M/S. G4S SECURITY SERVICES (INDIA) PVT. LTD.,GURGAON vs. ACIT, NEW DELHI

PER BENCH:

These are cross appeals filed by the assessee as well as Revenue against the order passed by Ld. ACIT, Circle

2 I.T.A.No..1540/Del/2012

12(1), New Delhi dated 25.01.2011 u/s 143(3) read with Section 144C of the Act for the Assessment Year 2007-08. 2. The assessee filed its return of income declaring income of Rs.29,65,66,497/- on 12.09.2007. The case was selected for scrutiny and notice u/s 143(2) was issued. During the year under consideration, Ld. A.O. observed that the assessee had undertaken international transaction with its AEs. Ld. A.O. in accordance with the provisions of Section 92CA of the Act, referred the international transaction to the TPO-I(5) for determination of ALP. 2.1 The assessee is a company engaged in the business of providing security services. During the course of hearing, assessee produced books of accounts which were test checked by the A.O. Ld. A.O. made certain additions on the corporate issues for the year under consideration. 2.2 Ld. TPO observed that the assessee had entered into following international transactions for the year under consideration.

S.No. Description of transaction Method Value (in Rs.) 1 Royalty payment TNMM 5,22,68,810 2 Export of service to AE CPM 16,06,038 3 Import of services from TNMM 10,29,834 AEs 4 Reimbursement of 1,48,416 expenses to G4S Security 5 Reimbursement of 23,02,457 expense by G4S Security 9 Royalty payment made 1,51,69,615

3 I.T.A.No..1540/Del/2012

between 1-1-2007 and 31.03.2007. Total 7,25,25,170

2.3 It was observed that the assessee in TP study, had selected Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for the international transaction above. For the purposes of applying TNMM, operating profit / sales was considered as the Profit Level Indicator (PLI) and the assessee had selected itself as a tested party. The assessee had arrived at OP/Sales margin at 3.64%. 2.4 It was observed by the Ld. TPO that the assessee had paid royalty amounting to Rs.6,74,38,425/- in consideration of an agreement entered into between the assessee and M/s. Group 4 Holdings A/S. It was contended by the assessee that the Royalty has been paid in lieu of right to use of the trade mark, and that no ownership right passed to the assessee in any kind whatsoever. The assessee contended that no enduring benefit in the nature of enduring advantage arose to the assessee. Ld. TPO applied CUP as the MAM by using benefit test and held that since the assessee has not substantiated by way of any documentary evidence any benefit that has accrued, the royalty paid cannot be justified. The Ld. TPO determined the ALP and Royalty at ‘nil’. Aggrieved by the order of Ld. TPO, the assessee preferred an appeal before Ld. CIT(A).

4 I.T.A.No..1540/Del/2012

2.5 Ld. CIT(A) upheld the adjustment made by Ld. A.O. 3. Another ground that was raised by the assessee for adjudication before Ld. CIT(A) was in respect of treatment of royalty claim as capital expenditure by the Ld. A.O. Ld. CIT(A) followed the order passed by the Tribunal for Assessment Year 2003-04 in assessee’s own case and held that the expenditure incurred by the assessee as royalty is revenue expenditure and is allowable in the hands of assessee u/s 37(1) of the Act. He also held that the assessee has not acquired any asset of enduring nature. 4. Against the order of Ld. CIT(A), assessee as well as the Revenue are in appeal before us. 5. In the appeal filed by the revenue, the issue raised is against royalty payment being treated as revenue expenditure in the hands of the assessee as held by Ld. CIT(A). 5.1 It is observed from the order of Ld. CIT(A) that the issue stands covered by the order of this Tribunal in assessee’s own case which has been upheld by the Hon'ble Jurisdictional High Court in I.T.A. No. 1943/Del/2010, I.T.A. No. 763/Del/2011 and I.T.A. No. 765/Del/2011 vide order dated 11.07.2011 for the Assessment Year 2002-03, 2003-04 and 2004-05 and the Hon'ble High Court while affirming the decision of this Tribunal, has held as under:

“10. From the ratio of the above said cases, we are of the considered view that under the terms of the

5 I.T.A.No..1540/Del/2012

agreement as noted above, the ownership rights of the trade mark and knowhow throughout vested with G4F and on the expiration or termination of the agreement the assessee was to return all G4F know how obtained by under the agreement. The payment of royalty was also to be on year to year basis on the net sales of the assessee and at no point of time the assessee was entitled to become the exclusive owners of the technical knowhow and the trade mark. Hence, the expenditure incurred by the assessee as royalty is revenue expenditure and is therefore, relatable under Section 37(1) of the Act. We thus, answer the question in favour of the assessee and against the Revenue and consequently dismiss all the three appeals.”

(b) The CIT(A) has also erred in law and on the facts of the case while making addition of aforesaid International transaction without appreciating the genuine adjustments / extraordinary expenses

6 I.T.A.No..1540/Del/2012

adjustments made by the appellant company in TP study to determine the arm's length price.

(c) The CIT(A) / AD had erred both on the law as well as on the facts while not considering all the comparable companies adopted by the appellant using TNMM Method in the TP study & wrongly applied CUP method by ignoring the fact that sales / net margin's of appellant company are substantial higher as compared with the comparable companies.

