TMI Blog2010 (11) TMI 630X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation at higher rate of 60 per cent on computer accessories and peripherals instead of the normal rate of 25 per cent has been upheld by the Hon'ble Delhi High Court in the case of CIT v. BSES Rajdhani Powers Ltd. [2010 -TMI - 78240 - DELHI HIGH COURT] - Decided in the favor of the assessee - IT APPEAL NO. 712 (DELHI) OF 2010 - - - Dated:- 30-11-2010 - C.L. SETHI, AND A.K. GARODIA, JJ. Mrs. Kavita Bhatnagar for the Appellant. Rahul Mitra for the Respondent. ORDER C.L. Sethi, Judicial Member ‑ This is an appeal filed by the Revenue Department against the order dt. 17th Dec., 2009 of the learned CIT(A) in the matter of an assessment made under section 143(3) of the IT Act, 1961 (the Act) by the AO for the assessment year 2005-06. 2. The present appeal was heard along with an appeal filed by the assessee against the same impugned order of the CIT(A). The issues involved in this appeal are separate and independent to the issues involved in assessee's appeal. The appeal filed by the assessee has been disposed of by a separate order dt. 6th Aug., 2010. We now proceed to decide the appeal filed by the Revenue. 3. The first issues raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder under section 92CA(3) dt. 23rd Oct., 2008 wherein the ALP of international transactions relating to advisory services and reimbursement of expenses from AEs was computed at Rs. 9,06,06,349 as against the transaction value of Rs. 5,53,81,248 declared by the assessee. Therefore, an upward adjustment of Rs. 3,52,25,101 was made to the declared value of international transaction entered into with the AEs/concerns. 6. In the order under section 92CA(3) of the Act passed by the TPO, the TPO suggested the upward adjustment to the extent of Rs. 3,52,25,101 to the book value of international transactions declared by the assessee and since the difference between the book value of international transactions and the ALP determined by him was more than 5 per cent, no benefit under proviso to section 92C(2) was given to the assessee. 7. Since in the light of the provisions contained in sub-section (4) of section 92C, the AO was required to compute the total income of the assessee in conformity with the ALP as determined by the TPO, the AO made an addition of Rs. 3,52,25,101 to the total income of the assessee on account of adjustment to ALP of international transactions with AEs. 8. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... client's corporate image. As per Foreign Investment Promotion Board approval, Cheil India is permitted to undertake the following activities : l Advertising, communication, publicity and merchandising including undertaking market research, planning, providing consultancy services and training on any present and future media/medium and to do all incidental acts and things necessary thereto. l Managing all kinds of events, shows, fairs and all activities requiring advertising publicity and entertainment; and l To act as product/brand image builder, product launch promoter, set designer, interior designer, merchandiser and display. For performing the above functions, Cheil India has entered into following agreements : 1. Agreement for advertising. 2. Media services agreement. 3. Agreement for outdoor. 4. Commission sharing agreement. Agreement for advertising has been entered into between Samsung India Electronics Ltd. (client) and Cheil India (Cheil) and following services are required to be rendered : (1) Print advertising, broadcast advertising, marketing analysis and consultation, marketing research and other research, special publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transactions ? 2. What should be the financial year/years data of which is to be used in regard to the financials of the comparables so as to arrive at arithmetic mean of the NCP margin ?" 16. The assessee submitted before the TPO that net revenue model followed by the assessee is as per accounting practices and OECD guidelines. The assessee made a reference to two decisions of Hon'ble Apex Court in the cases of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 and Malayala Manorama Co. Ltd. v. CIT [2008] 300 ITR 251/169 Taxman 471, wherein it has been enunciated that the accounts maintained as per Companies Act are sacrosanct and the AO has no power to re-scrutinize these accounts and satisfy himself that these accounts are maintained in accordance with the provisions of the Companies Act. The assessee also submitted before the TPO that once the profit and loss is certified by the auditors, then the AO does not have the jurisdiction to go beyond the audited P L a/c. This contention of the assessee was not found favour with the TPO, who was of the opinion that in this respect, the assessee company completely misinterpreted the show-cause notice, and submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. In support of this view taken by the TPO, he also made a reference to the following 2 decisions : (i) Jonnalla Narashimharao Co. v. CIT [1993] 200 ITR 588/68 Taxman 340 (SC). (ii) CIT v. Karam Chand Thapar [1996] 222 ITR 112/88 Taxman 40 (SC). 