Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCHES : I-1 : NEW DELHI
Before: SHRI R.S. SYAL & SMT. BEENA A. PILLAI
Date of Hearing : 18.07.2018 Date of Pronouncement : 19.07.2018 ORDER PER R.S. SYAL, VP: This appeal filed by the assessee is directed against the final assessment order dated 14.01.2015 passed by the Assessing Officer (A.O.)
143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2010- 11.
The first issue raised in this appeal is against the transfer pricing addition made by the A.O. for a sum of Rs.86,70,078/- in Marketing and after-sales support services characterized by the assessee as `Service fee received’.
Briefly stated, the facts of the case are that Philip Morris Services India S.A. is a company incorporated in Switzerland and is a wholly owned subsidiary of FTR Holding S.A. (Swiss holding company). The Indian operations are carried on by the Indian Branch of Philip Morris Services which is primarily in import and distribution of Marlboro brand of cigarettes in India. It also provides market support services to its associated enterprise (AE) in India and certain other countries. The assessee filed return declaring total income of Rs.3.15 crore and odd. The international transactions undertaken by the assessee were separately reported in Form No.3CEB. The A.O. referred the determination of the arm’s length price
(ALP) of the international transactions to the Transfer Pricing Officer (TPO). In the instant appeal, we are concerned only with the international transaction of ‘Service fees received’ with a transacted value of Rs.22,81,92,227/-. The assessee employed the Transactional Net Margin Method (TNMM) with the Profit Level Indicator (PLI) of Operating Profit to Operating Cost (OP/OC). The assessee computed its own ALP at 10%.
Certain comparables were chosen, whose average PLI for the year under consideration was computed at 10.20%. It was on such basis that the assessee claimed its international transaction to be at ALP. The TPO did not approve the comparables chosen by the assessee. He shortlisted nine companies as comparable with their average PLI of 24.80%. Applying such benchmark on the assessee’s Operating costs incurred under this segment, the TPO recommended transfer pricing adjustment amounting to Rs.1,52,78,270/-. The assessee objected to the draft order, incorporating the transfer pricing addition recommended by the TPO, before the Dispute Resolution Panel (DRP). The DRP corrected the margins of the comparables, but, did not tinker with the final set of companies chosen by the TPO. This resulted in the reduction of addition to the extent challenged in the instant appeal. The assessee is aggrieved only against the inclusion of four companies in the final set of comparables.
Before taking up the comparability or otherwise of the companies assailed before us, it is sine qua non to consider the functional profile of the assessee under this international transaction. The assessee entered into an Agreement with its AE on 01.04.2007 to be read along with an Amendment agreement dated 01.04.2008, under which it agreed to carry out market support services in India, Nepal, Bangladesh and Afghanisthan.
The AE agreed to reimburse all Direct marketing expenses (DME), including, events sponsorship and agency costs; Trade marketing expenses (TME), including, sale materials, trade events, display rentals, trade and brand support expenses; allowances and travel costs to the assessee on a mark-up of 10%. In a nutshell, the assessee rendered marketing support services for its AE in connection with sale of tobacco products in India, Nepal, Bangladesh and Afghanisthan. With the above understanding of the nature of functions carried out by the assessee under this international transaction, we will now espouse for determination the four comparable companies challenged by the assessee in seriatim. 4 i. Apitco Limited.
The assessee argued against the functional incomparability of this company before the TPO by putting forth that this company was providing high-end diversified activities. Such contention did not find favour with the TPO, who treated this company as comparable by including its OP/OC at 40.09%.
We have analyzed the Annual report of this company which is available at page 34 of the paper book. From this report, it can be seen that its `Income from operations’ stands at Rs.15,41,75,273/-, break-up of which has been given as per Schedule 11, as under:-
INCOME FROM OPERATIONS
Micro Enterprises Development 5,283,039 Skill Development 27,575,000 Entrepreneurship Development 10,873,397 Tourism & Research Studies 14,835,450 Project related Services, Infrastructure Planning & Development 32,600,996 Environment Management 3,998,796 Energy related Services 4,835,206 Cluster Development 47,986,516 Asset Reconstruction & Management Services 5,503,141 Emerging Areas 683,732
A careful perusal of the operations carried out by Apitco Limited reveals that this company is providing services in the nature of Project 5
Technical and economic studies, Feasibility studies, Micro enterprise development, Skill development, Project management consulting, Industrial cluster development, Environmental management consulting, Energy management consulting, Market and social research and Asset reconstruction management services. No segment-wise profitability data of these services is available. The TPO has considered this company as comparable on entity level. We find that there is a tiny resemblance of `Market and social research’ functions performed by this company with the overall activities undertaken by the assessee. All other services are entirely different. We fail to appreciate as to how all the above listed services can be considered as comparable with the services provided by the assessee, which are restricted to market support as indicated above.
