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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SHRI GEORGE GEORGE K.
Per Chandra Poojari, Accountant Member
This appeal by the assessee is directed against the order of the DCIT, Circle 12(2), Bangalore passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act].
The assessee has raised the following revised grounds:-
“On the facts and in the circumstances of the case and in law: The grounds mentioned herein by the Appellant are without prejudice to one another.
IT(TP)A No.283/Bang/2014 Page 2 of 13
1. That the order of the learned Deputy Commissioner of Income Tax, Circle-12(2), Bangalore ("Assessing Officer" or "the learned AO") to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case and liable to be quashed. (corresponding to ground no.1) 2. That on the facts and circumstances of the case, the learned AO and the learned Dispute Resolution Panel ("the learned Panel") erred in upholding the approach of the learned Transfer Pricing Officer ("the learned TPO") and the adjustment of INR 3,45,45,100 made to the transfer price of the Appellant in respect of its contract marketing support services provided to its Associated Enterprises (`AEs'). (corresponding to ground no.2) 3. That the learned AO and the learned Panel erred both in facts and law in confirming the action of the learned TPO of making an adjustment to the transfer price of the Appellant holding that the international transactions do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 ("the Act") and in doing so, grossly erred in: (corresponding to ground no.3) 3.1. Re-characterising the business profile of the Appellant (i.e. re-characterized from a contract marketing service provider to a full-fledged technical/business support service provider) in relation to the Appellant's international transactions with its associated enterprises. (corresponding to ground no.3.1) 3.2. Upholding the arbitrary segmentation carried out by the learned TPO, of the total revenue/ costs pertaining to the marketing support services rendered by the Appellant to its associated enterprises, on the basis of employee costs incurred for marketing-related qualified personnel and engineering/ technical related qualified personnel as income/ expenditure from "Business Support services" and "Technical Support services". The learned Panel further erred in upholding the approach of the TPO in computing the transfer pricing adjustment on such basis. (corresponding to ground no.3.2)
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3.3. Upholding the learned TPO's approach of using data as at the time of transfer pricing assessment proceedings which was not available to the Appellant on the date of preparing the TP documentation. (corresponding to ground no.3.3) 3.4. Disregarding application of multiple year/ prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2008-09) data for comparable companies should be used. (corresponding to ground no.3.4) 3.5. Rejecting the TP documentation maintained by the Appellant and the comparability analysis in undertaken therein, by the Assessee in accordance with the provisions of the Act read with the Income Tax Rules, 1962, ("the Rules") and conducting an arbitrary comparability analysis for arriving at a final set of comparables companies. (corresponding to ground no.3.5) 3.6. Upholding the TPO's approach of undertaking a fresh search for the purpose of comparability analysis and selecting incorrect industry classifications as part of the search strategy, thereby arriving at a set of comparable companies, which are functionally dissimilar to the Assessee. (corresponding to ground no.3.6) 3.7. The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including Apitco Limited as a comparable to the Appellant for the Business Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar. (corresponding to ground no.3.7) 3.8. The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including Global Procurement Consultants Limited as a comparable to the Appellant for the Business Support Services segment on the ground of functional similarity whereas this comparable
IT(TP)A No.283/Bang/2014 Page 4 of 13 should have been excluded for the reason being functionally dissimilar and segmental data not available in the public domain. (corresponding to ground no.3.7) 3.9. The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including HCCA Business Services Private Limited as a comparable to the Appellant for the Business Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar. (corresponding to ground no.3.7) 3.10 The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including Killick Agencies and Marketing Limited as a comparable to the Appellant for the Business Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar, qualified annual report and fails advertising expenses < 3% of total sales filter. (corresponding to ground no.3.7) 3.11.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including TSR Darashaw Limited as a comparable to the Appellant for the Business Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar. (corresponding to ground no. 3. 7) 3.12.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including Orient Engineering and Commercial Company Limited as a comparable to the Appellant for the Business Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar, segmental data not available in the public domain and fails advertising expenses < 3% of total sales filter. (corresponding to ground no.3.7)
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3.13.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in excluding Empire Industries Limited as a comparable to the Appellant on the ground of functional dissimilarity whereas this comparable should have been included for the reason being functionally similar and passing all the filters applied by the Ld. TPO. (corresponding to ground no.3.7) 3.14.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in excluding PAE Limited as a comparable to the Appellant on the ground of functional dissimilarity whereas this comparable should have been included for the reason being functionally similar and passing all the filters applied by the Ld. TPO. (corresponding to ground no.3.7) 3.15.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in excluding Salora International Limited as a comparable to the Appellant on the ground of functional dissimilarity whereas this comparable should have been included for the reason being functionally similar and passing all the filters applied by the Ld. TPO. (corresponding to ground no.3.7) 3.16.