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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 ..... ollowing the co-ordinate Bench orders [ 2011 (11) TMI 194 - ITAT DELHI] , the issue of royalty is decided in favour of the assessee and against the Revenue. Adjustment on account of advertisement expenses - As 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 advertisement expenses incurred by the assessee is remanded to the file of the TPO for fresh determination in accordance with law after allowing a reasonable opportunity of being heard to the assessee. Accordingly, Ground 3 and sub-grounds are partly allowed for statistical purposes. Reimbursement of Advertisement expenses - assessee submitted before the TPO that these expenses were incurred by its AE with respect to Indian catalogue and brochure, Indian advertisement campaigns and related travelling and accommodation expenses of models for advertisement campaigns etc - TPO 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 - HELD THAT:- observations of the TPO in our view is fallacious in as mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilar 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 taken by the Tribunal in Assessee s own case for the Assessment Years 2007-08, 2008-09 and 2009-10 [ 2017 (10) TMI 1259 - ITAT DELHI] , we hold that the impugned addition cannot be sustained. We, therefore, direct the TPO/AO to delete the adjustment made on this issue. Adjustment on account of provision of Market Support Services - Comparable selection - HELD THAT:- APITCO Ltd. is a government company set up for specific government purposes. It provides diversified high end technical services, that are different in nature than the support services. Further, this company has been consistently excluded on the basis of functional comparability by the coordinate benches and the exclusion is upheld by the Hon ble High Court. Therefore, we agree with the contention of the assessee to exclude this company from the list of comparables. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HIGH COURT] the company cannot be rejected merely on account of wide fluctuation in margin (profit/loss) if it is otherwise comparable. ICRA Management Consulting Services Ltd - TPO/AO included the company as a comparable in AY 2009-10, AY 2011-12 and AY 2012-13. In the current year, no different facts were brought on record. Therefore, no difference is warranted in its treatment. Following the principle of consistency, we agree with the contention of the assessee and uphold the decision of the ld. CIT(A) to include this company. In view of above, the TPO/AO is directed to give effect and re-compute the arm s length price for the marketing support services segment. - Shri G. S. Pannu, Vice President And Shri Yogesh Kumar U.S., Judicial Member For the Assessee : Shri Atul Jain, Ms. Suchita Kanodia, ARs For the Department : Shri Mahesh Shah, [CIT] D.R. Sh. Kanv Bali, Sr. DR ORDER PER YOGESH KUMAR U.S., JM These two appeals are filed by the assessee and the Revenue for Assessment Years 2017-18 2010-11 aggrieved by the orders dated 25/02/2022 11/04/2014 respectively passed by Additional/joint/Deputy/ Assistant Commissioner of Income Tax , National Faceless Appeal Centre, Delhi u/s 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies selected by the Appellant to benchmark the transaction of payment of royalty. 3.5 Proposing to apply Transactional Net Margin Method ('TNMM') on entity level, disallowing the entire royalty and making a further adjustment on advertisement expenses, while doing so the Ld. TPO further erred in disregarding the favorable precedence in Appellant's own case wherein the Hon'ble ITAT held that royalty cannot be disallowed and TNMM cannot be used considering the facts of the case; 3.6 Erred in using an incorrect approach for determining the arm's length price by- a. treating the selling and distribution expenses as a part of the advertising and marketing expenses; b. incorrectly selecting functionally dissimilar companies as comparable companies which were used by the Assessee to benchmark its trading operations while the Assessee pays royalty only for manufactured goods; c. applying an ad-hoc margin of 10% on the alleged advertising and marketing spend; d. incorrectly computing the net operating margin of the Appellant as well as of the comparable companies by not granting the benefit of economic adjustments as required under Rule 10B(2) as well as Rule 10B( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and papers as may be considered necessary either before or during the appeal hearing. The Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case. 3. The Revenue has raised following grounds of appeal:- I.T.A. No. 7389/DEL/2017 (A.Y 2010-11) (Revenue) 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made on account of arm s length price of international transaction amounting to Rs. 18,90,29,156/-. