TMI Blog2017 (7) TMI 854X X X X Extracts X X X X X X X X Extracts X X X X ..... with AE gives the profit ratio of 23.91%, which is more than the adjustment made by the TPO. It is held accordingly. The assessee succeeds on this account as well. In result, the adjustment in question made and upheld by the authorities below is held as not justified. Addition of royalty - Held that:- We find that in the immediately subsequent assessment year 2008-09, the ld. DRP following survey report by the publication “Franchising World” has observed that the average royalty percentage in travel industry is 5.6%. In the absence of any data to the contrary and non-specific comment of the TPO in this regard, the ld. DRP has taken guidance from the said survey report and since the royalty paid by the assessee was lower than 5.6%, it held the royalty percentage at 5.6% is justifiable in the case of assessee. Following the same, we find it reasonable and justifiable to direct the TPO to allow the average royalty percentage at 5.6% during the year as well against the claimed royalty percentage of 6% by the assessee. The grounds on the issue are thus partly allowed, to the above extent. - ITA. No. 4229/Del/2010 And ITA. No. 5742/Del/2011 - - - Dated:- 9-3-2017 - SHRI I. C. SUDHI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The transfer pricing adjustment is based on the mean margin formulae which the assessing officer has calculated by dividing OP or Operation Profit {(which is taken as Net Profit) with OC or Operating Cost (which is taken as Gross Profit)} The assessing officer has erred in law and on facts by applying the resulting mean margin percentage (21.53% for comparables) on the gross amounts of international transactions of the assessee instead of calculating the net profit based on the gross profit of the international transactions of the assessee (as per the formulae worked out by the AO for calculating the mean margin). 6. Without prejudice, the assessing officer erred in law and facts in wrongly rejecting the comparable company i.e. Travel Corporation of India Limited (TCI) (carrying on the similar business of handling inbound tour as that of the assessee) identified by the assessee, based upon the logical search process (i.e. CAPITALINE). 7. The assessing officer erred in law and on facts in concluding that the assessee is engaged in the business of providing comprehensive travel and tour related services, whereas in fact, during the year under consideration, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding out the arm s length price of international transactions at 5.54%. He has also applied 4 comparables including Cox Kings (India) Ltd., ignoring the objection of the assessee. The action of the TOP has resulted in adjustment of ₹ 2,05,69,692/-. The assessee questioned the same before the ld. DRP, but could not succeed. 4. In support of the grounds the ld. AR, Shri P.C. Yadav, has submitted the following written synopsis :- 1. Assessee is a Company and part of A K Group; it provides personalized luxury tour and travel services. A K India primarily operates destination Management Company that specializes in handling free individuals travelers, group travelers, special interest group who intends to visit India, Nepal, Srilanka. A K India was established in 1985 and presently has its offices in New- Delhi. 2. It is pertinent to mention here that A K is arranging two type of tours a. Inbound tours, involves non residents travelling in India b. Outbound tours, involves residents travelling outside India 3. Certain dates which are relevant to decide certain admitted facts are as under:- Date Event Remarks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grieved with the order of the TPO assessee filed application before DRP and raised his objections pointing out that approach of the TPO was patently wrong. 9. Ld DRP without considering the submissions of the assessee dismissed the appeal of assessee and now the assessee is before this Hon ble ITAT Submissions of the assessee are asunder :- 10. It is pertinent to mention here that total sales of the assessee with AE is 34,02,16,704/- and total sales with Non AE of assessee is 25,19,30,724/-( see Page no-41 and 42 of PB-4 and voucher wise breakup is given at Page No115 onwards of PB-2). The TPO while making adjustment and computing ALP has taken the total receipts to such tune as has been shown by the assessee and figure of sales with AE as correct. However the TPO rejected the figures of sale vis- -vis non AE without apportioning any expenses to such sales on the ground that assessee failed to submitted the audited segments of the transactions with AE and non AE and hence allocation of expenses is not correct. Submissions in this regard are made hereunder:- 11. It is submitted that Ld TPO has selected four comparables as mentioned at Page NO-10 of TPO order for AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that income of the assessee from the tour operations is to the tune of ₹ 59,21,47,427/-. All in foreign exchange- See Page No- 19 of PB-1 . It is pertinent to mention here that income from commission of assessee is very meager i.e. ₹ 75000/- only See Page No-112 of PB-1 The fact of the matter that assessee is earning 99% of its receipts from Inbound tours is accepted by the DRP in AY 2008- 09- See Page NO-121 of the Compilation In view of the above facts and figures it can be said that the functions performed by the assessee and C K are entirely different and nature of income is also different. Recently Hon ble Delhi high court in the case of Rampgreen Solutions ltd Vs CIT reported in 377 ITR 533(Del) has held that though entities rendering voice call services and a KPO service provider employs IT based delivery system but the charterstics of services, functional aspects, business envoirnment risk and quality of human resources employed are materially different and hence cannot be compared with each other Risk No such risk is undertaken by C K Risk undertaken by assesse a) A K India guarantee open 365 days 24 hours a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dealing in taxation matters. Relevant observations of the High Court are as under:- Certainty is integral to rule of law. Certainty and stability form the basis foundation of any fiscal laws. Highlighting this fact in Vodafone International Holding B.V. Vs. Union of India, (2012) 341 ITR 0001, the Supreme Court has observed that foreign direct investment flows towards a location with a strong governance infrastructure which includes enforcement of laws and how well the legal system work. There should be consistency and uniformity in interpretation of provisions as uncertainties can disable and harm governance of tax laws. Authority should follow their earlier view, unless there are strong grounds and reasons to take a contrary view, but in the present case there is no compelling justification and reason to override and disturb the earlier view 17. Further assessee seeks to rely on the following judgments wherein it has been held that comparables which are excluded in subsequent years are required to be excluded from previous year. I) APTEAN SOFTWARE INDIA (P.) LTD. vs. INCOME TAX OFFICER reported in 152 ITD 311(Bang) II) DEPUTY COMMISSIONER OF INCOME TAX vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of expenses by a generalize observation. Recently Hon ble Bombay High Court in the case of Alstom has held that even in absence actual segments adjustment has to be done in respect of transactions with AE only and not on entity level. 