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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI N.K. SAINI & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
Appellant, Corning SAS – India Branch Office (for short ‘the assessee company’), by filing the present appeal sought to set aside the impugned order dated 10.09.2012, passed by the AO under section 144C read with section 143 (3) of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2008-09 in consonance with the orders passed by the ld. DRP/TPO on the grounds inter alia that :-
“1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs.3,74,88,920 as against the income of Rs. 2,34,58,367 returned by the appellant. 2. That the assessing officer erred on facts and in law in making addition of Rs.1,40,30,553 of the alleged difference in the arm's length price of the international transactions undertaken by the appellant.
2.1 That the assessing officer/TPO erred on facts and in law in inappropriately aggregating the international transaction of provision of agency services with market support services, without appreciating that such services ought to have been aggregated with the distribution segment, being closely linked with such segment.
2.2 The TPO erred on facts and in law in inappropriately allocating expenses to the agency segment in the ratio of sales, not appreciating that such allocation ought to have been done on the basis functions performed, assets employed and risks assumed by the appellant in the agency segment. 2.3 That the assessing officer I TPO erred on facts and in law in using inappropriate quantitative filters which are not based on any rational or reasonable basis.
2.4 That the assessing officer I TPO erred on facts and in law in rejecting the comparable companies selected by the appellant, without appreciating that such companies are comparable to the appellant on the parameters of functions performed, assets employed and risks assumed.
2.5 That the assessing officer / TPO erred in selecting the following companies for the purpose of benchmarking the international transactions undertaken by the appellant: a) APITCO Ltd b) Choksi Laboratories Ltd c) WAPCOS 2.6 That the assessing officer / TPO erred on facts and in law in selecting super normal profit making companies namely, APITCO and W APCOS as comparable to the appellant. 2.7 Without prejudice that the assessing officer / TPO erred on facts and in law in not appreciating that the assessee operates as a low-risk-bearing contract service provider and a risk adjustment on a conservative basis to the extent of 5% over the cost should be provided, as risk and reward to this extent vest with the overseas associated enterprise.”
Hon’ble High Court vide order dated September 18, 2017 passed in ITA 5-5/2017 remanded this appeal back to the Tribunal for disposal on merits for limited purpose, qua the issue concerning validity of the inclusion of the three comparables, Aptico Limited, Choksi Laboratories Limited and Wapcos and the exclusion of three comparables as suggested by the Assessee viz. Educational Consultants (India) Limited, India Tourism Development Corporation Limited and In House Productions Ltd. made by ld. DRP.
Briefly stated the facts necessary to adjudicate the issues in controversy are : assessee company is into the distribution of Rough Ophthalmic Blanks (ROB) in India and providing agency services for sale of certain non-ophthalmic products viz. optical fiber, optical fiber cable and other telecommunication equipments to the head office and entered into international transactions with its head office and other Corning group companies during the year under assessment as under :-
S. Nature of Transaction Amount Method PLI No. 1 Import of Rough Ophthalmic 228,505,530 TNMM OP/OR Blanks 2 Marketing support services 60,400,045 TNMM OP/OC 3 Agency support services (Treated 8,197,038 TNMM OP/OR as closely linked with Import of Ophthalmic Glass Product for distribution) 4 Reimbursement of Expenses Recd. 3,204,022 --- ---
Assessee is into three categories of business viz. distribution business involving import of ROB from Associated Enterprises (AEs), namely, Head Branch or Corning SAS Branch and warehousing some of these products used to be sold in India and neighbouring countries; assessee also provides agency services for ophthalmic glass products sold by Corning France directly to the buyers in India at the commission of 3% of the sales value; that the assessee also renders marketing support services for sale of non- ophthalmic products, optical fiber cable and other telecom equipment etc.; the Marketing Support Services includes collecting marketing information, exploring sales and distribution services, marketing research and promoting awareness about the Corning products in India market and is remunerated for such services at cost plus mark up at 5%; that assessee claimed that its agency service activities and distribution activities are similar in nature, thus clubbed together and determined the Arms Length Price (ALP) by applying TNMM. However, TPO disagreed with the assessee company and segregated agency activities from distribution and clubbed it with marketing activities for computation of ALP.
