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Judgment
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER :
The captioned appeals preferred by the assessee is against the order of the Assessing officer, Delhi relating to assessment year 2006-07 and AY 2007-08 passed under section 143(3) r.w.s. 144C of the Income-tax Act, 1961 (in short “the Act”) order dated 15.06.2010 and 30.06.2011 respectively passed in pursuance of directions of the Dispute Resolution Panel (DRP) under S. 92CA(3) dated 15.10.2009 and 30.05.2011 respectively under S. 144C(5).
The grounds raised by the assessee in ITA 3869/Del/2010 for AY 2006-07 are as under :
“The hon'ble Dispute Resolution Panel I, New Delhi (DRP") grossly erred in conforming the addition proposed by the Ld Dy Commissioner of Income Tax, Circle 12(1), New Delhi (Ld AO) and Ld Additional Commissioner of Income of Income Tax, Transfer Pricing Officer 1(2) ('Ld TPO). In making the said addition, the Ld AO/TPO erred in principal and on facts on the following grounds
1.The Ld AO/TPO grossly erred in understanding the functions performed by the Appellant Company
a)The Ld AO/TPO erroneously characterized the Appellant Company, a reseller of customized SIM cards, as a service provider on the basis of information available at the website of Gemalto N.V. (ww.gemalto.com), the parent company.
b)The Ld AO/TPO erred in arbitrarily disregarding the fact that the Appellant Company is a 'Tier 3' entity in the group hierarchy, engaged only in peripheral activities viz. selling and distribution of customized SIM cards and is unable to develop any product/solutions on its own.
2.The Ld AO/TPO erred in arbitrarily rejecting the comparables by the Appellant Company.
a)The Ld TPO arbitrarily rejected the comparables selected by GDSL, without identifying any specific deficiency or insufficiency in the search process adopted by GDSL.
b)The Ld TPO erroneously rejected 5 out of 7 comparables selected by the Appellant Company, solely on the ground that contemporaneous data in respect of such companies for financial year 2005-06 is not available.
c)The Ld TPO rejected the balance 2 comparables on the basis of incorrect facts and erroneous understanding of the functions performed by the Appellant Company and the said comparables.
3.The Ld AO/TPO erred in applying a grossly deficient search/benchmarking process to select fresh comparables.
a)The process adopted by the Ld TPO is based upon inappropriate and insufficient filters and key words, which do not correspond to the business activity of the Appellant Company.
b)The Ld TPO violated the principles of natural justice by concluding the proceedings under section 92CA(3) of the Income Tax Act, 1961 ('the Act) without providing the Appellant Company with the findings and results of the search/benchmarking process adopted by his office.
4.The Ld AO/TPO erred in selecting functionally different companies as comparable to the Appellant Company.
a)The companies selected by the Ld TPO are service oriented companies (namely Omnitech Infosolutions Ltd and ORG Informatics Ltd), not comparable to the Appellant Company in any aspect, being a reseller of customized SIM cards.
b)The Ld TPO erred in selecting the final set of comparables without conducting any FAR analysis of either the Appellant company or the selected comparables. This led to selection of companies which are incomparable to the Appellant Company, both on account of different risk as well as functional profile.
5.The Ld AO/TPO erred in using single year data for the purpose of comparability analysis. The Ld AO/TPO ought to have used multiple year data which would have captured normal market cycles and reduced the variability/distortions in the financial results arising out of single year data
The grounds of appeal are notwithstanding each other. The appellant craves leave to amend, alter or add fresh grounds of appeal during the course of proceeding before your good self.”
Brief facts of the case are that the assessee company was a wholly owned subsidiary of Schlumberger Sema B.V., Netherlands which was subsequently sold to Axalto, Netherland B.V, in 2004. Axalto, in turn, merged with Gemplus in February, 2007. During the relevant previous year it was a hundred percent subsidiary of Axalto Holding NV, Netherlands. During the period under consideration, the company was known as Gemalto Digital Security Pvt. Ltd. after merger with this business. This company has again merged into Thales Dis India Private Limited on 13th February, 2020 and is now known as Thales Dis India Private Limited.
