M/S. NOKIA SOLUTIONS AND NETWORKS INDIA PVT. LTD.,GURGAON vs. ACIT, NEW DELHI

The substantive grievances of the assessee relates to the T.P. adjustment made on account of the following:

The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules.

The appellant company is a company incorporated in India under the provisions of the Companies Act, 1956. For the subject assessment year under consideration, the assessee was engaged in the business of manufacturing and trading of telecommunication network equipment and provision of related services such as network design, installation and commissioning. The company also provided support services to major telecom operators and IP service providers in India and to customers of its associated enterprises (“AEs”).

Further, the company also provided software development and certain network management support services. Further, NSN India rendered certain marketing support services to its AEs, such as, providing information on potential customers, providing assistance in marketing products of its AE. Other support services rendered by NSN India to its AEs include warranty support services.

During the course of assessment proceedings, the A.O referred the matter to the TPO. The TPO made the transfer pricing adjustment in relation to following international transactions entered into by the appellant vide order dated 30 January 2013:

The AO passed the draft assessment order dated 22 March 2013.

Summary of the international transactions analyzed in the TP study report is as under:

We will first take up the Transfer Pricing adjustment in respect of Software Services Segment.

At the very outset, the ld. counsel for the assessee stated that similar comparables were used by the TPO in assessment year 2008-09 and the Tribunal excluded 7 comparables out of the bouquet of comparables selected by the TPO. It is the say of the ld. counsel for the assessee that for similar reasons, all the comparables excluded in assessment year 2008-09 should be excluded in assessment year under consideration also.

The ld. DR vehemently opposed to these submissions of the ld. counsel for the assessee by stating that in the earlier assessment year, there were two companies namely, Nokia Siemens Networks Pvt Ltd and Nokia Solutions and Networks India Pvt Ltd whereas during the year under consideration, there is only one amalgamated company i.e. Nokia Solutions and Network India Pvt Ltd. It is the say of the ld. DR that since the business profile of the assessee has changed, the comparables excluded in earlier years need not be excluded for the year under consideration.

We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. We have also pursed the order of the co-ordinate bench in assessment year 2008-09 in ITA No. 332/DEL/2013. We find that in assessment year 2008-09, Nokia Siemens Networks Pvt Ltd was assessed pre amalgamation and Nokia Siemens Network India was assessed post-amalgamation. While deciding appeal in the co-ordinate bench observed as under:

As the contentions of the ld. DR are as considered by the Tribunal in 2008-09 [supra], we do not find any merit in the objections raised by the ld. DR.

The ld. counsel for the assessee has pleaded for exclusion of the following comparables similar in line of exclusion in assessment year 2008-09:

A perusal of the order of the co-ordinate bench in shows that the aforementioned comparables were excluded from the final set of comparables. The relevant findings of the co-ordinate bench in respect of each comparable reads as under:

As no new facts have been brought to our notice, except the fact of amalgamation, which has been taken care of by the Tribunal in its order in we find no reason to interfere with the findings of the co-ordinate bench. Respectfully following the same, we direct the TPO to exclude the aforementioned comparables from the final set of comparables.

The ld. counsel for the assessee further stated that the following comparables should also be excluded from the list of final set of comparables:

We will now consider each comparable one by one.

The ld. counsel for the assessee stated that this company is functionally dissimilar as it provides wide array of services as, I.T.

Per contra, the ld. DR stated that the filters proposed by the TPO have been accepted by the assessee as the same were never objected.

We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. We have also perused the Annual Report of this company. From the Annual Report of the company, we find that out of total sales of Rs. 27,385 crores, only Rs. 1,719 crores is from BPO, Rs. 225 crores from I.T.

The acquisition mentioned in the Annual Report also does not show any substantial impact in the profit margin of this company.

Pleading for exclusion of this company, the ld. counsel for the assessee argued that this company is engaged in the software validation and verification services to the banking and financial industry worldwide and, therefore, is functionally dissimilar. The ld. counsel for the assessee further stated that for software testing, revenue is recognised based on software tested and billed to clients as

It is the say of the ld. counsel for the assessee that no adjustment can be made for different revenue recognition model.

