| 2017-TII-INSTANT-ALL-504 | 10 November 2017 |
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CASE LAWS PR CIT Vs MAKEMY TRIP INDIA PVT LTD: DELHI HIGH COURT (Dated: November 7, 2017) Income Tax - Section 260A - Rules 10B & 10C Keywords - Method for Transfer Pricing Report The assessee company is engaged in the travel and tourism business. The assessee is also engaged on-line solutions for travel product and other comprehensive services for the global traveller including air tickets, hotel reservations, car bookings and holidays. The TPO examined the Transfer Pricing Report filed by the assessee for AY 2005-2006. The TPO opined that adoption of the Resale Price Method (RPM) was appropriate in the circumstances, and made some adjustments accordingly. On appeal, the CIT(A) set aside both the findings of the TPO and the subsequent adjustments. The CIT(A) reasoned that the services provided in the two business segments by the assessee, made them incomparable at the gross margin level. The CIT(A) further held that on account of high degree of functional congruence required for application of RPM, it was not appropriate. On appeal by the revenue, the Tribunal upheld the findings of the CIT(A). On hearing the matter, the High Court held that, Whether mere difference of opinion between the CIT(A) & TPO on correct method used in TP Report, unless shown to be contrary to Rules 10B or 10C, would not warrant interference from the High Court - YES: HC ++ the ITAT has returned its findings after taking into account the OECD commentary and also analysing the Transfer Pricing Report, filed by the assessee; ++ the Court is of the opinion that no substantial question of law arises. The difference of opinion between the CIT(A) and the TPO, as to the appropriateness of one or the other methods, cannot per se be a ground for interference; the appropriateness of the method unless shown to be contrary to the Rules especially Rules 10B and 10C, in the opinion of the Court, are hardly issues that ought to be gone into under Section 260A of the Income Tax Act. Revenue's appeal dismissed
CIT Vs ESPN SOFTWARE INDIA LTD: DELHI HIGH COURT (Dated: November 7, 2017) Income Tax - Air time sale - Advertisement inventory - Channel subscription - Distinct revenue streams - OECD TP Guidelines - RBI guidelines & US TP Regulations. The Assessee-a media company, filed its return for the relevant AY. On a reference by AO, TPO noted from TP study that both sets of businesses i.e., channel subscription and air time sale segment were separate and distinct and therefore, could not be clubbed. It was contended by the Assessee that in earlier years, the clubbing of these two transactions was permitted to determine Arm’s Length Price (ALP). Further, the Assessee also submitted its contentions by stating that in a sale of airtime, it was bulk sale of product or service to the airtime user. However, the Assessee's contentions for determination of ALP were rejected by the TPO. On appeal, the CIT(A) believed that both the said segments i.e., distribution business segment and sale of air time advertisement sale segment were clubbed mainly to benchmark international transactions. During the proceeding, the Assessee placed two reasons for clubbing the said segment. Firstly, the two segments were closely related and the popularity of a channel had bearing on the subscription as well as sale of airtime for advertisement. Secondly, both the segments employed the similar set of assets and separate benchmarking would take it away from reality. The CIT(A) considered and accepted all the submissions made by the Assessee with regard to the set of transactions for the purpose of ALP determination and thereby worked out an operating profit margin of 7.82%. On appeal before the Tribunal, the Revenue contended that in earlier years the advertisement sales had reflected a profit but, the Assessee had recorded the same as losses in the relevant A which was subsequently used as evidence to submit that clubbing of these two set of transactions had deformed the picture. The Tribunal rejected the Revenue's submissions and held that by changing the business model, the Assessee company was getting more control over the distribution of function and it was a part of the Assessee's business strategy. Moreover, it was also found that according to the OECD TP guidelines, in this regard, closely linked transactions had to be aggregated and evaluated together. On appeal, the High Court held that, Whether clubbing of two distinct revenue streams i.e. sale of air time with distribution business, mainly to benchmark international transactions with regard to aggregation for ALP purposes, is allowable - YES: HC ++ after taking due note of the OECD Transfer Pricing Guidelines as well as the US Transfer Pricing Regulations, the Tribunal upheld the Appellate Commissioner's findings that the transactions in question ought to be analyzed in conjunction i.e. after aggregation for arm's length purposes. The Tribunal also found that the Assessee had structured itself in a manner that its profit was maximized as a whole rather than independently as regards these two activities; ++ this Court has considered the Revenue's submissions which largely reiterated what was urged before the Tribunal. The Court is of the opinion that the Tribunal's decision cannot be faulted. The rejection of the RBI guidelines and the TPO's omission given due weight to the down linking guidelines were a relevant factor, which in our opinion, the CIT(A) and the Tribunal correctly noted to reverse the original findings; ++ it is a settled proposition that whether to segregate or not segregate two transactions, is entirely a fact dependent exercise that cannot per se be treated as a question of law. In the present case, the reasons which impelled the lower authorities i.e. the CIT(A) and the Tribunal to uphold the Assessee's plea with regard to aggregation for ALP's purposes, are reasonable and cannot be interfered with. The appeals are therefore dismissed. Revenue's appeal dismissed
