Qualcomm India Pvt. Ltd. Challenges Transfer Pricing Adjustments for AY 2015-16

Case Overview: Qualcomm India Pvt. Ltd. vs. Addl. CIT, Special Range-7, New Delhi – Assessment Year 2015-16

The case of Qualcomm India Pvt. Ltd. vs. Addl. CIT, Special Range-7, New Delhi for the assessment year 2015-16 was adjudicated by the Income Tax Appellate Tribunal (ITAT) Delhi Bench. The primary issue in this case revolved around the adjustments made by the Transfer Pricing Officer (TPO) concerning the arm’s length price (ALP) of international transactions conducted by Qualcomm India Pvt. Ltd. (QIPL). Additionally, the allowability of education cess as a deductible expense was also contested.

Background of the Case

Qualcomm India Pvt. Ltd. (QIPL) is a subsidiary of Qualcomm Inc., a global leader in wireless telecommunications and related technologies. The company operates in India, offering software development, IT support, and business support services to its associated enterprises (AEs). For the assessment year 2015-16, QIPL filed its income tax return declaring an income of INR 507.69 crores.

However, the Assessing Officer (AO), following the draft assessment order, proposed to increase the total income to INR 737.26 crores, primarily due to transfer pricing adjustments amounting to INR 229.57 crores, as determined by the TPO. The TPO had rejected the transfer pricing documentation provided by QIPL and conducted a fresh analysis, which led to the proposed adjustments. The TPO also made an adjustment on account of interest on outstanding receivables.

Key Issues Raised by the Appellant

QIPL raised several grounds of appeal, challenging the TPO’s adjustments and the decision of the Dispute Resolution Panel (DRP). The key issues included:

• Rejection of Economic Analysis: QIPL contested the rejection of its economic analysis by the TPO, arguing that the analysis was conducted in accordance with the Income Tax Act and Rules.
• Selection of Comparables: QIPL disputed the inclusion of certain companies as comparables, particularly Killick Agencies & Marketing Ltd., arguing that they were functionally different.
• Rejection of Comparables: QIPL argued against the exclusion of certain companies from the list of comparables, such as India Tourism Development Corporation Ltd. and Concept Public Relations India Ltd.
• Interest on Receivables: QIPL contested the TPO’s decision to impute interest on outstanding receivables, asserting that the receivables were closely linked to the provision of services and did not warrant such an adjustment.
• Incorrect Computation of Margins: QIPL argued that the AO did not correctly compute the margins of the comparables, leading to an incorrect ALP determination.
• Risk and Depreciation Adjustments: QIPL contended that appropriate adjustments were not made to account for functional and risk differences between QIPL and the comparables, particularly in terms of risk adjustment and differences in depreciation policies.
• Deduction of Education Cess: QIPL also raised an additional ground for the deduction of education cess, arguing that it should be allowed as a deductible expenditure under the Income Tax Act.

Tribunal’s Decision

The ITAT Delhi Bench, comprising Judicial Member Ms. Suchitra Kamble and Accountant Member Dr. B. R. R. Kumar, heard the appeal and delivered its final order on November 1, 2021. The key rulings of the tribunal were as follows:

Exclusion of Killick Agencies & Marketing Ltd. as a Comparable

The tribunal agreed with QIPL that Killick Agencies & Marketing Ltd. was functionally different from QIPL and should not be included as a comparable. The tribunal noted that Killick was involved in activities related to marine equipment and after-sales services, which were not comparable to QIPL’s software and business support services.

Rejection of Additional Comparables

Regarding the comparables proposed by QIPL, such as India Tourism Development Corporation Ltd. and Concept Public Relations India Ltd., the tribunal upheld the DRP’s decision to exclude these companies, as they were functionally different from QIPL’s business operations.

Interest on Receivables

The tribunal ruled in favor of QIPL on the issue of interest on receivables. It noted that QIPL was a debt-free company and had no interest-bearing borrowings. Therefore, there was no basis for imputing interest on the receivables related to services provided to its AEs.

Incorrect Computation of Margins

The tribunal directed the AO to re-compute the margins of the comparables, ensuring that the correct margins were applied in determining the ALP. The tribunal emphasized the need for accuracy in the computation process and instructed the AO to give due consideration to QIPL’s submissions.

Deduction of Education Cess

The tribunal also ruled in favor of QIPL on the issue of education cess. Citing relevant judgments, including the decision of the Rajasthan High Court in Chambal Fertilizers and Chemicals Ltd. vs. JCIT, the tribunal held that education cess was an allowable deduction under Section 37 of the Income Tax Act. The tribunal observed that education cess did not fall within the definition of “tax” under Section 40(a)(ii) and therefore could be claimed as a business expenditure.

Conclusion

The ITAT’s decision in the case of Qualcomm India Pvt. Ltd. provides significant relief to the appellant by addressing key issues related to transfer pricing adjustments and the deductibility of education cess. The exclusion of non-comparable companies and the re-computation of margins are expected to have a substantial impact on the final tax liability of the company for the assessment year 2015-16.

Moreover, the tribunal’s ruling on the allowability of education cess as a deduction is likely to influence similar cases, as it reinforces the position that education cess, being a distinct levy from income tax, can be treated as a deductible business expense. This decision highlights the importance of thorough economic analysis and accurate computation in transfer pricing cases, as well as the need for a clear understanding of tax law provisions.

Qualcomm India Pvt. Ltd. Challenges Transfer Pricing Adjustments for AY 2015-16