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Income Tax Appellate Tribunal, “K”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMIT SHUKLA, JM
आदेश / O R D E R
PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against the final assessment order dated 14/01/2016, passed by the Assessing Officer for the quantum of assessment u/s. 143(3) r.w.s. 144C(13) of the IT Act for the assessment year 2011-12 in pursuance of direction given by the Dispute Resolution Panel–II, Mumbai (DRP), vide order dated 14/12/2015.
In various grounds of appeal, assessee has challenged the following additions/ transfer pricing adjustments.
M/s.Thomas Cook (India) Ltd., (i) Transfer Pricing Adjustment of Rs.2,64,66,824/- in relation to the „travel related segment‟ (Ground No.1); (ii) Transfer Pricing Adjustment on account of disallowance of advertising, marketing and sales promotion expenses of Rs.14.89,21,569/- (Ground No.2); (iii) Transfer Pricing Adjustment of Rs.2,12,060/- in relation to the disallowance of insurance cost incurred by the assessee towards export and foreign currency (Ground No.3); (iv) Disallowance of claim of depreciation of Rs.1,36,098/- on Jodhpur Property (Ground No.4); (v) Disallowance of Rs.96,20,608/- u/s.14A (Ground No.5).
At the outset, learned Senior Counsel, Mr. P.J. Pardiwala submitted that all the issues raised in the grounds of appeal are squarely covered by the decision of Tribunal for the Assessment Year 2009-10. Explaining the brief facts and the background of the case, he submitted that the assessee, Thomas Cook India Ltd., is part of Thomas Cook Group which is engaged in the business of rendering travel and financial services. The assessee offers spectrum of travel related services that include Foreign Exchange, Corporate Travel, Leisure Travel and Insurance. It had entered into international transactions of payment towards name and license fees, export of M/s.Thomas Cook (India) Ltd., foreign currency, travel services – inbound and outbound travel and reimbursement of expenses. The operational segments of the assessee were divided in two; firstly, travel and related services segment; and secondly, financial services segment. Under travel related services segment, the assessee had shown operating margin of 10.78%. To benchmark the said margin, assessee carried out detailed transfer pricing analysis and after adopting TNMM as the most appropriate method by taking Profit Level Indicator (PLI) as Operating Profit / Total Cost (OP & TC), it identified six comparable companies, the arithmetic mean of which was arrived at 5.42%, accordingly, it was stated that the assessee‟s operating margin are at arm‟s length. The summary of such comparables and the computed margin are as under:-
Sr. Name of the Company OP/TC as OP/TC as OP/TC using Business Description No. Per TP Using net sales study data for FY 2010-11 F.Y.2010-11 1 Crown Tours Ltd. 2.00% 0.96% 3.11% The company is involved in tourism related activities and is the IATA Travel agent 2 Tamarind Tour Pvt. 2.89% -0.26% -1.96% The company is involved in Ltd., tour management activities 3 Balmer Lawrie & 3.20% 3.65% 3.65% The segment is involved in Co.Ltd., the provision of travel Travel & Tours agency services. 4 Trade Wings Ltd., - 13.74% 17.68% 17.68% The segment is involved in the M/s.Thomas Cook (India) Ltd., Travel & Tour provision of travel, tourism and related services 5 Indo Asia Leisure 4.90% 2.24% 9.43% The company is involved in the provision of hospitality services and derives its revenue from tour receipts, room tariff, restaurant sales, hotel operations etc., 6 Pearl International 6.19% 7.14% 7.14% The company is involved in Tours and the provision of tourism and Travel Limited travel related services 5.42% 5.24% 6.60%
The learned Transferring Pricing Officer however, rejected most of the above comparables after giving detailed reasons and parameters which were earlier discussed by the TPO in his order for the A.Y. 2010-11. After detail analysis, the ld. TPO accepted only one comparable i.e., Trade Wings Ltd., and after eliminating the amount of bad debts from the operating cost of said company, he recomputed the margin of the said company at 19.34% from 17.68%. The relevant discussion of TPO appears from pages 10 to 12 of the TPO‟s order. Based on one comparable only, he made an upward adjustment of Rs.2,64,66,824/-. Before the Ld. DRP, assessee pointed out that out of six comparables, four comparables were common and were also subject matter of dispute in the A.Y.2010-11, however the DRP held that in that year the four comparables of the assessee were rejected after detail
M/s.Thomas Cook (India) Ltd., discussion. For the other two new comparables namely, M/s Indo Asia Leisure and M/s Pearl International Tours and Travels Ltd., (which were not in the comparability list in the earlier years), the ld. DRP gave independent reason for the rejection of the comparables. Before us, Mr. Pardiwala submitted that now the Tribunal in the earlier year has accepted the said four comparables in the comparability list and if same are taken as the comparables, then assessee‟s margin vis-à-vis margin of comparables would be within the tolerance range of +/-5%. In that case the two new comparables may not be adjudicated as it will become purely academic. The learned CIT DR strongly relied upon the order of the DRP and submitted that the detailed reasons have been given by the DRP for rejecting these comparables chosen by the assessee.
