M/S. PHILIP MORRIS SERVICES INDIA S.A.,NEW DELHI vs. DDIT, NEW DELHI

For the assessment year 2009-10 the assessee filed their return of income on 30/09/2009 declaring an income of Rs. 3,68,11,639/-and revised the same on 26/03/2010 declaring an income of Rs. 3,69,92,315/-offering interest expense of Rs. 1,80,676/-. Since the assessee was carrying out international transactions with its associate enterprises, the matter was referred to transfer Pricing Officer (TPO) for examining the same at arm’s length price.

The arms length price of the international transactions representing market support/business services provided to the associated enterprises is determined by applying Transactional Let Margin Method (TNMM), Operating Profit to Total Cost (OP/TC) ratio is taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the company is arrived at 10.06% on cost whereas the average PLI of the comparables is arrived at 6.06% as per the analysis in TP study report. Further the PLI of the comparable companies was worked out by adopting weighted average per the current year and the immediately preceding 2 years.

The assessee selected the following 10 comparables: – number name of the company OP/OC for 1. Concept communication Ltd 2.88% 2. Cyber media research Ltd 10.93% 3. EDCIL (India) Ltd 0.47% 4. HINDUSTAN housing company limited 7.69% 5. Kestone integrated Mktd. Services private limited -4.86% 6. Quadrant communications Ltd 5.96% 7. Hansa vision private limited 4.49% 8. Empire industries Ltd (trading and indenting) 9.44% 9. Priya international Ltd (indenting) 21.69% 10. Entertainment Network (India) Ltd (even segment) 1.05% Arithmetical mean 5.97%

However, Ld. TPO, after analysing the data bases, annual reports and other relevant material and after due consideration of the assessee’s objections selected the following seven companies as comparables:

Basing on the above average PLI of comparables, Ld. TPO computed the arms length price of the market support services rendered by the assessee at Rs. 40,68,66,472/-and suggested the adjustment of Rs. 4,54,50,662/-. Further, Ld. AO also disallowed a sum of Rs. 5,48,27,751/-under section 40(i)(a) of the Act.

Main plank of objection taken by the assessee is against the inclusion of file comparables, namely Apitco Ltd., Cameo Corporate Services, Global Procurement Consultants Ltd, Killik Agencies and Marketing Ltd and TSR Darashaw Ltd, on the grounds of difference in business structures and functionally not comparable. However, when the assessee raised all these objections before the Ld. DRP, Ld. DRP by way of impugned order turned down the objections of the assessee and held that these five companies are good comparables with the assessee. Hence the assessee is before us in this appeal mainly challenging the inclusion of these five companies and also the disallowance under section 40(a)(i) of the Act. Now we shall proceed to deal the question of comparable tea of these companies with assessee with reference to the submissions on either side and the material placed on record.

Ld. TPO, however, held that the revenue breakup of services given constitute much lower percentage of total services and most of the services rendered by Apitco Ltd., or in the nature of business services and predominantly Apitco Ltd., is a company providing various support services for allotment of tourism and industry, as such the objection of the assessee was not acceptable. Ld. TPO further held that the assessee has experienced employees in the field of engineering, marketing, management and therefore the employee profile of assessee with the Apitco Ltd., is comparable.

It is the argument of the Ld. AR that the profile of the company as narrated by the Ld. TPO itself suggests the non-compatibility of Apitco Ltd., with the assessee inasmuch as the assessee is providing only simple support services whereas the services provided by the Apitco Ltd., are very diverse and high-end ones rendering Apitco Ltd., non-comparable with the assessee. 12. It is submitted by Ld. DR that as rightly recorded by the Ld. TPO, most of the services rendered by the Apitco Ltd., are in the nature of business services and predominantly Apitco Ltd., is a company providing various support services for allotment of tourism and industry. Further, it could be seen that the margins of Apitco Ltd., are quite consistent and in the range of 37% to 49% from FY 2005-06/02/2009-10 in this era of volatile business conditions, forex fluctuations etc. Basing on these observations made by Ld. TPO, Ld. DR justifies the inclusion of this company in the set of comparables.

As could be seen from the annual report of this company, is company is one of the 18 TCOs was formed by the key national level financial institutions in association with state-level institutions and banks, and accordingly being a government enterprise Apitco Ltd., was established to provide technical services to other government companies and body corporate. Further this company is engaged in providing services such as asset reconstruction and management, clustered allotment for mega footmarks, and environment services, energy-related services, infrastructure planning and development, energy audit etc. and undoubtedly this company is a high-end consultancy service provider. The annual report further reveals that this company is engaged in providing high-end technical services also.

