9911796707
TMI Blog2019 (12) TMI 1221X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent involving similar issue and therefore they are heard together and disposed of by this common order. ITA number 996/del/2011 and CO number 315/del/2011 assessment year 2002 - 03 2. ITA number 996/del/2011 is filed by the Deputy Commissioner Of Income Tax, central circle - 2 (1), New Delhi (the learned AO) against the order of The Commissioner Of Income Tax (Appeals) - XX, New Delhi dated 30/12/2010. The Revenue has raised the following grounds of appeal for the Assessment Year 2002-03:- "1. The ld CIT(A) has erred on facts and in law in deleting addition of Rs. 3,52,71,454/- made on account of transfer pricing adjustment as:- a. The ld CIT(A) has erred in law in accepting the assesse's contention that it is only intermediary between third party and AE. b. The soul of the market support services functions is present in India as the assessee company is responsible for discharging such functions as an independent organization and a lot of effect is required to be put into by it providing business promotion and research services and, therefore, it needs to be adequately compensated for such efforts. Therefore, such cost cannot be ignored and excluded for the purpose of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered into another international transaction with issue of media Inst for providing trainers to them for running the news journalism course at the Institute where the salaries were reimbursed to the assessee on cost to cost basis without any mark up. The total receipt from the same was INR 15.5 lakhs against the expenditure of INR 20 140 08/02/2003/-. Assessee has also taken pound dominated external commercial borrowing of INR 1,000,000 for working capital requirements where part of the loan is s interest free and other loan on interest rate of LIBOR +0.06 percentage. The method adopted by the assessee for benchmarking of the other international transaction was CUP Method and assessee has compared the rate of commission charged by it with the commission charged by an unrelated 3rd party in India who paid commission at the rate of 10% for marketing advertisement Air Time sponsorship for BBC world channel in India. 8. For market support services it was found that the functions performed by the assessee are much simpler thus it was taken as tested party. The assessee selected Transactional Net Margin Method [ TNMM] for determination of arm's-length price using net profit based on cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support service function and Airtime sale function by including the direct expenses and indirect common expenses. Such total expenses was worked out at INR 101978926/-. The total receipt of these services was INR 73780695/- and thus he found that assessee has incurred a loss of Rs. 28198231/-. As according to him assessee has incurred a loss of Rs. 28198231 in the market support service function, this amount of loss was compared with the profit margin of the comparable companies engaged in broadly similar functions for the purpose of determination of arm's-length price of market service fee. Thereafter after making a fresh search process, he identified seven comparable companies whose Arithmetic mean of net margin over cost was 7.63%. Thereafter, he took the total cost of market support service as computed by him at INR 101978926/- applied AM 7.63% over the cost of comparable companies thus such cost was Rs. 7780990/- and therefore the total support service fee that should have been received by the assessee was determined at INR 109759916/-. Accordingly, he proposed an adjustment of INR 35979221 because of ALP of International Transaction of market support services fee income. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to cost base of the assessee. The contention of the TPO is that market support service function is performed in India as the assessee company is responsible for discharging such functions as an independent organization and lot of effort is required to be put into by it for providing business promotion and research services. Therefore, it needs to be adequately compensated for such an effort. Therefore, such 3rd party cost cannot be ignored and excluded for the purpose of computation of arm's-length price of market support service fees. 13. The assessee has also filed across objection, which is supportive in nature. However during the course of hearing assessee has raised an additional ground of cross objection as under: That on the facts and circumstances of the case and in law, the order passed by TPO and, consequential order passed by the AO are not valid as the same have not been passed by the prescribed authority under the provisions of the income tax act 1961. As the additional ground raised in cross objection is legal and goes to the root of the matter which is essential for the dissension of the substantial justice, same was requested for admission. He referred to the pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 336, 17 taxmann.com 138 and the decision of the honourable Bombay High Court in 346 ITR 443. Therefore, he submitted that the Legislature in its wisdom has empowered only Assistant Commissioner, Deputy Commissioner And Joint Commissioner To discharge the functions of the Transfer Pricing Officer and therefore The Additional Commissioner is not permitted to discharge such functions since the such officer has not been included in the definition of the Transfer Pricing Officer u/s 92CA of Act. Therefore any order passed by Additional Commissioner u/s 92CA is ultra virus the provisions of the act and without jurisdiction and therefore void ab initio. Thus, he submitted that the transfer pricing order dated 30/11/2004 for assessment year 2002 - 03 u/s 92CA of the act passed by The Additional Commissioner Of Income Tax i.e. an authority, which is not expressly included by Legislature in the definition of the Transfer Pricing Officer is invalid. 