Income Tax Appellate Tribunal - Bangalore
H & M Mauritz India Pvt. Ltd.,, vs Assessee on 19 August, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'B', BANGALORE
BEFORE SHRI S.K.YADAV, JUDICIAL MEMBER
AND
SHRI A. K. GARODIA, ACCOUNTANT MEMBER
IT (TP) A No.282(Bang) 2015
(Assessment year 2010-11)
M/s H & M Mauritz India Pvt.Ltd.,
No.1102, 1104 and 1105, 11th Floor,
World Trade Centre,
Bangalore-560 055
No.AABCH6109F Appellant
Vs
The Deputy Commissioner of Income Tax,
Circle-3(1)(1),
Bangalore Respondent
And
IT(TP)A No.490(Bang)/2015
(Assessment year 2010-11)
(By Revenue)
Assessee by: Shri Nageshwar Rao, Advocate
Revenue by: Ms. Neera Malhotra, CIT
Date of hearing : 30-06-2016
Date of pronouncement: : 19-08-2016
ORDER
PER SHRI A.K.GARODIA, AM
These are cross appeals filed by the assessee and the revenue which are directed against the assessment order passed by the AO on 29-01- 2015 u/s 143(3) r.w.s.144C of the IT Act, 1961, as per the directions of DRP.
2. The grounds raised by the assessee in IT(TP)A No.282(B)/2015 are as under;
IT(TP)A No.282 & 490/B/2015 2 "Based on the facts and circumstances of the case and in law, H&M Mauritz India Private Limited ("H&M India' or "Appellant" or "the Company") respectfully craves leave to prefer an appeal against the order passed by Deputy Commissioner of Income Tax, Circle-3( 1)( I) ('the learned Assessing Officer' or 'the AO'), dated 29 January 2015 for A Y 20 I 0-11, under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 ('Act') in pursuance of the directions issued by Dispute Resolution Panel ('DRP'), Bangalore dated 19 December 2014 under section I 44C(5) of the Act ('the impugned order') inter-alia on the following grounds:
In the facts and circumstances of the case and in law:
General Grounds I. The impugned order and directions of the Hon'ble DRP are based on incorrect appreciation of facts and wrong interpretation of law and therefore, are bad in law.
2. The learned AO / Transfer Pricing Officer ('TPO') has erred in assessing the total income at Rs. 5,05,70,333 as against the returned income of Rs 2,76,94,194 as computed by the Appellant in its return of income for A Y : 2010-11.
3. The learned AO has erred in law and in fact, in determining a sum of Rs 1,26,88,059 as the balance tax demand payable by the Appellant.
Transfer Pricing related grounds- General.
4. The learned DRP has erred in, law and facts, by upholding the stand of learned TPO and the learned AO of not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP of the international transaction of the Appellant and holding that the Appellant's international transaction is not at arm's length
5. The learned TPOIAO has erred, in law and in facts, by determining the arm's length margin! price using only Financial Year ("FY") 2009-10 data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and the learned DRP has erred in upholding the said action of the TPO/AO.
6. The learned TPO/AO/DRP has erred, in law and facts, by not making suitable comparability adjustments to account for differences in risk profiles of the Appellant and the comparables.
Transfer Pricing related grounds - Comparable specific
7. The impugned order erred in making an addition of Rs. 2,28,76,139 to the total income of the Appellant on account of adjustment to the arm's length price with respect to business support services provided by the Appellant to its associated enterprise.
8. The learned DRP erred in upholding the inclusion of certain functionally different companies as comparables based on unreasonable comparability criteria adopted by the TPO:
IT(TP)A No.282 & 490/B/2015 3 Apitco Ltd, Global Procurement Consultants Ltd, Quadrant Communications Ltd= The said com parables ought to be rejected as comparables since (a) they are functionally different from the appellant as apparent from the description in the Annual Reports and (b) the Hon'ble DRP has not properly refuted the detailed contentions of Appellant in respect of erroneous inclusion of the said companies as comparables.
9. The learned DRP erred in rejecting certain valid comparables considered by the Appellant in the comparability analysis, by upholding the approach of TPO in applying arbitrary filters.
Ma Foi Global Services and Ma Foi Management Consultants Ltd. - Erroneously rejected based on different financial year ending filter Overseas Manpower Corpn. Ltd.- Erroneously rejected based on (a) peculiar circumstances i.e., declining sales and (b) the same being not discussedl adjudicated by the Hon'ble DRP in its directions. Inhouse Productions Ltd, India Tourism Development Corporation Ltd and ICRA Management Consulting Services Ltd. - Erroneously rejected based on perceived functional difference which is factually incorrect, since the TPO/ DRP failed to consider the information pertaining to segmental results and business description provided in the annual reports of the said companies.
