Income Tax Appellate Tribunal - Delhi
Messe Duesseldorf India Pvt. Ltd., New ... vs Dcit, New Delhi on 4 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I' : NEW DELHI)
BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.5059/Del./2010
(ASSESSMENT YEAR : 2006-07)
Messe Dusseldorf India Pvt. Ltd., vs. DCIT, Circle 6 (1),
1, Commercial Complex, New Delhi.
2nd Floor, Pocket H & J,
Sarita Vihar,
New Delhi-110 076.
(PAN : AABCC4889E)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Piyush Kaushik, Advocate
REVENUE BY : Shri Neeraj Kumar, Senior DR
Date of Hearing : 15.11.2017
Date of Order : 04.01.2018
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, Messe Dusseldorf India Pvt. Ltd. (hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 13.09.2010, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short 'the Act') qua the assessment year 2006-07 on the grounds inter alia that :-
2 ITA No.5059/Del/2010
"1. That on the facts and circumstances of the case and in the Law, the DRP has grossly erred in confirming the addition of Rs.4,195,482 to Arm's Length Price (ALP) of representation services segment.
2. That on the facts and circumstances of the case and in the Law, the DRP has grossly erred in confirming the addition of Rs.4,195,482 to Arm's Length Price (ALP) of representation services segment without establishing 'on merits' any sort of discrepancy in the details / evidences submitted before the DRP and the Transfer Pricing Officer (TPO) in the remand proceedings to rebut the computation of ALP pursuant to directions of Hon'ble Delhi High Court in WP (C) No. 14079/2009 dated 22.12.09.
3. That the DRP has grossly erred in confirming the addition of Rs.4,195,482 to Arm's Length Price (ALP) of representation services segment without fairly and judiciously dealing with various contentions and objections placed before the DRP to rebut the computation of ALP of representation services segment."
2. Briefly stated the facts necessary for adjudication of the controversy at hand are : the taxpayer is into the business of organizing and performing trade fairs, exhibition, seminars, congresses and similar events and also engaged in advising and developing trade fairs, seminars and similar projects. The taxpayer is also into the business of arranging for orders in the field of international trade fairs and exhibition and promoting, organizing Indian participation in trade fairs outside India. 50% of the equity of the taxpayer is held by Koelnmesse International GmbH, Germany. The taxpayer entered into international transaction during the year under assessment as under :-
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S. Description of transaction Method Value (in No. Rs.) 1 Reimbursements received - 2669762 2 Collection of sale of entry tickets - 4355235 3 Representation services Cost Plus 8284836 Method 4 Sale of package space & - 8090451 catalogue
3. The ld. Transfer Pricing Officer (TPO) has not disputed the international transaction entered into by the taxpayer during the year under assessment qua sale of package space and reimbursement received described at Sl.No.1 & 4 in the aforesaid table, thus accepted the Arms Length Price (ALP) determined by the taxpayer qua transaction no.1 & 4. Now, the only dispute is qua transactions pertaining to representation services activity. The taxpayer in its TP study adopted Cost Plus Method (CPM) in determining the ALP representation services transaction.
4. Pursuant to the order passed by Hon'ble Delhi High Court in Writ Petition filed by the taxpayer, the taxpayer submitted details maintained with regard to the representation services segment during the original proceeding as well as remand proceeding and thus adopted cost plus method in determining ALP representation services. TPO found segmental account relied upon by the taxpayer in the transfer pricing report as manipulated and refused 4 ITA No.5059/Del/2010 to rely upon the same to benchmark the international transaction on the ground that, "the taxpayer has not only managed to hide the loss at entity level but also reported profit from representation services by arbitrarily allocating cost without assigning any credible reason or data/documents." TPO also proposed to determine ALP of international transaction using financials at entity level and computed the profitability of the taxpayer at entity level and determine the ALP qua representation services transaction.
