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TMI Blog2018 (7) TMI 2111X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee who is the acting as subagent of the AE and in respect of such transactions, assessee has also been remunerated. Since the direct customer segment and subagent segment are materially different as such, the margin of profit earned by the assessee in respect of transactions entered with its AE is not comparable with the margin of profit earned by the assessee with its direct customers. Further, if the approach of the TPO is to be applied then the effect of the comparison would be that assessee will receive 15,90 percent of the total gross profit earned by the AE, and in such circumstances proper adjustment would be to allocate the proportionate operating expenses incurred by the AE, and in such circumstances, the effect would be that there would be downward adjustment to the book value of international transactions of the assessee, which itself contravenes the section 92(3) of Income Tax Act. In summary, appeal of the revenue in relation to the benchmarking adopted by the assessee and the approach followed by the CIT (A) for the international transactions of the assessee is arm s length and the grounds raised by the Revenue are dismissed - ITA No. 6055/Del/2010 - - - Dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness segment )] based purely on own conjectures and surmises. The consequential application of Cost Plus Method ( CPM ) by the Ld. TPO by undertaking comparability analysis of the aforesaid segments at the 'gross level' is devoid of merits and inconsistent with the functional and risk profile of the Appellant. 1.2. By not giving due consideration to Assessee's counter-submissions as regards allocating a proportion of operating expenditure incurred by the AE which follows as a corollary to the 'gross level' approach adopted by the Ld. TPO while undertaking the impugned TP adjustment. 1.3. By concluding the assessment without serving a show-cause notice upon the Appellant as mandated by proviso to Section 92C(3) of the Act. Thus, the action taken by the Ld. TPO is against the principles of natural justice. 1.4. By resorting to an erroneous application of CPM to arrive at the impugned TP adjustment. 1.5. By not allowing the benefit of (+/-) 5 percent as provided in the proviso to Section 92C(2) of the Act, while determining the arm's length price of the international transaction of the Appellant. 1.6. By not appreciating that there was no inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2004-05 whereas the CIT(A) has allowed depreciation at the rate of 25% as 'Intangible Assets' on website development cost, which has not been followed in the order of the Ld AO/ Hon'ble DRP. 2.5. Without prejudice to the above grounds, on the facts and in the circumstances of the case, the Ld AO has erred in proposing and the Hon'ble DRP has further erred in not considering the jurisdictional High Court decision in the case of Commissioner of Income-tax IV vs. India Visit.com private Limited (219 CTR 603) wherein the expenditure on website have been allowed as revenue expenses under Section 37(1) of the Act. The Ld AO has erred in placing reliance on the case of Goetze India Ltd Vs CIT (284 ITR 323) and holding that no claim can be made at the time of assessment which have not been made at the time of return ignoring the fact that: 2.5.1 Website development cost as revenue expenditure was submitted as an alternate plea, without prejudice to the original contention of the assessee, in case the depreciation is not allowed on website development cost as 'Software'. 2.5.2. The captioned decision in the case of Commissioner of Income-tax IV Vs India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses is also not justified. It is further submitted that both these issues have been decided by Co-ordinate Bench of Tribunal in assessee s own case for the assessment year 2005-06 vide order dated 29.03.2017 in ITA No. 1875/Del./2011 and 2337/Del./2011, which is confirmed by Hon ble Delhi High Court in ITA No.881/2017. Therefore, the TPO shall have to pass fresh order as per order of the Tribunal on Ground No. 1. 4. On the other hand, the ld. DR relied on the orders of the authorities below. 5. Having considered the rival submissions and gone through the entire material available on record, we observe that only two issues are involved in this appeal for adjudication. The first is with respect to adjustment of ₹ 80,43,918 on account of arm s length price of international transactions and second disallowance of ₹ 37,14,202/- of expenses incurred on website development. We further find that both these issues are squarely covered by the decision of Co-ordinate Bench in the case of assessee itself (supra) for the preceding assessment year 2005-06. With respect to Website expenses, the Tribunal has observed as under : 4. In so far as the claim of depreciation on we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 94,000/-. However, from the perusal of the depreciation chart, it is apparent that opening WDV of block of asset of website development cost was ₹ 48,25,879/- and during the assessment year, an addition of ₹ 94,000/- was made and on the total block of asset, depreciation cost was ₹ 48,25,879/- and during the assessment