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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI B.P. JAIN & SHRI KULDIP SINGH
(PAN : AADCB7453L) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/Shri Atul Jain & Mankush Soni, CAs REVENUE BY : Shri Koushlendra Tewari, Senior DR Date of Hearing : 21.11.2017 Date of Order : 12.12.2017
O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. M/s. Belkin India Private Limited (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 15.03.2017, passed by the AO in consonance with the orders passed by the ld. CIT (A)/TPO under section 250 / 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2011-12 on the grounds inter alia that :-
“1 On facts, circumstances of the case and in law, the Learned Commissioner of Income-Tax (Appeals) - 19, New Delhi [herein referred to as "Ld. CIT(A)"] erred in confirming an addition of INR 15,503,946 to the taxable income of the Appellant on account of determination of arm's length price of the international transaction u/ s 92CA(3) of the Income-tax Act, 1961 (“the Act").
2 On facts and in law, the Ld. CIT(A) erred in confirming the action of the Deputy Commissioner of Income-tax, Transfer Pricing Officer - 1(1)(2) ("Ld. TPO") of disregarding the economic analysis carried out by the Appellant u/ s 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 (lithe Rules"), by modifying filters and arbitrarily rejecting the companies selected by the Appellant which are functionally comparable.
3 On facts and in law, the Ld. CIT(A) grossly erred in confirming the action of Ld. TPO of including Media Research Users Council as a comparable company.
4 The Ld. AO erred on facts and in law in initiating penalty proceedings under sections 271(1)(c) of the Act.
5 The Ld. AO, based on directions of Ld. CIT(A), erred on facts and in law in charging interest under section 234B and 234C of the Act.” 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : Belkin India Pvt. Ltd., the taxpayer is a 99% subsidiary of Belkin B.V. engaged in marketing support for computer and mobility equipment, accessory and related products and are performing the functions viz. providing information on Indian market, product awareness, information on regulatory environment in India and coordinating in respect of logistic services.
During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprise (AE) to the following effect :-
Sl.No. Name of the international Amount transaction (INR) 1 Provision of support services 171,249,543 2 Purchase of fixed assets 2,683,783 3 Reimbursement of expenses paid 2,030,640 4 Reimbursement of expenses 495,209 received
The taxpayer in order to benchmark its international transaction selected 6 comparables having average Net Cost Plus (NCP) at 8.22% as against NCP mark up of taxpayer at 9.99% and found its international transactions at arm’s length.
However, TPO rejected 6 comparables chosen by the taxpayer and retained 2 and introduced 2 new comparables and calculated NCP mark up of 4 comparables at 26.34% as against NCP mark up of taxpayer at 9.99% and proposed the adjustment on account of arm’s length price at Rs.2,54,52,714/-.
The taxpayer has not approached the ld. DRP rather raised objections before the ld. CIT (A) who has ordered to exclude one comparable viz. Info Edge India Ltd. from the final list of comparables. Consequently, average NCP mark up of 3 comparables was recomputed at 19.95% vis-à-vis NCP mark up of taxpayer at 9.99% thereby reducing TP adjustment to Rs.1,55,03,946/-.
Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
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.
GROUNDS NO.1, 2 & 3 9. TPO while benchmarking the international transactions qua Market Support Service segment after applying various filters selected 4 comparables which are as under :-
Sl.No. Company Name OP/OC 1 Quadrant Communication Ltd. 14.58 2 Concept Communication Ltd. 4.73 3 Info Edge (India) Ltd. 45.53 4 Media Research Users Council 40.53 Average 26.34 and proposed TP adjustment u/s 92CA at Rs.2,54,52,714/-.
However, ld. CIT (A) after considering the contentions raised by the taxpayer ordered to exclude Info Edge (India) Ltd. from the final set of comparables. Consequently, the average NCP mark up of 3 comparables comes down to 19.95% as against NCP mark up of 9.99%. Pursuant to the order passed by the ld. CIT (A), AO passed fresh assessment order dated 15.03.2017 reducing the TP adjustment to Rs.1,55,03,946/- from Rs.2,54,52,714/- which is under challenge before the Tribunal.
At the very outset, the ld. AR for the taxpayer contended that the taxpayer only challenges inclusion of one comparables viz. Media Research Users Council (MRUC). Functional profile of the taxpayer is not in question. Method for benchmarking the international transaction has also been accepted by the ld. TPO. Now, we will examine the suitability of Media Research Users Council (MRUC) in the light of the contentions raised by the ld. AR for the taxpayer as well as ld. DR for the Revenue.
