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Sony Mobile Communications International AB (India Branch Office) , (Formerly known as Sony Ericsson Mobile Communication International AB) Versus DDIT, Circle-2 (2) , New Delhi

2016 (5) TMI 198 - ITAT DELHI

Non granting of working capital adjustment - Held that:- We are not inclined to accept the view canvassed by the authorities that the working capital adjustment cannot be allowed as the assessee is in service industry. Such an adjustment is restricted to inventory, trade receivables and trade payables. If a company carries high trade receivables, it would mean that it is allowing its customers relatively longer period to pay their dues, which will result into higher interest cost and the resulta .....

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comparable entities. We, therefore, agree in principle with the grant of working capital adjustment.

To sum up, we set aside the impugned order on the issue of addition towards transfer pricing adjustment and remit the matter to the file of AO/TPO for fresh determination of the ALP of the international transaction of rendering of software services in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fre .....

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ce alone, thereby leading to transaction with self, in our considered opinion, is again devoid of merits. Once the law requires an Indian branch of a foreign enterprise to be considered independent of its head office for taxation purpose, the AO cannot make out a case that there is no difference between head office and branch office in India and, hence, no deduction, which is otherwise available, should be given. If the principle of mutuality as invoked by the AO for denial of deduction u/s 10AA .....

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d what was received was simply the cost incurred plus a certain mark up and the same cannot be considered as sale proceeds of the software sold by the assessee. Again, we are unable to countenance this view of the AO because the assessee brought in India sale proceeds from rendering of services to its AE. The remuneration model has been decided by the parties inter se with a cost plus mark-up, which in the instant case, is 15% of costs. What the assessee has realized in India is nothing, but, sa .....

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verturn the impugned order on this issue and direct the grant of deduction u/s 10AA of the Act. - Decided in favour of assessee - ITA No. 769/Del/2014 - Dated:- 29-4-2016 - Shri R. S. Syal, AM And Shri Kuldip Singh, JM For the Petitioner : Shri Nageswar Rao, Shri Sandeep S. Karhail & Shri Parth, Advocates For the Respondent : Shri A.M. Govil, CIT, DR ORDER Per R. S. Syal, AM This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) .....

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rmerly called Sony Ericsson Mobile Communications International AB), a company incorporated under the laws of Sweden. The assessee s Head office is a wholly owned subsidiary of Sony Ericson Mobile Communications AB (hereinafter referred to as SEMC ). SMCI set up a branch office (R&D Centre) in a Special Economic Zone (SEZ) in Chennai with the objective of entering into research and development activity in the information technology industry. The assessee filed its return along with the audit .....

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ting to Contract software development maintenance and up gradation and Contract design, development, testing and any similar activities in relation to mobile phones, their accessories, communication devices or communication systems. The nature of business carried on by the assessee was characterized by the TPO as that of providing software services to its AE. The assessee adopted Transactional net margin method (TNMM) as the most appropriate method with the Profit Level Indicator (PLI) of Operat .....

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21 in the Table with duplication of two companies), as tabulated on pages 55 and 56 of his order, as comparable with their average OP/TC at 26.37%. By applying this profit rate as benchmark, the TPO proposed a transfer pricing adjustment of ₹ 10,68,36,646/-. The assessee assailed the draft order of the AO containing such addition before the Dispute Resolution Panel (DRP). After certain rectification order passed by the TPO pursuant to the directions of the DRP, a final addition of ₹ .....

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e companies in the final set of comparables, namely, Infosys Ltd., Tata Consultancy Services Ltd. (Consolidated) and Bodhtree Consulting Ltd. (Standalone). We will take up these three companies in seriatim to decide their inclusion in the final list of comparables. 5. Before deciding the comparability or otherwise of the three companies under challenge, it is of paramount importance to first ascertain the functional profile of the assessee. It has been noticed above that the assessee is providin .....

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02 onwards. The nature of services provided by the assessee pursuant to this Agreement are contained in Annexure, which are verbatim reproduction of what has been mentioned above. This Agreement provides that the assessee will be compensated by its AE on all Costs incurred in providing such software services with a certain mark up. The term Costs has been defined to mean all variable and fixed operating expenses including normal recurring costs, such as, lease rent, communication and linkage cha .....

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r of all rights relating to or emanating from any information or material including intangibles supplied by it to the assessee. It has further been agreed that the assessee will not acquire any ownership or economic interest in the intangibles. We have gone through certain invoices raised by the assessee on SEMC, copies of which are available on page 118 onwards of the paper book. For example, invoice dated 7.1.2009 has been raised on SEMC by giving total expenses incurred during the month of De .....

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d it to be engaged into software development services qualifying all the filters applied by him. The assessee raised certain objections before the DRP against the inclusion of this company, but without any success. The TPO computed operating profit margin of this company at 40.74% and considered it accordingly. The assessee is aggrieved against the inclusion of this company in the eventual set of comparables. 6.2. We are disinclined to sustain the preliminary objection taken by the ld. DR that t .....

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which is otherwise not chargeable, should also be excluded. There can be no estoppel against the provisions of the Act. Extending this proposition further to the context of the transfer pricing, we find that if an assessee fails to report an otherwise comparable company, then the TPO is obliged to include it in the list of comparables, and in the same manner, if an assessee wrongly reports an incomparable case as comparable in its TP study and then later on claims that it should be excluded, th .....

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6.3. Turning to the functional comparability, we find that the assessee is simply a captive unit rendering services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related pr .....