EDCIL (India) Ltd.- Erroneously rejected based on the contention that revenue from service was less than 75% of the total revenue, which is factually incorrect since the TPO failed to consider the information pertaining to segmental results available in the annual report of the said company.
10.The learned TPO and the learned AO have erred by wrongly computing the quantum of TP adjustments while giving effect to the directions of the DRP
11. The learned TPO/ AO erred in not providing the basis of arriving at the revised TP adjustment as per the impugned assessment order pursuant to the directions of the DRP, despite specific request by the Appellant in this regard. Other Grounds On the facts and in the circumstances of the case and in law:
12. The learned AO erred in levying interest of Rs. 49,12,458 and Rs. 4,132 under section 2348 and section 234C of the Act respectively;
13.The learned AO erred in initiating penalty proceedings under section 271(1)(c) of the Act, since the basic conditions required to initiate penalty proceedings were not satisfied in the Appellant's case.
14. All the above grounds may be considered independent and without prejudice of each other.
The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.
IT(TP)A No.282 & 490/B/2015 4
3. Similarly, the revenue has raised the following grounds in IT(TP)A No.490(B)/2015;
"1. The directions of the DRP are opposed to law and facts of the case.
2. On the facts and in the circumstances of the case, as per the directions of the DRP, whether working capital adjustments can be made on the basis of advance received from A Es in absence of debtors and inventory in the case of assessee for calculating the cost of working capital built in the profit margin .
3. On the facts and in the circumstances of the case the DRP is not justified in directing the TPO to adjust the profit margin of the assessee for the entire amount of advances received from AE on the ground that there is time value for money.
4. On the facts and circumstances of the case, the DRP erred in directing the TPO/AO to exclude the comparables M/s HCCA Business Services Pv.Ltd., & M/s TSR Darshaw Ltd., without considering the facts discussed by the TPO for selection of the comparables in the case of assessee and without appreciating the fact that this is qualifying all the qualitative and quantitative filters applied by the TPO.
11. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the DRP in sofar as it relates to the above grounds may be reversed.
12. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above".
4. It was submitted by the ld.AR of the assessee that it can be seen that on page-18 & 19 of the TPO's order, the TPO has selected six comparables having average margin of 27.74%. He also submitted that on page-3 of the TPO's order, the TPO has worked out assessee's margin percentage at 12.06%. Out of these six comparables, DRP has directed IT(TP)A No.282 & 490/B/2015 5 the AO/TPO to exclude two comparables i.e. M/s HCCA Business Services Pvt. Ltd., and M/s TSR Darashaw Ltd., for which the revenue is in appeal and the assessee in its appeal is pleading for exclusion of two more comparables i.e. M/s Aptico Ltd., and M/s Global Procurement Consultants Ltd., He submitted that if the appeal of the assessee on account of exclusion of these two comparables is allowed and the appeal of the revenue against exclusion of two comparables by the DRP is dismissed then there will be two remaining comparables i.e. M/s Cyber Media Research Ltd.14.85% and M/s Quadrant Communications Ltd., 13.11% the average around 14% as against the profit margin of the assessee company of 12.06% then no TP adjustment is required to be made.
5. Regarding exclusion of these two comparables for which the exclusion is being requested by the assessee, reliance was placed on the Tribunal order rendered in the case of M/s Adidas Technical Services Pvt.Ltd., Vs DCIT in ITA No.1233(Del.)/2015 dated 15-02-2016. He submitted a copy of the Tribunal order and drawn our attention to para-
8.3 of this Tribunal order as per which it was held by the Tribunal in that case that both these companies are functionally dissimilar and therefore, should be excluded from the list of final comparables.
6. Regarding functional profile, he submitted that in that case, it is noted by the Tribunal in para-2.2 of the Tribunal order that the assessee is rendering business support services to AE. Regarding the functional profile of the present assessee, he submitted that it is noted by the TPO on IT(TP)A No.282 & 490/B/2015 6 page-1 of his order that the assessee company is acting as facilitator between Indian manufacturer and associated enterprises and therefore, the functional profile of both are similar and hence, this Tribunal order should be followed in the present case and it should be held that these two companies are required to be excluded from the list of final comparables.
