NXP India Pvt. Ltd. Vs DCIT (ITAT Bangalore)
Conclusion: Exclusion of comparables from the list of comparables on basis of turnover, functional difference for determination of Arms Length Price was valid.
Held: Assessee-company was engaged in the activities in India, which included design and sales agent support services NXP’s design competence centre in Bangalore offered user solutions for vibrant media technologies and focused on automotive, identification and software businesses. For the above determination of Arms Length Price (ALP), assessee selected 25 comparables, however, TPO limited the comparables to the extent of 10 out of which 4 selected by the assessee were retained by the TPO. TPO made transfer pricing adjustment. However, DRP confirmed 9 comparables out of the above 10 comparables. Assessee had challenged for the exclusion of the five comparables – Persystent Systems Limited, Larsen & Toubro Infotech Limited, Infosys Limited, Genesys International Corporation Limited, Sasken Communication Technologies Limited. It was held that Persystent Systems Limited was having revenue of 8103.64 Million from software services and other income of 323.76 million from income from other sources. Assessment year 2012-2013 was an abnormal year of operation to Persystent Systems Limited, which was evident from the annual report placed on record by the assessee in its paper book. Further, Persystent Systems Limited was having intangibles to the tune of 2402.67 million as evident from its balance sheet ended on 31.03.2012. Being so, it was not comparable to assessee’s case. As regarding Larsen & Toubro Infotech Limited engaged in development of software onsite and its overseas revenue for the financial year 2011-2012 was Rs.27,838,752,995 and domestic revenue was Rs. 1,756,792,454. Further in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1939/Bang/2017 for assessment year 2012-2013 – order dated 31.10.2018 has taken the same view that it could not be a comparable with that of the assessee. Being so,TPO was directed to exclude the same from the list of comparables. Infosys Limited was engaged in a leading global technology services corporation. The company provided business consulting, technology, engineering and outsourcing services to help clients build tomorrows enterprise. In addition, the company offered software products for the banking industry. It owned high brand value at Rs. 56,286 crore in the year 2012 and brand value as a percentage of market capitalization was 34.2%, and also incurred huge amount for research and development at Rs.5 crore as a capital expenditure and Rs.655 crore as a revenue expenditure for the year ended 31st March, 2012. Therefore, it could not be said to be a comparable. TPO was directed to exclude Infosys Limited from the list of comparables. Genesys International Corporation Limited was functionally different from assessee’s case. Further, no segmental information was available. It had high research and development expenditure incurred as on 31.03.2012. Intangible was very high and also have high brand value. Being so, this company could not be considered as a comparable company. Sasken Communication Technologies Limited earned revenue from 3 segments. However, the segmental operating margins were not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data could not be considered as comparable with the assessee for software development services segment. Accordingly, the above five were excluded from the list of comparables.
FULL TEXT OF THE ITAT JUDGEMENT
These appeals filed by the assessee are directed against two separate orders of the CIT(A), dated 30.01.2017 and 24.10.2017 for the assessment years 2012-2013 and 20132014, respectively.
First, we shall take up IT(TP)A No.692/Bang/2017 for assessment year 2012-2013 for adjudication.
