TaxTMI 
TaxTMI 
2016 (7) TMI 318
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....second Ground of appeal deals with Transfer Pricing Adjustment for disallowance of Advertisement Marketing and Promotion (AMP) Expenses amounting to Rs. 8.09Crores. The brief facts are that a reference u/s. 92CA(1) of the Act was made by the AO to Transfer Pricing Officer(TPO)on 23.11.2010 for determination of Arm's Length Price(ALP). The TPO issued a notice u/s.92CA(2) of the Act to the assessee asking it to furnish all necessary evidences in support of ALP. The TPO noted that the assessee provides travel and related services and it also provides financial services during the course of its operations, that it also organizes excursions for clients which involves taking the client around the city. Besides, this the assessee provides foreign exchange and payment solutions for leisure and business travelers, students going abroad, people travelling for employment, medical treatment, emigration etc.He found that the assessee's foreign currency activity is broadly divided into two segments namely (i) retail and (ii)wholesale. For retail operations it relies mainly on purchase and sale of foreign exchange from business and leisure travelers and for wholesale operations it mainly consist ....
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....at it had paid a hefty sum for the use of brand through trade mark licence agreement, dated 29.3.2006, that the assessee was incurring expenses for promoting brand name of TCUK, it was also paying license fee.He held that the AMP expenses were to be restricted to the industry mean AMP/total revenue i.e. @ 3.9% , that the assessee was earning a profit margin of 25.64% that was more than industry mean for leisure travel industry, that it was one of the largest leisure travel company in India who had acquired 100% share holding in Travel Corporation of India Ltd., that the assessee had location advantage, that there had been no location specific premium/rent to India, that the location advantage generated in India through super normal profit had been passed on to the majority share owner by way of indirect benefits i.e. incurring expenses in building and promoting TCUK brand in its territory and payment for use of the same brand which it was building in India, that trade mark fee charge by TCUK and passing on of expenses of brand building in the territory by TCUK to the assessee was nothing but arm twisting of the assessee to pay the brand, that the deal given to the assessee by its A....
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....ee had failed to establish reasonable cause that the additional evidences could not be accepted in appeal. Consequently, the adjustment made by the TPO were upheld. 2.2. Before us, the Authorised Representative(AR)stated that the assessee was not provided sufficient opportunity by the TPO with regard to adjustment made with regard to AMP expenditure, the FAA summarily rejected the application made by him under Rule 46A of the IT Rules, that the AMP expenditure was not an IT transaction, that the expenditure was incurred by the assessee to promote its own business, that there was no agreement with the AE to share the expenditure, that the payment was made to unrelated third parties in India. The Departmental Representative(DR) relied upon the case of Whirlpool India Ltd (ITA 610 of 2014), Bausch & Lomb Eyecare (India) Ltd.)(ITA 643 of 2014) and Maruti Suzuki India Ltd.(ITA110 of 2014). Diageo India (P) Ltd.7545/ Mum/ 2012 and Heinz India P. Ltd.(7732/ Mum/2012). In the year under consideration the FAA had not passed a speaking order.He has just confirmed the adjustment. In the next year the DRP has dealt with all the arguments raised by the assessee before the TPO and before t....
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....he AO/TPO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him the assessee made elaborate submissions. Referring to the order of his predecessors for the AY 2008-09, he dismissed the appeal filed by the assessee . 3.2. Before us, the Authorised Representative stated that while deciding the appeal for earlier AY., the Tribunal had already adjudicated the issue. The Departmental Representative left the matter to the discretion of the Bench. We find that the Tribunal had, on 29.04.2016 (ITA No.859-768/Mum/2014), deliberated upon the issue as under : "3. First, we may take up the appeal of the assessee, wherein the first issue is in relation to an addition of Rs. 18, 05, 400/- made to the total income on account of transfer pricing adjustment with respect to the corporate guarantee issued by the assessee on behalf of its foreign associated enterprise. In this context, brief facts are that the assessee was found to have entered into certain international transactions with its associated enterprise within the meaning of section 92B of the Act and consequential reference under section 92CA(1) was made by the Assessing Officer to the Transfer Pric....