18. Countering the submission of the learned authorised representative, the learned departmental representative referred to provision of explanation to section 92CA of the income tax act. He referred those authorities who are called Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dditional Commissioner Of Income Tax under subsection (1) of section 117 of the act . Further, it is not the case of the assessee that such Additional Commissioner of income tax, who passed an order u/s 92CA (3) of the income tax act, was not an authorised officer by the central board of direct taxes. Reliance placed by the learned authorised representative on the decision of the honourable Delhi High Court in 58 taxmann.com 336 decided the issue that Where re-assessment proceedings were initiated after expiry of four years from end of relevant years, sanction for issuance of notice for re-assessment proceedings was to be granted by Joint Commissioner and not by commissioner as per provisions of section 151(2) of the act. Therefore, in that case notice was to be issued by the joint Commissioner, which was issued by the Commissioner. Such is not the case before us. Therefore, the reliance on this decision does not help the case of the assessee. Further, the reliance placed by the assessee on the decision of the honourable Delhi High Court in 17 taxmann.com 138 (Delhi) also does not help the case of the assessee as in that case it was held that Where Assessing Officer instead of tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the total cost of the assessee for providing marketing support services and therefore markup thereon should also be placed to determine the arm's-length price of the market support and services fee on by the assessee. 22. The learned departmental representative referred the paragraph number 5 of the order of the learned transfer-pricing officer wherein this issue was discussed. He submitted that the learned transfer pricing officer has held that the agreement entered between the assessee as well as the associated , it is apparent that assessee did not have any independent business interest in India. He further referred to para number 5.1 of the order wherein the learned transfer pricing officer has held that the assessee has claimed the deduction of all the expenses in the computation of the total income including the expenses not allocated to any income generating activity and therefore such expenses have been incurred by the assessee for the purpose of the business of the assessee. He further referred to paragraph number 5.3 of the order of the learned transfer pricing officer where the contention of the assessee has been considered that expenses not allocated by it to either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above issue has been discussed at threadbare, for those reasons these expenses cannot be kept out of the cost basis. He further referred to the para number 2 of the remand report, wherein it has been stated that the appellant itself in the submission before the learned CIT appeal has contended that the expenses of distribution and commission is part of facilitation and coordination and in the same light it is contended that since these do not relate to the efforts of its employees the same are third-party expenses ought to be reimbursed on cost to cost basis. He submitted that these expenses relate to the co-ordination and facilitation activities. Hence they cannot be kept out of the cost base. Therefore he submitted that the cost pertaining to the promotion of the business of the overseas associated enterprise have to be reimbursed with appropriate mark up. He further referred to the annual accounts of the company and submitted that no amount has been certified by the auditors to be the 'cost to cost' reimbursement and purported to be kept out of the profit and loss account. He referred to schedule 10 of the profit and loss account , which shows that dealers commission of Rs. 213 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;, i.e., intermediary (operating at low risk) and not as a full-fledged entrepreneur. iii. It is humbly submitted that 'operating cost' of low risk agent cannot be substituted by / comparable to 'operating cost' of a full-fledged entrepreneur which are themselves rendering marketing / advertisement services. Thus, scope of term 'operating cost' has to be restricted having regard to the function / role of Assessee. iv. Further, attention is invited to the order passed by TPO, under section 92CA(3) of the Act, wherein it has been inter alia observed: "Market Support Services (MSS) BWIPL has entered into an agreement with BBCW, i) to act as an exclusive agent for marketing and distribution of BBC World Channel in India ii) to carry out research in respect of the performance and viewership of BBC World channel in India and iii) to carry out distribution and marketing activities of BBCW with appropriate promotional material provided by BBCW from time to time. Broadly speaking, the primary objective of all such activities is to promote and enlarge the viewership of BBC World Channel in India. For such services, BWIPL charges BBCW, as per the terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are mere out-of-pocket expenses incurred by Assessee in providing assistance to its AE. xi. Further, these third party expenses / pass through costs were paid to un-related parties and have no cogent nexus with the agency function / intermediary role which was performed by Assessee. xii. It is further submitted that such expenses were not incurred in the course of providing some value added services to the AE, in fact, by incurring such expenses Assessee had not performed any value added function relating to such costs / expenses. xiii. It is further submitted that Assessee neither had any control on the outcome of these pass through expenses / third party cost, nor had any obligation / risk towards the AE for such outcome, being pure agent acting on behalf of its AE. Further, Assessee had no control on budget relating to such expenses and it did not even bear any risk in this regard. xiv. In view of aforesaid, it may be summaried that Assessee had not performed any value added function by paying for these expenses and, in any case, these transactions were entered into with third parties which were