5. The taxpayer carried the matter before the ld. DRP by filing objections who has upheld the proposed ALP of international transaction determined by TPO to the tune of Rs.41,95,482/-. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
6. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
7. Undisputedly, the TPO in order to determine the ALP of the international transaction taken the profitability of the taxpayer at entity level and then computed the average OP/TC of 3 comparables as under :-
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"The profitability of the assessee at entity level is as under :-
Cidex Trade Fairs Private Limited F.Y. 2005-06 INCOME Revenue 29,228,272 Total Op. Income 29,228,272 EXPENDITURE Payment towards 12,274,858 services for trade fairs and exhibitions Payments and provisions 9,524,123 for employees Administrative Selling & 13,192,218 other expenses Depreciation 1,634,892 Total Op. Expenses (TC) 36,626,091 Operating Profit (OP) (7,397,819) OP/TC (%) (20.19%) The average OP/TC of the three comparables are tabulated as under :-
S.No. Name of the Company OP/TC (%)
1 IBI Chematur (Engg. & 19.01%
Consultancy) Ltd.
2 ICRA Online Limited 8.85%
3 L&T Ramboll Consulting 14.88%
Engineers Limited
Average 14.24%
9. The ld. TPO on the basis of profit margin earned on cost by the comparable companies at 14.24% and loss of 20.19% at operating level by the taxpayer as compared to an average profit of 14.24% of the comparables determined ALP of international transaction as under :-6 ITA No.5059/Del/2010
Total Revenue of the assessee Rs.29,228,272(a) Total Operating Cost of the assessee Rs.36,626,091(b) Representation service revenue Rs.8,284,836 Representation service cost Rs.10,381,769 (in proportion of a & b) [Revenue from representation services Plus Rs.12640071 entry ticket sale) : this is the transaction at test.
Cost of representation services plus Entry Rs.14737004
ticket Sale) this is the cost base
Arm's Length Revenue at 14.24% of above Rs.16835553
Revenue actually realized Rs.12640071
Adjustment required Rs.4,195,482
On the basis of the difference of Rs.4,195,482, the arm's length value of the international transactions undertaken by the assessee with its associated enterprises is determined as under :-
S. International Book Difference Arm's Difference N Transaction Value loaded length (%) o Price 1 Representatio 8284836 2749896 1103473 24,92% n services 2 rendered 2 Sale proceeds 4355235 1445586 5800821 24.92% of entry tickets Total 12640071 4195482 Since the difference of the book value and the arm's length price determined is more than 5% of the international transaction, no benefit under the amended proviso to section 92C(2) is available to the assessee."
10. The ld. AR for the taxpayer contended that the TPO/DRP/AO have erred in considering domestic transaction as international transaction; that the TPO has taken PLI of entity as a whole; that benefit of +/- 5% has not been given to the taxpayer;
that the taxpayer has adopted the scientific criteria in the allocation of cost towards representation services segment being essentially 7 ITA No.5059/Del/2010 the proportion of time spent by the employees at the respective location on representation services segment; that the TPO has erred in adopting Transactional Net Margin Method (TNMM) when the taxpayer has followed one of the standard method viz. CPM in the present case.
11. However, on the other hand, the ld. DR for the Revenue while relying upon the order passed by the ld. TPO/DRP contended that the TPO has rightly computed the cost base representation activities separately and has added collection of sale of entry tickets on revenue side as well as on cost side as the collection of sale of entry tickets has been aggregated with the representation activities; that the TPO has rightly rejected the CPM under the identical situation in case of the taxpayer in AY 2005-06 and has adopted TNMM which has been confirmed by ITAT in ITA No.2139/Del/2012 date 19.03.2014 against which no appeal has been filed by the taxpayer; that the TPO has taken the proportionate cost culled out of the total cost and that the TPO after rejecting the CPM has rightly adopted TNMM which is an accepted method as per order of AY 2005-06; that the segmental account has been rightly rejected and this issue has been confirmed by the Tribunal.
8 ITA No.5059/Del/2010
12. So far as question of excluding the domestic transaction for determining the ALP of international transaction is concerned, it is settled principle of law that TP adjustment can be made qua international transactions only. TPO, in the instant case, has computed cost base of representation activities separately and has added collection of sale of entry tickets on the revenue side as well as on the cost side. In taxpayer's own case for AY 2005-06 decided vide ITA No.2139/Del/2012 order dated 19.03.2014, identical issue has come up before the Tribunal wherein, "CIT (A)'s order directing TPO to exclude domestic transaction in computation while computing adjustment based on ALP of international transaction was upheld". So, we are of the considered view that for transfer pricing adjustment only, international transactions are to be considered. Since there is no change of facts on this point qua the year under assessment, TPO is directed to exclude domestic transaction in computing adjustment based on ALP of international transaction.