After considering relevant findings given by the impugned orders as well as the order of the Tribunal for the A.Y.2010-11, we find that the four comparables namely, Crown Tours Ltd., Tamarind Tours Pvt. Ltd., Balmer Lawrie & Co. Ltd., and Trade Wings Ltd., were subject matter of dispute in the earlier year also. The tribunal after detailed discussion accepted all the four comparables of the assessee as good comparables. The relevant
M/s.Thomas Cook (India) Ltd., observation and the findings of the Tribunal in this regard reads as under:-
7.3. We find that the assessee was engaged in travel industry primarily providing travel and tour services, that the travel and related segment activities of the assessee included two IT.s- handling of inbound tourists and handling of out bound tourists, that both the transactions were aggregated for the purpose of bench -marking analysis, that the assessee-company was selected as tested part, that TNMM was adopted as most appropriate method, that the profit level indicator (PLI) used was operating profit/operating cost (OP/TC),that it had selected four comparables to prove the arm's length of the IT.s., that the operating margin of the assessee was 10.76% as against the margin of 4.39% of the comparables, that the updated margin was found to be within the +- 5% range, that while making the adjustment the TPO had rejected three comparables namely CTL,TTPL and BLCL, that after rejecting the three comparables he had recomputed the operating margin of balance one comparable i.e. TWL@ 45.06%, that while making the adjustment the TPO reduced bad debt expenses from operating cost on the ground that same was abnormal in nature, that he increased the margin of the comparable to 45.06% and benchmarked the same against assessee's operating margin of 11.52% after reducing bad debt expenses of the assessee, that he made an adjustment of Rs.12.08 Crores, that the DRP confirmed the rejection of comparables and dismissed other arguments. We are aware that the principles of res-judicata do not apply to the income tax proceedings. But, the rule of consistency applies. Without assigning valid reason for rejecting the earlier years' stand, the TPO should not have rejected the comparables that were found valid comparables in previous years. Without bringing on record the salient features of the year under consideration as compared to the facts of the earlier years, the departmental authorities cannot take an opposite view. It brings uncertainty in the assessment proceedings. In our opinion, stand taken in the earlier years should not be disturbed in the subsequent years until and unless new facts emerge and the same are confronted to the assessee. Here, we would like to refer to the case of Galileo Nederland BV,(367ITR319),of the Hon'ble Delhi High Court wherein it has been held that decision on an issue or question taken in earlier years though not binding should be followed and not ignored unless there are good and sufficient reasons to take a different view, that said principle was based upon rules of certainty and that a decision taken after due application of mind should be followed consistently as this lead to certainty, unless M/s.Thomas Cook (India) Ltd., there were valid and good reasons for deviating and not accepting earlier decision. The Hon'ble Bombay High Court in the case of Aroni Commercials Ltd.(362 ITR 403) has held as under: "Though the principle of res judicata is not applicable to tax matters as each year is separate and distinct, nevertheless where facts are identical from year to year, there has to be uniformity and in treatment." In the case under consideration we find that the TPO/DRP has not proved that there was a change in the facts, as compared to earlier years and even if they existed same were not brought on record. In short, the TPO/DRP has failed to prove the justification for deviating from the decision taken earlier. We find that the TPO and the DRP had taken a view that bad debts should be excluded as an extra ordinary item while calculating margin, that accordingly the final margin was altered. But, they have not addressed the basic and fundamental issue as to whether the item was of operating nature. The TPO had not demonstrated the non-operating nature of the bad debts. Therefore in our opinion the rationale for eliminating bad debts and reworking of PLI was unjustified. The issue of inclusion/exclusion of bad debts for the purposes of computation of margin has already been deliberated upon by the Tribunal on more than one occasion. While deciding the appeal of the case of M/s. Kenexa Technologies Pvt. Ltd. Hyderabad,(ITA/243/Hyd/2014,dt.14.11. 2014),the Tribunal has held as under: "40.With respect to ground No. 2.6.3 and 2.6.4, it was argued by the learned counsel that the TPO erred in computing the margins of comparable companies by considering the provision for bad and doubtful debts and bad debts as non-operative expenditure.
