Income Tax Appellate Tribunal - Delhi
Acit, New Delhi vs M/S. Karl Storz Endoscopy India Pvt. ... on 24 January, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I', NEW DELHI
Before Dr. B. R. R. Kumar, Accountant Member
Sh. Yogesh Kumar US, Judicial Member
ITA No. 1967/Del/2017: Asstt. Year: 2011-12
ACIT, Vs Karl Storz Endoscopy India Pvt. Ltd.,
Circle-41(1), D-181, Okhla Industries Area, Phase-1,
New Delhi New Delhi-110020
(APPELLANT) (RESPONDENT)
PAN No. AAACK4816D
ITA No. 2281/Del/2017: Asstt. Year: 2011-12
Karl Storz Endoscopy India Pvt. Ltd., Vs. DCIT,
11th Floor, 28, Barakhamba Road, Circle-14(1),
New Delhi-110001 New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AAACK4816D
Assessee by : Sh. V. K. Sabharwal, Adv.
Sh. Ravi Kapoor, CA
Revenue by : Sh. Bhagwati Charan, Sr. DR
Date of Hearing: 24.11.2022 Date of Pronouncement: 24.01.2023
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the Revenue and the assessee against the orders of the ld. CIT(A)-19, New Delhi dated 31.01.2017.
2. In ITA No. 1967/Del/2017, the revenue has raised the following grounds:
"(1 ) "I n the fac ts and circums ta nces of the cas e, the order of Ld. C IT(A) is pervers e i n direc ti ng the TPO to exclude comparables i.e. Quippo Val uers and A uctioneers Pr ivate Limited , Global Procurement Cons ulta nts Limit ed, Power System Operation Corporation Limited, MMTV Limited, Info Edge(India) Limit ed, Cryst al hues Limited, on the basi s of comparables being f unctionally differ ent without Page | 1 consideri ng t he fact t hat the comparabl es a re pioneer i n providi ng marketing services, ad vertisement s ervices, inter net bas ed pr omotion of product etc which are the whol e and s oul of Ma rket s upport service i.e. is the key servic e provided by the ass ess ee."
(2 ) " In the f acts and circumst anc es of the cas e, the order of Ld. C IT(A) is perv ers e in directing the TPO t o del ete the followi ng c ompara bles i.e. Apitc o Li mited, D FHL Property Service Limited on the ground of absenc e of segmental data wit hout consideri ng t he fact a mere m enti on of a segment i n the service p rovided by t he comparabl e company (which may or may not be ther e)does not indicate presence of s egmental data. Furt her not consideri ng t he f act t hat applicati on of TNMM does not call for rejec tion of a functionally similar c ompara ble j us t on the f act that it does not have s epara te s egment al data availabl e."
(3 ) "I n the fac ts and circums ta nces of the cas e, the order of Ld. C IT(A ) is pervers e in del eti ng the C ommission exp ense fr om the AMP expens e wit hout c onsideri ng t he fact that the expens es made t oward t he commission has a direct impact toward penet rati on of the market, brand promotion, creation a nd development of marketi ng intangibl es whic h belongs to the A E." (4 ) "I n the fac ts and circums ta nces of the cas e, the order of Ld. C IT(A ) is perv ers e i n d eleti ng the adjustm ent made by the TPO regar di ng the AMP iss ue by put ti ng his relianc e on verdict of H on'ble Del hi Hi gh Cour t in the case of S ony Ericss on Mobile wi thout appreciating the f act t hat SLP has been filed i n the supreme Cour t in the said matter against the verdict of the Hon'ble Hi gh C ourt." (5 ) "That the order of t he Ld. C IT(A ] is erroneous and is not tena ble on facts and i n law."
3. In ITA No. 2281/Del/2017, the assessee has raised the following grounds:
"1 . That on f act s and in law, the Learned C ommission of Inc ome Tax(Appeals) has erred in sel ecti ng comparabl e IC C Int ernational Limited and Priya Internati onal Limited, whic h were rejec ted by the TPO and no appeal was pref erred by the assess ee company f or their i nclusion i n the fi nal list of t he c ompa rabl e, yet t hese were directed to be incl uded i n the fi nal list of comparable by the L earned CIT(Appeals ).
2. That on f act s and in law, the Learned C ommission of Inc ome Tax(A ppeals) has erred in rej ec ting comparable Concept C ommuni cation L td. and C rystal Hues Ltd., whic h Page | 2 were accepted by the TPO and no appeal was preferred by the asses ee company f or their excl usion i n the fi nal list of the comparable, yet thes e were directed to be incl uded in the fi nal list of c omparable by t he Lear ned CIT(Appeal s).
