TaxTMI 
TaxTMI 
2018 (7) TMI 2111
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....lhi ("the DRP") has erred both in law and on facts by summarily rejecting the Appellant's objections to the draft order dated December 24, 2009 passed by the Ld. AO under section 143(3) read with section 144C(1) of the Act. The Hon'ble DRP while issuing directions under section 144C(5) of the Act did not consider the facts and merits of Appellant's objections to the proposed adjustments, and merely relied on the reasoning given by the Additional Commissioner of Income-tax, Transfer Pricing Officer - 1 (3) vide order under section 92CA(3) of the Act dated July 09, 2009 ("TP Order"). On the facts and in the circumstances of the case, the Ld. TPO and the Ld. AO have erred in proposing and the Hon'ble DRP has further erred in confirming the transfer pricing adjustment of INR 8,043,918 without due application of mind and without affording a reasonable opportunity of being heard in the matter to the Appellant on the following grounds: 1.1. By summarily rejecting Appellant's business characterization as presented in its transfer pricing documentation and modifying the functional and risk profile of the Appellant as regard its two business segments [i.e. provision of ....
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....urther erred in disallowing depreciation on Website Development Cost incurred during the year amounting to Rs. 3,714,202 ignoring the fact that it qualifies as 'Software' within the meaning of Section 32 of the Act read with Appendix I of the Rules and eligible for depreciation at the rate of 60 percent. 2.3 On the facts and in the circumstances of the case, the Ld AO has erred in proposing and the Hon'ble DRP, has further erred in not allowing the alternate claim of allowing depreciation at the rate of 25% applicable to 'Intangible assets' even after confirming that CIT (A) - IX in its order for Assessment Year 2004-05, has allowed depreciation on website development cost at the rate of 25%, holding it as 'Intangible assets'. 2.4. On the facts and in the circumstances of the case, the Ld AO has erred in proposing and the Hon'ble DRP has further erred in disallowing the depreciation on Website Development Cost ignoring the fact that the Revenue had, in Assessment Year 2001-02, examined at length the issue and allowed depreciation on website development and the same has not been challenged in the Assessment Years 2002-03 and 2003-04. The Hon'b....
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.... Dispute Resolution Penal, who vide their order dated 27.09.2010 affirmed the draft assessment order and directed the Assessing Officer to proceed further and complete the assessment as proposed in the draft assessment. Pursuant to the directions of DRP, the Assessing Officer made addition of Rs. 80,43,918/- as TP adjustment and Rs. 37,14,202/- as disallowance of website expenses and accordingly adjusted the above income from the declared loss shown by the assessee. Aggrieved by the assessment order, the assessee is in appeal, inter alia, on the grounds mentioned hereinabove. 3. During the course of hearing, the ld. AR of the assessee company submitted that the ld. DRP was not justified in affirming the adjustments made by the TPO without considering the true character of appellant's business presented in the TP documents and have wrongly modified the functional and risk profile of assessee company with respect to various segments of its business and, therefore, the application of Cost Plus Method by the TPO while analyzing the comparability tests of business segments of assessee at the gross level is based on conjectures and surmises, if the same are analysed with the functional ....
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....venue that the assessee is not eligible to the claim of depreciation does not survive and hence is rejected. 5. However, in so far as the claim of the assessee that it is eligible for the claim of depreciation @ 60% instead of 25% as allowed in the preceding year, learned Senior Counsel of the assessee has submitted that assessee has incurred expenditure on the website development cost and website is nothing "but software and since the software has been included in Appendix-I {item (5) under Item-111 under the Machinery & Plant}, and rate of depreciation on the software has been provided 60%, as such, assessee has claimed depreciation @60% in the return of : income. It has further been submitted that the issue stands fully covered by the order of Special Bench in the case of Amway India Enterprises vs. DCIT reported in [2008] 114 TTJ 476 (Delhi) (SB), wherein it has been held that expenditure incurred on the software is eligible for depreciation @60% and aforesaid order of the Tribunal has also been affirmed by the Hon'ble High Court of Delhi and is reported in [2012] 346 ITR 341 (Delhi). In view thereof, we hold accordingly. 6. It may further be stated here that AO had dis....
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....sident Indians. That in respect of the customers located in India i.e. direct customers, in respect of whom assessee provide its services, assessee earn direct revenue from such customers. Whereas, AE of the assessee makes substantial efforts for acquisition of the customers and also incurs substantial expenditure on marketing activities. Further, the AE of the assessee has also entered into two agreements with the assessee, one dated 6th December, 2001 [which has been replaced with, agreement dated 1st October, 2003) for providing Customer Handling and Data Management Services and Business Promotion Services and another dated 3rd October, 2001 (which has been replaced with agreement dated 1st April, 2004) for providing ticketing and tour and travel services. Assessee has been remunerated under both the agreements. That sum-received under the agreement for Customer Handling and Data Management Services has been accepted to be arm's length. In respect of ticketing and tour and travel services provided to the AE, assessee earns a margin of 2% and 5% respectively for Ticketing and Tour & Packages. It is seen that under the agreement dated 1st April, 2004, the AE of the assessee ha....
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....he customer acquisition efforts are only of the AE and for customer acquisition, assessee has no role to play. Since in online travel business, the major and primary activity is to attract the customers to visit the website, and this is responsibility of the AE and once the customer visits the website, only then the activity of the assessee will begin. Even though the assessee under the agreement, undertakes the activity of - booking of tickets and arrangement of tour and travel, however, in case of any breach, only AE is responsible. Whereas, in respect of direct customers of the assessee, assessee acts as principal and all the risk lies with the assessee. In such, circumstances, we agree with the contention of the assessee that both the segments are not comparable on account of the risk and additional functions undertaken by the AE in respect of the international transactions. 15.2 That in so far as the benchmarking analysis is concerned, in the instant case/to benchmarked its international transaction, assessee has chosen Transactional Net Margin Method [TNMM) being the most appropriate method with profit level indicator of Net Cost Plus (NCP) i,e: Net Profit/Total Expenses i.....
