Income Tax Appellate Tribunal - Delhi
Yum! Restaurants (India) Pvt. Ltd., ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I' : NEW DELHI)
BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER
and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.6168/Del./2012
(ASSESSMENT YEAR : 2008-09)
Yum! Restaurants (India) Private Ltd., vs. ITO, Ward 18 (4),
2nd Floor, Tower - D, New Delhi.
Global Business Park, M.G. Road,
Gurgaon - 122 002.
(PAN : AAACY1883E)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : S/Shri Nageshwar Rao &
Shailesh Kumar, Advocates
REVENUE BY : Shri Peeyush Jain, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This appeal filed by the assessee emanates from the order of Assessing Officer u/s 143 (3) read with section 144C (4) of the Income-tax Act, 1961 dated 29.11.2012 for the Assessment Year 2008-09.
2. The assessee company, Yum! Restaurants (India) Private Ltd. (YRIPL) incorporated as per the provisions of the Companies Act, 1956 is engaged in the business of franchising of 'Pizza Hut' and 'KFC' restaurants in India. The assessee has obtained franchisee rights from KFC International Holdings (KFCIH) and Pizza Hut International LLC (PHILLC) which has been subsequent assigned in favour of 2 ITA No.6168/Del/2012 Yum! Restaurants Asia Pte Ltd., Singapore (YRAPL) to whom the assessee pays royalty for the use of such rights after taking requisite government approval. Assessee has entered into a service agreement with Yum! Restaurants International Inc. (YRI) for a period 01.04.2003 to 31.12.2003 and with YRAPL for the period 01.01.2004 to 31.03.2004. Assessee has also established a wholly owned subsidiary under the name of Yum! Restaurants Marketing Private Limited (YRMPL) with the object of undertaking advertising, media and promotional activities (AMP activities).
3. The assessee has taken the following grounds of appeal related to Corporate Tax matters :-
"B. Grounds relating to Corporate Tax matter Service income treated as 'income from other sources'
1. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in characterizing the service income earned by the appellant amounting to Rs.10,98,31,254 from M/s Yum! Restaurants Asia Pte Ltd., Singapore ("YRAPL"), as "income from other sources" as against "business income".
1.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has grossly erred in taking a divergent view from the Ld. TPO on the same sets of facts.
Disallowance of royalty expenditure
2. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in disallowing the royalty expenditure paid by the appellant to YRAPL to the tune of Rs.7,62,43,298 2.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in holding that the royalty payments made by the appellant are in relation to trademark usage and not for obtaining technical knowhow.
3 ITA No.6168/Del/20122.2 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in ignoring the specific approvals and clarification letter obtained by the appellant from the Government of India for payment of royalty.
Hypothetical disallowance of administrative expenses
3. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in making a hypothetical disallowance of the administrative expenses of Rs.23,87,46,837 incurred by the appellant as being attributable to its subsidiary company, Yum! Restaurants Marketing Private Limited ("YRMPL"). 3.1 Without prejudice to the above, even assuming (without admitting) that the expenses pertained to that of YRMPL, the Hon'b1e DRP/ Ld. AO had on the facts of the case and circumstances, erred in arbitrarily arriving at an allocation criteria of 50:50 ratio, for apportionment of the expenses.
3.2 Without prejudice to Ground No.3 above, the Hon'ble DRP/ Ld. AO has erred in taking a contradictory view with regard to allowance of such administrative expenses as compared to the view taken by the Ld. TPO while carrying out segmental analysis. Part disallowance of tax depreciation
4. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has grossly erred in disallowing the Income tax depreciation claim to the extent of Rs.25,59,253 made by the appellant under Section 32 of the Act.
4.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has grossly erred in failing to appreciate that under the block of assets concept, actual physical possession of the fixed assets is not relevant for the claim of depreciation. Disallowance of alleged excessive advertising, marketing and promotion (' AMP') contribution
5. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld, AO has erred in disallowing the contribution made by the appellant to YRMPL, to the tune of Rs.1,91,74,987, for carrying out advertising, promotion and marketing ('AMP') activities contending the same to be excessive under Section 40A(2)(b) of the Act.
4 ITA No.6168/Del/2012
Disallowance of the research and development expenses
6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in disallowing the research and development expenses amounting to Rs.9,48,831 by holding them to be of capital nature.
6.1 Without prejudice to the above, even assuming (without admitting) that the said research and development expenses are of capital nature, the Ld. AO has erred is not allowing depreciation on the said expenditure.
Disallowance of tax depreciation @60% on computer peripherals
7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in allowing depreciation on computer peripherals and accessories @15% as against the depreciation claim of the appellant @60%."
4. In the ground nos.1 & 1.1, the issue involved is regarding service income earned by the assessee amounting to Rs.10,98,31,254/- from M/s. Yum! Restaurants Asia Pte Ltd., Singapore ("YRAPL") as "income from other sources" as against business income.
5. This issue has been decided by the ITAT in the assessee's own case in ITA Nos.2678 & 2679/Del/2012 for Assessment Years 2004-05 and 2005-06 dated 14.02.2014 and also in earlier years. The relevant para of the aforesaid order is reproduced as under :-
"4. In the ground no.1 in both the revenue's appeal, the issue involved is whether income from receipt of services fee assessable under the head Profits and Gains of Business or to be treated as 'income from other sources' as held by Assessing Officer. Assessee has entered into service agreements with Yum! Restaurants International Inc., USA (YRI) for the period 1.4.2003 to 31.12.2003 and with M/s Yum Restaurants Asia Pte. Ltd. (YRAPL) for the period 1.1.2004 to 31.3.2004, for providing the franchisee support services in area countries, that is, liaison services for obtaining necessary approvals/ licenses, providing assistance to existing and future licensee's in India, Pakistan, Sri Lanka and Mauritius, provision 5 ITA No.6168/Del/2012 of reports related to India, Sri Lanka, Mauritius, Bangladesh and new markets and market development in existing and new markets. Assessee was remunerated at a fixed fee for providing various franchisee support/market development services to YRAPL/ its franchisees in area countries. The Assessing Officer disallowed the amount for the service agreement in respect of neighboring countries of India, but income received is only in respect of costs incurred in India. It was also held that dominant intention of the assessee was not to enter into any business activity but was to pass on the income earned by the group companies in Indian subcontinent without payment of tax and the activity carried out by the assessee is not a systematic or an organized activity so as to be called a business activity.
