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ST Microelectronics Pvt. Ltd. Versus Addl. Commissioner of Income Tax, Special Range-8, New Delhi

2018 (1) TMI 325 - ITAT DELHI

TPA - rejection/non-inclusion of certain companies as comparable which were otherwise functionally similar, on the ground that they follow accounting year other than financial year - Held that:- As decided in CIT-II Vs Mckinsey Knowledge Centre India Pvt. Ltd. [2015 (3) TMI 1226 - DELHI HIGH COURT] the revenue submits that comparable was correctly rejected by TPO because the company had different financial year ending on December, 2006, whereas Assessee’s financial year ended on March, 2006. The .....

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available data on record, the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings.”. Thus resorted this issue back to the file of the TPO/AO with the direction to include the aforesaid comparable, if from the available data on record, the results for financial year can reasonably be extrapolated. - Inclusion of amount pertaining to ESOPs twice in the operating cost bas .....

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nable opportunity of being heard to the assessee. - Treatment of the foreign exchange fluctuation gain/loss as a non-operating item while computing the operating margin of the assessee and of the comparables companies - Held that:- Hon’ble Supreme Court in the case of CIT Vs Woodward Governor India P. Ltd. (2009 (4) TMI 4 - SUPREME COURT) held that Loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expendi .....

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on Panel ( DRP ) erred in fact and law by upholding the adjustment proposed by the Additional Commissioner of Income Tax - Special Range-8, New Delhi ( learned AO )/ learned Transfer Pricing Officer ( Ld. TPO ) wherein the Ld, AO/ Ld, TPO has held that the Appellant's international transaction of provision of design implementation and maintenance with respect to integrated circuit ( I/Cs ) and software development services with its Associated Enterprises ( AEs ) does not satisfy the arm' .....

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computing operating margin of the Appellant and of the comparable companies; 1.4. disregarding the arm's length price ( ALP ) determined by the Appellant in the transfer pricing ( TP ) documentation maintained by it, in terms of section 92D of the Act, by not accepting the economic analysis undertaken by the Appellant and conducting a fresh economic analysis and in particular modifying/rejecting the filters applied by the Appellant; 1.5. The Ld. TPO erred in law in applying certain incorrect .....

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ollow accounting year other than financial year; 1.8. not appropriately considering the functions, assets and risk profile of the companies used for comparison with the Appellant, thereby including in the final comparable set certain companies with completely different functional profile; 1.9. committing errors in the computation of the operating profit margins of the Appellant and of the comparables selected for benchmarking the international transaction; 1.10. introducing companies in the fina .....

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t which was the prescribed range applicable for the relevant AY as per proviso to section 92C(2) of the act; 1.13. dis-regarding judicial pronouncements in undertaking the TP adjustment; 1.14. in initiating penalty proceedings under Section 271(1)(c) of the Act. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant prays for leave to add, alter, amend and/ or modify any ground of appeal at or before the hearing of the appeal. The Appellant prays fo .....

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brief are that the assessee company was incorporated in India and is a subsidiary of ST Microelectronics Pte. Ltd. The assessee filed the return of income on 28.11.2012 declaring an income of ₹ 49,16,03,970/-. Later on, the case was selected for scrutiny. The AO, in respect of international transactions entered into by the assessee referred the matter to the TPO u/s 92CA(3) of the Act. The operating profit margin (OP/OC) was computed by the assessee in the TP study at 11.54%, the average .....

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td. (Seg.) -14.62 iii. CAT Technologies -4.41 iv. CTIL Ltd. 10.50 v. Cigniti Technologies Ltd. 8.02 vi. Evoke Technologies 12.81 vii. Helios Matheson Information Technology Ltd. 12.41 viii. Infomile Technologies Ltd. 5.08 ix. Larsen and Toubro Infotech Ltd. 23.65 x. Prism Informatics Ltd. 12.77 xi. RS Software (India) Ltd. 16.39 xii. Thinksoft Global Ltd. 12.74 xiii. Mindtree India Ltd. 16.16 xiv. Persistent Systems ltd. 24.93 xv. R Systems International ltd. 3.09 xvi. Sasken Communication Ltd. .....

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23.79% v. RS Software (India) Ltd. 15.43% vi. Mindtree India Ltd. 19.19% vii. Persistent Systems Ltd. 26.92% viii. Sasken Communication Ltd. 14.58% ix. Ybrant Digital Ltd. (LGS Global Ltd.) 19.34% x. Zylog Systems Ltd. 33.01% xi. Acropetal Technologies Ltd. (seg.) 17.75% xii. Infosys Ltd. 42.15% xiii. Spry Resources Pvt. Ltd. 33.59% xiv. E-Zest Solutions Ltd. 17.51% Average 20.78% 7. The TPO proposed an adjustment of ₹ 29,14,20,630 in his order dated 24.10.2016. Thereafter, the AO passed .....

