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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: VIKAS AWASTHY & MS. PADMAVATHY S.
Date of hearing 06-07-2023 Date of pronouncement -07-2023 O R D E R PER : MS PADMAVATHY S. (AM)
This appeal is against the final order of assessment passed by the Deputy Commissioner of Income-tax-6(1)(1), Mumbai under section 143(3) read with section 144C(13) and 254 of the Income-tax Act, 1961 (in short, „the Act‟) dated 13/12/2016 for A.Y. 2008-09. The assessee raised the following grounds of appeal:- “The grounds set out below are independent and without prejudice to one another:
2 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd Transfer Pricing Adjustment 1. The learned AO, while passing the assessment order, under the directions from Dispute Resolution Panel- II (DRP) erred in proposing a transfer pricing adjustment of 8,76,36,161/- u/s 92CA(3) of the Act in the hands of the Appellant in respect of international transactions entered into by it during the year ended 31 March 2008.
2. The learned AO, following the directions of the DRP, erred by rejecting the transfer pricing study report submitted by the Appellant without providing any cogent reasons.
The learned AO, following the directions of the DRP, erred in incorrectly ascertaining Appellant to be a full-fledged entrepreneur with high risks, by ignoring the facts of case.
The learned AO following the directions of the DRP, erred in rejecting the exhaust benchmarking analysis conducted by the Appellant.
The learned AO erred in incorrectly calculating certain amounts of income non-operating while computing the cost plus margin of the Appellant.
6. The learned AO erred in using search process applied by the TPO for AY 2009-10 (or dated 18 January 2013), thereby using data which is not contemporaneous.
7. The learned AO erred in not providing detailed search process adopted by the learned TPO to replace benchmarking of the international transaction of the Appellant.
8. The learned AO erred in selecting the comparable companies which are functionally dissimilar 9. The learned AO erred in selecting the comparable companies with abnormal margins.
10. The learned AO erred in selecting the Profit Level Indicator (PLI) of PBIT on Cost inste. of berry ratio for the purpose of benchmarking analysis; 11. The learned AO erred in not using multiple year data as prescribed in Rule 10B(4) of t Income Tax Rules,1962.
12. The learned AO erred in law by initiating penalty proceedings u/s 271(1) (c) of the Act II. Credit for payment of taxes The learned AO erred in not granting credit for taxes of Rs. 3,00,00,000 paid by appellant. III. Lew of interest under section 234B The learned AO erred in levying interest under section 234B of the Act till the date of order passed under section 143(3) r.w.s. 144C(13) and 254 as against till the date of regular assessment.
3 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd IV. Levy of interest under section 234C The learned AO erred in levying interest under section 234C of the Act. The Appellant craves leave to add, alter, amend or withdraw all or any of the grounds of a| herein above and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law.”
The assessee is the subsidiary of Abacus International Pte. Limited, Singapore (Abacus Singapore). Abacus Singapore has a Computerized Reservation system which provides travel information and reservations & facilities air booking & provided non-air solution like hotel booking, car booking, etc. specifically tailored to the Asian region. The Assessee markets and distributes Abacus system in India and signs up the travel agents in India in this regard. The assessee filed the return of income for the assessment year 2008-09 on 30/09/2008 declaring total income of Rs.6,52,65,858/- which was set off against the brought forward losses pertaining to assessment years 2000-01 and 2001-02. The case was selected for scrutiny and a reference was made to the Transfer Pricing Officer to determine the arm‟s length price of the international transaction the assessee is having with its Associated Enterprises (AEs). The TPO in the first round of transfer pricing proceedings, passed an order making an adjustment of Rs.10.29 crores which was confirmed by the DRP. The assessee went on further appeal before the Tribunal. The Tribunal vide order dated 06/12/.2013 (ITA No.7275/Mum/2012) set aside the order stating that the entire issue of transfer pricing needs to be restored back to the file of the Assessing Officer / TPO for de novo adjudication after taking into consideration the principal agreement and other relevant documents and assessee‟s explanation regarding benchmarking of the margin vis-à-vis comparables. The TPO in the second round of transfer pricing proceedings, determined a TP adjustment of Rs.8,76,36,161/-. The Assessing Officer passed a draft assessment
