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2018 (7) TMI 741
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....nternational transaction with its AE, the Assessing Officer 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 ....
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....mputation of Arm's Length Price of Software Development Services: The arm's length price of the international transaction related to the provision of Software 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% ....
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....mmunication Limited, Apitco Limited, Global Procurement Consultants Limited, TSR Darashaw Limited are functionally different entity and hence does not make good comparables to the assessee in MSS function. Similarly, they held that Power Systems Operation Corporation Limited being 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 Assessi....
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....a b. Determining the arm's length margins / prices using data pertaining only to FY 2010-11 which was not available to the Appellant at the time of complying with the Transfer Pricing ("TP") documentation requirements. 6. The learned AO / TPO / DRP have erred in rejecting certain comparable companies identified by the Appellant using employee 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 co....
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....filters and, therefore, it is a robust comparable. The argument of the assessee before the TPO that Infosys Technologies Ltd. is functionally dissimilar, engaged in significant R&D activities, having significant intangible assets, brand value of Infosys and earning supernormal profits was rejected by the TPO. The DRP directed the TPO to exclude Infosys Technologies Ltd. from the list of comparables on the ground that it is an industrial giant 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 ....
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....sions of software development services, according to which, Adobe India provides engineering, research and development services to Adobe US. Further, Adobe India also performs design, development, support improvement and enhancement services for Adobe US products. As per the said terms and conditions, Adobe India is reimbursed by Adobe US all direct, indirect and overhead expenses incurred in rendering services along with a mark up on such costs. 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 bas....
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....tage which the assessee does not possess. 17. Referring to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. vide ITA No.1204/2011 order dated 10.07.2013, he submitted that Infosys Technologies Ltd. was excluded from the list of comparables on account of its operating as full-fledge risk taking entrepreneurs has diversified services and develops/owns proprietary products like Finacle, Infosys Actice 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 com....
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....late to provide end-to-end business solutions that leverage technology, thereby enabling clients to enhance business performance delivered to customers globally operating various industry segments and accordingly segment information in respect of operation in industries and geographic location has been provided. 6.5.8 When we compare the activity of the instant assessee, we find from the transfer pricing study as under: "a) Adobe India provide engineering, research 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 perf....
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....he Associated Enterprises without any compensation i.e. by the application of these clauses of the agreement the associated Enterprises becomes legal owner of the intangibles developed by the assessee in India. It is pertinent to mentioned here that the assessee has developed these intangibles in India and had borne cost and risk and had used its asset. Accordingly, the economic ownership of the intangibles is with the assessee. It is now well accepted principle that local economic ownership of intangible can be created separately & 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." ....
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....he products developed by the assessee are different as compared to the entities in the cases relied upon by the assessee. Since function of the comparable company and the assessee may differ from year to year, the decision of Tribunal in earlier year, for not treating the company as comparable, cannot be taken as binding precedent. 6.5.17 In view of above discussion, we direct the learned TPO to retain M/s Infosys Technologies Ltd. as one of the comparable to the assessee." 21. While holding so, the Tribunal has further observed that the assessee has 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 ....
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....e remaining 7 comparables for which the Revenue is not in appeal before the Tribunal. 25. We have considered the rival arguments made by both the sides and perused the material available on record. So far as MMTV Limited is concerned, the DRP excluded this company from the list of comparables on the ground that this is functionally different entity and does not make a good comparable to the assessee in MSS function. Further, the submission of the assessee that it has significant intangibles could not be converted by the ld. DR. Since the above company is engaged in the business of television broadcasting and related operations 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....
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....depository services, record management, payroll and provident fund management and corporate fixed deposit management which are in the nature of IT enabled services as evident from page 21 of the annual report. We, therefore, uphold the order of the DRP in holding that this is functionally different entity. Further, this company was rejected by the Tribunal in assessee's own case for assessment year 2009-10 and the DRP in assessee's own case for assessment year 2010-11 and no appeal was filed by the Revenue before the Tribunal. We, therefore, uphold the order of the DRP in excluding the company from list of comparables. The ground no.2 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 ....
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.... the case of Alliance Global Services IT India (P) Ltd. vide ITA No.58/Hyd/2014 has held that the provision for bad and doubtful debts should form part of the operating expenses. Similar view has been taken by the Delhi Bench of the Tribunal in the case of Rolls Royce India Private Limited vs. DCIT vide ITA No.1310/Del/2015. In view of the above discussion, we do not find any infirmity in the order of the DRP holding that the losses/gains due to foreign exchange fluctuation as part of the operating margin and the bank charges as part of the operating expenditure of the assessee. Further, the order of the DRP holding the provision for doubtful 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 ....
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.... online portal based on subscription by the buyer and seller of the services compared to services provided by the assessee of marketing support services . In view of this we direct ld. TPO for exclusion of this comparable." 41. Similarly, the Tribunal in the case of Linkedin Technology Information Private Limited (supra) has directed the TPO to exclude this company from the list of comparable. 42. Following the above two decisions and considering the fact that the functions of Info Edge (India) Limited is different from that of the case of the assessee, we hold that the above company is not a comparable. We accordingly direct the Assessing Officer/TPO to exclude 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 Advis....
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....e development consultancy and also manufacturing EVM and VDB Electronic Board (Hardware Division). We find considering all aspects the Co-ordinate Bench of the Tribunal in the case of Ness Technologies Private Limited (supra) has directed to exclude this company from the list of comparables. The relevant observation of the Tribunal from para 4 onwards read as under :- "8. We have carefully considered the rival submissions. In the context of the objections raised by the assessee, we have perused the ITA No. 696& 1006/Mum/2016 (Assessment Year 2011-12) Annual Report of the said concern, a copy of which has been placed in the Paper Book at pages 418 to 429. A perusal of the 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 ....
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....ent to note that the aforesaid observations of our Co-ordinate bench are in relation to the assessment year 2011-12, which is also the assessment year under consideration before us. 8.2 On the basis of the aforesaid discussion, in our view, the said concern cannot be considered as a good comparable and deserves to be excluded from the final set of comparables for benchmarking the international transactions of Provision of software development services undertaken by the assessee. Thus, on this aspect we uphold the stand of assessee and Ground of appeal no. 15 is allowed." 47. Following the decision of the Tribunal cited (supra) and in view of our above discussion, we hold that the E-Infochips 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 t....
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....that since this company passes all the filters, therefore, it is good comparable. 53. In our opinion, the matter needs to go back to the TPO/Assessing Officer on this issue to give an opportunity to the assessee to substantiate as to how this company is functionally different from that of the assessee company. The Assessing Officer/TPO shall decide the issue afresh after giving due opportunity of being heard to the assessee. 54. So far as Igate Global Solutions Ltd. is concerned, the TPO included this company on the ground that it passes all the filters which was upheld by the DRP. It is the submission of the ld. counsel for the assessee that Igate Global Solutions Ltd. is engaged in IT and ITeS services. 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 verifi....
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....No.217/2014 and the decision of the Special Bench of the Tribunal in the case of Sun Life India Service Centre Pvt. Ltd. vide ITA No.750/Del/2015. We hold and direct accordingly. This issue is accordingly allowed for statistical purposes. 60. So far as R Systems International Limited is concerned, it was rejected by the TPO on account of different financial year ending which has been upheld by the DRP. It is the submission of the ld. counsel for the assessee that since quarterly results of the company are available in public domain, therefore, margin computation for the period ended on 31.03.2011 is possible. Further it was accepted by the Tribunal in assessee's own case for assessment year 2010-11. 61. After hearing both 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 expor....