5. At the outset of the hearing, ld. AR submitted that this issue has been decided by the ITAT in favour of the for the Assessment Years 2002- 03, 2003-04 and 2006-07 vide order dated 31.05.2011 and submitted that the ITAT has held that providing of services was not an isolated act by assessee but of a continuous nature since Assessment Year 1998-99, with the intentions to earn profits. The assessee has received similar service income in previous and subsequent years which has been consistently held as business income. The different basis for computation of service income is purely a commercial decision between assessee and YRAPL, which ought not to have any impact on characterization of income as business income or income from other sources. He further submitted that when the expenses incurred by the assessee, which form the basis of computation of service income are allowed as business expenditure, the corresponding income should also be treated as business income. It was also submitted that the main objects clause of the memorandum of association of the assessee provides for provision of restaurant support services. He also relied on the case laws, viz., Mazagaon Dock Ltd vs. CIT (SC) (34 ITR
368); Barendra Prasad Ray vs. ITO (SC) (129 lTR 295); and Senairam Doongarmall vs CIT (SC) (42 ITR 392) for the proposition that a regular and continuous activity carried out with the intention to earn profits is to be regarded as business income.
6. We have heard both the sides on the issue. The ITAT in its order dated 31.05.2011 vide para 8 has held as under :-
"8. We have duly considered the rival contention and gone through the record carefully. Ld. First Appellate Authority has reproduced the submissions of the assessee. The assessee in its submissions has pointed out that section 2 (13) provides the definition of expression "business" according to which business includes any trade, commerce, manufacture or any adventure or concern in the nature of trading, commerce or manufacture. In various authoritative pronouncement of the Hon'ble Supreme Course and Hon'ble High Court, meaning and scope of expression "business" has been propounded. It is not necessary to recite and recapitulate of those decisions, but on the strength of them, it would 6 ITA No.6168/Del/2012 be suffice to say that word "business" is one of wide import and which means an activity carried out continuously and systematically by a person by the application of his labour and skill with a view to earn income. The case of the assessee is that right from asstt. Year 1998-99, it is providing various types of services to the franchise in India and also to its associate enterprises, because it is collecting fees etc. from the franchise and remitting it to YRI in US. The main object of the assessee company, as discernable from Memorandum of Association is to own, purchase, lease, develop, operate, franchise and manage restaurant etc. Similarly, its next object is to provide consultancy and advisory services in connection with the establishment, organization, financing, management and operation of restaurant, café....etc. This business, assessee has been performing right from 1998-99 and the department has accepted this. Assessee has shown additional receipts which means higher taxes would be payable. The assessee has also pointed out at the time of hearing that a reference to the TPO to determine the arms length price u/s 92 (CA) 3, in respect of the international transaction entered into by the assessee was made and the TPO has also accepted that the transaction are at arms length price. With regard to the objection of the AO, on account of authenticity of the agreement by the assessee that agreement has duly been signed by the both the parties. There is no specific defect referred by the AO. According to the assessee under the Indian Tax Act even on oral agreement or an agreement on plain paper entered into by two or more parties is valid and binding upon the contracting parties. With regard to allegation of AO about payment of dividend by the assessee to the parent company is concerned, it was contended by the assessee that AO has observed that possibility of payments being made in lieu of dividend on contribution toward development / business from time to time made by parent company by the assessee cannot be ruled out. There is no evidence with the AO in this regard. The assessee is receiving the income from parent company i.e. YRI and not making payment to it. Taking into consideration the detailed submission by the assessee, which have duly been reproduced by the Ld. CIT(A) coupled with the finding recorded by the Ld. CIT(A) (extracted supra), we are of the view that AO miserably failed to appreciate the facts and circumstance. The assessee has been offering income from consultancy etc. as a business income. It has duly been accepted by the department since 1998-99. The AO without assigning any valid reason concluded that it is an income from other sources. On the other hand, Ld. First Authority has considered this issue in right perspective. Therefore, we do not find any merit in this ground of appeal it is rejected."
Since facts are same, therefore, respectfully following the decision of ITAT in earlier years, we dismiss ground no.1 of both revenue's appeal." 7 ITA No.6168/Del/2012 The facts of the issue in this year and pleadings of both the sides remain the same, respectfully following the aforesaid decision of the ITAT, this issue is being taken as covered in favour of the assessee. Therefore, we allow this ground of assessee's appeal.
6. In the ground nos.2, 2.1 & 2.2, the issue involved is restricting the royalty expenditure paid by the assessee to YRAPL to the tune of Rs.7,62,43,298/-.
7. At the outset of the hearing, ld. AR submitted that this issue is also covered in favour of the assessee by the aforesaid order dated 14.02.2014 of ITAT.
8. We have heard both the sides on the issue. The facts of the issue and pleadings of both the sides remain the same in this year as well as in the aforesaid order for Assessment Years 2004-05 and 2005-06. The relevant portion of the order is reproduced as under :-
"7. In the ground no.2 & 3 in ITA No.2678/Del/2012 and ground nos.2 & 2.1 in ITA No.2679/Del/2012, the issue involved is disallowing of royalty expenditure. The assessee's primary business operation relates to the operation and development of Pizza Hut and KFC restaurants in India through franchisee. For this purpose, the assessee has entered into a technology license agreement with KFC / Pizza Hut through which assessee has been granted the rights to use the technology and system in operation of restaurants in India. The assessee has also obtained approval from Secretariat SIA, Government of India (GOI) for payment of royalty for the use of technology and systems for operation of KFC/ Pizza Hut restaurants in India. Later, these royalty payments were covered in the automatic route as per the terms notified in the Press Note 9 (2000 series) and Press Note 2 (2003 series). The assessee has also sought specific clarification in this regard and obtained the same from the GOI, Ministry of Finance. The disallowance was made on the reason that the SIA approval i.e. the Government approval used the term 'license fee' whereas the assessee has used the term 'royalty' in its accounts which is not as per the SIA approval, therefore, it was considered as disallowance. The payment 8 ITA No.6168/Del/2012 of royalty was specifically inapplicable even in the initial agreement by virtue of Conditions 2, 3, 4 of Annexure 1. The payment of license fee was allowed only for a period of initial seven years, so payment was termed as royalty to avoid the said clause. Then the payments have been made to parent companies, it cannot be ruled out that the same is in lieu of dividend. Ld. AR submitted that ITAT has allowed the issue in favour of the assessee in assessment years 2002-03, 2003-04 and 2006-07 and he referred to para 20 of the order. It was also submitted that against this expenditure of royalty, the assessee has also earned royalty of Rs.6,32,44,241 from the franchisee's. There is an accrual of direct income from such expenditure and he referred to the decisions of CIT vs. Ciba of India Ltd. (SC) (69 ITR
692) and Shriram Refrigeration Industries Ltd vs. CIT (Delhi HC) (127 ITR
746). It was also submitted that payment is made for the purposes of carrying out its business and hence allowable as a genuine business expenditure. The term classification (nomenclature) of license fees as royalty or technical fees is not relevant. The terms "royalty" and "license fee" were interchangeably used by the Government of India in its correspondence with assessee. He submitted that AO has misinterpreted the SIA approval since the clause made inapplicable to the assessee was not relevant to its nature of business. It was further submitted that the Government of India, in its letters dated September 29/30, 2003 and June 16/17, 2004, which is placed at Page 280 and 282 of Paper book 2 for AY 2005-06, has used the term 'royalty' and not 'technology license fee', while mentioning that as per the liberalized policy, assessee may remit royalty under the automatic route within the prescribed limits. He further submitted that payment is in accordance with the SIA approval and within the prescribed limits. Additionally, Payment of royalty up to 5% of sales has been allowed by Government of India under automatic route in view of Press Note 2 of 2003 and he submitted that therefore, the royalty was paid in accordance with the policies of the Government. It was submitted that payments have been made through authorized dealer and thus cannot be under violation of any law or exchange control regulations. The TPO has also held the same to be an arm's length payment. Therefore, the payment of royalty cannot be treated as unreasonable or excessive as alleged by the AO.