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....rmine arm's length rate and instead contended that a rate of 0.50% was quite justified. 4. Before us, the assessee has primarily argued that the rate of 3% adopted by the income-tax authorities in order to determine the arm's length rate of the impugned international transaction was untenable and instead pointed out that in the following decisions of the Tribunal rate of 0.50% has been considered to be arm's length rate on account of fee for providing corporate guarantee. (1) M/s. Everest Kento Cylinders Ltd. vs. DCIT, ITA No.542/Mum/201 order dated 23/11/2012. (2) Aditya Birla Minacs Worldwide Ltd. vs. DCIT, 56 taxman.com 317 (Mum-Trib) (3) M/s. Godrej Household Products Ltd. vs. Addl. CIT, ITA No.7369/Mum/2010 order dated 22/11/2013 (4) ACIT vs. Nimbus Communications Ltd., ITA No.3664/Mum/2010 dated 12/06/2013. It was also pointed out that so far as the decision of the Tribunal in the case of Everest Kento Cylinders Ltd.(supra) is concerned, the same has since been affirmed by the Hon'ble Bombay High Court vide ITA No.1165 of 2013 dated 8th May, 2015 also and in this manner, it is sought to be made out that application of a rate of 0.50% to de....
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....rm's length rate based on the probable rate being charged by the commercial banks is not justified. In this view of the matter, we are unable to approve 3% rate of guarantee commission fee determined as arm's length rate by the income-tax authorities. In the alternative, the addition that is required to be sustained is the position canvassed by the assessee before the Transfer Pricing Officer i.e. adoption of 0.50% as arm's length rate for the purpose of determining the arm's length income on account of guarantee commission fee in the present case. The Ld. Departmental Representative had referred to certain decisions of the Mumbai Tribunal, wherein a rate higher than 0.50% has also been approved in order to determine the guarantee commission fee. All those decisions are based on the probable rates at which the guarantees are issued by the commercial banks, and in view of the judgment of Hon'ble Bombay High Court in the case of Everest Kento Cylinders Ltd.(supra), such an approach cannot be upheld since the instant is a case, where a corporate guarantee has been issued by holding company for the benefits of its step-down subsidiary associated enterprise. Considering ....
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....6/mum/2010 dated 31/12/2013. Consequently, the Ground of appeal No.3, raised by the assessee is dismissed." Respectfully, following the above, fifth ground is decided against the assessee. 6. Last Ground of appeal is disallowance made u/s. 14A of the Act amounting to Rs. 8.79lakhs. During the assessment proceedings, the AO found that the assessee had received dividend income of Rs. 2, 90, 706/- on mutual funds, that same was claimed exempt, that the assessee had not allocated any expenditure towards earning of the said income.He directed the assessee to file explanation in that regard. Vide its order dt.25.10.12 the assessee stated it had not incurred any direct or indirect expenditure for earning the exempt income, that it had adequate own funds for making investment in mutual funds, that the borrowing made by it in the form of bank overdraft were used for business purposes, that they were not used for making investments. After considering the submission of the assessee, the AO held that for making investments manpower and funds were required, that the investments were made from a pool of funds available to the assessee. Applying the provisions of Rule 8D r.w.s 14A(2), he made ....
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....Average 4.39 **(Travel & Tour Segment) Assessee claimed that it had recorded an OP/TC of 10.96% for the Travel segment and hence the Transaction was at Arm's Length. The TPO held that the assessee had already established Third Party Agents in almost all parts of the world, that from the description of the outbound services that the assessee was performing almost all the functions for the out bound tourists, that it had required Expert Manpower to perform the function, that in the TPSR it was mentioned that only a marketing fee was retained by the assessee, that nowhere in the TPSR the percentage of the Marketing fee was mentioned, that it had not provided the said data. The assessee was asked to explain as to why three comparable entities, i.e. CTL, TTPL and BLCL, which were functionally not comparable, should not be excluded from the final list. Vide its letter dtd.24.12.2013, the assessee filed its reply in that regard and stated that all the three comparables were functionally similar. After considering the same, the TPO held that the above mentioned three comparables were to be excluded from the list.He picked up the last comparable i.e. TWL as a va....
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.... the operating margin of TWL-TTS by in appropriately deducing the bad debts expenses, that bad debts written off were intrinsically linked to the business, that same were operating in nature and could not be held to be abnormal, that use of only one comparable was inappropriate, that it did not represent the industry, that if bad debts were eliminated from all the for comparables provided by the assessee the mean margin of the compa rable-companies would be 13.21% which was within + -5% of arm's length range. The assessee relied upon the case of Willis Processing Services India Private Ltd. After considering the orders of the TPO and the submissions of the assessee, the DRP held that the functional profile of TTPL showed that it was in the revenue of event management as well as management of weddings, that functions of event management were completely different and the assets requirement was different, that the clientele was of different class, that the TPO had rightfully rejected TTPL from the list of comparables, that CTL operated only in and around Rajasthan as opposed to worldwide operation of the assessee, that the foreign exchange-earning of CTL was nil, that BLCL was a pu....
