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Income Tax Appellate Tribunal, DELHI ‘I-2’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI SUCHITRA KAMBLE
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
These two cross appeals by the Revenue and the assessee are preferred against the order of the CIT(A) – XX, New Delhi dated 31.07.2014 pertaining to assessment year 2009-10. Both these appeals were heard together and are disposed of by this common order for the sake of convenience and brevity.
Quarrel is in respect of exclusion of one comparable and inclusion of two comparables. The Revenue is in appeal for exclusion of the comparable and the assessee is in appeal for inclusion of comparables.
Representatives of both the sides were heard at length, case records carefully perused.
Briefly stated, the facts of the case are that the assessee is an Indian company and is part of the Six Continents Hotels group. The appellant-company was incorporated as H.I. Crowe Plaza [India] Pvt.
3 Ltd as a subsidiary of BASS International Holdings N.V. Netherlands, now known as Six Continents International Holdings, Holdings BV. The assessee provides ancillary management services to Six Continents Hotels, Inc. It also renders service to Indian franchises of its foreign affiliates. Following International transactions were entered into during the year under consideration:
Total Value Sl. No Types of International Method of Transaction Selected Transaction| Provision of ancillary 1 TNMM 156,241,883 management and operational assistance services No Reimbursement of expenses 2 335,566 Benchmarki by AE's ng & Reimbursement of expenses 3 7,800,462 Required to AE's
The assessee has used TNMM as the method and OP/TC as the PLI. The assessee has arrived at a set of three companies with an average margin of 9.62% by using multiple year data. The assessee’s own margin is worked out to be 11.15%, and based on this, the assessee has concluded that its international transactions are at arm’s length.
4 6. After considering the objections regarding the comparables and their margin calculations, TPO finally concluded by considering the following comparables:
S.No. Company Name NCP 1 ICRA Management consulting Services 1.25 2 Vapi Waste & Effluent Mgmt Co. Ltd. 26.98 3 WAPCOS Ltd. 23.60 4 Piramal Healthcare Limited 22.69 5 Choksi Laboratories Limited 23.19 6 Techprocess Solutions Limited 27.98 Average 20.95
Based on the above, the ALP of international transaction was computed as under:
Arm's length mean margin 20.95 Operating Cost 166,125,429 Arms Length Margin 20.95% of the OC Arms Length Price (ALP) @120.95% of operating cost 200,928,706 Price received 183,478,661 Shortfall being adjustment u/s 92CA 17,450,045
The assessee strongly objected for inclusion of three comparables, namely, Vapi Waste & Effluent Mgmt. Co. Ltd, Choksi Laboratories Ltd and Techprocess Solutions Limited.
Before the first appellate authority, it was strongly contended that all these three companies are functionally different from the assessee company and, therefore, they should not be considered as comparables for determination of ALP.
After considering the facts and submissions, the ld. CIT(A) was convinced that Techprocess Solutions Ltd is not a good comparable by holding as under:
“The Directors' Report reveals that Techprocess Solutions Ltd. has acquired significant new capabilities in each of its business lines. In the payment processing space, Techprocess Solutions Ltd. has completed technology integration with bank partners, in order to access the RBI's NECS/NEFT platforms. The online payment processing business acquired a number of major customers for Techprocess Solutions Ltd. The Company's fully online, mutual funds transaction platform has been well received by customers and opinion-makers alike, with several of India's leading financial services distributors having been acquired. The platform underwent major functional enhancement this year, including the enablement of SIP/ SWP (Systematic Investment Plan/ Systematic Withdrawal Plan). Techprocess Solutions Ltd. Earns Rs 32.39 crores from transaction processing fees and Rs 15.55 crores from software development & maintenance out of the total revenue of Rs 60.06 crores. Considering the facts of the case, I am of the view that Techprocess Solutions Ltd which is engaged in online payment processing business and software development &
6 maintenance cannot be selected as a comparable in the present case as the appellant is engaged in the providing ancillary management support services. Accordingly, Techprocess Solutions Ltd. is excluded from the list of comparables selected by the TPO.”