Assessee company being a service provided applied TNMM with OP/OC as the Profit Level Indicator (PLI) and worked out tested party margin at 5.73%.
Assessee company chosen 12 comparables showing margins of the comparables at 8.86% as against margin of 5.73% of tested party by using data for AYs 2006-07, 2007-08 and 2008-09 and found its international transaction at arms level, so far as marketing support services are concerned.
TPO, in order to benchmark the international transaction, combined all agency services activities with market support activities and applied TNMM and determined the income from the agency services by allocating indirect expenses aggregating to Rs.28,99,07,910/- relating to distribution segment comprising of distribution and agency service functions in proportion of distribution sales and sales to earn agency commission i.e. in the ratio of 52.25% and 47.75%. TPO then came to the conclusion that in the agency service business, assessee incurred loss of Rs.17,37,667/- and TPO has further considered the cost of Rs.99,34,705/- as part of the market support services at Rs.5,71,27,738/- and aggregate cost of Rs.6,70,62,443/- was considered as cost base for undertaking benchmarking of agency service commission and marketing support services.
However, TPO after rejecting the TP analysis made by the assessee proposed TP adjustment of Rs.1,32,99,572/- to the ALP of international transactions by segregating the agency services from the distribution services and clubbed the same with marketing support services for the purpose of benchmarking the international transaction by applying TNMM.
Assessee carried the matter before the ld. DRP by filing objections and the DRP has upheld the reasoning of the TPO regarding segregation of international transactions under the distribution segment and agency segment and aggregating the agency segment with transaction under the marketing support segment; allocation of common expenses to agency segment on the basis of sales/revenue under the said segment vis-à-vis distribution segment and not in the ratio of their gross margin. However, ld. DRP directed exclusion of two comparables viz. Rites Limited and Vapi Waste and Effluent Management Co. Ltd. and consequently revised average of OP margin of remaining comparables comes to 23.21% and TP adjustment stood increased to Rs.1,40,30,533/-.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Undisputedly, the assessee has not challenged the aggregation of agency segment with marketing support segment in view of the order for AY 2003-04 passed in assessee’s own case which has since attained finality nor assessee has challenged allocation of common expenses under the agency segment under the sales/revenue earned under the said segment vis-à-vis distribution segment and not in the ratio of their respective gross margin. As per the challenge made by the assessee, now the Tribunal is to decide exclusion of three comparables viz. Apitco Limited, Choksi Laboratories Ltd. and Wapcos and inclusion of three comparables viz. Educational Consultants (India) Limited, India Tourism Development Corporation Limited and In House Productions Ltd. as sought for by the assessee which would be discussed one by one as under.
COMPARABLES SOUGHT TO BE EXCLUDED BY THE ASSESSEE APITCO LIMITED (APITCO) 12. Assessee sought exclusion of Apitco on the ground of functional dissimilarity; non-availability of segmental data; it being a 100% Government organisation and relied upon the decisions of the coordinate Benches of the Tribunal in Cisco Systems (India)(P)
Ltd. vs. DCIT – 66 SOT 82, Ciena India (P.) Ltd. vs. DCIT – & 3324/Del/2013 for AY 2008-09, Avaya India Pvt. Ltd. vs. DCIT – ITA No.146/Del/2013 for AY 2008-09, International SOS Services India P. Ltd. vs. DCIT in ITA No.1631/Del/014 and Kobelco Cranes India P. Ltd. vs. ITO in ITA No.802/Del/2016.
Apitco was challenged by the assessee before the ld. DRP but perusal of the order passed by the ld. DRP shows that no specific findings have been returned. When we examine the annual report, available at pages 1 to 26 of the annual reports paper book, it has come on record that Apitco is into diversified business, namely, asset reconstruction & management services, project related services, infrastructure planning & development, research studies and tourism, skill development, environment management, cluster development, etc. but segmental data is not available in its financial statement, available at pages 19 & 20 of the annual reports paper book.
