9911796707
TMI Blog2010 (11) TMI 630X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio of the assessee should be determined on a net basis which is in absolute divergence to the actual procedure of business actually earned out by the assessee. 2(b) The learned CIT(A) has erred in law and facts of the case in determining the cost base of the profit level indicator (PLI) by taking income on net basis due to which various costs were ignored while computing cost of the assessee or PLI. 2(c) The learned CIT(A) has erred in law and facts in applying the principle of res judicata in this year ignoring the following judgments of the apex Court, Hon'ble Madras High Court and Hon'ble Tribunal, Delhi which apply squarely in this case : (i) CIT v. British Paints India Ltd. [1991] 91 CTR (SC) 108 : [1991] 188 ITR 44 (SC); ii) CIT v. Shaik Md. Rowther Shipping & Agencies (P.) Ltd. [2000] 160 CTR (Mad.) 203 : [2000] 246 ITR 161 (Mad.); (iii) Dy. CIT v. Carraro India Ltd. [2009] 120 TTJ (Delhi) 77 : [2008] 16 DTR (Delhi) (Trib.) 80 : [2009] 28 SOT 53 (Delhi) (URO)." 4. In this case, the assessee filed its return of income on 31st Oct., 2005 declaring total income of Rs. 4,54,28,436. The assessee's case was selected for scrutiny issued notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances of the case, no adjustment to the declared value of international transactions entered into, with AEs is called for and he therefore, directed the AO to delete the addition. 9. Being aggrieved, the Revenue is in appeal before us. 10. We shall now deal with the order of TPO whereby TPO has made an upward adjustment of Rs. 3,52,25,101 to the declared value of international transactions with associate concerns. 11. With a view to determine, ALP under section 92CA(3) in respect of international transactions entered into by the assessee with AEs/concerns, the AO referred the matter to the TPO. The documentations prepared under rule 10D of the IT Rules were submitted by the assessee and were placed on record. The assessee is a wholly-owned subsidiary of Cheil Communications Inc. (Cheil Korea) and it was established to handle the Indian operations of Cheil Korea advertising business. During the year under consideration, the assessee was serving Samsung for creating its advertisement for brands of air-conditioners, mobiles, monitors, outdoor hoardings etc. Cheil Korea is a Samsung Group company. It is a global advertising company and it is involved in the global advertisement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices has been discussed by the TPO in his order and are not a matter of dispute between both the parties. The relevant portion of the agreement shall be discussed at the appropriate stage while deciding the main controversy arising in this appeal. 13. The media service agreement was entered into between Samsung India Electronics Ltd. and the assessee company, and as per this agreement, the assessee company was required to supply to Samsung India Electronics Ltd., the following services for effective and better promotion, advertisement and management of the brands listed in the scope of assignment by and through media : (1) Tactics (planning) (2) Investment, implementation and post-analysis (buying). 13.1 As per the agreement for the services, the assessee company will be remunerated as per Annex. B of the agreement. 13.2 Agreement for outdoor was also executed between M/s. Samsung India Electronics Ltd. and the assessee company. 13.3 Commission sharing agreement was executed between Cheil Communication Inc. and Cheil Communication India (P.) Ltd. i.e., the assessee company and the purpose of the agreement is described fully in the agreement itself. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view that the role of TPO was to determine the ALP of international transactions undertaken by the assessee on the basis of documents maintained by the assessee, prescribed under rules and on the basis of five methods prescribed under rules. TPO further stated that he could utilize the information, which is available in the public domain to judge the ALP determined by the assessee as per the provisions of the IT Act and Rules. He further stated that when the assessee has applied TNMM as the most appropriate method with net cost plus margin as PLI, it was his duty to know as to whether method and the PLI applied was appropriate or not. Net cost plus margin is based on operating profit and total cost, He further stated that to determine the operating profit, determination of operating revenue is utmost important and if the billing is made and payment is received on gross revenue basis, it is very much within the power of TPO to scrutinize as to how the assessee has disclosed net revenue in its financial statement in spite of the fact that gross revenue is not disclosed in the audited financial statement submitted by the assessee. It was further pointed out by him that client of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating cost) 1,13,90,88,116 Operating profit 4,47,38,885 NCP% 3.93% 18. TPO then discussed about the use of data for multiple years and in that context, he has taken a view that comparability analysis is to be conducted on the basis of current year data as so held by the decision of Special Bench of Tribunal, Bangalore Bench in the case of Aztec Software & Technology Services Ltd. v. Asstt CIT [2007] 162 Taxman 119/107 ITD 141/15 SOT 49 which was followed by the Delhi Bench of Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101/18 