9911796707
TMI Blog2019 (12) TMI 1221X X X X Extracts X X X X X X X X Extracts X X X X ..... itional Commissioner of income tax who passed the order of the transfer pricing under section 92CA (3) of the act was not authorised by the central board of direct taxes to perform all or any of the functions of an assessing officer specified u/s 92C of the Act. Thus we hold that, the order passed by the additional Commissioner of income tax u/s 92CA (3) of the income tax act is appellate order passed by a transfer pricing officer in case of the assessee for assessment year 2002 03. In view of this, the additional ground raised by the assessee in the cross objection is dismissed. Cost for working out PLI of the assessee for benchmarking international transactions - Whether third-party cost should be included in the total cost of the assessee for providing marketing support services and therefore markup thereon should also be placed to determine the arm s-length price of the market support and services fee on by the assessee? - In this case the agreement between the assessee and the associated enterprise was not produced before the lower authorities. In absence of examination of such agreement with the actual conduct of the parties, it cannot be decided that what are the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccountant Member For the Assessee : Shri Gaurav Gupta,Adv. For the Revenue : Shri H.K. Choudhary, CIT DR, Shri Rakesh Kumar, Sr. DR ORDER PER BENCH 1. This is the bunch of 11 appeals and cross objections by the parties in case of one Assessee , appellant/respondent involving similar issue and therefore they are heard together and disposed of by this common order. ITA number 996/del/2011 and CO number 315/del/2011 assessment year 2002 03 2. ITA number 996/del/2011 is filed by the Deputy Commissioner Of Income Tax, central circle 2 (1), New Delhi (the learned AO) against the order of The Commissioner Of Income Tax (Appeals) XX, New Delhi dated 30/12/2010. The Revenue has raised the following grounds of appeal for the Assessment Year 2002-03:- 1. The ld CIT(A) has erred on facts and in law in deleting addition of ₹ 3,52,71,454/- made on account of transfer pricing adjustment as:- a. The ld CIT(A) has erred in law in accepting the assesse s contention that it is only intermediary between third party and AE. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te and enlarge the viewer of BBC world channel in India. For such services, the assessee charged as per terms of agreement cost +10% mark up. The assessee rendered total market support services revenue of INR 73780695/ . The learned transfer pricing officer noted that no significant assets employed for this function except normal office appliances, furniture vehicles etc. and no significant risk was also assumed apart from minor risk of fluctuation in the exchange rate for its foreign exchange loans and its use. The assessee has also entered into another international transaction with issue of media Inst for providing trainers to them for running the news journalism course at the Institute where the salaries were reimbursed to the assessee on cost to cost basis without any mark up. The total receipt from the same was INR 15.5 lakhs against the expenditure of INR 20 140 08/02/2003/ . Assessee has also taken pound dominated external commercial borrowing of INR 1,000,000 for working capital requirements where part of the loan is s interest free and other loan on interest rate of LIBOR +0.06 percentage. The method adopted by the assessee for benchmarking of the other i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not have any margin in absence of any value addition by assessee. After considering the reply furnished by the assessee, he reached at a conclusion that though assessee has used Transactional Net Margin Method to determine the arm s-length price of market support service fee income but the method adopted by the assessee to justify the arm s-length nature of the transaction is nothing but a Modified Cost Plus Method which is also the most suitable method to determine the arm s-length price in case of a service provider. Thereafter, he computed the expenses attributable to the market support service function and Airtime sale function by including the direct expenses and indirect common expenses. Such total expenses was worked out at INR 101978926/ . The total receipt of these services was INR 73780695/ and thus he found that assessee has incurred a loss of ₹ 28198231/ . As according to him assessee has incurred a loss of ₹ 28198231 in the market support service function, this amount of loss was compared with the profit margin of the comparable companies engaged in broadly similar functions for the purpose of determination of arm s-length price of market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price of the market support service segment at INR 30,880,000, whereas the revenue of the appellant from the above services was found to be ₹ 31,930,000/- . Therefore, he held that the international transaction of the appellant with respect to the provision of market support services complies with the arm s-length standard under the Indian transfer pricing regulations. 