DQ ENTERTAINMENT (INTERNATIONAL) LTD., HYD,HYDERABAD vs. ACIT, CLRCLE-14(1), HYD, HYDERABAD

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “B”, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA No.546/Hyd/2016 Assessment Year: 2011-12 M/s DQ Entertainment vs. Asst. Commissioner of (International) Ltd., Income Tax, Circle – 14(1), Hyderabad. Hyderabad. PAN – AACCD8731C (Appellant) (Respondent) Assessee by : Shri P.V.S.S. Prasad Revenue by : Shri Srinivas Reddy Date of hearing : 26-03-2018 Date of pronouncement : 06-04-2018 ORDER PER P. MADHAVI DEVI, J.M.: This is assessee appeal for the A.Y 2011-12 against the assessment order passed u/s 143(3) r.w.s 144C(5) and 144C(13) of the IT Act dated 26.02.2016.

2 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. determination of Arms Length Price of such transactions was referred to the TPO u/s 92CA of the IT Act. The TPO passed an order u/s 92CA(3) of the IT Act on 29.01.2015 proposing an adjustment of Rs. 6,91,84,554/-. The draft assessment order was accordingly passed, against which, the assessee preferred its objections before the DRP. DRP issued the directions vide order at 28.12.2015. In accordance with the DRPs direction, the final assessment order passed, against which, the assessee is in appeal before us by raising the following grounds of appeal: “1. The Learned Dispute Resolution Panel (DRP) / Assessing Officer (AO) are erroneous in law and on the facts of the case. 2. The Ld. DRP/AO are not legally justified in making an adjustment of Rs.3,00,05,103/- as profit attributable to the appellant company under the Profit Split Method in connection with the absolute sale of intangible asset to AE when such revenue is generated by AE of the appellant company i.e., DQ Ireland which is the absolute owner of such intangible asset. 3. The Ld. DRP/AO is erroneous in not considering the fact that the Intangible asset was sold to its AE at Arms length and accepted by Ld. Transfer Pricing Officer 1 AO and therefore did not require any further additional adjustment. 4. The Ld. DRP/AO are not justified in questioning the commercial wisdom of the appellant' decision to incur the expenditure towards management consultancy fees

3 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. ofRs.3,62,94,254/- .The Ld AO/TPO ought to have considered the tangible and direct benefits derived by the appellant by incurring the management consultancy fees and ought to have allowed the same as complying with arms length principle.

4 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. 5. Having regard to the rival contentions and the material on record, we find that grounds of appeal No. 2 and 3 are against the Transfer Pricing Adjustment made in connection with the income generated out of an intangible asset (Jungle book) even after absolute sale of such intangible asset to the AE, DQ Ireland, and which is the absolute owner of such intangible asset after such sale. We find that this issue had first arisen during the A.Y 2010-11 and the Tribunal, at para 15 of its order, has considered the issue at length and has held as under:

“15. Considered the submissions of both the parties and perused the material facts on record as well as the orders of revenue authorities. The facts are, the assessee had sold "IP" (Jungle Book) to its "AE" on 30/09/2009 at the development stage. It was not fully developed to generate revenue immediately. As per ld. AR, "AE" was in a position to generate revenue in the last quarter of 2009-10 i.e. Jan-March, 2010. But TPO adopted the whole revenue generated by "AE" in the whole year to arrive the profit arithmetically to the Indian Entity. The main issue before us is, whether the TPO justified to determine the profit attributable to Indian entity (assessee) when he himself determined the sale consideration of IP (Jungle Book). When the TPO ITA No. 151 /Hyd/2015 D.Q. Entertainment (International) Ltd. agreed that there is a outright sale, there ends the international transaction. Now, TPO is trying to go beyond sales and making TP adjustments. We are asking ourselves, whether there is any international transaction exists. In our considered view, there is no international transaction after outright sale. There is no international transaction exists as per section 92B of the Act as there is no transaction exists between assessee and with it's AE. We are inclined to reject the stand of the TPO.

5 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. 15.1 Moreover, after the completion of the sale process, the "AE" has done transaction with the outsiders or outside the jurisdiction of the Indian territory but there is no transaction done with the assessee involving the above IP (jungle book) to consider that there exists a international transaction. Once, the IP is sold and Arm's length price is determined, the "IP" becomes the property of "AE". The assessee has no locus stand to claim any benefit neither the revenue. 15.2 The revenue has grievances on the arrangement and existences of group companies. There is no doubt, there exists tax planning. There can be tax planning within the four corners of the taxation laws. There is enough mechanism in the existing Act and also there is DTAA - arrangement with Ireland, which will take care of the situations of tax avoidance. The revenue has not brought any cogent evidence to prove that there exists any tax avoidance. In our considered view, the action of the TPO is not justified and accordingly, the grounds raised by assessee are allowed.” 5.1. We also find that this decision has been followed by the Coordinate Bench of the Tribunal in 441/Hyd/2017 dated 12.01.2018 for the A.Y 2012-13 in the assessee’s own case for holding that there is no international transaction during the relevant financial year. Respectfully following the said decisions, the grounds of appeal No. 2 and 3 are allowed.