17. Having taken a view that the assessee should have accounted for its gross receipts as operating revenue and outgo should have been claimed by it as operating expenses in its P L a/c to arrive at the operating profit, the TPO worked out the NCP margin of the assessee on the basis of gross receipts and expenses as under : Particulars As per financial statement Non-operational/past years/other items Operating items Revenue (gross) as given vide Annex. II of submission, dt. 6-10-2008 1,18,31,65,243 1,18,31,65,243 Other income 14,41,186 7,79,428 6,61,758 Operating income 1,18,38,27,001 Operating and other expenses 4,68,45,804 2,19,266 4,66,26,538 Personal expenses 3,55,12,480 3,55,12,480 Depreciation 51,62,456 51,62,456 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvertising (India) (P.) Ltd. and (ii) Portland India Outdoor Advertising (P.) Ltd. pertaining to the year ended on December, 2004 and arrived at a mean of 7.02 per cent as under : Particulars Contract Advertising ( India ) (P.) Ltd. ( year ending December, 2004 ) ( Rs. in crores ) Portland India Outdoor Advertising (P.) Ltd. ( year ending December, 2004 ) ( Rs. in crores ) Revenue (gross) 62.44 66.60 Other income 0-85 - Operating income 63.29 66.60 Direct cost 34.43 58.87 Personal expenses 09.62 1.88 Power and fuel 0.47 0.09 Other operating expenses 11.61 2.93 Miscellaneous expenses 0.76 0.29 Depreciation 0.48 0.06 Amortization of research expenses 0.09 Total operating expenses (operating cost) 57.37 64.21 Operating profit 5.92 2.39 NCP% 10.32% 3.72% Mean 7.02% 21. In the light of the NCP margin of comparable cases worked out at 7.02 per cent as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revenue and operating costs for the purpose of margin computation of the appellant was appropriate ? III. Whether TPO's rejection of comparable companies used by the appellant for benchmarking its international related party transactions in its TP documentation report for the year is appropriate ? IV. Whether in the case of comparables, for the purpose of margin computation, current year data is to be considered ? V. Whether the benefit of 5 per cent is available as standard deduction. 25. In this appeal, we are only concerned with the issue whether the TPO's rejection of net revenue basis of accounting and grossing up of the revenue and operating costs for the purpose of margin computation of the assessee is appropriate. In respect of this issue, the assessee made elaborate submissions before the learned CIT(A) which is summarized as follows. 26. Cheil India is an advertising agency and is engaged in undertaking advertising services for its customers in respect of their products and brands, in the capacity of an agent. As part of its business operations of preparation of advertisements and provision of related consultancy services, the company also facilitates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/services from third party vendors, the assessee also operates as an agent of the customer and the relationship does not constitute a principal-to-principal relationship. Further, it must be noted that the appointment of third party vendors, fixation of pricing etc. terms are taken after taking necessary approvals in this regard from the end customers. 26.5 In addition to the above, the costs if any, paid by the advertising companies to outsourced production houses for production/shoot of an advertisement are recovered by the advertising company from the end customer on a cost to cost basis, since they act as the agents of the ultimate customer in appointing such third party production houses. 26.6 The fact that the accounting approach of reporting net revenue/commission income as the revenue of advertising companies is adopted as an industry practice is evident from the accounting adopted by numerous advertising companies both within India as well as globally. 26.7 Further, it must be noted that the assessee pays any amounts to such third parties towards renting of space and/or procurement of goods/services only when the same is recovered from the relevant customer. It is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed (in dollars or as a percentage of the arrangement fee). When a company earns a fixed dollar amount per customer transaction or a stated percentage of the amount billed to a customer, it appears to be acting as an agent of the supplier. The supplier has credit risk. If credit risk exists (that is, the sales price has not been fully collected prior to delivering the product or service) but the supplier assumes that risk, the company appears to be acting as an agent of the supplier." 26.12 The accounting treatment of adopting commission/net revenue as the total income of the company is also supported by the conclusions made and guidance provided by the EITF. In the light of the guidance provided by the EITF, it was thus clear that the accounts of the assessee company were duly prepared in accordance with the generally applicable and accepted accounting principles in India and it was absolutely unreasonable and undue on the part of the TPO to completely ignore and disregard the opinion of an independent accountant on the accounts. 