IT(TP)A No.692/Bang/2017 : Asst. Year 2012-2013 :
2. The assessee has raised the following grounds:-
“Based on the facts and circumstances of the case and In law, NXP India Private Limited (Successor of NXP Semiconductors India Private Limited) (hereinafter referred to as ‘Appellant”) respectfully craves leave to prefer an appeal against the order passed by Deputy Commissioner of Income Tax, Circle-5(1)(1) (Assessing Officer” or “AO”), dated 30 January 2017 for A Y 2012-13, under section 143(3) read with section 144C of the Income Tax Act, 1961 (“the Act”) pursuant to the directions issued by the Honourable Dispute Resolution Panel (“Hon’ble DRP”), Bangalore dated 01 December 2016 under section 144C(5) of the Act (“the impugned order”), inter-alia on the following grounds:
That on the facts and circumstances of the case and in law:
General Grounds
1. The impugned order and directions of the Hon’ble DRP are based on incorrect appreciation of facts and wrong interpretation of law and therefore, are bad in law;
2. The learned AO / Transfer Pricing Officer (“TP0′) has erred in assessing the total income at INR 324,935,945 as against the returned income of INR 244,543,220 computed by the Appellant in its return of income for A Y 2012-13;
3. The learned AO has erred in law and in fact, in determining a sum of INR 40,638,140 as the balance tax demand payable by the Appellant;
Transfer Pricing grounds
4. The Hon’ble DRP has erred in, law and facts, by upholding the stand of learned AO/ TPO of not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (“the Rules”), and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant’s international transaction is not at arm’s length;
5. The learned AO/TPO erred in making an addition of INR 70,609,072 to the total income of the Appellant on account of adjustment in the arm’s length price (“ALP”) of the provision of software development (“SWD”) services transaction entered by the Appellant with its associated enterprise;
6. The learned TPO/AO has erred, in law and in facts, by determining the arm’s length margin! price using only Financial Year (“FY”) 2011-12 data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and the Hon’ble DRP has erred in upholding the said stand of the learned TPO/AO;
7. The learned AO/ TPO has erred in law and facts by rejecting certain comparable companies considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters:
(A) by rejecting certain comparable companies identified by the Appellant for having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months);
(b) by rejecting certain comparable companies identified by the Appellant using export earnings greater than 75% of the sales as a comparability criterion;
(c) by rejecting certain comparable companies identified by the Appellant using employee cost greater than 25% of the total revenues as a comparability criterion;
8. The Hon’ble DRP has erred in, law and facts, by holding that the functions of the Appellant are highly complex and complicated in nature;
9. The learned AO/ TPO has erred in law and in facts by accepting/ rejecting certain companies based on unreasonable comparability criteria.
10. The learned AO/ TPO erred in law and in facts by erroneously computing the margins of certain comparable companies.
11. The learned AO / TPO have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the corn parables.
Corporate Tax Grounds
12. The learned AO has erred in law and in facts, in disallowing the stock compensation expense amounting to INR 6,523,426 on the basis that, tax has not been deducted at source on the amount of perquisite taxable in the hands of the employees, without appreciating the fact that as per the provisions of Section 17 of the Act, perquisite taxation would arise only at the time of exercise of the option.
13. The learned AO has erred in law, in disallowing the payment made towards purchase of software amounting to INR 134,700 due to non-deduction of taxes at source, without appreciating the fact that this expenditure does not pertain to the current assessment year.
14. The learned AO has erred in inadvertently increasing the income by adding depreciation amounting to INR 3,125,527 instead of reducing the same while computing the income.
Other Grounds
15. The learned AO has erred in levying interest of INR 13,759,456 under section2 234B and INR 797,664 under section 234C of the Act.
16. The Hon’ble DRP erred in upholding the action of the learned AO in levying interest under section 234D of the Act;
17. The learned AO has erred in initiating penalty proceedings under section 271 (1)(c) of the Act.
All the above grounds may be considered independent and without prejudice of each other.
The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon’ble Income Tax Appellate Tribunal to decide on the appeal in accordance with the law.
3. The assessee has raised additional grounds twice, i.e. on 16.01.2018 and on 05.03.2018, which read as follows:-
ADDITIONAL GROUND dated 16.01.2018
In addition to the grounds of objections raised in Form 36A before the Hon’ble Tribunal and the additional grounds filed earlier, after ground number 15, the Petitioner hereby wishes to introduce ground numbers 18-20 as under:
18. “The learned AO / TPO and DRP erred in accepting Genesys International Corporation Limited and Infosys Limited as comparable companies applying unreasonable comparability criteria.”
19. Systems Limited were chosen as comparables in transfer pricing study, however upon availability of more details in public domain, these companies are found to be not comparable and should be excluded from the finals set of comparables.”
