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International Merchandising Corporation Versus DDIT, Circle-1 (2) , International Taxation, New Delhi and Vica-Versa

2016 (5) TMI 255 - ITAT DELHI

TDS liability - Payment to Association of Tennis Profession (ATP) - disallowance u/s 40(a)(i) - Held that:- Section 194E read with Section 115 BBA apply to payments made to a non-resident sports association or an institution. In the instant case, ATP is undisputedly a governing body of the world wide men’s professional Tennis Circuit, responsible for ranking of its players and coordinating the Tennis Tournament in the world. In such circumstances we are of the opinion that ATP is a non-resident .....

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working out the operating costs. - Decided in favour 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 ass .....

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cation 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 Section 40(a)(i) of the Act do not apply to A.Y 2004-05 which is the assessment year under consideration. Therefore, no disallowance can be made in respect of expenditure incurred in Indian Rupees payable to Indian Resident on allegati .....

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aneous expenses, and this ground of the Department appeal is liable to be dismissed. - Decided in favour of assessee - I.T.A .No.-222/Del/2013, I.T.A .No.-6449/Del/2012 - Dated:- 5-4-2016 - SHRI N. K. SAINI, ACCOUNTANT MEMBER AND SMT SUCHITRA KAMBLE, JUDICIAL MEMBER For The Appellant : Sh.Hemant Gupta, Sr. DR For The Respondent : Sh. S.K. Aggarwal, C.A ORDER PER SUCHITRA KAMBLE, JM ITA NO. 222/DEL/2013 These cross appeals are filed against the order dated 30/10/2012 passed by CIT (A)-XXIX, New D .....

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ing the disallowance, without giving the Appellant an opportunity of being heard in this regard. • The CIT(A) has erred in observing that payments made as sanction fee to ATP are directly related to use of ATP logo and therefore, partakes the character of royalty under domestic law as well under the provisions of India-US treaty and accordingly, chargeable to tax and subject to withholding tax u/s 195 of the Act. • The CIT (A) has erred in not relying on the findings of the CIT (A) in .....

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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 t .....

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erred in stating that the conditions prevailing in the markets in which parties operate including geographical location are vital to judge the comparability. (e) The CIT (A) has erred in upholding the action of the A.O that comparability analysis is to be conducted on the basis of current year data only and rejecting multiple year data used by the Appellant for computing the net profit margin of the comparable companies. (f) The CIT (A) has erred in not allowing for a variation/reduction of 5% .....

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d in re-computing ALP charged by the Appellant for the provision of service to its AE by applying the adjusted NCP margin for Event Management without appreciating the fact that the services rendered by Appellant to its AE s include both activities in nature of Production Management Services and Event Management which have been analyzed separately in transfer pricing report. The above grounds are without prejudice to and independent of one another. 3. International Merchandising Corporation ( IM .....

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ing corporation world-class events cultural institutions and recreational resorts. The production centers are located in New York, London, Hong Kong, Sydney 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: .....

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oduction 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 revised the loss to ₹ 30,038,768/-. The Assessing Officer passed the assessment order under Section 143(3) of the Act dated 26.12.2006, wherein the loss o .....

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s length price on account of provision of services 243,227 6. In respect of reimbursement of ₹ 1,05,21,562/-, the Assessing Officer held that these services provided by the assessee to its AE s and worked out upward adjustment of ₹ 20,58,017/- and in respect of provision for services of ₹ 24,29,844/-, the Assessing Officer worked out upward adjustment of ₹ 2,43,227/-. The Assessing Officer had also not allowed the benefit of 5% range to the assessee, while determining th .....

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ehalf of its AE s do not represent pass through costs per se. The services provided by the assessee to its AE s do require arm s length mark-up on its cost base. The CIT(A) decided the said issue against the assessee. As relates to benefit of 5% range to the assessee on account of arm s length price , the CIT(A) held that the provision of section 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 .....

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ssional 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 w .....

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ulars Amount (in Rs) Nature of payment Tournament Fee 1,046,063 Paid for obtaining permission to get the event recognition as an ATP s event. Player s Welfare Contribution 876,600 Apart from being the governing body of the worldwide Men s Professional Tennis Circuit, ATP takes care of the benefits of the players affiliated with it. During the year, an amount of ₹ 876,600 is paid by the Appellant towards funds (viz. Retirement contribution, kids fund contribution, world doubles contribution .....