The ld. DR strenuously argued that all the activities done by this company are basically `Business services’ and the assessee is also rendering business services. He submitted that differentiation of functions in the overall `Business services’ umbrella is taken care of under the TNMM. He harped on the contention that there is no requirement to have identical services for the purpose of making comparison under the TNMM. 6
We are unable to accept this argument in view of the judgment of the Hon’ble jurisdictional High Court in the case of Rampgreen Sales Pvt. Ltd. vs. CIT (2015) 377 ITR 533 (Del) in which it has been held that the comparables are to be selected on the basis of similarity even under TNMM. The Hon’ble High Court has laid down that selection of comparables does not differ with the method adopted. Ex consequenti, it is no more open to argue that the functional dissimilarity of the companies under the overall broader category can be ignored under the TNMM.
In view of the foregoing discussion, we find that the functionally similarity of Apitco Limited is lacking on entity level with the assessee company. As such, we order for its exclusion from the final set of comparables. Similar view has been taken by the Tribunal in assessee’s own case for the immediately preceding year, a copy of which has been placed on record. ii. Global Procurement Consultants Limited
The TPO included this company in the list of comparables despite the assessee’s objection that it is engaged in providing consultancy services and World Bank. The assessee failed to convince even the DRP for its exclusion.
After considering the rival submissions and perusing the relevant material on record, we consider it expedient to first discuss the nature of activities carried out by Global Procurement Consultants Ltd. A copy of Annual report of this company for the relevant year is available on record.
As per this Report, this company is promoted by Export-Import Bank of India in association with leading Indian Public Sector and Private Sector consultancy organisations on the basis of Public-private partnership model that offers collective Indian experience and expertise through the provision of a range of advisory services with particular focus on `Procurement’.
This company provides technical assistance in enhancing quality, transparency, efficiency and effectiveness of procurement and implementation service to help attain desired institutional and corporate objectives. The expertise of this company is available to various sectors including power, water resources, transportation, industries, etc. Its services have been outlined in the Annual report. From such services rendered by this company, it can be noticed that it is conducting Independent 8
Procurement Review of multilaterally funded projects spread across the globe. It also undertakes Procurement audits. This company is providing full time advice on procurement and contract related aspects to several agencies across the globe. For example, in Georgia, it provided advice on procurement and contract related services to Municipal Development Fund (MDF), Republic of Georgia. In Iran, this company provided procurement advisory services to international forums, such as, Bam Reconstruction Office of Ministry of Housing, Tehran. In Guyana, this company was selected through an international competitive process in assisting the Government of Guyana in ‘strengthening of its procurement administration’ under Technical Assistance Credit from the World Bank. In India, it provided Procurement Advisory Services to IIT, Baramathy, Pune, India in the implementation of World Bank administered ‘Empowering Poor: A pilot ICT programme for rural areas of Pune District’ funded by Japan Social Development Fund Grant. It has also carried out review of Procurement Systems and Organisation in the State of Madhya Pradesh, particularly, covering the health, public health, engineering and women and child development departments. When we go through the nature of services provided by this company, which basically aim at providing advice on procurement and also carrying out procurement audit, it becomes palpable that there is an absolute mismatch with the services provided by the assessee. The services provided by Global Procurement Consultants Ltd. are miles apart from those rendered by the assessee, which, in turn, are confined to market support. By no standard, Global Procurement Consultants Ltd., can be considered as comparable with the assessee company. We, therefore, order for the elimination of this company from the list of comparables. Similar view has been taken by the Tribunal in its order for the immediately preceding year in assesse’s own case. iii. TSR Darashaw Limited.
The assessee objected to the inclusion of this company by arguing that the business segments of this company are, Registrar and Transfer Agent activity; Records management activity; and Payroll and trust fund activity.
Not convinced with the assessee’s submissions, the TPO treated it as comparable on entity level, against which the assessee is before us.
