TMI Blog2017 (12) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... me on the request of the parties. The assessee filed a certified copy of the order of the Hon ble High Court only on 25/10/2017 and, thereafter, both parties were heard. 3. The ground No. 6 and 14 of the appeal of the assessee in ITA No. 1163/Del/2014 are reproduced as under: 6. The learned AO/TPO/DRP have erred in rejecting certain companies which are comparable to the Appellant and adding certain functionally dissimilar companies to the final set of comparable companies. 14. The learned AO/DRP have erred by not making suitable adjustments to account for differences in the risk profile and working capital of the Appellant vis- -vis the comparable companies. 4. The facts in brief of the case are that the assessee (hereinafter also called as Adobe India ) is a subsidiary of Adobe USA . During relevant period, the assessee was engaged in providing software development services to Adobe USA . It also provided marketing and sales support services to Adobe System Software, Ireland . For the year under consideration, the assessee filed return of income on 28/09/2009, declaring total income of ₹ 24,74,56,967/- after claiming exemption under section 10A of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Provision of software development services Rs.33,39,88,898 2 Provision of marketing support services Rs.2,35,01,986 Total Rs.35,74,90,884 4.3 The assessee filed objections before the Ld. DRP. The Ld. DRP included/excluded certain comparables out of the set of the comparables selected by the Ld. TPO, which resulted into reduction in adjustment under both the segments of software development services and marketing support services as follows S. No. Nature of international transaction Adjustment 92CA under section 1. Provision of software development services ₹ 18,73,02,909 2. Provision of marketing support services ₹ 1,18,51,961 3. Total ₹ 19,91,54,870 4.4 Aggrieved, both the assessee and the Revenue filed appeal before the Tribunal. 5. Under softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infosys technologies Ltd Retained 2. Tata counseltancy services Retained 3. Wipro Ltd Retained 4. Zenith Infotech Ltd Retained. 6.1 In background of the above facts, both parties have been heard. 6.2 Addressing the ground No. 6 before us, the learned counsel of the assessee submitted that consequent to the order of the Tribunal, TP adjustment relating to market support services segment got deleted and department s appeal against the deletion is pending consideration before the Hon ble High Court of the Allahabad. 6.3 We find that Hon ble High Court has restored back the entire ground No. 6 of the appeal of the assessee. The ground No. 6 is in respect of rejection of certain comparables and addition of certain functionally dissimilar companies to the final set of comparable companies. Thus, ground No. 6 is both in respect of software development services and marketing support services. Now, the position is that on one hand the appeal of the Department against the exclusion of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal, and the appeal of the Revenue has not been allowed by the Tribunal. Therefore, the assessee cannot challenge exclusion of the said comparable in proceedings remitted by the Hon ble High Court. We have heard the rival submission of the parties. We agree with the contention of the Ld. CIT(DR). Since this comparable was already excluded by the Ld. DRP, and assessee was not aggrieved with the said direction of the Ld. DRP, the assessee could not have challenged this exclusion in ground No. 6. Exclusion of the said comparable was challenged by the Revenue in its appeal and which has been allowed by the Tribunal. Since the appeal of the Revenue has not been remitted back to the Tribunal, now we cannot consider exclusion/inclusion of the said comparable. Accordingly, we refrain from giving any direction on the exclusion of the said comparable out of the list of the final set comparable under software development services. Infosys Technologies Ltd. 6.5.3 The Ld. counsel requested for exclusion of the company due to the reason that it is engaged in various products and insufficient segmental information is available in the annual report. He further submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat during the year the company has shown income from software service and products. Further, on page 80 of the Annual Report (page 953 of the paper book) under the head segment reporting , it is reported that the company s operations predominately relate 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is seen as per clauses of software Research Agreement dt. 01.09.1997 the legal ownership of R D intangibles developed by the assessee in India automatically gets transferred to the 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases relied upon by the assessee are not applicable over the facts of the instant case as the functions carried out and the economic interest in the 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. Tata Consultancy Ltd: 6.5.18 The Ld. counsel submitted that income of the said comparable comprising revenue from sale of equipment and software license alongwith revenues from information technology and consulting services. He also submitted