Further, this company has incurred significant marketing and selling expenses. The ld. counsel for the assessee pointed out that because of the functional dissimilarity, this company was excluded by the Tribunal in the case of Conexant Systems Pvt Ltd in and ITA No. 453/HYD/2014 and Planet Online in ITA No. 464 and 608 of 2014.

The ld. DR submitted that the software validation and verification services are different verticals of software development services and, therefore, the same cannot be construed as functionally dissimilar. The ld. DR strongly placed reliance on the findings of the TPO.

We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. We have also perused the Annual Report of this company. It is not in dispute that this company is engaged in the software validation and verification services to the banking and financial industry worldwide. It is also not in dispute that the revenue recognition of this company is such that no adjustment can be made. The undisputed fact is that the assessee is recognising its revenue on cost +5% basis. In our considered opinion, this company cannot be considered as a good comparable. We, accordingly, direct the TPO to exclude this company from the final set of comparables.

Once again, the ld. counsel for the assessee stated that this company is totally functionally dissimilar as it is into implementation and consulting services of software, based on ERP and business intelligence. The ld. counsel for the assessee further stated that this company has insufficient segment information and has earned supernormal profits in the year under consideration. Further, the revenue recognition for software testing is based on software tested and billed to clients as per the terms of specific contracts. For fixed price contracts, revenue is recognised on proportionate completion method on basis of work completed. Strong reliance was placed on the decision of the Tribunal in the case of St Ericsson India Pvt Ltd 79 Taxmann.com 207 [Del-Trib] 207.

It is the say of the ld. DR that this company is primarily into software development services and, therefore, functionally similar and placed reliance on the findings of the TPO.

On careful consideration of the Annual Report of this company, we are of the considered opinion that it is functionally dissimilar. Our view is fortified by the decision of the co-ordinate bench in the case of St Ericsson India Pvt Ltd. Further, revenue recognition model of this company cannot be accepted, as there is no room for any adjustment for different revenue recognition model. As mentioned elsewhere, the assessee recognises its revenue at cost +5%. Therefore, this company cannot be accepted as a good comparable. The same is directed to be excluded.

We find that the issue relating to this company was remanded by the Tribunal in assessee's own case for assessment year 2008-09 and the ld. counsel for the assessee pointed out that while giving appeal effect, the TPO has accepted to include this company.

The ld. DR fairly conceded to this submission of the ld. counsel for the assessee.

Considering the past history of the assessee, qua the inclusion of this company, we restore this matter to the file of the TPO to decide the inclusion or otherwise of this company as per the findings given in assessment year 2008-09 and after affording sufficient opportunity of being heard to the assessee. Thus, Ground No 4 with all its sub grounds is partly allowed.

The business profile of the assessee has already been explained elsewhere. The appellant company also provides the following services to its AEs:

Under the head ‘Marketing and business development” Marketing strategy functions are those activities that determine the positioning of a firm's product — in a market and that establish marketing techniques that bring the products to the customers' attention. NSN India conceptualises the marketing strategy for the sale of its products and services and undertakes functions such as customer lead identification, marketing and securing the orders for its products. NSN India conducts marketing activities such as performing market research, monitoring market demand, formulating marketing strategies and budgets. NSN India is responsible for deciding the types of marketing activities performed and the timing of these activities in India. NSN India employs a sales force that is responsible for both identifying and developing new business opportunities, and maintaining the existing customer base in India. The sales force is also responsible for negotiating with customers in relation to product purchases and pricing. NSN India is responsible for training its local sales force on both technical and product related issues. PT NSN India also undertakes marketing activities for its AEs. It is responsible for identifying potential customers for its AEs. However, NSN India does not have the authority to enter into contracts on behalf of its AEs.

The TPO has made an upward adjustment under this segment.

The TPO, during the course of TP assessment proceedings observed that the assessee has not bench-marked these services separately and combined with other operations of network division.