20. “The learned AO / TPO and DRP erred in rejecting HeNos & Matheson Information Technology Limited, R Systems International Limited, Caliber Point Business Solutions Limited, Cigniti Technologies Limited, Evoke Technologies Private Limited, Maveric systems Limited and Thinksoft Global Services Limited as comparable company.”
The Petitioner submits that the above additional grounds are being raised by way of abundant caution. The additional grounds raise issues which are fundamental to the appeal and the non-admission and non-adjudication of the same would result in an incomplete appreciation and adjudication of the matter. The Petitioner submits that the failure to raise these grounds at an earlier stage is neither wilful nor wanton but due to the reasons stated above.
No prejudice would be caused to the Respondent by reason of the above additional ground being admitted and adjudicated and accordingly the balance of convenience is in favour of such an order being passed by this Hon’ble Tribunal. The Petitioner states and submits that the issues raised in the additional ground above arise out of the order of the lower authorities. Reliance is based on the decisions of the Hon’ble Supreme Court in the case of Jute Corporation of India vs. C.I.T. (187 ITR 688) and National Thermal Power Corporation vs. C.I.T. (229 ITR 383) as well as the full Bench of the Bombay High Court in the case of Ahmadabad Electricity Co. Ltd. (199 ITR 351).
In the above circumstances the Petitioner prays that this Hon’ble Tribunal may kindly be pleased to;
(i) admit and adjudicate the above additional ground,
(ii) pass any other order that may be required in the circumstances of the case and render justice.
ADDITIONAL GROUND dated 05.03.2018
In addition to the grounds of objections raised in Form 36A before the Hon’ble Tribunal (after ground number 15) and the additional grounds filed earlier, after ground number 20, the Petitioner hereby wishes to introduce ground number 21 as under:
21. “Sasken Communications Technologies Limited were chosen as comparable in transfer pricing study, however upon availability of more details in public domain, this company is found to be not comparable and should be excluded from the finals set of comparables.”
The Petitioner submits that the above additional ground is being raised by way of abundant caution. The additional grounds raise issues which are fundamental to the appeal and the non-admission and non-adjudication of the same would result in an incomplete appreciation and adjudication of the matter. The Petitioner submits that the failure to raise these grounds at an earlier stage is neither wilful nor wanton but due to the reasons stated above.
No prejudice would be caused to the Respondent by reason of the above additional ground being admitted and adjudicated and accordingly the balance of convenience is in favour of such an order being passed by this Hon’ble Tribunal. The Petitioner states and submits that the issues raised in the additional ground above arise out of the order of the lower authorities. Reliance is based on the decisions of the Hon’ble Supreme Court in the case of Jute Corporation of India vs. C.I.T. (187 ITR 688) and National Thermal
Power Corporation vs. C.I.T. (229 ITR 383) as well as the full Bench of the Bombay High Court in the case of Ahmadabad Electricity Co. Ltd. (199 ITR 351).
In the above circumstances the Petitioner prays that this Hon’ble Tribunal may kindly be pleased to;
(i) admit and adjudicate the above additional ground,
(ii) pass any other order that may be required in the circumstances of the case and render justice.
Transfer Pricing grounds :
4. However, at the time of hearing before us, the assessee has only pressed exclusion of following comparables from the list of comparables considered by the Transfer Pricing Officer (TP0):-
(i) Persistent Systems Limited
(ii) Larsen & Toubro Infotech Limited
(iii) Infosys Limited
(iv) Genesys International Corporation Limited
(v) Sasken Communication Technologies Limited
4.1 Hence, we limit our adjudication with regard to the exclusion of the above five comparables.
5. The facts relating to the transfer pricing issue are that the assessee-company is engaged in the activities in India, which includes design and sales agent support services NXP’s design competence centre in Bangalore offers user solutions for vibrant medis technologies and focuses on automotive, identification and software businesses.
The segmental (SWD segment) financials as given in the TP study is as under:-