8. We have heard both the sides on the issue. As mentioned by the ld. AR, the issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07, the relevant para of the said order is reproduced as under :-
"20. With the assistance of Ld. Representative, we have gone through the record carefully. The main reason for disallowing the royalty payment by the assessee to M/s. KFC international holding Inc and M/s. Pizza Hut with whom it had entered into technology licence agreement is that Govt. of India has permitted the assessee to pay technical fees which is restricted to seven years and assessee is paying it as a royalty. Ld. CIT(A) has deleted the disallowance on the ground that assessee has earned an income of ` 3,37,05,801/- as 9 ITA No.6168/Del/2012 continuing fees from the franchise, because of this technology licence agreement. It has been permitted to collect the fees on behalf of KFC International and Pizza Hut. This permission is in pursuance to the technology licence agreement. The AO failed to bring on record any material that assessee has infringed any law in conducting its business. We have perused the relevant material and also the written submissions of the assessee reproduced by the Ld. CIT(A). In our opinion, AO has misread the approvals granted by the Govt of India while arriving at a conclusion that assessee has not been remitting the payment as per the approvals. In the approval SIA has used expression "royalty as well as fee for technical services" loosely and interchangeably. Apart from all these things, the tax rate for remitting a royalty as well as fee for technical service is 15% plus the research and development cess. The assessee has paid both these amounts while remitting the payment. The expense is directly related to its business. It has been incurred wholly and exclusively for running the franchises within India. Therefore in our opinion Ld. First Appellate Authority has appreciated the facts and circumstances in right perspective and has rightly deleted the disallowance."
Facts are same, therefore, we find no merits in the ground nos.2 & 3 in ITA No.2678/Del/2012 and ground nos.2 & 2.1 in ITA No.2679/Del/2012 and the same are dismissed."
Facts of the issue and pleadings of both sides remain the same, therefore, respectfully following the aforesaid decision of the ITAT, we allow this ground of assessee's appeal.
9. In the ground nos.3, 3.1 & 3.2, the issue involved is hypothetical disallowance of the administrative expenses of Rs.23,87,46,837/- incurred by the assessee as being attributable to its subsidiary company, YRMPL.
10. At the outset of the hearing, ld. AR submitted that this issue is also covered in favour of the assessee by the aforesaid order dated 14.02.2014 of ITAT.
11. We have heard both the sides on the issue. The facts of the issue and pleadings of both the sides remain the same in this year as well as in the aforesaid 10 ITA No.6168/Del/2012 order for Assessment Years 2004-05 and 2005-06. The relevant portion of the order is reproduced as under :-
"9. Ground No.4 in ITA No.2678/Del/2012 and ground no.3 in ITA No.2679/Del/2012 is against the deletion of addition out of administrative expenses. The YRMPL is a wholly owned subsidiary of the assessee operating as a mutual concern for the common benefit of all the franchisees and the assessee. It carries out advertising, marketing and promotion activities. For this purpose, assessee and YRMPL have entered into a tripartite agreement with each franchisee. Each franchisee is required to contribute a fixed percentage of its sales as its contribution towards advertising and marketing activities. As per the tripartite agreement, for the cost effective functioning of YRMPL, assessee provided YRMPL with any or all administrative support facilities. In case such facilities are extended by assessee to YRMPL, it would be required to reimburse assessee with such costs. Where on one hand assessee is entitled to receive money for such costs incurred by it, on the other hand it is also obliged to contribute to YRMPL for meeting its advertising, marketing and promotion activities budget deficit. The disallowance was made on the reasoning that the administrative expenses incurred by the assessee, proportionately also belong to YRMPL as the business is carried out from common premises and employees and YRMPL has not paid its share of administrative expenses to assessee for the common facilities used by it which belong to the assessee and also that there is no reduction in the AMP contribution to be made by the assessee to YRMPL in lieu of providing administrative support. Ld. AR submitted that the this issue is cove red in favour of the assessee by the decision of ITAT in assessee's own case for assessment years 2002-03, 2003-04 and 2006-07 and referred to Para 22 of the said He submitted that the CIT(A) also for assessment years 2004-05 and 2005- 06 has relied upon the said decision of the ITAT and decided. this issue in favor of the assessee. He submitted that YRMPL is a not for profit entity set up with the due approval of SIA with the objective of conducting AMP activities for the assessee and its franchisees. YRMPL is completely funded by the assessee and its franchisees by way of fixed contributions and any additional fund requirements being met by the assessee. He further submitted that the ITAT has duly examined the business model of the assessee and YRMPL and held that the assessee was entitled to contribute to the activities of YRMPL as per its business needs and the facts and circumstances of the case remain identical to those before the ITAT in previous years. Ld. AR submitted that the assessee, instead of recovering charges for sharing administrative facilities, reduced its AMP contribution to YRMPL to avoid unnecessary cash flows. He explained that by way of a simple example - if assessee has to fund Rs.100 and recover Rs.20 from YRMPL; it funds only Rs.80 after reducing the amount of recovery. However, the AO has grossly misinterpreted the same as non-reduction of AMP contribution. He submitted that direct contributions paid by the assessee to YRMPL have been allowed by the AO as an expense thereby 11 ITA No.6168/Del/2012 duly recognizing the commercial interest of assessee in the functioning of YRMPL. He relied on the decisions in the cases of S.A. Builders Ltd vs. CIT (SC) (288 ITR I); Sassoon J. David and Co. (P) Ltd vs. CIT (SC) (118 ITR 261); CIT vs. Sales Magnesite P Ltd (Bombay HC) (214 ITR I); and CIT vs. Panipat Woolen & General Mills (SC) (103 ITR 66) wherein it has been held that merely because some other party has also benefited from the expenditure incurred it cannot be held that it is not allowable. He further submitted that there is no rational basis adopted by the AO for allocating 50% of the expenditure incurred by assessee as being attributable to YRMPL. To clarify the same, he submitted that the assessee has a huge employee base for the purposes of operating its equity stores, huge rental and other operating costs being incurred for the operation of equity stores, which has nothing to do with the AMP activities that YRMPL coordinates on behalf of assessee. Therefore, such expenses should not be allocated to YRMPL at all, as its functioning is basically to make payments to third party advertising firms. Finally, he pleaded to dismiss this ground of revenue's appeal.