already at arm's length, i.e., profit attributable to such activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that such expenditure couldn't be excluded from the cost base while working out the profit level indicator in case of the assessee. The learned CIT - A held that these expenses are in the nature of pass through expenses as the appellant is just acting as a conduit between the associated enterprises and 3rd party vendor. The appellant is merely acting as an agent of the associated enterprise. Further the decision to incur these expenses has been taken by the associated enterprise and the entire budget with respect to these expenses controlled by the associated enterprise. Therefore, the learned CIT - A as per para number 20 of his order has held that the 3rd party cost incurred by the assessee do not represent any value-added activity carried out by the appellant as the appellant was engaged in rendering market support services to its associated enterprise in the capacity of an agent. He further held that the assessee operates as an agent of the associated enterprise and the relationship between the appellant and the 3rd party vendor does not constitute a 'principal to principal' relationship. He further reaches at the conclusion that the decisions with respect to payment are to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketing services. In consideration for the provision of the above services by assessee, BBC worldwide shall pay assessee such amount as shall be sufficient to cover the 'operating costs' (including appropriate overhead) which shall be incurred by assessee in providing the above services, together with an additional payment of 10% of such cost. The level of such cost shall be agreed in advance by BBC worldwide and assessee on an annual basis. The terms of this agreement shall commence on 01/04/2000 and shall continue until terminated by either party on not less than 6 months prior written notice to the other party. This fact is confirmed by assessee as well as BBC worldwide Ltd as per this agreement. On plain reading of this agreement, the consideration is required to be determined which shall be sufficient to cover the operating cost, (including appropriate overhead) which shall be incurred by the assessee in providing the above services. Such cost base needs to be agreed by the assessee and AE in advance. Therefore, it is apparent that all expenditure incurred by the assessee for provision of the market support services to BBC worldwide shall form part of the cost base on which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odward Governor in [2009] 312 ITR 254/179 Taxman 326 (SC) , wherein it held that profits for income-tax purpose are to be computed in accordance with ordinary principles of commercial accounting, unless such principles stand superseded or modified by legislative enactments. Thus, it can be said that accounting treatment of any transaction is relevant only to the extent they are not in conflict with the express provisions of the IT Act. The learned CIT did not show that how this accounting treatment is in conflict with the transfer pricing provisions. Unless the assessee establishes that, such accounting treatment in the books of accounts which is approved by the shareholders, auditors and directors of the company and found to be in accordance with the accounting standard issued by the Ministry of corporate affairs, read with the above guidance of the honourable Supreme Court, cannot be ignored as such. Further we have also looked at certain invoices which are said to be 3rd party invoices (3rd party cost incurred by the assessee) which is not included in the cost base. One of such instances , the bill raised by Network Advertising Private Limited on the assessee on 16/11/2001, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee to produce all relevant agreement as well as to demonstrate the conduct of the assessee in accordance with those agreements , and to justify what the parties mean by the 'operating cost' and 'indirect overhead'. Thereafter the learned transfer-pricing officer may determine the arm's-length price of the market support service fee, which would have been charged by an independent party to the associated enterprise. Accordingly, we set aside this issue to the file of the learned transfer-pricing officer accordingly. Thus, ground number one of the appeal of the learned assessing officer challenging the order of the learned CIT - A, wherein it has been held that no mark up was required on 3rd party cost incurred by the taxpayer on account of sales promotion, marketing and other expenses and expenses incurred for distribution of the digital satellite receiver for which dealers/agents were engaged and also the commission paid to dealers and agents for selling such digital satellite receiver is allowed for statistical purposes as per above directions. 25. In the revised ground filed by the learned assessing officer , it has challenged that the whether the forex loss being a nonopera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional Commissioner of income tax (TPO) is not in accordance with the law and hence it is invalid. This ground of appeal in the cross objection is identical to the cross objection of the assessee for assessment year 2002 - 03 which has been dismissed by the assessee by giving reference. Therefore, for the same reasons, we dismiss the cross objection of the assessee. 30. Both the parties agreed that the grounds of appeal raised by the learned assessing officer are identical to the grounds of appeal raised by him for assessment year 2002 - 03. They submitted that their arguments also remains the same as there is no change in the facts and circumstances of the case for this year. 31. As we have already set aside the transfer pricing issue while deciding the appeal of the learned assessing officer for assessment year 2002 - 03, for the similar reasons , we also set aside appeal of the learned assessing officer back to the file of the learned transfer pricing officer to redetermine the arm's-length price of the international transaction in accordance with the direction contained therein. 