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2016 (8) TMI 727 - AT - Income TaxTransfer pricing - Valuation of an intangible asset - revenues generated out of the Intellectual Property ( IP ) or not. - Held that - What is important is the value available at the time of making business decision. It should be left to the wisdom of the businessman, he knows what is good for the organization. No doubt, IP was sold to AE . The method adopted should be consistent and should be documented to review in the future. The review does not mean replacing the projection with actuals. It is the rational of adopting the values for making decision at the point of time of making decision. When the values are replaced subsequently, it is not valuation but evaluation i.e. moving the post of result determined out of projections. The revenue is doubting the valuation because the actual revenues were favourable. In rational decision making, the actual results are irrelevant. In the present case, the valuation was done by two independent valuers not by the assessee. The other issue with this are that the revenue adopted the actuals of AE without considering whether they are revenues generated out of the IP or not. They simply adopted the revenues of AE without giving proper findings that the revenues of AE are all generated only out of this IP (Jungle Book). The assessee submitted that these revenues are generated by AE out of other properties(IPs) as well. We are of the view that the revenue cannot adopt such values without proper verification. In our considered view, for valuation of an intangible asset, only the future projections alone can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by assessee are allowed. Apportionment of profit of the AE based on the ownership arising out of exploitation of intangibles - whether the TPO justified to determine the profit attributable to Indian entity (assessee) when he himself determined the sale consideration of IP (Jungle Book)? - Held that - After the completion of the sale process, the AE has done transaction with the outsiders or outside the jurisdiction of the Indian territorybut there is no transaction done with the assessee involving the above IP (jungle book) to consider that there exists a international transaction. Once, the IP is sold and Arm s length price is determined, the IP becomes the property of AE . The assessee has no locus standi to claim any benefit neither the revenue. The revenue has grievances on the arrangement and existences of group companies. There is no doubt, there exists tax planning. There can be tax planning within the four corners of the taxation laws. There is enough mechanism in the existing Act and also there is DTAA arrangement with Ireland, which will take care of the situations of tax avoidance. The revenue has not brought any cogent evidence to prove that there exists any tax avoidance. In our considered view, the action of the TPO is not justified and accordingly, the grounds raised by assessee are allowed. Payment towards management consultancy service fee - Held that - After analyzing the case laws and assessee s own case in the earlier year, the coordinate bench of this Tribunal has adjudicated that management consultancy charges have to be allowed as per the MoU and OECD guidelines. Respectfully following the earlier decision, we are inclined to allow the grounds raised by the assessee. Mark up on travel and other expenses reimbursed by the AE - Held that - The assessee as a group company, incurred travelling and other expenditure on behalf of DQE, Mauritius. Assessee had raised the bill for reimbursement on cost to cost basis, it is normal in the case of group companies. There is no element of service in these transactions. These transactions are not in any way connected to the nature of business of assessee. These are the services rendered by outsiders for the AE s and only payment was made by assessee and got reimbursement from AE . Since there is no element of service by the assessee, adding markup on these kind of transactions are not justified. As held in the case of M/s Cognizant Technologies Solution (spra), the additions made were deleted by Chennai Bench of ITAT. Accordingly, the grounds raised by the assessee are allowed. Adjustment in respect of bonus shares issued by the appellant to its AE - Held that - The TPO made a general observation in his report on the issue of bonus shares but the TPO or the AO had not made any addition. Since there is no demand raised, the ground raised by the assessee on this issue becomes infructuous. Hence, need no adjudication
Issues Involved:
1. Adjustment of sale price of intangible asset. 2. Profit attributable to the appellant company. 3. Payment of management charges. 4. Reimbursement of expenses received. 5. Adjustment regarding bonus shares issued by the appellant to its AE. Issue-wise Detailed Analysis: 1. Adjustment of Sale Price of Intangible Asset: The appellant sold the Intellectual Property (IP) rights of the Jungle Book Animation series to its AE, DQ Ireland, for ?5,36,20,000, based on valuations by two independent valuers. The TPO replaced the projected cash flows with actual revenues and determined the value at ?12,35,18,271, resulting in an adjustment of ?6,98,98,271. The appellant argued that valuations should be based on projections and not actuals, citing the decision in Social Media India Ltd. Vs. ACIT. The tribunal agreed, stating that valuations should not be revisited with actuals years later, and allowed the grounds raised by the appellant. 2. Profit Attributable to the Appellant Company: The TPO applied the Profit Split Method (PSM) to apportion profits between DQ India and DQ Ireland, attributing 80% of the profits to DQ India. The tribunal noted that the IP was sold outright and there was no international transaction post-sale. The tribunal found that the TPO's action was unjustified, as the revenue generated by DQ Ireland post-sale did not constitute an international transaction involving DQ India. The tribunal allowed the grounds raised by the appellant. 3. Payment of Management Charges: The appellant paid ?3,70,53,448 to DQ Mauritius for management consultancy services. The TPO determined the Arm’s Length Price (ALP) at NIL, citing the appellant's failure to substantiate the tangible benefits received. The tribunal, referencing its decision in the appellant's case for AY 2008-09, held that management consultancy charges should be allowed as per the MoU and OECD guidelines. The tribunal allowed the grounds raised by the appellant. 4. Reimbursement of Expenses Received: The appellant incurred expenses on behalf of DQ Ireland and recovered the same at cost. The TPO applied a 10% markup on these reimbursements, resulting in an adjustment of ?7,73,699. The tribunal held that reimbursements of actual costs do not involve a service element and should not be marked up. The tribunal allowed the grounds raised by the appellant. 5. Adjustment Regarding Bonus Shares Issued by the Appellant to its AE: The TPO made a general observation regarding the issuance of bonus shares but did not make any addition. The tribunal noted that since no demand was raised, the grounds raised by the appellant on this issue were infructuous and dismissed them. Conclusion: The tribunal allowed the appeal partly, agreeing with the appellant on the issues of sale price adjustment, profit attribution, management charges, and reimbursement of expenses, while dismissing the grounds regarding bonus shares as infructuous.
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