We place reliance on the decision of ITAT Delhi Bench in the case of Sony India Pvt. Ltd. vs. DCIT, 819/Del/2007 and 820/Del/2007. The relevant portion is extracted below: "106.2 Thus, creation of unpaid liability and its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period. Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts we do not see any justification for excluding provisions written back in the profit and loss account as not forming part of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted.
M/s.Thomas Cook (India) Ltd., 107. The next item relates to balances written back. In our considered opinion, finding given in respect of provisions written back is equally applicable to balances written back more particularly when ld. CIT(A) has not given any separate finding and the Transfer Pricing Officer has said nothing specifically on this item. The balances written back should also be treated as part of operating profit. We direct accordingly."
We are of the view that in the instant case bad debts and provision for bad and doubtful debts are part of the operating expenses and we direct the TPO to re- compute the margins of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies." In the case of EDAG Engineers & Design India Pvt. Ltd. (ITA/3618/Del/2009 dt.13/10/ 14) the Delhi Tribunal has held as under: "..... As for the exclusion of bad debts, amortization and provisions, in computation of the PLI of the comparables, we are unable to see any rationale in the same nor has it been justified before us. In view of these discussions, in our considered opinion, the stand taken by the CIT(A) does not merit any interference by us." As per the AS-5, bad debts cannot be considered as extra ordinary item. Considering the above we are not agreeable to the proposition propounded by the TPO and the DRP that bad should excluded as an extra ordinary item for calculating margins. If we ignore the reworking of the PLI of the assessee and of TWL it is found that the correct operating margin of TWL would be 11.64% and it would fall within the criteria of +- 5% of arm's length range. In our opinion, the TPO had followed the peculiar pattern in rejecting/selecting the comparables without following the basic philosophy of TP provisions. TNMM is one of the MAM and was adopted by the assessee. The fundamental principle of the said method is to broadly compare the functions of the selected companies. In other words, product comparability is not the back bone of TNMM. The proverbial fly cannot be replaced by another fly (Makshika Sthane Makshika) in TNMM. No two entities would be replica of each, so, diversity is bound to be there. But, the final aim, to avoid transferring of profits to AE.s.by the Indian entities, of the TP provisions has always to be kept in mind while making adjustments. In these circumstances, the argument advanced by the TPO and the DRP that reporting of results on GP/NP basis by the assessee/ comparables was an evidence of diversity is beyond our comprehension- especially when the assessee had filed reconciliation about the it (Pg.348 of the PB.)Whether the Reporting system of profit margins resulted in transferring of the M/s.Thomas Cook (India) Ltd., legitimate taxes from India to the AE has not been dealt or answered by both the authorities while rejecting the comparables. Secondly, two of the comparables were rejected on the basis of area of operations. But, if we closely look at the function profile of the comparables ,one thing is clear that they are in the same business that of the assessee and there exists functional similarities between the assessee and the comparable selected by it. As, all the comparables selected by it were in the same line of business and they were face same risks ,so, the TPO was not justified in rejecting the three and cherry picking one. Comparables selected by the assessee should not be rejected in a casual and light manner. Now we would like to discuss all the three comparables rejected by the TPO. We find that one of the reason for rejecting CTL was foreign exchange earnings, that it had earned foreign exchange, that the annual report of the CTL for the year under consideration, at page 48 talks of foreign exchange earnings, that the TPO had misinterpreted the reserve and surplus being a balance sheet item (page 32 of the annual report) as earning in foreign exchange. It is a fact that majority of operating income of TCL is from Tours and travels operations, that in the segmental reporting, the assessee has reported activity of tourism business is the only activity, that in the balance sheet abstract and general is this profile TCL has been referred as IATA isn't carrying out tourism related activities. We find that these vital facts were ignored by the TPO and the DRP therefore the rejection of TCL is comparable is held to be unjustifiable. We have gone through the annual report of the TTPL and find that there is no mention of event management and managing the weddings by it, that for the year under consideration it had shown the operating income from Tours and travels in the profit and loss account, that while reporting the segmental results it has stated that it was in the business of organising tours, that the balance sheet abstract and company general business profile talks about inbound tour operator and domestic tour operators. Before us, the DR stated that the website of the TTPL was the proof that it was in the business of wedding planning and event management. We are deciding the appeal for the year under consideration and as per the books of accounts; TTPL was carrying out business of Tours and travels only in that year. Therefore, we are unable to endorse the view of the DRP and the TPO in rejecting it as a valid comparable. In the case of the BCLC, we find that Tours and travels was the main segment of operating income for the year under consideration. So, we hold that the TPO had wrongly rejected the comparables. Considering the peculiar facts and circumstances of the case, we hold that the TP adjustment made by the TPO and confirmed by the DRP has to be deleted. First effective ground of appeal is decided in favour of the assessee.
