AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (7) TMI 741
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....fficer referred the matter to the TPO u/s 92CA of the I.T. Act. 3. The TPO observed that the Adobe Systems India Pvt. Ltd. is a software research and development company incorporated in India on 30.07.1997. It functions as a contract services provider and renders service to its group companies. It is primarily engaged in undertaking software development services. Further, the company is engaged in marketing and promoting the products and services of Adobe group. He observed that during the impugned assessment year, the assessee has entered into the following international transactions with its AE M/s Adobe Systems Inc. and Adobe Systems Software Ireland Ltd. :- S. No. Name of the associated enterprises Nature of transaction Amount received Method 1. Adobe systems Inc. California, USA Provision of software development services 4,39,34,28,313 TNMM 2. Adobe Systems Software Ireland Limited Provision of marketing support services 23,36,49,199 TNMM 3. Adobe Systems Inc. U.S.A. 345 Park Avenue, San Jose California 6951102704 U.S.A. Payment of Interest on Advance fee for services 70,87,823 Total 4,63,41,65,335/- 4....
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....re Development services is recalculated as below :- a) Operational Cost 3,81,99,26,227 b) Arm's Length Price @ 24.42% (a*1.2442) 4,75,24,52,211 c) Price Received 4,39,34,28,313 d) Adjustment u/s 92CA(B-C) 35,93,23,898 5. So far as the provision of market support services segment is concerned, the TPO after considering the various objections raised by the assessee selected the following 15 comparables with adjusted OP/OC at 25.39% and made an adjustment of Rs. 3,65,91,236/-, the details of which are as under :- Sr. No. Name of the company OP/OC (%) Unadjusted OP/OC (%) Adjusted 1. Priya International Ltd. (Segmental) 4.68% 5.67% 2. Indus Technical Financial consultants Limited 12.05% 13.07% 3. Cyber Media Research Ltd. 10.60% 12.17% 4. I C R Management Consulting Services Ltd. 16.14% 12.10% 5. Info Edge (India) Ltd. 15.53% 53.85% 6. M M TV Ltd. 32.94% 33.90% 7. Media Research Users Council 40.53% 72.60% 8. Power System Operational Corpn. Ltd. 22.52% 21.18% 9. Quadrant Communications Ltd. 14.58% 21.09% 10. Apito Ltd. 25.17% 20.01% 11. Global Procurement Consultants Ltd. 3....
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.... Government of India undertaking has very different economic model and environment and therefore, cannot be compared with the assessee for which they directed the same to be excluded. 9. So far as gains/losses arising out of foreign exchange fluctuations, provision for doubtful debts, bank charges and provisions written back while computing the operating margins of the assessee as well as the comparable companies are concerned, the DRP held that the losses/gains due to foreign exchange fluctuation are part of operating margins. Similarly, bank charges have also to be treated to the extent of direct nexus with business operations of the assessee. Similarly, they held that the provisions of doubtful debts and provisions written back are to be treated as part of operating margins. They also directed the TPO to allow the risk adjustment subject to verification. Based on the direction of the DRP, the Assessing Officer vide order dated 29.02.2016 passed the order wherein he made addition of Rs. 25,94,80,676/- on account of the software development services segment and marketing support services segment. 10. Aggrieved with such order of the Assessing Officer/TPO/DRP, the assessee as wel....
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....mployee cost greater than 25 percent of the total cost as a comparability criterion. 7. The learned AO / TPO / DRP have erred in selecting certain companies (which are earning super normal profits) as comparable to the Appellant. 8. The learned AO / TPO / DRP have erred in rejecting certain comparable companies identified by the Appellant using "Turnover less than INR 5 Crores" as a comparability criterion for software development services segment and "Turnover less than INR 1 Crore" for marketing support services segment. 9. The learned AO / TPO / DRP have erred in rejecting certain comparable companies identified by the Appellant using "Export earnings less than 75 percent of operating revenues" as a comparability criterion. 10. The learned AO / TPO have erred in passing an order which has computational errors in the margin of comparable companies used in the determination of the ALP for software development services segment and marketing support services segment. 11. The learned AO / TPO have erred in not following the directions issued by the DRP, thereby acting in contravention of provisions of Section 144C(13) of the Act. 12. The learned AO / TPO / DRP have ....