12. The learned assessing officer aggrieved with the order of the learned CIT A in deleting the addition of INR 35271454/ holding that assessee s contention that it is only intermediary between the 3rd party and the associated enterprise, therefore there is no mark up required on this cots. Thus CIT A has not considered those cost in to cost base of the assessee. The contention of the TPO is that market support service function is performed in India as the assessee company is responsible for discharging such functions as an independent organization and lot of effort is required to be put into by it for providing business promotion and research services. Therefore, it needs to be adequately compensated for such an effort. Therefore, such 3rd party cost cannot be ignored and excluded for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee stated that only 3 income tax authorities namely Joint Commissioner, Deputy Commissioner Or Assistant Commissioner are duly authorised by the CBDT to functions as a transfer pricing officer. Therefore, it is submitted that the authority given by the statute to Joint Commissioner cannot be exercised by Additional Commissioner and therefore the order passed by The Additional Commissioner under section 92CA of the act is ultra virus, null and void. The assessee also relied upon the decision of the honourable Delhi High Court in CIT vs Pankaj Gupta 334 ITR 240 wherein it has been held that when the power is given to do a certain thing in a certain manner, the same must be done in that manner or not at all and that all other proceedings are necessarily forbidden. He further relied upon the decision of the honourable Delhi High Court in 52 taxmann.com 336, 17 taxmann.com 138 and the decision of the honourable Bombay High Court in 346 ITR 443. Therefore, he submitted that the Legislature in its wisdom has empowered only Assistant Commissioner, Deputy Commissioner And Joint Commissioner To discharge the functions of the Transfer Pricing Officer and therefore The Additional Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. We have carefully considered the rival contention. Admittedly according to the provisions of Explanation to section 92 CA of the act Transfer Pricing officer for the purposes of the section of 92 CA of the act is Explanation.-For the purposes of this section, Transfer Pricing Officer means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the Board 17 to perform all or any of the functions of an Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons.] Provisions of section 2 (28C) of the Act defines the Joint Commissioner means a person appointed to be a Joint Commissioner Of Income Tax Or An Additional Commissioner Of Income Tax under subsection (1) of section 117 of the income tax act. Further with retrospective effect from 01/06/1994 section 2 (1C) was inserted by finance act 2007 to define Additional Commissioner means a person appointed to be an Additional Commissioner Of Income Tax under subsection (1) of section 117 of the act . Further, it is not the case of the assessee that such Additional Commissioner of income tax, who passed an order u/s 92CA (3) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not the case of the assessee that the additional Commissioner of income tax who passed the order of the transfer pricing under section 92CA (3) of the act was not authorised by the central board of direct taxes to perform all or any of the functions of an assessing officer specified u/s 92C of the Act. In view of this, the reliance on the above decision of the honourable Delhi High Court does not support the case of the assessee. Thus we hold that, the order passed by the additional Commissioner of income tax u/s 92CA (3) of the income tax act is appellate order passed by a transfer pricing officer in case of the assessee for assessment year 2002 03. In view of this, the additional ground raised by the assessee in the cross objection is dismissed. 20. Accordingly, the CO of the assessee is dismissed. 21. Now we come to the appeal of the learned assessing officer. The one of the issue involved in the appeal of the revenue is that whether third-party cost should be included in the total cost of the assessee for providing marketing support services and therefore markup thereon should also be placed to determine the arm s-length price of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricing officer or the learned CIT A. He therefore submitted that the learned CIT A could not have said that such cost is not the cost of market support services. He extensively referred to the remand report dated 24/11/2010 placed at page number 133 of the paper book, wherein during the course of appellate proceedings, the assessee has claimed that the in respect of market support segment, there are third-party expenses with respect to distribution of digital satellite receivers and commission paid for selling them of ₹ 11.86 millions cumulatively and further sales promotion marketing and other expenses of ₹ 29,990,000. The assessee has contended before the learned CIT Appeal that these expenses have been in the nature of the pass-through expenses (non-value-added) and should be considered for remuneration on cost to cost basis on which they have been actually reimbursed. Acordingly they are not part of operating expenses. He submitted that in para number 5.6 and 5.7 of the order of the learned transfer-pricing officer the above issue has been discussed at threadbare, for those reasons these expenses cannot be kept out of the cost basis. He further referred to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r carry out research in respect of the performance and viewership of BBC World in India and communicate the results of all such research to BBCW. 2) BBCW shall provide BWIPL from time to time with appropriate promotional material to assist BWIPL in carrying out its distribution and marketing activities. 