TaxTMI 
TaxTMI 
TaxTMI 
2016 (7) TMI 318
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....f 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 of purchase and sale of foreign currency in large quantities from other authorize....
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....so 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 AE was not at arm's length, that the assessee was entitled to use the brand only in its territory, that the assessee just by being in controlled transaction was in a situation where it had....
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....horised 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 the DRP itself. We find that except for the issue of non admission of additional evidences the assessee has advanced all most all the arguments while arguing the matter for the subsequent year. ....
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....8-09, 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 Pricing Officer (TPO) for determination of arm's length price of such transactions. In an order passed by the Transfer Pricing Officer under section 92CA(3) of the Act dated 30/09/2011, the Transfer Pricin....
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.... 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 determine the arm's length rate towards guarantee commission fee would be justified. 5. On the otherhand, Ld. Departmental Representative has pointed out that the rate of 0.50% being canvassed by the asses....
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....#39;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 the entirety of facts and circumstances of the case and on the basis of the material available on record, we, therefore, proceed to uphold the rate of 0.50% for the purpose of determining the arm's length ra....
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....allowance 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 a disallow - ance of Rs. 8.79lakhs. 6.1. Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA. In the original appeal the disallowance under section 14A was not challenged.However, by way of an....
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....scription 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 valid comparable.He further observed that the PLI of the TWL was not properly calculated, that there were certain mistakes in it.Hence the PLI of TWL was recalculated as under: Travel Segment revenue (A)- Rs.13,65,59,448/- Bad Debts (B)- Rs.2,81,93,887/- Cost (C)- Rs.12,23,31,834/- Adjusted Cost after Bad Debts ....
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....panies 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 public sector entity, that the business dynamics of a PSE could not be compared with that of private sector, that comparable segment of the BLCL included several functions, that other than the segment of TWL other cases could not be compared with the assessee, that every assessment year was a separate year and the principles of res-judicata were not applicable to the proceedings under the act, that the stand taken by the TPO during the year under....
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....osed 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 less affected by transactional differences than is the case with price(CUP method), that the comparables selected by the assessee were engaged in travel services, that as per schedule -8 of annual report the assessee was deriving majority of its operating income from tour and travel operations, that in the notes to accounts it was mentioned that company was carrying out activity of tourism business, that in the earlier years the TPO had accepted th....
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....n 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 under consideration we find that the TPO/DRP has not proved that there was a change in the facts, as compared to earlier years and even if they existed same were not brought on record. In short, the TPO/DRP has failed to prove the justification for deviating from the decision taken earlier. We find that the TPO and the DRP had taken a view that bad debts should be excluded as an extra ordinary item while calculating marign, that accordingly the final margi....
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....t 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 AS-5, bad debts cannot be considered as extra ordinary item. Considering the above we are not agreeable to the proposition propounded by the TPO and the DRP that bad should excluded as an extra ordinary item for calculating margins. If we ignore the reworking of the PLI of the assessee and of TWL it is found that the correct operating margin of TWL would be 11.64% and it would fall within the criteria of +- 5% of arm's length range. In our opinion, the TPO had followed ....
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....y 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 business profile talks about inbound tour operator and domestic tour operators. Before us, the DR stated that the website of the TTPL was the proof that it was in the business of wedding planning and event management. We are deciding the appeal for the year under consideration and as per the books of accounts, TTPL was carrying out business of Tours and travels only in that year. Therefore, we are unable to endorse the view of the DRP and the TPO in rejecting it as a valid comp....
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....fer 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 territory, that for a transaction to be treated as an IT, same should have been undertaken between to AE.s., that the payment for advertisement expenses had been made to third parties, that the same was not covered within the ambit of TP regulations, that there was no prior agreement between TCUK and the third parties to advertisement promo - tions payment were made, that the TPO did not bring any material on record to demonstrate that there existed prior agreement between the as....
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....nal 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 benefit of these decisions which had been rendered subsequent to the decision of Special Bench in the case of LG, that there was a substantial expenditure under the head AMP which signified carrying out of AMP functions and its intensity by an entity, that the natural course would be to make in-depth analysis of functions, assets and risks(FAR), that the selection of the comparables would need to be aligned in terms of the revised FAR.He referred to number of cases where the Tribunal had r....
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....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, is very precious and it should not be wasted for dealing with mere academic arguments. The recourse of remanding of matters/issue to the AO.s has to resorted rarely and selectively. In the case before us, no reasonable cause has been shown to justify the setting aside the issue. Here, we would also like to refer to the case of Bosch and Lomb (supra) wherein all the arguments raised by the TPO & FAA/DRP have been deliberated upon in length and the relevant portion of the order reads as u....
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....n 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 apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for ....
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.... 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 element of the shared common Objective' or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition....
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....ruti 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 persons other than AEs in uncontrolled conditions", Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly -in-light of the fact that -the-BLT has been expressly negatived by the Court in Sony Er....
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....g 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 considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be "impacted by numerous other imponderables not lim....
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....ew 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 Rs. 20.20 Crores in relation to CG given by the assessee to its AE. Following our order for the earlier year (para No.3.2 pg.6-8 of our order, GOA-3 is decided in favour of the assessee. 10. Fourth ground is about TP adjustment of Rs. 3.07crores in relation to insurance cost. During the course of hearing before us, the AR stated that the identical issue had arisen in the AY.2005-06 and the Tribunal had decided it in favour of the assessee. The DR left the issue to the discretion of the Bench. 10.1. We find that in assesse....
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....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 It discontinued this arrangement. The appellant by an Internal CUP (Travelex / HSBC) has demonstrated that counting fees for export of currency entails more expense than corresponding service fees or / incentive receipts. Thus, It has passed the test of comparability. It is a fact that counting fees for currency exported is charged by third parties (HSBC / Travelex) and so if the appellant AE did not charge it last year or this year, does not in any way negate the crucial fact that a third independent part would have charged it any ....
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....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 study and research, that required manpower time and funds to make investments, the cost would be in the form of direct as well as indirect costs, that the assessee's explanation that no interest expenses were involved for earning exempt income was not acceptable, that investments were made from the pool of funds available to assessee, that it was option of the assessee to invest the surplus fund in the investments and used borrowed funds for business, that had the surplus funds being used for business purposes there would not had been any need....