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....and has to be excluded in view of the decision of the Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) wherein it has been held that the giant entities which have tremendous economic advantage compared to the assessees like that of the assessee. The ld. DRP further held that the Tribunal in assessee's own case for assessment year 2008- 09 had directed Infosys Technologies Ltd. to be excluded from the list of comparables. 13. The ld. DR strongly opposed the order of the DRP directing the TPO to exclude Infosys Technologies Ltd. from the list of comparables. He submitted that the DRP had excluded Infosys Technologies Ltd. from the list of comparables and, therefore, the Tribunal had no occasion to deal with this comparable during the assessment year 2008-09. The Tribunal relying on the decision of the Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) directed the TPO to be excluded Infosys Technologies Ltd. from the list of comparables. He submitted that during the assessment year 2009-10, the Tribunal at page 5, para 6 of the order had not made any discussion regarding Infosys Technologies Ltd. When the matter was....
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....Referring to page 31, Volume- 1 of the Paper Book, he submitted that Adobe India undertakes the coding and documentation function with respect to the software modules that it develops. Adobe US plans, supervises and manages the coding and documentation function performed by Adobe India. Adobe India is only responsible for the development of modules of the software for a product. He submitted that the assessee has technical man power and is capable of developing new software. It has registered 27 patents with the U.S. Govt. department. Referring to page 32 of the Paper Book, he drew the attention of the Bench to para 4.2.3 which is risk analysis. Referring to page 33 of the Paper Book, he submitted that Adobe India is compensated on the basis of a full cost plus mark-up and is assured of the recovery of costs of any underutilized/unutilized resources. Thus, Adobe India is not exposed to any utilization risk and the capacity utilization risk is borne by Adobe US. He submitted that in any service, there is some calculation on the basis of manpower. The assessee also takes some risk. Therefore, it cannot be said that the assessee is not a risk free entity. Referring to page 621 of Volu....
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....ce Desk, Infosys iPrime, Infosys mConnect etc. He submitted that substantial expenditure has been incurred on account of R&D, expenditure on account of advertising/sales promotion and brand building and onsite services by Infosys. He also relied on various other decisions and submitted that Infosys Technologies Ltd. should be excluded from the list of comparables. 18. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer/TPO/DRP and the Paper Book filed on behalf of the assessee. We have also considered the various decisions relied on by both the sides. We find the TPO included Infosys Technologies Ltd. as a comparable in the software services segment on the ground that this company passes all the filters and, therefore, it is robust comparable with that of the assessee company. We find the DRP excluded the above company from the list of comparables by relying on the decision of the Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) and the decision in assessee's own case for assessment year 2008-09. 19. It is the submission of the ld. DR that in assessment year 2009-10, the Tribunal has thoroug....
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....and development services to Adobe US . Adobe India also performs design, development, support improvement in enhancement services for Adobe US products (para-4.2.1 on page 22 of the TP study) b) Adobe India undertakes, the coding and documentation function with respect to the software modules that it develops ( page 24 of the TP study) c) Adobe India is responsible for day-to-day project management and the end deliverables with respect to the models of the software being developed by it.( Page 24 of the TP study) d) Adobe India undertakes quality control procedure with respect to the software modules developed by it. ( Page 24 of the TP study) e) Adobe India also performs unit test for the software modules developed by it.( Page 25 of the TP study).´ 6.5.9 Though, in the TP study the assessee has furnished that conceptualization and design of the software are being done in the supervision or direction of the 'Adobe US' and the assessee's having limited role in these activities, but, in our opinion, it is evident from the transfer pricing study, as far as development of software modules is concerned, the assessee also plays a dominant role. The learn....
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.... & distinctly from the legal ownership of parents, trademarks etc. The assessee claim that the Associated Enterprise is the legal owner of the intangibles may be correct, but the economic ownership of the intangible is with the assessee. That during the period 2008-09 number of patents have been developed with India origin and legal ownership of these patents have been transferred to its AE as per the agreement without any compensation because the compensation model of cost plus 15% is not adequate to compensate the assessee for the functions performed by it because it not include return associated with economic ownership of intangibles." 6.5.12 We agree with the fact that the assessee has developed these intangibles in India and transferred to the AE, who is registered as legal owner. Thus, though the legally assessee is not owner of the intangibles, but it has carried out all functions to generate intangibles, and thus it becomes functionally similar to the comparable company who has also generated intangibles during the year. The assessee also deserves to be compensated for generation of the intangibles similar to the intangible exploited by the comparable. 6.5.13 Next ....