11. However, the ld. CIT(A) rejected the claim of the assessee to exclude Choksi Laboratories Ltd and Vapi Waste & Effluent Mgmt. Co. from the set of comparables. The relevant findings of the ld. CIT(A) are as under:
“'I have carefully considered the above submission of the appellant, Vapi Waste & Effluent Mgmt. Co. Ltd is mainly engaged in the providing waste management services and operates effluent treatment plant. The appellant company renders ancillary support services to SCH1. Considering the facts of the case, I am of the view that the functions of Vapi Waste & Effluent Mgmt. Co. Ltd. are broadly similar to the functions carried out by the appellant company. Accordingly, Vapi Waste & Effluent Mgmt. Co. Ltd is retained in the final set of comparable companies.
I have carefully considered the above submission of the appellant. Choksi Laboratories Limited is engaged in business of testing, analysis and research services. The appellant renders ancillary management support services to SCHI which includes the following: locating new business opportunities in the region
7 under the right brand, building strong relationships with existing and prospective hotel owners; ensuring that the franchisee hotels are in compliance with the brand standards and suited to the local markets in which the individual hotels operate; implementing and maintaining brand standards with respect to hotel design and operations etc. Both the appellant company and Choksi Laboratories are rendering support services. Considering the facts of the case, I am of the view that the functions of Choksi Laboratories Limited are broadly similar to the functions carried out by the appellant Company. Accordingly, Choksi Laboratories Limited is retained in the final set of comparables.”
As mentioned elsewhere, the Revenue is in appeal against the exclusion of Techprocess Solutions. We find that Techprocess Solutions Ltd use unique capabilities and proprietary tools and is engaged in providing payment processing and online transactions processing to customers in banking, mutual funds, telecom and other entities in banking, financial services and insurance. In our considered view, this company cannot be compared to the assessee company which is a routine marketing support services provider, having no unique/ technical capabilities. Moreover, the assessee does not cater to any unique segment as is done by Technprocess Solutions Ltd.
We further find that Techprocess Solutions Ltd owns several technology based platforms using which it provides services. The ratio of software to other assets is 27.38% in the case of Techprocess Solutions Ltd whereas the same is 0.45% in the case of the assessee company. Functional profile, as per website extracts of Techprocess Solutions Ltd, major services are software services, document management and transaction processing services and transaction processing and data/document management services not comparable to the services being provided by the assessee company.
Considering the aforesaid functional dissimilarities, in our considered opinion, Techprocess Solutions Ltd cannot be used as a comparable, we, therefore, do not find any reason to interfere with the findings of the ld. CIT(A). This ground of the revenue is dismissed.
Coming to the inclusion of two comparables, we find that Vapi Waste Effluent Co. is a non-profit making entity engaged in treatment of polluted water, industrial effluents and deposition and treatment of solid wastage of the member units whereas the services provided by 9 the assessee company are purely in the nature of marketing support services.
We further find that in the case of Vapi Waste Efflunet Co., capital is contributed by its members and Government. Major portion of its income comes from members in form of charges for deposition which means that the contributors are beneficiaries. Therefore, the price of this company cannot be treated as an independent and uncontrolled price when the majority of the Revenue is earned from the members who have contributed to the capital of the company.
We further find that almost 64% of the assets employed by this company are plant and machinery and for a service company to have such heavy capitalisation in plant and machinery is unique whereas assets of the assessee company are of routine nature, namely computer and office equipment.
The coordinate bench in the case of Actis Advisers Pvt Ltd in has held as under:
10 'Coming back to the issue of comparability the inclusion/ exclusion of Vapi and WAPCOS, the ITAT in the cases of M/s MCI Com India P. Ltd. and M/s Verizon India P. Ltd. (supra) has held that companies like EIL, Rites, Wapsos and TCE are engineering companies and provide end to end solutions and therefore they cannot be compared with those assessee who were into providing marketing support services to the parent company. They were held to be functionally not comparable with these engineering companies. The case of Vapi also falls on the same footing. Therefore, respectfully following the order of the IT AT in the cases of M/s MCI Com India P. Ltd. and M/s Verizon India P. Ltd. (supra) and Estel in we are of the view that Vapi and WAPCOS are functionally not comparable to the assessee.“
The order of the coordinate bench was affirmed by the Hon'ble Delhi High Court in Tax Appeal No. 952/2015 wherein the Hon'ble High Court has held as under:
"6. As far as Issue (i) is concerned, the Court finds that while the Assessee provides marketing support services, the first excluded company WASCOS, as a comparably/ provides engineering consultancy services and the second excluded company Vapi provides consultancy for water resource management. The reasons given by the ITAT for exclusion of those two entities as comparables appears, therefore, to be fully justified on facts as well as in law. No substantial question of law arises”
As discussed elsewhere, Vapi Waste & Effluent Mgmt. Co. Ltd is functionally different from the assessee company and following the findings of the coordinate bench [supra], we are of the considered view that this company is not a good comparable and should be excluded from the final list of comparables.
