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2018 (12) TMI 1852
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.... "General 1. That the impugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as 'DRP') under Section 143(3) read with Section 144C of the Incometax Act, 1961 ('Act'), is bad in law, violative of principles of natural justice and void ab-initio. 1.1 That the assessing officer erred on facts and in law in completing the assessment under section 143(3) read with section 144C of the Income-tax Act ("the Act") at an income of Rs. 165,588,189 as against Nil returned income. Transfer Pricing Issues: 2. That the assessing officer erred on facts and in law in making addition to the income of the appellant to the extent of Rs. 28,27,99,372 on account of the alleged difference in the arm's length price of international transactions. Advertisement, marketing and sales promotion expenses: 3. That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to Rs. 27,87,32,906 in relation to advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expens....
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.... i. Cameo Corporate Services Ltd ii. Delta Services (India) Pvt Ltd iii. CSS Technergy Ltd 4.3 That the TPO erred on facts and in law in rejecting Sparsh BPO on the basis that the company has a negative networth, not appreciating that the company has positive net worth as on March 31, 2011 4.4 That the TPO erred on facts and in law in rejecting Twinstar Export Ltd. On the basis that it is engaged in manufacturing of insulators 4.5 That the TPO erred on facts and in law in rejecting R Systems International Ltd on the basis that it has a different financial year, not appreciating that the company is functionally comparable to the appellant. 4.6 That the TPO erred on facts and in law in considering foreign exchange fluctuation as an item of nonoperating nature for computing operating profit margin of the appellant and the comparable companies 4.7 That the DRP/TPO erred on facts and in law in not allowing appropriate adjustment on account favorable working capital position of the appellant vis-a-vis the comparable companies 4.8 That the DRP/TPO erred on facts and in law in not allowing appropriate risk adjustment....
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....lars Amount in Rs. Advertisement and Sales Promotion Expenditure (Gross) 20,76,15,000 Selling and Distribution Expenses 4,10,75,000 Total AMP 24,86,90,000 Sales 175,68,00,000 7. The taxpayer incurred Rs. 24,86,90,000/- on account of AMP expenditure which accounts for 14.16% to the sales ratio. The TPO in order to benchmarking international transaction qua AMP expenses applied "Bright Line Method" by following the Special Bench decision passed by the Tribunal. The ld. TPO in order to determine Arm's Length Price (ALP) of AMP expenditure incurred by the taxpayer rejected two comparables viz. HMT International Limited and Titan Industries Limited and chosen two comparables selected by the taxpayer and determined the bright line method of the two companies to work out the AMP expenses/sales percentage as under :- No. Name of the Company AMP Expense / Sales (%) 1 KDDL Ltd. 2.12% 2 Kamla Retails Ltd. 1.49% Mean 1.81% 8. The ld. TPO further added mark-up of AMP spent to the tune of 12.26% qua non-routine AMP activities carried out by the taxpayer for performing additional significant marketing function for i....
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....stment of Rs. 40,66,466/- on account of difference in the margin of comparable companies of the taxpayer. 12. The taxpayer carried the matter before the ld. DRP by filing objections who has disposed of the same. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal and the assessee has also filed the cross objection. 13. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUND NO.1 OF ITA NO.845/DEL/2016 (ASSESSEE'S APPEAL) 14. Ground No.1 is general in nature, hence requires no adjudication. GROUNDS NO.2 & 3 TO 3.3 OF ITA NO.845/DEL/2016 (ASSESSEE'S APPEAL) GROUNDS NO.1 & 2 OF CO NO.95/DEL/2016 (REVENUE'S CO) 15. Undisputedly, the taxpayer is into the business of manufacturing and sale of watches and is also into distribution of watches imported from its AE. It is also not in dispute that 85% of the turnover of the taxpayer is sale of watches manufactured by the taxpayer in India, it being operated as a full-fledged manufacturer and full risk be....
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.... High Court in Sony Ericsson India Pvt. Ltd. v. CIT (2015) 374 ITR 118 (Del.) and subsequently in Maruti Suzuki India Ltd. v. CIT (2016) 328 ITR 210 (Del.) has categorically held that BLT is not a valid basis for determining the existence of international transaction or for that matter for computing the ALP of such international transaction involving AMP expenses. So, in these circumstances, the order of TPO passed by making BLT as basis of the ALP adjustment is not sustainable in the eyes of law. 22. Furthermore, Hon'ble Delhi High Court in subsequent decisions viz. Bausch & Lomb Eye Care (India) Pvt. Ltd. v. Additional CIT (2016) 381 ITR 227 (Del.) and Honda Siel Power Products Ltd. v. Dy. CIT (2016) 237 Taxman 304 held that it is for the Revenue to firstly discharge the onus to prove the existence of an international transaction between the taxpayer and its AE and only thereafter ALP of international transactions involving AMP can be computed. 23. It is further contended by the ld. AR for the taxpayer that quantitative adjustment made by the TPO on account of AMP expenses is not permissible within the framework of Chapter-X as has been held by the Hon'ble Delhi High Court ....
