ABERCROMBIE & KENT INDIA PVT. LTD.,NEW DELHI vs. ACIT, NEW DELHI

O R D E R PER I. C. SUDHIR, J.M. :

The assessee has raised the following grounds in his appeal for assessment year 2006-07 :-

“ 1. Without prejudice, the assessing officer applied Transactional Net Margin Method (TNMM) and then erred in law in determining the Arms Length Price (ALP) in relation to an international transaction under the TNMM by computing the net profit margin realized by the assessee at entity level (at 15.98%) and not on the basis of the net profit margin realized by the assessee only from its international transactions (at 23.91%) as mandated by Rule 10B(1)(e) and by Hon’ble ITAT, Mumbai in the case of T Two international Pvt. Ltd. , Tara Jewels Exports Pvt. Ltd. Tara Ultimo Pvt. Ltd., UCB India P. Ltd. Vs. Asstt. Comm. of Income Tax, Dy. CIT vs. Starlite [2010]6 taxmann.com41, Addl. CIT vs. Tej. Diam [2010]37 SOT 341 (Mum).

2. The assessing officer has erred in law and on facts in rejecting the Comparable Uncontrolled Price (CUP) workings (based on internal TNMM derived from comparisons of similar transactions between AEs and Non AE) submitted by the assessee and relied upon by the assessing officer.

3. The assessing officer has grossly erred on facts and in law by not accepting the transfer pricing methodology in spite of the fact that the assessee had undertaken similar transactions with non-AEs amounting to Rs. 25,19,30,724/- (42.55 % of total sales) and with AEs amounting to Rs. 34,02,16,704/- (57.45 % of total sales) and evidently demonstrated through audited segment accounts that it earned a margin of 23.91% from its AE transactions and 03.43% from its non-AE transactions.

4. The Assessing officer applied TNMM and then erred in using incorrect profit margin calculated at entity level (15.98 %) for the assessee, instead of the correctly computed profit margin from international transactions with AEs (23.91%), earned by the assessee and has further erred in not calculating the ALP in relation to the international transactions of the Income Tax Rules, 1962) and directly compared the incorrect margin of 1598% with the margin of allegedly comparable companies.

5. The transfer pricing adjustment is based on the mean margin formulae which the assessing officer has calculated by dividing OP or Operation Profit {(which is taken as Net Profit) with OC or Operating Cost (which is taken as Gross Profit)} The assessing officer has erred in law and on facts by applying the resulting mean margin percentage (21.53% for comparables) on the gross amounts of international transactions of the assessee instead of calculating the net profit based on the gross profit of the international transactions of the assessee (as per the formulae worked out by the AO for calculating the mean margin).

6. Without prejudice, the assessing officer erred in law and facts in wrongly rejecting the comparable company i.e. Travel Corporation of India Limited (TCI) (carrying on the similar business of handling inbound tour as that of the assessee) identified by the assessee, based upon the logical search process (i.e. CAPITALINE).

7. The assessing officer erred in law and on facts in concluding that the assessee is engaged in the business of providing comprehensive travel and tour related services, whereas in fact, during the year under consideration, the assessee has primarily earned its revenue from inbound tours only. The assessing officer has further erred in unilaterally identifying other companies (i.e. Cox & Kings India Ltd, International Travel House Ltd, and Shreeraj Travels and Tours Ltd) as comparable, that were not comparable with the assessee, operationally and / or functionally.

8. The assessing officer has erred in law and on facts in not carrying out the Function, Assets and Risk analysis (FAR) while selecting the comparables.

9. The assessing officer has erred in law and on facts in not conforming the assessee with the comments of the TPO sought by Dispute Resolution Panel (DRP) during the proceedings of the DRP.

10. The assessing officer has erred in law and on facts in adopting different basis for determining OP/OC for comparing the profits margins to make transfer pricing adjustments.

11. The assessing officer erred in law and on facts of this case in relying on the data during the course of assessment which was not available to the assessee at the time of preparing transfer pricing documentation.

12. That the assessing officer erred on facts and in circumstances of the case and in law completely ignoring the duly audited segment- wise report filed before DRP on the financial results for determination of ALP based upon TNMM in respect of transactions with AE and non-AE. ”

2. Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.