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....mpany and highlighted that in the abstract it was mentioned that the assessee was an IATA travel agent and was engaged in all tourism related activities. With regard to CTL the AR stated that page-32 of the annual report of the company pertained to financial data on the reserves and surplus, that there was only one type of reserve called foreign exchange earning-unutilised reserve, that it had foreign exchange-earning for the AY. 2010-11 as disclosed at page No.48 of the annual report, that the criteria used by the TPO was vague, that it could not be used to assess the functional comparability, that the financial data of CTL and of the assessee were audited and the manner of revenue reporting was in accordance with the acceptable accounting practices in India, that a mere difference in nature of reporting should not be used as a criteria for rejecting the company holding it to be functionally different, that under the TNMM comparable transaction were required to be broadly similar, that the product diversity and some functional diversity between the controlled and the uncontrolled parties was acceptable, that under the TNMM the net profit indicators, used for bench marking, were le....
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....epartmental authorities cannot take an opposite view. It brings uncertainty in the assessment proceedings. In our opinion, stand taken in the earlier years should not be disturbed in the subsequent years until and unless new facts emerge and the same are confronted to the assessee.Here, we would like to refer to the case of Galileo Nederland BV, (367ITR319), of the Hon'ble Delhi High Court wherein it has been held that decision on an issue or question taken in earlier years though not binding should be followed and not ignored unless there are good and sufficient reasons to take a different view, that said principle was based upon rules of certainty and that a decision taken after due application of mind should be followed consistently as this lead to certainty, unless there were valid and good reasons for deviating and not accepting earlier decision. The Hon'ble Bombay High Court in the case of Aroni Commercials Ltd.(362 ITR 403) has held as under: "Though the principle of res judicata is not applicable to tax matters as each year is separate and distinct, nevertheless where facts are identical from year to year, there has to be uniformity and in treatment." In the case unde....
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....red opinion, finding given in respect of provisions written back is equally applicable to balances written back more particularly when ld. CIT(A) has not given any separate finding and the Transfer Pricing Officer has said nothing specifically on this item. The balances written back should also be treated as part of operating profit. We direct accordingly." 42. We are of the view that in the instant case bad debts and provision for bad and doubtful debts are part of the operating expenses and we direct the TPO to recompute the margins of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies." In the case of EDAG Engineers & Design India Pvt. Ltd. (ITA/3618/Del/2009 dt.13/10/ 14) the Delhi Tribunal has held as under: "..... As for the exclusion of bad debts, amortization and provisions, in computation of the PLI of the comparables, we are unable to see any rationale in the same nor has it been justified before us. In view of these discussions, in our considered opinion, the stand taken by the CIT(A) does not merit any interference by us." As per the A....
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....had earned foreign exchange, that the annual report of the CTL for the year under consideration, at page 48 talks of foreign exchange earnings, that the TPO had misinterpreted the reserve and surplus being a balance sheet item (page 32 of the annual report) as earning in foreign exchange. It is a fact that majority of operating income of TCL is from Tours and travels operations, that in the segmental reporting, the assessee has reported activity of tourism business is the only activity, that in the balance sheet abstract and general is this profile TCL has been referred as IATA isn't carrying out tourism related activities. We find that these vital facts were ignored by the TPO and the DRP therefore the rejection of TCL is comparable is held to be unjustifiable. We have gone through the annual report of the TTPL and find that there is no mention of event management and managing the weddings by it, that for the year under considera -tion it had shown the operating income from Tours and travels in the profit and loss account, that while reporting the segmental results it has stated that it was in the business of organising tours, that the balance sheet abstract and company general bu....
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....rties i.e. advertising and business promotion incurred by it during the year for the purpose of selling products in Indian market, that the transaction were purely domestic transactions with third parties and were outside the purview of section 92 of the act, that the AMP expenses did not form part of the international transactions, that the expenditure had been entirely incurred in India with unrelated domestic parties and the same had not been reported in form 3 CEB, that transfer pricing is applicable only in respect of income arising/expenses incurred from/for an international transaction, that the TPO had treated AMP expenditure as non-routine expenditure incurred towards brand building, that AMP incurred by the assessee was an expenditure incurred for its own business, that the payment had been primarily made to unrelated third parties in assessee's territory and did not benefit AE in any manner, that the transaction could not be treated as an IT, that the promotion of sale in the assessee's territory was its sole responsibility, that the expenditure incurred for advertisement etc was solely for its own business interest in order to increase its sales and market share in its ....
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....ordingly for the purposes of ALP of AMP transaction, that the TPO in the segment of distribu -tion or manufacturing, considered the normal expenditure on AMP which did not include amount over and above the BLT, that the TPO evaluated the transactions into set of two transactions i.e. distribution and AMP separately, that in cases of manufacturing, the TPO did the benchmarking separately for manufacturing segment and AMP segment, that in case AMP was considered not to be an international transaction the bench - marking of the other segment(distribution or manufacturing)would get impacted , that the non-routine excess expenditure taken out for bench -marking of AMP would be required to be considered as part of cost base or expenditure relating to distribution segment or manufacturing segment as the case may be, that existence of international transaction is to be demonstrated on the basis of agreements, arrangements etc., that the Tribunal in number of cases, after considering Sony Ericsson and Maruti Suzuki, issued directions restoring the matter for fresh determination of ALP, that the principle behind remanding the case back to the TPO could that the TPO/AO did not have the benefi....