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....uki India Ltd. v. CIT (supra), we are of the considered view that adjustment made by the Revenue on account of incurrence of AMP expenses are not sustainable in the eyes of law. 27. Learned DR for the Revenue, although admitted the legal position enunciated in the preceding paragraphs, but he contended that since all the aforesaid decisions are lying challenged before the Hon'ble Apex Court, the matter may be kept pending till the decision by Hon'ble Apex Court. However, we are of the considered view that since it is a stay granted matter and the proceedings before the second appellate authority have not been stayed by any higher forum, the same cannot be kept pending. 28. After considering the legal position as discussed in the preceding paragraphs, we are of the considered opinion that the ALP of an international transaction involving AMP expenses, the adjustment made by the TPO/DRP/AO is not sustainable in the eyes of law. At the same time, we cannot ignore the submission made by the learned DR that the matter is pending before Hon'ble Apex Court and the decision of Hon'ble Apex Court would be binding upon all the authorities. In view of the above, we set a....
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....rvices Ltd.; (iv) ICRA Techno Analytics Limited; (vi) Infosys B P O Ltd.; and TCS E - Serve Ltd., from the final set of comparables on the ground hat the same are not valid comparable for benchmarking the international transactions. 33. Undisputedly, the ld. DRP has accepted the contentions raised by the taxpayer that the TPO has erred in characterizing the provisions of Information Technology Support Services (ITSS) involving payroll processing, account processing, etc. services as software development services, as KPO services. So, ITES consisting of payroll processing, account processing, etc. cannot be treated as KPO services. It is contended by the ld. AR for the taxpayer that as against the directions issued by the DRP that all the comparables to be taken for benchmarking the international transactions should be of BPO services, but the ld. TPO has chosen all the companies as comparables which are into KPO services. So, we would discuss the aforesaid comparables challenged by the taxpayer one by one to examine their suitability vis-à-vis the taxpayer. ACCENTIA TECHNOLOGIES LTD. (ACCENTIA) 34. After DRP's order, ld. TPO has introduced Accentia having OP/TC of 2....
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....dings returned by the Tribunal excluding Accentia as a comparable vis-à-vis routine ITES provider on ground of being engaged in KPO services in health care sector. Moreover, Accentia owns various software products, as discussed in the preceding paras. Even, segmental financials to work out the profitability of Accentia qua ITES segment and software segment are also not available. The ld. TPO has selected Accentia as a comparable even against the directions issued by the ld. DRP that company engaged in KPO services is not to be selected as comparable. So, in these circumstances, we order to exclude ccentia being not a valid comparable. ACROPETAL TECHNOLOGIES LTD. (SEG.) (ACROPETAL) 38. TPO has selected Acropetal (segment) which is challenged by the taxpayer on the ground that it is engaged in provision of providing high-end services in hospital management system, electronic medical records, PACS, diagnostics and workflow management. Perusal of annual report of Acropetal, relevant portion available at page 95 of the annual report paper book, shows that within ITES segment, Acropetal is engaged in health care by providing high end services viz. hospital management system,....
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.... catalogue competitive intelligence and broader data collection, cleansing, enriching and reporting. We work with over 30 Global Fortune 500 scale clients including any of the world's leading High Tech and Industrial Manufacturing & Distributors, Online Retail, Interactive Media & Entertainment, Software Vendors, Travel and Leisure and Financial Services companies." 43. The ratio of the judgment in Rampgreen Solutions P. Ltd. vs. CIT (supra) is applicable to the facts and circumstances of the case in which Eclerx has been specifically ordered to be excluded as a comparable vis-à-vis routine ITES services provider on the ground that Eclerx is into Knowledge Process Outsourcing (KPO) services. So, in these circumstances, we find Eclerx is not a valid comparable, hence ordered to be excluded from the final set of comparables. ICRA TECHNO ANALYTICS LTD. (ICRA) 44. The taxpayer sought exclusion of Icra by again relying upon Rampgreen Solutions P. Ltd. vs. CIT (supra) on the ground that it is engaged in the provision of business intelligence and analytic services. Annual report of Icra, available at page 319 of the paper book, explains the services being rendered by i....
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....cess management services as against routine ITES being provided by the taxpayer. Moreover, Infosys BPO is operating as a full-fledged risk bearing entrepreneur as against taxpayer which is a captive service provider. So, keeping in view the turnover of Infosys BPO which is Rs. 1129.11 crores against Rs. 2.60 crores of the taxpayer and Infosys BPO is having a huge brand value with considerable R&D activities, it cannot be a valid comparable vis-à-vis taxpayer. 49. In the similar set of facts, Infosys BPO has been ordered to be excluded by the coordinate Bench of the Tribunal in Hyundai Motors Engineering India Pvt. Ltd. vs. ITO (ITA No.1850/Hyd/2012) and Capital IQ information Systems (India) Pvt. Ltd. (ITA No.124/Hyd/2014). 50. In view of what has been discussed above, we find that Infosys BPO is not a valid comparable vis-à-vis taxpayer, hence ordered to be excluded. TCS E-SERVE LIMITED (TCS E-SERVE) 51. The taxpayer sought exclusion of TCS E-serve again on the ground that it is into providing Knowledge Process Outsourcing (KPO) services. When we examine the TCS E-serve overview in the annual report, available at page 550 of the annual report paper book, ....