Ld. AR brought to our notice that they Apitco Ltd., was rejected by a catena of decisions rendered by different Benches of this Tribunal including a coordinate Bench of this Tribunal in Ciena India (P) Ltd vs. DCIT in and 3224/del/2013 following which in Avaya India private limited versus DCIT in ITA No. 146/del/2013. He also placed reliance on the nation reported in Kobelco Cranes India Private Limited vs. ITO in ITA No. 802/del/2016. In international SOS services India private limited versus DCIT ITA No. 1631/del/2014 this company was excluded on account of being hundred percent government organisation and the appeal against this decision of the tribunal was dismissed by the Hon’ble jurisdictional High Court.. Further it could be seen in Vestegaard Asia private limited verses DCIT in ITA No. 6670/del/2015 and H & M Mouritz India private limited verses DCIT in ITA 282/bankg/2015 it is held that the Apitco Ltd., is not a good comparable with any company rendering business support services on the ground that this Page 6 of 20 company is a public sector undertaking and its operations are mainly based the on the policy requirements of the government.

Further reliance is placed by the counsel on the decision of the Mumbai bench of this tribunal in TysokKrupp industries India private limited verses ACIT in wherein it was held that this company being a government enterprises is not comparable with a private business service provider because in case of government enterprises profit motive is not irrelevant consideration, and government companies work for other public sector undertakings and in that sense the related party transactions are much more than the filter of 25%. This decision of the tribunal was upheld by the Hon’ble Bombay High Court in ITA number 20/02/2018 of 2013.

The reasons recorded by the Tribunal in all the decisions referred to above hold good for the assessee also inasmuch as the assessee is a private company in the field of providing business support services. We, therefore, while respectfully following the ratio laid down in the above decisions hold that Apitco Ltd., is not a good comparable with the assessee and is accordingly liable to be excluded. We, therefore, directly Ld. TPO to exclude this company from the finalist of comparables to benchmark the international transaction relating to the market support services provided by the assessee to its AEs. Cameo corporate services.

Assessee disputed the inclusion of this company before the Ld. TPO on the ground that Cameo Corporate Services is providing business service – registry, transfer, archival and retrieval and as per the website, Cameo corporate services is an established business process outsourcing (BPO) service, headquartered in Chennai, India providing diversified services of document management, medical transcription, registry and share transfer and other BPO services.

Ld. TPO extracted the details of the services rendered by Cameo corporate services which includes the registry and transfer agency division, archival and retrieval services and medical transcription division.

It is the submission of the Ld. AR that going by the description of the services, the details of which are extracted by the Ld. TPO it is evident that this company is functionally not comparable being engaged in share registry and service of transfer and registry services relating to open offers, bonus, stock splits, buybacks etc. Per contra, it is the submission of the Ld. DR that a study of the highlighted portions in the profile of the company extracted in the order of the Ld. TPO reveals that the activities of the company or in the nature of business services which are outsourcing will companies in India, as such this company is a good comparable to the assessee, inasmuch as AEs of the assessee also outsource some of their services to the assessee. By placing reliance on the order of the Ld. TPO, he further submitted that as rightly pointed out by the Ld. TPO the comparison has to be with a company which is providing services by dealing in the domestic market and not towards his clients in form of call centres and other outsourcing services catering to foreign customers. The beneficiary in both cases is a foreign client, but the difference is that in one case the services are being provided entirely in local market and in the case of ITES companies services are being provided by interacting with foreign clients are customers of foreign clients on day to day basis. ITES companies have the advantage of location savings why the business service companies do not have the advantage and since in this case services are being provided in India for the predominant business, Cameo corporate services is a correct comparable to the assessee. Page 8 of 20

We have gone through the financials of this company, including the profit and loss account incorporated page No. 96 and scheduled 8 incorporated at page number 102 of the paperbook relating to the financials of the comparable companies and find that the entire income of Rs. 24,36,67,920/-was shown without any segmental bifurcations.

Further the comparability of the Cameo Corporate Services with the companies providing market support services like assessee was considered by a coordinate Bench of this Tribunal in Vestergaard Asia private limited ITA 6670/del/2015 by order dated 30/11/2017, in the light of the annual reports of the companies and the decision in Adidas Technical Services Private Limited vs. DCIT in discussed the desirability of retaining the Cameo corporate services as one of the comparables, and reached a conclusion that the functional profile of Cameo Corporate Services is similar to the profile of TSR Darashaw Ltd. and not to the companies like assessee in this matter. On that ground Cameo Corporate Services was directed to be excluded from the list of comparables. It is pertinent to note that in Adidas technical services private limited (supra) TSR Darashaw Ltd. was considered and rejected. The Tribunal in Vestergaard Asia private limited (supra) found that Cameo corporate services and TSR Darashaw Ltd. stand on the same footing and are not good comparables to the market support service providers.