Having heard the rival submissions and perused the relevant material on record, we find that this company is a broking and investment banking house with its three segments, namely, Registrar and transfer agent activity (R&T); Records management activity (Records); and Payroll and trust fund activity (Payroll). Under the Registrar and Transfer Agent activity, this company undertakes registrar and transfer agent activity functions for Equity and preference shares, debenture instruments and bonds, commercial paper and private placements. It also undertakes transfer processing, customer/query handling and correspondence, split/consolidation/renewal of certificates, processing and distribution of interest/dividend warrants, payments by physical warrants/through ECS/Direct Credit. Under Records Management Activity, this company undertakes storage, retention & retrieval of physical and/or electronic records. Under Payroll and Trust Fund Activity, this company handles the activities normally handled by “Payroll and Retirement Funds” section in any organization, including interface with regulatory authorities. When we compare all the three broader activities undertaken by this company, namely, R&T, Records and Payroll, with the market services rendered by AE, on a cost plus basis, we find that there is a huge functional disparity between the two. That apart, the consideration of this company on an entity level by the TPO has rendered the entire exercise of comparison meaningless. Finding striking dissimilarities between this company and the assessee, we order to exclude this company from the final set of comparables. Similar view has been taken by the Tribunal in its order for the immediately preceding year in assessee’s own case. iv. Quippo Valuers
The TPO proposed to include this company in the list of comparables which was objected to by the assessee. Such an objection was overruled by the TPO. The assessee could not get any relief from the DRP on this issue.
We have heard both the sides and perused the relevant material on record. It is an admitted position that the Annual report of this company for the relevant year is not available in public domain. Annual report of this company for the next year is available at page 148 onwards of the paper book, which also contains figures for the year under consideration as preceding year’s figures. It is palpable from such Report that this company
Asset management services. From the ‘Operational review’ given in the Director’s report, it is overt that this company is engaged in sale of construction and earthmoving equipments through auctions and also by means of innovative disposal methodologies; execution of live auctions for financial institutions in the eastern part of the country; and provision of valuation services to a number of clients in respect of assets including construction equipment, barges and other industrial assets. The assessee also raked up such dissimilarities before the TPO, who did not controvert the functional profile of this company. In view of the fact that this company is mainly providing Asset management services of the nature discussed above, the same cannot be considered as comparable with the market support services rendered by the assessee. We, therefore, direct to exclude this company from the list of comparables.
No other issue in relation to the determination of the ALP of this international transaction was raised before us.
To sum up, we set aside the impugned order on the issue of transfer pricing addition in the international transaction of ‘Marketing and after-
sales support services’, characterized by the assessee as `Service fee received’ and remit the matter to the file of AO/TPO for fresh determination of its ALP in consonance with our above directions.
Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings
The only other issue raised by the assessee in this appeal is against the disallowance of Rs.1,97,09,254/- made by the Assessing Officer u/s 40(a)(i) of the Act.
Succinctly, the facts of this ground are that the assessee incurred certain expenses in foreign currency on various accounts. On perusal of the details filed by the assessee, the Assessing Officer observed that the assessee did not deduct tax at source from payments made to certain parties outside India. A list of such payments made by the assessee totaling Rs.2.05 crore and odd has been set out on page 2 of the final assessment order. On being called upon to explain as to why no tax withholding was done, the assessee submitted that the services were rendered in Bangladesh/Italy/Nepal and the payees did not have any business
India. It was thus claimed that the amount was not chargeable to tax in India, thereby obliterating the requirement of deduction of tax at source. The assessee also submitted that some of the payments made were in the nature of reimbursement of expenses, again, not requiring any tax withholding. The Assessing Officer noticed in para 5.2 of the impugned order that the payments were made for alleged professional services/other services in Bangladesh/Nepal. Such payments were held by him to be in the nature of managerial, consultancy or technical services to the non-residents. The Assessing Officer further held that such payments to be ‘Royalty’ for imparting of commercial or industrial knowledge and skill.
As the assessee failed to furnish the copies of the Agreements with the payees, the Assessing Officer made disallowance u/s 40(a) of the Act. The DRP directed to exclude disallowance of Rs.8,65,254/-, being, payment made to Philip Morris Services claimed to be reimbursement of expenses and sustained the remaining disallowance of Rs.1.97 crore. The assessee has come up in appeal challenging such disallowance.
We have heard the rival submissions and perused the relevant material on record. It is observed that similar disallowance was made by the 15
Assessing Officer u/s 40(a) for the immediately preceding assessment year.
When the matter came up for consideration before the Tribunal, the matter was sent back to the authorities below for re-adjudication in the light of the evidence which the assessee proposed to file. This view was taken by considering the decision of the Tribunal for the assessment year 2008-09.
Adverting to the facts of the instant case, we find that the DRP has not considered the assessee’s claim for non-deduction of tax at source in the light of the respective Double Taxation Avoidance Agreements (DTAA). It is further observed that the assessee did not adduce necessary Agreements with the payees before the Assessing Officer. Since the orders of the authorities below are silent on these vital aspects having bearing on the application of section 40(a), respectfully following the precedent, we set aside the impugned order and remit the matter to the file of AO for deciding it afresh as per law, after allowing a reasonable opportunity of being heard to the assessee.
In the result, the appeal is allowed for statistical purposes.
The order pronounced in the open court on 19.07.2018.