The ld. AR for the taxpayer challenged the inclusion of MRUC as a comparable for benchmarking the international transaction qua market support service segment on grounds of functional dissimilarity; that MRUC is a not-for-profit organisation; that MRUC outsources most of its activities to third party; that MRUC does not qualify the filter applied by the TPO qua Related Party Transaction (RPT) and relied upon the decision of M/s. Linked in Technology in ITA No.706/Del/2016.
However, on the other hand, ld. DR for the Revenue to repel the arguments addressed by the ld. AR for the taxpayer contended that when the functional profile of a company is similar to the taxpayer, it cannot be excluded for benchmarking international transaction merely because of the fact that it is a not-for-profit organisation.
Undisputedly, major source of revenue of MRUC is the income from its members in the shape of membership fee and subscription fee for Indian Readership Survey (IRS) and Indian Outdoor Survey (IOS) reports. When we refer to relevant page 374 of the annual report of MRUC, available in the paper book, it is referred as a not-for-profit organisation representing four different stakeholders in Media Research covering media sellers and buyers, operative portion thereof is extracted for ready reference as under:-
“Membership The Council has from the beginning, been a non-for-profit organisation representing four different stakeholders in Media Research covering media sellers and buyers. On 31st March 2011, MRUC had members as follows :- No. Advertisers 58 Publishers 107 Advertising Agencies 51 Broadcast and Other media 33 249
When we examine the issue of comparability of taxpayer vis-à-vis MRUC in the light of Rule 10B (2) of the Income-tax Rules, 1962 (for short ‘the Rules’), we are of the considered view that the taxpayer cannot be compared with MRUC because of functional dissimilarity as no risk is assumed by the MRUC being a not-for-profit organisation and only serves the interest of its members and assets employed are only from the membership fee as well as subscription fee collected from its 249 members.
Furthermore, benefits / profits of the MRUC are not divided between the members, it being a not-for-profit organisation. So, the MRUC does not qualify the parameters lay down under Rule 10B (2) of the Rules, necessary for comparability analysis. Even otherwise, surplus of MRUC are neither distributed among the members nor are offered for income-tax purposes.
Furthermore under section 10B(1)(e) under Transactional Net Margin Method (TNMM), net profit margin established by the TP analysis is taken into account to arrive at the arm’s length price qua international transactions. In case of MRUC being a not-for- profit organisation, profit making is not the motive rather it is operating in media research covering media sellers and buyers for some specific motive of the company. So, a not-for-profit organisation cannot be compared with the taxpayer which is a company established for making profit.
Furthermore it is event from page 386 of the annual report of MRUC, available in the paper book, that MRUC paid expenses to the tune of Rs.9,27,95,904/- (in the earlier year RS.8,19,52,193/-) to the third party research agency for generating income from its member by way of subscription fee for IRS/IOS, meaning thereby MRUC outsourcing expenses comes to 85% of the total expenses.
So, in the given circumstances, MRUC cannot be compared with the taxpayer which does not outsource any of its activity.
Furthermore MRUC does not qualify turnover filter of Rs.5 crores applied by the TPO for selecting the comparables as is evident from page 382 of the paper book which is income and expenditure account and total income is shown at Rs.2,64,37,978/-.
By applying the filters of Rs.5 crores, the TPO has rejected other comparables of the taxpayer viz. “Sporting & Outdoor Ad Agency Ltd.”. So, the MRUC is liable to be excluded from the final set of comparables on ground of turnover filter of Rs.5 crores also.
Even otherwise, the major transactions of MRUC is Related Party Transactions as its substantive income is generated from membership fees and subscription fees for IRS/IOS reports and as such, price cannot be considered as independent controlled price as the major revenue is earned from its 249 members. Suitability of MRUC as a comparable has come up before the coordinate Bench of the Tribunal in Linked in Technology (supra) and has been ordered to be excluded for the reason discussed in the preceding paras.
In view of what has been discussed above, we are of the considered view that MRUC is not a suitable comparable vis-à-vis the taxpayer for benchmarking the international transactions qua market support services segment. Consequently, grounds no.1, 2 & 3 are determined against the taxpayer.
GROUND NO.4 22. Ground No.4 needs no findings being premature.
GROUND NO.5 23. Ground No.5 qua levy of interest u/s 234B and 234C of the Act need no specific finding being consequential in nature. 24. Resultantly, the appeal filed by the assessee is dismissed. Order pronounced in open court on this 12th day of December, 2017.