2024 (8) TMI 277 - AT - Income Tax

Addition on account of payment of royalty - consideration paid for use of trademark and know-how - whether royalty arrangement which includes royalty not only for trademark and tradename but also for technical know-how and designs? - TPO has applied Transactional Net Margin Method (TNMM) on entity level and disregarded Comparable Uncontrolled Price (CUP) - TPO also included amount of third party AMP Expenses while computing the amount of adjustment for royalty, applied the TNMM Method and determined the Arm's Length Margin at 5.42% - TPO added advertisement expenses (including a mark-up of 10%) to the payment made by assessee in accordance with the Trademark and Know-how License Agreement ( License Agreement ), in addition to the royalty payment. HELD THAT - Following the principle of consistency, the TNM Method is rejected in the current year too, and the Assessee s use of CUP is upheld. Accordingly, following the co-ordinate Bench orders 2011 (11) TMI 194 - ITAT DELHI , the issue of royalty is decided in favour of the assessee and against the Revenue. Adjustment on account of advertisement expenses - As we found that the addition on account of advertising expenses incurred by the assessee according to the License Agreement was not done in earlier years. Therefore, the issue of advertisement expenses incurred by the assessee is remanded to the file of the TPO for fresh determination in accordance with law after allowing a reasonable opportunity of being heard to the assessee. Accordingly, Ground 3 and sub-grounds are partly allowed for statistical purposes. Reimbursement of Advertisement expenses - assessee submitted before the TPO that these expenses were incurred by its AE with respect to Indian catalogue and brochure, Indian advertisement campaigns and related travelling and accommodation expenses of models for advertisement campaigns etc - TPO questioned the reason for the 3rd parties to issue bills in the name of the assessee and for that reason according to him the receipt of services is not proved - HELD THAT - observations of the TPO in our view is fallacious in as much as the case of the assessee is that the 3rd party had executed the work on account of advertisement relating to Assessee s business and the expenditure thereof was met by Assessee s AE on behalf of the assessee. The Assessee s AE raised back-to-back invoices on the assessee for such expenses, which is clearly fortified by the material referred to before us, which also shows that there is no margin earned by the AE. Be that as it may, the TPO has no locus-standi to opine on the necessity or otherwise for the incurrence of expenditure. TPO does not has a jurisdiction to question the commercial expediency of the assessee have incurred such expenditure and his jurisdiction extends only to benchmark the transaction in terms of mandate of Section 92(1) of the Act. The aforesaid proposition is well founded in light of decision in the case of CIT vs. EKL Appliances Ltd. 2012 (4) TMI 346 - DELHI HIGH COURT - Addition deleted. IT Cost Allocation - assessee claimed to have received information technology support services from its AE in the nature of Computer Assistance Designing Techniques including software like CAD, Orchidie, Iris, Citirix, Rtbenet etc. which were used by it in its manufacturing process. - TPO determined the ALP of these intra-group services to be zero as the assessee could not provide any evidence of requisition or receipt or cost-benefit analysis - HELD THAT - While respectfully following the consistent view taken by the Tribunal in Assessee s own case for the Assessment Years 2009-10 2017 (10) TMI 1259 - ITAT DELHI we hold that the impugned addition cannot be sustained. We therefore direct the TPO/AO to delete the adjustment made on account of IT Cost Allocation. Consultancy Services - HR Cost - assessee hired the services of an employee (Mr. Daniel Hueng) to provide consultancy with regards to quality control. Salary and perquisites of this employee was paid by the AEs and reimbursed by BIPL on a cost-to-cost basis - TPO determined the ALP of this reimbursement to be zero as the assessee could not provide any documentary evidence of exclusive receipt of services from employee and categorized his services to be in the nature of shareholder service - HELD THAT - The assessee has availed consultancy services from an employee based out of Hong Kong and has reimbursed the salary and related expenses of this employee to its AE. Since this is similar to the issue of expatriate cost in previous years, we find no reason to take a different view for this assessment year. While respectfully following the consistent view taken by the Tribunal in Assessee s own case for the Assessment Years 2007-08, 2008-09 and 2009-10 2017 (10) TMI 1259 - ITAT DELHI , we hold that the impugned addition cannot be sustained. We, therefore, direct the TPO/AO to delete the adjustment made on this issue. Adjustment on account of provision of Market Support Services - Comparable selection - HELD THAT - APITCO Ltd. is a government company set up for specific government purposes. It provides diversified high end technical services, that are different in nature than the support services. Further, this company has been consistently excluded on the basis of functional comparability by the coordinate benches and the exclusion is upheld by the Hon ble High Court. Therefore, we agree with the contention of the assessee to exclude this company from the list of comparables. HCCA Business Services Pvt. Ltd. has total fixed assets to the tune of Rs. 6.27 Cr. As per Schedule-D of fixed assets out of the same, business and commercial rights are of Rs. 3.75 Cr. and Computer software is of Rs. 1.15 cr. This highlights the difference in the asset holding of the assessee company vis-a- vis comparable company. Further, it is observed that the comparable company has claimed software development cost of Rs. 1.5 Cr. during financial year 2008-09. This shows that the company has a dependency on the technology to deliver the functions. Since the functions performed by the comparable are dependent on the technology and are therefore, not comparable with the tested party. Accordingly, HCAA is not a good comparable in this case. Quippo Valuers and Auctioneers Pvt. Ltd service is in the nature of valuation and auctioning, which are different from the assessee. Further, this company has been excluded on the basis of functional comparability by in Adidas Technical Services Pvt Ltd. 2016 (2) TMI 916 - ITAT DELHI . Therefore, we agree with the contention of the assessee and uphold the decision of the ld. CIT(A) to exclude this company from the list of comparables. TSR Darashaw Ltd provides registrar and transfer agent services, records management services and payroll and trust fund services. All these segments are functionally different from the marketing support activities performed by the assessee. Further, this company has been consistently excluded on the basis of functional comparability by the coordinate benches and the exclusion is upheld by the Hon ble High Court. India Tourism Development Corporation Ltd (ITDCL) is a government company engaged in operation of hotels, restaurants, shops and also earns revenue from consultancy and ticketing systems. TPO has observed that the functions performed by ARMS are close to the functions performed by the tested party. The segmental data is available of the Annual Report, therefore, ARMS segment of ITDC is a good comparable with the tested party. Therefore, in this background, in our considered view, the Ld. CIT(A) has rightly directed the AO to include ITDS (ARMS segment) as a good comparable if the assessee provides the segmental financial results for benchmarking analysis. In view of above, we do not find any infirmity in the action of the Ld. CIT(A). Overseas Manpower Corporation Limited is a good comparable and directed the AO to include it in the final matrix of comparables. As held in the case of Chryscaptial Investment Advisors (India) Pvt. Ltd. 2015 (4) TMI 949 - DELHI HIGH COURT the company cannot be rejected merely on account of wide fluctuation in margin (profit/loss) if it is otherwise comparable. ICRA Management Consulting Services Ltd - TPO/AO included the company as a comparable in AY 2009-10, AY 2011-12 and AY 2012-13. In the current year, no different facts were brought on record. Therefore, no difference is warranted in its treatment. Following the principle of consistency, we agree with the contention of the assessee and uphold the decision of the ld. CIT(A) to include this company. In view of above, the TPO/AO is directed to give effect and re-compute the arm s length price for the marketing support services segment.

