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TMI Blog2016 (5) TMI 255X X X X Extracts X X X X X X X X Extracts X X X X ..... ity purposes. Thus we direct AO/TPO to exclude reimbursement costs while working out the operating costs. - Decided in favour of assessee Exclusion of Mega Soft Ltd. as comparable and inclusion of Orient Information Technology Ltd. in the set of comparables - Held that:- As regards to the inclusion of Orient Information Technology Ltd. is concerned, the TPO had not given any particular reason for its exclusion. The said company also designs, develops and deploys customized software solution and application, so its functionality was comparable with the assessee. The said company was not considered by the TPO because it was a loss making company but that cannot be a reason to exclude it from the set of comparable in view of the decision of the ITAT Delhi Bench in the case of Yum Restaurants India Ltd. [2011 (5) TMI 852 - ITAT DELHI ] wherein it has been held that merely a company showing loss would not lose its status of comparable if other criteria depicted status of comparable. Thus this issue is remanded back to the Assessing Officer for verification of the calculations furnished by the Ld. A.R of the assessee and to be decided afresh in accordance with law. Disallowance of expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Addition on account of mark-up to be recovered by the appellant on reimbursement of expenses received from Associated Enterprises (AE) and re-computation of arms length price (ALP) on account of provision for services of ₹ 9,42,641/- and ₹ 49,812/- respectively. Adjustment to net profit margin based on cost (NCP margin): On the facts and circumstances of the case and in law: (a) The CIT(A) has erred in observing that the Appellant has provided logistic services to its AE's and held that services provided by the Appellant to its AEs do require arm's length mark-up on its cost base. (b) The CIT (A) has also erred in holding that the payments made by AE's to the Appellant do not represent pass through costs. (c) Without prejudice to the above, the CIT (A) has erred in determining the arm's length profit margin at a rate of 11.6% on international transactions by rejecting the five comparable independent companies recognized by the Appellant to determine ALP under the provisions of Section 92 of the Act and Rule 10B to Rule 10D of Income Tax Rules 1962, without giving satisfactory reasons for such rejection. (d) Without prejudice to the above, the CIT (A) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the largest independent producer package and distributor of sports programming in the world. International Merchandising Corporation, Inc. USA (IMC Inc., USA) is a part of the IMG Group. IMG commenced operations in India by establishing a branch office of IMC Inc. The Indian Branch is engaged in the following activities: i. Activities relating to sports and arts and to represent local sport bodies associations and individuals for exploitation of commercial rights; and ii. Sale of television right and production of television programmes provided that the branch office does not undertake any broadcasting from Indian soil. 4. During the year under consideration, the Assessee was primarily engaged in the business of marketing, organizing and management of international sport events and fashion events, television production and management of commercial rights of sports persons and sports associations in India. 5. During the year under consideration, the assessee filed its return of income on 31.10.2004 declaring loss of ₹ 28,162,488/-. Subsequently, a revised return of income u/s. 139(5) of the Act was filed on 31.03.2006 wherein the assessee revised the loss to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s issue against the assessee. Now the assessee is in appeal. 9. The Ld. AR submitted the payment of ₹ 1,922,663/- was made to Association of Tennis Professionals, USA (ATP)during the year under consideration, the Assessee had organized a Men's Professional Tennis Championship in India ('Chennai Open'/'tournament'). For organizing the tournament, the Assessee had obtained the sanctions/approvals from ATP (which is the governing body of worldwide Men's Professional Tennis) to recognize the event as an ATP's event, and thus, this event was recognized as an official ATP Men's International Series Tennis Championship. Such payments have been grouped under the head 'sanction and rights' in the profit and loss accounts. It was further stated that without obtaining the approvals from ATP, the event would have not got international recognition and in absence of such recognition, no international player would have agreed to play in the tournament. Further, since the income from the tournament has been duly offered to tax by IMC in India, the expenditure incurred for earning the said income is allowable as legitimate business expenditure. For the aforesaid expenses the Ld. Counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal UK Ltd. 1,099,280 4 IMG Hong Kong 2,267,000 5 IMG Singapore Pte Ltd. 108,871 6 IMG Overseas, Hong Kong 90,381 7 IMGO Malaysia 164,674 8 IMG Sports Development (Shanghai) Ltd. 183,041 (A) Total Amount of Reimbursement of Expenses 8,126,215 9 International Merchandising Corp. Income received by AEs on behalf of branch 1,197,536 10 IMG Hong Kong 1,129,814 11 Trans World International UK Ltd. 67,996 (B) Total amount of Income received by AEs and then paid back to Appellant. 2,395,347 Total (A+B) 10,521,562 11. The Ld. AR submitted that the A.O in the assessment order treated the amount of reimbursement received from group companies by the Assessee on cost to cost basis, as services rendered by the Assessee to AEs and applied a mark-up of 19.56% (the mark-up computed by the A.O for event/production management services provided to group companies) and made the following additions: Particulars Amount (in Rs). Reimbursement of expenses received from AEs(A) 10,521,562 Arithmetic mean of NCP ('Net Cost Plus') of comparable companies as computed by the Ld. A.O (computed with respect to event/production management services) (B). 19,56% Addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal of expenses demonstrates that the expenses reimbursed included travel/accommodation and other miscellaneous third party expenses incurred by the Assessee on behalf of AEs, these expenses represents third party expenditure paid by the Assessee on behalf of AEs merely for administrative convenience and do not involve any services rendered by the Assessee. Thus, from an arm's length perspective, these expenses should be permitted to be 'pass through expenses' which should be reimbursed only on cost to cost basis. 