Since the year 2001 the assessee company has been engaged in the business of re-selling chip-based products imported from its Associate Enterprises (AE) of Schlumberger Sema and sold in India. The assessee company purchases from its AE's Point of sale (POS) equipment, Mobile Com SIM, Smart Cards, Pay Phones and sells them in the Indian market.
The assessee submits that the Gemalto worldwide Group companies are categorized into three tiers as follows:-
Gemalto France (Strategic Tier 1- Main Entrepreneur Development Centre) (France)- the highest level in the structure - bears the greatest degree of non-routine business and economic risks within the group.
ii) Tier 2- Secondary manufacturing companies Gemalto France & Singapore Engineering Centers.
iii) Tier 3- Peripheral Entities the Gemalto entities which are engaged in selling & distribution of products manufactured by AEs. The Assessee company is Tier-3 company.
The assessee company is a Tier 3 company and is engaged in the business of reselling the products imported from the AEs. The assessee's business consists of purchase and sale of products manufactured by AEs such as Sim cards for cellphones, Point of sale (POS), Mobile SIM Cards for business solutions, Smart Cards, Pay Phones etc. It is submitted that this business and functional profile of the Assessee company has been consistently accepted by all the Revenue & Judicial authorities since its inception in the year 2001. The assessee undertook the following international transactions during the year under consideration:
| S.N. | Nature of transaction | Value of Transaction (Rs.) |
| 1. | Miscellaneous Gain on Forex Fluctuation | 566 |
| 2. | Purchase of personalisation Eq (fxd assets) | 765,308 |
| 3. | Purchase of Finished Goods (subject of Dispute) | 729,485,424 |
| 4. | Reimbursement of expenses at actual cost | 1,847,866 |
| 5. | Sale of Finished Goods | 95,004 |
| 6. | Interest on ECB | 183,53,529 |
| 7. | Travel Credit Note | 69,920 |
The issue at contention between the assessee and Revenue is the Arms Length Price adjustment of the transaction for Purchase of Finished Goods. The assessee has computed the arms length price with respect to purchase of finished goods from AE's adopting the TNMM method, keeping the assessee as tested party and considering the PLI (net margin) of 2.83%. Whereas the TPO made adjustment for Purchase Price of Finished Goods holding that the assessee is not a mere distributor of goods but but is engaged in wide range of activities including services. Consequently, he rejected all the comparables selected by the assessee and substituted his own comparables thereby leading to a transfer pricing addition of Rs. 11,15,08,274/-. The TPO did not make any adjustment in respect of any other transactions. The TPO, for arriving at the TP adjustments, selected the following comparables and determined the OP/Sales % @ 10.31 and made a TP addition of Rs. 11,15,08,274/-. The comparables of the assessee and those selected by the TPO are as follows:-
| Sr No. | Assessee's selection of comparable | TPO selection of comparables | OP/Sales(%) by TPO |
|---|---|---|---|
| i | Grupa Payoji Electronic Appliances Ltd. | i) ORG Informatics Ltd. | 7.51 |
| ii | HCL Infinet Ltd. | ii)OmnitechInfosolutions Ltd. | 13.11 |
| iii | Jainson Corpn. Ltd. | ||
| iv | Priya Lld. | ||
| v | SES Technologies Ltd. | ||
| vi | Videocon Industrial Ltd | ||
| vii | Vivek Ltd. (Pg. 12/ΤΡΟ) | ||
| Arithmetical Mean | 10.31 | ||
| TP Addition | 11,15,08,274 | ||
At the outset, the ld counsel of the assessee submitted that the assessee company is only engaged in the business of importing from its AEs & selling in India chip based SIM cards, Point of sale equipment and associated terminals etc. to cell phone providers, shops, establishments, petrol stations and banks etc. This functional profile has been consistently accepted by the Tax dept. since AY 2002-03. Assessee is primarily a distributor of finished goods purchased from its AE. It is stated that the imported sim & smart cards are ready-to-use. These cards come with embedded chip memory and application software. However, depending on customers request the logo/design of the cell phone operator can be electrically embossed on the Sim card. This is done in 'Chip Personalization Unit' at its facility at Noida. This process is termed as Personalization'/Customization. In the impugned year, two-third of the Sim cards were personalized (embossing of logo etc.). and one third were sold without embossing such as point of sale equipment "system solutions" and smart cards are distributed in original condition.
