9911796707
TMI Blog2019 (2) TMI 1808X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst final assessment order dated 19/06/2018 passed by the Assistant Commissioner of Income Tax, Circle-18(2), New Delhi [ hereinafter will be referred as the 'Assessing Officer'] in compliance to the direction dated 16/04/2018 of the Ld. Dispute Resolution Panel (DRP) for assessment year 2014-15. The grounds raised in the appeal are reproduced as under: "1. That on the facts and in the circumstances of the case and in law, the order passed by the Assessing Officer ("AO") is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the reference made by the AO suffers from jurisdictional error as the AO did not record any reasons in assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Transfer Pricing Officer ("TPO") for computation of the arm's length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ("Act"). 3. That on facts and circumstances of the case and in law, the TPO/AO/ Dispute Resolution Panel ("DRP") erred in making an addition of INR 42,11,57,036/- to the returned income of the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Freescale Semiconductor, Inc., USA. The company provides chip designing software development services to its associated enterprises (AEs). The assessee also provides marketing support services to its associated enterprises. The company operates through its centres at Noida and Bangalore, registered with Software Technology Park of India as 100% export oriented units and Hyderabad, registered with Special Economic Zone. For the services rendered, the assessee is being remunerated on the cost-plus basis by its associated enterprises. 3. For the year under consideration, the assessee filed return of income on 28/11/2004 declaring total income of ₹ 51,39,45, 910/-. The case was selected for scrutiny and the statutory notices under the Income Tax Act, 1961 (in short the Act) were issued and complied with. In view of the International Transactions carried out by the assessee with its Associated Enterprises. The Ld. Assessing Officer referred the matter of determination of arm's length price of those international transactions to the Ld. Transfer Pricing Officer (TPO), who after considering submission of the assessee, proposed transfer pricing adjustment as under: Segments Adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prises. The arm's length price of this international transaction of software development services was determined by the assessee by applying Transactional Net Margin Method (TNMM). The Operating Profit to Total Cost (OP/TC) ratio is taken as the Profit Level Indicator (PLI) in the TNMM analysis. The PLI of the software segment was worked out to 10% on cost. The assessee selected 9 comparables and worked out their average PLI at 10.07% as per the updated version. Accordingly, the assessee submitted that the value of the International transaction of the software development services was at arm's length price. 11. The Ld. TPO however, did not accept certain filters for selecting the comparables by the assessee and he rejected 6 comparables of the assessee and accepted balance 3 comparables. The Ld. TPO introduced 5 new comparables making the total comparables to 8. The Ld. TPO worked out the average of adjusted OP/OC of the comparables at 27.27% and worked out that adjustment to ₹ 48,43,20,261/-. The Ld. DRP directed further to include/exclude certain comparables. The final list of the comparables selected by the Ld. DRP and their average margin which is worked out to 25.02 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products, which supports the stand of the Revenue that the company was engaged only in software development services. With regard to the decision of the Tribunal in the case of Pubmatic India (P) Ltd. is concerned, he submitted that the decision relates to assessment year 2012-13 and cannot be used as precedent for comparing result with the assessment year in consideration i.e. AY 2014-15. 13.3. We have heard the rival submissions and perused the relevant material on record. The Ld. DRP has held that company is engaged in software development services though in the company's website " automation engineering " is mentioned but that is in context of automated testing services but no separate revenue has been shown in the annual report from such testing services and thus the company has been held to be engaged in software development services only. From the profit and loss account available on page 14 of the paper book and relevant note 20 on page 21 of the paper book, we find that the company has shown revenue of ₹ 32,96,59,883/-from sale of software including domestic and export. We also find that in the balance sheet nowhere inventory of software product is shown. The Ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I, travels and transportation and others are different verticals of the software development services function and the functions of product engineering i.e. Hitech segment has been segregated by the Ld. TPO and thus according to the Ld. DR the segment considered by the Ld. TPO is functionally similar to the assessee. On the issue of high-value intangibles, the Ld. DR referred to page 148 of the compilation of the Annual Reports and submitted that the intangible assets of the company as on 31/03/2014 consist of intellectual property of ₹ 1.5 crore and computer software of ₹ 15.50 crores. He also referred to the Annual Report of the assessee available on page 284-322 of the paper book and referred to page 303 containing details of the intangible fixed assets of ₹ 4.33 crores comprising of software of ₹ 3.33 crores, stamp duty ₹ 48.13 lakhs and assets retired from active use ₹ 52.35 lakhs. According to him the claim of the Ld. Counsel of high intellectual property is not correct and thus the company cannot be excluded on the ground of high intellectual property rights. 13.6 We have heard the rival submissions and perused the relevant material on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is profit and loss account of the company and page 475, which is note on Revenue Operation. According to the note on Revenue from Operations, the entire Revenue has been shown from sale of software services. Thus according to the Ld. DR the company is having only one segment of software development services and there is no sale of software products, which is evident even from no stock of software product in the balance sheet. The Ld. DR submitted that matter should be restored to the file of the Ld. TPO for verification of the revenue streams of the company, whether it includes revenue from sale of products. The Ld. DR also submitted that as per the balance sheet, the company has total intangible assets of ₹ 70 crores (which includes contractual rights brought forward of ₹ 54 Crores against total assets of ₹ 280 crore, which is not very significant and thus FAR of the company is similar to that of the assessee. 13.10 We have heard rival submission of the parties. We note from list of intangible assets available on page 469 of the Annual Report Compendium that the company is having net block of intangible assets as on 31st of March 2014 of ₹ 16.28 crores, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. TPO of company being a good comparable, wherein he has held that software development, implementation and support services are various sub segment of software development services only and require employment of software engineers. 13.14 We have heard the rival submissions and perused the relevant material on record. We find from the profit and loss account of the company available on page 616 of the Annual Report Compilation, that Revenue of ₹ 20,675.74 of the company has been shown from sale of products and the expenses include purchase of stock in trade amounting to ₹ 4021.19. But on further analysis of the profit and loss account, we find that there is no change in the inventory of stock-in-trade during the year under consideration. Thus there is no effect of purchase of stock-in-trade on the revenue stream, when it has not been sold during the year under consideration. As far as contention of the Ld. Counsel that assessee is having diversify business operation is concerned, we find that for this argument, the Ld. Counsel has relied on the policies followed by the assessee for recognising Revenue from different streams of the Revenue mentioned on page 627 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cording to the Ld. DR in view of this extraordinary event also this company cannot be compared with the assessee. 17. We have heard the rival submissions and perused the relevant material on record. We find that intangibles owned by the company are of ₹ 76.81 crores as against the intangibles of ₹ 3.3 crores owned by the assessee. Thus there is very wide variation in the assets owned by the company and assessee. Further, the profit during the year under consideration has been affected by the bad debt of ₹ 6490.49 lakhs and ₹ 1993.63 lakhs, which is an extraordinary transaction and not a routine feature of the business. Thus the profit results of the company during the year under consideration are not reliable for comparing with assessee. In view of the above discussion, we uphold the finding of the Ld. TPO that company is not suitable for considering as comparable. 18. As far as ground No. 3.5 and 3.6 of the appeal are concerned, neither any arguments were made by the Ld. Counsel nor any documentary evidence to support that the assessee does not bear any working capital risk. No evidences were also furnished in support of risk profile of the company as w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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