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Facts
Benetton India Pvt. Ltd., a subsidiary of Benetton International NV, is engaged in the manufacturing and sale of readymade garments in India. The case involves two appeals: one by the assessee for AY 2017-18 and another by the Revenue for AY 2010-11, both concerning Transfer Pricing adjustments. For AY 2017-18, the TPO made a significant adjustment of Rs. 72,23,54,728/-, largely for royalty payments, advertisement reimbursements, IT cost allocation, and consultancy services, which the assessee challenged. For AY 2010-11, the Revenue contested the CIT(A)'s deletion of TPO's adjustments on the arm's length price for international transactions, including royalty, expense reimbursements, and market support services.
Held
For AY 2017-18, the Tribunal upheld the assessee's CUP method for royalty payments, rejecting the TPO's TNMM based on judicial consistency from prior years. Adjustments for IT Cost Allocation and Consultancy Services-HR Cost were deleted following previous tribunal decisions, while the advertisement expenses issue was remanded to the TPO for fresh determination. For AY 2010-11, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s deletion of adjustments for royalty and IT cost allocation due to consistent precedent. For market support services, the Tribunal largely upheld the CIT(A)'s approach to comparable selection and directed the TPO/AO to re-compute the arm's length price.
Key Issues
The core legal issues revolved around the determination of Arm's Length Price for royalty payments, advertisement expenses, IT cost allocation, and consultancy services, including the appropriate benchmarking methods (CUP vs. TNMM) and the selection of comparable companies for transfer pricing analysis, while adhering to the principle of judicial consistency from past assessment years.
Sections Cited
Section 143(3), Section 144C(13), Section 143(3A), Section 143(3B), Section 144B, Section 270A(1), Section 92CA(1), Section 92CA(3), Rule 10B(2), Rule 10B(1)(e), Section 92(1), Section 115JB
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Income Tax Appellate Tribunal, [ DELHI BENCH: ‘I’ NEW DELHI ]
Before: SHRI G. S. PANNU & SHRI YOGESH KUMAR U.S.Shri Deepak Chopra, H. S. Ajmani, Sh. Shri Mahesh Shah,
per the Annual Report of APITCO Ltd., it is evident that it is engaged in provision of various services and not products.
The ld. AR submitted that APITCO Ltd is a government-controlled company engaged in diversified services. He relied on the judgments of Hon’ble Delhi High Court in Philip Morris (ITA No. 1468 of 2018) and various judgments of coordinate benches which have held that APITCO Ltd. be excluded as a comparable.
We have heard the rival arguments. APITCO Ltd. is a government company set up for specific government purposes. It provides diversified high end technical services, that are different in nature than the support services.
Further, this company has been consistently excluded on the basis of functional comparability by the coordinate benches and the exclusion is upheld by the Hon’ble High Court. Therefore, we agree with the contention of the assessee and uphold the decision of the ld. CIT(A) to exclude this company from the list of comparables.
The TPO included HCCA Business Services Pvt. Ltd as it is engaged in provision of business/market support services and clears all the filters set by him. The ld. CIT(DR) submitted that the assessee excluded the company in its TP Study due to insufficient information and the audited financials were available at the time of the TPO’s order. He further submitted that there is negligible impact of owning intangible assets as the assessee does not use these assets in provision of services.
The Ld. AR objected to the company’s inclusion as it owns significant amount of intangibles in the form of business and commercial rights. He also contended that it is functionally not comparable as it provides HR services.
We have heard the rival arguments. We find that the comparable company HCCA Business Services Pvt. Ltd. has total fixed assets to the tune of Rs. 6.27 Cr. As per Schedule-D of fixed assets out of the same, business and commercial rights are of Rs. 3.75 Cr. and Computer software is of Rs. 1.15 cr.
This highlights the difference in the asset holding of the assessee company vis- a-vis comparable company. Further, it is observed that the comparable company has claimed software development cost of Rs. 1.5 Cr. during financial year 2008-09. This shows that the company has a dependency on the technology to deliver the functions. Since the functions performed by the comparable are dependent on the technology and are therefore, not comparable with the tested party. Accordingly, HCAA is not a good comparable in this case. This in view of the proposition of ‘functional similarity’ laid down by the Hon’ble Delhi High Court in the Rampreen Green Solutions. In view of above, we do not find any infirmity in the action of the Ld. CIT(A), hence, we uphold the same.
The TPO included Quippo Valuers and Auctioneers Pvt. Ltd as it is engaged in provision of selling services, does not have significant material costs and clears all the filters set by him. The ld. CIT(DR) relied on the order of the TPO.
The Ld. AR objected to the company’s inclusion as it is functionally not comparable being an appraiser and auctioneer for construction equipment. He also relied on the decision of the Coordinate Bench in Adidas Technical Services Pvt. Ltd vs. DCIT (ITA No.1233/Del/2015).