Coming to the exclusion of the next comparable Choksi Laboratory Ltd, we find that it is engaged in as a commercial testing house in running laboratory testing, chemical testing and services which are highly technical in nature. It offers services like testing of products and also offers services in the field of pollution control as allied activity, whereas the services provided by the assessee company are purely in the nature of marketing support services. The assessee company is not engaged in providing technical services. In our considered opinion, the profile of the assessee company cannot be compared with the profile of a laboratory.
12 22. We further find that Choksi Laboratory have incurred significant expenditure on purchase of inventory i.e. glass ware and chemicals and laboratory consumables used for testing purposes. As per annual report of Choksi Laboratory Ltd 36.80% is incurred by this company. Even this company cannot be compared with the assessee company on the basis of assets employed which can be understood from the following chart:
IHG India Particulars Choksi Instruments (A) 86,913,623 - Other Fixed Assets 45,749,622 19,691,329 India 19,691,329 (B) Total Fixed Assets 132,663,245 (A) + (B) Revenue 95,618,162 25,666,285 7.64% Total Fixed Asset/ 138.742% Revenue ratio Instruments/ 90.89% Revenue Ratio Instruments/ Total 65% Assets
Considering the facts in totality, we have no hesitation in holding that Choksi Laboratories Ltd is not a good comparable and should be excluded from the final list of comparables. We, accordingly set aside the finding of the ld. CIT(A) and direct the TPO/Assessing Officer for 13 exclusion of two companies, namely Vapi Waste & Effluent Mgmt. Co. Ltd and Choksi Laboratories Ltd.
There are two more grounds in Revenue’s appeal which relate to deletion of addition of Rs. 23,25,896/- on account of project and consultation fee and deletion of Rs. 68,27,880/- on account of advertisement and sales promotion. We find that the first appellate authority, while deleting these two additions, have followed the order of the Tribunal in assessee’s own case for assessment year 2007-08. The relevant findings of the coordinate bench in read as under:
“6. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that in this case assessee business model is concerned of providing various support services to its parent company located in USA. The said Service Agreement clearly provides that assessee company would be reimbursed the expenditure incurred with the markup of 8%. In the course of rendering services to its parent company which is in the hotel business, the assessee has availed the services of Control Risk 3roup, Singapore in order to carryout the due diligence and risk analysis with the target hotels. Thus, we agree with the Ld. Commissioner of Income Tax (A) that these expenses are incurred in the normal course of the business of the 14 assessee and accordingly are avenue in nature. We find that Assessing Officer's decision that the due diligence exercise undertaken by M/s Control Risk Group, Singapore would create reliable data base for use in future, thereby providing enduring benefit to the assessee is not sustainable. Assessee has undertaken all these activities as part of its services agreement with its parent company^ Thus, we agree with the Ld. Commissioner of Income Tax (A) that the conclusion drawn by the Assessing Officer that these expenses are capital in nature cannot be sustained.
We have heard the rival contentions in light of the material produced and precedent relied upon. We find that the expenditure on advertisement was in print and electronic media and for hosting / sponsoring certain conventions and conferences and similar other expenditure on calendar printing, posters etc. We note that the total expenditure works out approximately 1.9% of the total expenditure. We are in agreement with the Ld. Commissioner of Income Tax (A) that there is no element of brand building or acquisition of brand by incurring such expenses. The concerned brands were not owned by the assessee, but it belongs to the assessee's overseas group entity, assessee has been reimbursed the entire advertisement and sale promotion expenses by the overseas group entity on cost plus basis. Under the circumstances, we do not find any infirmity in the order of me
15 Ld. Commissioner of Income Tax (A) in holding that these expenses are revenue in nature. We also find that the case law relied upon by the Ld. Commissioner of Income Tax (A) are germane to the issue and supports the case of the assessee.”
Since the first appellate authority has followed the findings of the coordinate bench while deleting the aforementioned two additions, we do not find any reason to interfere with the findings of the ld. CIT(A). These grounds are accordingly dismissed.
In the result, the appeal of the Revenue is dismissed and the appeal of the assessee is allowed.
Order pronounced in the open court on 27th July, 2018.