year, an addition of ₹ 94,000/- was made and on the total block of asset, depreciation @ 60% was claimed of ₹ 29,51,927/- (including depreciation on the addition made during the year of ₹ 94,000/- @60%). The AO has disallowed a sum-of ₹ 56,000/-- being the depreciation on the additions made during the year, however he has not disputed the depreciation claimed on the block of asset of website development cost of ₹ 48,25,879/-. In view thereof, once the AO himself has accepted the allowance of depreciation on the block of assets of website development cost @ 60% as such, disallowance made on the additions made during the year is unjustified in law and accordingly, it is held that on the website development cost, assessee is entitled to claim of depreciation @ 60%, we order accordingly. The ground Nos. 1 to 3 of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cketing and tour and travel services and under the aforesaid agreement services provided by the assessee to AE has been stated in clause 2 which is reproduced hereinbelow: 2. Services The Service Provider shall provide the following services: a) Ticketing Services: - i) The supplier will issue the tickets as per Client's request/order. ii) The Supplier shall deliver the tickets to the Client or Client's customer(s) directly as per client's instructions. iii) The Supplier shall provide the Client with the Tracking numbers on a weekly basis for the tickets dispatched by the supplier to or on behalf of the client . iv) In case there is a delay or a delay is expected in dispatch of the tickets, due to any reason whatsoever, the supplier shall keep the client informed. b) Tour Arrangement services: i) The supplier will contact/interact directly with the client's customer once a booking is passed on by the client to the supplier. ii) The supplier will provide the customer with necessary information and/or details as per customer's requirement/request. iii) The supplier will co-ordinate, arrange and organize the entire trip of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evel. The activities of the assessee under the AE segment is that of IT enabled services, as such, assessee in its .TP Report selected 10 comparables undertaking IT enabled services, and weighted average margin of such comparables was calculated at 9.60%. Since the NCP of the assessee was computed at 36.71%, as such, international transactions was claimed to be at arm's length. That the TPO did not agree with the transfer pricing analysis of the assessee, and firstly he did not agree-with the selection of the most appropriate method as TNMM and he applied Resale price method as most appropriate method, wherein comparison is done at gross profit margin level. He further, compared the gross profit/total cost of sub-agent segment with the gross profit/total cost of direct customer segment and after granting an adjustment of 16.21%, made the impugned upward adjustment to the international transaction of the assessee in respect of ticketing and tour and travel transactions. 15.3 We find that firstly comparison at gross margin level in the business model of the assessee is incorrect, since to compare at gross margin level, international transaction as well as the comparable trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying on a general brokerage business, the resale price margin may be related to a brokerage fee, which is usually calculated as a percentage of the soles price of the product sold. The determination of the resale price 2.23 Following the principles in Chapter I an uncontrolled transaction is comparable to a controlled transaction (i.e. it is a comparable uncontrolled transaction) for purposes of the resale price method if one of two conditions is met: a) none of the differences (if any) between the transactions being compared or between the enterprises undertaking those transactions could materially affect the resale price margin in the open market; or, b) reasonably accurate adjustments can be made to 'eliminate the material effects of such differences. In making comparisons .for purposes of the resale price method, fewer adjustments are normally needed to account for product differences than under the CUP method, because minor product differences are less likely to have as material an effect on profit margins as they do on price. [Unquote] - Further, in order to substantiate the reliance placed on the guidelines issued by the OCED in relation to the application of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantum of profits and the profits are mainly dependent on expenses incurred. The fundamental premise being that the operating expenses adequately represent all functions performed and risks undertaken. For this reason Berry ratio is effectively applied only in cases of stripped down distributors; that is, distributors that have no financial exposure and risk in respect of the goods distributed by them. [Unquote] 15.4 That the learned DR has also challenged the aggregation of the ticketing and tour and travel services and submitted that TPO has separately benchmarked both the transactions and approach of the assessee in not separately benchmarking is incorrect. We find in the instant case, AE of the assessee is providing online ticketing and travel-services, and to provide such services, AE