SOT 76. The TPO then proceeded to make comparability analysis of the comparable companies. The TPO found that in the transfer pricing report, the assessee has chosen nine comparable companies of which two are Indian companies namely, Cinerad Communication Ltd. and SSI Media India (P.) Ltd. Information regarding these companies are available in databases, namely, prowess and capitaline functional analysis of these companies reveals that they are in the business of production and sale of advertising films and documentaries. Though the assessee company does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he book value and the ALP of the international transactions. On the same lines, the ALP of international transactions in respect of advertising service and cost sharing/cost allocation arrangements is determined as under : Sl.No International transaction Book value Difference loaded ALP 1. Receipt for advertising services 2,93,95,488 1,90,76,042 4,84,71,530 2. Payment to Cheil Korea for cost sharing 2,48,85,114 1,61,49,059 87,36,055 In respect of cost to cost recharge, the assessee has not benchmarked the same and the same is accepted. The AO shall accordingly increase the income of the assessee by Rs. 3,52,25,101. Since the difference between the book value of the international transactions and the ALP so determined is more than 5 per cent, no benefit under proviso to section 92C(2) is available to the assessee." 22. In the light of the determination of ALP and the difference worked out by the TPO, the AO made the addition of Rs. 3,52,25,201 to the total income on account of adjustment to ALP of international transactions with AEs. 23. Being aggrieved, the assessee preferred an appeal before the learned CIT(A). 24. After considering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presents income from jobs completed by the assessee on behalf of its clients and are disclosed net of pass through costs. 26.2 The assessee undertakes advertising services for its customers in capacity of an agent. In this regard, it makes payment to third parties like media agencies, printing press, etc., for renting of advertising space etc., on behalf of its customers and recovers the same from the customer. Such third party payments do not represent any value-added functions undertaken by Cheil India/advertising agency. 26.3 As per the industry norms in this regard, the advertising space (be it media, print or outdoor) is let out by the third party vendors in the name of the ultimate customer/beneficiary of the advertisement. Advertising agencies/companies simply act as an intermediary in between the ultimate customer and the third party vendors in order to facilitate the placement of advertisement since the advertising company is engaged in development and preparation of the relevant advertisement. 26.4 Further, it must be noted that as per industry practice, typically, the advertising companies are remunerated/compensated for their efforts and costs relating to provision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions laid down in the Companies Act, generally accepted accounting principles and standards issued by the ICAI and its accounts have been duly audited by an independent chartered accountant under section 44AB of the Act. 26.10 A reference was also made to the observations made and guidance provided by the Emerging Issues Task Force (EITF) formed in 1984 by Financial Accounting Standards Board (FASB) to provide assistance with timely financial reporting. The relevant extract of publication issued by the EITF on Gross v. Net Presentation of Revenue issue was pointed out stating that gross reporting treats the transaction as the company purchasing a product or service from the supplier and then selling that product or service to the end-user, while net reporting treats the transaction as the end-user making a purchase from the supplier, with the company acting as a sales agent. 26.11 The circumstances and indicators in which net revenue reporting may be adopted as the basis for revenue recognition were set out as under : "The supplier is the primary obligor in the arrangement. If the supplier is responsible for fulfilment and customer satisfaction, that may be an indicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this connection, the guidelines of transfer pricing for multinational enterprises and tax administrations issued by the Organization for Economic Co-operation and Development (OECD guidelines) were also pointed out and detailed note thereupon was submitted before the learned CIT(A). 29. After considering the assessee's submissions, material available on record, TPO's report and AO's order, the learned CIT(A) had arrived at the following finding on this issue : "10.2 I have gone through the above submissions of the appellant and have examined them in the light of material available on record; the main bone of contention is whether operating profit is to be calculated after grossing up of the revenue or on net basis. 10.3 The claim of the appellant is that the payments made to the third party vendors/media agencies are mere pass through in nature and recovered from the customer on whose behalf the payments are made. The appellant only acts an intermediary between the vendor and the ultimate customer. To demonstrate the pass through nature of such costs, the agreements entered into with the vendors/media agencies, payment schedules and invoices/other relevant back-ups were sought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is not correct in the year under consideration to deviate from the established position of maintaining books on net revenue basis. 