7. Regarding two comparables of which exclusion is directed by DRP, he placed reliance on the Tribunal order rendered in the case of M/s Eli Lilly & Co., (India) Pvt.Ltd.,Vs ACIT in ITA No788(Del.)/2015 dated 24-11- 2015. He submitted a copy of the Tribunal order and pointed out that in that case also, the issue in dispute was in respect of providing of business support services as noted by the Tribunal in para-18 of the Tribunal order. He further submitted that in para-24 of the Tribunal order, it is noted by the Tribunal in that case also that two companies i.e. M/s HCCA Business Services Pvt. Ltd., and M/s TSR Darashaw Ltd. were brought in by the TPO as comparable companies. Thereafter, he has drawn our attention to para-44 of the Tribunal order as per which it was held by the Tribunal that M/s TSR Darashaw Ltd., is not functionally comparable and therefore, the Tribunal directed to exclude this company from the list of final comparables.
8. Regarding the second company i.e. M/s HCCA Business Services Pvt.Ltd., (Supra), he fairly conceded that as per para-46 of this Tribunal order, the issue regarding exclusion of this company was kept open by the Tribunal. He submitted that in the present case also, even if it is held that IT(TP)A No.282 & 490/B/2015 7 one company i.e. M/s HCCA Business Services Pvt. Ltd., is accepted as a good comparable, then also the average profit margin of remaining 3 comparables i.e. M/s Cyber Media Research Ltd., 14.85%, M/s HCCA Business Services Pvt.Ltd., 20.05% and M/s Quadrant Communications Ltd., 13.11% will be 16% only as against profit margin of the assessee company of 12.06% which is within +=5% range and therefore, no TP adjustment can be made in that situation also.
9. The ld. DR of the revenue supported the order of the AO/TPO.
10. We have considered the rival submissions. We find that as per para-13 of the TPO's order, he has considered six companies as good comparables having average profit of 27.74%. On page-3 of the TPO's order, the assessee's profit margin has been noted as 12.06%. Now as per arguments of the ld. AR of the assessee, two companies M/s Aptico Ltd., (Supra) and M/s Global Procurement Consultants Ltd., (Supra) should be excluded from the list of final comparables on the basis of functional dissimilarity in view of the Tribunal order rendered in the case of M/s Adidas Technical Services Pvt.Ltd., (Supra) .
11. The ld. DR of the revenue could not point out any difference in facts in the present case and in that case i.e. of M/s Adidas Technical Services Pvt.Ltd., (Supra). Para-8.3 of this Tribunal order is reproduced below. The Tribunal in that case held to exclude three companies i.e. M/s Aptico Ltd., M/s Global Procurement Consultants Ltd., and M/s TSR Darashaw Ltd., IT(TP)A No.282 & 490/B/2015 8 "8.3. We first take up the case of Apitco Ltd.,
(a) Apitco Ltd.:- Apitco Ltd. is a Public Sector Undertaking providing various support services for the development of tourism industry. Later the functional profile of the company had undergone a change, and it is now engaged in providing technical consultancy relating to asset reconstruction companies, management services, micro enterprise development, skill development etc. This is a government company. The fact that its operations are mainly based on the policy requirements of the government and the fact that it is a preferred company of the Government of India for entrustment of works, cannot be ignored. Be it as it may, in our considered opinion, the functional profile of this company is different from that of the assessee company and hence the same should be excluded from the list of comparable companies while computing the ALP.
(b) Global Procurement Consultants Ltd.:-
The Ld.Counsel for the assessee submitted that the functional profile of the company is different and that Global Procurement Consultants Ltd. is merely rendering services to government bodies and international organisations. It was further submitted that it is engaged in providing varied services in consultancy segment which are as follows.
(a) Bid support services; (b) Performance review;
(c) Valuation assignments;
(d) Financial advisory services and other assignments.
It was further argued that no segmental details are available and hence it cannot be taken as a comparable. The Ld.D.R. IT(TP)A No.282 & 490/B/2015 9 submitted that this comparable company as a client's representative in taking on the total responsibility of procurement by providing the comprehensive range of procurement related advisory services at inter-allied activities for projects in India and abroad and hence is functional comparable. The ITAT Delhi I-2 Bench in the case of International SOS Services Ltd. vs. DCIT in ITA 1631/Del/2014 order dt. 8.12.2015, at para 4 has held as follows.