We have heard the rival arguments. The services provided by Quippo Valuers and Auctioneers are in the nature of valuation and auctioning, which are different from the assessee. Further, this company has been excluded on the basis of functional comparability by the Coordinate Bench in Adidas Technical Services Pvt Ltd vs. DCIT (ITA No.1233/Del/2015). Therefore, we agree with the contention of the assessee and uphold the decision of the ld. CIT(A) to exclude this company from the list of comparables.
The TPO included T S R Darashaw Ltd as it is engaged in provision of business support services and clears all the filters set by him. The ld. CIT(DR) relied on the order of the TPO and submitted that the segmental accounts of the company are available.
The ld.AR objected to the inclusion of the company on the ground that it acts as a depository and share registrar. He also relied on the judgments of Hon’ble Delhi High Court in Philip Morris (ITA No. 1468 of 2018) and various judgments of coordinate benches which have held that T S R Darashaw Ltd. be excluded as a comparable.
We have heard the rival arguments. TSR Darashaw Ltd provides registrar and transfer agent services, records management services and payroll and trust fund services. All these segments are functionally different from the marketing support activities performed by the assessee. Further, this company has been consistently excluded on the basis of functional comparability by the coordinate benches and the exclusion is upheld by the Hon’ble High Court.
Therefore, we agree with the contention of the assessee and uphold the decision of the ld. CIT(A) to exclude this company from the list of comparables.
India Tourism Development Corporation Ltd (ITDCL).
The TPO excluded ITDCL as it is functionally different from the assessee.
The ld. CIT(DR) submitted that as per the segmental results of the company provided in the Annual Report, the “ARMS” Segment is unidentifiable.
The ld. AR relied on the order of the ld. CIT(A) which seeks inclusion of this company if the segmental results of Ashok Reservation and Management System (“ARMS”) are available.
We have heard the submissions of both the parties. ITDCL is a government company engaged in operation of hotels, restaurants, shops and also earns revenue from consultancy and ticketing systems. The TPO has observed that the functions performed by ARMS are close to the functions performed by the tested party. The segmental data is available at Page No. 78 of the Annual Report, therefore, ARMS segment of ITDC is a good comparable with the tested party. Therefore, in this background, in our considered view, the Ld. CIT(A) has rightly directed the AO to include ITDS (ARMS segment) as a good comparable if the assessee provides the segmental financial results for benchmarking analysis. In view of above, we do not find any infirmity in the action of the Ld. CIT(A), hence, we uphold the same.
The TPO excluded Overseas Manpower Corporation Ltd. from the list of comparables as it was an employee placement agency and has diminishing revenue. The ld. CIT(DR) submitted that the ld. CIT(A) was factually incorrect in observing that the TPO did not question the functional comparability of the company.
The ld. AR relied on the order of the CIT(A) which directed inclusion of the company as the TPO did not question the functional comparability.
We have heard the rival arguments. We find that the stand taken by the TPO to reject the comparable is not in conformity to the judicial precedent, as held by the Hon’ble Delhi High Court in the case of Chryscaptial Investment Advisors (India) Pvt. Ltd. vs. DCIT (ITA No. 417/2014) wherein, the Hon’ble High Court has held that the company cannot be rejected merely on account of wide fluctuation in margin (profit/loss) if it is otherwise comparable. It is noted that Ld. CIT(A) has observed in his finding that TPO has nowhere questioned the functional comparability aspect, and therefore, observed that Overseas Manpower Corporation Limited is a good comparable and directed the AO to include it in the final matrix of comparables. In the background of the aforesaid, we do not find any infirmity in the action of the Ld. CIT(A), hence, we uphold the same.
The TPO excluded ICRA Management Consulting Services Ltd. as it is classified as a management consultant. The ld. CIT(DR) submitted that the company offers professional services, not similar to the assessee.
The ld. AR submitted that the TPO has accepted the comparable in the preceding and succeeding years.
We have heard the rival submissions. The TPO/AO included the company as a comparable in AY 2009-10, AY 2011-12 and AY 2012-13. In the current year, no different facts were brought on record. Therefore, no difference is warranted in its treatment. Following the principle of consistency, we agree with the contention of the assessee and uphold the decision of the ld. CIT(A) to include this company in the list of comparables.
In view of above, the TPO/AO is directed to give effect and re-compute the arm’s length price for the marketing support services segment. Accordingly, the Ground No. 3 of the Revenue is dismissed.
The Grounds No. 4 and 5 of the Revenue are general in nature which requires no adjudication.
In the result, the appeal of the Revenue in is dismissed.
Order pronounced in the open court on : 24/ 07/2024.