3. That on f acts and in law, t he L earned Assessing Of ficer, Trans f er Pricing Of fic er and C ommission of Income Tax(Appeals) has erred i n excl usion of IDC Limited, which was clearly mentioned as sel ect ed in the TPO or der, yet were exclud ed from the fi nal list of t he c omparable for unknown reasons.
4. That on facts and in law, the C ommission of Inc ome Tax(Appeals) has erred i n exclusion of Indus Tec hnical & Fi nancial Consulta nt L td, India Tourism Development Corporation Ltd., EDCIL (I ndia) L td.'& I n House Production Ltd. on the basis of the c ompar ability.
5. That on fact s and in law, the L earned Ass essi ng Off icer and Transfer Pri cing Offic er has erred i n maki ng the assessment under Section 143(3 ) of t he I ncome Tax Act,1961, by adding R s.2 ,16,33,306 on account of market support segment to taxable i nc ome.
6. The appellant s ubmits that each of the ab ove grounds /sub-
grounds ar e i ndependent and without prejudice t o one anot her.
7. The appellant cr aves l eave t o add, alt er, vary, omit, substitute or am end the abov e grounds of appeal , at any time bef ore or at, t he time of heari ng, of the appeal, s o as to enabl e the Inc ome-ta x Appellate Tribunal t o decide the appeals accordi ng to la w."
4. Karl Storz Endoscopy India Private Limited (Assessee) is a 100% sub sid iary of Karl Storz GmbH & Co. KG. Germany ("Karl Storz Germany"). The Company is engaged in the import and trading of endoscop ic instruments and providing after sales serv ices to customers.
5. Assessee also provides marketing and service support to the existing dealer network of Karl Storz Germany in India. The mark eting support provided by the Assesses primary encompasses sponsorship of seminars and conferences of prominent associations of the medical community and advertisement campaigns in the p rint media while service support pertains to warranty repair and Page | 3 exchange of damaged equip ment sold by Karl Storz Germany's dealers in India. In return for the services rendered and significant expenses incurred by the Company on marketing, Karl Storz Germany pays commission to Assessee on sales made by existing dealer network of AE in India. The Company also provides post warranty repair and maintenance service on chargeable basis.
6. Return declaring loss of Rs. 34,36,011/- was e-filed on 30.11.2011. During the year under consideration, the assessee has undertaken international transactions with associated enterprises. Under the provisions for Section 92CA of the Income Tax Act, the international transactions entered into by the Assessee with the AE was referred to the TPO for determining the ALP.
7. The assessee has benchmarked its international transactions under two segments Trading segment and provision of marketing support services. The assessee has benchmarked the trading segment by applying Resale Sale method (RPM) and Provision for marketing support services by applying TNMM.
8. The ld. TPO issued his order dated 28.01.2015 u/s 92CA (3) of the IT Act, 1961 and total adjustment of Rs.14,01,01,219/- was made as under:
SN Description Amount (Rs.)
1 On Account of Market Support Seg ment 2,16,33,306/-
2 On Account of AMP expenditure 11,84,67,913/-
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ADDITION ON ACCOUNT OF MARKETING & SUPPORT SERVICES SEGMENT
9. The assessee company is providing Provision of Marketing support services to the AEs. The marketing support provided by the company, primary encompasses sponsorship of seminars and conferences of prominent associations of the medical community and advertisement campaig ns in the print media while service support pertains to warranty repair and exchange of damaged equipment sold by Karl Storz Germany's dealers in Ind ia. In return for the services rend ered. In return of the significant expenses incurred by the Company on marketing, Karl Storz Germany pays a commission to Karl Storz India on sales made by its distrib utors in India.
10. The assessee has selected itself as the tested party and TNMM has b een used as MAM and P LI is OP/OC. The assessee has selected 13 companies as comp arable on the basis of the search conducted in the public database Prowess and Capita Line Plus. The PLI of the Company is arrived at 14.21% on cost whereas the average PLI of the 13 comparab le companies is arrived at 7.14% on multip le year basis as per the analysis in the TP document.
Sr. Name of the company Operating profits on operating costs (%) 1 ICRA Management 15.90% Consulting Services Ltd.
2 ID C (India) Ltd. 10.33% 3 ICC International Agencies 36.45% Ltd (Segmental) 4 Indus Technical & Financial 12.05% Consultants Ltd.