4. In support of the grounds the ld. AR, Shri P.C. Yadav, has submitted the following written synopsis :-

a. Inbound tours, involves non residents travelling in India b. Outbound tours, involves residents travelling outside India

3. Certain dates which are relevant to decide certain admitted facts are as under:-

Date Event Remarks 22.10.2006 ROI declaring an Income of Rs 1,37,39,380/- was filed 26.10.2007 ROI filed by the assessee was processed u/s 143(1) of the Act Case of the assessee was referred to TPO observing international transactions. 19.10.2009 TPO after making an adjustment referred the matter back to the AO 22.10.2009 Assessee filed an application before the DRP raising its objections 23.04.2010 DRP heard the matter 30.06.2010 DRP affirmed the order of TPO 26.07.2010 AO affirmed the order of DRP

5. It is submitted that the TPO has applied the TNMM method for finding out the Arm’s Length price of International Transactions. Ld TPO without applying FAR test and has chosen four comparables and has made the adjustment to the international transactions. It worthy to mention here that all these comparables have been dropped in next AY i.e AY 2007-08 and comparable chosen by the assessee namely TCI has been adopted as correct in next AY and no adjustment of any amount on account of payments made for services has been made in next year.

6. The main reason for rejecting the method of assessee as assigned by the TPO is that assessee has not submitted audited segment of the transactions entered with AE and non-AE and hence segments produced by assessee are not reliable.

7. The Ld TPO after rejecting the method of assessee applied TNMM, and made the adjustment of Rs2,05,69,692/- and the AO and DRP has affirmed the order of TPO.

9. Ld DRP without considering the submissions of the assessee dismissed the appeal of assessee and now the assessee is before this Hon’ble ITAT

Submissions of the assessee are asunder :-

10. It is pertinent to mention here that total sales of the assessee with AE is 34,02,16,704/- and total sales with Non AE of assessee is 25,19,30,724/-( see Page no-41 and 42 of PB-4 and voucher wise breakup is given at Page No115 onwards of PB-2). The TPO while making adjustment and computing ALP has taken the total receipts to such tune as has been shown by the assessee and figure of sales with AE as correct. However the TPO rejected the figures of sale vis-à-vis non AE without apportioning any expenses to such sales on the ground that assessee failed to submitted the audited segments of the transactions with AE and non AE and hence allocation of expenses is not correct. Submissions in this regard are made hereunder:-

11. It is submitted that Ld TPO has selected four comparables as mentioned at Page NO-10 of TPO order for AY 2006-07. When these comparables confronted to assessee the assessee, submitted his objections vide letter dated 05.10.2009- See Page No- 170 of PB -1, relevant submissions are at Page No-191 of the PB. In these submissions the assessee has pointed out that comparables chosen by the TPO are not similar with the assessee. However, the Ld TPO without applying the FAR test in a correct perspective, dismissed the contentions of the assessee.

12. It is submitted that assessee, without admitting any of the comparables, just wish to distinguish the Cox & King and desire the exclusion of the same from the list of comprables. In other words it is submitted that if Cox & King alone is excluded from the comparables then the mean of the comparables would be 19.24% which is within the range of + 5% of the total profits of the assessee that is 15.98% as adopted by the TPO.

Cox and King Assessee

Functions of C&K It is submitted that assessee is an Inbound tour operator. It arranges It is submitted that Cox& King is tours for foreigners travelling to mainly out bound tour operator. India. Functions of assessee are Means it send Indians abroad and very well explained in T.P study in lieu of this operation it gets report. See Page No-14 of PB-3. commissions. It is pertinent to The functions of the assessee are mention here that in the impugned reproduced hereunder:- year it has income from commission to the tune of Rs a) A&K on receipt of booking 63.17 Crore and has not earned order, will contact the any income from tour operations- customer and provide the See Page No-109 of PB -2 customer with requisite information and details It is submitted that 2nd nature of b) A&K India will coordinate, receipt is surrender of tenancy arrange and organize the rights, this has been exluded by entire trip of the customer the TPO himself at the time of including interaction with passing the order hotels, guides, transporters etc. c) A&K India will keep the customer informed of any delay or any other specific information which A&K India believes can materially affect the trip. d) A&K India from the moment the client set foot in India greet with traditional Namaste Gesture- two hands joined together in welcome and with this journey in India starts and becomes memorable.