10.7 Based on the above and also placing reliance on accounting principles followed by advertising companies and the OECD guidelines, I am of the opinion that such costs are merely pass through in nature and do not represent any value adding activity undertaken by the appellant, and accordingly do not warrant any mark-up as such costs do not impact the profitability statement/position of the appellant for the purpose of computing the OP/TC margin of the appellant as well as for the comparables too, the net revenue basis of accounting as reflected in the audited financials is appropriate." 30. Hence, the Revenue is in appeal before us. 31. The learned Departmental Representative has submitted that the profitability ratio of the assessee, in the present case, is to be determined by taking the gross receipts received by the assessee from associate concerns, and not the net receipt as so accepted by the learned CIT(A) in as much as in determining the cost base of the profit level indicator (PLI) by taking income on net basis, various costs incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the TPO. In the TP report submitted by the assessee, the assessee applied the TNMM on an entity level using operating profit/total cost ("OP/TC") as the profit level indicator. The total cost was comprising the expenses incurred by the assessee towards provision of the advertisement and related service such as personnel expense, other administrative expenses etc. The learned counsel for the assessee further pointed out that in the financial accounts of the assessee, the assessee recognized revenues on a net basis, i.e., it recognized the commission/charges received in respect of its functions as revenue and the gross media spends i.e. paid to third party media or vendor, costs were passed on to the customers or AEs, without a mark-up as pass through cost, thereby not including such third party costs in its P&L a/c and OP/TC computation, which is the proper method adopted by the assessee. 34. With regard to the comparables, the learned counsel for the assessee submitted that the comparables cited by the assessee were accepted by the learned TPO as appropriate. The only dispute is with regard to the method of computing of OP/TC margin whether on a gross basis as done by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluded entirely from the calculation.' 23. Further attention is also drawn towards the following observation made by the OECD in its proposed revision of Chapter I-III of the Transfer Pricing Guidelines (refer p. 83 of the compendium) : '2.134 In applying a cost-based TNMM, fully loaded costs are often used, including all the direct and indirect costs attributable to the activity or transaction, together with an appropriate allocation in respect of the overheads of the business. The question can arise whether and to what extent it is acceptable at arm's length to treat a significant portion of the taxpayer's costs as pass through costs to which no profit element is attributed (i.e. as costs which are potentially excludable from the denominator of the net profit margin indicator). This depends on the extent to which an independent party at arm's length would accept not to be remunerated on part of the expenses it incurs. The response should not be based on the classification of costs as 'internal' or 'external' costs, but rather on a comparability (including functional) analysis, and in particular on a determination of the value added by the tested party in relation to those cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided by the Emerging Issues Task Force formed in 1984 by FASB (refer extract below and pp. 464 and 465 of the paper book and pp. 135 and 138 of the compendium) : 'Gross reporting treats the transaction as the company purchasing a product or service from the supplier and then selling that product or service to the end-user, while net reporting treats the transaction as the end-user making a purchase from the supplier, with the company acting as a sales agent. Indicators of net revenue reporting The supplier is the primary obligor in the arrangement-If the supplier is responsible for fulfilment and customer satisfaction, that may be an indication that the company does not have risks and rewards as a principal in the transaction and therefore should recognize only its net fee as revenue. Representations made by a company during marketing and the terms of the sales contract will generally provide evidence as to a customer's understanding of whether the company or the supplier is responsible for fulfilment. The amount the company earns per transaction is fixed (in dollars or as a percentage of the arrangement fee)-When a company earns a fixed dollar amount per customer transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel for the assessee further submitted that even otherwise, without prejudice to the assessee's main contention that the net margin should be determined with reference to the net revenue, grossing up should be restricted to the quantum of international transactions, and in that regard a suitable adjustment is necessary to be made. The assessee's contentions in this regard given in writing are as under : "34. It may be noted that during the financial year 2004-05, out of the total pass-through cost amounting to approx. Rs. 105 crores incurred by the assessee, only an amount of approx. Rs. 1.8 crore relates to costs incurred towards services provided to its overseas AEs (i.e., even less than 2 per cent of the total third party cost of the company) (refer p. 199 of the paper book). Further, the value of the international transactions of the assessee to its total revenue for the financial year 2004-05 is approx. 