When we examine the diversified functions being carried out by the Apitco with no entity level accounts maintained, it becomes functionally dissimilar to assessee. Comparability of Apitco has been examined by the coordinate Bench of the Tribunal in Kobelco Cranes India Pvt. Ltd. (supra) available at pages 130 to 160 of the case laws paper book and Cisco Systems India Pvt. Ltd. (supra) available at pages 239 to 299 of the case laws paper book, observed that the company providing marketing support services cannot be a valid comparable on entity level when no segmental data of diversified services being provided by Apitco is not available. So, we order to exclude Apitco from the final set of comparables for benchmarking the international transactions.
CHOKSI LABORATORIES LTD. (CHOKSI)
Assessee sought exclusion of Choksi on ground of functional dissimilarity being into analyzing food and agricultural products, cement and building material, chemicals, drugs and paints; Choksi is also providing end to end solutions. The assessee has sought exclusion of Choksi by raising objection before ld.DRP who has not decided the issue by returning specific findings.
When we examine the assessee company, which is a routine market support service provider vis-à-vis Choksi which is providing end to end solution and is into commercial testing and analysis laboratory engaged in analyzing food and agricultural products etc., it is not a valid comparable. Moreover, segmental reporting is also not available as in the annual report, available at page 48 of the annual reports paper book. The segmental reporting is explained as under :-
“08. Segmental Reporting : The Company treats Analytical Charge and Consultancy Receipts as a single segment and therefore details of segments are not separately shown. The Company is a Commercial Testing House engaged in testing of various products and also offers services in the field of pollution control as allied activity. The company is managed organizationally as a unified entity with various functional heads reporting to the top management and is not organized along segments. There are, therefore, no separate segments within the Company as defined by AS-17 (Segmental Reporting) issued by the ICAI.”
So, in the absence of segmental reporting, Choksi cannot be taken as a valid comparable. Coordinate Benches of the Tribunal in Toluna India Pvt. Ltd. vs. DCIT in available at pages 317 to 321 of the case laws paper book and Avaya India Pvt. Ltd. in ITA No.146/Del/2013, available at pages 322 to 337 of the case laws paper book, directed to exclude Choksi as a comparable for benchmarking the international transaction vis- à-vis routine marketing support services providers, the assessee in this case. So, we order exclusion of Choksi from the final set of comparables.
WAPCOS 18. Assessee initially sought exclusion of Wapcos by raising objection before DRP who has not specifically decided the same, on the ground that it is functionally dissimilar as it has been providing high end consultancy services in water resources, power and infrastructure and as such, is a technical consultancy organisation. Assessee also challenged Wapcos on the ground that its separate segmental reporting for marketing supports services is also not available.
Perusal of the annual report as to its technical activities available at page 61 of the annual reports paper book shows that Wapcos undertakes consultancy services in the fields of Hydro Power and Thermal Power Projects, Transmission and Distribution Projects, Rural Electrification Project etc. These services are being rendered through the specialized divisions viz. Civil Designs and Electrical.
So when the Wapcos is into high end technical activities by rendering technical consultancy services for various projects and segmental reporting is not available, the same cannot be compared with assessee which is a routine market support service provider. Comparability of Wapcos was examined by coordinate Benches of the Tribunal in Avaya India Pvt. Ltd. vs. DCIT in available at pages 322 to 337 of the case laws paper book, DCIT vs. MCI Com India (P.) Ltd. (now known as Verizon India Pvt. Ltd.) in ITA No.2766/Del/2010 available at pages 161 to 180 of the case laws paper book and CIT vs. Actis Advisors Pvt. Ltd. in ITA No.952/Del/2015, vis-à-vis routine market support service provider and found to be incomparable and is ordered to exclude the same. So, we find Wapcos being not a valid comparables vis-à-vis assessee which is a routine market support service provider for benchmarking the international transaction. So, we order to exclude the same.
COMPARABLES SOUGHT TO BE INCLUDED BY THE ASSESSEE
Initially, ld. AR for the taxpayer sought to include three comparables viz. Educational Consultants (India) Limited, India Tourism Development Corporation Ltd. and In House Production Ltd. in the final set of comparables for benchmarking the international transactions but, after arguing for sometime, ld. AR preferred not to press the same. In these circumstances, ground raised
by the taxpayer for inclusion of aforesaid comparables is determined against the taxpayer.