10. We have heard both the sides on the issue. We find that this issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07. The relevant para of the said order is reproduced as under :-
"22. On appeal, Ld. CIT(A) deleted the disallowance. With the assistance of Ld. Representative, we have gone through the record carefully. It emerges out from the record that YRMPL was incorporated on 8th June, 1999. It is a 100% owned subsidiary of the assessee. It has been incorporated to carry out advertisement, marketing and promotion activities of the assessee as well as various franchise. The assessee had entered into a tripartite agreement with its franchise and YRMPL. As per this agreement, the franchise shall pay AMP contribution to YRMPL and assessee may not pay a separate contribution. In a way, YRMPL was to carry out the activities on no profit no loss basis. The AO has disallowed the expenses which are attributable to YRMPL but in fact, he ought to have not disallowed any such amount because ultimately it is the assessee who has to contribute for all these sums. The assessee can bear the cost of administrative expenses alleged to be incurred by YRMPL or it can separately remitted the amount to YRMPL towards such cost. From both the angles, it is the assessee or its franchise who has to contribute this amount. The AO, therefore, has erred in carving out the disallowance. Ld. CIT(A) has rightly deleted this disallowance and we do not find any force in this ground of appeal. It is rejected."
In view of these facts, we find no merits in the Ground No.4 in ITA No.2678/Del/2012 and ground no.3 in ITA No.2679/Del/2012 and the same are dismissed."
12 ITA No.6168/Del/2012Respectfully following the aforesaid decision of the ITAT, we allow this ground of assessee's appeal.
12. In the ground nos.4 & 4.1, the issue involved is not allowing the income tax depreciation claim to the extent of Rs.25,59,253/- made by the assessee under Section 32 of the Act.
13. At the outset of the hearing, ld. AR submitted that this issue is also covered in favour of the assessee by the aforesaid order dated 14.02.2014 in ITA Nos.2678 & 2679/Del/2012 of ITAT.
14. We have heard both the sides on the issue. The facts of the issue and pleadings of both the sides remain the same in this year as well as in the aforesaid order for Assessment Years 2004-05 and 2005-06. The relevant portion of the order is reproduced as under :-
"11. In the ground nos.5 & 6 in ITA No.2678/Del/2012 and ground nos.4 & 5 in ITA No.2679/Del/2012, the issue involved is disallowance of part depreciation. Brief facts of these grounds are that as part of its emolument policy for employees, the assessee reimburses amounts incurred by its employees on purchase of hard furnishings. Such reimbursements are made by the assessee to the employees only to the extent of their entitlement (determined on the basis of their grade / level as per their appointment letter). As per the perquisite valuation rules, such assets are considered in the personal income of the employees and taxes are duly deducted on the same. Further, such assets are recorded in the books of accounts by the assessee when the claim for reimbursement is submitted by the respective employees and only to the extent of their reimbursement entitlement. Also, the assessee had transferred certain assets belonging to its restaurant outlets in assessment year 1999-00 on itemized basis. However, no sales consideration was received for the same. Accordingly, no deletions were made in the block of assets (owing to Nil consideration) on account of this sale in accordance with the provisions of Section 43(6)(c)(i)(B) of the Act. The disallowance was made on the basis that in the earlier assessment years it was observed that certain assets which were 13 ITA No.6168/Del/2012 purchased during prior period have been entered in the books of accounts of the financial year. It was held that depreciation claimed on assets purchased exclusively for the employees, are not for the use of business and certain assets which were sold by the assessee as part of its undertakings (outlets) to its franchisees continue to remain in its books and depreciation claimed on the same. The ld. AR submitted that CIT(A) placing reliance on the judicial precedents set forth by the assessee has allowed the issue in favour of the assessee for assessment years 2004-05 and 2005-06. Complete depreciation has been allowed including depreciation of assets sold. He submitted that assets used by the employees would also be regarded as used for the purposes of business and hence eligible for claim of depreciation. He submitted that these were also taxed in the hands of the employees as perquisites and relied on the decision of Sayaji Iron and Engg Co vs. CIT (Gujarat HC) (253 ITR 749). He further submitted that under the block of asset concept, individual assets lose their identity when merged in the block and accordingly, actual physical possession and use of assets are not essential. He also relied on the decisions of CIT vs. Yamaha Motor India Pvt Ltd (Delhi HC) (ITA No 203/ 2009 and 601 2009): CIT vs Bharat Aluminium Co Ltd (Delhi HC) (ITA No 659/ 2007 and 1484/2006); Xerox India Ltd.. (Delhi ITAT) (ITA No. 680/Del/2006); CIT vs G.R. Shipping Ltd. (Bombay HC) (ITA No. 598 of 2009) and Swati Synthetics (ITA No. 1165/M/2006).
12. We have heard both the sides on the issue. We find that this issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07. The relevant para of the said order is reproduced as under :-
"25. On due consideration of the facts and circumstances, we are of the view that AO has highlighted certain discrepancies in the maintenance of WDV of the assets as well as identification of each assets. There may be some shortcomings but that does not mean that assessee was not having any assets and they were not used for the purpose of business. In our opinion, AO ought to have identified each item and find out how that item is treated in the block of assets, if it is established that those assets were not used for the purpose of the assessee's business then he should make out a care for disallowance of depreciation. By making general observation, he cannot deny the total claim of the depreciation of the assessee. Taking into consideration these aspects, we do not find any merit in this ground of appeal. Ld. CIT(A) has already directed the AO to give effect outcome of 1999-2000. The depreciation disallowed in asstt. year 1999-2000 would be considered for disallowance in this year also. The effect of outcome in asstt. year 1999-200 would be given after giving an opportunity of hearing to the assessee."14 ITA No.6168/Del/2012
In view of these facts, we find no merits in the ground nos.5 & 6 in ITA No.2678/Del/2012 and ground nos.4 & 5 in ITA No.2679/Del/2012 and the same are dismissed.
Respectfully following the aforesaid decision of the ITAT, we allow this ground of assessee's appeal.
15. In the ground no.5, the issue involved is disallowing the amount paid by the assessee to YRMPL to the tune of Rs.1,91,74,987/- for carrying out advertising, promotion and marketing (AMP).