5 Inhouse Productions Ltd -0.88% (Segmental) 6 Inmacs Management 50.35% Page | 5 Services Ltd 7 Priya International Ltd 4.32% (Segmental) 8 India Tourism Development -13.78% Corporation Ltd.
9 EDCIL (India) Ltd. 2.34%
Arithmetic mean 13.01%
11. The TPO has rejected all comparables selected by the Assessee except I C R A Manag ement Consulting Services Ltd. and IDC (India) Limited vide its order dated 28/01/2015. TPO cond ucted a fresh search on revised filters. As a result, TPO proposed a final set of 14 comparable with an average margin of 22.91%. However, TPO has left out IDC (India) Limited, which was accep ted by the TPO as comparable.
12. The comparables selected by the TPO is as under:
Sl. No. Company Name OP/OC
1 Concep t communication Ltd. 4.73%
2 Crystal Hues Ltd . 11.69%
3 Apar C hematek Lubricants Ltd. 42.31%
4 Cyber Media Research Ltd. 10.60%
5 DH L Property Services Ltd . 14.86%
6 ICRA Management Consulting Services 16.14%
Ltd.
7 Info Edge (Ind ia) Ltd . 45.53%
8 MMTV Ltd. 32.94%
9 Power System Operation Corporation Ltd. 22.52%
10 Quadrant Communications Ltd. 14.58%
11 Apitco Ltd. 25.17%
12 Global Procurement Consultants Ltd. 30.86%
13 TSR Darshaw Limited 41.60%
14 Quippo Valuers & Auctioneers Pvt. Ltd . 7.23%
Average 22.91%
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Computation of Arm's Leng th Price:
Particulars Amount Actual Cost of Assessee (A) 24,86,24,256 Arm's Length Revenue (B=A* 122.91%) 30,55,84,073 Revenue shown b y Assessee 28,39,50,767 Adjustment u/s 92CA 2,16,33,305
13. On appeal, CIT (Appeals)-19 directed, To exclude from final set of comparab le pertaining the adjustment on account of MSS M/s Indus Technical & Financial Consultant Ltd . M/s Inmacs Management Services M/s India tourism Development Corporation Ltd. M/s EDC IL (India) Ltd.
M/s In House Production Ltd.
M/s Crystal Hues Ltd .
M/s Apar Chemate K lubricants Ltd. M/s DHFL Property Services Ltd. M/s Info Edge (India) Ltd .
M/s MMTV Ltd.
M/s Media Research User Council M/s Power System Operation Corporation Ltd . M/s Apitco Ltd.
M/s Global Procurement Consultants Ltd. M/s TSR Darashaw Ltd.
M/s Quippo Valuers and Auctioneers Pvt. Ltd. M/s Concept Communication Ltd.
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14. To include in the final set of comparab le pertaining the ad justment on account of MSS.
M/s ICC International Agencies Ltd. M/s Priya International Ltd.
M/s ICRA Management Consulting Services Ltd. M/s Cyber Media Research Ltd.
M/s Quadrant Communications Ltd.
15. As per the d irection of the Ld. C IT(A) final set of comparables turn out to be follows:
Sl. No. Particulars Margin
1. ICC International Agencies Ltd 36.45%
2. Priya International Ltd 4.32%
3. ICRA Management Consulting 15.90%
Services
4. Cyber Media Research Ltd 10.60%
5. Quadrant Communications Ltd 14.58%
Average 16.37%
16. The average margin of the comparable companies is 16.37% and that of the assessee company is 14.21% which is under the 5% range of relaxation under second proviso of Section 92C .The adjustment proposed in segment of MSS gets reduced to Nil following the direction of Ld. CIT.
17. Aggrieved, the revenue filed appeal against the decision of the ld. CIT(A) directing the TPO to exclude the following comparables. The decision of the ld. CIT(A) and accep tance and rejection thereof by the Tribunal is tabulated as und er alongwith the reasons:
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1. Global Procurement FAR not Consultants Ltd. comparable.
This company is promoted by
Hence, the
Export-Import Bank of India in
decision of the
association with leading Ind ian
ld. CIT(A) is
Public Sector and Private Sector accep ted.
consultancy org anization on the basis of public private partnership model that offers collective Ind ian experience and expertise throug h the provision of a range of advisory services with particular focus on Procurement.
The company provides technical assistance in enhancing equality, transparency, efficiency and effectiveness or procurement and imp lementation service to help attain desired institutional and corporate objective. The expertise or this company is available to various sectors including power, water resources, transportation, ind ustries etc.