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....s not provided the details of software developed or designed and that conceptualizations was done abroad and development work was done in India. Similarly, the assessee has not provided the details of software developed completely and description of functions in India and abroad either before the TPO or before the Tribunal. Accordingly, it was concluded that the function of the assessee company become similar to the comparable company who develops products for the client and provide service in respect of those products. The Tribunal has further held that the assessee has not brought out any significant change in the ratio of the human resources or IT infrastructure in terms of the turnover of the assessee and comparables. The Tribunal has further held that the functions of the comparable company and the assessee may differ from year to year and the decision of the Tribunal in earlier year for not treating the company as comparable cannot be taken as binding precedent. In view of the above, we deem it proper to restore the issue to the file of the TPO with a direction to give an opportunity of the assessee to provide further details and substantiate with evidence to his satisfaction....
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....ations and it has got significant intangibles, therefore, we hold that this company cannot be compared with that of the assessee company. The order of the DRP is accordingly upheld. 26. So far as Media Research Users Council is concerned, we find this company is a council of media companies with members comprising advertisers, publishers, advertising agencies and companies from broadcast and other media and engaged in undertaking surveys, research into the readership, viewership, listenership of various media for advertising. We, therefore, uphold the order of the DRP on this count in holding that Media Research Users Council is a functionally different entity and hence does not make a good comparable to the assessee in MSS function. The order of the DRP is accordingly upheld. 27. So far as Power Systems Operation Corporation Limited is concerned, we find this is a Government of India undertaking and having RPT filter 48.20%. This company is also functionally different and segmental details are not available. Further, it fails export turnover filter being 14.16%. We, therefore, uphold the order of the DRP in excluding this company from the list of comparables. 28. So far as Quad....
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....by the Revenue is accordingly dismissed. 32. In ground no.3, the Revenue has challenged the order of the DRP in directing that Forex Fluctuations, bank charges, provision for doubtful debt and provisions written back should be considered part of operating margin calculation. 33. After hearing both the sides, we find the TPO while computing the operating margin of the assessee as well as comparable companies did not consider gains/losses arising out of foreign exchange fluctuation, provision for doubtful debts, bank charges and provision written back. The DRP held that the losses/gains due to foreign fluctuation are part of operating margins in view of plethora of decisions. Similarly, the charges have also to be treated similarly to the extent of direct nexus with business operation of the assessee. They also held that the provisions for doubtful debts and provision for written back have also to be treated as part of the operating margins. While doing so, the ld. DRP relied on the decision of the Delhi Bench of the Tribunal in the case of First Rain Software Centre Private Limited (ITA No.4006/Del/2010) and Sony India Private Limited reported in 114 ITD 448. We do not find any in....
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....debts and provision for written back as part of operating margin is also upheld. The ground raised by the Revenue on this issue is accordingly dismissed. 36. The ground no.4 and 5 being general in nature are dismissed. ITA No.6165/Del/2015 (By Assessee) : 37. Although a number of grounds have been raised by the assessee but ld. counsel for the assessee confined his argument to inclusion or exclusion of certain comparables. 38. So far as the order of the DRP in including the Info Edge (India) Limited is concerned, he submitted that the TPO included this comparable in the market support services segment on the ground that its functions are similar to that of the assessee company. He submitted that the DRP upheld the action of the TPO. Referring to page 11, 13, 37, 47, 56, 61 and 70 of the annual report, ld. counsel for the assessee submitted that Info Edge (India) Limited is functionally dissimilar being engaged in business of management of online portal. Further it also earns revenue from subscription fee. Referring to the decision of the Delhi Bench of the Tribunal in the case of Rolls-Royce India Pvt. Ltd. vs. DCIT vide ITA No.6636/Del/2015 for assessment year 2011-12 and in ....
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....lude this company from the list of comparables. 43. So far as inclusion of E-Infochips Limited in the list of comparables in the software services segment is concerned, ld. counsel for the assessee submitted that the TPO added the above company on the ground that it passes all the filters and therefore it is robust comparable. The DRP upheld the action of the TPO on the ground that the TPO has taken segmental figures. Referring to the decision of the Hon'ble Delhi High Court in the case of Chrys Capital Investment Advisors India Private Limited vs. DCIT reported in [2015-TII-13- HC-DEL-TP] and also the decision of the Special Bench of the Tribunal in the case of Maersk (Mumbai) (2014) 43 taxmann.com 100, he held that high profit or supernormal profits do not matter and it is the functional comparability and the FAR assessment that helps in considering a comparable for ALP determination. It is the submission of the ld. counsel for the assessee that EInfochips Limited is engaged in software development (73.38%), hardware maintenance (15.07%) and information technology consultancy (11.15%). Thus, the Revenue from software development services is less than 75% which is evident from pa....