4 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd order and the assessee filed its objection before the DRP. The DRP upheld the TP adjustment. The assessee is in appeal for the second time before the Tribunal against the final order of assessment passed by the Assessing Officer pursuant to the direction of the TPO. TRANSFER PRICING ADJUSTMENT 5. During the year under consideration, the assessee earned a marketing fee and commission income of Rs.43.40 crores. The assessee in the transfer pricing study with respect to the marketing services rendered to its AE has applied entity level transaction under net margin method (TNMM) for benchmarking provision of marketing services and has arrived at berry ratio of 1.12 as per below workings:- Particulars Amount Amount (Rs.) (Rs.) Commission 191,299,288 Marketing Service Fee 242,672,486 Online Web connect and training fees 6,391,245 Foreign Exchanger gain 66,638,485 Total Income 507,001,504 Expenditure Line Charges 5,825,645 Airfare Transaction Charges 44,082,127 Administrative and Other Expenses 380,723,125 Less: Financial charges 52,488 380,670,637 Depreciation 21,095,018 Total Operating Cost 451,673,427 Operating Margin 55,328,077 Berry Ratio 1.12
The assessee‟s justification for applying berry ratio was that the same is more useful PLI in the case of service provider and considering assessee being in the service industry, berry ratio was selected as PLI. The assessee while computing the ALP as above has considered the foreign exchange gain as part of the operating
5 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd cost and the breakup of the foreign exchange gains as submitted before the TPO is as given below Particular Amount – Rs. Connectivity charges and airfare transaction charges 24,371,268 ECB loan 10,465,910 Income received in advance 24,454,462 Other expenses 6,346,846
The assessee chose 4 comparables viz., J R G Insurance Broking Pvt ltd., M C S Ltd., Mefcons (India) Ltd., and P L Worldways Ltd. and the average Berry Ratio of the comparables worked out to 1.19 and accordingly the assessee concluded that the international transactions in respect of marketing services are within arm's length.
The TPO rejected the computation of PLI by the assessee and the comparables chosen. The TPO did not allow the foreign exchange gain to be part of the operating cost except for the gain on Connectivity charges and airfare transaction charges since the same is directly related to the business of the assessee. Accordingly the TPO recomputed the PLI of the assessee as under Particulars Amount - (Rs.) Commission 191,299,288 Marketing Service Fee 242,672,486 Online Web connect and training fees 6,391,245 Foreign Exchanger gain 24,371,268 Total Income 464,734,287 Expenditure Line Charges 5,825,645 Airfare Transaction Charges 44,082,127 Administrative and Other Expenses 380,723,125 Depreciation 21,095,018 Total Operating Cost 451,725,914 Operating Margin 13,008,373 Berry Ratio 2.88
6 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd
The TPO chose fresh set of comparables as listed below:- S.No. Name of the company Margin (%) PBIT/Cost 1 Aptico Ltd (AL) 49.35% 2 Best Mulyankayan Consultants 12.85% 3 Choksi Laboratories Ltd (CLL) 29.2% 4 Genins India T P A Ltd (GITL) 9.22% 5 ICRA Management Consulting Services Ltd 4.18% 6 Rites Ltd (Rites) 25.77% 7 Tehnicom-Chemie (India) Ltd 7.32% 8 WAPCOS Ltd (Seg) (WL) 40.37% Grand Average 22.28%
Accordingly, the TPO arrived at the TP adjustment as per below workings:- Particulars Amount (Rs) Total Income 464,734,287 Total Operating Cost 451,725,914 Operating Margin 13,008,373 Operating Profit / Operating Cost 2.88% Arm‟s Length margin 22.28% Arm‟s Length Income 552,370,448 Transfer Price 464,734,287 Transfer Pricing Adjustment 87,636,161
The ld AR during the course of hearing submitted that out of the 12 grounds raised with regard to the TP adjustment if Ground No.5 with respect to treatment of foreign exchange on certain transactions as non-operating and Ground No.8 pertaining to exclusion of comparables are adjudicated in favour of the assessee the rest of the grounds would become academic. Accordingly the Ld.AR first presented arguments with regard to Ground No.8 in which he prayed for exclusion of companies in serial No.1,3,4,6 & 8 from the above list of comparables. The Ld.AR submitted that if these comparables are excluded, then the assessee‟s
7 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd margin would be within the arm‟s length. The Ld.AR further submitted that the exclusion of these comparables are considered by the co-ordinate bench in assessee‟s own case for A.Y. 2009-10 where the comparables have been excluded based on functionality. The Ld.AR also submitted that since there is no change in the functionality of the assessee for the year under consideration and therefore the issue is covered by the earlier decision of the Hon‟ble Tribunal.