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in excluding Competent Automobiles Limited as a comparable to the Appellant on the ground of failing employee cost < 25% of the total cost filter whereas this comparable should have been included for the reason being functionally similar and passing all the filters applied by the Ld. TPO. (corresponding to ground no.3.7) Without prejudice, if the above grounds are not accepted, we mention below the grounds on technical support services: 3.17.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including Engineers India Limited as a comparable to the Appellant for the Technical Support Services segment on the ground IT(TP)A No.283/Bang/2014 Page 6 of 13 of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar and fails service income > 75% of total sales filter. (corresponding to ground no.3.7) 3.18.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including L & T Ramboll Consulting Engineers Limited as a comparable to the Appellant for the Technical Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar. (corresponding to ground no.3.7) 3.19.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including Enterprises as a comparable to the Zipper Trading Appellant for the Technical Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being data not available in the public domain. (corresponding to ground no.3.7) 3.2o.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including WAPCOS Limited as a comparable to the Appellant for the Technical Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar and fails service income > 75% of total sales filter. (corresponding to ground no.3.7) 3.21.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including Rites Limited as a comparable to the Appellant for the Technical Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar.(corresponding to ground no.3.7) 3.22.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including TCE Consulting Engineers Limited as a comparable to the Appellant for the Technical Support Services segment on IT(TP)A No.283/Bang/2014 Page 7 of 13 the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar (corresponding to ground no.3.7) 3.23.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including IBI Chematur Limited as a comparable to the Appellant for the Technical Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar. (corresponding to ground no.3.7) 3.24.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including M N Dastur as a comparable to the Appellant for the Technical Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar. (corresponding to ground no.3.7) 3.25.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including Mahindra Consulting Engineers Limited as a comparable to the Appellant for the Technical Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar. (corresponding to ground no.3.7) 3.26.The learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including Semac Limited as a comparable to the Appellant for the Technical Support Services segment on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar. (corresponding to ground no.3.7) 4. The learned AO erred in not giving effect to the directions of the Learned Panel and not providing the following: (corresponding to ground no.4)
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4.1. Giving effect to the correct computation of operating mark up on cost in respect of the comparables adopted for the 'business support segment' as provided by the Appellant to the learned AO; (corresponding to ground no.4) 4.2. Not adjudicating on the comparability of "Zipper Trading Enterprises" based on the information available with the learned TPO; and (corresponding to ground no.4) 4.3. Granting working capital adjustment based on the actual working capital position of the Appellant. (corresponding to ground no.4) 5. That the learned AO/the learned Panel erred in ignoring the limited-risk nature of the marketing and sales support services provided by the Appellant and in not providing an appropriate adjustment towards differences on account of working capital and risks between the Appellant and the entrepreneurial companies selected as comparables while determining the arm's length price. (corresponding to ground no.5) The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.”
3. Ground Nos. 1 to 3 are general in nature which do not require any adjudication.
4. Now we consider ground No.3.1. The facts are that the assessee entered into international transaction with its AE in the marketing and sales support services of Rs.22,35,84,793 under the TNMM method. The TPO was of the opinion that the assessee vide agreement dated 8.8.1994 with its AE i.e., Parametric Holding Inc. Parametric India is engaged in IT(TP)A No.283/Bang/2014 Page 9 of 13 marketing & support services in India on behalf of its AE. Para 2 of the agreement states as follows:-
“a. Assist Holding and other entities through the coordination of sales promotion and advertising for the products in the territory; b. Conduct market research and keep Holding and/ or other entities advised and informed regarding all matters within the territory which may be reasonable business interest or concern to Holding and/ or other entities; c. Provide informational, educational and service programs in the territory to other entities and end users as may be requested by Holding from time to time; and d. Perform such other services in the Territory as Holding and/or other entities may from time to time reasonably request." Further, following functions have been stated to be done by Parametric India as per Transfer Pricing report:- "4.3.10 Sales support services including pre-sales, marketing and post sales, warranty support services." The same have been further detailed as under:- "4.3.12 Implementation of marketing strategy set out by Parametric. 4.3.13 a. Acting as sales support, b. Improving brand awareness c. Marketing Programs 4.3.14 Visits to existing and prospective customers and making pre-sales presentations to impart knowledge about products. 4.3.15 a. Providing pre-sales technical information to clients b. Database creation of existing and potential customers c. Full software warranty including maintenance contract for remote and onsite support, inclusive of software
IT(TP)A No.283/Bang/2014 Page 10 of 13 updates and labour - generally for 1 year but sometimes for 2 years. 4.3.19 Technical support services for products sold in India 4.3.20 Remote and onsite support by application engineers/ support engineers in respect of Parametric products sold in India. 4.3.21 Telephonic and web based online support to customers 4.3.22 Visit to customers to provide inputs about the product and hand holding. These visits are in addition to break down rectification and general maintenance services. 4.3.23 Documentation and localization of training materials in collaboration with the Global Sales Organization (GSO).”