It is submitted that income of the assessee from the tour operations is to the tune of Rs 59,21,47,427/- . All in foreign exchange- See Page No- 19 of PB-1. It is pertinent to mention here that income from commission of assessee is very meager i.e. Rs 75000/- only See Page No-112 of PB-1

The fact of the matter that assessee is earning 99% of its receipts from Inbound tours is accepted by the DRP in AY 2008- 09- See Page NO-121 of the Compilation

In view of the above facts and figures it can be said that the functions performed by the assessee and C&K are entirely different and nature of income is also different. Recently Hon’ble Delhi high court in the case of Rampgreen Solutions ltd Vs CIT reported in 377 ITR 533(Del) has held that though entities rendering voice call services and a KPO service provider employs IT based delivery system but the charterstics of services, functional aspects, business envoirnment risk and quality of human resources employed are materially different and hence cannot be compared with each other.

Risk Risk undertaken by assessee

No such risk is undertaken by a) A&K India guarantee open C&K 365 days 24 hours a day in case of an emergencies b) A&K India guarantee in house quality control department c) A& K India guarantee highly experienced licensed tour escorts, guides and naturalists who are expert speakers, skilled group leaders and experience problem solvers d) A*K India guarantee guest relation team assists guests throughout the stay of clients e) Assessee guarantee response to query with in 24 Hrs f) Further page No 72 of PB-3 is an example of services provided by assessee. This is itinerary of the foreigners coming to India

Assets Assets of assessee

It is submitted that assets of the The total assets of the assessee are C&K in the impugned year were to the tune of Rs 3.2 Core and after Rs 13.07 Core See Page NO-108 depreciation would become Rs 1.63 of PB-2 and beside this there was Core See Page No11 of PB -1 and investment of Rs 35.87 Crore See also Page NO 15 of PB-3 Page NO-108

13. It is submitted that above table would prove beyond doubt that C& K and assessee are examined on the basis of FAR test then one can infer that C&K and assessee are not at all comparables with each other and the TPO has erred in taking C&K as comparable. It is submitted that if FAR test is applied in correct manner then C&K is required to be excluded from the list of comparables. And hence the mean of the rest of the comparables falls within the ambit of + 5% and hence no adjustment is required to be done.

14. Similarly for other comparables the assessee has submitted its objections. However the same were rejected by the TPO. See Page no 191 to 194 of PB-1

in previous year also. Rieta Industries- 309 ITR 154(P&H). Recently Hon’ble Delhi High Court in the case of Crain U.K- 359 ITR 268(Del) has held that that there has to be consistency uniformity in the approach of revenue while dealing in taxation matters. Relevant observations of the High Court are as under:-

“Certainty is integral to rule of law. Certainty and stability form the basis foundation of any fiscal laws. Highlighting this fact in Vodafone International Holding B.V. Vs. Union of India, (2012) 341 ITR 0001, the Supreme Court has observed that foreign direct investment flows towards a location with a strong governance infrastructure which includes enforcement of laws and how well the legal system work. There should be consistency and uniformity in interpretation of provisions as uncertainties can disable and harm governance of tax laws. Authority should follow their earlier view, unless there are strong grounds and reasons to take a contrary view, but in the present case there is no compelling justification and reason to override and disturb the earlier view”

I) APTEAN SOFTWARE INDIA (P.) LTD. vs. INCOME TAX OFFICER reported in 152 ITD 311(Bang)

II) DEPUTY COMMISSIONER OF INCOME TAX vs. AT&S INDIA (P) LTD. 170 TTJ 129(Kol)

see Page No 41 and 42 of the PB-IV. The Ld TPO without pointing out any defect in these figures and without doubting the price charged by the assessee from its AE and Non AE dismissed this calculations, which calculations has been extracted from audited books of account, and are relied on by the TPO himself while making the final adjustment.

a. Lummus Technology Heat Transfer BV Vs DCIT- Copy attached in judgment paper book. b. CIT Vs Alstom Projects India Ltd –ITA NO-362 of 2014(Bom) c. CIT Vs Keihin Panalfa Ltd- ITA No- 11 of 2015(Del).

margin is then compared with the operating profit margin from the assessee’s international transactions with AE. It is not possible to compare the assessee’s total margin emanating from national and international transaction with AE and Non AE with the average operating profit margin of the comparable cases,

(i) The CUP method applied by the assessee was the most appropriate method since the ratio of the transaction with AE and non-AE was approximately similar inasmuch as the transactions with AE were 57% and with non-AE at 43%;

(ii) The TPO has not applied the FAR test before selecting the comparables correctly and in the immediately next assessment year i.e. AY 2007-08, the same TPO has ignored the comparables including Cox & Kings applied in the year under consideration. The TPO has accepted the results of the comparables, namely, TCI selected by the assessee as correct resulting into no adjustment; &

(iii) Without prejudice to the above grievances, if the working of margin of the assessee is seen with respect to transactions with AE only, then it is clear that the profit ratio is 23.21%, which is more than the adjustment made by the TPO.

