Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. Target Sourcing Services India ... on 13 September, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES "I-1" : DELHI
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA.No.457/Del./2014
Assessment Year 2009-2010
M/s. Target Sourcing Services
India Pvt. Ltd., 2nd & 3rd Floor,
The DCIT, Circle-16(1), vs. Copla Corporate Suites, Plot No.9,
C.R. Building, New Delhi. Non-Hierarchial Commercial
Centre, Jasola, New Delhi-110020
PAN AACCT7694Q
(Appellant) (Respondent)
For Revenue : Shri Amrendra Kumar, CIT-DR
Shri S.P. Singh, Shri Manoneet
For Assessee : Dalal, Authorised Representatives,
Shri Ashish Sabharwal & Shri
Parag Garg, C.A.s
Date of Hearing : 11.09.2017
Date of Pronouncement : 13.09.2017
ORDER
PER BHAVNESH SAINI, J.M.
This appeal by Revenue has been directed against the order of the Disputes Resolution Panel-II ("DRP" in short), New Delhi, dated 31st October, 2013 for the A.Y. 2009-2010 on the following grounds :
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ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
1. "On the facts and in the circumstances of the case and in law, Ld. DRP, Panel-II, New Delhi, erred in directing to drop the proposed addition of Rs.31,57,99,366/- on account of TP adjustment.
2. On the facts and in the circumstances of the case and in law, Ld. DRP, Panel-II, New Delhi, erred in directing to drop the proposed addition of Rs.29,62,617/- on account of loss on foreign exchange fluctuation."
2. We have heard the learned Representatives of both the parties and perused the material on record.
3. Briefly the facts of the case are that the proceedings before DRP were against the draft order dated 15th March, 2013 of ACIT, Circle-16(1), New Delhi. The DRP was required to issue directions under section 144C(5) for the guidance of A.O. for enabling him to complete assessment order. The DRP, before deciding the issue, has considered the contention of the department as well as the objections of the assessee. The assessee filed objections before DRP objecting to the draft order passed by the A.O. read with order of the TPO.
4. The DRP made their observations in the impugned order. It is noted that Target Corporation, USA, is a retailer in consumer products as enumerated in the impugned order under the Head "Profile of the Assessee". The assessee had used Transaction Net 3 ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
Margin Method (in short "TNMM") as the most appropriate method by taking Operating Profit/Operating Cost (in short "OP/OC") as the Profit Level Indicator (in short "PLI"). The assessee had taken nine comparables engaged in the provision of support services. The OP/OC of the assessee was at 16.27% with three year average data. With the single year data, the margin of the comparable was at 7.89%.
4.1. The TPO rejected the method used by the assessee. The TPO has objected to the use of multiple year data used by the assessee in benchmarking its international transaction. Further, assessee was characterized as 'contract manufacturer' instead of 'sourcing agent'. The show cause notice of the TPO has mentioned that assessee has human intangibles in the form of skilled man- power and supply chain intangible. The TPO suggested that correct comparables to the assessee are those companies which are in the retail marketing in India. The TPO also proposed in the show cause notice that the margin will be calculated on FOB value of goods sourced from India instead of Cost plus margin employed by the assessee. Based on certain filters, the TPO identified four 4 ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
comparables viz., (1) Pentaloon Retail (India) ltd., (2) Shoppers Stop Ltd., (3) Jaypee Spintex Ltd., and (4) Provogue Ltd., with an OP/TC of 5.32% and proposed an addition of Rs.69.07 crores. 4.2. The assessee raised objections to the show cause notice. The TP order justified the show cause notice. However, the TPO did not stick to this approach indicated in the show cause notice and decided to use Profit Split Method (in short "PSM") in the end. The TPO concludes that "in view of the discussion in para-19 below, the discussion on the filters above have been rendered academic in nature." In para-19 of the TP order, the TPO computes Arms Length Price (in short "ALP") by taking PSM. The TPO employed PSM by stating that functions performed by TSS India are significant within the entire value chain and applied split of profit at the ratio of 60 :
40 between A.E. and TSS India respectively concluding that 40% of the overall business activities relating to the goods imported from India are carried out by TSS India. Thus, 40% of the operating margins of the A.E. were applied to the FOB value of the goods sourced from India and an upward adjustment of Rs.31,57,99,365 was made to the income of TSS India.5
ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
4.3. The assessee has objected that TPO has violated the principles of natural justice by not giving an opportunity to the assessee before employing PSM. The assessee also on merit made submissions before DRP which are reproduced in the impugned order that addition is unjustified.