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lf and similarly, it receives reimbursement of expenses incurred by it on behalf of group companies on cost to cost basis. The details of the amount paid to the group companies and the amount received from group companies towards reimbursement of costs on cost to cost basis as per Form 3CEB for the A.Y 2004-05 under Rule 10E, Section 92E of the Act (paper book page number 158) is as under: Details of amount paid to the group companies Sl. No. Name of AE Description Amount (in Rs) 1 International .....

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n behalf of AE 738,586 Total 11,818,633 Details of amount received from the group companies S. No. Name of AE Description Amount (in Rs) 1 Trans World International Inc Reimbursement of expenses incurred by branch 318,666 2 IMG UK Ltd. 3,894,301 3 Trans World International UK Ltd. 1,099,280 4 IMG Hong Kong 2,267,000 5 IMG Singapore Pte Ltd. 108,871 6 IMG Overseas, Hong Kong 90,381 7 IMGO Malaysia 164,674 8 IMG Sports Development (Shanghai) Ltd. 183,041 (A) Total Amount of Reimbursement of Expens .....

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lied a mark-up of 19.56% (the mark-up computed by the A.O for event/production management services provided to group companies) and made the following additions: Particulars Amount (in Rs). Reimbursement of expenses received from AEs(A) 10,521,562 Arithmetic mean of NCP ('Net Cost Plus') of comparable companies as computed by the Ld. A.O (computed with respect to event/production management services) (B). 19,56% Additions made to the income in the assessment order by way of mark-up on re .....

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ursement 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 repres .....

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charges, sports goods, etc. and has concluded that the Assessee is providing logistics services to its AEs. It was further submitted that the reimbursements received from AEs by the Assessee are purely of cost to cost reimbursement nature and that by administratively facilitating payments to Indian third party petite vendors, there is no intent of the Assessee to render any services to AEs, therefore, the cost reimbursements do not require arm s length mark-up on the cost base. It was also submi .....

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, these expenses represents third party expenditure paid by the Assessee on behalf of AEs merely for administrative convenience and do not involve any services rendered by the Assessee. Thus, from an arm s length perspective, these expenses should be permitted to be pass through expenses which should be reimbursed only on cost to cost basis. 13. As regards to re-determination of arm s length price margin for Income from production and Event Management services of the Assessee, the Ld. A.R submit .....

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l:- 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 company and has a positive net .....

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ign comparable companies by the CIT(A) has given the constraint of nonavailability of suitable Indian companies, the Assessee had selected foreign comparables (as mentioned at S. No. 4 to 6 in the above table) in order to broad base the set of comparable companies. It was stated that the CIT(A) erroneously concluded that such comparables should not be considered and out rightly rejected these comparables on account of having operations in different geographical markets. The Ld. AR further submit .....

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ollowing calculations:- Computation of +/-5% Range as per proviso to Section 92C(2) of the Income Tax Particulars IMC India At Arm's length price as per CIT(A) Minus 5% 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 asse .....

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d amount should be exempted from the tax purview. In fact the US entities are tax exempted association. 17. As relates to Ground No. 2, the assessee relied upon the decision of the I.T.A.T Hyderabad in the case of HSBC Electronic Data Processing India Ltd. Vs. Add. CIT 2(2) reported at TS-174-ITAT-2013 (Hyd.) wherein the reimbursement issue was decided in favour of the assessee. The assessee relied upon the decision of ACIT, Circle 3(1), New Delhi Vs. City Financial Consumer Finance India Ltd. i .....

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s order. 19. We have perused all the records and heard both the parties Ground No. 1 in assessee s appeal is already covered by the ITAT Delhi Bench in assessee s own case for the subsequent years i.e A.Y s 2006-07 to 2009-10 in ITA Nos. 4679 & 525/Del/2011 and 686 & 687/Del/2013 respectively wherein it has been held in Para 11 of the order dated 25/3/2015 as under:- It is evident that Section 194E read with Section 115 BBA apply to payments made to a non-resident sports association or .....

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estored. 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/HY .....

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mes 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 gone through the material available on the record. In the present case, it appears that the grievance of the department only relates to the exclusion of Mega Soft Ltd. as comparable and inclusion of Orient Information Technology Ltd. in the set of comparables. As regards to the inclusion of Orient Information Technology Ltd. is concerned, the TPO had .....