D VENUGOPAL Vs ASSISTANT DIRECTOR DIRECTORATE OF ENFORCEMENT: KARNATAKA HIGH COURT (Dated: October 6, 2017) FEMA - Petitioner seeking declaration that proceedings initiated by the respondents under the provisions of FEMA are without jurisdiction - petitioner has also sought for quashing the complaint dated 31.5.2016 filed against it under section 16(3) of FEMA vide and the SCN dated 6.6.2016 issued by the Special Director, Directorate of Enforcement - two other separate writ petitions, one by the present Director of the company Shri D.Venugopal and another by the former Director Shri M.Umesh have also been filed HELD - Sum and substance of the SCN makes it very clear that specific allegations made against petitioners have been reproduced with reference to different provisions of the Act and the Rules and petitioners have been called upon to submit their explanation - when full details are given regarding the allegations made based on complaint and documents produced, SCN cannot be characterized as one that predetermines the issue - any investigation undertaken with an intention to unearth violations of provisions of FEMA cannot be characterized as motivated or malicious merely because before initiation of such proceeding, an award had been passed against the Central Government regarding alleged breach of contract entered into between the Government and the Company - alleged breach of contract is one thing and violation of FEMA is totally another thing - this Court cannot interfere in the matter to stall the investigation and enquiry by the adjudicating authority - in such matters, all such allegations can be pleaded, demonstrated and proved by way of reply to SCN - prima facie, such bare allegations cannot form basis for stalling investigation and enquiry into violation of FEMA and the Rules and Regulations framed thereunder - thus, it is clear that the Act and the Rules framed provide sufficient mechanism for redressing the grievance of petitioners - in such circumstances, merely on the basis of certain allegations of malafides, this Court cannot entertain the writ petition to quash the SCN or the complaint exercising jurisdiction under Article 227 of Constitution of India - it will tantamount to preventing investigation and enquiry into violations of serious nature which may affect the economic fabric of the country - truth will, in anyway, ultimately emerge - petitioners have adequate safeguards in the form of effective remedies within the four corners of FEMA to seek redressal - the same process of reasoning is applicable to both the Directors who have filed separate writ petitions - writ petitions are dismissed : HIGH COURT [para 23, 26, 27, 29, 30, 31] Writ Petitions dismissed
MARUTI SUZUKI INDIA LTD Vs ADDL CIT: DELHI ITAT (Dated: November 9, 2017) Income Tax - Sections 92CA(1), 143(3) & 144C(5). Keywords: AMP Services - Bright Line Test - Incidental benefit - non-routine expenses - PLI - TNMM - Use of Trademark. The assessee is a leading automobile company which caters to the Indian market and exports to various countries. It is a subsidiary of Suzuki Motor Corporation of Japan. For the AY 2008-09, they have filed their return declaring a total income of Rs. 20,92,03,70,320/- and also disclosed long term capital loss of Rs. 15,39,21,183/-. Revised return was filed on 27.03.2010 at an income of Rs. 20,96,66,30,740/- and in that revised return assessee claimed credit of additional TDS of Rs. 25,66,500/- excluding income from the sales tax subsidy being capital receipt and expenditure/loss on Mark-to-market of derivative contracts and including expenditure on lumpsum royalty paid during the year. AMP Expenses On appeal, the DRP directed the TPO to consider only AMP expenses incurred and not to include sales promotion expenses within the ambit of AMP expenses for the purpose of applying the BLT. The TPO accordingly restricted the adjustment to Rs 195.16 crores. The assessee decided to challenge the adjustment made by the TPO - firstly that there was no international transaction, secondly that the Bright line test was not the prescribed method, thirdly that the assessee was the economic owner of the trademark ‘Maruti Zuzuki’ and fourthly that the expenditure on AMP incurred wholly and exclusively for business of the assessee, and that the benefit to AE were only incidental, and lastly that the AMP expenditure closely linked with the business of manufacture and sale of motor cars. Royalty for Use of Brand Name During the relevant previous year the assessee hade entered into the transaction of payment of royalty of Rs 494.25 crore to Suzuki Motor Corporation in consideration for the right to manufacture and sell various models of motor cars. TNMM was applied to benchmark the aforesaid transaction of payment of royalty and OP/Sales was considered as the profit level indicator. Since the operating profit margin (OP/Sales) of the assessee at 13.17% was higher than the average of the operating profit ratio of comparable companies, at 6.60% the international transactions entered into by the assessee were considered as having been entered at arm’s length price, applying TNMM. The TPO, however, disregarded the benchmarking analysis undertaken by the assessee and held that the international transaction of payment of royalty did not satisfy the arm’s length principle, that the assessee was not justified in paying any royalty to SMC towards use of SMC’s trademark, and allocated the royalty paid in the ratio of R&D expenses incurred by the associated enterprise. The TPO accordingly held that 48% of the total royalty paid was towards use of trademark. The TPO accordingly made an adjustment of Rs 237.24 crores being 48% of the total royalty paid. On appeal, the Tribunal held that, Whether AMP expenses in excess of the Bright Line Test constitute international transaction u/s 92B - NO: ITAT + the TPO has held that since the assessee had incurred expenditure on AMP in “excess” of the “bright line”, the excess would be treated as independent international transaction of rendering service of brand building by the assessee to Suzuki Motor Corporation, Japan; + following the decision in assessee’s own case, the AMP expenses cannot be treated and categorised as an international transaction under Section 92B of the Act, and the question of the TPO making any transfer pricing adjustment in respect of such transaction Chapter X does not arise; Payment of Royalty for use of brand name Whether TP Adjustment with respect to use of trademark can only be made if separate value of international transaction of royalty is available on record - YES: ITAT + this issue was dealt with by a coordinate Bench of this Tribunal in the AY 2006-07. For the AY 2007-08, vide Paragraph No 28.8 in the order, this Tribunal followed the above order on the issue under similar set of facts. Since there is no change of law on this aspect, while respectfully following the decision of this Tribunal for the AY 2006-07, we order for the deletion of the addition of Rs. 237.24 crore on account of transfer pricing adjustment of royalty for use of licensed trademark. Assessee's appeal allowed
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