The Ld.DR relied on the order of the TPO.
We have heard the parties and perused the material on record. The co- ordinate bench in assessee‟s own case has considered the exclusion of the above listed comparables in assessee‟s own case in dated 05/01/2018 has held that –
3.4.We have heard the rival submissions and perused the material before us.We find that the assessee is a wholly own entity of Singapore base parent company, that the AE was providing CRS for Airline ticket bookings, that CRS was being used by the Travel Agents for booking of Air Tickets,that the main source of income of the AE was the commission received by it from Airline companies whose tickets were booked using the CRS, that the AE had appointed assessee as its national marketing company in India for promoting use of its CRS among the travels agents in India,that it would receive 25% of the Revenue generated by the AE in respect of Airline-Tickets booked from India,as commission fee, that the assessee had also earned marketing services fee from the AE,that TP adjustment were made for the first time in the A.Y.2007-08,that it had selected six comparables,that the TPO rejected the all of them,that he identified new eight comparables,that the DRP upheld all the comparables selected by him,that the assessee had adopted the PLI as berry ratio being EBIT/Operating Cost X 100, that the TPO had changed the PLI to Operating Profit /Operating Cost (OP/OC),that the TPO determined the assessee's OP to cost at 5.87% as against average operating to cost earned by 8 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd the comparables of 20.34 %, that for rejecting the assessee TP study the TPO had referred to the sub-distribution agreement that he had concluded that it was providing complete MSS that he further held that the AE had engaged the assessee to promote the CRS among the Travel Agents of India, that when the assessee formulated the marketing strategy it was effectively carrying on its own business and not rendering any service to the AE that the DRP approved the upward adjustment proposed by the TPO/AO.
3.4.Now,we would like to discuss the comparables which have been contested before us. As per the annual report of AL it derives its revenue from various sources that during the year it had recorded total revenue of Rs. 1 145.71 lakhs from major 10 segments namely skill development (Rs.322.59 lakhs),tourism and research studies(Rs.207.44 lakhs),project related services(Rs.!80. 06 lakhs),micro-enterprises development(Rs.l 17.83 lakhs),cluster developments.97.14 lakhs), asset reconstruction and management services(Rs.78.03 lakhs),energy-related services (Rs. 50.87 lakhs),entrepreneurship development and training(Rs.30.781akhs),environment management (Rs. 10 lakhs),infrastructure planning and development (Rs.7.99 lakhs).Considering the profile of AL,we are of the opinion that it has to be rejected from the list of valid comparables.
As per the website maintained by CLL.it is a leading analysis and research group providing complete solution for improving quality in process,products and services that it provides contract laboratory services including pharmaceutical analysis food and beverages analysis, water analysis,construction material analysis, environment management services, clinical research and consultancy.lt is also engaged in testing of various products and offer services in the field of pollution control as per the profile of the company. Referring to segmental reporting, it has been mentioned that it treats analytical charges and consultancy receipts as a single segment, that details of segments were not separately reported,that it is managed organisationally as a unified entity with various functional heads reporting to the top management and is not organised along segments.In our opinion,CLL is functionally different and hence is to be rejected as a valid comparable.
9 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd We find that GITL provides third party administrative services in the field of health insurance including receiving of insurance clai.m An analysis of the financial statements of the company revealed that revenue is recognised as and when Medicare policy is issued by general insurance companies in favour of the policyholders.We are of the opinion that GITL is functionally dissimilar from the assessee and has to be excluded from the list of the comparables. \ As per the annual report of Rites (system integration and support service segment)has business operation in for distinct fields namely consultancy in transportation infrastructure section, construction activities,export and leasing of railway equipments and running railway system on concession, the consultancy business is mainly in transport infrastructure sector i.e. railways, highways,airports,ports,Roads,urban transport, inland waterways, that it had started construction activities from the year under review, that it had started leasing business in railway sector in mid-1990,that consulting services accounted for 75% of the total operating income for the year under consideration that export sales accounted for 12% of the income. The annual report proves that the main source of income for the year under consideration was consultancy fee. In our opinion, the assessees is justified in arguing that Rites should be excluded from the list of comparables.