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.... transaction an IT. The factors like payment under the head AMP expenditure to the third independent parties, promoting own business interest by way of AMP expenses take away the alleged 'internationality' of the transact - tion. In absence of any direct or direct evidence of incurring of AMP expenses by the assessee for the benefit of the AE or on behalf of the AE, it is has to be held that the transaction in dispute is not covered by the provisions of section 92B or 92B(1)of the Act and hence is not an IT. Once it goes out of the ambit of being an IT, FAR analysis of comparables or any other adjustment will and cannot come in picture. Folk wisdom of rural India the says that mother(Maa)is must for existence of her sister(Mausi). Similarly the existence of an IT is the pre-requisite of applying the provisions of chapter X of the Act. The assessee from the very beginning was arguing that it is not an IT, but, the TPO and the DRP did not deal with the core issue. In these circumstances, we are of the opinion that the matter should not be remitted back to the file of the TPO/ AO. Litigation has to be put to an end at some stage. Judicial time of every authority, including the TPO/DRP....
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...., or any contribution to, any cost. or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 'of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to' the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionm....
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....en obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC." 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v.. Jayaram Chigurupati 2010(6)MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., 'Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In. para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a- certain target company, There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company, For, de hors the e....
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.... Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard with B&L, USA. A similar contention by the Revenue, namely the fact that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also encure to the AE is itself self sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an* exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between perso....
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.... the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. '(supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy; and for-no other purpose; in the- context of a domestic transaction involving two or more related parties, reference may' be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he con....
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....ld not arise.However, the other part of the argument that matter should be restored back to the file of the AO/TPO as they were following the order of LG and did not have benefit of later judgments of the Hon'ble High Court, we would like to mention that matter can be restored back in certain conditions only. Restoration of matters to the AO.s is not a tool to give one more opportunity of hearing to the litigants. It is not advisable to prolong the judicial proceedings in the name of fair play. It is not a case where new evidences have been placed on record by the assessee, that were not made available to the AO at the time of original assessment. It is not also a matter wherein some ground of appeal has remained un-adjudicated. There is violation of principles of natural justice. So, we hold that it is not a fit case to be sent back to the TPO for fresh adjudication. 8.4. In the first ground of appeal for the earlier year, the assessee had raised the issue of non admission of additional evidence by the FAA, with regard to AMP expenses. As we have already decided the issue in favour of the assessee, so, the issue becomes academic. 9. Third ground deals with TP adjustment of R....
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....it is also equally true that AE charges counting fees also on the transactions of the assessee. If both are taken into account quantitatively, it is the claim of the assessee that the assessee will put to losses and the same is not accounted by the income fact of figures. These kind of accounting issues are outside the scope of TP principles as discussed in para 2.9 of the impugned order. The CIT (A) discussed the issue at length in para 2.10 of his order, giving the reasoning. For the sake of completeness of this order, the said para 2.10 is reproduced here under: "2.10. I have perused the facts of the case and written submissions and verbal arguments of the appellant. The TPO has views the whole arrangement of the appellant with its AE in isolation. He has failed to take into account the fact that the appellant is required to pay counting fees to Its AE as well as third parties (HSBC / Travelex) in respect of currency exported and corresponding counting fees paid is more than what it received by way of incentive / service fee. As such if both the service fees and counting fee are included / taken together in transactions with the AE, the appellant would be worse off. As such I....
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....er the provisions of section 14A of the Act, that the dividend income was claimed as exempt income predation of total income u/s.10 (35) of the Act, that it had not incurred any expenditure, direct or indirect, for earning the said exempt income, that the provisions of section 14A read with rule 8D of the Income-tax Rules, 1962(Rules)were not applicable in respect of strategic investment made in subsidiaries, that expenditure incurred for acquiring shares out of commercial expediency had already been capitalised, that own funds during the year were sufficient to make investment in subsidiary entities, that the interest expenditure for the year pertain to working capital loans, that domestic borrowings for making downstream investment were not permitted as per the guidelines of Ministry of Industry, that there was no nexus between interest expenditure and the investment made by the assessee, that no fresh investment was made during the year under consideration. The AO did not agree with the assessee and held that investments were made out of funds and the funds always involved time, cost and opportunity cost, that making investment was an informed decision and it would involve st....