16. The assessee company has 100% subsidiary in the name of Yum! Restaurants Marketing Private Limited (YRMPL). The assessee has claimed that it has entered into tripartite agreement between YRMPL and various franchisees. As per this arrangement, the franchisees were required to contribute 5% (inclusive of service tax) of the net sales as its contribution to YRMPL to be spent on AMP activities. During the year, the assessee has also made additional payment of Rs.2,27,53,357/- to its subsidiary YRMPL which was over and above the 5% of the net sales being contributed by the franchisees. The DRP directed the Assessing Officer on this issue which read as under :-
"5.3 We have carefully considered the submissions of the assessee and have perused the material on record. It is seen that YRMPL undertakes AMP activities at the national level of brand names owned by the foreign entity for which every franchisee contributes 5% of its turnover as per the tripartite agreement. Apart from this contribution, as per the agreement, every franchisee including the assessee is required to utilise 1 % of its sales for AMP activities. Further, if there is a need to spend additional amount for the AMP activities, the same is to be contributed by the assessee. During the year under consideration, the assessee has made additional payments of Rs 2,27,53,357/- over and above the 5% of the net sales of its equity stores, as being contributed by other franchisees. It is noticed that 15 ITA No.6168/Del/2012 the actual beneficiaries of the AM.P activities undertaken by YRMPL are the foreign brand holders or the parent company whose income is directly proportional to the turnover of the franchisees and whose brand value/goodwill would increase. The beneficiaries are the new stores because they get straight away huge turnovers without any AMP activities initially. The other marginal beneficiaries would be the franchisees whose total turnover would increase by such AMP activities. But major beneficiaries of such AMP activities i.e. the foreign entity as well as the new stores are not contributing anything for activities of YRMPL and are also not making any additional contribution. Logically, the excess funding to YRMPL should have been proportionately distributed among all the franchisees, the assessee and the foreign company which has not been done. Thus the excess payment made by the assessee cannot be treated as being incurred wholly and exclusively for the purpose of business as required under section 37 read with section 40A(2)(b) of the Income tax Act, 1961.
5.4 In view of the facts stated above, the AO is directed to allow to the assessee, the contribution attributable to the assessee, on account of the benefit derived by it by way of increased sales of its various equity stores during the financial year 2007-08 due to the AMP activities of the YRMPL from the proposed disallowance of Rs.2,27,53,357/- under section 40A(2)(b) of the Income tax Act, 1961."
As per the direction of the DRP, actual beneficiary of the AMP activities undertaken by YRMPL are the foreign brand holders or the parent company whose income is directly proportional to the turnover of the franchisees and whose brand value/goodwill would increase. DRP has also held that beneficiaries are the new stores because they get straight away huge turnovers without any AMP activities initially. DRP has also held that the other marginal beneficiaries would be the franchisees whose total turnover would increase by such AMP activities. It was directed that excess payment made by the assessee cannot be treated as being incurred wholly and exclusively for the purpose of business as required u/s 37 read with section 40A(2)(b) of the Income-tax Act, 1961. While working out the ratio of benefits accrued to the assessee, franchisees and parent company which has been mentioned in Assessing Officer's order, but here appears to be no scientific 16 ITA No.6168/Del/2012 calculation to justify the ratio of benefits. Initially, the ld. AR claimed that it has no dispute with the ratio worked out, however, during the pleadings, he also objected to this ratio. The ld. AR's claim that the actual beneficiary of AMP activities is assessee and expenditure was made for commercial expediency through which the increase of sales of its equity stores as well as the increase of royalty when the sales of franchisees increase, thus, the assessee gets double benefit by making such expenditure and it was claimed that all conditions laid down u/s 37 of the Act is satisfied and expenditure is a genuine business expenditure. It was also canvassed that foreign company which is holding the brand name is getting benefit only incidentally in the form of a part of the increased royalty as compared to major benefit to the assessee. He relied on the following decisions where such expenditure has been held to be allowable expenditure :-
(i) Sassoon J. David and Co. (P.) Ltd vs. CIT - 118 ITR 261 (SC);
(ii) Cit VS. Chandulal Keshavlal & Co. - 38 ITR 601 (SC);
(iii) Nestle India Ltd. vs. DCIT - 111 TTJ 498 (Delhi ITAT)
(iv) Star India (P) Ltd. vs. ACIT - 311 ITR 235;
(v) Sony India Pvt. Ltd. vs. DCIT - 114 ITD 448.
It was also pleaded before us that the commercial expediency and quantum of expenditure needs to be examined from the stand point of the assessee and not from the point of view of tax authorities. The tax authorities should not superimpose an imaginary limit for determining the allowability of an expenditure based on surmises and conjectures and reference was drawn to CIT vs. Microsoft Corporation of India (P) Ltd. - 176 Taxman 396 (Delhi High Court). It was also pleaded that by making such expenditure, assessee gets benefit through increase in 17 ITA No.6168/Del/2012 sales of the franchisees and any benefit to the foreign brand holders is only incidental and not the driving factor. It was also claimed that YRIPL is an independent third party and no prudent businessman shall contribute to the AMP activities without getting any benefit out of it. There was no clause that assessee has to spent mandatorily any amount on AMP activities which will benefit the foreign brand. It was also claimed that section 40A(2)(b) of the Act has no relevance to the facts of the case as YRIPL is functioning only and on behalf of the YRIPL. It was also claimed that section 40A(2)(b) is not applicable to the facts of the assessee's case as it can be involved only in the case of tax evasion whereas both assessee and YRIPL are corporate assessees liable to tax at the same rate. It was also pleaded that appropriateness of the payments to/receipts from foreign companies is not under the jurisdiction of the Assessing Officer to hold the expenditure as excessive on account of benefit flowing to the foreign company. Reliance was placed on the decision of ITAT Delhi in the case of Oracle India Pvt. Ltd. in ITA No.18/Del/2007. Finally, it was pleaded that such expenditure has been allowed as genuine expenditure in preceding years and in the absence of any change in facts, there should not be any deviation taken by the Department. For this proposition, reliance was placed on the decisions of Hon'ble Supreme Court in the case of Radhasoami Satsang vs. CIT - 193 ITR 321 and Hon'ble Delhi High Court in the case of CIT vs. Neo Poly Pack (P) Ltd. - 245 ITR 492.
17. On the other hand, the ld. DR submitted that in the Income-tax every assessment year is a separate year and no res judicata is applicable. He also 18 ITA No.6168/Del/2012 pleaded that this disallowance has not only been made u/s 40A(2)(b) of the Income- tax Act, 1961 but this expenditure has also been found not wholly and exclusively for the purpose of business which is a requirement of section 37 of the Act for allowability of any expenditure. It was also submitted that all the franchisees are contributing 5% of their contribution towards the advertisement expenses and some of the expenditure is also to be required to be made by these franchisees then additional amount paid by the assessee cannot be for genuine need of the business of the assessee. It is for the brand holding which is owned by the foreign associate concern of the assessee. Therefore, such expenditure cannot be treated as wholly and exclusively for the purpose of business u/s 37 of the Act. The DRP has also held that actual beneficiary of the AMP activities are foreign brand holders or the parent company and the franchisees are marginal beneficiaries from this expenditure. Logically, such expenditure should be proportionately distributed among the franchisees, assessee and foreign company which is not done by the assessee, therefore, this expenditure cannot be held wholly and exclusively for the purpose of business of the assessee.