The ld AR vehemently argued that the TPO confused the functional profile of the Group Head Gemalto Company, a Tier I company with the Assessee which is a Tier III company. Pursuant to this interpolation of the functional profile of the Group Head Gemalto Tier I company onto the subsidiary Tier III Assessee company, the TPO held that the assessee is not a mere distributor of goods but that it is engaged in a wide range of diverse activities including services, and bears high level of risks. Consequently, the TPO rejected all the comparables selected by the Assessee as being functionally different. The TPO then selected fresh comparables based on an entirely different functional profile extracted from the website of the Group Head of Gemalto Tier-I company leading to a transfer pricing addition of Rs. 11,15,08,274/-.
The ld AR submitted that the Ld. TPO ignored the FUNCTIONAL ANALYSIS of the assessee company as reported in the Transfer Pricing Report which stated that the assessee is a distributor of finished goods, which it purchases/imports from AEs. It is stated that the TPO ignored the Form 3CEB as well as the Annual Report of the company of F.Y. 2005-06 and the Tax Audit Report u/s 44BA.
The ld AR stated that having confused the functional profile of the Group Tier-I company with the Assessee Tier-III company, the TPO erroneously rejects all comparables selected by the assessee. He thereafter makes a fresh selection of comparables, which are essentially engaged in providing 'services'. No FAR analysis of the tested party or of the comparables is carried out by the TPΟ to demonstrate any similarity and relied on the case of Sony Ericsson, 374 ITR 118 (Del). The ld AR submitted a 'Table' to show the material difference in functions of the assessee (tested party) and the entities selected by AO/DRP as comparables and prayed for exclusion of mis-matched Comparables and inclusion of seven companies chosen by the assessee.
The ld AR submitted that the RPM method was applied upto the AY 2002-03 when the CIT(A) changed it to TNMM method. The assessee, since then is following the TNMM method. With respect to comparables, the ld AR submitted that the companies ORG Infomatics ltd and Omnitech Infosolutions Ltd are functionally different whereas the comparable companies chosen by the assessee Priya Ltd and SES Technologies Ltd are proper comparables. In fact, the company Priya Ltd was accepted by the TPO as comparable in AY 2007-08.
Per contra, the ld DR vehemently argued that the assessee is functionally different from its AEs which are its holding companies. It is stated that the TPO rightly held the functional profile of the assessee as the assessee customizes the Cards and is not merely the Distributors. The ld DR submitted that the assessee itself rejected the RPM method and has applied the TNMM method. On comparables, the ld DR stated that Omnitech was not chosen as comparable in AY 2007-08. The company SES Technologies Ltd was rejected as comparable as data was not available.
We have heard the rival submissions and have perused the materials on record. We are of the opinion that the TPO has failed to recognize and differentiate the functions of different entities in the Gemalto Group of companies. The assessee is a Tier 3 company, imports and sales products manufactured by AEs such as Sim cards for cellphones, Point of sale (POS), Mobile SIM Cards for business solutions, Smart Cards, Pay Phones etc. These imported sim & smart cards are ready-to-use and come with embedded chip memory and application software. The only activity that the assessee does on these Chips is electrically embossing the logo/design of the cell phone operator as per their request, through a process termed as Personalization', in its 'Chip Personalization Unit' at its facility at Noida. To our mind, such an activity do not materially alter the assessee status as a distributor of finished goods purchased from its AEs. By merely embossing the SIM cards, the functional profile of the assessee, in our considered view, would not tantamount to that of Tier 1 companies of the group which bears the economic risk of its business. From the factual matrix evolving from the case, we are of the view that the assessee is not in the business of providing services or software solutions etc. nor is it engaged in manufacturing of goods. The assessee is merely a reseller of 'SIM cards' and does not carry out 'diverse activities' as held by TPO.
In the above facts and circumstances, we are of the considered view that the TPO has confused the functional profile of the Group Head Gemalto Company, a Tier I company with that of the Assessee which is a Tier III company. Pursuant to this interpolation of the functional profile of the Group Head Gemalto Tier I company onto the subsidiary Tier III Assessee company, the TPO has rejected the comparables selected by the assessee as being functionally different.