Going by the profile of Cameo corporate services extracted by the Ld. TPO in his order and also in view of the nonavailability of segmental information in the financials of this company coupled with the findings of a coordinate Bench of this Tribunal Vestergaard (supra), we are of the considered opinion that Cameo Corporate Services is not a good comparable to the assessee in view of the functionality similarity. We, accordingly, direct the Ld. TPO to delete this company from the final set of comparables.

Ld. TPO, however, opined that the Global Procurement Consultants Ltd., is into the activity of providing procurement management services to government departments and their project execution agencies, and inasmuch as the procurement services are in the nature of business services, Global Procurement Consultants Ltd., is a correct comparable. Ld. DRP in the impugned order stated that Global Procurement Consultants Ltd., is also in the similar line of business as that of the assessee and therefore it should be retained in the list of comparables.

Ld. AR submitted that this company is not a good comparable with the assessee who is only a marketing support service provider whereas Global Procurement Consultants Ltd., is giant government company with diversifying activities. Ld. DR submitted that it is the function that is important but not the magnitude of business or the clients which the companies serve.

We have gone through the material provided in the paper book in respect of Global Procurement Consultants Ltd. and find that Global Procurement Consultants Ltd., is primarily engaged in preparing and reviewing technical specifications, estimation of castes, selection of vendors, inspection and a expediting and quality control and time management. It is also clear that the company renders the procurement related services in exclusively in CIS countries, Eastern Europe and emerging economies in the African continent, by Kettering relates in the areas like Health, Education, Urban and Rural Development, agriculture, mining, transportation, communication, energy, water resources and other key factors. We also further find from the record that Global Procurement Consultants Ltd., conducts procurement pushed revenue for World Bank financed projects, renders financial advisory services with a high volatile margins.

This profile what we have observed from the record certainly makes this company to stand apart from the market support service providers. Further it is submitted by the Ld. AR that this company rejected by Ld. DRP, Delhi in the case of travel security services (India) private Ltd for assessment year 2011-12 by holding that this company is functionality similar and should be deleted from the set of comparable companies rendering business support services. Page 11 of 20 Further a coordinate Bench of this Tribunal in Kobelco Cranes India Private Limited vs. ITO in excluded this company as comparable to the marketing support services. So also in Adidas technical services Ltd vs. DCIT in ITA No. 862/del/2016 and ITA No. 1233/del/2015 a coordinate Bench of this Tribunal excluded this Global Procurement Consultants Ltd., as a good comparable to the marketing support service providers on the ground of functionality similarity.

The profile of this Global Procurement Consultants Ltd., as narrated by the Ld. TPO himself speaks in unequivocal terms that this Global Procurement Consultants Ltd., is a company established by the government to serve the purpose of professional procurement and management services needs and also to provide combines management services required by the government departments or their project execution agencies to carry out the procurement in a time bound and efficient manner within the framework of government regulations and guidelines of international institutions, which is not such a characteristic of the business of the assessee. The business model itself is different, let alone the disproportion is of the financials. We have no hesitation, in the face of the profile of Global Procurement Consultants Ltd., that it is not a good comparable at all to the assessee and for that matter to any private marketing support service provider, as such we direct the Ld. TPO to exclude this company from the list of comparables to benchmark the international transaction of the assessee in providing the market support services to its AEs.

Killik Agencies and Marketing Ltd was opposed before the Ld. TPO by the assessee to be included in the final list of comparables on the ground that this company is providing business services and not comparable with the assessee. Having extracted the business profile of Killik Agencies and Marketing Ltd, Ld. TPO observed that this company earns commission and service charges for providing agency services, one of the services is listed as commission agents services and on that score this is a good comparable for the companies providing market support services. Ld. TPO further observed that there is no need of any segmental financials.

It is the argument of the Ld. AR that Killik Agencies and Marketing Ltd is engaged in agency services in respect of dredgers, Dredging Equipments, steerable Ruddar propulsion is, maritime and aviation lighting and acrostic communications etc., besides rendering engineering services in relation to installation and communication of new equipment and maintenance and repair of old equipment. He submitted that a particular agency in a particulars equipment in a monopolistic environment cannot be equated to the market support services to be a good comparable the companies like assessee.