32. In view of this, we dismiss the cross objection filed by the assessee and allow the appeal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee for this year too. 36. With respect to ground number 1 in the cross objection which is general in supportive in nature, no arguments were advanced by either of the parties and therefore it is dismissed. 37. The ground number 2 in the cross objection is related to the transfer pricing issue with respect to the determination of the arm's-length price of the market support service functions of the assessee which is also connected with the appeal of the learned assessing officer, therefore, same would be dealt with by dealing with the appeal of the learned assessing officer for this year. 38. Both the parties agreed that the grounds of appeal raised by the learned assessing officer are identical to the grounds of appeal raised by the for assessment year 2002 - 03. They submitted that their arguments also remain the same. As we have already set aside the transfer pricing issue while deciding the appeal of the learned assessing officer for assessment year 2002 - 03, for the similar reasons, we also set aside appeal of the learned assessing officer back to the file of the learned transfer pricing officer to redetermine the arm's-length price of the international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished economic principle of excluding such non value added expenses from the cost base of the tested party; ^ 2.2. The Ld. AO has erred in law and on facts in making modification to the set of comparable companies identified by the Appellant in relation to marketing & distribution support services segment by rejecting comparables on grounds of functional dissimilarity based on conjectures and surmises; 2.3. The Ld. AO has erred in law and on facts in selecting Maruti Insurance Brokers Limited as a comparable on an arbitrary basis and without assigning any cogent reason for its selection, disregarding the fact that the Appellant has rejected this company in the Transfer Pricing Documentation; 2.4. The Ld. AO has erred in law and on facts in computing erroneous arm's length margins in respect of comparables companies; 2.5. The Ld. AO has erred in law and on facts in computing erroneous profitability of the Appellant for analysis under the Transactional Net Margin Method ("TNMM") based on inaccurate characterisation of income and expenses into "operating" and "non-operating" categories; 2.6. The Ld. AO has erred in law and on facts in determining the arm's length pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t base of the assessee. Therefore the ground number 2 of the appeal is set aside to the file of the learned transfer pricing officer with similar direction to the assessee and the learned transfer pricing officer as given by us in deciding the appeal for assessment year 2002 - 03. Accordingly, ground number 2 of the appeal is allowed with above direction. 43. Ground number 1 is general in nature and therefore same is dismissed. 44. Accordingly, ITA number 4304/del/2010 is allowed for statistical purposes. AY 2007-08 ITA No 5556/Del/2014 ( AO) & 5441/del/2014 ( By Assessee) 45. The Revenue has raised the following grounds of appeal in ITA No. 5556/Del/2014 the Assessment Year 2007-08:- "1. Whether on the facts and in the circumstances of the case, and in law, the Ld. CIT(A) was justified in considering the New Age Entertainment as a comparable without appreciating that no company can be taken as comparable whose detailed data is not available in public domain. 2. Whether on the facts and in the circumstances of the case, and in law, the Ld. CIT(A) has made the decision on reimbursement cost by plainly citing the previous year adjudication without appreciating the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stribution segment which is a purely domestic activity during the year; 1.5 that the Appellant has not submitted details with regard to the channel distribution income earned in foreign exchange. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in erroneously stating that the Distribution segment did not exist in the original Transfer Pricing Documentation report and audited accounts of appellant for the year overlooking the facts that information with regard to the Distribution segment was presented by the Appellant on Page 36 of the said report and the audited accounts also separately recorded the channel distribution income in Schedule 9; 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in erroneously alleging that the Distribution segment was artificially created by the Appellant by entering into the agreement dated February 21, 2008 with retrospective effect from November 11, 2005 in order to show profitability at desired levels, without providing the Appellant an opportunity of rebutting such false allegations before passing the order; Operating Profit and Profit Level Indicator 4. On the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm's length price by relying upon data of the selected comparable companies for financial year 2006-07 only, disregarding the multiple year data approach followed by the Appellant and the fact that updated data of these companies was not available to the Appellant at the time of maintenance of Transfer Pricing Documentation within the time-frame mentioned in Rule 10D(4) of the Income Tax Rules; Benefit (=/-)5% Range 10. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not allowing the benefit of (+/-) 5% range as provided in the proviso to Section 92C(2) of the Act for determination of the arm's length price of the international transactions of the Appellant. General 11. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding that brought forward losses and unabsorbed depreciation under Section 72 of the Act should be set-off against the taxable income of the Appellant determined after considering the transfer pricing adjustment; 12. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding levy of interest under section 234D of the Act." 47. For assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X
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