5. The Ld. DRP considering the issue in detail was of the view that TNMM should be used as most appropriate method. The mark- up should be on the actual cost incurred by the assessee. In view of the margin earned by the assessee, there cannot be any addition under TNMM as the most appropriate method. The conclusion of the DRP in para 4.22 of the impugned order are reproduced as under :
"4.2.2. The conclusion of the DRP on the transfer pricing adjustments are summed up as follows :
1. This is not a fit case for using Profit Split Method as the most appropriate method since there is neither transfer of intangibles nor the transaction between the AE and the assessee is so complex (Para 4.9 to 4.12 and 4.17 above).
It also should be kept in mind that the AE of the assessee 6 ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
company was performing similar activities as a liaison office and no tax was being paid in India till 2007.
2. The fact that other countries are accepting the case of the related parties of the assessee at cost, or at cost plus 10% maximum needs to be taken into account along with the export promotional efforts made by other Departments of Government of India. This is mandated under Rule 10B(2)(d) of the Income Tax Rules (Para 4.13, 4.18 and 4,19 above).
3. The case of GAP International (supra) is applicable in the case of the assessee (Para 4.16 above) and therefore it is not FOB value but the cost incurred by the assessee should be taken to calculate the operating margin.
4. TNMM should be used as the most appropriate method.
5. As the margin earned by the assessee Is 16.28% as compared to the comparable which are at 9.58% with multiple year data and 7.89% by using single year data, there is no addition required to be made to the international transaction declared by the assessee.
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ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
Therefore, the Assessing Officer and the Transfer Pricing Officer are directed to delete the addition made in the draft assessment order relating to transfer pricing issues". 5.1. The DRP directed the A.O. and TPO to delete the addition on which ground No.1 is raised.
6. On the last date of hearing i.e., on 31st August, 2017, Learned Counsel for the Assessee stated that in subsequent years, TPO has accepted the TNMM as the most appropriate method and filed the chart of subsequent years. Copy was also supplied to the Ld. D.R. The Ld. D.R. filed paper book of the Department containing Assessment Order, DRP Order, Draft Assessment Order, T.P. Order, Service Agreement, Annual Audit Report and T.P. Report. No material is produced from the side of the Department to contradict the chart submitted by the Learned Counsel for the Assessee that TNMM was considered as most appropriate method in the case of the assessee by TPO.
7. After considering the rival contentions, we do not find any merit in the Departmental appeal on ground No.1 above. The Learned 8 ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
Counsel for the Assessee filed chart of litigations status of assessee for the assessment year under appeal as well as of the subsequent years. The same is reads as under :
Sr. Assessment Method adopted Approach by TPO DRP No. Year (AY) by Assessee directions Transactional Profit Split Method Selected Net Margin ("PSM") as most TNMM as 1 Method appropriate most 2009.10 ("TNMM") as method. appropriate most appropriate method.
method.
TNMM as most TNMM as most Directions
appropriate appropriate given in
2 method. method. respect of
2010-11
Adjustment was comparables.
made in respect of
comparables.
TNMM as most NA
3 2011-12 appropriate Case not referred to
method. TPO
TNMM as most No dispute on Upheld the
appropriate method. order of TPO.
4 2012-13 method. Adjustment was
made on interest on
receivables.
TNMM as most No dispute on Upheld the
appropriate method. order of TPO.
5 2013-14 method. Adjustment was
made on interest on
receivables.
TNMM as most TP issue was not N.A.
6 appropriate examined and no
2014-15
method. adjustments were
made.
TNMM as most The case was not N.A.
7 2015-16 appropriate picked up for TP
method. assessment.
