GE India Technology Centre (P.) Ltd. v. Dy. Director of IT

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The Tax Publishers2013 TaxPub(DT) 0809 (Bang-Trib) : (2013) 141 ITD 0245 INCOME TAX ACT, 1961 --Transfer pricing--computation of ALP Selection of comparables--Assessee had entered into international transactions with AEs for customized electronic data, computer software and any other tangible article or things as a result of research activity. Therefore, assessee while conducting its TP study had adopted/choosen comparables which were all in field of 'development and export of computer software'. TPO observed that assessee was providing contract services of research and development and other services in various field of engineering. TPO observed that assessee was basically carrying out research and development and engineering analysis with aid of sophisticated labs/software in various fields of engineering. He therefore, rejected assessee's TP study holding that they were functionally different. He, therefore, proceeded to re-determine ALP by conducting search on data base 'powers' for fresh comparables. Search was made for business line 'Technically consultancy and engineering services and research developments'. However, as some of comparables offered by taxpayer were having engineering services, TPO accepted same as comparables along with those proposed by TPO and, thereafter adopting TNMM computed ALP. Held: Assessee was engaged in contract research and development activity and derives income from foreign principals/associated enterprises and merely because result of such research and development is delivered to its AE's in customized electronic data, it would not make nature of services as software development. Thus TPO has rightly treated assessee as engaged in contract research and development, technical engineering services and accordingly selected relevant comparables, however in view of not conducting FAr, issued is remanded back to TPO. Assessee is a service provider for research and development in various fields of engineering (including computer software) as enumerated in the agreements between the assessee and its associated enterprises reproduced in para 8 and 9 above and the result of such research and development is being delivered to the clients/associated enterprise in the form of customized computer data through network/internet. Thus, even as per the assessee's submissions, it is conducting the research and development through its multi-disciplinary R&D centre JFWTC and its activities are for several streams/areas including Information Technology. Thus it can be seen that it is catering to nearly all of GE's diverse business worldwide touching nearly every scientific discipline across the spectrum such as mechanical engineering, electronic and electrical and metallurgy, catalysis and advanced chemistry, polymer science and new synthetic materials, power electronics etc. Therefore, as rightly held by the TPO, the assessee is not into simple software development but is engaged in research and development in technical and engineering services on contract basis. Therefore, the TPO has rightly rejected the TP study conducted by the assessee and has rightly proceeded to select his own comparables in the field of Research and Development and re determine the ALP. [Para 19] Assessee has forcefully argued that even if the assessee is to be considered a Research and Development company, then the comparables have to be of the same industry in which the assessee is doing research and development. If this argument of the learned counsel for assessee is accepted, then the comparables selected/short listed by the assessee from the ITES Industry are also liable to be rejected as they are not from the same industry. Thus, the argument of the learned counsel for the assessee that the functions are synonymous with or analogous to the industry and the comparable companies have to be from the same industry for comparability analysis under TNMM is not in tune with the principles enunciated by the guidelines of OECD or United Nations Manual which advocate that under TNMM only broad functional and product comparability is to be considered as net margins are less influenced by differences in products and functions. [Para 33] As per the principles of comparability, controlled and uncontrolled transactions are regarded as comparable if their economically relevant attributes and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm's length result. However, in reality, two transactions are seldom completely alike. To be comparable does not mean that the two transactions are necessarily identical, but that either none of the differences between them could materially affect the arm's length price or, where such material differences exist, then reasonably accurate adjustments can be made to eliminate their effect. It is important to note that the type and attributes of the comparables available in a given situation typically determine the most appropriate transfer pricing method. In general, closely comparable products/services are required if the comparable uncontrolled price ('CUP') method is used for arms' length pricing; the resale price, cost-plus methods generally require a lesser degree of products or services comparability and may be appropriate if functional comparables are available. The TNMM requires only broad functional and product/services comparability. In many instances, it will be possible to use 'imperfect' comparables, e.g., comparables from another industry sector, possibly adjusted to eliminate or reduce the differences between them and the controlled transaction. Hence, the contention of the assessee that the comparables have to be of R & D companies from the same industry is not appropriate for TNMM. [Para 34] The notion that risk can be controlled remotely by the parent company and that the Indian subsidiary engaged in core functions, such as carrying out research and development activities or providing services are risk free entities is something which needs to be demonstrated by the assessee. The conventional wisdom is that the core function of R & D services are located in India, which in turn require important strategic decisions by management and employees of Indian subsidiaries or related party to design the direction of R&D activities or providing services and control over the operational and other risks. In these circumstances, the ability of the parent company to exercise control over the risk - remotely and from a place where core functions of R & D and services are not located - is very limited. Under these circumstances, the claim of the assessee that it is totally risk free is not acceptable. However, the relative risk profile of the comparable company, particularly on the factors of human involvement in the clinical trails needs to be evaluated and a determination made whether such differences in risk needs to be adjusted or whether such risks are not amenable for adjustment at all, as claimed by the assessee. In view of all the above, the issue of comparability of Vimta Labs is remanded back to the AO/TPO with a direction that the comparability may be analyzed in the light of the observations made above. [Para 36] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0809 (Bang-Trib) : (2013) 141 ITD 0245