"4. Global Procurement Consultant Limited:
12.6 The ld. Counsel for the assessee submitted that this is an 100% Government owned company as it is promoted by Exim Bank. He vehemently contended that functionally, this company is not a comparable, as it works with in the field of power, water resources, transportation industry such as economic, textile, mining, cement, leather, health education, environment, InfoTech etc. The pith and substance of the submission are that the areas in which this company provides support services is totally different from the type of support services provided by the assessee. He placed reliance on the decision of the Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Limited vs. CIT, ITA No. 102/2015 judgment dated 10/08/2015 for the proposition that functionally dissimilar companies cannot be taken as comparables. He pointed out that decision of the Spl. Bench of the Tribunal in the case of Global India Pvt. Limited has been overruled by the Hon'ble Delhi High Court in ITA No. 7466/M/11 judgment dated 07/03/2004.
12.7 The ld. Departmental Representative on the other hand, pointed out that Global Procurement Limited is not a 100% Government of India owned company and that it is being IT(TP)A No.282 & 490/B/2015 10 promoted by export import bank of India, as a private sector company in partnership with Leading corporate groups like MECON, ICCI, TCE Consulting Engineers Ltd. etc. She submitted that the functional profile is that of specialized support services, which required high profile skill and timely delivery of quality services, which is comparable with the functional profile of the assessee.
12.8 On a careful consideration of these arguments, we are of the considered opinion that this company should be taken as a comparable for the following reasons:
a) This is not a 100% Government owned company as claimed by the assessee. Under the head "corporate synergy" it is stated that this company is co-promoted by the Export Import Bank of India as private sector Company along with a number of other Private Companies.
b) The functional profile of this company is rendering of highly specialized procurement support services. The quality of service, the skills are comparable with the quality and skill of support services provided by the assessee, though in functionally different areas. As the ld. Counsel for the assessee has accepted before us that comparable companies rendering services in the same field as that of the assessee company cannot be found companies rendering support services in other fields have to be taken as comparables.
c) We have also perused the decision of the Hon'ble Jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd.(supra). The claim of the ld. Counsel for the assessee is based on the propositions laid down in this case law. If on such an argument, the comparable Global Procurement Consulting Limited is excluded, then all the other comparables cited by the assessee as well as the ld.TPO have to be excluded on the same principle. This will leave us with no other comparable. The assessee cannot advance IT(TP)A No.282 & 490/B/2015 11 contradictory arguments. As it has been accepted by both the parties before us that, companies having a broad functional profile of rendering skilled professional support services, should be taken as comparable companies, the proposition laid down in Rampgreen Solutions Pvt. Ltd.(supra), cannot be applied to the facts of the case on hand. In view of the above discussion. we are of the considered opinion that Global Procurement Consulting Limited has rightly be taken as the comparable by the TPO. Hence we dismiss this argument of the assessee. Consistent with the view taken therein, we agree with the Ld.TPO that this company has to be taken as functionally comparable. But this company is also undertaking many other activities such as valuation etc. The issue for consideration would be as to whether segmental data is available. If such data is available then the company has to be taken as a comparable. As the argument of the Ld.Counsel for the assessee is that there are no segmental results available, this company is directed to be excluded as a comparable.
(c) Quippo Valuers and Auctioneers Private Limited:- (QVAPL) The Ld.Counsel for the assessee submitted that this comparable needs to be rejected for the reason that the functional profile is different from the assessee company as the company is engaged in providing asset management services as an auctioneer and valuer for construction equipment, earth moving machineries, commercial vehicles and other assets. It was further submitted that the annual report of the comparable is not available in the public domain for quantitative analysis. The Ld.D.R. submits that this company is functionally comparable as it is providing large gamut of services including allied business services to its IT(TP)A No.282 & 490/B/2015 12 clients. He further submitted that the company also qualifies the quantitative filters.
On perusal of rival contentions, we find that the functional profile of the company Quippo Valuers and Auctioneers P.Ltd. is not similar to the functional profile of the assessee company. When a company is providing asset management services as an auctioneer and is also undertaking valuation of construction equipment, earth moving machineries etc. and when segmental data is not available, this company has to be, in our opinion, excluded from the list of comparables.
(d) TSR Darashaw Ltd.:- The TPO included this company on the ground that the company is providing business out sourcing services to clients in India. These services are provided to local clients and not the foreign clients and hence they are not similar to ITES services. The TPO observed that ITES companies have the advantage of location savings, while the business service companies do not have advantage. Since in this case the services are predominantly provided in India, the company is a correct comparable. He also held that the assessee had not gone into the verticals or high end or low end distinctions while selecting the comparables and has selected companies operating in various verticals. The TPO has also selected comparables which are broadly engaged in the field of marketing support services which has similar to the services provided by the assessee.
