M/S. LINKEDIN TECHNOLOGY INFORMATION PVT. LTD.,NEW DELHI vs. ACIT, NEW DELHI

Date of hearing: 17.06.2016 Date of Pronouncement: 23.06.2016 ORDER

PER BEENA A. PILLAI, JM:

“1. That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant for the relevant AY at Rs.1,95,95,410/- as against the returned income of Rs.71,44,336/-.

2 I.T.A.N0.706./Del/2016 alleging the same to be not at arm's length in terms of the provisions of section 92C of the Act read with Rule 10D of the Income-tax Rules,1962 ("the Rules"). 3. That on the facts and circumstances of the case and in law, the DRP / AO / TPO while rejecting Appellant's determination of arm's length price for rendering marketing support services have erred in including inappropriate comparables from the Appellant's search matrix.

4. That on the facts and circumstances of the case and in law, the DRP / AO / TPO have erred, in arbitrarily rejecting certain functionally comparable companies identified by the Appellant, inter alia, using unreasonable comparability criterion.

5. That on the facts and circumstances of the case and in law, the AO has erred in charging interest under Sections 234B and 234D of the Act. 6. That on the facts and circumstances of the case and in law, the AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act for furnishing of inaccurate particulars and concealment of income. Each of the above grounds is independent and without prejudice to the other grounds of appeal

preferred by the Appellant. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before, or at, the time of hearing of the appeal.”

2. The brief facts that emanates from the orders of the authorities below are as under:

2.1 The assessee had filed its return of income declaring total income of Rs.71,44,336/- on 04/11/2011. The same

3 I.T.A.N0.706./Del/2016 was processed under section 143 (1) of the IT Act. As there involved International Transaction, the case was referred to the Transfer Pricing Officer (TPO) for assessing the arm’s length price of the transaction.

2.2 Ld. TPO observed that assessee is a wholly owned subsidiary of LinkedIn-Ireland (AE), which operates an online professional network on the internet through which its members are able to create, manage and share their professional identities online, build and engage their professional networks, access shared knowledge and insights and find business opportunities. Assessee has entered into an Inter company marketing service agreement with its AE on 29/01/2010, which was later on amended on 17/06/2011 to provide marketing support services associated with LinkedIn business in India. These services include promoting their LinkedIn business for the account of and the benefit of the AE, liaison of potential new customers, hosting conferences and sales events to promote LinkedIn product in the local market. The assessee had entered into following international transactions with its AE’s:

Type of transaction Method Amount INR Provision of marketing support services to TNMM 8,71,82,854 LikedIn Ireland pursuant to intercompany (PLI+OP/OC) Marketing Services Agreement dated 29th January 2010 (Refer Page 119-128)

4 I.T.A.N0.706./Del/2016 2.3 In connection with the provision of marketing services to its AE the assessee applied a markup of 10% on the cost incurred. The assessee has selected transactional net margin method (TNMM) as the most appropriate method (MAM) for the purposes of calculating the arm’s length price (ALP) of the international transaction and the operating margin has been calculated by using profit level indicator (PLI) as operating profit over operating costs (OP/OC). The assessee had calculated its average mean at 10.21%. For the benchmarking the assessee has selected itself as the tested party as the same is the least complex and reliable accurate data for comparison and is easily and readily available. It has also submitted in the TP study that the assessee does not own any valuable intangible property.

2.4 The functions performed by the assessee and the risk assumed by it are similar to those of sales and marketing companies as the assessee is mainly engaged in selling and marketing support activities. On the basis of the financial results, the assessee had selected the following comparables whose arithmetic mean was 11.94% as under:

Sr. Company Name Data Base 3 Year No. Average (FY 2009- 2011) 1 Asian Business Exhibition & Prowess 40.42% Conferences Ltd.

5 I.T.A.N0.706./Del/2016 2 Concept Communication Ltd. Prowess 3.59% 3 Hindustan Unilever Field Services Prowess 10.69% Pvt. Ltd. 4 IDC (India) Ltd. Capitaline 13.18% 5 India Exposition Mart Ltd. Prowess -4.36 6 Marketing Consultants & Agencies Prowess 8.11% Ltd. 7 Arithmetic Mean 11.94% 2.5 From the above, the Ld. TPO accepted IDC India Ltd., Concept Communications Ltd. and Hindusthan Unilever Field Services Pvt. Ltd. The Ld. TPO, applied quanlitative filter and arrived at new set of comparables, of which the average mean calculated was 23.20%, which are as under:

S.No. Company Name OP/TC 1 IDC (India) Ltd. 10.60 2 Media Research Users Council 40.53 3 Quadrant Communications Ltd. 14.58 4 Info Edge (India) Ltd. 45.53 5 Concept Communication Ltd. 4.73 6 Hindustan Unilever Field Services P. Ltd. 6.45% Average 23.20% 2.6 This lead to the proposal for a transfer pricing adjustment amounting to Rs.80,61,649/-. Thereafter the assessee carried the matter before the dispute resolution

6 I.T.A.N0.706./Del/2016 panel (DRP)-1, New Delhi. The DRP under section 144C (5) of the IT act, 1961 gave directions on 24/11/2015, determining the total income confirming the addition made by the Ld.TPO at Rs.80,61,649/-, to the arms length price. The DRP excluded 2 comparables being Quadrant Communications Ltd. and Concept Communications Ltd. and accepted the remaining comparables, which are as under: S.No. Company Name OP/OC% 1 IDC (India) Ltd. 10.60% 2 Media Research Users Councils 40.53% 3 Info Edge India Ltd. 45.53% 4 Hindustan Unilever Field Services P. Ltd. 6.45% 5 Average 25.78 2.7 On receipt of the directions passed by the DRP, the Ld. AO passed the assessment order on 31/12/2015, making the impugned additions.