24. It is next submitted that the issue whether furnishing of audited segments is sine-qua non or not is recently considered in following judgments.. a. Lummus Technology Heat Transfer BV Vs DCIT- Copy attached in judgment paper book. b. CIT Vs Alstom Projects India Ltd ITA NO-362 of 2014(Bom) c. CIT Vs Keihin Panalfa Ltd- ITA No- 11 of 2015(Del). 25. In all above cases it has been unanimously held that the when audited accounts have been produced in terms of Rule 10E and no specific defect has been pointed out by the TPO either in those accounts or in allocation keys then the allegation that audited segments vis- -vis International transactions with AE and non AE has not been produced is useless and have no relevance. 26. It is next submitted that the TPO and the AO has not pointed out any specific defect in the allocation keys used by assessee for allocating expenses and has rejected the method of assessee in an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs by the TPO in subsequent assessment year 2007-08 cannot be a basis to exclude the same during the year. He submitted that every assessment year is an independent unit and, hence facts of that particular assessment year can be considered on an issue raised. 6. Having gone through the submissions of the parties in view of the orders of the authorities below, the grievances of the assessee in the present appeal can be summarized as :- (i) The CUP method applied by the assessee was the most appropriate method since the ratio of the transaction with AE and non-AE was approximately similar inasmuch as the transactions with AE were 57% and with non-AE at 43%; (ii) The TPO has not applied the FAR test before selecting the comparables correctly and in the immediately next assessment year i.e. AY 2007-08, the same TPO has ignored the comparables including Cox Kings applied in the year under consideration. The TPO has accepted the results of the comparables, namely, TCI selected by the assessee as correct resulting into no adjustment; (iii) Without prejudice to the above grievances, if the working of margin of the assessee is seen with respect to transactions with AE only, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on this account as well. In result, the adjustment in question made and upheld by the authorities below is held as not justified. The grounds are accordingly allowed. 7. In result, appeal is allowed. 8. ITA. No. 5742/Del/2012 : The assessee has questioned the order of the DRP on the following grounds :- The addition amounting to ₹ 36,242,182 undertaken by the Ld. Deputy Commissioner of Income Tax, circle (1), New Delhi, ( the Ld. AO ) vide final assessment order dated October 20, 2011 (served on the Appellant on October 27, 2011) passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 ( the Act ) is not in accordance with law and therefore not sustainable. Transfer Pricing ( TP ) Adjustment ₹ 3,62,42,182 That the Hon ble Dispute Resolution Panel, New Delhi ( DRP ) has erred both in law and on facts by rejecting the appellants objections to the draft order dated December 28, 2010 passed by the Ld. AO under section 143(3) read with section 144C(1) of the Act. The Hon ble DRP while issuing directions under section 144C of the Act did not consider the facts and merits of Appellants objections to the proposed adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business interests of the Appellant by canvassing tourist destinations in India to international travellers / potential customers; b. By misconstruing technical inputs and marketing support as shareholder activity (stewardship expenses) without appreciating the underlying nature of services and tangible operating benefits derived by the Appellant therefrom; c. By making misplaced reference to OECD Guidelines, whereas they are not applicable to the facts of the case; d. By conveniently overlooking relevant evidence produced by the Appellant during the course of proceedings, including the fact that it had incurred negligible expenditure on marketing and promotion in India, which clearly demonstrated the Appellant s reliance and dependence on the Agreement for generating sales; e. By reaching a self conflicting conclusion that technical inputs and marketing support qualified as shareholder activity, after having held that these were integral to acquisition of customers to promote the sales of the Appellant and therefore could be characterized as Intra Group Services ( IGS ); 1.5 By assigning NIL value to IGS based upon conjectures and surmises, by di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n parts in as much as it has allowed the payment of royalty to the tune of 2%. And now assessee is in appeal before the ITAT. It is submitted that Royalty has been paid by assessee in terms of agreement collaboration agreement dated 11.06.2005(Copy in PB-1 Page NO-55 onwards). Relevant clause on Page No-82 of PB-1. It is submitted that the assessee has paid the royalty for the use of trade mark, marketing support and technical inputs amounting to ₹ 5,43,63,274/- out of this amount an amount of ₹ 2,50,72,047/- was paid to AE and ₹ 2,80,91,469 was paid to Non AE and service tax of ₹ 57,97,590 and Exchange Fluctuation ₹ 11,99,758/-. See Page No 23 of the PB for AY 2007-08 It is submitted that Hon ble DRP in its order for AY 2008-09 to AY 2013- 14 has accepted the arrangement of the assessee vis- -vis payment of royalty. See Page No-121 to 132 Para 4.3 of Compilation. It is next submitted that DRP has first interpretated the collaboration agreement very meticulously and then relied on the survey report of Franchise world. In this report it is clearly mentioned that in travel industry royalty @5.6% is permissible. See Finding of DRP in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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