4 per cent. Accordingly, strictly without prejudice to other submissions made by the assessee, even if gross revenue was to be considered, such grossing up would need to be restricted to the amounts recoverable by the assessee from its overseas AEs i.e., to the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. Asstt. CIT [2009] 30 SOT 319 (Pune) was also pressed into service on this point. 40. The rival contentions of both the parties have been considered and orders of the authorities below have carefully been perused. The only question that falls for our consideration is with regard to the method of computing profit/TC margin whether on gross basis as done by the TPO or net basis as worked out by the assessee. In this case the assessee has applied TNM method to determine ALP, which has also been accepted by the Revenue authorities. The comparables cited by the assessee has also been accepted by the TPO as appropriate. It is also found by us that in the regular financial accounts maintained by the comparable companies, the comparables recognize revenue on a net basis. The assessee has also recognized revenues on a net basis in its financial account, which had been duly audited by the auditor. The assessee has computed the margin of operative profit on the total cost on the basis of net revenue by way of mark-up received from the associate concern. The payment made by the assessee to third party vendor/media agencies for and on behalf of the principal has not been included in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be appropriate to determine ALP as a mark-up on the cost of services but rather on the cost of agency function itself, or alternatively, depending on the type of comparable data being used the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. In this type of case, it will be appropriate to pass on the cost of rendering advertising space, to the credit recipient without a mark-up and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function. These guidelines are as under : "3.41 In applying the transactional net margin method, various considerations should influence the choice of margin used for example, these considerations would include how well the value of assets employed in the calculations is measured (e.g. to that extent there is intangible property the value of which is not captured on the books of the enterprise) and the factors affecting whether specific costs should be passed through, marked-up, or excluded entirely from the calculation." 41. In the proposed revision of Chapter I-III of the Transfer Pricing Guidelines issued on 9th Sept., 2009 - 9th Jan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g advertising space on behalf of its AEs. We further find that the method adopted by the assessee while submitting transfer pricing study based on net revenue has been accepted by the Department in earlier year and, therefore, there is no reason to depart from that stand already accepted by the Department in earlier year. In the light of the view we have taken above, we therefore, uphold the order of the learned CIT(A) on this issue and reject the ground raised by the Revenue. 44. Before parting with this issue, we may observe that the following decisions relied upon by the Department are not relevant to the present issue in as much as all these were rendered in different context and not in the context of what would be the basis for determining the net margin in the case of an agent acting for and on behalf of the principal : (i) CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 (SC), (ii) CIT v. Shaik Md. Rowther Shipping & Agencies (P.) Ltd. [2000] 246 ITR 161/[2002] 124 Taxman 79 (Mad.), (iii) Dy. CIT v. Carraro India Ltd. [2009] 28 SOT 53 (Delhi) (URO). Thus, these decisions are distinguishable on facts. 45. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owable at the rate 60 per cent. 48. We have heard both the parties and gone through the material on record. We have also gone through the above referred Tribunal's order dt. 13th Feb., 2009 passed in the assessee's case pertaining to the assessment year 2004-05 where the Co-ordinate Bench of the Tribunal has decided this issue as under : "3. In the next ground of appeal, grievance of Revenue relates to grant of depreciation at the rate of 60 per cent on computer peripherals. On due consideration of the facts and circumstances, we find that the assessee had claimed depreciation at the rate of 60 per cent on computer peripherals such as monitors and scanner etc. The AO held that such instrument cannot be treated at par with the computer and, therefore, depreciation was granted at the rate of 25 per cent. On appeal, learned CIT(A) allowed the depreciation at the rate of 60 per cent. This issue is squarely covered in favour of the assessee by the order of the Tribunal rendered in the case of ITO v. Samiran Majumdar [2006] 101 TTJ (Kol.) 501 : [2006] 98 ITD 119 (Kol.) wherein it has been held that depreciation would be admissible at the rate of 60 per cent on monitors and scanners etc ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