7 I.T.A.N0.706./Del/2016 around the exclusion of the following comparables in the list of comparables:-

1. 1. Media Research Users Councils 2. Info Edge India Ltd. 4.2 Apart from that the assessee is insisting on inclusion of the following 2 comparables, which were not included by the DRP as well as the TPO in their list of comparables:- 1. Concept Communication Ltd.

2. Indian Exposition Mart Ltd. 4.3 We shall take up these companies one by one to ascertain their comparability or otherwise with the assessee company. Before embarking upon this exercise, it is sine qua non to precisely consider the functional profile of the assessee.

8 I.T.A.N0.706./Del/2016 relationship. LinkedIn offers 4 types of account basic, premium for business, premium for jobseekers and premium for recruiters and employers. LinkedIn platform provides members with solutions including applications and tools to search connect and communicate with business contacts, learn about career opportunities, join industry groups research organisation and share information. 5.2 During the year under consideration the assessee has generated revenue under the following categories hiring solutions, marketing solutions, premium subscriptions. It is observed from this TP study that the assessee does not bear any risks associated with the intangibles including technology act symptoms, technology obsolescence, technology failure and intellectual infringement risks. Further it does not bear any market risk, foreign-exchange risk or credit risk. All the risks are borne by the AE. – The assessee provides the following primary functions to support the sales:

1. 1. Marketing 2. Promotion 3. Facilitating the sales of LinkedIn products and services in India.

4. Provide local support on sales opportunities 5. build and maintain the relationship with prospective and existing customers 6. engages in various promotional and marketing activities

9 I.T.A.N0.706./Del/2016 5.3 Thus the company has characterised itself as being engaged in marketing and sales promotion activities with its AE and is a Support service provider that does not own any intangibles. With the above understanding of the nature of services provided by the assessee to its AE’s, we will now proceed to examine the compatibility or otherwise of the companies disputed by the assessee to the extent.

10 I.T.A.N0.706./Del/2016 basically from the subscription fees received from its members. He further submitted that this comparable being a charitable organisation does not have segmental reporting and related party disclosures. Thus this company does not have adequate requisite data available. 6.2 We have perused the annual reports of this comparable and have found that the main revenue has been generated only from the subscription fees from members and it meets its expenses through these subscription fees. Further it is observed that this company is a non-profit making organisation. We are thus of the considered opinion that this company should be excluded from the list of comparables.

12 I.T.A.N0.706./Del/2016 8.1 The assessee has prayed for inclusion of this company as a comparable. It has been submitted that this company is engaged in the business of organizing trade fairs, conferences and exhibitions. It is also involved in providing event management services, advertising and interior decoration services. The Ld. A.R. submits that the current year data of this comparable is available. He further submitted that the related party transactions of this comparable company does not exceed 25% of its sales and it is not a loss-making company and submitted that this comparable qualifies for all the filters that have been applied by the Ld.TPO.

8.2 On the contrary, the Ld. DR relied upon the orders of the authorities below. On the contrary the Ld. DR relied upon the order of the DRP and prayed for exclusion of this comparable as the activities of this comparable company are substantially different from the business activities of the assessee. He further submitted that this comparable company is a media company and thus, does not match functionally with the assessee in any manner whatsoever.

8.3 We have considered the rival submissions and the material placed before us. It is observed that this comparable company is into a wide range of services including advertising, interior decoration and event management. On a similar footing we had excluded in for edge India Ltd as it was involved in various web portals. There cannot be a different yardstick for deciding

13 I.T.A.N0.706./Del/2016 comparability of cases. Accordingly, we direct this comparable to be excluded from the list.

9.1 The assessee has prayed for inclusion of this company as a comparable. It has been submitted that this company is engaged in providing communication agency services, digital advertising and marketing services, event management services and consultancy, media planning and buying, public relations services etc. The Ld. AR submitted that this comparable passes through the filters applied by the TPO. He further submitted that only broad functional and product compatibility is to be considered as net margins are less influenced by product and functional differences.

9.2 On the contrary the Ld. DR relied upon the order of the DRP and prayed for exclusion of this comparable as the activities of this comparable company are substantially different from the business activities of the assessee. He further submitted that this comparable company is a media company and thus, does not match functionally with the assessee in any manner whatsoever.

9.3 We have considered the rival submissions and the material placed before us. It is observed that this comparable company is into a wide range of services including advertising and public relations management. On a similar footing we had excluded Info Edge India Ltd.,

14 I.T.A.N0.706./Del/2016 as it was involved in various web portals. There cannot be a different yardstick for deciding comparability of cases. Accordingly, we direct this comparable to be excluded from the list.

9.4 IN view of the discussions and findings recorded hereinabove, we direct the Ld TPO/AO to work out the arm’s length price adjustment, if any.

Order pronounced in open court on 23rd June, 2016