A show cause notice was issued to the assessee to explain how these transactions are intricately connected with each other. In its reply, the assessee once again contended that the support services were integral and intricately connected to the net work division.

According to the TPO, support services provided by the assessee are separate and distinct from the contract and sales being made by the assessee. The TPO further observed that the cost basis in respect of transaction of purchase and sale and that of providing services are very different. According to the TPO, cost base in respect of transaction of purchase and sale included mainly cost of material and there is little value addition. However, in respect of support services, the main cost itself comprises of salaries of employees and therefore, involves significant value addition. Accordingly, the TPO selected the following comparables to bench mark the market/business support services:

In light of the above, support services transactions were separately bench marked.

Before us, the ld. counsel for the assessee vehemently stated that both the TPO and the DRP grossly erred in understanding the true nature of business support services. It is the say of the ld. counsel for the assessee that marketing support services is an integral part of main network division and the assessee has adopted the best approach of aggregating transaction for bench marking. The ld. counsel for the assessee further pointed out that the AE has reimbursed the cost with mark up of 3% and in doing so, the AE has reimbursed the entire marketing cost incurred by the assessee for its domestic market also.

The ld. counsel for the assessee further brought to our notice that the TPO has failed to appreciate that the cost of service to AE was only Rs. 36.32 crores ,which reflected in the operating margin Rs. 64.89 crores on operating cost to the assessee, which is far in excess of operating margin from the company selected by the TPO.

The ld. counsel for the assessee further drew our attention to the fact that this issue was raised before the DRP and arguments were made but could not be supported by any documentary evidence and hence the DRP did not give any direction to the TPO. The ld. counsel for the assessee pointed out that now the documentary evidences are available. Therefore, this issue should be remitted to the file of the TPO for fresh consideration as per working supported by certificate from the Chartered Accountant.

The ld. DR strongly supported the findings of the TPO though agreed for remittance to the file of the TPO for fresh consideration in the light of documentary evidences brought on record.

We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. It is an undisputed fact that the assessee has recharged the total cost of marketing team alongwith markup of 3% from the AE, which means that the AE not only compensated the cost of marketing, team attributable towards the provision of marketing support services to AE by the assessee but also compensated the cost of marketing team attributable to the support provided by the marketing team to the assessee itself. This is not warranted as per the inter company agreement. In our considered opinion, considering the attribution to the services provided to the AE, vis a vis actual revenue realised from the AE, margin of the assessee from the provision of marketing support services has to be higher than 3%. We find that now the assessee has obtained certain documentary evidence and, accordingly, wishes to submit the same in respect of the claim.

In view of the above, we are of the considered opinion that cost of marketing team should be bifurcated based on revenue of AE from its operations in India vis a vis revenue generated by the assessee from its sales to third party vendors. We, accordingly, restore this issue to the file of the Assessing Officer/TPO. The assessee is directed to submit the India Specific Profit and Loss Account, network equipment sales to Indian telecom operators of the AE duly certified by an authorised public accountant of Finland. The TPO is directed to examine the same and decide the issue afresh after giving reasonable and sufficient opportunity of being heard to the assessee.

NSN India provides technical support and other related services to its customers. AEs provide documentation, technical assistance, Spare log and training to NSN India in order to ensure that the company can carry out the services. NSN India also provides repair and replace services. Where products break down, these are repaired on site by NSN India. In case the same cannot be repaired, the same are replaced and the faulty parts, if purchased from the AE are sent back to the respective associated enterprise to be repaired. Once repaired, the product is then made available for use at a different customer site. The functions performed by NSN India and its AEs are summarized in the table below:

During the TP assessment proceedings, the TPO found that the assessee has not bench-marked these services separately and combined them with other operations of network division. Being not satisfied with the action of the assessee, the TPO used the following set of comparables for bench marking of this segment:

Before us, the ld. counsel for the assessee vehemently stated that TSS segment is an integral part of network division and hence the assessee has rightly bench marked the same by adopting aggregated approach. The assessee has received cost + mark up of 5%. The ld. counsel for the assessee further drew our attention to the Advance Pricing Agreement u/s 92CC of the Act dated 28.03.2016. It is the say of the ld. counsel for the assessee that though this agreement shall apply to five consecutive years commencing from the previous year 2013-14 and also apply to four consecutive roll back years commencing from the previous assessment year 2009-010 but the same has persuasive value for the year under consideration also. The ld. counsel for the assessee further pointed out that under Appendix 1A, details of cover transaction between the assessee and the AE relate to the network division has been mentioned at Item VIII.