6 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. the A.Y 2008-09 in ITA No. 62/Hyd/2013 dated 30.10.2015. The relevant paras of the ITAT orders are reproduced here under: “10. Having regard to the rival contentions and the material on record, we find that during the A.Y 2012-13, the assessee paid an amount of Rs.2,14,06,307 to its AE at Mauritius towards Management Consultancy services received. The assessee had claimed that the payment was made to the Board of Directors of the AE as they were rendering invaluable advice and guidance to the assessee company. The TPO however, held that the assessee failed to furnish any evidence in support of the receipt of the benefit for which the payment was made by the assessee to its AE and hence computed the ALP at “Nil” and suggested the adjustment. We find that very same issue had arisen in the assessee’s own case for the A.Y 2008- 09 in ITA No.62/Hyd/2013 dated 30th October, 2015 and at Paras 6.2 to 6.7 the Tribunal has held as under: “6.2. As can be seen from the above, the TPO analysed the accounts of DQ Entertainment Plc and DQE Mauritius in analyzing the nature of payment. Out of the total amount of US$ 7,99,000 paid, the actual Management Consultation Charges were only US$ 4,27,000 along with administrative and audit fee of US$ 14,000. As per the agreement, there is a markup of 5%. This expenditure only can be considered, in our view, as the Management Consultancy Service Fee, whereas the foreign exchange loss of US$ 3,21,000 cannot be considered as intra group service. We notice from the documents placed on record that instead of quarterly bills being raised as per the agreement, DQE Mauritius has raised only one bill for the whole of the year, which was placed at page 170 of the Paper Book. As can be seen from the details of payments made, placed at page 171 of the Paper Book, the amount of US$ 799,174 charged on 31-03- 08 was paid in three installments of US$ 3,00,000 on 14-09-2010, US $ 1,99,174 on 25-10-2010 and US$ 3,00,000 on 04-01- 2011. It is noticed that even though invoice was raised on 31-03-2008 for whole year instead of quarterly billing, the payments were

7 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. made from September, 2010 to January, 2011 with substantial delay. The reasons for such delayed payments were not explained. Therefore, we are of the view, that in the given circumstances, the foreign exchanges losses or gains in the hands of DQE Mauritius cannot be considered as services rendered by the DQE Mauritius to assessee which should be on it's own account. To the extent of the above amount, we are in agreement with the observation of the TPO in para 8.3 of his letter dt. 08- 11-2012, that foreign exchange loss does not pertain to any management and consultancy services. To that extent his order has to be approved. 6.3. What the TPO has missed is with reference the amounts other than foreign exchange loss. In the absence of any comparable figures and in the absence of any further enquiry and having the fact that services have been rendered to assessee as accepted by DRP also, TPO cannot take the amount of ALP at NIL, ignoring the payment by assessee of US$ 4,27,000. As per the agreement, all the costs incurred by the DQE Mauritius with 5% markup had to be charged to assessee. Therefore, as per the details furnished by assessee before the TPO, the actual management fee of US$ 4,27,000 with administration charges of US$ 14000 and markup of 5%, at the exchange value as on the date of 31-03- 2008, can be considered as 'service charges' for the intra group services rendered. This can be taken as ALP. Therefore, modifying the order of TPO, we determine the Management Consultancy Fee as detailed above and AO is directed to modify the order accordingly. 7. In arriving at the above, we have considered the OECD Transfer Pricing guidelines 2010, Chapter-VII pertaining to 'special considerations for intra group services'. Considering the assessee's agreement with DQE Mauritius which in turn has an agreement with DQ Entertainment Plc, and the reimbursement of cost from one company to another, we agree with the TPO's observation that foreign exchange loss in financial transactions cannot be considered as 'service charge' for the intra group and therefore, we after considering the facts of the

8 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. case, restrict the amount to the actual management fees charged by the DQE Mauritius along with other cost of administration and audit and mark up at 5%”. 11. Since the facts and circumstances are the same for the A.Y before us, respectfully following the decision of the Coordinate Bench (to which both of us are signatories), we allow the assessee’s ground of appeal.

6.1. Since the facts and circumstances before us for the relevant assessment year also the same, respectfully following the decision of the coordinate Bench this ground of appeal is allowed.

“23. As regards ground No. 9 pertaining to mark up on travel and other expenses reimbursed by the AE of Rs. 77,36,985/-, it is observed that DQE India had incurred expenses on behalf of DQE Ireland in the nature of travel & other expenses. DQE India recovered the same from DQE Ireland on the basis of actual costs incurred. It was explained by assessee to the Ld. TPO that, reimbursement of travel and other expenses were incurred solely on behalf of DQE Ireland, This transaction did not impact the P&L of DQ India and that it was at cost and did not amount to any service rendered. The assessee raised bills against DQE (Ireland) at cost, and explained to Ld. TPO that it is in general practice among group companies to incur expenses on behalf of group companies and to recover the same at cost, and that these transactions have no impact on profit & loss account. 24. Ld. TPO applied mark -up on reimbursement of travel and other expenses @ 10%, stating that the same was reasonable which any independent party would be willing