INCOME TAX ACT, 1961

--Transfer pricing--computation of ALP Selection of comparables--Assessee had entered into international transactions with AEs for customized electronic data, computer software and any other tangible article or things as a result of research activity. Therefore, assessee while conducting its TP study had adopted/choosen comparables which were all in field of 'development and export of computer software'. TPO observed that assessee was providing contract services of research and development and other services in various field of engineering. TPO observed that assessee was basically carrying out research and development and engineering analysis with aid of sophisticated labs/software in various fields of engineering. He therefore, rejected assessee's TP study holding that they were functionally different. He, therefore, proceeded to re-determine ALP by conducting search on data base 'powers' for fresh comparables. Search was made for business line 'Technically consultancy and engineering services and research developments'. However, as some of comparables offered by taxpayer were having engineering services, TPO accepted same as comparables along with those proposed by TPO and, thereafter adopting TNMM computed ALP. Held: Assessee was engaged in contract research and development activity and derives income from foreign principals/associated enterprises and merely because result of such research and development is delivered to its AE's in customized electronic data, it would not make nature of services as software development. Thus TPO has rightly treated assessee as engaged in contract research and development, technical engineering services and accordingly selected relevant comparables, however in view of not conducting FAr, issued is remanded back to TPO.

Assessee is a service provider for research and development in various fields of engineering (including computer software) as enumerated in the agreements between the assessee and its associated enterprises reproduced in para 8 and 9 above and the result of such research and development is being delivered to the clients/associated enterprise in the form of customized computer data through network/internet. Thus, even as per the assessee's submissions, it is conducting the research and development through its multi-disciplinary R&D centre JFWTC and its activities are for several streams/areas including Information Technology. Thus it can be seen that it is catering to nearly all of GE's diverse business worldwide touching nearly every scientific discipline across the spectrum such as mechanical engineering, electronic and electrical and metallurgy, catalysis and advanced chemistry, polymer science and new synthetic materials, power electronics etc. Therefore, as rightly held by the TPO, the assessee is not into simple software development but is engaged in research and development in technical and engineering services on contract basis. Therefore, the TPO has rightly rejected the TP study conducted by the assessee and has rightly proceeded to select his own comparables in the field of Research and Development and re determine the ALP. [Para 19] Assessee has forcefully argued that even if the assessee is to be considered a Research and Development company, then the comparables have to be of the same industry in which the assessee is doing research and development. If this argument of the learned counsel for assessee is accepted, then the comparables selected/short listed by the assessee from the ITES Industry are also liable to be rejected as they are not from the same industry. Thus, the argument of the learned counsel for the assessee that the functions are synonymous with or analogous to the industry and the comparable companies have to be from the same industry for comparability analysis under TNMM is not in tune with the principles enunciated by the guidelines of OECD or United Nations Manual which advocate that under TNMM only broad functional and product comparability is to be considered as net margins are less influenced by differences in products and functions. [Para 33] As per the principles of comparability, controlled and uncontrolled transactions are regarded as comparable if their economically relevant attributes and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm's length result. However, in reality, two transactions are seldom completely alike. To be comparable does not mean that the two transactions are necessarily identical, but that either none of the differences between them could materially affect the arm's length price or, where such material differences exist, then reasonably accurate adjustments can be made to eliminate their effect. It is important to note that the type and attributes of the comparables available in a given situation typically determine the most appropriate transfer pricing method. In general, closely comparable products/services are required if the comparable uncontrolled price ('CUP') method is used for arms' length pricing; the resale price, cost-plus methods generally require a lesser degree of products or services comparability and may be appropriate if functional comparables are available. The TNMM requires only broad functional and product/services comparability. In many instances, it will be possible to use 'imperfect' comparables, e.g., comparables from another industry sector, possibly adjusted to eliminate or reduce the differences between them and the controlled transaction. Hence, the contention of the assessee that the comparables have to be of R & D companies from the same industry is not appropriate for TNMM. [Para 34] The notion that risk can be controlled remotely by the parent company and that the Indian subsidiary engaged in core functions, such as carrying out research and development activities or providing services are risk free entities is something which needs to be demonstrated by the assessee. The conventional wisdom is that the core function of R & D services are located in India, which in turn require important strategic decisions by management and employees of Indian subsidiaries or related party to design the direction of R&D activities or providing services and control over the operational and other risks. In these circumstances, the ability of the parent company to exercise control over the risk - remotely and from a place where core functions of R & D and services are not located - is very limited. Under these circumstances, the claim of the assessee that it is totally risk free is not acceptable. However, the relative risk profile of the comparable company, particularly on the factors of human involvement in the clinical trails needs to be evaluated and a determination made whether such differences in risk needs to be adjusted or whether such risks are not amenable for adjustment at all, as claimed by the assessee. In view of all the above, the issue of comparability of Vimta Labs is remanded back to the AO/TPO with a direction that the comparability may be analyzed in the light of the observations made above. [Para 36]