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2016 (5) TMI 255

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..... our of assessee Exclusion of Mega Soft Ltd. as comparable and inclusion of Orient Information Technology Ltd. in the set of comparables - Held that:- As regards to the inclusion of Orient Information Technology Ltd. is concerned, the TPO had not given any particular reason for its exclusion. The said company also designs, develops and deploys customized software solution and application, so its functionality was comparable with the assessee. The said company was not considered by the TPO because it was a loss making company but that cannot be a reason to exclude it from the set of comparable in view of the decision of the ITAT Delhi Bench in the case of Yum Restaurants India Ltd. [2011 (5) TMI 852 - ITAT DELHI ] wherein it has been held that merely a company showing loss would not lose its status of comparable if other criteria depicted status of comparable. Thus this issue is remanded back to the Assessing Officer for verification of the calculations furnished by the Ld. A.R of the assessee and to be decided afresh in accordance with law. Disallowance of expenditure incurred in Indian Rupees payable to Indian Residents - non deduction of tds - Held that:- The provisions of S .....

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..... ion on account of mark-up to be recovered by the appellant on reimbursement of expenses received from Associated Enterprises (AE) and re-computation of arms length price (ALP) on account of provision for services of ₹ 9,42,641/- and ₹ 49,812/- respectively. Adjustment to net profit margin based on cost (NCP margin): On the facts and circumstances of the case and in law: (a) The CIT(A) has erred in observing that the Appellant has provided logistic services to its AE s and held that services provided by the Appellant to its AEs do require arm s length mark-up on its cost base. (b) The CIT (A) has also erred in holding that the payments made by AE s to the Appellant do not represent pass through costs. (c) Without prejudice to the above, the CIT (A) has erred in determining the arm s length profit margin at a rate of 11.6% on international transactions by rejecting the five comparable independent companies recognized by the Appellant to determine ALP under the provisions of Section 92 of the Act and Rule 10B to Rule 10D of Income Tax Rules 1962, without giving satisfactory reasons for such rejection. (d) Without prejudice to the above, the CIT (A) .....

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..... dney and New Delhi. It is the largest independent producer package and distributor of sports programming in the world. International Merchandising Corporation, Inc. USA (IMC Inc., USA) is a part of the IMG Group. IMG commenced operations in India by establishing a branch office of IMC Inc. The Indian Branch is engaged in the following activities: i. Activities relating to sports and arts and to represent local sport bodies associations and individuals for exploitation of commercial rights; and ii. Sale of television right and production of television programmes provided that the branch office does not undertake any broadcasting from Indian soil. 4. During the year under consideration, the Assessee was primarily engaged in the business of marketing, organizing and management of international sport events and fashion events, television production and management of commercial rights of sports persons and sports associations in India. 5. During the year under consideration, the assessee filed its return of income on 31.10.2004 declaring loss of ₹ 28,162,488/-. Subsequently, a revised return of income u/s. 139(5) of the Act was filed on 31.03.2006 wherein the assessee .....

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..... on 92C(2) state that if difference between arm s length price and transfer price does not exceed 5% of arm s length price, then no TP adjustment should be made. The CIT(A) further held that where such difference exceeds 5%, then entire difference has been added to the Income without giving any sort of standard deduction out of it and has to be treated as TP adjustment. Thus the CIT(A) decided this issue against the assessee. Now the assessee is in appeal. 9. The Ld. AR submitted the payment of ₹ 1,922,663/- was made to Association of Tennis Professionals, USA (ATP)during the year under consideration, the Assessee had organized a Men s Professional Tennis Championship in India ( Chennai Open / tournament ). For organizing the tournament, the Assessee had obtained the sanctions/approvals from ATP (which is the governing body of worldwide Men s Professional Tennis) to recognize the event as an ATP s event, and thus, this event was recognized as an official ATP Men s International Series Tennis Championship. Such payments have been grouped under the head sanction and rights in the profit and loss accounts. It was further stated that without obtaining the approvals from ATP, .....

