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Qualcomm India Pvt. Ltd. Versus DCIT, Circle-14 (1) , New Delhi

2016 (2) TMI 228 - ITAT DELHI

Transfer pricing adjustment - comparability of Saket Projects Ltd. company - Held that:- We concur with the conclusion of the TPO that a comparable cannot be excluded on the grounds of high profitability alone as high profit can be a measure of efficiency in management. While so holding taking into consideration the consistent finding on record qua the said comparable for the specific assessment year in consideration namely 2008-09 assessment year, we find that the judicial precedent concluding .....

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having an entirely different Revenue generation model of offering space on rent and selling event fees etc. has also not been rebutted. This fact further makes the said comparable as functionally not comparable to Business Support Services. Accordingly in the absence of any rebuttal on these crucial factual aspects, we find that the limited prayer of the assessee has to be allowed.

Thus, for the detailed reasons brought and herein above Saket Projects Ltd. is directed to excluded as .....

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ute Resolution Panel s (hereinafter referred to as DRP ). 2. The Ld. AR referring to the grounds raised by the assessee submitted that although various grounds have been raised in the present appeal however, on the basis of Ground Nos.2.1, 2.3, 2.4 and 2.5 the assessee only prays for exclusion of certain comparables. For ready-reference these grounds are reproduced hereunder:- 2.1. determining the arm s length margin/price using only financial year 2007-08 data which was not available to the App .....

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the assessee had put up a case before the Co-ordinate Bench that three comparables may be excluded. However, today on instructions from the client he is arguing only for excluding one comparable i.e. Saket Projects Ltd. The said comparable it was submitted was no doubt offered by the assessee however notwithstanding that reliance was placed on the jurisprudence available in support of the said prayer. Inviting attention to ITA No. 4765/Del/2011 & 427/Del/2013 in Nortel Networks India Pvt. Lt .....

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should not be retained on this count alone as at that stage full facts were not available in the public domain. It was his submission that at the time that the said comparable was offered the assessee did not have the benefit of examining its financial results of 2008-09 assessment year as the selection of the said comparable was done on the basis of the financial data of 2006-07 assessment year. 3.2. The decisions of the Special Bench in the case of DCIT vs Quark Systems Pvt. Ltd. [2010] 4 ITR .....

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al available on record. A perusal of the record shows that the assessee declared an income of ₹ 4,62,96,826/- under the normal provisions and an income of ₹ 51,17,87,682/- under the MAT provisions. The return was processed u/s 143(1) and subsequently after issuance of notice u/s 143(2) was selected for scrutiny assessment. The case following the procedures was marked to the TPO in view of the fact that the assessee engaged in the business of software development and providing marketi .....

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ision of Business Support Services . However, before we progress to the same it may not be out of place to refer to certain facts: namely that Qualcomm India Pvt. Ltd. (hereinafter referred to QIPL ) is engaged in the business of conducting research and development ( R&D ) in new technologies for enhancements and improvement of QUALCOMM s existing products and new product QIPL undertakes development of wireless communications and applications software, DSP firmware and hardware for the produ .....

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remuneration of only 10% mark up over costs was provided. Considering the vital service provided, he was of the view that the comparables chosen necessitated a relook and accordingly a show cause notice was issued by him. The relevant extract is reproduced hereunder from the TPO s order at pages 29 to 31 (Appeal set pages 139 to 140):- 6.1. As per your TP report, in the course of the international transaction related to provision of business support services, the functions that you perform are ( .....

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AE's customers. (vi) Providing technical guidance, support and training of the AE's customers. (vii) General administrative and technical assistance as requested by the AE. (viii) Other services that may be requested by the AE. The functional matrix of the functions earned by you vis-a-vis the AE is as below. Sl.No. Type of function QIPL AE 1. Corporate services functions Yes No 2. Market research and business development Yes No 3. Marketing support No Yes 4. Training of employees Yes Li .....

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hat governs the provision of business support services also mentions that the intellectual property that you will create will be transferred to the AE at no remuneration over and above the routine mark-up of 10% over cost. Such market behaviour is unlikely to answer the arm's length principle. As was argued In the case of the other segment it can be said on this occasion also that no independent party would have agreed to such terms. It is evident from the perusal of the service agreement an .....

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we choose the comparables carefully. 6.1. As per your TP report you have earned a margin of 10.77% on cost. As against this you have chosen a set of 14 comparables, which have an average margin of 11.97% using multiple year data. As explained in the case of software/chip designing segment, this approach is faulty-as the mandate of Rule 10D(4) is to use current year data unless it is demonstrated that factors of earlier years have affected the transfer prices in the current year. In all your subm .....

