ACIT CORPORATE CIRCLE 4(1), CHENNAI vs. MICHELIN INDIA PRIVATE LIMITED, GURGAON

Aforesaid appeal by Revenue for Assessment Year (AY) 2011-12 arises out of the order passed by Ld. Commissioner of Income Tax (Appeals)-44, New Delhi [CIT(A)] on 18.04.2019 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143 r.w s. 144C(3) of the Act on 20-05-2015. The revenue has filed revised grounds of appeal in due course which read as under:

The order of the Ld.CIT(A) is contrary to law and facts of the case.

The Ld. CIT(A) erred in directing the AO / TPO on the issue of ‘Market Support Services’ to calculate the margins of the comparables on the basis of annual report to be provided by the appellant, in the absence of the power to set aside after amendment of Sec. 251 w.e.f. 01.06.2001?

The Ld. CIT (A) erred in rejecting the comparablecompanies selected by the TPO while deciding Market Support Services, by applying close functional similarity without appreciating the fact that for TNMM broad functional comparability is sufficient?

The Ld. CIT(A) erred while deciding Market Support Services, in having accepted that only close functional similarity needs to be established in selecting comparable companies was correct in applying it only to high margin companies contested by assessee and not for low margin comparable companies suffering the same infirmity?

The Ld. CIT(A) erred in directing the AO/TPO to exclude Power system Operation Corporation Ltd from the list of comparable companies without considering the fact that the TPO in his order has clearly have stated that Power System Operation Corporation Ltd's 90 % of revenue is from market support rather than from integration of the power grid?

The Ld. CIT(A) erred in directing the AO/TPO to exclude Apitco Ltd from the list of comparable companies without noticing the fact that the TPO in his order have clearly stated that perusal of the annual report of the Apitco Ltd revealed that the functions performed by this company is similar to the services provided by the assessee?

The Ld. CIT(A) erred in directing the AO/TPO to exclude Global procurement consultants Ltdfrom the list of comparable companies when the procurement support services is similar to the marketingservices provided by the assessee?

The Ld. CIT(A) erred in directing the AO/TPO to include SEL &ARMS segment of India Tourism Development Corporation Ltd in the list of comparable companies relying on Eli Lilly &Co (Indi) P. Ltd ([2016) 70 taxmann.com 260 (Delhi - Trib) without noticing the fact that Hon’ble ITAT has made a categorical finding that SEL &ARMS segment of India Tourism Development Corporation Ltd was engaged in event management which is different from market support services provided by the assessee?

The Ld. CIT(A) erred in directing the AO / TPO to include comparable companies namely EDCIL (India) Ltd and In House Production Ltd which are functionally dissimilar that of the assessee.

The Ld. CIT(A) erred in assuming that the TPO had accepted the comparable companies namely EDCIL (India) Ltd and in House Production Ltd. in AY 2009-10 and 2010-11 whereas TPO did not comment on the comparability of these two companies in AY 2009-10 and 2010-11?

The Ld. CIT(A) erred in directing the AO to delete the disallowance of 50% amounting to Rs.33,679,958/- made on the expenses incurred on Advertisement as publicity following the orders of his predecessors for AY 2007-08 to 2010-11 on the same issue, when revenue had not accepted the same.

The Ld. CIT(A) erred in directing the AO to delete the disallowance made u/s 37(1) on the payment of Rs.48,62,810/- to M/s Michelin Asia Pacific Pvt. Ltd. by the assessee, while the said expenditure was not incurred wholly and exclusively for the purpose of assessee’s business. As is evident, the revenue is aggrieved by inclusion / exclusion of comparable entities while computing Transfer Pricing (TP) Adjustment of Marketing Support Services. The revenue is also aggrieved by deletion of certain disallowances as made by Ld. AO u/s 37(1).

The Ld. CIT-DR advanced arguments supporting the case of the revenue and drew attention to various documents on record. The Ld. AR, on the other hand, supported the findings given in the impugned order. The written submissions and tabulation have been filed during the course of hearing which has duly been considered by us while passing the order. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. Proceedings before lower authorities

1 The assessee carried out certain international transactions with its Associated Enterprises (AE) which were subject matter of determination of Arm’s Length Price (ALP) before Ld. Transfer Pricing Offcier-2(2), New Delhi (TPO) u/s 92CA. The Ld. TPO determined the ALP of these transactions vide order dated 19-01-2015. The assessee being resident corporate entity is stated to be wholly owned subsidiary of Compagnie Financiere Michelin. The assessee entity was established to carry out manufacturing and trading of all varieties of Tyres and Tubes. However, in the current year, the assessee was engaged in import and trading of Tyres under the brand name ‘Michelin’.