WL,as per the website of the company is a Mini Ratna and "ISO 9001: 2008"accreted public sector enterprises under the aegis of Union Ministry of Water Resources, that it provides consultancy services in all facets of water resources, power and infrastructure sector in India and abroad. As per the annual report income under the head consultancy and training project and lump sum turnkey projects was Rs. 10644. 78 lakhs and Rs. 9 862.5 lakhs respectively for the year under consideration.lt can safely be held that WL is basically engaged into project engineer -ing consultancy and therefore not comparable to the functional profile of the assessee. Here we would like to mention that Rites and WL have not been excluded by us from the list of valid comparables because they are government undertakings.We have compared the functional profile of the assessee and these two comparables.We find that there is no similarity between j.he functions performed by the assessee and these two entities.
10 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd We also find that in Ceina India Private Limited,the Tribunal had held that it was functional-ly dissimilar to a company providing MSS.In the case of Avaya India Private Limited(ITA/ 146/Del/2013,datedl7/06/2016),the Tribunal had held that AL was not a valid comparable for determining the ALP for MSS,that similar conclusion was raised by the Tribunal in the case E.G. India Energy Private Limited (ITA/6486/Del/2012,dated 04/10/2016).
3.5.Considering the above,we are of the opinion that all the five comparables- i.e. AL,CLL, GITL,Rites and WL,selected by the TPO for benchmarking the IT.s of the assessee-are not providing MSS,that there functionally dissimilar,that they have to be excluded from the final list of the valid comparables.There is nothing on record to prove that support services provided by the above five comparables were also associated with marketing function. There is no doubt that the support services provided by the assessee were directly associated with marketing.We find that if these five comparables are excluded from the list the valid comparables,the assessee will be in the safe zone of +/- 5% -the OP to OC of the assessee is 5.18% whereas OP to OC of the remaining comparables is 3.01%.In the circumstances, we hold that the IT.s entered into by the assessee with its AE was at arm's length. GOA 2.1 is decided in favour of the assessee.”
Considering the fact that there is no change to the functional profile of the assessee for the year under consideration respectfully following the above decision of the co-ordinate bench, we hold that AL,CLL, GITL, Rites and WL be excluded from the list of comparables.
Treatment of Forex Gain as Non Operating 15. The TPO while recomputing the PLI of the assessee has treated forex gain on ECB loan, Income received in advance and Other expenses as non operating. The TPO considered only the forex gain on connectivity charges and airfare transaction charges of Rs.2.43 crores as operating income stating that the same directly relates to marketing and supporting services rendered by the asessee to the 11 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd AE. With regard to the rest of the forex gain, the TPO held that they are non operating in nature. The TPO also made an observation that the assessee is not consistent in treatment of forex gain / loss and that in A.Y. 2012-13, the assessee has treated its forex loss of Rs.48.63 as non operating in nature.
The ld AR with respect to foreign exchange gain on ECB submitted that the loan is obtained from Sabre Asia Pte Ltd for working capital requirements. The Ld.AR further submitted that the coordinate bench in assessee‟s own case for AY 2010-11 in dated 10.01.2018 has considered the issue of treatment of foreign Exchange fluctuation on external commercial borrowing (ECB) where it has been held that – “5.1.During the course of hearing before us, the AR stated that foreign exchange (FE)loss represented further liability in foreign exchange arising on the assessee on account of revaluation of foreign currency liability is at the year and, that the nature of liabilities clearly showed that same were arising out of business transactions on revenue account, that the AO had assessed the FE gain, but he did not allow the loss, that the liability were reflected as a FE liability in the annual accounts, that the approval was given by the RBI for receiving the ECB loan, that the loan was taken for working capital requirements. He relied upon the cases of Woodward Governer India Private Ltd.(312 ITR 254) Oil and Natural Gas Corporation Ltd. (322 ITR 180). The DR left the issue to the discretion of the Bench. 5.2.We have heard the rival submissions and perused the material before us. We find that the AO on one hand would tax gain on FE earnings but would not allow loss arising on FE loss. In our opinion ,the stand taken by the AO is not justified in any manner. If the gains of FE fluctuation had to be taxed then the loss arising out of such fluctuation has to be allowed. We find that the honorable Supreme Court, in the case of Oil and Natural Gas Corporation (supra)has held that the loss claimed by the appellant on account of fluctuation in the rate of FE as on the date of the balance-sheet was allowable as expenditure under section 37(1) of the Act.