has entered into two agreements: one for Customer Handling and Data Management Services and other for providing ticketing and tour and travel services. That since Customer Handling and Data Management Services are provided in respect of both ticketing and tour and travel services, and further assessee provides its services in respect of ticketing and tour and travel services to the custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate the nature of functions performed and associated risks assumed by the appellant in relation to international transactions with its foreign affiliate. Accordingly, in view of the statutory principles enshrined under Section 92C(3) of the Act, I reject the transfer pricing approach adopted by the TPO since it was based on misplaced assumptions regarding the function-asset-risk profile of the appellant,, which cannot be sustained owing to lack of corroborative evidence or supporting material on record. 15.2 Since the appellant performed routine services (viz. customer handling and data management services) for its foreign affiliate without being assigned or carrying out any key entrepreneurial function in relation to the offshore business, it had adopted the correct economic benchmarking approach in its transfer pricing documentation by analyzing the arm's length margin being reported by independent third-parties engaged in providing similar business process outsourcing services under uncontrolled conditions. These benchmarking results or choice of most appropriate method ('TNMM') has not been independently challenged or contested by the TPO. Accordingly, I confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ism adopted by the TPO to affect the above .adjustment is faulty and erroneous. The TPO reduced the gross-profit margin of the appellant earned from its Direct customer business segment to affect above adjustment, instead of making appropriate adjustment to the cost-base/ value-added expenses of the AE for marketing activities/ functions undertaken by the AE. However, since we have already rejected the approach adopted by the TPO above, we refrain ourselves from commenting on the validity of any such adjustment computed by the TPO. 15.9 The assessee has further contended that the approach taken by the assessee in comparing the direct customer segment and the sub agent segment is incorrect and even if the TPO's approach were to be followed, and the assessee be characterized as risk-bearing entrepreneur akin to its direct customer segment for the sub-agent business, then the proportion of the operating expenses incurred by the AE in the US should also be allocated to the assessee. The assessee has filed its workings with the approach followed by the TPO and has contested that there will be a loss of 2.45 mn and which will result in a downward adjustment to the income of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India sourced @ cost plus 2% 213.48 47.36% US sourced 237.32 52.64% 450.80 Gross Profit I(Tickets) 10.33% 51.94 II T P Net cost India sourced @cost plus 5% 6.00 66.82% U.S. sourced 2.98 33.18% 8.98 Gross Profit II (T P) 24.41% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15.10 We have gone through the working of adjustment provided by the assessee, wherein approximately 15.90 percent of AE's operating expenses will be allocated to the assessee, since the assessee will receive 15.90 percent of the total gross profit if the TPO's approach is applied. Accordingly, ₹ 16.67 mn (being 15.90 percent of the AE's operating expenses amounting to ₹ 104.87 mn) is required to be allocated to the assessee. For better appreciation of the working, same is extracted herein below: Incremental Costs attributable to MMT India Amt ( INR mn) Total operating expenses of MMT U. S. ( not included in Direct costs) - Site hosting 2.63 - Customer handling and processing charges 48.60 - Depreciation 0.50 - Presonnel expenses 2.25 - Operating and admin expenses 50.90 - 104.87 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g as subagent of the AE and in respect of such transactions, assessee has also been remunerated. Since the direct customer segment and subagent segment are materially different as such, the margin of profit earned by the assessee in respect of transactions entered with its AE is not comparable with the margin of profit earned by the assessee with its direct customers. Further, if the approach of the TPO is to be applied then the effect of the comparison would be that assessee will receive 15,90 percent of the total gross profit earned by the AE, and in such circumstances proper adjustment would be to allocate the proportionate operating expenses incurred by the AE, and in such circumstances, the effect would be that there would be downward adjustment to the book value of international transactions of the assessee, which itself contravenes the section 92(3) of Income Tax Act. In summary, appeal of the revenue in relation to the benchmarking adopted by the assessee and the approach followed by the CIT (A) for the international transactions of the assessee is arm s length and the grounds raised by the Revenue are dismissed accordingly. 8. Having gone through the aforesaid discussio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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