M/s.Thomas Cook (India) Ltd., 6. Thus, following the earlier year precedence, we hold that the above four comparables companies as selected by the assessee should be accepted for benchmarking the assessee‟s margin. As submitted by the learned Counsel if these four comparables are accepted, then other two new comparables i.e., Indo Asia Leisure and Pearl International Tours and Travel Ltd., need not be adjudicated, because assessee‟s margin it will fall within the range of +/-5%. Accordingly, we are not adjudicating the two new comparables as they have become purely academic. Accordingly Ground No.1 raised by the assessee is allowed.
7. Regarding Transfer Pricing Adjustment of Rs.14,89,21,569/- in relation to the AMP expenses as raised vide ground no. 2, it has been pointed out that this issue is also covered by the decision of the Tribunal in assessee‟s own case for the A.Y.2010-11. The assessee pays for name and license fees to Thomas Cook, UK for the use of “Thomas Cook” name/ logo in connection with its business operations i.e., travels and services and financial service business. The TPO‟s case is that out of the total AMP expenses incurred by the assessee, majority of the expenses spent towards promoting the brand of AE in India which is incurred by the assessee. Accordingly, he held that out of the total expenditure of Rs.20,27,67,291/- incurred on AMP expenses, amount of M/s.Thomas Cook (India) Ltd., Rs.14,89,21,569/- is for promotion of brand name of the AE and accordingly, he disallowed the AMP expenses spent to turnover ratio of the assessee of 7.15% vis-à-vis the comparable company Trade Wings Ltd., of 1.9%. The assessee‟s case had been that the TPO had merely compared the AMP/Sales ratio of the comparable - Trade Wings Ltd. against the assessee's AMP/Sales ratio and has made the disallowance. The Ld. TPO has not used any of the methods prescribed under section 92C(1) of the Act or Rule 10B of the Income tax Rules, 1962, for making any TP adjustments on account of AMP spent. This indicates that the approach used by the Ld. TPO is adhoc and is completely outside the purview of Indian transfer pricing regulations.
The DRP following the earlier year order of the DRP for the A.Y.2010-11 rejected the assessee‟s contention.