It is the say of the ld. counsel for the assessee that the same view should be adopted for the year under consideration also as there is no change in the business model of the assessee. In support of its contention the ld. counsel for the assessee placed reliance on the decision of the Tribunal in the case of Ranbaxy Laboratories 68 Taxmann.com 322.

Per contra, the ld. DR strongly supported the findings of the TPO and it is the say of the ld. DR that the TPO has rightly segregated the transaction and has used the comparables as per filters accepted by the assessee and, therefore, no interference should be made with the findings of the TPO.

We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. We have also accordingly perused the advance pricing agreement u/s 92CC of the Act between the CBDT and the assessee which is exhibited at pages 18 to 76 of the paper book. It is true that the agreement is applicable to 4 consecutive rollback years commencing from the previous year 2009- 10 to previous year 2012-13. However, we find that the FAR analysis of the year under APA applicable from assessment year 2010-11 can also be used for the year under consideration since the TP adjustment is of a very small amount being 1.01 crores. Considering the facts in totality, we direct the TPO to accept the TSS segment as part of network division for bench marking the international transaction which means that this segment should be taken with the main network division of aggregated approach for bench marking.

In this segment, NSN India has entered into an Agreement for Support Service ("Support Agreement"), with NSN Finland for provision of network management services. Summarized below is a brief analysis of the nature and terms of the identified international transaction:

For bench marking this transaction, the assessee has used the following comparables in its TP Study Report:

The assessee used TNMM as the most appropriate method with operating profit to total cost as profit level indicator and PLI of the assessee is arrived at 10% on cost whereas operating PLI of the comparables mentioned hereinabove at 6.94% and hence the transaction was treated as Arm’s length. During the TP proceedings, the TPO was not satisfied with the bench marking made by the assessee and used final set of comparables for ITES segment.

Taking arm’s length margin at 36.67%, adjustment of Rs. 31,74,61,300/- was made which was confirmed by the DRP.

Before us, the ld. counsel for the assessee vehemently stated that the assessee is a low end service provider and cannot be compared with high end service providers in this segment. It is the say of the ld. counsel for the assessee that without prejudice, since the assessee has started its business in this segment from February 2009 and has done effective business for only two months in the year under consideration, margin cannot be compared with the comparables whose financials are for the entire F.Y. The ld. counsel for the assessee further drew our attention to Rule 10TA(e) of the ITAT Rules and pointed out that the Rule itself has distinguished ITES from the knowledge process of outsourcing services and, therefore, most of the comparables used by the TPO have to be rejected.

Per contra, though the ld. DR strongly supported the findings fo the TPO but accepted that Rule 10TA specifically distinguished between the two services.

We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. Rule 10TA(e) read as as under:

We find that under clause (g), knowledge process outsourcing services has been defined. This means that even the Legislature accepts that two segments cannot be mixed up, which means that most of the comparables used by the TPO have to be rejected. In all fairness, we deem it fit to restore the matter to the file of the TPO with a direction to use only those comparables which fit in Rule 10TA(e) of the Rules and decide the issue afresh after giving reasonable and fair opportunity of being heard to the assessee. The assessee shall be at liberty to bring any new comparables which fit into Rule 10TA(e) of the Rules. Ground No. 5 to 5.5 is allowed for statistical purposes. Ground No. 6 is allowed in part for statistical purposes.

In the result, the appeal filed by the assessee in 2810/DEL/2014 is allowed in part for statistical purposes.