According to the TPO, the above functions are both in respect of marketing / business support services and also technical support services as several functions involve working of engineers. The AO vide note dated 19.12.2012 required the assessee to establish with evidence why the assessee has employed engineers and developers and why it should not be treated as providing technical services. The assessee replied vide letter dated 27.12.2012 that all the employees performed services of AE doing only marketing and sales support services and no full-fledged technical and business support services were provided by the assessee.
According to the TPO, the assessee has not provided any evidence to support this segment and this claim was in contrast with the functions of Parametric India detailed in the TP report. Accordingly, assessee is treated from marketing service provider to a full-fledged technical/business support services to its AE. Against this, the assessee is in appeal before us.
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The ld. AR submitted that for all the AYs 2004-05 to 2008-09 and subsequent AY 2010-11, assessee has been characterized as conducting marketing services provider and this year alone assessee has been changed to full-fledged technical/business support services provider which is against the set principles of law. Further it was submitted that for AY 2010-11, the assessee came in appeal before this Tribunal in IT(TP)A No.145/Bang/2015 wherein the Tribunal held that there is no dispute regarding the assessee’s business profile as marketing support services in relation to global support services scheme. Being so, in this assessment year also, business profile cannot be changed to a technical/business support service provider.
On the other hand, the ld. DR submitted that the assessee has not provided bifurcation of employees involved in the two activities, as such business profile has been changed from contract marketing services provider to technical/business support services provider and if the assessee provides proper bifurcation of employees involved in these two activities, then it could be selected appropriately by the TPO.
We have heard both the parties and perused the material on record. It is an admitted fact that in the earlier assessment years 2004-05 to 2006- 07 the assessee’s return has not been subject to scrutiny and return was accepted u/s. 143(1) of the Act and there is no dispute regarding the business profile of the assessee. In AY 2007-08, the assessment was completed u/s. 143(3) of the Act, even in this assessment year there was no dispute regarding the business profile of the assessee. In the AY 2010- 11, the assessment was completed u/s. 143(3) which was also subject matter of appeal before the Tribunal on the TP adjustment. There also, there was no dispute regarding business profile of the assessee. The entire international transaction of the assessee was based on the agreement dated 8.8.1994 with its AE i.e. Parametric Holdings Inc.
IT(TP)A No.283/Bang/2014 Page 12 of 13 Parametric India is engaged in marketing and support services in India on behalf of its AE. On this basis, the international transactions have taken place. Further the TPO in the impugned assessment order observed that the services provided by the taxpayer to the AE are in the nature of marketing support services. However, while making the TP adjustment, he changed the business profile of the assessee recorded in page 21 of the TP order. Contrary to this, he reclassified the assessee’s business profile from contract marketing service provider to a full-fledged technical/business support service provider only on the reason that the assessee has not furnished proper bifurcation of employees involved in the two activities. In our opinion, this cannot be a reason to reclassify the business profile of the assessee. The engineers could have been appointed to carry out some work in the field of marketing services. There is no prohibition on this count. The assessee is not disentitled to appoint engineers for carrying out the marketing services with regard to international transactions to its AE. Since judicial discipline requires consistency in its proceedings from year to year, the business profile of the assessee cannot be changed from year to year wherein the all the international transactions of the assessee are based on the same agreement dated 8.8.1994 with its AE. Being so, in our opinion, it is appropriate to vacate the findings of the revenue authorities on this count and allow the grounds taken by the assessee. Accordingly this ground is allowed. Since we have allowed ground No.3.1 of the assessee, the TPO is required to carry out the TP study afresh so as to determine the ALP of international transactions with its AE. Accordingly, the other issues do not require any adjudication at this stage. The entire TP issue will go back to the TPO to carry out fresh TP study treating the assessee’s business profile as a full-fledged marketing service provider and decide the issue accordingly.
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In the result, the assessee’s appeal is partly allowed for statistical purposes.
Pronounced in the open court on this 1st day of December, 2021.