2018 (1) TMI 671 - AT - Income Tax

TPA - comparable selection criteria - Held that - All the five comparables- i.e. AL, CLL, GITL, Rites and WL, selected by the TPO for benchmarking the IT s of the assessee are not providing MSS, that there functionally dissimilar, that they have to be excluded from the final list of the valid comparables .There is nothing on record to prove that support services provided by the above five comparables were also associated with marketing function. There is no doubt that the support services provided by the assessee were directly associated with marketing. We find that if these five comparables are excluded from the list the valid comparables, the assessee will be in the safe zone of /- 5% -the OP to OC of the assessee is 5.18% whereas OP to OC of the remaining comparables is 3.01%. In the circumstances, we hold that the IT s entered into by the assessee with its AE was at arm s length Foreign exchange loss disallowed - Held that - As decided in assessee s own case we find that the AO on one hand would tax gain on FE earnings but would not allow loss arising on FE loss. In our opinion, the stand taken by the AO is not justified in any manner .If the gains of FE fluctuation had to be taxed then the loss arising out of such fluctuation has to be allowed .We find that the honorable Supreme Court, in the case of Oil and Natural Gas Corporation (supra)has held that the loss claimed by the appellant on account of fluctuation in the rate of FE as on the date of the balance-sheet was allowable as expenditure under section 37(1) of the Act . Income from the AE on account of incentive - Held that - As decided in assessee e own case incentive scheme was introduced by the assesee and the AE makes part payment for the expenditure incurred by the assessee for the scheme. Advertisement expenditure cannot be compared with introduction of an incentive schemes that would increase the revenue of the AE. Here it is not a case of incidental benefit to AE-it is a case of major benefit to the AE and fringe benefit to the assessee. TP provisions were introduced to take care of such eventualities i.e. determine the market value of transactions had they been entered in by two independent entities. Therefore, in our opinion, the order of the DRP does not require any interference from our side. Main argument of the assessee stands dismissed. As far as disallowing the expenditure of ₹ 2 crores, while computing the taxable income of the assessee, is concerned, we would like to hold that the DRP was not justified in disallowing the same. There is no doubt about incurring of expenditure by the assessee, as stated earlier .The assessee had introduced an incentive scheme and had incurred the expenses of ₹ 34 .61 crores . Whether the money received from AE was at arm s length or not is a separate issue. But, incurring of expenditure was never in doubt. So, in our opinion, the alternate argument raised by the assessee has to allowed

Summary

Issues Involved:
1. Addition made on account of Marketing Service Fee (MSF) and expenses on incentives to travel agents.
2. Taxation of foreign exchange gain.
3. Rectification order under section 154 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Addition made on account of Marketing Service Fee (MSF) and expenses on incentives to travel agents:
The assessee challenged the order of the Assessing Officer (AO) who had made an addition based on the Transfer Pricing Officer’s (TPO) determination of the Arm’s Length Price (ALP) for international transactions with its Associated Enterprises (AEs). The TPO proposed an adjustment of Rs. 2.78 crores to the income of the assessee. The AO issued a draft assessment order, which was challenged by the assessee before the Dispute Resolution Panel (DRP). The DRP upheld the TPO’s rejection of the comparables selected by the assessee and accepted the TPO’s selection of 10 new comparables, excluding two companies engaged in business process outsourcing. The DRP concluded that the assessee was not merely a commission agent but provided comprehensive marketing services, justifying the TPO's adjustments. The Tribunal, however, found that the comparables selected by the TPO were not functionally similar to the assessee's activities and excluded five comparables from the final list. This led to the conclusion that the international transactions were at arm's length, and the first ground of appeal was decided in favor of the assessee.

2. Taxation of foreign exchange gain:
The assessee objected to the taxation of foreign exchange gain on the grounds that in the preceding year, the foreign exchange loss was disallowed by the AO. The DRP held that the foreign exchange gain offered to tax by the assessee in the return of income was taxable and should not be reduced from the income offered. The Tribunal referred to its decision in the preceding year, where it had allowed the foreign exchange loss as an expenditure under section 37(1) of the Act, following the judgments of the Supreme Court in the cases of Woodward Governor India Private Ltd. and Oil and Natural Gas Corporation Ltd. The Tribunal decided the second effective ground of appeal in favor of the assessee, allowing the foreign exchange gain to be taxed while also allowing the foreign exchange loss to be recognized.

3. Rectification order under section 154 of the Income-tax Act:
The AO passed a rectification order under section 154, adding Rs. 2 crores to the income of the assessee on account of incentive. The DRP had earlier sustained the addition made by the AO, stating that the right to receive compensation from the AE did not arise on 31/12/2009 but when the assessee decided to give the incentive to the dealers. The Tribunal, while adjudicating the appeal for the previous assessment year, had held that the transaction was at arm’s length and that the assessee should have received Rs. 2 crores more from the AE. However, the Tribunal also held that the DRP was not justified in disallowing the expenditure of Rs. 2 crores incurred by the assessee. The Tribunal decided the effective ground of appeal in favor of the assessee, concluding that the expenditure was incurred and should be allowed.

Conclusion:
Both appeals filed by the assessee were partly allowed. The Tribunal found that the international transactions were at arm’s length, allowed the foreign exchange gain and loss to be recognized, and justified the expenditure incurred by the assessee. The order was pronounced in the open court on 10th January 2018.