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made by the TPO in ALP on two International Transactions i.e, Reimbursement of Expenses of Rs. 7,45,66,854/- 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the adjustment made by the TPO in ALP on account of provision of Market Support Services of Rs. 99,62,662/-. 4. Whether on the facts and in the circumstances of the case and in law, the findings given by the Ld. CIT(A) is perverse. I.T.A. No. 496/DEL/2022 (A.Y 2017-18) (filed by the Assessee) 4. The briefs facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent order dated 25/02/2022, the assessee has preferred the present appeal on the grounds mentioned above. 9. The Ground No. 1 2 are general in nature which requires no separate adjudication. 10. The Ground No. 3 and its sub grounds pertain to addition of Rs. 70,12,25,209/- on account of payment of royalty/consideration for use of trademark and know-how. 11. The brief facts are that, the assessee has entered into trademark and know-how license agreement with Benetton Group S.r.l, it's A.E. As per the License Agreement, the assessee pays royalty to its AE for the use of trademark and know-how at 5% on sale of products which are sold through stores owned by franchises, 2.5% on the sale of products which are sold through owned stores and 50% of gross royalty earned by the assessee from its authorized sub licenses. For the purpose of determining the Arm's Length Price for payment of royalty, the assessee has adopted CUP method. Three comparable agreements were selected for royalty payment which averaged out to be 6.08%. Since the effective royalty paid by the assessee during the year under consideration was 4.81% on sales, the transaction was held to be at Arm's Length. 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revious years of the order of the Tribunal, the issue of advertisement being part of the royalty payment was not there. It was further submitted that the advertisement expenses forming part of the royalty payment based on the Trade-Mark and Know-how License Agreement has never been dealt with by the Tribunal, for the first time the issue of advertisement being part of the royalty payment has come for consideration before the Tribunal. Therefore, submitted that this issue is not covered in favour of the assessee. 16. We have heard the rival submissions. The issue of benchmarking the royalty payment was litigated in AY 2006-07 (ITA No.3829/Del/2010),in A.Y. 2007-08 2008-09, (Revenue Appeal ITA No. 457and 453/Del/2013), in A.Y. 2009-10 (ITA No. 4329/Del/2014 and 4229/Del/2014), in A.Y. 2011-12 (ITA No. 31/Del/2017), in A.Y. 2012-13 (ITA No.1091/Del/2018), wherein the payment of royalty was held to be at arm s-length by coordinate benches of this Tribunal. 17. In the present year, the TPO added advertisement expenses (including a mark-up of 10%) to the payment made by assessee in accordance with the Trademark and Know-how License Agreement ( License Agreement ), in addition to the roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided by assessee, based on transaction to transaction basis in respect of different segments should be adopted. 7.1. From the facts mentioned above, it is clear that assessee s manufacturing export activities; buying/sourcing and commission earning activities are independent of each other. Each activity has different factors in respect of source, identification of vendors, merchandise, designs quality control, handling etc. The FAR analysis in each of the activity will have distinct and separate considerations. 7.2. We, find merit in the argument of the learned counsel that the TPO should have accepted the method of assessee s benchmarking analysis on the basis of transaction to transaction basis in respect of different segments of assessee s international transactions with associated enterprises. In our view, Assessee s functions, risk and assets FAR considerations, which are given in the above table, deserves to be merited. TPO did not appreciate the Assessee s transactions correctly and applied entity level benchmarking on TNMM method by combining Assessee s all international transactions with associated enterprise without justification. 