3) In consideration for the provision of the above services by BWIPL, BBCW shall pay BWIPL such amount as shall be sufficient to cover the operating costs (including appropriate overhead) which shall be incurred by BWIPL in providing the above services, together with an additional payment of 10% of such costs. The level of such costs shall be agreed in advance by BBCW and BWIPL on an annual basis. ii. From the aforesaid clauses of the agreement, it is apparent that the Assessee was acting as exclusive agent of its AE. Further, for services rendered under the agreement, the AE was obligated to pay operating costs (including appropriate overhead) along with mark-up of 10%. It may be noted that the 'operating cost' referred to above is the cost of operation as an 'agent', i.e., intermediary (operating at low risk) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same have been carefully considered by the TPO also vii. From the aforesaid observations / findings of the TPO, it is apparent that the Revenue had accepted that Assessee was acting as Low Risk (pure) Agent of its' AE during the previous year relevant to AY 2002-03. viii. Accordingly, expenditures incurred for and on behalf of the AE should not form part of 'operating cost' of Assessee, and consequently, mark-up could not be recovered on such pass through / third party costs / non-value added expenses, incurred by Assessee for and on behalf of the AE. ix. It is submitted that while performing its functions as exclusive agent for its AE, Assessee paid third party expenses on behalf of its AE for administrative convenience and such third party expenses had no cogent nexus with agency functions of Assessee. The functions of Assessee (as an exclusive agent) was to provide assistance to AE in execution of their decisions pertaining to incurrence of such pass through / third party costs. The same is evident from the nature of expenses. Sample copy of the invoices is placed in the Paper Book for AY 2002-03 at Page 107 to 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant. The fact shows that for the purpose of working out the cost base for determination of the arm s-length price in case of marketing support services, expenses of INR 2 3691597/ on sales promotion and expense of INR 6 296509 on research are specifically incurred by the assessee for undertaking certain specific activities for the associated enterprise. Such expenses are taken as out-of-pocket expenses incurred by the assessee and therefore the contention of the assessee is that it does not warrant any mark up in the context of determination of arm slength price. The learned transfer-pricing officer held that assessee is not acting merely as an agent or intermediary in provision of such services for business promotion and research etc. According to the terms of the agreement assessee is responsible for conceptualization, planning and execution of the entire market support services and is not performing such services based on day-to-day instructions form associated enterprise. According to the learned transfer pricing officer, in other words, it can be said that soul of such function is present in India, as assessee is responsible for discharging its market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transactions is not affected by the accounting treatment. He further relied upon the decision of the coordinate bench in case of Deputy Commissioner of income tax vs Cheil communications private limited [ ITA number 712/del/2010], wherein it was held that markup is to be applied to the cost incurred by the assessee company in performing its agency function and not to the cost of rendering advertisement space on behalf of its associated enterprises. Therefore, he held that based on economic and commercial reality of the operations of the appellant, income towards agency functions performed by the appellant, the 3rd party costs are not relatable to the agency function and are liable to be excluded from the cost base. The assessee has produced before us an agreement dated 21st of March 2001 entered into between BBC worldwide and BBC worldwide (India) private limited. According to that agreement, assessee shall act as BBC worldwide s exclusive agent for marketing and distribution of the televised Channel BBC world to cable operators and as and when approved by the Indian government to any other broadcast distribution system in India. The assessee shall fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which