We find that the Tribunal has dealt this issue in the following manner:-
8.3. We have heard the rival submissions and perused the material before us. In the earlier part of our order, we have mentioned that we would like to deal with the issue of AMP expenses for both the years at one place, as there is no change in the facts except for the amounts involved and the non adjudication of the issue in the earlier year. The arguments of the assessee for both the years are identical. We find that assessee had incurred an expenditure of Rs.12,25,71,652/-and Rs.10,01,37,032/-respectively for the M/s.Thomas Cook (India) Ltd., earlier and current AY. under the head AMP, that it was paying name and licence fee to TCUK, that the TPO held that the assessee was spending much more than Industry average in promoting and building brand of TCUK, that he made an adjustment of Rs.8.09 crores and Rs.8.31 crores for the AY.s.2009-10 and AY.2010-11 towards AMP expenditure, that the assessee had filed additional evidences before the FAA, that the FAA did not admit the evidences referring to the provisions of Rule 46A of the Rules, that he upheld the order of the TPO, that for the AY.2010-11 the assessee had filed objections before the DRP, that the adjustment made by the TPO were confirmed the DRP, that the adjustment was made/confirmed by the TPO/DRP because both of them were of the opinion that by incurring expenditure in India the assessee was benefitting a brand name of TCUK. 8.3.1.First of all, we would like to mention that as on today the legal position is as clear as crystal with regard to AMP expenses. The Hon'ble Delhi High Court has dealt the issue in depth and has arrived at the conclusion that in absence of any agreement for sharing AMP expenses it cannot be held that AMP expenditure was an IT. Probable incidental benefit to the AE would not make such a transaction an IT. The factors like payment under the head AMP expenditure to the third independent parties, promoting own business interest by way of AMP expenses take away the alleged 'internationality' of the transaction. In absence of any direct or direct evidence of incurring of AMP expenses by the assessee for the benefit of the AE or on behalf of the AE,it is has to be held that the transaction in dispute is not covered by the provisions of section 92B or 92B(1) of the Act and hence is not an IT. Once it goes out of the ambit of being an IT, FAR analysis of comparables or any other adjustment will and cannot come in picture. Folk wisdom of rural India the saying that mother (Maa) is must for existence of her sister (Mausi). Similarly the existence of an IT is the pre-requisite of applying the provisions of chapter X of the Act. The assessee from the very beginning was arguing that it is not an IT, but, the TPO and the DRP did not deal with the core issue. In these circumstances, we are of the opinion that the matter should not be remitted back to the file of the TPO/ AO. Litigation has to be put to an end at some stage. Judicial time of every authority, including the TPO/DRP is very precious and it should not be wasted for dealing with mere academic arguments. The recourse of remanding of matters/issue to the AO.s has to resorted rarely and selectively. In the case before us, no reasonable cause has been shown to justify the setting aside the issue. Here, we would also like to refer to the case of Bosch and Lomb (supra) wherein all the arguments raised by the TPO & FAA/DRP have been deliberated upon in length and the relevant portion of the order reads as under:
M/s.Thomas Cook (India) Ltd., "53.Areading of the heading of Chapter X['Computation of income from international transactions having regard to arm's length price"]and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP.
Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price.
Section 928 defines 'international transaction' as under: "Meaning of international transaction. 928.(1) For the purposes of this section and sections 92,92C,92D and 92E ,"international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents; in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 'of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to' the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 56.Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or M/s.Thomas Cook (India) Ltd., apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises.
Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore, for the purposes of the 'means' part of clause (b) and the 'includes' part. of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between BLI -and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction.
In Maruti Suzuki India Ltd. (supra), one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit.”This was negatived by the Court by pointing out; "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v), which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC a s regards AMP spend for brand promotion. In other words, for both the 'means', part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC."
In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v.. Jayaram Chigurupati 2010(6)MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., 'Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange M/s.Thomas Cook (India) Ltd., Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In. para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a- certain target company, There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company, For, de hors the element of the shared common Objective' or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to, cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being. "
The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred, for the AE. In any event, after the decision in Sony Ericsson (supre), -- the question of applying the BLT to determine the existence-of an- international transaction involving AMP expenditure does not arise.
There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function, cannot be construed as a 'transaction'. Further, the- Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same."
M/s.Thomas Cook (India) Ltd., 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard with B&L, USA. A similar contention by the Revenue, namely the fact that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also encore to the AE is itself self sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an· exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions", Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly -in-light of the fact that -the-BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT, 70. What is clear is that it. is the 'price' of an international transaction which is required to be adjusted: The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an adjustment had to be made. The -burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. " 71- Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the M/s.Thomas Cook (India) Ltd., present. case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on- application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 74.The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. '(supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy; and for-no other purpose; in the- context of a domestic transaction involving two or more related parties, reference may' be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be "impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance."
M/s.Thomas Cook (India) Ltd., 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v, CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is- unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise.
As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned-in- Sassoon -J David-(supra)- "the--fact that- somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being 'allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". With reference to the submissions of the DR, we would like mention that first of all the issue before us is not an assessee that is engaged in distribution and manufacturing of certain goods, so the question of slicing of expense in two portions would not arise. However, the other part of the argument that matter should be restored back to the file of the AO/TPO as they were following the order of LG and did not have benefit of later judgments of the Hon'ble High Court, we would like to mention that matter can be restored back in certain conditions only. Restoration of matters to the AO.s is not a tool to give one more opportunity of hearing to the litigants. It is not advisable to prolong the judicial proceedings in the name of fair play. It is not a case where new evidences have been placed on record by the assessee, that were not made available to the AO at the time of original assessment. It is not also a matter wherein some ground of appeal has remained un- adjudicated. There is violation of principles of natural justice. So, we hold that it is not a fit case to be sent back to the TPO for fresh adjudication.