7.3. Our view is supported by ITAT judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld. TPO found that all the third-party invoices were in the name of the associated enterprises namely Benetton Group Srl, Italy, and there was no evidence of the purported services by the assesses company. The assessee in its letter 18/01/2021 submitted before the TPO that the advertisement expenses are supported by 100% third party back-to-back invoices. The Ld. TPO has also on perusing the document found that all the third-party invoices are in the name of associated enterprises. The TPO concluded that there is no evidence of receipt of service as the third party invoices should have been in the name of the assessee company if at all the payments were in the nature of reimbursement. The ld. DRP upheld this finding of the TPO. 24. Having considered the rival stands on this issue, we find that the lower authorities have misdirected themselves and not appreciated the factual matrix sought to be canvassed by the Assessee. Notably, the assessee submitted before the lower authorities that the expenses in question were incurred for promotion of products of the assessee and in order to meet the high quality advertisement and promotion material which are of global standards. Such expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after approved by the Ld. DRP is contrary to the legal as well as the factual position and the transfer pricing adjustment made thereupon, is unsustainable. We hold accordingly. IT Cost Allocation 27. The assessee claimed to have received information technology support services from its AE in the nature of Computer Assistance Designing Techniques including software like CAD, Orchidie, Iris, Citirix, Rtbenet etc. which were used by it in its manufacturing process. The AE charged BIPL for the use of the above software on cost-to-cost basis. The TPO determined the ALP of these intra-group services to be zero as the assessee could not provide any evidence of requisition or receipt or cost-benefit analysis. The ld. DRP upheld the order of the TPO. 28. Before us, the Ld. AR submitted that the Coordinate Bench in Assessee s own case for AY 2009-10 and CIT(A) for AYs 2007-08 and 2008-09 decided this issue in the Assessee s favour. Ld. DR relied on the order of the TPO. 29. We have gone through the record in the light of the submissions made on either side. Since the facts are similar and issue is identical, we find no reason to take a different view for this assessment year. While respectf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions: S.No Head Value (Rs.) 1 Purchase of Consumables 70,45,063 2 Purchase of readymade garments and accessories 14,23,47,549 3 Sale of readymade garments and accessories 75,56,550 4 Payment of Royalty 10,35,00,000 5 Sourcing Support Services 8,78,60,727 6 Reimbursement of Expenses 7,45,66,854 7 Recovery of Expenses 2,16,22,275 8 Issue of Share Capital 40,00,00,000 Total 84,44,99,018 37. The Transfer Pricing Officer (TPO) determined the arm s length price of payment of royalty and reimbursements to be nil and that of sourcing support services to be Rs. 9,78,23,389/-. The TPO proposed an adjustment to the tune of Rs. 18,80,29,516/-attributable to the difference in arm s length price of the international transaction entered by the assessee with the associated enterprise. Pursuant to the order of the TPO, the Assessing Officer made an addition of such amount while passing the final assessment order. 38. Aggrieved by the said addition, the assessee preferred an appeal and by way of order, Ld. CIT(A) directed the Ld. TPO/learned Assessing Officer to treat the royalty payment and reimbursements at arm s length and not to make any upward adjustment on these issues following orders of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we hold that the impugned addition cannot be sustained. We, therefore, uphold the findings of the Ld. CIT(A) and dismiss the appeal of Revenue on this issue. IT Cost Allocation 45. The assessee claimed to have received information technology support services from its AE in the nature of Computer Assistance Designing Techniques including software like CAD, Orchidie, Iris, Citirix, Rtbenet etc. which were used by it in its manufacturing process. The AE charged BIPL for the use of the above software on cost-to-cost basis. The TPO determined the ALP of these intra-group services to be zero as the assessee could not provide any evidence of requisition or receipt or cost-benefit analysis. 46. The ld. CIT(A) held that the need, benefit and rendition test is satisfied in this case. He proceeded to delete the adjustment following the decision of his predecessors in Assessee s own case for AYs 2007-08 and 2008-09 which have already been affirmed by the Coordinate Bench of the Tribunal. 47. Ld. AR submitted that the Coordinate Bench in Assessee s own cases for AYs 2007-08, 2008-09 and 2009-10 decided in the Assessee s favor. Ld. DR relied on the order of the TPO. 48. We have gone through th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his reimbursement to be zero as the assessee could not provide any contemporaneous documentary evidence of receipt of services from the expat employees. 