Ld. DR submitted that, as in the case of the earlier comparables, it is not possible to have the comparables doing the very same business as that of the assessee and we have to take the companies performing the nearest possible functional profile and to make suitable adjustment in order to determine the arms length price. On the premise he submitted that the Killik Agencies and Marketing Ltd will also performing the agency functions and earning commission as an agent is also a good comparable

From the Annual Report of this company we find that Killik Agencies and Marketing Ltd is a public Ltd unlisted company acting as agent for various foreign prince falls far sale of dredgers, Dredging Equipments, steerable Ruddar propulsion, maritime and aviation lighting, acoustic communication Page 13 of 20 equipments etc. and this company also offers after sale services. Apart from this, the company is involved in export of micro switches, engineering items, accoustic items and headsets.

It is brought to our notice that in the case of Parametric Technology India Private Limited, Ld. DRP rejected this Killik Agencies and Marketing Ltd to be a good comparable to the companies engaged in market support services and a Jurisdictional Tribunal that is a Bench of the Bangalore Tribunal upheld such a finding of the Ld. DRP. Further the Bangalore tribunal in the case of DCIT vs. Aruba Networks India Private Limited in ITA-TP 57/bank/2015 found that Killik Agencies and Marketing Ltd is not a marketing support service and it cannot find a place in the set of comparables for such companies.

On a perusal of the profile of this Killik Agencies and Marketing Ltd and also the findings of the tribunal on the comparability of this company with the companies rendering market support services, we are of the considered opinion that Killik Agencies and Marketing Ltd cannot be a good comparable to the assessee and is liable to be excluded from the final list of comparables and, accordingly we direct the Ld. TPO to exclude this company from the list of comparables for benchmarking the international transaction of market support services.

This company was opposed by the assessee before the Ld. TPO on the ground of functionality similarity and the business model. It is argued before us that the TSR Darashaw Ltd. operates in three business segments, namely, Registrar and Transfer Agent activity, Record Management activity and Payroll And Trust Funding activity, which are quite dissimilar to the functions of the assessee. It is further submitted before us the TSR Darashaw Ltd. is a Business Page 14 of 20 Process Outsourcing (BPO) organisation primarily engaged in handling BPO activities in which it handles processing activity serving over 5 million customers and users on behalf of the clients most of whom are leaders in their respective industries.

Ld. TPO observed that the activities of TSR Darashaw Ltd. are in the nature of business services which are outsourced by companies in India and therefore TSR Darashaw Ltd. is a good comparable with the assessee inasmuch as AE of the assessee has also outsourcing some of services to the assessee. On this aspect Ld. DRP held that TSR Darashaw Ltd. is also in the business of payroll, record management and registrar and transfer agent for its client which are comparable to the activities of the assessee and on that score TSR Darashaw Ltd. is a good comparable to the assessee.

Ld. AR submitted that TSR Darashaw Ltd. is not functionally comparable and as per the Annual Report of the company it is primarily engaged in provision of share registry and related financial services and, therefore, cannot be compared with the assessee which is a captive market support service provider. He further submitted that as per company’s website it is engaged in provision of services such as valuation, consultancy, legal services, provision of fixed deposit management, payroll services, real estate initiation services etc. On this ground Ld. AR submitted that TSR Darashaw Ltd. may be excluded from the set of comparables.

Per contra, the Ld. DR while relying on the order of the Ld. TPO, submitted that the comparison has to be with a company which is providing services by dealing in the domestic market and not towards his clients in form of call centres and other outsourcing services carried into foreign customers. The beneficiary in both cases is a foreign client, with the difference that in one Page 15 of 20 case the services are being provided entirely in local market and in the case of ITES companies, services are being provided by interacting with foreign clients are customers of foreign clients on day to day basis. He further submitted that ITES companies have the advantage of location savings while the business service companies do not have that advantage and since in the case on hand the services are being provided in India for the predominant business, TSR Darashaw Ltd. is a good comparable with the assessee.

On a perusal of record and the Annual Report of TSR Darashaw Ltd. we find that TSR Darashaw Ltd. is mainly into the payroll process outsourcing with a new global payroll ERP application called RAMCO for its payroll business. Further the order of Ld. TPO itself reads that TSR Darashaw Ltd. undertakes the registrar and transfer agent activity functions for equity and preference shares, venture instruments and bonds, commercial paper and private placements. Moreover this company, under this segment also undertakes transfer processing customer/query handling and correspondence split/consolidation/renewal of certificates, processing and distribution of interest to slash dividend warrants, payments by physical warrants/through ECS/director credited. In the segment of Records Management activity, TSR Darashaw Ltd. undertakes storage, retention and tribal of physical and/or electronic records. In the segment of payroll and trust fund activity, TSR Darashaw Ltd. handles the activities normally handled by “Payroll and Retirement Funds” section in any organisation including interface with the regulatory authorities. These functions are not at all comparable with the functions performed by the assessee. At the same time no segmental information is available as to the revenues.

