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2025 Supreme(Online)(ITAT) 6595
INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
SHRI PRADIP KUMAR KEDIA, ACM, SHRI ANUBHAV SHARMA, JM
Addl. CIT – Appellant
Versus
ST Microelectronics Pvt. Ltd. – Respondent
CO No.144/Del/2018 (ITA No.3688/Del/2018)
For the Appellants/Petitioners:Shri Ajay Vohra, Sr. Advocate, Shri Neeraj Jain, Advocate, Ms Mansha Bhalla, CA, Shri Ramit Katyal, CA
For the Respondents: Shri Dharmvir Singh, CIT-DR
Transfer pricing comparability requires a close functional alignment; differences in service profiles and ownership of intangibles disqualify certain companies as comparables.
Headnote:(A) Income Tax Act, 1961 - Section 143(3) r.w.s. 144C - Transfer Pricing - Challenges to the exclusion of certain comparable companies in benchmarking analysis - Revenue's appeal against CIT(A) directing exclusion of companies lacking functional comparability and the inclusion of another deemed inappropriate - The CIT(A) found that selected comparables were functionally dissimilar as they were engaged in different lines of business and owned significant intangibles - TPO's reliance on assertive financial analyses that failed to address functional dissimilarities was overruled; CIT(A) decisions upheld for their adherence to legal frameworks that guide transfer pricing and comparable analysis. (Paras 2.1, 2.4, 2.6, 3.11, 3.19)
Facts of the case:
The Revenue appealed the CIT(A)'s decision regarding the exclusion of various companies as comparables in a transfer pricing study while arguing that these companies were suitable comparables based on their operational activities. The assessee, involved in integrated circuit design services, contested the inclusion of these companies, asserting functional differences.
Findings of Court:
The tribunal upheld the CIT(A)'s findings, confirming that companies excluded were functionally different and hence not valid comparables.
Issues: The fundamental issues revolved around the functional comparability of selected companies and the appropriateness of applying rigorous standards in selection criteria.
Ratio Decidendi: It was ruled that the functional profiles of companies must closely align to be considered comparables, emphasizing the need for comprehensive benchmarking analysis in transfer pricing.
Result: Revenue's appeal dismissed; Assessee's cross-objections partly allowed.
| Table of Content |
|---|
| 1. tax assessment context. (Para 1 , 2) |
| 2. functional analysis of the assessee's operations. (Para 3) |
| 3. evaluating extra serious company characteristics. (Para 4 , 5 , 6 , 7 , 8 , 9 , 10 , 11 , 12 , 13) |
| 4. final orders based on judicial scrutiny. (Para 14 , 15 , 16 , 17 , 18 , 19) |
ORDER
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the Revenue against the order dated 28.02.2018 of the Commissioner of Income-tax (Appeals)-44, New Delhi (hereinafter referred to as the ld.CIT(A) or the ld. FAA) in Appeal No.139/2017-18/CIT(A)-44 arising out of the appeal before it against the order dated 28.03.2014 passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the DCIT, Circle-9(1), New Delhi (hereinafter referred to as the Ld. AO). The assessee has filed Cross Objection being CO No.144/Del/2018.
2. Heard and perused the records. The written submissions filed from both the sides are duly taken into consideration. The primary facts asserted by the Assessee are that it is a captive service provider and undertakes Integrated Circuits (“ICs”) design implementation, maintenance and verification services for ST Group entities (“AEs”) based on the guidelines/ instructions provided by the AEs. Thus, the role of the assessee is akin to that of a risk mitigated captive design and development service provider and it is remunerated on a cost plus revenue model. The operating profit margin of the assessee submitted in the Transfer Pricing Documentation for the purpose of benchmarking was 10.40% (Considering FOREX as operating) and for benchmarking the international transaction of provision of I/C design implementation and maintenance services, the assessee considered the following 20 comparable companies with working capital adjusted arithmetic mean of 7.82% and risk adjusted operating profit margin (OP/OC) of 2.12%:-
| S. No. | Company Name | Weighted average risk adjusted OP/TC (%) |
| 1. | Akshay Software Technologies Limited | 7.85% |
| 2. | Ancent Software International Ltd | -10.59% |
| 3. | Aztecsoft Limited | 4.15% |
| 4. | CG VAK Software and Exports Limited (Segmental) | -1.88% |
| 5. | Goldstone Technologies Limited | 9.91% |
| 6. | Helios & Matheson Information Technology Limited | 11.26% |
| 7. | Indium Software (India) Limited | -6.19% |
| 8. | KPIT Cummins Infosystems Limited | 10.16% |
| 9. | Larsen and Toubro Infotech Limited | 16.62% |
| 10. | LGS Global Limited | 20.01% |
| 11. | Mindtree Limited | 9.90% |
| 12. | Persistent Systems Limited | 21.65% |
| 13. | Quintegra Solutions Limited | 1.14% |
| 14. | R S Software (India) Limited | 8.99% |
| 15. | Sasken Communication Technologies Limited | 16.32% |
| 16. | SIP Technologies and Exports Limited | -50.30% |
| 17. | Softsol India Limited | -39.46% |
| 18. | Thinksoft Global Services Ltd | 15.34% |
| 19. | TVS Infotech Limited | -12.36% |
| 20. | Zylog Systems Limited | 9.93% |
| Average | 2.12% |
2.1 However, the TPO cconsidered the following 19 companies as comparable:-
| S. No. | Company Name | Working Capital OP/TC (%) |
| 1. | Akshay Software Technologies Limited | -0.06% |
| 2. | E-Infochips Bangalore Limited | 66.50% |
| 3. | Evoke Technologies Pvt Limited | 20.03% |
| 4. | E-Zest Solutions Limited | 15.17% |
| 5. | Infinite Data Systems Pvt Ltd | 85.10% |
| 6. | Infosys Limited | 46.76% |
| 7. | Larsen and Toubro Infotech Limited | 21.33% |
| 8. | LGS Global Limited | 8.82% |
| 9. | Mindtree Limited | 15.85% |
| 10. | Persistent Systems Limited | 29.21% |
| 11. | R S Software (India) Limited | 11.53% |
| 12. | Sasken Communication Technologies Limited | 19.22% |
| 13. | Tata Elxsi Limited | 18.39% |
| 14. | Thinksoft Global Services Ltd | 14.98% |
| 15. | Thirdware Solutions Limited | 39.41% |
| 16. | CAT Technologies | 5.00% |
| 17. | Maveric Systems Limited | 16.06% |
| 18. | Persistent Systems and Solutions Limited (merged) | 13.20% |
| 19. | Sankhya Infotech | 6.07% |
| Average | 23.82% |
2.2. The TPO, for the purpose of benchmarking the transaction of provision of I/C design implementation and maintenance services considered the FOREX fluctuation and provision of doubtful debts as non-operating in nature and computed the operating margins of the assessee at 7.38%. The TPO accordingly, made an adjustment of Rs 52,57,03,976 in respect of international transaction of provision of IC Design and Software Development Services undertaken by the assessee.
2.3. The CIT(A) vide