18. We have heard both the sides on the issue. The DRP has given a finding that the major beneficiary of the AMP expenditure was foreign associate concerns who are the owner of the brand and the franchisees are only marginal beneficiaries. The calculation returned in the Assessing Officer's order give a different picture with regard to the ratio of benefits. Further, we find that no finding has been recorded with regard to the relevant provisions with regard to advertisements etc. in the 19 ITA No.6168/Del/2012 franchisees agreement between the assessee and the franchisees. Considering all these aspects, we hold that this issue requires a fresh look to determine the relevancy of the expenditure u/s 37 of the Act and also u/s 40A(2) of the Act. Since we are restoring the issue to the file of the Assessing Officer we find no necessity to adjudicate on other issues raised during the proceedings on this issue. Accordingly, this issue is restored to the file of the Assessing Officer.
19. In the Ground Nos.6 & 6.1, the issue involved is disallowing the research and development expenses amounting to Rs.9,48,831 by holding them to be of capital nature.
20. At the outset of the hearing, ld. AR submitted that this issue has been decided by the ITAT in the assessee's own case in ITA No.2679/Del/2012 for Assessment Year 2005-06 dated 14.02.2014. The relevant para of the aforesaid order is reproduced as under :-
"19. In Ground No.7 in ITA No.2679/Del/2012, the issue is regarding the disallowance of R&D expenses amounting to Rs.7,21,043/-. It was pleaded before us that no opportunity was afforded to the assessee to substantiate its claim. The Assessing Officer adjudged the expenditure to be of capital in nature. It was also pleaded that Assessing Officer held so without assigning any reason for the same. Such routine revenue expenses were disallowed by the Assessing Officer holding them to be capital in nature. CIT (A) deleted the disallowance by following the decision of ITAT in the assessee's own case for Assessment Year 2006-07.
20. We have heard both the sides on the issue. We find that this issue is also covered in favour of the assessee by the decision of ITAT in the assessee's own case for assessment year 2006-07 wherein similar expenses are held to be revenue in nature. The relevant para 100 of that order is reproduced as under :-20 ITA No.6168/Del/2012
"100. We have duly considered the rival contentions and gone through the record carefully. In its day to day operations, assessee is experimenting new dishes, where it incurred expenses on food items and spices etc. On many of occasions, the flavor may not come to the expectation for commercialized use. Thus, these are the routine research work carried out by the assessee and no capital assets came into existence. Learned DRP has erred in treating this amount as a capital expenditure. We allow this ground of appeal and delete the addition."
In view of these facts, we find no merits in the ground no.7 and the same are dismissed."
21. We have heard both the sides on the issue. The facts of the issue in this year and pleadings of both the sides remain the same, respectfully following the aforesaid decision of the ITAT, this issue is being taken as covered in favour of the assessee. Therefore, we allow this ground of assessee's appeal.
22. In the ground no.7, the issue involved is against allowing depreciation on computer peripherals and accessories @ 15% as against the depreciation claim of the assessee @ 60%.
23. The ld. AR submitted that this issue is covered in favour of the assessee by the decisions of various High Courts including the Hon'ble jurisdictional High Court in the cases of Commissioner of Income Tax vs. BSES Yamuna Powers Ltd. (in ITA No.1267 decided on 31.08.2010) and CIT vs. Oriental Ceramics & Inds. Limited in ITA No.66/2011.
24. We have heard both the sides on the issue and also perused the records. After hearing both the sides, we hold that this issue has been decided by the Hon'ble jurisdictional High Court in the case of CIT vs. BSES Yamuna Powers Limited 21 ITA No.6168/Del/2012 reported in 358 ITR 47 in favour of the assessee and Hon'ble High Court has held as under "4. We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60%."
Respectfully following the aforesaid decision of Hon'ble Delhi High Court, we delete the order of the authorities below on this issue and allow the deprecation @ 60% on computer peripherals and accessories.
25. Now, we take up the grounds relating to transfer pricing issues which read as under :-
"A. Grounds relating to Transfer Pricing matter
General Ground
1.1 On the facts and in the circumstances of the case and in law, the Hon'ble Dispute Resolution Panel (DRP) erred in confirming an adjustment of INR 72,20,177 in the "support services outside India"
segment of the appellant.
Comparable Companies 1.2 On the facts and in the circumstances of the case and in law, the Hon'ble DRP/Transfer Pricing Officer ('TPO') erred in considering an inappropriate set of companies as comparable to the "support services outside India" segment of the appellant.
Double Taxation 1.3 On the facts and in the circumstances of the case and in law, without prejudice to the above, the Ld. TPO erred in treating certain expenses in "support services outside India" segment as operating for transfer pricing purposes and disallowing the same from a corporate tax perspective thus leading to double taxation.22 ITA No.6168/Del/2012
1.4 On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in omitting to adjudicate on the contention of the appellant as raised in Ground 1.3 above.
Use of data not existing at the time of preparation of TP documentation 1.5 On the facts and in the circumstances of the case and in law, the Hon'ble DRP/Ld. TPO erred in using data not existing at the time of preparation of documentation prescribed under Rule 10D ("Rule 10D documentation") of the Income Tax Rules, 1963 ("the Rules") by the Appellant.
Single Year vs. Multiple Year Data 1.6 On the facts and in the circumstances of the case and in law, the Hon'ble DRP/Ld. TPO erred in using single year data as against the multiple year data used by the Appellant, to compute the arm's length price of the international transaction of the Appellant using Transactional Net Margin Method ("TNMM") method.
Application of Proviso to Section 92C of the Act 1.7 On the facts and in the circumstances of the case and in law, the Hon'ble DRP/Ld. TPO erred by not applying the Proviso to section 92C of the Act and have failed to allow the appellant the benefit of variation of 5 percent in determining the Arm's Length Price."
26. Ground No.1.1 is general in nature and the same does not require any adjudication as the issue raised therein is covered by other specific grounds raised in the grounds of appeal. Hence, the same is dismissed.