13. As regards to re-determination of arm's length price margin for Income from production and Event Management services of the Assessee, the Ld. A.R submitted that the AO in the assessment order made addition by reworking the mark-up on production / event management services from 9.55% to 19.56% which has been reduced to 11.60% by the Ld. CIT(A). The net addition made is as under: Particulars Amount (in Rs) Cost of rendering services 2,429.844 ALP Markup (@11.6%) 281,862 Less: Markup already earned by Assessee 59.55%) 232,050 Amount of addition 49,812 14. The Ld. A.R also submitted the chart showing NCP margin of comparables as per following detail:- S. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting Expense 174,545,272 2,429,844 2,429,844 2,429,844 Operating Profit 16,669,073 281,862 146,277 417,447 NCP(%) 0.55 11.60 6.02 17.18 16. The Ld. AR submitted that the assessee is a foreign based company's branch and the main company is situated in USA. The AR submitted that Ground No. 1 is covered against the assessee in assessee's own case for the subsequent assessment years. The AR submitted that only thing in the subsequent year's decision by the ITAT was that it has not taken into consideration that payment of tournament fee and players welfare contribution are two different aspects and players welfare contribution cannot be treated as the fees. Thus, the said amount should be exempted from the tax purview. In fact the US entities are tax exempted association. 17. As relates to Ground No. 2, the assessee relied upon the decision of the I.T.A.T Hyderabad in the case of HSBC Electronic Data Processing India Ltd. Vs. Add. CIT 2(2) reported at TS-174-ITAT-2013 (Hyd.) wherein the reimbursement issue was decided in favour of the assessee. The assessee relied upon the decision of ACIT, Circle 3(1), New Delhi Vs. City Financial Consumer Finance India Ltd. in ITA No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el. (Tri.)] has to be followed wherein it has been held that if the Arms Length Price comes within the range of +/ - 5% of the range then no addition has to be made. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that the grievance of the department only relates to the exclusion of Mega Soft Ltd. as comparable and inclusion of Orient Information Technology Ltd. in the set of comparables. As regards to the inclusion of Orient Information Technology Ltd. is concerned, the TPO had not given any particular reason for its exclusion. The said company also designs, develops and deploys customized software solution and application, so its functionality was comparable with the assessee. The said company was not considered by the TPO because it was a loss making company but that cannot be a reason to exclude it from the set of comparable, in view of the decision of the ITAT Delhi Bench in the case of Yum Restaurants India Ltd. in ITA No. 5122/Del/2010 wherein it has been held that merely a company showing loss would not lose its status of comparable if other criteria depicted status of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not a consistent loss making company and has positive net worth and hence cannot be excluded. The Department is in appeal against the aforesaid decision of the CIT(A). The Ld. AR submitted that the A.O erred in alleging that the comparable company is continuously loss making. It is submitted that Concept Marketing & Advertising Ltd has incurred lossess only in the subject ASSESSMENT YEAR (PB page No. 436 for computation of the margins earned by the comparable company over a period of 3 years). The net worth of the comparable company in the subject A.Y was around 0.93 crores. The inclusion or exclusion of comparable company on the ground that it is a loss making company is contrary to the OECD draft notes on comparability released for public comments on May 10, 2006. The assessee also relied on the decision of the ITAT, Delhi in the case of Sony India (P) Ltd Vs. DCIT (ITA No. 1189/Del/2005, 819/Del/2007 & 820/Del/2007, (2008-TIOL-439-ITATDEL). 26. As regards to Ground No. 2 the Ld. AR submits that during the A.Y 2004-05, the Respondent assessee incurred expenditure under the head 'sanctions and rights' in Indian Rupees paid/payable to Indian Residents amounting to INR 1,07,57,45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the A.O. The CIT(A) after duly considering the remand report of the A.O admitted the additional evidence vide para 7 of his order, which is reproduced as under: "During appellate hearing, the appellant furnished details of Sanction and Rights expenses incurred in INR and also copy of agreement with Shah Wallace Distilleries Ltd. Since these were additional evidences which were not produced before Assessing Officer, these were sent to A.O for report u/s 46A and a remand report was requisitioned. The A.O furnished remand report which was communicated to the appellant for its rejoinder. The appellant has furnished rejoinder vide letter dated 14/9/2010. I have considered various submissions made by the A.O and the appellant. The basic argument of the appellant is that it could not furnish these details to A.O because A.O asked for details of payments in foreign currency only. Since these documents are vital to decide the issue in appeal. I hereby admit the additional evidence u/s 46 A in view of facts and circumstances of the case." 27. It is submitted that the A.O has never asked/confronted the assessee to reproduce any documentary evidence to substantiate that sanctions and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in foreign currency u/s 40(a)(i) of the Act which deals with disallowances of amount paid to Non-residents without deducting applicable tax at source. Therefore, provisions of Section 40(a)(i) of the Act do not apply in respect of expenditure/amount payable to Indian Residents and thus, these expenses cannot be disallowed u/s 40(a)(i) of the Act. The Ld. AR further submitted that Section 40(a)(i) of the Act relating to disallowance of certain expenditure payable to a resident for non-deduction of tax at source was inserted by the Finance Act, 2004 with effect from 1 April 2005 and is therefore, applicable from A.Y 2005-06. Hence, the provisions of Section 40(a)(i) of the Act do not apply to A.Y 2004-05 which is the assessment year under consideration. Therefore, no disallowance can be made in respect of expenditure incurred in Indian Rupees payable to Indian Resident on allegation of non-deduction of tax at source in respect of A.Y 2004-05 as there was no such enabling provision in the statute. Therefore, the CIT(A) rightly deleted the disallowances in respect of expenditure incurred in Indian Rupees payable to Indian Residents 30. As regards to Ground No. 3, the Ld. AR submit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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