27. It was thus submitted by the assessee that net revenue basis of accounting followed by the assessee is justified on the following counts : "( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the invoices submitted by the appellant. The MTV agreement is a tripartite agreement entered into between the appellant, MTV India and Samsung India Electronics Ltd./client. The invoices raised by MTV on the appellant contain the name 'Samsung'. The other agreement is entered into between Samsung with TOI with counter signature of the appellant wherein the vendor/TOI can directly raise invoices on Samsung instead of the appellant. 10.4 During the course of appellate proceeding the appellant was also asked to give the details of collection date with respect to the invoices raised by them on their client etc. and corresponding payments made by them to advertisement agency/media. On test check it was noticed that payment to advertisement agencies/media agencies are being made only after recovering it from the respective customer. Thus, the appellant follows the advertising agency practice of settling vendor cost based on collection from the client. From the replies filed by the appellant it is further noticed that the appellant does not assume any risk on account of non-payment by the customers. In case of any default on non-payment by the customer, the appellant does not own any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue is to be made on gross payment basis and therefore, he submitted that the TPO was justified in making the adjustment to the profit disclosed by the assessee with regard to the international transactions effected by the assessee with the associate concerns. 32. The learned counsel for the assessee Shri Rahul Mitra supported the order of the learned CIT(A). In the light of the nature of business of advertising, communication, publicity, market research planning etc., services as an agent carried on by the assessee and in the light of the risk assumed by the assessee, he submitted that the net revenue recognition method while determining the net profit margin, is an appropriate method to determine the ALP of the transactions entered into by the assessee with its associate concerns. He submitted that the assessee had undertaken advertisement, brand promotion and other related activities for Samsung Group in India, and in respect of these services, the assessee used to raise bills to its AEs, the gross media spends, charged by the third party vendors/media agencies, which were passed on to AEs on cost to cost basis, and a fixed commission or charge based on the different types ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r : "18. The assessee's submissions in the instant case are provided below : I. Payments made to third party vendors/media agencies do not represent any value added activity carried out by the assessee. 19. The assessee is engaged in undertaking advertising services for its customers/AEs in the capacity of an agent. As part of its business operations, the assessee facilitates placement of advertisements (for its customers/AEs) in the print, electronic etc., media. To this end, it may be required to make payment to third parties like advertisement agencies, printing presses, etc. for renting of advertising space on behalf of its customers. Such payments are fully recovered from the respective customers/AEs. Here, it may be reiterated that the assessee's business is provision of advertising and related services and not sale of advertising slots to customers. 20. For performing the above functions, the assessee is remunerated by its customers/AEs on the basis of a fixed commission/charge based on the 'gross media spends' incurred by them for release of a particular advertisement. 21. Accordingly, the commission/charges received by the assessee from its customers/AEs represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dium) '7.36 When an AE is acting only as an agent or intermediary in the provision of services, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves. In such a case, it may not be appropriate to determine arm's length pricing as a mark-up on the cost of the services but rather on the costs of the 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. For example, an AE may incur the costs of rendering advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function.' 26. Reliance in this regard is also placed upon the landmark judgment of E.I Du Pont De Nemours Company v. The United States, 78-1, USTC, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the industry norms in this regard, the advertising space (be it media, print or outdoor) is let out by third party vendors in the name of the ultimate customer and beneficiary of the advertisement (all the invoices and/or purchase orders from third party vendors necessarily need to contain 'account customer name' and the appointment of third party vendors, fixation of pricing terms etc. are carried out after taking approval from the customers). Advertising agencies/companies simply act as intermediaries between the ultimate customer and the third party vendors in order to facilitate placement of the advertisements. 