27. In the ground no.1.2, the assessee has raised the issue that DRP/TPO has erred in considering an inappropriate set of companies which has been taken as comparable to the support services outside India segment of the assessee. 23 ITA No.6168/Del/2012
28. While pleading on behalf of the assessee, ld. AR submitted that M/s. Saket Projects Limited is a company engaged in hosting of events, exhibitions in the area of energy, textile industry, etc. which is a different business activity vis-à-vis services provided by the assessee. M/s. Saket Projects Limited was having a negative net worth in financial year 2007-08. The segmental results of M/s. Saket Projects Limited are not reliable. The segmental results of M/s. Saket Projects Limited are significantly varying if one looks in comparison to past three years. The segmental margin of 159.37% computed by the TPO was abnormal and is an outlier. This cannot be taken as a representative of the industry. He also relied on the decisions wherein M/s. Saket Projects Limited has been considered as not comparable on functional basis. In the case of M/s. Premier Exploration Services Pvt. Ltd. vs. ITO in ITA No.5293/Del/2012 order dated 22.11.2013, M/s. Saket Projects Limited has been held to be not comparable. The relevant para is no.9 of the order. He further submitted that the other comparable taken by the TPO, i.e. M/s. Choksi Laboratories Ltd. is also functionally not comparable as it is engaged in chemical testing services and analysis through testing laboratory which is highly technical and not comparable to the assessee. Similarly, M/s. Indus Technical & Financial Consultants Ltd. is also not comparable as the same is engaged in rendering services which are technical and also different from the low end services of the assessee. Similarly, comparability with M/s. Choksi Laboratories Ltd. is not justified as the company's assets employed comprises significantly of testing equipments which further emphasizes the fact that the company's functional profile is different vis-à-vis the assessee. Similarly, in the case of Indus Technical & 24 ITA No.6168/Del/2012 Financial Consultants Ltd., it is a renowned manufacturer of TMT Bars and no segmental results are available in the annual report, hence it is not clear whether the margins computed by the TPO include results of the above manufacturing activity as well. He pleaded that these companies should not be taken as comparables. Ld. AR also submitted that these companies have not been considered as comparables in the case of Nortel Networks India P. Ltd. vs. Addl.CIT in ITA Nos.4765/Del/2011 & 427/Del/2013 order dated 25.02.2014. Ld. AR also submitted that Rites Limited and Wapcos (India) Ltd. should not be considered as comparables also. Wapcos (India) Ltd. is engaged in providing engineering and technical consultancy services in the transportation industry. In the assessee's own case, the TPO has rejected M/s. Wapcos (India) Ltd. as comparable by holding that it is functionally different as compared to YRIPL in the Assessment Years 2007-08 and 2009-10. Ld. AR also submitted that as per notes of accounts of M/s. Wapcos (India) Ltd., it has received grants in aids for carrying out specific schemes of the Government. The company has also not provided pay revision as recommended by the Sixth Pay Commission. Accordingly, the profit of the company did not give the correct picture. Similarly, in the case of Rites Limited, ld. AR submitted that it is engaged in the engineering services and providing consultancy for infrastructure. Services rendered by Rites Limited are similar to M/s. Wapcos (India) Ltd. There is a change in the accounting practice in Rites Ltd. in the Assessment Year 2007-
08. As a result of this change, profits of the year were higher by INR 2388.60 lakhs. This constituted 25% of the company's overall profit of the company. Given these abnormalities, Rites Ltd. cannot be considered as comparables. 25 ITA No.6168/Del/2012 Reliance was placed on the decision of ITAT, Delhi in the case of M/s. MCI Com India P. Ltd. (now known as Verizon India P. Ltd.) - (TS-643-ITAT-2012 (Del.)- TP) wherein Rites Ltd. and Wapcos (India) Ltd. are held to be engineering companies and these companies provided end-to-end solutions, therefore, these are not functionally comparables to the assessee. Ld. AR submitted that this order of ITAT has been confirmed by Hon'ble Delhi High Court in the case of CIT VI vs. Verizon India Pvt. Ltd. in ITA Nos.271/2013 & 277/2013 dated 29.05.2013.
29. Ld. DR relied on the orders of the authorities below.
30. We have heard both the sides on the issue. With regard to the comparables taken by the revenue authorities, we find that Saket Projects Ltd. cannot be held to be comparable on the basis of functional dissimilarities and the assets employed. ITAT, Delhi Bench-I, New Delhi in the case of M/s. Premier Exploration Services Pvt. Ltd. vs. ITO in ITA No.5293/Del/2012 in its order dated 22.11.2013 held as under :-
"9. We have heard both sides on this ground. TPO had considered the event management Division of Saket Projects Ltd. as comparable to assessee's functions. Although assessee had taken this company as comparable on the basis of past years data but in our considered view, the Saket Projects Ltd. was not comparable to assessee because the event management was done by sponsorships which is evident form various documents placed in paper book. Further the segment allocation of expenses also appears to be not reliable. We agree with the view of revenue that no comparable can be rejected merely on the basis of high margins if the comparable is functionally comparable to the assessee and also that there is miner variation in functional similarity. However, in the case of Saket Projects Ltd. there is functional dissimilarity. The company is organizing events with various kinds of sponsorships. The facts also suggest that segmental allocation of expenses were not reliable. We also hold that when direct comparables are available then segmental results of 26 ITA No.6168/Del/2012 companies engaged in other business should not be taken as comparable. On the basis of these facts, we hold that Saket Projects Ltd. was not comparable to the extent wherein the various variations could be ruled out or iron out by provisions of law and rules."
Similarly, in the case of Nortel Networks India P. Ltd. vs. Addl. CIT in ITA Nos.4765/Del/2011 & 427/Del/2013 order dated 25.02.2014, the ITAT, Delhi Bench 'I', New Delhi has held as under :-
"11.2. On issue of exclusion of Saket Projects Ltd, we are of the view that specific characteristics of services provided, assets employed, risk assumed i.e. the FAR of the comparable is decisive and inclusion or exclusion of comparables. The higher or lower rate of profit is nowhere prescribed as the determinative factor in this behalf. Only if the higher or lower profit rate results on account of effect of factors given in Rule 10B(2)read with sub-rule (3), that such case shall merit omission then only it can be considered. Higher profits achieved due to factors not mentioned in the rule then such case shall be continued to find place in the list of comparables. Similar view has been approved by various coordinate ITAT benches in the cases like Exxon Mobil Company India (P.) Ltd.- (2011-TTJ-68-ITAT-MUMTP) and DCIT vs. M/s. B.P. India Services (P.) Ltd. - ITA No.4425/Mum/ 2010.
11.3. On issue of comparability of Saket Projects Limited, we are in agreement with the ld DR that no comparable can be rejected merely on the basis of high margins if it is functionally comparable to the assessee or there is miner variation in functional similarity. The case of Saket Projects Ltd. has functional dissimilarity as it is organizing events with various kinds of sponsorships. The company in this division is earning revenue from selling event fees and offering space for rent which cannot be comparable with provision of marketing and sales support services. Besides segmental allocation of expenses were not reliable. In view of these facts, we hold that Saket Projects Ltd. has been rightly held as not an appropriate comparable. We direct ld. AO to work out the ALP in A.Y. 2008-09 accordingly."
31. Considering all these facts, we find that inclusion of Saket Projects Ltd. in the comparable basis is not justified. The specific characteristics of services provided, assets employed and risk assumed, i.e. the FAR of the comparable is decisive and inclusion or exclusion of comparables. Saket Projects Ltd is 27 ITA No.6168/Del/2012 functionally different as it is organizing events with various kinds of sponsorships. The company in this division is earning revenue from selling event fees and offering space for rent which cannot be comparable with provision of marketing and sales support services. Further, the segmental allocation of expenses was also not reliable. Keeping all these facts in view, we direct to exclude Saket Projects Limited from the comparables.