9 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. to pay. Assessee submitted that it is only reimbursement of expenses incurred by the company on behalf of its AE and there is no services rendered. This resulted in an adjustment of Rs 7,73,699/- to the profit of the assessee company. 25. When the assessee raised objection before the DRP, the DRP observed that the receipt of reimbursement has not been routed through books of account. No independent party would render such services without any mark up. Even other wise, recovery of expenses always forms part of operating cost in the case of independent comparable companies. Thus these expenses incurred by the taxpayer and subsequently reimbursed by AEs need to be suitably marked up. The TPO held a mark-up of 10% for rendering services. The DRP, therefore, hold that the TPO was justified and accordingly, declined to interfere with the order of the TPO and the ground of objection was rejected. 26. Ld. AR submitted that DQE India had incurred expenses on behalf of DQE Ireland in the nature of travel & other expenses. DQE India recovered the same from DQE Ireland on the basis of actual costs incurred. During the assessment year 2010-11 the assessee incurred amount of Rs.77, 36, 985/- on behalf of its AE DQE (Ireland) towards travel expenses and other expenses. It was submitted that, Reimbursement of travel and other expenses were incurred solely on behalf of DQE Ireland, This transaction did not impact the P&L of DQ India and that it was at cost and did not amount to any service rendered. It is submitted that the assessee raised bills against DQE (Ireland) at cost, and submitted that it is in general practice among group companies to incur expenses on behalf of group companies and to recover the same at cost, and that these transactions have no impact on profit & loss account. 26.1 Ld. AR submitted that despite the submissions made Ld TPO applied mark -up on reimbursement of travel and other expenses @ 10%, stating that the same was reasonable which any independent party would be willing to pay. It is submitted that it is only reimbursement of expenses incurred by assessee on behalf of AE and there is no services rendered This resulted in an adjustment of Rs 7,73,699/- to the profit of the assessee company. 26.2 Ld. AR submitted that according to Black's Law "reimburse means to pay back, to make restoration, to repay that expended, to indemnify or make whole". As per Concise Oxford Dictionary the term reimburse means "repay (a person who has expended money) or repay( a person's expenses)" In view of the above definition being reimbursement of actual cost there is no income element in

10 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. embedded in such payment and is merely in the nature of reimbursement. Hence to apply a markup of 10% based on the profit earned by the assessee is factually and legally incorrect. 26.3 Ld. AR submitted that in M/s. Cognizant Technology Solutions India Pvt. Ltd v, ACIT ITA Nos.114 & 2100(Mds)/2011 the Bench held that "The next issue raised by the assessee is against the addition made by the Transfer Pricing Officer on the ground of reimbursement of expenses. The Transfer Pricing Officer has made a mark up of 5 per cent on certain travel cost incurred by the assessee and reimbursed by its associate enterprise and treated as additional income to be taxed as part of transfer pricing adjustment. But the fact is that the reimbursement was made on cost to cost basis and there is no rendering of any service and it does not involve service element. What is incurred is reimbursed. So, therefore, there is no profit element in the reimbursement. In such situation there is no justification in making a mark up of 5 per cent. This addition is accordingly deleted. This issue is decided in favour of the assessee." 27. Ld. DR submitted that the TPO considered markup of 10% on these reimbursements and accordingly computed the ALP and adjustment of Rs. 7,73,699/- was computed. He submitted that the assessee submitted that the markup adopted by the TPO of 10% is incorrect and the reimbursements received are at arm's length. Ld. DR submitted that the TPO has considered 10% markup as no independent party would render such services without any markup. Hence, the mark up made is correct and accordingly, the ALP on reimbursements and the adjustment thereon is correct. 28. Considered the submissions of both the parties and perused the material facts on record as well as the orders of revenue authorities. The assessee as a group company, incurred travelling and other expenditure on behalf of DQE, Mauritius. Assessee had raised the bill for reimbursement on cost to cost basis, it is normal in the case of group companies. There is no element of service in these transactions. These transactions are not in any way connected to the nature of business of assessee. These are the services rendered by outsiders for the AE's and only payment was made by assessee and got reimbursement from "AE". Since there is no element of service by the assessee, adding markup on these kind of transactions are not justified. As held in the case of M/s Cognizant Technologies Solution (spra), the additions made were deleted by Chennai Bench of ITAT. Accordingly, the grounds raised by the assessee are allowed.

11 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. 7.1. Since the facts and circumstances before us are the same, also for the assessment year before us, the ground of appeal No. 5 is allowed.

Sd/- Sd/- (B. RAMAKOTAIAH) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 06th April, 2018

12 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. KRK 1 M/s DQ Entertainment (International) ltd., C/o Prasad & Prasad CAs, Flat No. 301, MJ Towers, 8-2-698, Road No. 12, Banjara Hills, Hyderabad. 2 The ACIT, Circle-14(1), Hyderabad 3 DRP-1, Bengaluru. 4 The Pr. Commissioner of Income tax-5, Hyderabad. 5 The DR, ITAT Hyderabad 6 Guard File