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TMI Blog2018 (12) TMI 1852X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as 'DRP') under Section 143(3) read with Section 144C of the Incometax Act, 1961 ('Act'), is bad in law, violative of principles of natural justice and void ab-initio. 1.1 That the assessing officer erred on facts and in law in completing the assessment under section 143(3) read with section 144C of the Income-tax Act ("the Act") at an income of Rs. 165,588,189 as against Nil returned income. Transfer Pricing Issues: 2. That the assessing officer erred on facts and in law in making addition to the income of the appellant to the extent of Rs. 28,27,99,372 on account of the alleged difference in the arm's length price of international transactions. Advertisement, marketing and sales promotion expenses: 3. That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to Rs. 27,87,32,906 in relation to advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. 3.1 The DRP/TPO erred on facts and in law in not app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appreciating that the company has positive net worth as on March 31, 2011 4.4 That the TPO erred on facts and in law in rejecting Twinstar Export Ltd. On the basis that it is engaged in manufacturing of insulators 4.5 That the TPO erred on facts and in law in rejecting R Systems International Ltd on the basis that it has a different financial year, not appreciating that the company is functionally comparable to the appellant. 4.6 That the TPO erred on facts and in law in considering foreign exchange fluctuation as an item of nonoperating nature for computing operating profit margin of the appellant and the comparable companies 4.7 That the DRP/TPO erred on facts and in law in not allowing appropriate adjustment on account favorable working capital position of the appellant vis-a-vis the comparable companies 4.8 That the DRP/TPO erred on facts and in law in not allowing appropriate risk adjustment holding that "the taxpayer has not shown with evidence as to whether each of the risks were actually undertaken by the comparables." 5. That the assessing officer erred on facts and in law in levying interest under Section 234B and Section 234C of the Act." 3. The Objector, DC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmarking international transaction qua AMP expenses applied "Bright Line Method" by following the Special Bench decision passed by the Tribunal. The ld. TPO in order to determine Arm's Length Price (ALP) of AMP expenditure incurred by the taxpayer rejected two comparables viz. HMT International Limited and Titan Industries Limited and chosen two comparables selected by the taxpayer and determined the bright line method of the two companies to work out the AMP expenses/sales percentage as under :- No. Name of the Company AMP Expense / Sales (%) 1 KDDL Ltd. 2.12% 2 Kamla Retails Ltd. 1.49% Mean 1.81% 8. The ld. TPO further added mark-up of AMP spent to the tune of 12.26% qua non-routine AMP activities carried out by the taxpayer for performing additional significant marketing function for its Associated Enterprises (AE). It is the case of the TPO that the taxpayer through its non-routine marketing (AMP activities) has not only enhanced the brand value of the AE in India but has also developed market intangibles for its AE which has resulted in enhanced sale and profit to the AE for which it has not been reimbursed. So, the ld. TPO by taking into account the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUND NO.1 OF ITA NO.845/DEL/2016 (ASSESSEE'S APPEAL) 14. Ground No.1 is general in nature, hence requires no adjudication. GROUNDS NO.2 & 3 TO 3.3 OF ITA NO.845/DEL/2016 (ASSESSEE'S APPEAL) GROUNDS NO.1 & 2 OF CO NO.95/DEL/2016 (REVENUE'S CO) 15. Undisputedly, the taxpayer is into the business of manufacturing and sale of watches and is also into distribution of watches imported from its AE. It is also not in dispute that 85% of the turnover of the taxpayer is sale of watches manufactured by the taxpayer in India, it being operated as a full-fledged manufacturer and full risk bearing distributor. It is also not in dispute that the TPO has applied "bright line method" for determining the existence of international transaction in order to compute the ALP of such transaction. It is also not in dispute that the ld. TPO has proceeded on the premise that the taxpayer by incurring nonroutine marketing (AMP) activities has not only enhanced the brand value of its AE in India but has also developed marketing intangible f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stainable in the eyes of law. 22. Furthermore, Hon'ble Delhi High Court in subsequent decisions viz. Bausch & Lomb Eye Care (India) Pvt. Ltd. v. Additional CIT (2016) 381 ITR 227 (Del.) and Honda Siel Power Products Ltd. v. Dy. CIT (2016) 237 Taxman 304 held that it is for the Revenue to firstly discharge the onus to prove the existence of an international transaction between the taxpayer and its AE and only thereafter ALP of international transactions involving AMP can be computed. 23. It is further contended by the ld. AR for the taxpayer that quantitative adjustment made by the TPO on account of AMP expenses is not permissible within the framework of Chapter-X as has been held by the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. v. CIT - ITA No.110/2014 & 710/2015). Hon'ble High Court has categorically held that none of the substantive or procedural provisions of Chapter-X permits adjustment on account of AMP expenses. 24. The taxpayer has contested before ld. DRP that incurring of AMP expenses are not international transactions and BLT method has no statutory basis to infer the existence of international transactions qua AMP expenses, however, the ld. DRP has proceede ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we are of the considered view that since it is a stay granted matter and the proceedings before the second appellate authority have not been stayed by any higher forum, the same cannot be kept pending. 