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at merely a company showing loss would not lose its status of comparable if other criteria depicted status of comparable. Same view has been taken by the ITAT Delhi Bench in the case of Sony India Ltd. reported at 114 ITD 448. 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. 22. In result, the appeal is partly allowed for statistical purposes. ITA NO. 6449/DEL/2 .....

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ional evidence under Rule 46A on the issue of allowance of sanctions and rights expenses and further allowing the same in favour of the assessee. 3. On the facts and in the circumstances of the year, the Ld. CIT(A) has erred in allowing the deduction of personal expenses without mentioning any reason behind the relief allowed to the assessee. 24. The Ld. DR submits that the Assessing Officer has properly taking into account all the relevant material. Thus the Comparables having negative NCP marg .....

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ly 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 .....

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). The net worth of the comparable company in the subject A.Y was around 0.93 crores. The inclusion or exclusion of comparable company on the ground that it is a loss making company is contrary to the OECD draft notes on comparability released for public comments on May 10, 2006. The assessee also relied on the decision of the ITAT, Delhi in the case of Sony India (P) Ltd Vs. DCIT (ITA No. 1189/Del/2005, 819/Del/2007 & 820/Del/2007, (2008-TIOL-439-ITATDEL). 26. As regards to Ground No. 2 the .....

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allowed sanctions and rights expenses amounting to INR 128,63,376, out of the total expenditure of INR 1,32,38,483, under section 40(a) (i) of the Act for non-deduction of tax at source, wrongly treating the entire expenditure as paid/payable to Non-Residents in foreign currency. It was pointed out that during the course of the assessment proceedings, in reply to the A.O s query regarding sanctions and rights expenses paid in foreign currency and tax deducted at source thereon, the assessee vide .....

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able to Indian Residents. Therefore, the sanctions and rights expenses payable to non-residents in foreign currency 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 I .....

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nts. 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 furnished details of Sanction and Rights expenses incurred in INR and also copy of agreement with Shah Wallace Distilleries Ltd. Since these were additional evidences which were not produced befor .....

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ocuments are vital to decide the issue in appeal. I hereby admit the additional evidence u/s 46 A in view of facts and circumstances of the case. 27. It is submitted that the A.O has never asked/confronted the assessee to reproduce any documentary evidence to substantiate that sanctions and rights incurred in foreign currency were not liable to withholding of taxes, no further opportunity was given to explain the facts/provide supporting documents for the disallowance made by the A.O. It was sta .....

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ut of payments to Non-Residents S. No. Particulars Amount (in INR) Amount (in INR) 1. Total amount paid/payable to Non-Residents 24,80,983 2. Disallowances confirmed by the Ld. CIT(A): 20,23,413 (i) Amount paid to ATP as tour fees in relation to 'Chennai Open Tournament' [para 7.3 (f) of the Ld. CIT(A) order] 19,22,663 (ii) Amount paid to AFT Enterprises Pty Ltd 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 ( .....

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ubmitted 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 of Section 40(a)(i) of the Act do not apply to payments made to Indian Residents. 29. The Ld. AR further submitted that the A.O has made the disallowance in the assessment order u/s 40(a)(i) of the Act under the heading Sanctions and rights expenses incurred in foreign currency (page 2 of the assessment order,). From the assessment o .....

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)(i) of the Act. The Ld. AR further submitted that Section 40(a)(i) of the Act relating to disallowance of certain expenditure payable to a resident for non-deduction of tax at source was inserted by the Finance Act, 2004 with effect from 1 April 2005 and is therefore, applicable from A.Y 2005-06. Hence, the provisions of Section 40(a)(i) of the Act do not apply to A.Y 2004-05 which is the assessment year under consideration. Therefore, no disallowance can be made in respect of expenditure incur .....

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ous expenses in the P &L A/c. The A.O disallowed 20% of the miscellaneous expenses debited to P &L A/c on adhoc basis, stating that the payments/reimbursements made by the assesses to its employees are of personal nature, ignoring the submissions made by the assessee. 31. It was further submitted that during the A.Y 2004-05, the assessee has not debited any personal expenses relating to its employees. In this regard, reference was also made to clause 17(b) of Form 3CD for the year ended .....

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ncurred 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 .....

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