29. As mentioned earlier, the advertising companies are compensated for their efforts and costs relating to provision of advertisement services on the basis of an agreed commission fixed as a percentage of the gross media spend for the release of a particular advertisement. The payment to the vendors is recovered from the respective customer(s). In the event that a customer fails to pay any such amounts to the advertising agency the bad debt risk is borne by the third party vendor and not by the advertising agency. Therefore, in no event whatsoever, does the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntum of the taxpayer's international transactions. 36. Here it may also be noted that the transactions viz. ,. advertising services and cost allocation/sharing arrangement amount to a mere Rs. 5.42 crores during the financial year 2004-05. By grossing up the entire revenues, the learned TPO had in effect made an adjustment to the domestic transactions of the assessee also, which do not fall under the purview of section 92 of the IT Act, 1961." 38. An alternative argument was also made contending that the computation of comparable margins carried out by the TPO is erroneous as the TPO recomputed the average of OP/TC of the comparables on gross basis of accounting at 7.02 per cent being the average of 2 comparable cases which is not correct as per the computation carried out by the assessee, the average of OP/TC margin of the comparables during the financial year 2004-05 after grossing up of the revenue and expenses has been worked out to 6.05 per cent. The operating margin for Contract Advertising India (P.) Ltd. has been worked out at 9 per cent and for Portland India Outdoor Advertising (P.) Ltd. worked out at 3 per cent. It was also contended by the learned counsel for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilitates placement of advertisement for its AE in the print/electronic etc. media and for that purpose, the assessee is required to make payment to third parties for rendering of advertisement space on behalf of its customers or AEs. It is, thus, clear that the assessee's business is not sale of advertising slots to its customers or associate concern. For performing the functions for and on behalf of AEs, the assessee is remunerated by its AEs on the basis of a fixed commission/charges based on expenses or cost incurred by the assessee for release of a particular advertisement. It is also to be noted that advertising space (be it media, print or outdoor), has been let out by third party vendors in the name of ultimate customers and beneficiary of advertisement. We have gone through the invoices and purchase orders from third party vendors and find that they contain customers' name, and all the terms of advertisement are finalized after taking the approval from the customers. The assessee simply acts as an intermediary between the ultimate customer and the third party vendor in order to facilitate placement of the advertisement. The payment made by the assessee to vendors is recove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 costs." 42. Further, OECD in ITS 2009 Transfer Pricing Guidelines has laid down as under : "7.36 When an AE is acting only as an agent or intermediary in the provision of services, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves. In such a case, it may not be appropriate to determine arm's length pricing as a mark-up on the cost of the services but rather on the costs of the agency function itself or alternatively, dependi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed by the assessee at 60 per cent is not allowable but the same is to be allowed only at the rate of 25 per cent treating the computer accessories and peripherals to be in the nature of normal plant and machinery. On an appeal, the CIT(A) allowed the assessee's claim by observing and holding as under : "During the year under consideration the appellant made the additions to the block of computers included computer peripherals/accessories such as printers etc. amounting to Rs. 54,400 and on which he claimed depreciation at the rate of 60 per cent. The AO did not admit this claim on the ground that 60 per cent depreciation is allowable on computer and computer accessories and it is not available on computer peripherals like printers etc. During the course of appellate proceedings the appellant made the detailed submissions and stated that in their own case for assessment year 2004-05, the addition on this issue was made and Tribunal, Delhi Bench vide their order No. ITA No. 1451/Delhi/2008, dt. 13th Feb., 2009 have allowed the claim of depreciation of 60 per cent on printers, scanners etc. I have gone through the detailed submissions made by the appellant and it is notice ..... X X X X Extracts X X X X X X X X Extracts X X X X
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