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....hat has been purchased from an associated enterprise is resold to an independent enterprise. This price (the resale price) is then reduced by an appropriate gross margin on this price (the "resale price margin") representing the amount out of which the reseller would seek to cover its selling and other operating expenses and, in the light of the functions performed (taking into account assets used and risks assumed), make an appropriate profit What is left after subtracting the gross margin can be regarded, after adjustment for other costs associated with the purchase of the product (e.g. customs duties), as an arm's length price for the original transfer of property between the associates enterprises. This method is probably most useful where it is applied to marketing operations. 2.22 The resale price margin of the reseller in the controlled transaction may be determined by reference to the resale price margin that the same reseller earns on items purchased and sold in comparable uncontrolled transactions ("internal comparable"). Also, the resale price margin earned by an independent enterprise in comparable uncontrolled transactions may serve as a guide ("external comparab....
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....ectively only in case where the value of goods have no role to play in the profits earned by an Assessee and the profits earned are directly linked with the operating expenditure incurred by the Assessee. In other words, the operating 'expenditure incurred by the Assessee effectively captures all functions performed and risks undertaken by the Assessee. Thus, in cases where an Assessee uses intangibles as a part of its business, Berry ratio, would not be an appropriate PLl as the value of such tangibles would not be captured in the operating cost and, therefore, it would not be appropriate to compute the ALP based on net profit margin having regard to the operating cost as a relevant base. Similarly, Berry ratio would not be an appropriate PLI for determining ALP in cases of Assessees who have substantial fixed assets since -the. value added by such assets would not be captured in Berry ratio; - 47. In our prima facie view, the third reason stated by the TPO, that is, the rate of commission paid to the Assessee is based on the value of the goods, would be a valid reason to reject the use of Berry ratio because Berry ratio can only be applied where the value of the goods are n....
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....without any merit. 15.6 We also find that the TPO failed to appreciate the nature of functions performed and the risk assumed by the assessee in relation to the international transactions carried out by the assessee with its AEs. Since the assessee performed routine back office services (viz. customer handling and data management services) for its AEs,, without being assigned or carrying out any key entrepreneurial function in relation to the offshore business of the AEs, the assessee can be characterized as a routine back office service provider. Hence, the approach adopted by the assessee to benchmark such transactions using TNMM as the most appropriate method by finding comparables engaged in providing similar services holds merit. 15.7 In this regard, we uphold view taken by the Ld. CIT(A) wherein it was held that the TPO failed to appreciate the nature of functions performed and the associated risks assumed by the assessee in relation to the international transactions with the AEs. The relevant excerpts of the CIT (A)'s order is reproduced below: [Quote] ' "15.1 Based on detailed arguments presented by the appellant, I am convinced with the view that the AO/ TP....
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....ferred to by the TPO as 'Segment 2'),'the TPO was grossly incorrect in adopting the 'cost-plus' approach by seeking to true-up the economic results of routine international transactions using 'gross- margins' earned in the functionally dissimilar (entrepreneurial) domestic business segment Accordingly, I reject the economic benchmarking methodology and profit-level indicator adopted by the TPO at the time of assessment," [Unquote] 15.8 The assessee further contends that the adjustment carried out by the TPO to iron the differences between the direct customer business and the sub agent business is grossly erroneous and without any scientific reasoning. In this regard, the assessee submitted that the adjustment undertaken by the TPO for marketing functions undertaken by the AE in the U.S. has inherent anomalies to the extent the above average margin represents the return for a different set of activities (i.e. IT enabled services) undertaken by the comparable companies in India. Further, the TPO erred in not accounting for geographical differences while arriving at the adjustment for marketing functions undertaken by the AE in the U.S. Further the comp....
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..... - GP composition and break-up of tickets and T&P sourced from MMT India S. No. Amt (INR mn) % Amt ( INR mn) I Tickets 502.74 Net cost India sourced @ cost plus 2% 213.48 47.36% US sourced 237.32 52.64% 450.80 Gross Profit I(Tickets) 10.33% 51.94 II T &P Net cost India sourced @cost plus 5% 6.00 66.82% U.S. sourced 2.98 33.18% 8.98 Gross Profit -II (T & P) 24.41% 2.90 III Cancellation 9.80 Net cost U.S. sourced 3.18 100.00% 3.18 Gross Profit - III(Cancellation) 67.55% 6.62 Note 2: Forward linking approach of the TPO (Attribution of MMT U.S. GP to MMT India) Selling price to MMT U. S. Selli....
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....O has the effect of downward adjustment to the book value of international transactions of the assessee. In this regard, we find that we have already .rejected the approach adopted by the TPO, the claim of the assessee on account of downward transfer pricing adjustment does not survive. Hence, in our view the adjustment undertaken by the Ld. TPO to iron out the differences between the two segments is not warranted. 15.11 In view of the foregoing discussion, we are of the .opinion that the selection of most appropriate method by the TPO of resale price method is incorrect as resale price method is inapplicable to the facts of the assessee. Apart therefrom, while determining the arm's length price, the TPO has benchmarked the margin of profit earned in subagent segment with the margin of profit earned by the assessee from its direct customers. In doing so, TPO has failed to appreciate that AE of the assessee is not the customer of the assessee, and it is assessee who is the acting as subagent of the AE and in respect of such transactions, assessee has also been remunerated. Since the direct customer segment and subagent segment are materially different as such, the margin of pr....