even remotely suggest that these 3rd party costs have been incurred at the insistence of the associated enterprise and no risk is involved on assessee. Firstly, in the profit and loss account which is audited by the auditor of the company and approved by the shareholders and directors, there is no reference of any 3rd party cost incurred by the assessee on behalf of the associated enterprise. In fact, all the expenses are routed through the profit and loss account. Had this been the third party cost, which is not the liability of the assessee for making the payment, but of the associated enterprise, it should have been debited to the account of the associated enterprise and should not have been routed through the profit and loss account. The accounting treatment itself shows that the expenses incurred by the assessee are its own expenditure. Therefore we do not find any reason to exclude them from the cost base on which the assessee needs to be remunerated. The learned CIT A has rejected this saying that accounting treatment does not govern the transfer pricing analysis. In the case of U.P. State Industrial Development Corpn. [1997] 225 ITR 703/92 Taxman 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of the assessee to incur them for rendering the market support services, they cannot be excluded. It is for the assessee to establish that certain expenditure are required to be incurred by the associated enterprise but they did not incur them, directed the assessee to incur them on their behalf and would be reimbursed to the assessee without any further function and risk associated with incurring such expenditure. Even in this case the agreement between the assessee and the associated enterprise was not produced before the lower authorities. In absence of examination of such agreement with the actual conduct of the parties, it cannot be decided that what are the operating costs incurred by the assessee for marketing support services functions, therefore, the order of the learned CIT A cannot be sustained. Further, we do not find that on what basis certain cost not allocated to the marketing support function of the assessee have been accepted by the learned CIT A. No basis has been given for accepting the contention of the assessee by him. As the assessee has also produced the agreement between the associated enterprise and the assessee now (it was not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by the assessee is dismissed. Assessment Year 2003 04 ITA number 3007/del/2011 (by assessing officer) Cross objection number 231/del/2011 27. The Revenue has raised the following grounds of appeal in ITA No. 3007/Del/2011 for the Assessment Year 2003-04:- 1. The ld CIT(A) has erred on facts and in law in deleting addition of ₹ 1,45,68,882/- made on account of transfer pricing adjustment as:- a. The ld CIT(A) has erred in law in accepting the assesse s contention that it is only intermediary between third party and AE. b. The soul of the market support services functions is present in India as the assessee company is responsible for discharging such functions as an independent organization and a lot of effect is required to be put into by it providing business promotion and research services and, therefore, it needs to be adequately compensated for such efforts. Therefore, such cost cannot be ignored and excluded for the purpose of computation of Arm s Length Price of Market support services fee. 28. The assessee has rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on facts and in law in deleting addition of ₹ 1,48,26,190/- made on account of transfer pricing adjustment. (b) The ld CIT(A) has inter alia erred in law in accepting the assessee s contention that it is only intermediary between third party and AE. (c) The ld CIT(A) inter alia erred in not appreciating that the soul of the Market Support Services functions is present in India as the assessee company is responsible for discharging such functions as an independent organization and a lot of effort is required to be put into by it for providing business promotion and research services and therefore, cannot be ignored and excluded for the purpose of computation of Arm s Length Price of Market support service fee. 34. The assessee has raised the following grounds of appeal in cross objection No. 52/Del/2012 in ITA No. 495/Del/2012 the Assessment Year 2005-06:- 1. On the facts and circumstances of the case and in law, we wish to rely on the order dated December 27, 2011 issued under section 250 of the Income Tax Act, 1961 passed by the ld Commissioner of Income-tax (Appeals)-XX (ld CIT(A), New Delhi and gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d assessing officer for assessment year 2002 03. 40. For this year, the ITO Ward 2 (4), New Delhi passed draft assessment order dated 30/11/2009 u/s 143 read with section 144C of the act proposing an addition of ₹ 22048880/ in pursuance of the direction of the learned dispute resolution panel where the transfer pricing adjustment suggested by the learned transfer pricing officer of ₹ 22048880/ was confirmed by the learned dispute resolution panel.. 