TaxTMI 
TaxTMI 
2018 (7) TMI 2111
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....he Hon'ble Dispute Resolution Panel - II, New Delhi ("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 Appell....
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...., 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 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 de....
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....rnational transactions . (ii). 37,14,202 Disallowance on account of Web site development expenses. 2.1 The assessee company filed objections before the ld. 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 ....
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....has held that the assessee is entitled to claim of depreciation @ 25% being the depreciation allowable on intangible asset. In view of the aforesaid, the ground of appeal filed by the revenue 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 ....
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.... assessee is providing online ticketing and tour and travel services to the customers located in India, on the other hand AE of the assessee provide online ticketing and tour and travel services to the US Non-Resident 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 tou....
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....s, f. Any other detail that may be relevant to each case." 15.1 As such role of assessee in respect of the customers of the AE is only that of agent and no more. In sub-agent segment, assessee merely acts on behalf of the AE and all the risk is that of the AE. That AE of the assessee is directly responsible towards their customers. Even the 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....
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....n independent party with an appropriate markup. Also, in order to. apply RPM Method, there should not be material 'differences between the controlled and uncontrolled transaction that will adversely affect the gross margin" of the RPM Method The relevant extracts are produced below: [Quote] "2.21 The resale price method begins with the price at which a product that 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....
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....sfer pricing in certain circumstances in its tax legislation reforms introduced in March 2013. 45, Traditionally, the denominator of the ratio only comprised of selling, general and administration expenses. However, the Treasury Legislation of USA also included depreciation as a part of the Operating Expenses used as a denominator in the berry ratio. As is apparent, Berry ratio has limited applicability; it can be used effectively 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 det....
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....ed by the TPO while the same formed part of the economic analysis conducted by the assessee in the TP Study. Since all such transactions were part of the overall TNMM applied by the assessee and the very fact that the TPO himself has accepted the transaction relating to customer handling and data management services at arm's length, the approach followed by the TPO to modify the transfer pricing methodology used to benchmark the other two transactions is 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 servi....
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....insulated business paradigm. However, appellant's claim for such adjustment is considered to be dismissed for statistical purposes since the appellant qualifies the arm's length test de hors any such adjustment. 15.3 Owing to fundamental differences in the functional/ risk profile of the domestic business carried on the appellant (referred to by the TPO as 'Segment 1') vis-a-vis routine customer handling and data processing services rendered by it to its foreign affiliate (referred 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 ....
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....tickets procured from India Forward linking approach of the TPO (Attribution of MMT U.S. GP to MMT adjustment proposed by the TPO ) (Refer Note 2) Final adjustment A B C D = B *C È F=D*E Gross margin on tickets 51.94 51.57% 47.36% 24.42% 60.69% 14.82% Gross margin on T & P 2.90 2.88% 66.82% 1,92% 55.75% 1.07% Gross margin on cancellation 6.62 6.57% Nil - - - Commission Income 39.25 38.97% Nil - - - 100.71 100.00% 26.35% 15.90% Note I: MMT U.S. - 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(....
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....India Amt ( INR mn) Total operating expenses of MMT U. S. ( not included in Direct costs) - Site hosting 2.63 - Customer handling and processing charges 48.60 - Depreciation 0.50 - Presonnel expenses 2.25 - Operating and admin expenses 50.90 - 104.87 - - Percentage of US Gross Profit attributed by the TPO to MMT India 15.90% - - Amount of US operating expenses attributable to MMT India 16.67 - As a result, of the above computation of the operating expenses, a downward revision amounting to Rs. 2.45 mn is required to be a undertaken to the intercompany transfer prices as shown below: Particulars TPO's Approach Assessee's Approach Additional GP attributed to MMT India Gross Profit - Ticketing (sub-agent) Rs. 17.58 Rs. 4.18 Rs. 13.40 Rs. 1.11 Rs. 0.29 Rs. 0.82 MMT India' total gross profit on sub-agents business Rs. 18.69 Rs. 4.47 Rs. 14.22 Less : U. S. Costs attributed to India Net operating losses attributable to the appellant Rs. 16.67 Rs.(2.45) On pe....