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..... 2 International Merchandising Corp. Reimbursement of expenses incurred 86,472 3 IMG UK Inc 306,901 4 IMG South Africa 17,623 5 Trans World International UK Ltd. 958,509 6 IMGO Spain 272,402 7 TWI Interactive Ltd. 51,397 8 IMG Singapor Pte Ltd. 52,267 9 IMG Overseas, Hong Kong 283,233 10 IMG of America Pty Ltd. 7,466,794 11 International Merchandising Corp. Amount received by 509,119 12 Trans World International UK Ltd. Branch on behalf of AE 738,586 Total 11,818,633 .....

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..... 19,56% Additions made to the income in the assessment order by way of mark-up on reimbursement of expenses received from AEs (A* B) 2,058,017 The Ld. AR submitted that while making the above addition, the A.O ignored the submissions of the Assessee that the transactions with AEs were in the nature of mere reimbursement of expenses which were initially paid by the Assessee on behalf of its AEs and later on received by them on cost to cost basis. The Assessee had submitted sample copies of invoices/debit notes which were raised by the Assessee on its AEs in connection with reimbursement of expenses to substantiate that such reimbursement does not involve rendering of any services to AEs and hence, does not require charging of any cost plus mark-up as no mark-up has been paid on similar reimbursements paid to AEs (paper book page numbers 420 to 474). 12. The Ld. AR submitted that the cost to cost reimbursements is not in nature of rendering services, but it is merely for administrative convenience. It was further submitted that the net amount of ₹ 8,126,215 represents reimbursements received from group companie .....

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..... Less: Markup already earned by Assessee 59.55%) 232,050 Amount of addition 49,812 14. The Ld. A.R also submitted the chart showing NCP margin of comparables as per following detail:- S. No. Comparable Name Average NCP Margin of comparables (%) As per TP Report as per Assessment Order as per CIT(A) order Remarks 1 IGE (India) Ltd. 21.92 21.92 21.92 Accepted by the Ld. A.O 2 Zigma Software Ltd. 17.21 17.21 17.21 Accepted by the Ld. A.O 3 Concept Marketing Advertising Ltd. -4.35 - -4.35 Excluded by the Ld. A.O on account of losses incurred by the comparable. However, the CIT(A) accepted this comparable as it is not a persistent loss making com .....

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..... Plus 5% A E Revenue 2,661,894 2,711,706 2,576,121 2,847,291 Non-A E Revenue 188,552,451 Operating Revenue 191,214,345 2,711,706 2,576,121 2,847,291 Operating Expense 174,545,272 2,429,844 2,429,844 2,429,844 Operating Profit 16,669,073 281,862 146,277 417,447 NCP(%) 0.55 11.60 6.02 17.18 16. The Ld. AR submitted that the assessee is a foreign based company s branch and the main company .....

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..... the order of the Assessing Officer is restored. So, respectfully following the above said order, Ground No. 1 is decided against the assessee. 20. As related to Ground No. 2, the reimbursement costs has to be excluded as the same do not involve any functions to be performed so as to consider it for profitability purposes. Thus we direct AO/TPO to exclude reimbursement costs while working out the operating costs. Besides the said issue is decided in case of M/s. HSBC Electronic Data Processing India Ltd. Vs. Addl. CIT [ITA No. 1624/HYD/2010 decision dated 28.06.2013 Hyd. (Tri.)] in favour of the assessee and the facts of the assessee s case are similar to that of HSBC Electronic Data Processing India Ltd. (Supra). Hence, Ground No. 2 of the assessee s appeal is allowed. 21. As relates to Ground No. 3, the directions given in case of ACIT vs. M/s. Citi Financial Consumer Finance India Ltd. [ITA No. 2848/DEL/2012 decision dated 17.08.2015 Del. (Tri.)] has to be followed wherein it has been held that if the Arms Length Price comes within the range of +/ - 5% of the range then no addition has to be made. We have considered the submissions of both the parties and carefully g .....