2. Power System Operation CL FAR not The function of a grid comparable.
maintenance company are
Hence, the
completely different from a
decision of the
marketing company. The company ld. CIT(A) is is also not in to marketing of accep ted.
power. Even otherwise the
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marketing of power is an entirely different ball game as compared to marketing of other goods and services. The company is not comparable and should be excluded.
3. MMTV Ltd. FAR not The company derived income from comparable. broadcasting and advertisements.
Hence, the This it is med ia for markets and is decision of the not engaged in marketing ld. CIT(A) is activ ities itself. Broadcasting accep ted.
advertisement and having such
consultants for promotion is
entirely different. The company is not correct comparable.
4. Info Edge (India) Ltd. FAR not The company owns several comparable.
websites that serve as online
Hence, the
search portal company to the
decision of the
needs of the customers.
ld. CIT(A) is
A perusal of the several websites accep ted.
which are owned by the company
ind icates that it is primarily in
business of internet related
business.
5. Crystal H ues Ltd. Hence, the
The assessee has no objection to decision of the consider this as a comparab le. ld. CIT(A) is not accepted.
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6. Quippo Valuers and FAR not Auctioneers Pvt. Ltd. comparable. The company which is in activities Hence, the of auctions and valuations is decision of the functionally different from the ld. CIT(A) is appellant. The functions involved accep ted.
in auctions are totally different
from promotion. Further no
segmental arte available to
quantify the extent and
profitability of valuation activities which are of a completely different nature.
7. Concept Communications Ltd. Hence, the On the facts of the instant case, decision of the the corrected OP/OC may be ld. CIT(A) is taken. not accepted.
8. DHFL Property Services Ltd. FAR not The company has two activities comparable. namely technical consultancy and Hence, the project advisory, but the decision of the segmental results are not ld. CIT(A) is availab le, therefore, it cannot b e accep ted.
selected and should be excluded.
10. Apitco Ltd. FAR not The Apitco Ltd . deciphers that this comparable. company is providing services in Hence, the nature of project report decision of the preparation, technical and ld. CIT(A) is economic studies, feasibility accep ted.
studies, micro enterprises
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management, sk ill developments, project management consulting, market and social research and asset reconstruction management services. No segment wise profitability data of these serv ices is available. The TPO has considered this company as comparable at entity level. This is a tiny resemblance of some of the function performed by this company with the overall activ ities undertaken by the assessee. However, in absence of any segmental data, the company cannot be taken as comparable on an entity level.
ADDITION ON ACCOUN T OF AMP EXPENSES
18. The TPO bifurcated Advertizing & Market Promotion (AMP) expenses into routine and non-routine following the Bright Line Test (BLT) and held that the appellant was providing service to its AEs because its AMP expenses were excessive. The TPO applied a markup of 15% on the non- routine expenditure of the appellant based on the PLR of the SBI. Thus, the TPO made an addition of account marketing intangibles developed by the appellant as a result of marketing expenditure on the basis of Bright Line Test (BLT) v ide order under section 92CA(3).
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19. Accordingly, the arm's length price in respect of the international transaction relating to AMP services is calculated as below:
Arm's length AMP i.e. the brig ht line 3.21% Sales of the assessee company 45,34,45,893 Arm's length amount of AMP 1,45,55,613 Amount spent by the assessee company on 11,75,71,190 AMP Amount in excess of the arm's length 10,30,15,577 amount of the AMP Mark up @ 15% 1,54,52,337 Adjustment on account of AMP 11,84,67,913
20. The TPO rectified his order u/s 92CA(3) passed on 28.01.2015 vide order u/s 92CA(5) r.w. sec 154 dated 12.03.2015 and reduced the addition on account of AMP Expenses from Rs.11,84,67,913/- to Rs.2,80,11,203/-. Thereafter, on appeal, CIT Ap peals-19 vide its order 31.01.2017 has deleted the entire add ition of Rs.2,80,11,203/- on account of AMP.
21. The Revenue came into appeal before ITAT on the grounds that the ld. CIT(A) ought not to have relied on the verdict of Hon'ble High Court of Delhi in the case of Sony Ericsson as the department has filed SLP before the Hon'ble Supreme Court. At this juncture, it would suffice to hold that the jud icial discipline mand ates to follow the ratio of the Hon'ble Jurisdictional H igh Court and hence the appeal of the revenue on this ground is liab le to be d ismissed.
Page | 13
22. In the result, the appeal of the assessee is partly allowed and that of the revenue is dismissed.
Order Pronounced in the Open Court on 24/01/2023.
Sd/- Sd/-
(Yogesh Kumar US) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 24/01/2023
*Subodh Kumar/AK, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
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