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TMI Blog2024 (8) TMI 277X X X X Extracts X X X X X X X X Extracts X X X X ..... ;Ld. AO') has erred in enhancing the income of the Appellant under section 143(3) read with section 144C(13) and section 144C(13) read with sections 143(3A) & 143(3B) of the Act, for the assessment year ('AY') 2017-18 at INR 13,23,48,799 as against the returned income of NIL under the normal provisions of Act. 2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in violating the provisions of section 144B of the Act and principles of natural justice by not providing an opportunity of being heard and failing to issue a show-cause notice for the proposed variation. Grounds pertaining to addition on account of payment of royalty (INR 70,12,25,209) 3. On the facts of the case and in law, the Learned Transfer Pricing Officer ('Ld. TPO') erred in proposing an adjustment on account of arm's length price for payment of royalty. In doing so, the Ld. TPO / Hon'ble DRP erred in: - 3.1 Rejecting the Comparable Uncontrolled Method ('CUP') method used by the Appellant to benchmark the royalty transaction based on surmises and incorrect findings and ignoring the fact that the royalty transaction has been accepted to be at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and marketing expenses incurred by the Appellant towards domestic unrelated parties while computing the amount of adjustment for payment of royalty; 3.8 Making an adjustment in a manner contrary to the accepted TP Principles. Grounds pertaining to addition on account of receipt of consultancy services (INR 56,70,203), reimbursement of other expenses (INR 1,24,46,492) and IT cost allocation (INR 30,12,824) 4. On the facts and circumstances of the case and in law, the Ld. TPO erred in determining a NIL price for payment of receipt of consultancy services, reimbursements of expenses and IT cost allocation using the Other Method. 4.1 In doing so, the Ld. TPO further failed to provide information on any comparable uncontrolled cases wherein NIL price would have been charged for similar transactions; 4.2 While doing so, the TPO/DRP completely ignored the judicial precedence in this regard in the Appellant's own case as well as in other taxpayers' case as upheld by the Hon'ble Tribunals; 4.3 While doing so, the Ld. TPO erred in completely brushing aside all the documentary evidences filed to substantiate the nature of services received; 4.4 While doing so, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. The assessee company operates through various franchisees as well as self-owned stores in India. The assessee has filed its Return declaring total loss at Rs. 14,68,46,338/- under normal provisions of the Income Tax Act, 1961 (hereinafter referred as to "Act"). 5. During the year under consideration, the assessee entered into International Transactions. The case was referred to the Transfer Pricing Officer as per provisions of Section 92CA (1) of the Act for computation of Arm's Length Price in relation to International Transactions/ Specified domestic transactions. Subsequently, the Ld. TPO passed an order u/s 92CA (3) of the Act on 29/01/2021, wherein total adjustment of Rs. 72,23,54,728/- was made with respect to the international transactions in following manner: SI No. Description of transaction Adjustment u/s 92CA(3) Rs. 1 Reimbursement of advertising expenses 1,24,46,492/- 2 IT Cost Allocation 30,12,824/- 3 Consultancy Services allocation 56,70,203/- 4 Payment of royalty/consideration for the use of trademark and know-how 70,12,25,209/- TOTAL 72,23,54,728/- 6. The Ld. A.O. agreed with the view taken by the TPO for calculating the Arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od and determined the Arm's Length Margin at 5.42%. The said action of the TPO has been confirmed by the DRP/A.O vide order impugned. 13. The Ld. Counsel for the assessee submitted that the Ld. TPO/AO/DRP have treated selling and distribution expenses as part of advertising and marketing expenses, incorrectly associated profitability with payment of royalty. The ld. Counsel further submitted that the authorities have erroneously found that marketing was responsibility of the A.E and applied an ad-hoc margin of 10% on advertising and marketing spend. He also submitted that, the authorities have incorrectly computed the net operating margin of the assessee as well as of the comparable companies by not granting benefit of economic adjustment as required under Rule 10B (2) and Rule 10B(1)(e) of the Rules. 14. The Ld. Counsel for the assessee further submitted that, the payment of royalty was held to be Arm's Length in the earlier years. For the Assessment Year 2006-07 in Assessee's own case, the Coordinate Bench of the Tribunal in ITA No. 3829/Del/2010 has treated the payment of royalty to be Arm's Length by rejecting the application of TNMM. Even in the Assessment Ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the consumers and in keeping with the trends of the market, by way of photo reportage, pictures, scripts ,texts, other materials and services made available by the LICENSOR with a view to both assuring as uniform as possible a world-wide image of the Licensed Trademarks and the Benetton Group and allowing the LICENSEE to avail itself of the world-wide terms and arrangements for the time being in force between Benetton Group and its advertising agencies 2. The LICENSEE shall previously submit to the LICENSOR for approval all data and information related to the media intended to be used (such as outdoor, tv, radio, the internet and press), and the relevant costs and expenses to be paid by the LICENSEE and shall not place any such campaign or action in hand without having secured the previous written approval of the LICENSOR with respect thereto. 3. in any case, the LICENSEE shall submit to the prior written approval of the LICENSOR all data and information regarding any advertising campaigns intended to be pursued (and shall not place any such campaign in hand, without having secured the prior written approval of the LICENSOR with respect thereto) in order to assure an image of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be determined based on the nature of service provided by assessee for each class of transaction based on various factors and analysis. In the case of Star India Ltd. (supra), also the TPO treated all the activities of the assessee as one and determined the ALP at entity level without appreciating that one cannot compare the FAR of a principal and agent on same footing. 7.4. In our view, in the assessee's case there are different segmental activities, which are independent of each other. They are required to be analyzed on transaction to transaction basis and not by combining all activities. Consequently, we uphold the assessee's method of ALP." 20. 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, the issue of royalty is decided in favour of the assessee and against the Revenue. 