12 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd Respectful ,following the above mentioned two judgments of the honorable Apex court relied upon by the assessee, we decide ground number four in favour of the assessee.”
17. With regard to the gain on income received in advance, the Ld.AR submitted that these advances are received towards the services rendered by the assessee and, therefore, are directly connected with the maketing support services rendered by the assessee to the AE. Accordingly, the Ld.AR prayed that the same should be treated as operating income. With regard to the gain on other expenses, the Ld.AR submitted that the gain is arising out of operating expenses reimbursed by the assessee to the AE and therefore is part of the operating expenses. The Ld.AR also submitted that in the year in which the assessee has incurred forex losses, the same has been considered as operating expenses for the purpose of arriving at ALP and it is not correct to treat the gain as non operating.
The ld DR supported the order of TPO and submitted that the assessee is not consistent in the treatment of foreign exchange fluctuation as observed by the TPO.
We heard the parties and perused the material on record. The main reason for the TPO to treat the gain ECB loan, Income received in advance and Income received in advance as non-operating is that the assessee such gain is not directly related to the marketing services rendered by the assessee and that the assessee in AY 2012-13 has treated the foreign exchange loss as non-operating. In the given case, we notice that the income received in advance is against the services rendered by the assessee and other expenses relate to the reimbursement of operating expenses. Therefore it cannot be said that there is no direct nexus with the international transactions and the foreign exchange gain. Further with regard to the 13 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd gain on ECB loan it is noticed that the same is obtained from the AE for the working capital requirements of the assessee. The coordinate bench in assessee's own case in AY 2010-11 has allowed the treatment of foreign exchange loss as an allowable expense on the ground that the same is taken for the working capital purpose and hence incurred for the purpose of business. Applying the ratio that the foreign exchange loss is allowable business expenditure, we see no infirmity in the claim that the same should be part of operating income for the purpose of computing ALP. It is relevant to note that the Hon'ble Delhi High Court in the case of Pr. CIT v. Ameriprise India (P.) Ltd. [2017] 78 taxmann.com 373 wherein the substantial question of law raised before the Hon'ble High Court was as follows: "3. The question sought to be urged by the Revenue is whether the ITAT was correct in directing the foreign exchange gain/loss to be considered as an item of operating revenue/cost?" The Hon'ble High Court on this substantial question of law has held and observed as follows: '4. The ITAT has in the impugned order noted the fact that the foreign exchange gain earned by the Assessee is in relation to the trading items emanating from the international transactions. Since the foreign exchange loss directly resulted from trading items, it could not be considered as a non- operating loss. Further, it is noted by the Dispute Resolution Panel that the service agreement between the Associated Enterprise (AE) and the Assessee stated that for the specified products and services provided by the Assessee, it "shall raise invoices on Ameriprise USA on the basis of a cost plus pricing methodology." The ITAT was therefore right in holding that the AO was not justified in considering the foreign exchange loss as a non-operating cost.' A similar view has been held by various benches of the Tribunal that foreign exchange gain, to the extent it relates to or connected with the business for which ALP is determined, is to be regarded as operating revenue or loss as the case may be. In the present case, the foreign exchange gain on ECB loan, Income Received 14 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd in Advance and Other Expenses reimbursements are emanating from the international transaction of the assessee with its AE. Therefore we hold that the gain arising on ECB loan, Income Received in Advance and Other Expenses reimbursements should be treated as part of operating income of the assessee for the purpose of computing PLI.
We have in the foregoing paragraphs have held both grounds 5 & 8 in favour of the assessee and, therefore, the rest of the grounds with regard to transfer pricing adjustments have become academic and does not warrant separate adjudication.
Credit for payment of tax 18. The Ld.AR submitted that the assessee, in the final assessment order did not give credit for self assessment tax to the extent of Rs.3 crores and that there was no specific reason provided for the same. We, therefore, remit the issue back to the Assessing Officer to verify the claim of the assessee towards payment of self assessment tax and allow the claim in accordance with law.
19. The assessee raised ground with regard to levy of interest under section 234B which is consequential in nature not warranting separate adjudication.
During the course of hearing, the Ld.AR did not press the ground raised with regard to levy of interest under section 234C and, therefore, the ground is dismissed as not pressed.
15 ITA 1056/Mum/2017 Sabre Travel Netwrok (India) Pvt Ltd
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court at the time of hearing on 25/07/2023.