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e rejected it on the ground that Segmental financials are not available. That Is found to be incorrect. As per annexure 8 of your submission dated 21.02.2011, segmental data is very much available. In this case, normally, the Event management segment is considered comparable. This segment still very much exists and the segment revenue is clearly identified. The segment expenses are identified at Schedule 14 of the annual report. Therefore, the event management segment of this company shall be tr .....

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percent) of total revenue. Since no segmental information is available, the company is rejected. 6.2. The assessee in its transfer pricing study disclosed that its margin of 10.77% with Profit Level Indicator (hereinafter referred to as PLI ) as Operation Profit to Total Cost (hereinafter referred to as OP/TC ) was comparable as against the OP/TC margins of 14 comparables which worked out to 11.97%. These 14 comparables selected by the assessee included Saket Projects Ltd. and since multiple yea .....

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y was chosen by the assessee as a comparable. The assessee has used multiple year data in its search for comparables. As in the case of many of the comparables chosen by it, in this case also the assessee did not use current year data. However, the assessee has obviously carried out a functional analysis on the basis of data of previous years. That means that this company was comparable based on earlier year data. The company would validly cease to be a comparable on the use of current year data .....

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l net margin method). They can also affect other items, e.g. exceptional items which are below the line but nonetheless may reflect exceptional circumstances. Where one or more of the potential comparables have extreme results, further examination would be needed to understand the reasons for such extreme results. The reason might be a defect in comparability, or exceptional conditions met by an otherwise comparable third party. An extreme result may be excluded on the basis that a previously ov .....

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cussed earlier in this order. In addition to what has been stated, it must he stated that margin is at best a measure of efficiency in the normal course of business. It cannot be used to reject a company as a comparable unless some actual functional dissimilarity has been pointed out. The assessee has failed to do so. In fact the assessee has chosen this as a comparable based on data for previous years. There is no change in the functions of this company in this year. The assessee has claimed th .....

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showed all along the said company has been offered as a comparable which necessarily supports the conclusion that functional comparability stood established and accepted and the assessee could not be allowed to resile from its accepted stand. Apart from that the absence of ostensible reasons justifying its exclusion was also found to be missing. The relevant extract is reproduced hereunder:- The company is engaged in four different business activities, namely Industrial Publication Division (IP .....

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nalysis. It may be mentioned here that the functional profile of this company is same in the current year as was in earlier years. Subsequently, when the TPO asked the assessee to provide current year s margin, the assessee changed its stand, obviously, for the reasons of its high margin in the current year. The assessee can t be allowed to change its stand unless: i) the functional profile of either the comparable or the assessee has changed in the current year or ii) there are some ostensible .....

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the Co-ordinate Benches in Nortel Networks India Pvt. Ltd. and Premier Exploration Services Private Ltd (cited supra). 6.6. A perusal of the record shows that the Co-ordinate Bench in the case of Nortel Networks India Pvt. Ltd. while considering the facts of Saket Projects Ltd. in 2008-09 assessment year directed exclusion of the said comparable holding as under:- 11.2. On issue of exclusion of Saket Projects Ltd, we are of the view that specific characteristics of services provided, assets emp .....

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find place in the list of comparables. Similar view has been approved by various coordinate ITAT benches in the cases like Exxon Mobil Company India (P.) Ltd.- (2011-TTJ-68- ITAT-MUMTP) and DCIT vs. M/s. B.P. India Services (P.) Ltd. - ITA No.4425/Mum/ 2010. 11.3. On issue of comparability of Saket Projects Limited, we are in agreement with the ld DR that no comparable can be rejected merely on the basis of high margins if it is functionally comparable to the assessee or there is miner variatio .....

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arable. We direct ld. AO to work out the ALP in A.Y. 2008-09 accordingly. (Emphasis provided) 6.7. A further reading of the decision of the Co-ordinate Bench in Premier Exploration Services shows again for 2008-09 assessment year vide para 9 (page 618-619 of the Paper Book) the said comparable was directed to be excluded from the list of comparables on the following reasoning:- 9. We have heard both sides on this ground. TPO had considered the event management Division of Saket Projects Ltd. as .....

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ns if the comparable is functionally comparable to the assessee and also that there is miner variation in functional similarity. However, in the case of Saket Projects Ltd. there is functional dissimilarity. The company is organizing events with various kinds of sponsorships. The facts also suggest that segmental allocation of expenses were not reliable. We also hold that when direct comparables are available then segmental results of companies engaged in other business should not be taken as co .....

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