21. In so far as the adjustment on account of advertisement expenses is concerned, 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 advertis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costs paid by its AE and thereafter reimbursed by assessee at the request of its AE. Before us, Ld. Representative for the assessee has referred the Pages 754 to 881 of the Paper Book Vol.II wherein, he placed the copy of Submission dated 25.11.2020 addressed to the TPO inter alia, including the summary of invoices raised by its AE Benetton Group SRL to the assessee which are supported by 100% third party back-to-back invoices. The said material has been referred to show that the amount reimbursed by the assessee to its AE were on No Margin Basis and were on account of advertisement expenses relating to business of assessee. 25. The Ld. DR, though defended the action of the lower authorities, but has not controverted the material referred to by the assessee before us, which ostensibly was also before the lower authorities. 26. We have perused the order of the TPO, more specifically, para 4.3 of his order, whereby he has 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. In fact the observations of the TPO in our view is fallacious in as much as the case of the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment made on account of IT Cost Allocation. Consultancy Services- HR Cost 30. The 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. The 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. The ld. DRP upheld the order of the TPO. 31. Before us, the Ld. AR submitted that the Tribunal in Assessee's own case for the Assessment Years 2007-08, 2008-09 and 2009-10, deleted the adjustment on account of similar issue of expatriate cost. 32. We have heard the rival submissions. 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 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) partly allowed the plea of the assessee by including/excluding certain comparables. Aggrieved by the order of the ld. CIT(A) dated 20/09/2017, the Revenue is in appeal before us on the grounds mentioned above. 39. The Ground No. 1 is general in nature which requires no adjudication. 40. Ground No. 2 of the Revenue is against the order of Ld. CIT(A) in deleting the addition made by the TPO in ALP on two international transactions i.e, Reimbursements of Expenses of Rs. 7,45,66,854/- and payment of royalty of Rs. 10,35,00,000/-. Payment of Royalty 41. Brief facts of the case are that, the assessee entered into technical know-how agreement with its Bencom S.R.L for payment of royalty for manufactured goods at 4.8% on net sales of goods through franchises and 2.4% of net sales in relation to goods sold through own retail outlets. The TPO treated the arm's length price of royalty paid to be zero on account of the assessee failing to produce any primary evidence to justify that the payment of royalty is at arm's length. 42. The ld. CIT(A) has discussed the issue in detail and concluded that that the Assessee's internal and external benchmarking using CUP method are valid. The TPO h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 009-10 decided in the Assessee's favor. The relevant portion of the order of the Coordinate Bench in ITA No. 4329/Del/2014 and ITA No. 4229/Del/2014 (A.Y 2009-10) is as under:- "13. The coordinate Bench of the Tribunal upheld the findings of ld. CIT (A) returned in favour of the taxpayer qua the identical issue on the premise that it is settled principle of law that certain transactions entered into by the taxpayer for business expediency need not necessarily attract financial benefits. In such cases, Revenue cannot dictate its term that certain transactions should not be entered into. Even otherwise, there is no data available with the Revenue that the CUP value of the transaction would be NIL nor any comparable has been taken where such adjustment on account of reimbursement of software cost or reimbursement of expatriate cost as the case may be has been taken as NIL. 14. Moreover keeping in view the concept of "there is no free lunch" a third party shall not charge anything for providing services. TPO as well as CIT (A) have not disputed the incurring of the software cost. Even otherwise, rule of consistency is required to be followed by the Revenue particularly when there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adjustment made by the TPO in ALP on account of provision of Market Support Services of Rs. 99,62,662/-. 55. The facts in brief that the assessee has assisted its AE Benind SPA in identifying vendors for acquiring products from third party vendors in India. For this provision of marketing support services, the assessee earned a margin of 12.39% on cost. The assessee selected 11 comparables with average margin 7.32% and determined the transaction to be at arm's length. The TPO rejected 10 of these comparables and introduced 7 new comparables, resulting in an average margin of 25.13%. Accordingly, an adjustment of Rs. 99,62,662/- was made by the TPO. 56. The ld. CIT(A) rejected 4 comparables chosen by the TPO viz., APITCO Ltd., HCCA Business Services, Quippo Valuers and Auctioneers Pvt. Ltd and TSR Darashaw Ltd. The ld. CIT(A) also accepted 3 comparables chosen by the assessee viz., ICRA Management Consulting Services Ltd., India Tourism Development Corporation Ltd and Overseas Manpower Corporation Ltd. 57. Before us, the Revenue prayed for exclusion of ICRA Management Consulting Services Ltd., India Tourism Development Corporation Ltd and Overseas Manpower Corporation Ltd. and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's inclusion as it owns significant amount of intangibles in the form of business and commercial rights. He also contended that it is functionally not comparable as it provides HR services. 64. We have heard the rival arguments. We find that the comparable company 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. This in view of the proposition of 'functional similarity' laid down by the Hon'ble Delhi High Court in the Rampreen Green Solutions. In view of above, we do not find any infirmity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71. The TPO excluded ITDCL as it is functionally different from the assessee. The ld. CIT(DR) submitted that as per the segmental results of the company provided in the Annual Report, the "ARMS" Segment is unidentifiable. 72. The ld. AR relied on the order of the ld. CIT(A) which seeks inclusion of this company if the segmental results of Ashok Reservation and Management System ("ARMS") are available. 73. We have heard the submissions of both the parties. ITDCL is a government company engaged in operation of hotels, restaurants, shops and also earns revenue from consultancy and ticketing systems. The TPO has observed that the functions performed by ARMS are close to the functions performed by the tested party. The segmental data is available at Page No. 78 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), hence, we uphold t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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