51. The ld. CIT(A) held that the assessee has fully discharged its onus providing the documentation regarding these employees and the TPO failed to prove otherwise. He proceeded to delete the adjustment following the decision of his predecessors in Assessee s own case for AYs 2007-08 and 2008-09 which have already been affirmed by the Coordinate Bench of the Tribunal. 52. Ld. AR submitted that the Coordinate Bench in Assessee s own cases for AYs 2007-08, 2008-09 and 2009-10 decided in the Assessee s favor. Ld. DR relied on the order of the TPO. 53. We have gone through the record in the light of the submissions made on either side. Since the facts are similar and issue is identical, we find no reason to take a different view for this assessment year. While respectfully following the consistent view taken by the Tribunal in Assessee s own case for the Assessment Years 2007-08, 2008-09 and 2009-10, we hold that the impugned addition cannot be sustained. We, therefore, uphold the findings of the Ld. CIT(A) and dismiss the appeal of Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the judgments of Hon ble Delhi High Court in Philip Morris (ITA No. 1468 of 2018) and various judgments of coordinate benches which have held that APITCO Ltd. be excluded as a comparable. 61. We have heard the rival arguments. APITCO Ltd. is a government company set up for specific government purposes. It provides diversified high end technical services, that are different in nature than the support services. Further, this company has been consistently excluded on the basis of functional comparability by the coordinate benches and the exclusion is upheld by the Hon ble High Court. Therefore, we agree with the contention of the assessee and uphold the decision of the ld. CIT(A) to exclude this company from the list of comparables. HCCA Business Services Pvt. Ltd. 62. The TPO included HCCA Business Services Pvt. Ltd as it is engaged in provision of business/market support services and clears all the filters set by him. The ld. CIT(DR) submitted that the assessee excluded the company in its TP Study due to insufficient information and the audited financials were available at the time of the TPO s order. He further submitted that there is negligible impact of owning intangible asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the list of comparables. T S R Darashaw Ltd 68. The TPO included T S R Darashaw Ltd as it is engaged in provision of business support services and clears all the filters set by him. The ld. CIT(DR) relied on the order of the TPO and submitted that the segmental accounts of the company are available. 69. The ld.AR objected to the inclusion of the company on the ground that it acts as a depository and share registrar. He also relied on the judgments of Hon ble Delhi High Court in Philip Morris (ITA No. 1468 of 2018) and various judgments of coordinate benches which have held that T S R Darashaw Ltd. be excluded as a comparable. 70. We have heard the rival arguments. TSR Darashaw Ltd provides registrar and transfer agent services, records management services and payroll and trust fund services. All these segments are functionally different from the marketing support activities performed by the assessee. Further, this company has been consistently excluded on the basis of functional comparability by the coordinate benches and the exclusion is upheld by the Hon ble High Court. Therefore, we agree with the contention of the assessee and uphold the decision of the ld. CIT(A) to exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Overseas Manpower Corporation Limited is a good comparable and directed the AO to include it in the final matrix of comparables. In the background of the aforesaid, we do not find any infirmity in the action of the Ld. CIT(A), hence, we uphold the same. ICRA Management Consulting Services Ltd 77. The TPO excluded ICRA Management Consulting Services Ltd. as it is classified as a management consultant. The ld. CIT(DR) submitted that the company offers professional services, not similar to the assessee. 78. The ld. AR submitted that the TPO has accepted the comparable in the preceding and succeeding years. 79. We have heard the rival submissions. The TPO/AO included the company as a comparable in AY 2009-10, AY 2011-12 and AY 2012-13. In the current year, no different facts were brought on record. Therefore, no difference is warranted in its treatment. Following the principle of consistency, we agree with the contention of the assessee and uphold the decision of the ld. CIT(A) to include this company in the list of comparables. 80. In view of above, the TPO/AO is directed to give effect and re-compute the arm s length price for the marketing support services segment. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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