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vice provider and also not owning any branded products with no expenditure of its own on R&D etc. When we consider the above factors in a holistic manner, there remains absolutely no doubt in our minds that Infosys Technologies Ltd. is non-comparable with the assessee company. Respectfully following the judgment of the Hon ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd., cannot be treated as comparable with the assessee company. This company is, .....

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77; 868.25 crore. The TPO has taken entity level figures of this company for the purpose of making comparison. When we peruse the segmental reporting given by this company, it turns out that the same has been done on the basis of geographical locations and there are no functional segments. It is further noticed above that total revenue of this company includes a larger chunk from the sale of equipment and software licenses, which renders it incomparable with the assessee, which is solely engaged .....

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of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been adopted by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. The ld. DR contended that the mere fact of acquisition and merger should not be considered as a decisive test for exc .....

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f a company on this score. In our considered opinion, when other comparables are available, the exclusion of a probable comparable company cannot have much significance in contrast to a situation of inclusion of a probable incomparable. Respectfully following the above referred decisions, we hold that TCS Ltd. cannot be considered as comparable with the assessee. The same is directed to be excluded. (iii) Bodhtree Consulting Ltd. 8.1. This company was chosen by the TPO as comparable. The assesse .....

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ts earned by this company during the year and also held the same to be functionally similar inasmuch as it was having only one identifiable reporting segment, i.e., software development services. The assessee is aggrieved with the inclusion of this company in the final list of comparables. 8.3. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, that it has only one segment, namely, Software development. It is enga .....

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the Annual report of this company, in which it has been reported that revenue from software development is recognized based on software developed and billed to clients. He submitted that the costs incurred by this company in respect of the projects pending completion at the end of the year are booked at the time of incurring, but, the income is recognized on the raising of bills in subsequent year, thereby distorting the comparability with the assessee company. 8.5. We find that the assessee is .....

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sed during the months of May 2008 to March 2009. However, difficulty arises qua the expenses incurred in rendering the services during the month of March, 2008, for which bill is raised in the month of April, 2008 and the expenses incurred in rendering the services during the month of March, 2009, for which the bill is raised in the month of April, 2000. The assessee follows the financial year closing, namely, March ending every year. The revenue for the year ending 31.3.2009 thus includes the i .....

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in April, 2009 for Pounds 3,40,153.46. Difference in these two amounts, translated into Indian rupees, as per the ld. AR would be roughly to the tune of ₹ 18.00 lac. This shows that both the assessee and Bodhtree Consulting Ltd. are not following any different pattern of income recognition, namely, Bodhtree Consulting is recognizing income at the completion of project and the assessee at the end of month. In such circumstances, we find it difficult to order the exclusion of this company fr .....

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le in one case does not per se become comparable in all other cases and vice versa. What is required to be seen is the basis/factor on which such company was held as comparable or non-comparable in the first case. If the same basis/factor exists in other cases as well then, no different view can be taken. But if the relevant basis/factor for decision in the first case does not exist in the other cases, it is but natural that different view will have to be taken. In Ciena (supra), the tribunal fo .....

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sed by the ld. AR is about not granting of working capital adjustment. The assessee requested for allowing working capital adjustment which the TPO refused to allow on the ground that such adjustment would be relevant only when some inventory remains tied up or receivables are held up which cannot be a criteria in a service industry as the assessee is engaged in. He, therefore, refused to allow any working capital adjustment. 9.2. We have heard the rival submissions and perused the relevant mate .....

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the authorities that the working capital adjustment cannot be allowed as the assessee is in service industry. Such an adjustment is restricted to inventory, trade receivables and trade payables. If a company carries high trade receivables, it would mean that it is allowing its customers relatively longer period to pay their dues, which will result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer pe .....

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e view taken by the Dispute Resolution Panel (DRP) for computing such adjustment on the basis of daily average of working capital deployed by the tested party and also each of the comparables, is not tenable because of the order passed by the Delhi Bench of the Tribunal in the case of Navisite India Pvt. Ltd. Vs. ITO (ITA No.5329/Del/2012). Vide its order dated 31.5.2013, the Tribunal has held that the components of the working capital deployed should be considered on annual basis with the avera .....

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ent, if any, available to the assessee in the light of our above discussion. Once it is held that such an adjustment is allowable, then it should be carried out whether it favours or disfavors the assessee. It goes without saying that the assessee will be allowed an opportunity of hearing in such fresh determination of the working capital adjustment, if any. 10. To sum up, we set aside the impugned order on the issue of addition towards transfer pricing adjustment and remit the matter to the fil .....

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10AA. The AO refused it giving three major reasons as recorded on pages 6 and 7 of his order, namely, first, that the services were rendered by the Indian branch office to its holding company at cost plus basis and the branch office cannot be treated as separate taxable entity different from its head office for determining the income which accrues in respect of activities undertaken by it. The second reason given by the AO was that even if exports were made, but, sale proceeds in foreign curren .....

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O. The assessee is aggrieved against the denial of benefit of deduction u/s 10AA of the Act. 13. We have heard the rival submission and perused the relevant material on record. We find that the assessee furnished complete details about the fulfillment of all the relevant conditions for the eligibility of deduction u/s 10AA before the AO as well as the DRP. Copies of such letters addressed to these authorities are available on pages 138, 166, 167, 173, 184, 193, etc. of the paper book. The AO has .....

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e services to its AE, on which transfer pricing adjustment was made. Under such circumstances, the point of view of the AO that the services were rendered by the assessee to its holding company, is wholly incorrect. As regards the other point considered by the AO for denial of deduction about the assessee rendering services to its head office alone, thereby leading to transaction with self, in our considered opinion, is again devoid of merits. Once the law requires an Indian branch of a foreign .....

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