that the company is engaged in various products and fails onsite filter proposed by the learned TPO itself. The Ld. counsel referred to page 1056 of the paper book and submitted that the comparable company has acquired certain companies during the year which is having impact on the Profit Level Indicator of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see company during the year. Accordingly, we direct the Ld. TPO/AO to exclude the above company out of the set of the comparables under software developments services segment. Wipro Ltd 6.5.22 The learned counsel submitted that during the year the company has acquired Wipro Technology Service Ltd. in January 2009 and subsidiaries of the company have been merged with the holding companies in USA. He submitted that the company was engaged in diversifying business operations and during the year revenue from software development was only 40%. He said that the company has also shown income from BPO services and consulting services. The Ld. counsel also submitted that the company is dissimilar to the assessee company in view of significant intangible assets, significantly large scale of operations and industry giant and having significant brand value. The learned counsel submitted that the company has been excluded as comparable by the Tribunal Delhi bench in the case of Ciena India Private Limited (ITA No. 1489/Del/2014 for assessment year 2008-09. He also submitted that comparable should be excluded relying on the decision of the Tribunal in assessee s own case for assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of amalgamation, the Company has allotted 968,803 fully paid equity share with a market value as on April 1, 2007 of ₹ 542 Million as consideration to a Wipro Inc. Trust to be held for the benefit of Wipro Inc. (Note 6 in the Notes to Accounts of the annual parent financial statements). 6.5.25 Thus, it is evident that acquisition and mergers has enhanced the capability of the company. This being an extraordinary event during the year under consideration, the company cannot be compared with assessee company. Accordingly we direct the AO/TPO to exclude above company from the list of the comparables. Zenith Infotech Ltd: 6.5.27 The learned counsel submitted that the company is engaged in various products and no segment information is available in the Annual Report of the company. He submitted that company has shown growth of 76.35 percent as compared to previous year and thus this being exceptional years in terms of financing performance the company should be excluded as comparable. He also submitted that Tribunal in assessment year 2008-09 has excluded the company as comparable. The ld. CIT(DR), on the other hand, submitted that the comparable company is functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o other reason has been raised by the assessee for excluding the above company. In view of above, we direct the Ld. AO/TPO to retain the above comparable in the list of comparables under software development service segment. 7. In respect of ground No. 14, the Ld. counsel of the assessee submitted that during the course of assessment proceeding the assessee furnished that in comparing margins earned by the comparables viz-a-viz the assessee, difference on account of working capital employed need to be factored into. But this claim of the assessee was not accepted on the ground that the assessee had not been able to demonstrate that the difference in working capital employed by the comparables and the assessee affected the comparability and reliable data was not available for making such adjustment. 7.1 Before us, the learned counsel submitted that detailed computation was filed before the Ld. DRP and a copy of which was made available on page 300- 302 of the paper book filed before the Tribunal. 7.2 He further submitted that the Tribunal has allowed working capital adjustment in assessment year 2010-11 and assessment year 2008-09 in the case of the assessee itself. He a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing working capital deployed has to be taken into consideration for making any adjustment to the working capital deployed in the case of a comparable, of course, the assessee for availing the above benefit has to demonstrate that there was difference in the levels of working capital employed, vis-a-vis, the comparables. We thus set aside the matter to the file of the TPO to decide the issue accordingly after affording opportunity of being heard to the assessee. The ground no. 8 is thus allowed for statistical purposes. 7.6 The assessee submitted that in assessment year 2011-12 and assessment year 2012-13 the learned TPO himself has allowed the working capital adjustment. The Ld. CIT(DR) has not disputed this fact. 7.7 In view of the above, following the Rule of Consistency and finding of the Tribunal in the case of the assessee for assessment year 2008-09, we direct the Ld. AO/TPO to give effect of the working capital adjustment to the working capital employed by the comparables. Thus, we set aside and restore the issue of allowing working capital adjustment to the file of the Ld. AO/TPO for deciding after affording opportunity of being heard to the assessee. 8. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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