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..... he year 2004 and the relief given to the assessee on the issue of determination of ALP by the CIT(A) is without any application of mind. As regards to Ground No. 2, the Ld. DR submitted that the Assessing Officer has already taken into account all the aspects in consideration and has rightly rejected the contentions of the assessee at the relevant time related to the expenses and allowance of sanctions. As regards to Ground No.3, the Ld. DR submitted that the personal expenses were rightly rejected by the Assessing Officer. 25. As regards to Ground No. 1, the Ld. AR submitted that the A.O in the assessment order has excluded Concept Marketing Advertising Ltd from the list of comparables while determining arm s length mark-up in relation to production/event management services provided by the Respondent assessee to its AEs, on the ground that it is a loss making company. However, the CIT(A) accepted the submission of the Respondent assessee that this comprabale company is not a consistent loss making company and has positive net worth and hence cannot be excluded. The Department is in appeal against the aforesaid decision of the CIT(A). The Ld. AR submitted that the A.O erred i .....

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..... rency was only INR 35,73,088 (Reconciliation provided in para 6.5 at Page no.7 of the order of the CIT(A). It was submitted that the AO disallowed INR 1,28,63,376, which is almost the entire expenditure out of the total expenditure of INR 1,32,38,483, under section 40 (a) (i) of the Act, wrongly assuming it to be payable to Non- Residents (which included INR 1,07,57,455 paid/payable to Indian Residents), without giving any further opportunity to the assessee to explain. It was further submitted that during the proceedings before the CIT (A), the assessee submitted the details of sanctions and rights expenses incurred in Indian Rupees and a copy of agreement entered into with Shaw Wallace Distilleries Ltd (SWDL) as additional evidence under Rule 46A. The A.O filed his remand report dated 25th June 2009 against the details/additional evidence sent by the Ld. CIT (A) for his comments. The assessee filed the rejoinder dated 14th September 2010 against the aforesaid remand report of the A.O. The CIT(A) after duly considering the remand report of the A.O admitted the additional evidence vide para 7 of his order, which is reproduced as under: During appellate hearing, the appellant .....

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..... for Lakme India Fasion Week [Para 7.3 of the Ld. CIT(A) order] 1,00,750 3. Amounts allowed by the Ld. CIT(A): 4,57,570 (i) Amount paid to Business Golf Corporation in F.Y 2003-04 for World Corporate Golf Challenge Tournament, Spain [Para 7.3 (a) of the Ld. CIT(A) order] 1,93,850 1 (ii) Amount paid to Allan Donald for interview with J Stewart [para 7.3 (b) of the Ld. CIT(A) order] 17,623 (iii) Costs reimbursed to TWI UK for legal costs in UK in connection with Indian team clothing issue [para 7.3 (d) of the Ld. CIT(A) Order]. 2,46,097 28. It was submitted that from the above details it is clear that the assessee submitted the additional evidence only in respect of expenditure in Indian Rupees payable to Indian Residents, which has been allowed by CIT (A) since the provisions .....

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..... ense of personal nature had been debited to P L A/c. It was stated that in the case of a company, such adhoc disallowance cannot be made and that the assessee had a policy for managing the expenses pertaining to credit cards issued to the employees, whereby any expenses incurred by the employees for official purposes, through the credit cards were to settle by them personally. They were entitled to the reimbursement for expenses incurred by them for official purpose by getting suitable approvals and verifications from the respective supervisors/departments. Thus the Ld. AR submitted that the CIT (A) has rightly deleted the adhoc estimated disallowance of miscellaneous expenses, and this ground of the Department appeal is liable to be dismissed. 32. The Ld. AR refuted all the contentions of the DR and relied in following case laws:- Union of India Vs. Azadi Bachao Andolan (263 ITR 706) CIT(A) Vs. Visakhapatnam Port Trust Ltd (144 ITR 146). Sony Ericsson Mobile Communications India Pvt. Ltd Vs. CIT(A)-III (ITA No. 16/2014 and connected matters) DCIT Vs. Cheil Communications India Private Limited: ITA 712/Del/2010, (2010-TII-60-ITAT-Del-TP) HSBC Electro .....

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