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ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
7.1. The above chart clearly shows that in subsequent assessment year, TNMM was considered as most appropriate method by TPO wherever the matter was referred. The Ld. D.R. did not produce any material against the above chart in respect of ground No.1 of appeal. It, therefore, stands proved that in the case of the assessee, the Department has accepted in subsequent year that TNMM is the most appropriate method for working-out the calculation of the profit. Therefore, there is no justification for the Department to challenge the order of the DRP in the assessment year under appeal. Further, the DRP has passed a detailed order considering the facts of the case and material on record and came to the conclusion that profit margin earned by the assessee as compared to the comparable was very high. Therefore, there were no basis to make any addition against the assessee by changing the method from TNMM to PSM in the assessment year under appeal. No new facts have been brought to our notice with regard to business activities of the assessee or the method employed by the assessee. In view of the history of the assessee as explained by Learned Counsel for the Assessee and since no infirmity have been pointed out in the 10 ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
order of the Ld. DRP in directing to delete the proposed addition of Rs.31,57,99,366, we do not find any merit in the Departmental appeal on this ground. Ground No.1 of appeal of Revenue is accordingly dismissed.
8. On ground No.2, the assessee objected to the proposed disallowance of Rs.29,62,617 being the loss on foreign exchange fluctuation proposed by the A.O. by holding that the same is a notional loss. The A.O. noted that loss of Rs.29,62,617 claimed by the assessee on account of foreign exchange fluctuation was admittedly due to reinstatement of debtors is not a realised loss as no loss has 'actually' been incurred. Therefore, being notional loss, it is not allowable as per Income Tax Act. The A.O. accordingly, proposed these disallowance.
9. The assessee submitted that foreign exchange loss of Rs.29,62,617 is net of foreign exchange gain of Rs.61,677 and foreign exchange loss of Rs.30,24,393. It is, therefore, reiterated that the foreign exchange fluctuation loss of Rs.30,24,393 relates to reinstatement of amount payable to its group entity who are debtors at the year end and it is not related to any fixed assets or item of 11 ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
capital in nature. Therefore, it was claimed as revenue expenditure. Assessee relied upon the decision of the Hon'ble Supreme Court in the case of Woodward Governor India Pvt. Ltd., 312 ITR 254 wherein it was held that, in terms of mercantile method of accounting, the exchange fluctuation arising on reinstatement of liability in the foreign currency at the year end is an allowable loss where the liability is on revenue account.
10. The Ld. D.R.P. noted that assessee is following the mercantile system of accounting consistently. The foreign exchange loss is due to the reinstatement of the accounts at the end of the financial year as per Accounting Standard-11 issued by the Institute of Chartered Accountants of India. At the end of the year, the assessee re-values its outstanding balance. The underlying liability was on account of revenue transaction, income/loss on account of settlement of creditors/debtors. Therefore, the foreign exchange loss also takes the colour of revenue loss. It is not the case of the A.O. that this loss is on account of reinstatement of fixed assets or capital items. The Ld. DRP following the judgment of the Hon'ble Supreme 12 ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
Court in the case of Woodward Governor India Pvt. Ltd., (supra), directed the A.O. to drop the proposed addition in this regard.
11. After considering the rival contentions, we do not find any merit in this ground of appeal of Revenue. It is an undisputed fact that the issue is covered in favour of the assessee by the Judgment of the Hon'ble Supreme Court in the case of Woodward Governor India Pvt. Ltd., (supra). It is also not in dispute that assessee is following the mercantile system of accounting consistently. The foreign exchange loss is due to the reinstatement of the accounts at the end of the financial year as per the accounting standard approved by the Institute of Chartered Accountants of India. No infirmity have been pointed out in the order of the DRP in directing the A.O. to drop the proposed addition. There is no merit in this ground of the Revenue and the same is accordingly dismissed.
12. In the result, appeal of the Department is dismissed.
Order pronounced in the open Court.
Sd/- Sd/-
(PRASHANT MAHARISHI) (BHAVNESH SAINI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Delhi, Dated 13th September, 2017
VBP/-
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ITA.No.457/Del./2014 M/s. Target Sourcing Services India Pvt. Ltd., New Delhi.
Copy to
1. The appellant
2. The respondent
3. CIT(A) concerned
4. CIT concerned
5. D.R. ITAT "I-1" Bench
6. Guard File //By Order// ASST. REGISTRAR ITAT : DELHI BENCHES DELHI.