The Delhi High Court has held that Transfer Pricing Entities operating on economic upscale cannot be included as comparables of those working on cost plus pricing.
The bench Justice Yashwant Varma and Justice Ravinder Dudeja has observed that as far as the exclusion of comparables is concerned, the ITAT was cognizant of and took note of the circumstances that these entities had a high brand value and, therefore, were able to command greater profits; besides, they operated on economic upscale.
Table of Contents
Background – Transfer Pricing Entities
The appellant/assessee, Cadence Design Systems (India) Private Limited sought to challenge the order of the Income Tax Appellate Tribunal.
The principal issue which arises is whether the Tribunal fell in error in upholding the inclusion of TCS E-serve International, TCS E- Serve Limited and Infosys BPO Limited as comparables in respect of the Arm’s Length Price determination pertaining to the appellant’s international transactions for Assessment Year 2010-11.
The Tribunal has in terms of the order upheld the view expressed by the Transfer Pricing Officer, as well as the Dispute Resolution Panel.
As per Annual Report of the company for the year under consideration that primarily the company is not engaged in software development and it was engaged in providing IT enabled services (ITes) only. The technical services of software testing, verification and validation of the software were carried out at the time of implementation of software only and are in the nature of back-office support. On perusal of the service agreement between “CDS” and the assessee, we find that the assessee was also engaged in application development and support, web development etc.
Arguments – Transfer Pricing Entities
The assessee contended that Cadence Design was principally engaged in providing IT Software Development Services, Information Technology back office support services together with pre-sales marketing and post-sales technical support services to its group entities.
The assessee contended that Cadence Design was being remunerated for those services on a cost-plus mark-up basis. Out of the ten comparable companies that came to be included by the TPO for the purposes of ALP, an objection appears to have been raised with respect to TCS E-Serve International Ltd., TCS E-Serve and Infosys BPO Limited. It was the view as taken in the final assessment order as affirmed by the DRP which came to be questioned before the Tribunal.
The assessee contended that it was a captive contract service provider, that is compensated on a cost-plus mark-up basis for services provided to its Associated Enterprise6 and that no cost is incurred for promoting the brand of its AE. The inclusion of TCS E-Serve International Ltd., TCS E-Serve and Infosys BPO Limited was essentially raised on the ground of the huge expenditure incurred by those entities in brand building and advertisement as also on account of the reputed brand value and profile of those entities which clearly resulted in higher profitability.
Conclusion – Transfer Pricing Entities
The court directed the exclusion of TCS E-Serve International Ltd., TCS E-Serve and Infosys BPO Limited from the list of comparables for the purposes of undertaking the ALP for AY 2010- 11.
Case Details
Case Title: Cadence Design Systems (India) V/S Deputy Commissioner Of Income Tax
Case No.: ITA 592/2018
Date: October 22, 2024
Counsel For Appellant: Mr. Nageswar Rao & Mr. Parth
Counsel For Respondent: Siddhartha Sinha, SSC