The Above ground are independent and without prejudice to each other.”

7 I.T.A.No..1540/Del/2012

financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure particularly on the grounds which have been given by the TPO is not contemplated or authorized.”

8.1 Ld. A.R. relied upon various decisions passed by Coordinate Bench of this Tribunal in support of the view taken by the Hon'ble Jurisdictional High Court in the case of CIT Vs ELK Appliances Ltd. (supra). 8.2 Ld. A.R. further submitted that the TPO has held that royalty is a class of transaction on its own and it requires separate analysis by applying CUP method. Ld. A.R. submitted that for the year under consideration, the payment has been made for the use of trademarks only as per the agreement dated 27.12.2007 placed at pages 250- 269 of the Paper Book. 8.3 On the contrary, Ld. D.R. submitted that the assessee has not derived any benefit from the use of such trademarks and thus, the payments made to the AEs in the nature of royalty, cannot be considered as

8 I.T.A.No..1540/Del/2012

international transaction. He relied upon the orders passed by the authorities below. 8.4 We have perused the arguments advanced by both the parties and the decisions relied upon by the assessee as well as the Revenue. It is observed that Ld. TPO did not have any opportunity to apply the ratio laid down by Hon'ble Jurisdictional High Court in the case of CIT Vs EKL Appliances Ltd. (supra). We, therefore, set aside this issue to the file of Ld. CIT(A) to determine the quantum of expenditure for allowing the same as royalty being international transaction. We direct the Ld. CIT(A) to decide the issue in the light of the decisions passed by Hon'ble Jurisdictional High Court in the case of CIT Vs EKL Appliances Ltd. (supra). Accordingly, Ground No.1(a) & 1(c) of the assessee’s appeal stands allowed for statistical purposes. 9. Grounds No.1(b) relates to the disallowance of adjustment made by the assessee in its TP study to determine the ALP. Ld. A.R. submitted that the assessee, while calculating operating expenses for computation of margin, had excluded certain extra ordinary expenses pertaining to prior period expenses, excess lease rent debited to P & L account due to change in the method of accounting, excess provision for bad debts due to change in management policy, excess depreciation due to change in the accounting method / policy. Ld. TPO recomputed

9 I.T.A.No..1540/Del/2012

assessee’s margin at 0.74% as compared to 3.64% calculated by the assessee. 9.1 Ld. A.R. relied upon various decisions passed by Coordinate Bench of this Tribunal to buttress his arguments. He submitted that since the payments as enumerated above, were not there in the cases of comparables applied, it was not justified to deny the benefit of such payments to the assessee. 9.2 Ld. D.R. however, relied upon the orders passed by the authorities below. 9.3 We have perused the orders relied upon by the Ld. A.R. as well as the arguments advanced by both the parties. There is no doubt that while determining the ALP of international transaction entered into by the assessee with its AEs by comparing the net profit (on tested parties being assessee in the present case), with that of comparbles, only the receipt and expenditure connected with such international transaction are required to be taken into account. It is evident from the statutory provisions that ‘net profit’ used under Rule 10B, can be taken to mean the commercial profit. The adjustments are then required to be made to level out the functional difference. Ld. A.R. has placed reliance upon the following decisions which are as under: i) Qual Core Logic Lt. Vs DCIT 52 SOT 574 (Hyd.) ii) Schefenacker Motherson Ltd. Vs ITO 123 TTJ 509 (Del.) iii) Skoda Auto India (P) Ltd. Vs ACIT 30 SOT 319 (Pune) iv) Sony India (P) Ltd. Vs DCIT 114 ITD 448 (Del.) v) E-Gain Communications (P) Ltd. Vs ITO 23 SOT 385 (Pune)

10 I.T.A.No..1540/Del/2012

vi) Mentor Graphics (Noida) Pvt. Ltd. Vs DCIT 109 ITD 101 (Del.)

9.4 In view of above and respectfully following the ratio laid down by the above decisions of Coordinate Bench of the Tribunal, we are of the considered view that Ld. TPO was wrong in not granting the benefits of extra ordinary expenses as the same has a material impact as compared to the comparables. Accordingly, this ground of assessee’s appeal is set aside to the Ld. TPO for purposes of calculation of margin of the assessee by granting adjustments in respect of the extra ordinary expenses. 10. In the result, appeal filed by the assessee stands allowed for statistical purposes and the appeal filed by the Revenue stands dismissed. Order pronounced in the open court on 03rd Aug., 2016.

Sd./- Sd./- (N. K. SAINI) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Date: 03.08.2016 2016 Sp. Copy forwarded to:- The appellant The respondent The CIT The CIT (A)-, New Delhi. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy. By Order

11 I.T.A.No..1540/Del/2012

(ITAT, New Delhi)

S.No. Details Date Initials Designation 1 Draft dictated on Sr. PS/PS 2 Draft placed before author Sr. PS/PS Draft proposed & placed before 3 JM/AM the Second Member Draft discussed/approved by 4 AM/AM Second Member Approved Draft comes to the Sr. 3/8/16 5 Sr. PS/PS PS/PS 6 Kept for pronouncement 3/8 Sr. PS/PS 7 File sent to Bench Clerk 3/8/16 Sr. PS/PS Date on which the file goes to 8 Head Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order