13. Furthermore, TPO while computing the ALP of international transaction has taken average OP/TC at Profit Level Indicator (PLI) at 14.24% which is factually incorrect because as per working of comparable companies net margin given by the taxpayer, available at page 194 of the paper book, is 11.51%. 9 ITA No.5059/Del/2010 Without disputing the working of the comparable companies and net margin given by the taxpayer, the ld. TPO has wrongly given the average at 14.24% which is incorrect. So, TPO is directed to adopt the correct average PLI as per working available at page 194 of the paper book.
14. So far as question of rejecting the segmental account by TPO by taking proportionate cost culled out of total cost is concerned, after a direction issued by the Hon'ble High Court in the Writ Petition No.14079/2009, available at pages 182 to 187 in the paper book. All these objections were taken by the taxpayer before the ld. DRP who has called remand report from the TPO, but TPO without pointing out any discrepancy in the segmental account proceeded to reject the segmental account on the ground that it was not given during the original proceedings. When directions of Hon'ble High Court were there, the TPO was required to consider the segmental account to determine the ALP of the international transaction.
15. Even during the original TP proceedings, the TPO has not demanded any segmental account. The ld. DR for the Revenue contended that no such segmental account was given to the TPO during original as well as remand proceedings. When we examine para 1 at page 9 of the TP order, TPO has categorically mentioned 10 ITA No.5059/Del/2010 that, "I have not been able to find any segmental accounts with identifiable costs in the Profit and Loss account of the assessee. Hence the basis of such segmentation in respect of the cost base for representation services is not determinable". So, in the given circumstances, we are of the considered view that the taxpayer is directed to again place on record segmental accounts with identifiable cost in profit and loss account of the taxpayer to be examined by the ld. TPO.
16. In so far as question of denying the benefit of +/- 5% by applying the TNMM under Second Proviso to section 92C (2) by ld. TPO/DRP is concerned, the ld. AR for the taxpayer relied upon the decision rendered by the Tribunal in case cited as (i) Sony India (P) Ltd. vs. DCIT - 315 ITR (AT) 150; (ii) ACIT vs. MSS India (P) Ltd.- 123 TTJ 657, (iii) M/s. Adobe Systems India Pvt. Ltd. vs. ACIT in ITA No.5043/Del/2010 dated 21.01.2011 and M/s. Symantec Software Consultants vs. ACIT in ITA No.7894/2010 dated 31.05.2011.
17. However, on the other hand, ld. DR for the Revenue relied upon the decision rendered by Special Bench of the Tribunal in IHG IT Services (India) (P.) Ltd. vs. ITO, Ward 11 (3), New Delhi - (2013) 33 taxmann.com 1 (Delhi - Trib.) (SB). 11 ITA No.5059/Del/2010
18. Special Bench of the Tribunal in IHG IT Services (India) (P.) Ltd. (supra) held that, "after the retrospective amendment to the second proviso to section 92C (2) by the Finance Act, 2012, there remains no ambiguity that the benefit of tolerance margin is available only when the variation between the arm's length price as determined under section 92C(1) and the price at which the international transaction has actually been undertaken does not exceed the tolerance margin. Once it exceeds the tolerance margin, no benefit under the proviso would be available to the assessee and the ALP as determined under section 92C(1) shall be considered".
19. However, we are of the considered view that tolerance margin in the instance case is to be determined after making correct computation by the TPO, as discussed in the preceding paras. We are of the considered view that in case, variation between the ALP as determined u/s 92C (1) and the price at which the international transaction has actually been undertaken exceeds the tolerance margin then the taxpayer is not entitled for benefit of +/- 5%. This exercise is to be carried out by the TPO after correct computation by the TPO in the light of the decision rendered by the Special Bench of the Tribunal in IHG IT Services (India) (P.) Ltd. (supra). 12 ITA No.5059/Del/2010
20. In view of what has been discussed above, impugned order passed by the ld. DRP/TPO/AO is set aside and the TPO is directed to decide afresh after providing an opportunity of being heard to the taxpayer in view the directions issued herein before. Consequently, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in open court on this 4th day of January, 2018.
Sd/- sd/-
(B.P. JAIN) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 4th day of January, 2018
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.