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erly financials of the company were available. The assessee also asked for the exclusion of M/s Infosys Technologies Ltd. and M/s Larsen & Toubro Infotech Ltd. on account of high turnover, intangibles, different business modules, significant branding etc. The ld. DRP directed to exclude the above said comparables on account of difference in FAR. The assessee also sought exclusion of M/s Persistent Systems Ltd., M/s Sasken Communication Technologies Ltd., M/s Zylog systems Ltd. However, the l .....

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f human assets, for which no adjustment can be made, this company is rejected. Business circumstances such as incurring losses cannot be sole ground for rejection of a comparable companies. It falls a valid filter, Hence validity Excluded 2. Thinksoft Global Services Limited ( Thinksoft ) "The company is functionally different as it is a Low end software service provider, not comparable to Assessee high end functions." The company generates majority revenue from software services while .....

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the said filter. On the baas of the same, it is prayed that this comparable should be accepted. It fails a valid filter adopted by the TPO. Hence action of the TPO is upheld 4. Caliber Point Business Solutions Limited (Caliber Point) The company is Functionally different as it generates income mainly from BPO services. Further, this company is failing the different financial ending filter. IT segment of Caliber is engaged in the provision of Software development services. Since, Caliber is Funct .....

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O is upheld. 8. Thereafter, the TPO by considering the directions of the ld. DRP worked out the adjustment at ₹ 22,52,63,184/- vide order dated 25.05.2017 and on the same date the AO passed the assessment order by making an addition of ₹ 22,52,63,184/- on account of arm s length price of the international transaction. 9. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the quarterly financial data in respect of the comparables was available. Therefore, t .....

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sions of both the parties and perused the material available on the record. In the present case, it is noticed that on a similar issue relating to different financial year, the Hon ble Jurisdictional High Court in the case of CIT-II Vs Mckinsey Knowledge Centre India Pvt. Ltd. in ITA 217/2014 vide order dated 27.03.2015 held as under: 14. The Revenue is in appeal before this Court questioning the admissibility of the above mentioned comparables while computing Arm s Length Price regarding the IT .....

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. There is nothing shown to the court that supports the revenue s argument that the ITAT fell into error in holding that if a comparable is following different financial year then the same cannot be included in the list of comparables selected for benchmarking the international transaction. Therefore, the ITAT has held that if the comparable is functionally same as that of tested party then same cannot be rejected merely on the ground that data for entire financial year is not available. If from .....

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extrapolated. 13. Vide Ground No. 1.2, the grievance of the assessee relates to the inclusion of the amount of ₹ 3,33,10,161/- pertaining to ESOPs twice in the operating cost base of the assessee. 14. This issue was agitated by the assessee before the ld. DRP by stating that certain expenses were considered twice, thus, rendering the results spurious. It was stated that the TPO had erroneously included an amount of ₹ 3,33,10,161/- pertaining to ESOP twice in the operating cost base o .....

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order without making any correction in the adjustment proposed by the TPO. 15. Now the assessee is in appeal. The ld. Counsel for the assessee drew our attention towards page no. 318 of the assessee s paper book which is the copy of the notes to Form 3CEB wherein in para 5, it has been stated that ST Microelectronics N. V. has transferred shares to employees of the assessee and has charged ₹ 3,33,10,161/- on account of the same, this transaction has been closely linked to the provision of .....

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ts employees are on an accrual basis. The ld. Counsel for the assessee submitted that the amount of ₹ 3,33,10,161/- was deleted from the liability and thereafter liability at the end of the year was determined. A reference was made to page no. 338 of the assessee s paper book which is the working of the liability of ESOP. It was contended that despite overwhelming evidence as per the audited financial statement and in the Form 3CEB supporting the assessee s contention, none of which had be .....

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t has been done than no adjustment is required on account of transfer price which will come within the range of ±5%. 16. In his rival submissions the ld. DR strongly supported the orders of the authorities below. 17. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that the directions given by the ld. DRP has not been appreciated by the TPO in right perspective. It also appears that the .....

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computing the operating margin of the assessee and of the comparables companies. 19. As regards to the above issue, the ld. Counsel for the assessee submitted that it is now covered against the revenue and in favour of the assessee by the judgment of the Hon ble Jurisdictional High Court in the case of Pr. CIT, Delhi-I Vs Agilis Information Technologies International (I) Pvt. Ltd. in ITA No. 907/2015, order dated 08.02.2016. A reference was made to page nos. 1774 & 1775 of the assessee s com .....

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Notification dated 18.09.2013, the TPO was justified in treating income/loss on account of foreign exchange fluctuation as non-operating cost. 21. We have considered the submissions of both the parties and perused the material available on the record, it is noticed that on a similar issue, the Hon ble Supreme Court in the case of CIT Vs Woodward Governor India P. Ltd. (supra) held as under: Loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of .....

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