10. Thus, following the earlier year precedence, this issue is decided in favour of the assessee and accordingly Ground No.2 as raised by the assessee is allowed.
M/s.Thomas Cook (India) Ltd., 11. Next issue relates to Transfer Pricing Adjustment of Rs.2,12,060/- as raised in ground no.3 in relation to disallowance in respect of transaction of export of foreign currency. Learned TPO while analyzing the financial services segment and specially the international transaction pertaining to export of currencies, noted that assessee has followed CUP method to benchmark the said transaction. The assessee has also corroborated the analysis of the said transaction by using TNMM. The assessee has recorded margin of 31.68% on a base of OP/TC, whereas the operating margin of 5 comparables selected by the assessee under TNMM was only 6.20%. For the purpose of CUP analysis the assessee contended that during the relevant year, the assessee has exported foreign currency to its AE in Mauritius. Similarly it has exported foreign currency to unrelated parties viz., "Travelex‟, 'HSBC' and 'NEFC'. It was further submitted that for the foreign currency exported by the assessee to the AE and the Non-AEs, an equivalent credit is received by the assessee in its Nostro accounts. As per the assessee, there is only one difference between Export to AE and Non AE, that is, in the case of the AE export assessee had paid insurance of USD 4610 while for Non AE it is not incurred by the assessee.
M/s.Thomas Cook (India) Ltd., 12. The TPO required the assessee to explain why the assessee has incurred insurance expenses for AE when for non-AE assessee does not have to incur such an expense. In response, assessee had stated that insurance expense is with the third party and hence, it cannot be treated as an international transaction. The TPO however made the adjustment after observing and holding as under:- It is a fact that the assessee has benchmarked this transaction applying CUP. Assessee has compared the export of Currency to AE and Non AE. On perusal of the submission, it is observed that the assessee has paid Insurance Fee for the Currency exported to AE whereas no insurance fee has been paid for the Currency Exported to Non AE. Assessee's submission has been considered. Nowhere in the submission has assessee given the reason for payment of Insurance for AE and non-payment of Insurance for Non AE. The assessee has merely mentioned some other facts. Assessee has not touched the issue why Insurance is paid in the case of AE only. In CUP one has to consider similarity. Here, the assessee has paid Insurance in the case of Export to AE and no insurance in the case of Export to Non AE. In an independent scenario, no one will pay insurance if there is an option not to pay. Therefore, the transaction is not at Arm's length.
Before us, learned Sr. Counsel submitted that in case of export of foreign currency to AE or third parties, TCIL receives corresponding forex credit to its Nostro accounts where such physical currency is exported to third parties as well as AEs. Accordingly credit received in the Nostro account is a CUP for export of such physical currency to the AE. Further, in the course
M/s.Thomas Cook (India) Ltd., of such export of foreign currency" the assessee incurs certain expenses such as counting fee and insurance cost for third parties and AEs respectively. A comparison of the net position of the assessee with respect to currencies exported and expenses incurred for transactions between AE and third parties in relation to export of foreign currency by TClL was provided as below:
Currency Amount Counting Incentive Insurance NET INCOME Exported to exported and Free payable receivable incurred / (LOSS) equivalent Nastro Credit received HSBC 78,893,264 32,729 -- -- (32,729) NFEC 229,516,520 -- -- -- (BAHRAIN) Bank of 958,562,890 394,943 -- -- (394,043) America Total of Non- 1,266,972,674 426,772 -- -- (426,772) AE Thomas Cook 3,602,875 -- -- 4,610 (4,610) (Mauritius Operations Co. Ltd., („TCMOL‟)
It was further pointed out that in A.Y.2010-11, this issue has been decided in favour of the assessee.