41. The Assessee has raised the following grounds of appeal in ITA No. 4304/Del/2010 the Assessment Year 2006-07:- The addition amounting to INR 2,20,48,880 undertaken by The Learned Income Tax Officer, Ward 2(4), New Delhi ( the Ld. AO ) vide final assessment order dated July 16, 2010 (received by the Appellant on July 21, 2010) passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ( the Act ) is not in accordance with the law and therefore not sustainable. 1. The Dispute Resolution Panel, New Delhi ( the DRP ) erred in law and facts by summarily rejecting the Appellant's objections to the draft order dated November 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial year 2005-06 only, disregarding the multiple year data approach followed by the Appellant. Further, the Ld. AO has erred in laws and on facts by relying upon updated data of the Comparables which was not available to the Appellant at the time of maintenance of Transfer Pricing Documentation within the time frame mentioned in Rule 10D(4) of the Income Tax Rules; 2.7. The Ld. AO has erred in law and on facts by not allowing the benefit of (+/-) 5% range as provided in the proviso to Section 92C(2) of the Act while determining the arm's length price of the international transactions of the Appellant; 2.8. The Ld. AO has erred in law and on facts by not allowing the Appellant the adjustment for differences in the material items reported in the financial statements of the Appellant as compared to those of the comparable companies for analysis under the TNMM; and 2.9. The Ld. AO has erred in law and on facts in not allowing the Appellant the adjustments for differences in its risk profile vis-a-vis those of the comparable companies disregarding the fact that while the Appellant is a captive risk-free service provider, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) has made the decision on reimbursement cost by plainly citing the previous year adjudication without appreciating the following grounds: (i) The tax auditor of the assessee has itself classified this expenditure as Operational Costs in notes to the account for the reason that these expenses are intrinsically linked to the running of business of the assessee of promoting the business of its overseas affiliate. (ii) There cannot be any reason to treat such expenses as non-operating in nature given that the entire revenues of the assessee are from the business of promoting, marketing and distribution of BBC Channel and Ad time of the AE. (iii) The assessee has rendered these services for the benefit of the AE Under Arm's Length circumstances any enterprise rendering such services solely for the benefit of the recipient would charge a sum on the expense incurred which would include an agreed mark-up. (iv) The assessee w.e.f. 2004-05 has maneuvered its financial ignoring past practice under a common agreement in such a manner that a part of the expenses were kept out of the cost base only to hide the obv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion segment was artificially created by the Appellant by entering into the agreement dated February 21, 2008 with retrospective effect from November 11, 2005 in order to show profitability at desired levels, without providing the Appellant an opportunity of rebutting such false allegations before passing the order; Operating Profit and Profit Level Indicator 4. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding inclusion in the cost base of the Appellant, ₹ 16,328,860 on account of costs incurred by the Appellant towards payments made to third party vendors for research and agency fees on behalf of its associated enterprise; which were reimbursed to the Appellant on a costto- cost basis and had no value added activity carried out by the Appellant; 5. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in considering certain third party non value added costs (research and agency fees) incurred by the Appellant as costs intrinsically linked with the core areas of operations of the Appellant and in recommending that the Appellant should earn a mark-up o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or determination of the arm's length price of the international transactions of the Appellant. General 11. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding that brought forward losses and unabsorbed depreciation under Section 72 of the Act should be set-off against the taxable income of the Appellant determined after considering the transfer pricing adjustment; 12. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding levy of interest under section 234D of the Act. 47. For assessment year 2007 08, the learned transfer pricing officer considered the reimbursement of INR 45,100,000 as part of the cost base of the assessee and therefore determined the profit level indicator of the assessee at (-) 13.98% whereas the PLI of the comparables was determined at 13.04% and thus worked out the adjustment of the arm s-length price of the international transaction of marketing support services at INR 3 4069484/ . The assessment order was framed on 01/02/2011 wherein the above adjustment was incorporated and the total taxable incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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