6.1 The ld. AR, Mr. Yadav emphasized that if only one comparable, namely, Cox & Kings is excluded then the mean of other comparables would come to 19.24%, which is within + - 5% of the profit margin declared by the assessee, hence no adjustment is required to be made for working of the arm’s length price on international transaction entered into by the assessee during the year.

6.2 We thus find that if we firstly confine ourselves on the applicability of the comparable Cox & Kings during the year, the grievance of the assessee will be addressed. We fully concur with the submission of the ld. CIT [DR] that the principle of res judicata is not applicable in the Income Tax matters. However, it is an established proposition of law that consistency in the approach on an issue under similar set of facts is required to be maintained in the action of the Revenue. There is no dispute on similarity of facts on the issues raised in the grounds during the year in comparison to the subsequent year. Thus, following the principle of maintenance of consistency in its approach by the Revenue on an identical issue under similar set of facts, we are inclined to accept the contention of the ld. AR that if the comparable Cox & Kings as excluded by the TPO in the subsequent assessment year 2007-08 under similar facts is excluded during the year, then the mean of other comparables would come to 19.24%, which is within + - 5% of the profit margin declared by the assessee. Thus, no adjustment is required to be made by the TPO during the year for working out the arm’s length price relating to the international transactions entered into during the year. It is ordered accordingly. Apart from this finding, even otherwise, we find substance in the contention of the ld. AR that mean has to be applied to the transactions related to AE only and transactions related with non-AE are to be excluded from the net profit margin. The assessee at page Nos. 41 and 42 of the paper book – IV has made available the complete working vis-a-viz transactions with AE and non-AE, perusal of the same shows that the margin of the assessee with respect to transactions with AE gives the profit ratio of 23.91%, which is more than the adjustment made by the TPO. It is held accordingly. The assessee succeeds on this account as well. In result, the adjustment in question made and upheld by the authorities below is held as not justified. The grounds are accordingly allowed.

“ The addition amounting to Rs 36,242,182 undertaken by the Ld. Deputy Commissioner of Income Tax, circle (1), New Delhi, (“the Ld. AO”) vide final assessment order dated October 20, 2011 (served on the Appellant on October 27, 2011) passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 (“the Act”) is not in accordance with law and therefore not sustainable. Transfer Pricing (“TP”) Adjustment – Rs 3,62,42,182 That the Hon’ble Dispute Resolution Panel, New Delhi (“DRP”) has erred both in law and on facts by rejecting the appellants objections to the draft order dated December 28, 2010 passed by the Ld. AO under section 143(3) read with section 144C(1) of the Act. The Hon’ble DRP while issuing directions under section 144C of the Act did not consider the facts and merits of Appellants objections to the proposed adjustments, and merely relied on the reasoning given by the Additional Commissioner of Income Tax, Transfer Pricing officer – I(1) (“TPO”) vide order under section 92CA(3) of the Act dated October 28, 2010 (“TP Order”). On the facts and in the circumstances of the case and in law, the Ld. TPO and the Ld. AO have erred in proposing and the Hon’ble DRP has further erred in confirming the transfer pricing adjustment of Rs 3,62,42,182 on the following grounds: 1.1 By adopting a materially defective approach in disregarding the composite nature of the Foreign Technical Collaboration Agreement (hereinafter referred to as the “Agreement”) and conveniently overlooking the fact that the items covered by the Agreement formed inseparable and indivisible constituents of bundled benefits derived by the Appellant; 1.2 By reaching an erroneous conclusion that only 2% royalty paid under the Agreement qualified the arm’s length test, by artificially dissecting the compensation based on the conjecture that independent benefits could be derived under each of the constituents of the Agreement in isolation of the others. While taking the disputed position, the DRP also overlooked the well established market practice wherein a third party licensor acting under uncontrolled conditions would not offer piecemeal terms under a similar contract for use of Intellectual Property rights;