With respect to the comparable selected by the TPO, ORG Informatics, we agree with the assessee that the said company is an inappropriate comparable as the said Company's primary business activity is of providing service of System Integration and Telecommunication Services and is implementing MTNL contract of 421 crores for supply, installation, commissioning, and Annual Maintenance of Convergent Billing System for next 5 years.
With respect to Omnitech Infosolutions Ltd., we again agree with the assessee that it is an entirely in-appropriate comparable to the Assessee. We find that there is no rebuttal to the fact that Omnitech is engaged in manufacture, import & export and deals with production, assembling, designing & developing computer peripherals, hardware, software & 'electronic components. It is engaged in business of providing IT services from its Global Delivery centre under Build-Operate-Transfer delivery model & provides 'system integration’, Applications Management Services and software services. It has, no trading segment. It carries out R&D & has intangibles like 'omni monitor'.
With respect to the inclusion of comparables, we find that 5 comparable out of 7 companies have been rejected solely on the ground that contemporaneous data is not available on Prowess/Capitaline in respect of such companies. In such facts and circumstances, we are of the considered view that the TPO shall make effort in collecting data/financial results from the 5 comparable through his internal databases or through powers vested in his office per section 133(6) of the Act. The TPO, if at all rejects them as comparable, he should have more cogent and substantial reasons for such rejection or he could negate the assessee’s submission that they are not selected through an objective search process with adequate reasons.
With respect to Priya ltd, chosen by the assessee for comparison, we find that in the subsequent A.Y. 2007-08, with no change in business profile, the same TPO has accepted Priya Ltd. as an appropriate comparable. We hold that as the business profiles in the impugned year being identical to AY 2007-08, has gone unrebutted, the company shall be considered as a comparable for TP purposes.
With respect to SES Technologies, selected by assessee as comparable on the basis of information available on 'Prowess', we find that the TPO excluded it because it's Annual Report was not available. We further find that it is an unrebutted fact that the TPO had selected SES Technologies for A.Y. 2002-03 & 2003-04 and its business profile continues to be the same. Further, the assessee has furnished before us the Annual Report of SES Technologies for F.Y. 2005-06 & 2006-07, being available in public domain. In view of such facts, we are of the considered view that this company may be included as a suitable comparable.
In the factual matrix of the instant case for the impugned year, we hold that the correct functional profile of the assessee, being a Tier III company of its Gemalto Group and as a mere reseller/distributor of SIM card etc, be adopted by the Ld TPO. The necessary consequence of such consideration would be selection of correct comparables for bench marking the international transaction. We are therefore of the considered view, as discussed above, the comparables such as ORG Informatics and Omnitech Info Solutions be excluded and comparables such as Priya Ltd & SES Technologies be included as also the 5 companies whose data shall be collected by the TPO. The issue of Arms Length Price of the international transaction, is accordingly set aside to the TPO for adjudication afresh in the light of aforesaid directions. The grounds are allowed in the aforesaid terms.
The grounds raised by the assessee in ITA 4071/Del/2011 for AY 2007-08 are as under :
“The hon'ble Dispute Resolution Panel 1, New Delhi (DRP) grossly erred in conforming the addition of Rs 6,20,03,516 proposed by the Ld Assistant Commissioner of Income Tax, Circle 12(1), New Delhi (Ld AO) and Ld Additional Commissioner of Income Tax, Transfer Pricing Officer 1(2) ('Ld TPO"). In making the said addition, the Ld AO/TPO erred in principal and on facts on the following grounds
1.The Ld AO/TPO erred in characterizing the Appellant Company, a reseller of personalised SIM cards, as a predominantly service company.
2.The Ld AO/TPO erred in arbitrarily rejecting the comparables selected by the Appellant Company.
2.1The Ld TPO arbitrarily rejected the comparables selected by the Appellant Company, without identifying any specific deficiency or insufficiency in the search process adopted by the Appellant Company.
2.2The Ld TPO erroneously rejected 3 out of 4 comparables selected by the Appellant Company, alleging product dissimilarity.