After considering the aforesaid submissions and the relevant finding during the impugned order, we find that the Tribunal has dealt this issue and decided in favour of the assessee after following the assessee‟s own case for the earlier years. The relevant observation of the Tribunal in this regard reads as under:-
With reference to the submissions of the DR, we would like mention that first of all the issue before us is not an assessee that is engaged in distribution and manufacturing of certain
M/s.Thomas Cook (India) Ltd., goods, so the question of slicing of expense in two portions would not arise. However, the other part of the argument that matter should be restored back to the file of the AO/TPO as they were following the order of LG and did not have benefit of later judgments of the Hon'ble High Court, we would like to mention that matter can be restored back in certain conditions only. Restoration of matters to the AO.s is not a tool to give one more opportunity of hearing to the litigants. It is not advisable to prolong the judicial proceedings in the name of fair play. It is not a case where new evidences have been placed on record by the assessee, that were not made available to the AO at the time of original assessment. It is not also a matter wherein some ground of appeal has remained un-adjudicated. There is violation of principles of natural justice. So, we hold that it is not a fit case to be sent back to the TPO for fresh adjudication.
10.1. We find that in assessee's own case (ITA/2465/M/2011- AY 2005-06 dt.31.10. 2013) identical issue has been decided as under: 4. The facts relating to the issue relating to TP adjustment are that the assessee did not charge any fees from its Associated Enterprises (AE) (namely HSBC, Travellex and TCMOL), while he is charging the same from other related parties. Applying the Arm's Length Price (ALP) provisions, TPO made an addition of Rs.7,46,243/-. Matter travelled to the CIT (A). During the proceeding before the CIT (A), assessee submitted that in case of exports to non-AEs i.e., unrelated parties, assessee incurred losses as compared to the parties to the AE (TCMOL), therefore, it is a revenue loss. Further, he pointed out that with regard to exports to the AEs, assessee was not subject to any counting fees charged by AEs, unlike third parties (HSBC / Travelex). Normally, counting fees paid is often more than an incentive receipt. If the both service fees and counting fees were taken, it would lead to loss of income to the assessee. The assessee relied M/s.Thomas Cook (India) Ltd., on various TP Guidelines of Organization for Economic Cooperation and Development (OECD) in favour of such counting principle and submitted that ALP principle need not be invoked in such circumstances.CIT (A) considered the same and allowed the claim of the assessee and deleted the adjustment as seen from para 2.10 of the impugned order.
5. During the proceedings before us, Ld DR relied on the order of the AO and the TPO and submitted that every transaction has to be independently benchmarked. However, there is no specific submission by the Ld DR to counter the reasoning given by the CIT (A) while granting the relief to the assessee.
We have heard both the parties on this issue and perused the orders of the Revenue Authorities. It is a fact that the assessee has not charged from AE. Further, it is also equally true that AE charges counting fees also on the transactions of the assessee. If both are taken into account quantitatively, it is the claim of the assessee that the assessee will put to losses and the same is not accounted by the income fact of figures. These kind of accounting issues are outside the scope of TP principles as discussed in para 2.9 of the impugned order. The CIT (A) discussed the issue at length in para 2.10 of his order, giving the reasoning. For the sake of completeness of this order, the said para 2.10 is reproduced here under: "2.10. I have perused the facts of the case and written submissions and verbal arguments of the appellant. The TPO has views the whole arrangement of the appellant with its AE in isolation. He has failed to take into account the fact that the appellant is required to pay counting fees to Its AE as well as third parties (HSBC / Travelex) in respect of currency exported and corresponding counting fees paid is more than what it received by way of incentive / service fee. As such if both the service fees and counting fee are included / taken together in transactions with the AE, the appellant would be worse off. As such It discontinued this arrangement. The appellant by an Internal CUP (Travelex / HSBC) has demonstrated that counting fees for export of currency entails more expense than corresponding service fees or / incentive receipts. Thus, It has passed the test of comparability. It is a fact that counting fees for currency exported is charged by third parties (HSBC / Travelex) and so if the appellant AE did not charge it last year or this year, does not in any way negate the crucial fact that a third independent part would have charged it any case. The fundamentals underlying transfer pricing involves setting of prices within an MNE In line with what third parties would have negotiated in similar circumstances. In the present case had the AE insisted on charging counting fees for currency exported then it would have been more than the corresponding incentives / service for income and the appellant would have been worse off. To sum up, the discontinuance of earlier arrangement of not paying any counting fees to it's AE at Mauritius and also M/s.Thomas Cook (India) Ltd., foregoing the corresponding service / incentive fees, does not erode the tax base if one keeps in mind the ratio of such receipts and payment made which is tilted in favour of the payment side. Moreover, the appellant has demonstrated by an Internal CUP (HSBC / Travelex) on this aspect to establish its case. The adjustment of Rs.7,46,243/- so made is therefore, deleted."