1.3 By failing to discharge the statutory obligation of providing supporting evidence / data / information to justify 2% royalty being paid under similar contracts between unrelated parties, after having reached the firm conclusion that ‘CUP method’ qualified as the Most Appropriate Method u/s 92C(1) of the Act for testing the arm’s length nature of royalty payments arising under the Agreement; 1.4 By misconstruing the Appellant’s business model and by conveniently overlooking the supporting evidence and arguments that the Appellant filed / adduced during the course of the proceedings to support the ‘real benefits’ it received in return for the Royalty Payment. In this regard, the observations made by the DRP (in para. 3.2 of the DRP direction) are perverse on facts and based on misplaced notions owing to, but not limited to, the following: a. The DRP failed to appreciate that the marketing brochures, layouts, etc. were specifically developed and customized to promote the business interests of the Appellant by canvassing tourist destinations in India to international travellers / potential customers; b. By misconstruing technical inputs and marketing support as shareholder activity (stewardship expenses) without appreciating the underlying nature of services and tangible operating benefits derived by the Appellant therefrom; c. By making misplaced reference to OECD Guidelines, whereas they are not applicable to the facts of the case; d. By conveniently overlooking relevant evidence produced by the Appellant during the course of proceedings, including the fact that it had incurred negligible expenditure on marketing and promotion in India, which clearly demonstrated the Appellant’s reliance and dependence on the Agreement for generating sales; e. By reaching a self conflicting conclusion that technical inputs and marketing support qualified as shareholder activity, after having held that these were integral to acquisition of customers to promote the sales of the Appellant and therefore could be characterized as Intra Group Services (“IGS”);

1.5 By assigning ‘NIL’ value to IGS based upon conjectures and surmises, by disregarding substantive provisions of section 92(2) of the Act and without applying machinery provisions regarding choice of Most Appropriate Method u/s 92C(1); 1.6 By erroneously concluding that Transactional Net Margin Method (“TNMM”) cannot be used as a corroborative analysis to justify the arm’s length nature of Royalty Payment, without appreciating that royalty is intrinsically linked to the inbound tour operations of the Appellant; Benchmarking Analysis 1.7 By summarily ignoring / disregarding / overlooking the internal gross margin analysis presented by the Appellant relating to its inbound tour operations with the AEs vis-a-vis the third-parties to demonstrate the arm’s length compliance of Royalty Payment. 1.8 By not giving any consideration to the information on the comparable uncontrolled license agreement in the travel industry placed on record by the Appellant during the course of the assessment proceedings.

The above ‘Grounds of Appeal’ are all independent and without prejudice to one and another. The Appellant craves leave to supplement, to cancel, amend, add and /or otherwise alter / modify any or all the grounds of the appeal stated hereinabove. ”

“ Assessee is a Company and part of A&K Group; it provides personalized luxury tour and travel services. A&K India primarily operates destination Management Company that specializes in handling free individuals travelers, group travelers, special interest group who intends to visit India, Nepal, Srilanka. A&K India was established in 1985 and presently has its offices in New-Delhi.

It is submitted that in this year the Ld TPO has disallowed the entire sum of royalty paid by assessee. And ld DRP after appreciating the facts and submission of the assessee allowed the appeal of the assessee in parts in as much as it has allowed the payment of royalty to the tune of 2%. And now assessee is in appeal before the ITAT.

It is submitted that Royalty has been paid by assessee in terms of agreement collaboration agreement dated 11.06.2005(Copy in PB-1 Page NO-55 onwards). Relevant clause on Page No-82 of PB-1. It is submitted that the assessee has paid the royalty for the use of trade mark, marketing support and technical inputs amounting to Rs 5,43,63,274/- out of this amount an amount of Rs 2,50,72,047/- was paid to AE and Rs 2,80,91,469 was paid to Non AE and service tax of Rs

57,97,590 and Exchange Fluctuation Rs 11,99,758/-. See Page No 23 of the PB for AY 2007-08

It is submitted that Hon’ble DRP in its order for AY 2008-09 to AY 2013- 14 has accepted the arrangement of the assessee vis-à-vis payment of royalty. See Page No-121 to 132 Para 4.3 of Compilation.

It is next submitted that DRP has first interpretated the collaboration agreement very meticulously and then relied on the survey report of Franchise world. In this report it is clearly mentioned that in travel industry royalty @5.6% is permissible. See Finding of DRP in this regard at Page no-132 of compilation. Copy of the report is at page no 285 of PB – for AY 2007-08.

In view of the above it is submitted that the same report may also be relied in the case of assessee for the impugned year and for AY 2006-07. ”

15. The order is pronounced in the Open Court on : 09.03.2017.