Services Rendered By The Assessee Are Tabulated At Page No 24 Of The Transfer Pricing Documentation Is Study Of The Assessee According To That Services Provided By An Indian Entity In Monitoring And Analysing The Indian Market It Collects Information Such Information Pertaining To Market Trends Key Policy Changes In The Industry Etc Provided To The Core Group Companies It Has Its In Nutsh Ell The Group Companies In Identifying Customers And Provides Market Related Information It Acts As A Coordinator Between The Group Companies And The Customers Located In India With Respect To The Sales Of The Groups Products And Solutions In India The E Mployees Of The Assessee Further Supports Technical Support To Various Customers During The Development Of Any Product Or Application In India 21 First Coming To The Comparability Analysis With Respect To Tsr Darashaw Ltd Whose Annual Accounts Are Provided B Y The Assessee In Paper Book At Page No 1237 1278 The Above Companies Engaged In The Business Of Payroll Processing Traditional Registry System And Record Management Systems Etc Therefore Mainly The Comparable Company Is Engaged In The Business Of Registrar And Transfer Of Shares Records Management And Payroll Processing This Comparable Has Been Selected By The Ld Transfer Pricing Officer Which Is Engaged In Three Segments Such As Registrar And Transfer Agent Activit Y Records Management Activity And Pay Roll And Trust Fund Activity According To The Ld Transfer Pricing Officer And Ld Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 13 P A G E Dispute Resolution Panel This Is A Good Comparable However The Ld Authorised Representative Submitted That This Company Is Engage D In Share Registry Services And Other Support Services Further As Per Annual Report Of The Company It Is Primarily Engaged In Provision Of Share Registry And Related Financial Services And Therefore Cannot Be Compared With The Assessee A Captive Marke T Support Service Provider It Is Also Contended That Company Has Earned A High Profit Margin Of 41 86 During The Fy 2009 10 The Ld Authorised Representative Placed Reliance In This Regard On The Decision Of Delhi Itat In Case Of Microsoft Corporation I Ndia P Ltd Vs Dcit Ita 5766 Del 2011 We Have Carefully Considered The Rival Contention And Perused The Balance Sheet Of The Company Which Is Placed The Paper Book Which Says That It Is Mainly Enga Ged In The Business Of Registrar And Share Transfer Agent As Per Segment Reporting Shows That Out Of The Total Turnover Of 1089 53 Lakhs And Rs 116 36 Lacs Of The Turnover Goes To The Registry And Share Transfer Agent Business And Records Management Se Rvices The Functions To Be Performed With Respect To The Registry And Share Transfer Agent Are Altogether Dissimilar To The Functions To Be Performed By A Procurement Advisor Like Assessee It Is Also Not The Case Of The Revenue That Only Some Of The Segm Ent Of The Comparable Is Required To Be Considered But The Ld Transfer Pricing Officer Has Considered The Whole Of The Company As Functionally Comparable To The Assessee With Which We Disagree Therefore We Direct The Ld Transfer Pricing Officer Ao To Exclude This Comparable For Being Functionally Dissimilar Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 14 P A G E 22 The Next Comparable Contested Is Global Procurement Consultants Ltd The Ld Transfer Pricing Officer Has Included This Comparable And According To Him This Company Acts As The Clients Representa Tive In Taking On The Total Responsibility Of Procurement By Providing A Comprehensive Range Of Procurement Related Advisory Services And Allied Activities For Projects In India And Abroad The Main Functions Of The Company Are Preparing And Reviewing Tech Nical Specifications Estimation Of Costs Selection Of Vendors Inspection And Expediting Quality Control And Time Management The Ld Authorized Representative Has Contested That This Company Is Engaged In Business Of Shipping Logistics Payment And Acc Ounting Know How Transfer Training And Bid Support Services Which Are Not Similar To Services Provided By The Assessee It Also Renders Financial Advisory Services It Was Further Contested That It Has Abnormal And Volatile Margins The Assessee Has Sub Mitted The Balance Sheet Of The Company Which Is Placed At Page No 1279 1323 Of The Paper Book According To The Revenue Model Of The Company It Is Providing Services Of Procurement Advisory Services And Back Office Support To The Regional Procurement O Fficers Of The World Bank Reviewing Their Technical Specification Of The Goods Planned To Be Procured The Major Earning Of The Company Is From Consultancy Services In These Areas Only On Perusing The Functional Profile Of This Comparable Company We Are Of The View That Functions Performed By This Comparable Company Are Comparable With The Functions Performed By The Assessee Hence We Reject The Argument Of The Ld Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 15 P A G E Authorised Representative Of The Functional Dissimilarity Of This Comparable 23 Accordingly Appeal Filed By The Assessee Is Partly Allowed With Respect To Comparables In Software Development Segment Directing Ld Tpo Ao A To Exclude Infosys Limited Infinite Data Systems Limited And E Info Chips Bangalore Limited From Software Development Segment B To Reexamine The Claim Of The Assessee Of Sonata Software Limited Not Passing The Filter Of Related Party Transactions C To Exclude Tsr D Arshwa Limited From Marketing Support Services Segment 24 As Ther E Were No Other Grounds Pressed By The Ld Ar Before Us Other Than Adjudicated Above Hence We Dismiss Remaining Grounds Of Appeal 25 In The Result Appeal Of The Assessee For Ay 20 10 11 Is Partly Allowed Accordingly 26 Order Pronounced In The Open Court On 0 8 12 2017 S D S D Bhavnesh Saini Prashant Maharishi Judicial Member Accountant Member Dated 0 8 12 2017 A K Keot Copy Forwarded To 1 Applicant Freesscale Semiconductor India Private Limited V Dcit Ita No 1263 Del 2015 A Y 2010 11 16 P A G E 2 Respondent 3 Cit 4 Cit A 5 Dr Itat Assistant Registrar Itat New Delhi