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....e same reveals that apart from providing software development services, the said concern is also engaged in selling software products. The Annual Report also reveals that the said concern is also engaged in manufacturing EVM and VDB Electronic Boards, which is a hardware related activity. Notably, the Annual Report reveals that all the activities have been clubbed and considered as single reportable business segment, and segmental data for software services is not available so as to be used for benchmarking the transactions which are being tested. On the contrary, in so far as the activity of the assessee, which is under benchmarking is concerned, it relates to pure software development services and it does not involve sale or development of software products or hardware. It is also quite evident that M/s.E-Infochips Limited is undertaking I.T enabled services, which also is distinct from the software development activities undertaken by the assessee. In fact, at the time of hearing, Ld. Representative for the assessee had relied upon the decision of the Delhi Bench of the Tribunal in the case of Saxo India Pvt. Ltd. vs. ACIT, ITA No.6148/Del/2015 dated 5th February, 2016, wherein ....
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....ochips Limited is not a good comparable. We accordingly direct the TPO/Assessing Officer to exclude this company from the list of comparables. 48. So far as Wipro Technology Services Limited is concerned, we find this company was included by the TPO on the ground that it passes all the filters and accordingly it is robust comparable. The DRP upheld the action of the TPO on the ground that it passes the filter and is functionally comparables. It is the submission of the ld. counsel for the assessee that this company is engaged in IT software solutions/maintenance and technology infrastructure support services and has got high brand value. Similarly, it's related party transaction are more than 25%. It is also his submission that this company was rejected by the Tribunal in assessee's own case for assessment year 2010-11 and by the Coordinate Bench of the Tribunal in the case of Equant Solutions India Pvt. Ltd. vide ITA No.1202/Del/2015, Ness Technologies Private Limited (supra) and Orange Business Services India Solutions Pvt. Ltd. vide ITA No.869/Del/2016. 49. It is the submission of the ld. DR since this company passes all the filters, therefore, it is a robust comparable and, t....
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.... Referring to various pages from the annual report, he submitted that there is insufficient segmental information and, therefore, the same should be excluded from the list of comparables. 55. It is the submission of the ld. DR that this issue may be set-aside to the extent of verification of segment details. 56. We find merit in the argument of the ld. counsel of the ld. DR that this issue may be set-aside to the file of the TPO/Assessing Officer to the extent of verification of segmental details. Accordingly, the comparable Igate Global Solutions Ltd. is allowed for statistical purposes. 57. So far as certain companies erroneously rejected by the TPO is concerned, ld. counsel for the assessee challenged the order of the TPO/DRP to the extent of the following comparable. 58. So far as Cat Technologies Limited is concerned, the TPO rejected the same on the ground that it fails RPT filters and it is functionally dissimilar. However, the DRP held that the TPO/Assessing Officer shall verify the submission of the assessee that the comparable passes the filters. Further, it was accepted as comparable by the TPO in assessment year 2010-11 in assessee's own case. It is the submission o....
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....oth the sides, we find the Tribunal in assessee's own case at para 8.11 had directed the TPO to consider the allowability of this company as comparable with certain direction. We, therefore, restore this issue to the file of the TPO with the same direction. 62. So far as Helios & Matheson Information Technology Limited is concerned, the TPO excluded the same from the list of comparables on the ground that it has different financial year ending and fails export turnover filters. The DRP upheld the action of the TPO. It is the submission of the ld. counsel for the assessee the different financial year ending is not an appropriate filter and the company passes export earnings filter of 76.31%. Further, the TPO himself has accepted this company in assessee's own case in assessment year 2007-08 and was accepted by the Tribunal in assessee's own case for assessment year 2010-11. 63. After hearing both the sides, we find this company was considered by the Tribunal in assessee's own case in the immediately preceding assessment year and the Tribunal has restored this issue to the file of the TPO/Assessing Officer with certain direction for inclusion of this company. We, therefore, restore....