Considering the above, we are of the opinion that the order of the CIT (A) does not call for any interference. Accordingly, ground no.1 raised by the Revenue is dismissed. Following the above we decide ground no.4 in favour of the assessee.
Thus, following the earlier year precedence, we allow the ground in favour of the assessee.
With regard to disallowance of claim of depreciation of Jodhpur Property, as raised vide ground no.4, it has been admitted by learned Counsel that same has been decided against the assessee by the tribunal in the earlier years.
Thus, following the earlier orders, this issue is decided against the assessee.
Lastly with regard to disallowance u/s.14A r.w.r. 8D of Rs.96,20,608/- as raised vide ground no. 5, we find that this issue too was under consideration before the Tribunal in the A.Y. 2010- 11, which has been decided by the Tribunal in the following manner:-
M/s.Thomas Cook (India) Ltd., 12. Last Ground of appeal deals with disallowance u/s. 14A r.w.r. 8D of the Rules of Rs.96.20 lakhs. During the assessment proceedings, the AO found that the assessee had received dividend income of Rs.11.01 lakhs on mutual funds and same was claimed exempt, that it had not allocated any expenditure towards the earning of the exempt income. He directed the assessee to file explanation in that regard. Vide its letter dated 3/02/2014,the assessee stated that it had Suo Motu disallowed Rs. 6,415/- under the provisions of section 14A of the Act, that the dividend income was claimed as exempt income predation of total income u/s.10 (35) of the Act, that it had not incurred any expenditure, direct or indirect, for earning the said exempt income, that the provisions of section 14A read with rule 8D of the Income-tax Rules, 1962(Rules)were not applicable in respect of strategic investment made in subsidiaries, that expenditure incurred for acquiring shares out of commercial expediency had already been capitalised, that own funds during the year were sufficient to make investment in subsidiary entities, that the interest expenditure for the year pertain to working capital loans, that domestic borrowings for making downstream investment were not permitted as per the guidelines of Ministry of Industry, that there was no nexus between interest expenditure and the investment made by the assessee, that no fresh investment was made during the year under consideration. The AO did not agree with the assessee and held that investments were made out of funds and the funds always involved time, cost and opportunity cost, that making investment was an informed decision and it would involve study and research, that required manpower time and funds to make investments, the cost would be in the form of direct as well as indirect costs, that the assessee's 1261 & 1238/M/15 Thomas Cook explanation that no interest expenses were involved for earning exempt income was not acceptable, that investments were made from the pool of funds available to assessee, that it was option of the assessee to invest the surplus fund in the investments and used borrowed funds for business, that had the surplus funds being used for business purposes there would not had been any need to borrow and the interest expenses would have been proportionately reduced. Invoking the provisions of section 14A(2)r.w.r.8D of the Rules, he made a disallowance of Rs. 96,20, 694/-. Aggrieved by the order of the AO, the assessee filed objections before the DRP. After considering the submissions of the assessee and the draft order of the AO, the DRP held the AO had rightly applied provisions of Rule 8D of the Rules, that in the earlier years the tribunal had upheld the disallowance at the rate of 2% of the exempt income, that in those years Rule 8D M/s.Thomas Cook (India) Ltd., was not applicable, that provisions of the Rule were applicable for the year under consideration. Finally, the DRP upheld the disallowance made by the AO. 12.1. Before us, the AR stated that strategic investment could not be considered for 14A disallowance, that almost all the investment(Rs.192.54 crores), was made in domestic(Rs.184.99 crores)or overseas subsidiaries(Rs.7.54 crores), that the AO and the DRP had not considered the above issue while making/ confirming the disallowance. DR left the issue to the discretion of the bench. 12.2. After hearing both the sides we are of the opinion that matter should be restored back to the file of the AO for fresh adjudication. The Hon'ble High Courts have laid down the principle that strategic investment should be excluded from the list of investments, while computing the disallowance u/s. 14Ar.w.r 8D of the Rules. As this vital issue has not been considered by the lower authorities, so, we are of the opinion that the AO should decide the issue 1261 & 1238/M/15 Thomas Cook afresh after affording reasonable opportunity to the assessee. Sixth ground is decided in favour of the assessee, in part.
19. Thus, in view of the aforesaid precedence, we also restore the matter back to the file of the AO for fresh adjudicating in line with the same direction, accordingly Ground No.5 is treated as allowed for statistical purposes.