Summary

Issues Involved:
1. Enhancement of income under Section 143(3) read with Sections 144C(13), 143(3A), and 143(3B) of the Income Tax Act.
2. Violation of Section 144B and principles of natural justice.
3. Adjustment on account of payment of royalty.
4. Adjustment on account of receipt of consultancy services, reimbursement of other expenses, and IT cost allocation.
5. Initiation of penalty proceedings under Section 270A(1) of the Act.
6. Deletion of addition made on account of arm's length price of international transactions.
7. Deletion of adjustment made by the TPO in ALP on account of provision of Market Support Services.

Detailed Analysis of the Judgment:

I.T.A. No. 496/DEL/2022 (A.Y 2017-18) (filed by the Assessee):

1. Enhancement of Income:
The assessee contested the enhancement of income to INR 13,23,48,799 against the returned income of NIL. The Tribunal upheld the assessee's contention, finding that the Assessing Officer (AO) and Transfer Pricing Officer (TPO) had erred in their calculations and methodologies.

2. Violation of Section 144B and Principles of Natural Justice:
The assessee argued that the AO violated Section 144B and principles of natural justice by not providing an opportunity of being heard and failing to issue a show-cause notice. The Tribunal found merit in this argument, emphasizing the necessity of adhering to procedural fairness.

3. Adjustment on Account of Payment of Royalty:
The assessee challenged the adjustment of INR 70,12,25,209 for royalty payments. The Tribunal noted that the assessee had used the Comparable Uncontrolled Price (CUP) method, which had been accepted in previous years. The TPO's application of the Transactional Net Margin Method (TNMM) was rejected, consistent with past judgments. However, the issue of advertisement expenses related to the royalty payment was remanded to the TPO for fresh determination.

4. Adjustment on Account of Receipt of Consultancy Services, Reimbursement of Other Expenses, and IT Cost Allocation:
The Tribunal found that the TPO erred in determining a NIL price for consultancy services, reimbursements, and IT cost allocation. The Tribunal upheld the assessee's documentation and previous favorable judgments, directing the deletion of these adjustments.

5. Initiation of Penalty Proceedings:
The Tribunal noted that the initiation of penalty proceedings under Section 270A(1) was consequential and required no separate adjudication.

6. General Grounds:
General grounds raised by the assessee were deemed non-adjudicatory.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific adjustments being remanded for fresh determination.

I.T.A. No. 7389/DEL/2017 (A.Y 2010-11) (filed by the Revenue):

1. Deletion of Addition Made on Account of Arm's Length Price of International Transactions:
The Tribunal upheld the CIT(A)'s deletion of adjustments related to royalty payments and reimbursements, consistent with previous years' judgments.

2. IT Cost Allocation:
The Tribunal upheld the CIT(A)'s decision to delete the adjustment for IT cost allocation, following consistent views in previous years.

3. Reimbursement of Expatriate Cost:
The Tribunal upheld the CIT(A)'s deletion of the adjustment for expatriate costs, consistent with past judgments.

4. Provision of Market Support Services:
The Tribunal upheld the CIT(A)'s decision to exclude certain comparables and include others, directing the TPO/AO to recompute the arm's length price for marketing support services.

5. General Grounds:
General grounds raised by the Revenue were deemed non-adjudicatory.

Conclusion:
The appeal filed by the Revenue was dismissed.

Summary:
The Tribunal's judgment comprehensively addressed various issues related to income enhancement, procedural violations, and transfer pricing adjustments. The Tribunal upheld the assessee's methodologies and documentation while remanding specific issues for fresh determination. The appeals were partly allowed for statistical purposes (for the assessee) and dismissed (for the Revenue).