32. In the case of M/s. Nortel Networks India P. Ltd., the other three companies are also held not comparable and ITAT held as under :-
"11. We have heard the rival contentions and perused the material available on record. Apropos the issue of comparability and the exclusion of Choksi, Rites and WAPCOS, Delhi Tribunal in the cases of M/s MCI Com India P. Ltd. and M/s Verizon India P. Ltd. has held that companies like EIL, Rites, Wapsos and TCE are engineering companies which provide end to end solutions and therefore they cannot be compared with assessees who provide marketing support services to the parent company. They were held to be functionally not comparable with thee engineering companies.
11.1. Following the orders of coordinate benches of ITAT in the cases of M/s MCI Com India P. Ltd.; M/s Verizon India P. Ltd. (supra); Estel in ITA no.584/Banglore/ 06 and our own decision in case of Actis Advisers Pvt. Ltd. ITA No. 390/Del/2012, we hold that Choksi, Rites and WAPCOS being functionally different cannot be applied as appropriate comparable to the assessee.
Therefore, they are to be excluded from TP adjustment while determining the ALP."
As far as Wapcos (India) Ltd. and Rites Limited are concerned, we find that both these companies are providing engineering consultancy and undertake turnkey contracts as held in the case of M/s. Nortel Networks India P. Ltd., cited supra. These companies were found to be not comparable on the basis that these 28 ITA No.6168/Del/2012 companies are providing marketing support services to the parent company and these were held to be functionally non-comparable. Wapcos (India) Ltd. provides services requiring technical expertise. In the Assessment Year 2007-08 and 2009- 10, TPO itself has rejected as comparable to assessee. Wapcos has recorded grants in aid for carrying out specific schemes of the Government. It has also not provided for pay revision in view of 6th Pay Commission. In view of this, the results are not comparable. In the case of Rites Limited, we find that it is engaged in engineering services and providing consultancy pertaining to infrastructure services. The services rendered by Rites Ltd. are similar to Wapcos. Due to change in accounting practice, the profit for the year has been overstated. In view of this fact, we hold it as non-comparable.
33. In the case of M/s. Choksi Laboratories Ltd., we hold that it was engaged in chemical testing services which are highly technical and not comparable to assessee. It has been held to be not comparable on the functional basis. In view of these facts, we also hold that Choksi, Rites and Wapcos are functionally different from the assessee company and cannot be held to be proper comparables, therefore, we direct to exclude these from the TPO adjustment while determining the ALP. As far as, M/s. Indus Technical & Financial Consultants Ltd. is concerned, it is engaged in rendering services pertaining to environment and energy conservation which cannot be held to be different from the assessee company. Although the assessee's claim that as per the website of the company, M/s. Indus Technical & Financial Consultants Ltd. is a renowned manufacturer of TMT Bars, we find no 29 ITA No.6168/Del/2012 substance in this claim and we dismiss this plea of the assessee. Accordingly, we direct to recompute the ALP by excluding the following comparables taken by the TPO :-
(i) M/s. Saket Projects Limited;
(ii) M/s. Choksi Laboratories Limited;
(iii) M/s. Wapcos (India) Limited; and
(iv) M/s. Rites Limited.
34. In the Ground Nos.1.3 & 1.4, the assessee has raised the issue that DRP has omitted to adjudicate on the contention of the assessee that certain expenses in support services outside India segment as operating for transfer pricing purposes and disallowing the same from a corporate tax perspective thus leading to double taxation. Ld. AR submitted that the DRP has omitted to adjudicate on the contention of the assessee and he further submitted that the Assessing Officer/DRP has disallowed the personnel and administrative expenses. These expenses have been disallowed by the Assessing Officer on corporate tax perspective should be treated as non-operating while calculating the operating margins for transfer pricing purposes. He further submitted that there would be no addition on account of transfer pricing matters if assessee's plea is accepted. DRP had not adjudicated on this issue.
35. We have heard both the sides on this issue. This issue has not been decided by the DRP. After hearing both the sides and in the interest of justice and equity, we restore this issue to the file of the DRP to be decided afresh. 30 ITA No.6168/Del/2012
36. The other issue involved in Ground Nos.1.5 & 1.6 is use of data not existing at the time of preparation of TP documentation and single year versus multi year data respectively. Similar issues have been considered by the ITAT.
37. The ITAT in the case of M/s. Premier Exploration Services Pvt. Ltd. vs. ITO in ITA No.5293/Del/2012 order dated 22.11.2013 has decided the issue against the assessee. The relevant para 3 is reproduced as under :-
"3. The assessee objected the use of current year data by the TPO for transfer pricing analysis on the basis that such data was not available in public domain at the time of finalization of transfer pricing study and the use of multiple year data would result in better capturing of market/business cycles reflected in the industry in comparison to single year data. This plea of the assessee was not accepted in view of the provisions of Rule 10B(4) of the Income-tax Act, 1961 wherein it is provided that data of the comparable transactions shall be for the same financial year in which the assessee has entered into international transactions unless data related to earlier years (not more than 2 years) reveals certain facts which could have an influence on the determination of transfer pricing in relation to the transactions being compared. Since assessee has failed to make out any case relating to the use of earlier years data, this plea of the assessee was dismissed. This issue has been taken by the assessee under grounds no.16.1 to 16.4.
4. After hearing both the sides on this issue, we find that assessee has failed to establish that earlier two years data reveal certain facts which have influence on the determination of transfer pricing in relation to transactions being compared. Therefore, TPO was justified in using current year datas. Similar view has also been affirmed and settled by the decision of Hon'ble jurisdictional High Court in the case of CIT vs. Denso Haryana Pvt. Ltd. - 2009-TIOL-696-DEL-IT. In many other cases, the coordinate Benches also taken the similar view which can be enumerated as under :-
(i) M/s Haworth (India) Pvt. Ltd. (2011-TII-64-ITAT-DEL-TP)
(ii) M/s ST Micro Electronics (2011-TII-ITAT-DEL-TP)
(iii) M/s Birla Soft Limited (2011-TII-0-ITAT-DEL-TP)
(iv) M/s Global Vantedge Pvt. Ltd. (2010-TIOL-24-ITAT-Del) Thus, the issue raised in grounds no.16(i) to 16 (ii) stands dismissed."31 ITA No.6168/Del/2012
Facts are similar, therefore, respectfully following the aforesaid decision of ITAT, we dismiss this ground of assessee's appeal.
33. In the ground no.1.7, the assessee has asked for +/- 5% in view of the Proviso to section 92C(2) of the Income-tax Act, 1961.
34. We have heard both the sides on this issue. This issue has been settled by the amendment made by the Finance Act, 2012 retrospectively thereby it has been made clear that benefit of +/- 5% under the Proviso to section 92C(2) of the Act shall not be allowed for the purpose of computation of arm's length price. Therefore, we find no merits in this ground of assessee's appeal and dismiss the same.
35. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in open court on this 30th day of May, 2014.
Sd/- sd/-
(DIVA SINGH) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 30th day of May, 2014/TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.