Further the coordinate benchs of this tribunal in Microsoft Corporation India Private Limited vs. DCIT in Eli Lilly and Co (India) Private Ltd vs. ACIT in ITA No. 788/del/2015 and Kobelco Cranes India Private Limited vs. ITO in ITA No. 802/del/2016, Adobe Systems India Private Limited vs. JCIT in ITA No. 1163/del/2014, and Adidas technology Services Private Limited vs. DCIT in ITA No. 862/del/2016 held that TSR Darashaw Ltd. is not a good comparable to the companies rendering market support services.

In this factual and legal position, where of the considered opinion that TSR Darashaw Ltd. is not at all a good comparable to the assessee who is rendering only market support services in no way comparable to the functions performed by the TSR Darashaw Ltd. We, therefore, direct the Ld. TPO to delete this company from the finalist of comparables.

For the reasons recorded in the preceding paragraphs, we find that the 5 companies, namely, Apitco Ltd., Cameo Corporate Services, Global Procurement Consultants Ltd, Killik Agencies and Marketing Ltd and TSR Darashaw Ltd. opposed by the assessee before the authorities below are not good comparables to the assessee and they are liable to be deleted. We therefore direct the Ld. TPO to delete all these companies can define a list of comparables for benchmarking the international transaction of Market Support Services rendered by the assessee to AEs., and to recompute the Arm’s Length Price of the international transaction of Market Support Services.

No turning to the issue relating to disallowance of Rs. 5,24,18,207/- under section 40 (i)(a) of the Act, Ld. AO, during the course of assessment proceedings observed that the assessee had incurred certain expenditure in foreign currency on various accounts and out of the same a sum of Rs. 5,24,18,207/-was found inadmissible as the assessee was supposed to deduct Page 17 of 20 tax on such payments but no TDS was made on such payments. Assessee explained that the services were rendered in Bangladesh and there was no business connection of the payee in India and hence this sum is not being chargeable to tax in India, TDS was not done and that no income accruing or arising to the payee in India, as such TDS was not done.

Ld. AO, however, held in paragraph No. 5.2 that the “...payments were made for the alleged professional services in Bangladesh. As per section 5 (2) read with section 9 (1) (vii) (c), such payments are made to non-resident for rendering managerial, consultancy or technical services to such nonresidents find their business in India are taxable in India. Such payments are covered under article XXIV of the treaty. Such payments can also be characterised as royalty for imparting of commercial or industrial knowledge and skill in the act as well as DTAA between India and Bangladesh. The assessee has not furnished the copy of Agreement between the assessee and the payee. xxx xxx xxx xxx xxx xxx in view of discussion in para 5.2 above, the payments are chargeable to tax in India and hence, tedious should have been done. In the event of non-compliance, the provisions of section 40 (i) (a) is attracted and disallowance of rupee Rs. 5,24,18,207/-is is being made.”

It is brought to our notice that in respect of the assessment year 2008- 09 in by order dated 19/04/2018 a coordinate bench of this tribunal considered this aspect of disallowance under section 40 (a)(i) and noted that the fact whether the services have been provided only in Bangladesh and not in India is also not available on record before the AO, and the assessee did not submit Mrs Insight and ideas. Thus mere presumption not be taken into account while determining the nature of payment is whether Fees for Technical Services are Royalty, as such, the claim under section 40 (a)(i) is valid or not needs to be verified at the level of AO. On this ground the tribunal remanded back the issue to the file of the Ld. AO for fresh adjudication after releasing the assessee an opportunity of being heard.

It is submitted by the Ld. AR that in relation to the present assessment year the assessee filed the additional evidence before the Ld. DRP but the Ld. DRP without adverting to such additional evidence recorded that is there is no evidence available during the assessment proceedings to support the premises that the payments which were made to the above party where in the nature of business income in the hands of the parties and were related to marketing/advertising activities carried out in Bangladesh.

The very submission of the learned Counsel that the assessee had to file additional evidence to furnish the alleged Agreement, lends any amount of support to the observations of the Ld. AO that such an Agreement was not available during the assessment proceedings so that the Ld. AO could have returned a finding after appreciating the contentions of the assessee. Further the matter is pending before the Ld. AO for consideration of the very same issue in respect of the assessment year 2008-09, as was remanded by this Tribunal. In the circumstances, we deem it just and proper to remand this issue to the file of the Ld. AO for consideration this issue in the light of the Agreement, after giving an opportunity to the assessee of being heard.

The appeal is, therefore, allowed in part for statistical purposes.