The Ld.Counsel for the assessee on the other hand submitted that the company is not functionally comparable. It is contended that there can be no comparison between a specific pay roll service rendered and marketing support service provided. It was contended that TSR Darashaw Ltd. is a IT(TP)A No.282 & 490/B/2015 13 broking and investment banking house and as 57.4% of its income is from the share registry services segment and hence not a comparable. Reliance is placed on the following decisions.
i. Microsoft Corporation P.Ltd. vs. DCIT in ITA no.5766/Del/2011;
ii. Premier Exploration Services P.Ltd. vs. ITO in ITA No.4935/Del/2011.
In our considered opinion TSR Darashaw Ltd. cannot be taken as a comparable as 57.4% of its income is from share registry services segment. This shows the functional profile of the assessee is different.
In the case of Miscrosoft Corporation Ltd. (supra) at para 1 the Tribunal has held as follows.
"Coming to the merits of comparability, we find that this company has three segments, which inter alia include: 'Pay Roll and Trust Fund activity (Pay Roll)'. It is this segment which has been considered by the assessee as comparable. This company on an overview is a broking and investment banking house. Its other segments are :
'Registrar and Transfer Agent activity (R&D)' and 'Records management activity (Records)'. The segment of 'Pay Roll' was considered by the assessee as comparable in its TP study report and the same is now assailed. Under the 'Pay Roll' segment, this company undertakes pay roll and employee trust fund administration and management. When we compare the nature of pay roll activity undertaken by this company with the marketing support services rendered by the assessee to its AEs, we find that both are way apart IT(TP)A No.282 & 490/B/2015 14 from each other. There can be no logical comparison between a specific pay roll services rendered by a company to its clients with the marketing support services rendered by the assessee to its AEs. This company is, therefore, directed to be excluded from the final set of comparables."
Consistent with the view taken in the above case, we direct the AO/TPO to exclude this comparable.
12. Respectfully following this Tribunal order, and the absence of any difference in facts having been pointed out by the ld. DR of the revenue, we direct the AO/TPO to exclude these three companies i.e. M/s Aptico Ltd., M/s Global Procurement Consultants Ltd., and M/s TSR Darashaw Ltd. from the list of final comparables and since, the average profit of the remaining three comparable i.e. M/s Cyber Media Research Ltd.,14.85%, M/s HCCA Business Services Pvt. Ltd., 20.05% and M/s Quadrant Communications Ltd., 1.11% is around 16% which is within += 5% range of the assessee's profit margin of 12.06%, no TP adjustment is required to be made. We hold accordingly.
13. In view of the above, no other ground in any of these two appeals requires any specific adjudication because, the same will be of academic interest only.
14. In the result, the appeal of the revenue is partly allowed because we have reversed the order of the DRP regarding exclusion of M/s HCCA Business Services Pvt.Ltd. and the appeal of the assesee is allowed.
IT(TP)A No.282 & 490/B/2015 15
15. In the combined result, the appeal of the revenue is partly allowed and the appeal of the assessee is allowed.
Order pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/-
(S.K.YADAV) (A.K. GARODIA)
JUDICAL MEMBER ACCOUNTANT MEMBER
Bangalore:
D a t e d : 19.08.2016
am*
Copy to :
1 Appellant
2 Respondent
3 CIT(A)-II Bangalore
4 CIT
5 DR, ITAT, Bangalore.
6 Guard file
By order
AR, ITAT, Bangalore
IT(TP)A No.282 & 490/B/2015
16
1. Date of Dictation .................................................................
2. Date on which the typed draft is placed before the dictating Member ........................................
3. Date on which the approved draft comes to the Sr. P. S. .......................................................................... 4 Date on which the order is placed before the dictating Member for pronouncement ....................
5. Date on which the order comes back to the Sr. P.S. ....................................................................
6. Date of uploading the order on website ......................................................................................
7. If not uploaded, furnish the reason for doing so...................
8. Date on which the file goes to the Bench Clerk ...................................
9. Date on which order does for Xerox & endorsement .....................................
10. Date on which the file goes to the Head Clerk................ 11 The date on which the file goes to the Assistant Registrar for signature on the order.................................. 12 The date on which the file goes to the dispatch section for dispatch of the Tribunal order......
13 Date of dispatch of order...............
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