2 The first dispute of present appeal is adjustment made by lower authorities while determining ALP of marketing support services under TP mechanism. The assessee provided marketing support services to its AE. The assessee’s computed its own Profit Level Indicator (PLI) OP/TC at 4% of cost as against PLI of comparable entities at 12.88%. The assessee had adopted 11 comparable entities. However, Ld. TPO

3 In the present appeal before us, the revenue has assailed inclusion / exclusion of certain comparables entities viz. (i) Power Systems Operations Corp. Ltd.; (ii) Apitco Ltd.; (iii) Global Procurement Consultants Ltd; (iv) SEL and ARMS segments of India Tourism Development Corporation Ltd.; (v) EDCIL Ltd.; and (vi) In House Production Ltd. After considering factual matrix, our adjudication to the same would be as under. (i) Power Systems Operations Corp. Ltd. The Ld. TPO proposed inclusion of the same. The assessee opposed inclusion of the same on the ground that this entity was functionally different and it was a government company. Further, this company was formed to take over a part of business of Power Grid Corporation of India Ltd. However, Ld. TPO rejected the same on the ground that it was performing the same functions. The objection of high turnover was also rejected. The Ld. CIT(A) held that this entity was functionally different as it was responsible for ensuring the integration of power grid whereas the assessee was providing limited marketing support services. Therefore, this entity was to be excluded. Aggrieved, the revenue is in further appeal before us. We find that this entity is a government company and responsible for ensuring the integration of power grid whereas the assessee is providing only limited marketing support services. The sale magnitude of this entity is quite high and not comparable to the assessee. In the case of Mentor Graphics (Sales and Service) Pvt. Ltd.(102 Taxmann.com 117), which is an entity having similar functional profile as that of the assessee, Ld. DRP has excluded this entity from comparable matrix. Therefore, this entity has rightly been excluded by Ld. CIT(A). (ii) Apitco Ltd. The Ld. TPO proposed inclusion of the same. The assessee opposed inclusion of the same on the ground that it was providing high end consultancy services. However, Ld. TPO held that it was providing similar function as that of the assessee. The objection that it was a government company was also rejected. The Ld. CIT(A) concurred with assessee’s submissions that this entity was providing high end technical consultancy related to reconstruction and management services, micro enterprise development, skill development etc. and therefore, this entity was to be excluded. In our opinion, the assessee’s marketing functions could not be compared with an entity providing high end technical consultancy. This entity is engaged in providing specialized consultancy and therefore, rightly been excluded by Ld. CIT(A). The various decisions of the Tribunal as mentioned by Ld. AR support the exclusion of this entity.

The revenue has also assailed the directions of Ld. CIT(A) with respect to certain comparable entities wherein Ld. CIT(A) has directed Ld. AO / TPO to reconsider the Annual Report of these entities. The same is on the ground that Ld. CIT(A) has no power to set aside the assessment. However, we find that Ld. CIT(A) has merely directed lower authorities to reconsider the annual report and re-compute the margins of these entities. Therefore, the argument raised by the revenue is not to be accepted.

Another grievance of the revenue is deletion of disallowance u/s 37(1) on Advertisement, Marketing and Promotion expenses. The Ld. AO disallowed 50% of such expenditure on the ground that it was capital in nature. The same resulted into disallowance of Rs.336.79 Lacs in the hands of the assessee, The Ld. CIT(A), considering first appellate orders for AYs 2007-08 to AY 2010-11, held that such expenditure would be revenue in nature. Aggrieved, the revenue is in further appeal before us. We find that this issue is covered in assessees’ favor by the decision of Delhi Tribunal in assessee’s own case for AY 2008-09, ITA No.2415/Del/2014 dated 22.06.2020 wherein Tribunal, in para-34, has dismissed revenue’s ground of appeal assailing similar adjudication.

The assessee paid management fees of Rs.48.62 Lacs to is AE which was disallowed u/s 37(1). These transactions were subjected to determination of ALP by Ld. TPO. The Ld. TPO proposed adjustment of Rs.1167.07 Lacs out of total expenditure of Rs.1215.70 Lacs. The Ld. AO disallowed the differential of Rs.48.62 Lacs u/s 37(1). The Ld. CIT(A) deleted the same on the ground that once ALP has been determined by Ld. TPO, separate disallowance could not be made by Ld. AO. Aggrieved, the revenue is in further appeal before us. We concur with the adjudication of Ld. CIT(A) that once ALP has been determined by appropriate authority, no separate adjustment / disallowance is called for on the part of Ld. AO. The corresponding grounds stand dismissed.

In the result, the appeal stands dismissed.