28. After considering the legal position as discussed in the preceding paragraphs, we are of the considered opinion that the ALP of an international transaction involving AMP expenses, the adjustment made by the TPO/DRP/AO is not sustainable in the eyes of law. At the same time, we cannot ignore the submission made by the learned DR that the matter is pending before Hon'ble Apex Court and the decision of Hon'ble Apex Court would be binding upon all the authorities. In view of the above, we set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We hold that as per the facts of the case and the legal position as of now and discussed above in this order, the adjustment made by the TPO/DRP/AO in respect of AMP expenses is not sustainable. However, if the above decisions of Hon'ble Jurisdictional High Court which is under consideration before the Hon'ble Apex Court is modified or reversed by the Hon'ble Apex Court, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oll processing, account processing, etc. cannot be treated as KPO services. It is contended by the ld. AR for the taxpayer that as against the directions issued by the DRP that all the comparables to be taken for benchmarking the international transactions should be of BPO services, but the ld. TPO has chosen all the companies as comparables which are into KPO services. So, we would discuss the aforesaid comparables challenged by the taxpayer one by one to examine their suitability vis-à-vis the taxpayer. ACCENTIA TECHNOLOGIES LTD. (ACCENTIA) 34. After DRP's order, ld. TPO has introduced Accentia having OP/TC of 29.18% as a comparable which the taxpayer has challenged for exclusion on the ground that Accentia is engaged in providing KPO services as well as software services to its AE and it also owns various software products, namely, (i) instakare, (ii) instaweb, (iii) instaPMS, (iv) instaScribe etc.. 35. We have perused the annual report of Accentia, relevant information is available at page 5 of the annual report, which is extracted for ready perusal as under :- " Accentia has gone a long way from being a single location, single service firm to a multi location, dive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der to exclude ccentia being not a valid comparable. ACROPETAL TECHNOLOGIES LTD. (SEG.) (ACROPETAL) 38. TPO has selected Acropetal (segment) which is challenged by the taxpayer on the ground that it is engaged in provision of providing high-end services in hospital management system, electronic medical records, PACS, diagnostics and workflow management. Perusal of annual report of Acropetal, relevant portion available at page 95 of the annual report paper book, shows that within ITES segment, Acropetal is engaged in health care by providing high end services viz. hospital management system, electronic medical records, PACS, diagnostics and workflow management. So, providing high end health care services require application of specialized knowledge and skill, which otherwise cannot be compared with routine ITES provider. 39. Hon'ble Delhi High Court in Rampgreen Solutions P. Ltd. vs. CIT - (2015) 377 ITR 533 (Delhi) defined the Knowledge Process Outsourcing (KPO) as a high value added process chain wherein the process are depending on advance skills, domain knowledge and the experience of persons carrying on such processes and as such, is understood as the high end of ITES in ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices provider on the ground that Eclerx is into Knowledge Process Outsourcing (KPO) services. So, in these circumstances, we find Eclerx is not a valid comparable, hence ordered to be excluded from the final set of comparables. ICRA TECHNO ANALYTICS LTD. (ICRA) 44. The taxpayer sought exclusion of Icra by again relying upon Rampgreen Solutions P. Ltd. vs. CIT (supra) on the ground that it is engaged in the provision of business intelligence and analytic services. Annual report of Icra, available at page 319 of the paper book, explains the services being rendered by it are as under :- "The company is engaged in the software development & consultancy, engineering services, web development & hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing." 45. So, when Icra is into providing software development and high end analytic services, the same cannot be taken as a comparable for benchmarking the international transactions vis-àvis the taxpayer who is a routine back office processing services provider. So, again by applying the ratio of Rampgreen Solutions P. Ltd. vs. CIT (supra), we are of the considered view tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital IQ information Systems (India) Pvt. Ltd. (ITA No.124/Hyd/2014). 50. In view of what has been discussed above, we find that Infosys BPO is not a valid comparable vis-à-vis taxpayer, hence ordered to be excluded. TCS E-SERVE LIMITED (TCS E-SERVE) 51. The taxpayer sought exclusion of TCS E-serve again on the ground that it is into providing Knowledge Process Outsourcing (KPO) services. When we examine the TCS E-serve overview in the annual report, available at page 550 of the annual report paper book, it shows that it is providing a broad range of services that cater to process management requirements for delivery of wide range of financial products and enterprise support function which include financial information processing (data processing); customer care (voice based); business process management and analytics. Though the company is providing BPO services but its analytic services are high end KPO services, which makes it incomparable to the taxpayer which is providing routine BPO services. 52. The taxpayer has specifically relied upon the information available at the website of Reuters (http://in.reuters.com /finance/stocks/company Profile?symbol=CIGR.BO) to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... study we observe that, this company is a wholly owned subsidiary of TCS E serve International Ltd. During the year under consideration, this company has made payments towards use of Tata brand. Consequentially use of the TCS brand has substantially increased the operating profits post acquisition. Hence we are of the opinion that this company cannot be taken as a comparable. We therefore direct to exclude this comparable." 56. In view of what has been discussed above, we are of the considered view that TCS E-serve being into high end KPO services and is also exploiting brand TATA cannot be a valid comparable vis-à-vis taxpayer which is a routine ITES provider. So, we ordered to exclude the same. 57. In view of our findings, grounds no. 3 to 3.8 qua TP adjustment on account of AMP expenses, appeal filed by the assessee is allowed as per findings returned in preceding paras. However, appeal qua transfer pricing adjustment on account of ITES is allowed for statistical purposes. In view of what has been discussed above, the AO/TPO is directed to compute the transfer pricing adjustment of international transactions accordingly. Consequently, appeal filed by the taxpayer is part ..... X X X X Extracts X X X X X X X X Extracts X X X X
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