3.The Ld AO/TPO erred in applying a grossly deficient search/benchmarking process to select fresh comparables. The process adopted by the Ld TPO is based upon inappropriate and insufficient filters and key words, which do not correspond to the business activity of the Appellant Company.
4.The Ld TPO erred in violating the principles of natural justice by concluding the proceedings without providing the Appellant Company with the findings and results of the search/benchmarking process undertaken by his office.
5.The Ld AO/TPO erred in selecting functionally different companies as comparable to the Appellant Company.
5.1The Ld TPO erred in selecting the final set of comparables without conducting any FAR analysis of either the Appellant Company or the comparables selected by his office. This led to selection of comparable which have a significant different functional and risk profile.
5.2The keywords applied by the Ld TPO resulted into selection of a 'service' oriented company (namely, ORG Informatics Ltd) and a manufacturing concern (namely, Raychem RPG Ltd), not comparable to the Appellant Company, a reseller of Smart Cards, in any manner.
6.The Ld AO/TPO erred in arbitrarily disregarding the fact that the operating margins earned by the Appellant Company are consistent with the Global Transfer Pricing Policy and Benchmarking Analysis of Gemalto Group
7.The Ld AO/TPO erred in computing the arithmetic mean of OP/Sales Margins of a selected comparable corapany (namely, Raychem RPG Ltd.) at 15.50% against correct margins of 15.15%.
8.The Ld AO/TPO erred in not providing relief in accordance with second proviso to section 92C(2) of the Income Tax Act, 1961 (the 'Act').
The Ld TPO erred in not making adjustments to the transaction price of the international transaction to the lower end of the arithmetic mean of the Arm's Length Price (ALP). The Ld AO/TPO ought to have restricted the amount of Transfer Pricing adjustments to the lower end of arithmetic mean of the ALP after considering a tolerance level of 5%.
9.The Ld AO/TPO erred in using single year data for the purpose of comparability analysis. The Ld AO/TPO ought to have used multiple year data which would have captured normal market cycles and reduced the variability/distortions in the financial results arising out of single year data.
The grounds of appeal are notwithstanding each other. The appellant craves leave to amend, alter or add fresh grounds of appeal during the course of proceeding before your good self.”
We find that the facts in AY 2007-08 are identical to that of AY 2006-07 except for inclusion/exclusion of comparable companies. We find that the assessee has selected four comparables company which was rejected by the TPO. The TPO instead chose three of his own comparable company. TPO has selected three comparable companies which are Priya Ltd; Raychem RPG Ltd and ORG Informatics Ltd.
The TPO has accepted the company Priya Ltd as appropriate comparable. The company, ORG Informatics ltd has been rejected by us as inappropriate comparable, in our decision herein above. As far as Raychem RPG Ltd is concerned, we find that the said company is an inappropriate comparable as it is functionally dissimilar to the assessee functional profile. We find that the fact that this company owns 4 plants in Maharashtra, for Manufacturing Domestic Gas Flow Meters, the only one of its kind in India and Transformers for manufacturing Industrial Products for Transmission & Distribution Network of power and that its AE, Raychem, USA, provides it know-how & technology for which it pays royalty, has gone unrebutted. The said company is involved in technologies in the areas of infrastructure development, viz, Energy, Oil & Gas and Telecommunications, Electronics and hence we are of the considered view that comparability on an entity level with the assessee is wholly inappropriate.
As far as rejection of the company SAS Technologies as comparable by the TPO is concerned, the TPO shall include the same as comparable as per the decision rendered herein above for AY 2006-07 as there is no assertion made on behalf of the Revenue as to any change in facts in AY 2007-08.
In the factual matrix of the instant case for the impugned year, we hold that the decision rendered for AY 2006-07 herein above shall apply to the facts of the AY 2007-08. The comparables such as Raychem RPG Ltd and ORG Informatics Ltd shall be excluded and comparables such as Priya Ltd & SES Technologies be included. The issue of Arms Length Price of the international transaction, is accordingly set aside to the TPO for adjudication afresh in the light of aforesaid directions. The grounds are allowed in the aforesaid terms.
In the result, the appeal of the assessee in ITA No. 3869/DEL/2010 and ITA 4071/Del/2011 are allowed for statistical purposes.