Income Tax Appellate Tribunal - Hyderabad
Dq Entertainment (International) ... vs Acit, Clrcle-14(1), Hyd, Hyderabad on 6 April, 2018
THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
ITA No.546/Hyd/2016
Assessment Year: 2011-12
M/s DQ Entertainment vs. Asst. Commissioner of
(International) Ltd., Income Tax, Circle - 14(1),
Hyderabad. Hyderabad.
PAN - AACCD8731C
(Appellant) (Respondent)
Assessee by : Shri P.V.S.S. Prasad
Revenue by : Shri Srinivas Reddy
Date of hearing : 26-03-2018
Date of pronouncement : 06-04-2018
ORDER
PER P. MADHAVI DEVI, J.M.:
This is assessee appeal for the A.Y 2011-12 against the assessment order passed u/s 143(3) r.w.s 144C(5) and 144C(13) of the IT Act dated 26.02.2016.
2. The assessee company, engaged in software development and animation of 2D and 3D films, filed its return of income on 29.11.2011 declaring loss of Rs. 3,52,45,624/-. The return was initially processed u/s 143(1) of the IT Act. Subsequently it was noticed that the assessee has entered into international transactions with its AEs. Therefore, the 2 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. determination of Arms Length Price of such transactions was referred to the TPO u/s 92CA of the IT Act. The TPO passed an order u/s 92CA(3) of the IT Act on 29.01.2015 proposing an adjustment of Rs. 6,91,84,554/-. The draft assessment order was accordingly passed, against which, the assessee preferred its objections before the DRP. DRP issued the directions vide order at 28.12.2015. In accordance with the DRPs direction, the final assessment order passed, against which, the assessee is in appeal before us by raising the following grounds of appeal:
" 1. The Learned Dispute Resolution Panel (DRP) / Assessing Off icer (AO) are erroneous in law and on the facts of the case.
2. The Ld. DRP/AO are not legally justif ied in making an adjustment of Rs.3,00,05,103/- as prof it attributable to the appellant company under the Profit Split Me thod in connection with the absolute sale of intangible asset to AE when such revenue is generated by AE of the appellant company i.e., DQ Ireland which is the absolute owner of such intangible asset.
3. The Ld. DRP/AO is erroneous in not considering the f act that the Intangible asset was sold to its AE at Arms length and accepted by Ld. Transf er Pricing Off icer 1 AO and therefore did not require any further additional adjustment.
4. The Ld. DRP/AO are not justif ied in questioning the commercial wisdom of the appellant' decision to incur the expenditure towards management consultancy f ees 3 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad.
of Rs.3,62,94,254/- .The Ld AO/TPO ought to have considered the tangible and direct benef its derived by the appellant by incurring the management consultancy f ees and ought to have allowed the same as complying with arms length principle.
5. The Ld. DRP/AO legally erred in making an adjustment of Rs.14,42,598/- on reimbursement of expenses received of Rs.2,88,51 ,974/- ,which was arrived at by applying the mark up @ 5%.The Ld. AO/TPO ought to have appreciated the f act that expense incurred on behalf of DQ Entertainment Ireland our Associated Enterprise was purely at cost and is not a service.
6. The AO erred in not giving full eff ect to the directions of Ld. DRP in respect of eligible amount of deduction under Section l0A by wrongly making an adjustment of Rs.6,52,861/- (i.e. Rs.8,51,48,837/- less Rs.8,44,95,976/-) instead of Rs.l,54,636/- (i.e. Rs.8,53,03,473/- less Rs.8,51 ,48,837/-)
7. Any other ground that may be urged at the time of hearing with the previous approval of the Hon'ble Tribunal."
3. The Ld. Counsel for the assessee, while reiterating the submissions made by the assessee before the authorities below, has submitted that the grounds 2 to 5 are covered in favour of the assessee by the decisions of the coordinate Bench of this Tribunal in the assessee's own case for the A.Ys 2010- 11 and 2012-13.
4. The Ld. DR however supported orders of the the authorities below.
4ITA Nos. 546/Hyd/2016
M/s DQ Entertainment (International) Ltd, Hyderabad.
5. Having regard to the rival contentions and the material on record, we find that grounds of appeal No. 2 and 3 are against the Transfer Pricing Adjustment made in connection with the income generated out of an intangible asset (Jungle book) even after absolute sale of such intangible asset to the AE, DQ Ireland, and which is the absolute owner of such intangible asset after such sale. We find that this issue had first arisen during the A.Y 2010-11 and the Tribunal, at para 15 of its order, has considered the issue at length and has held as under:
"15. Considered the submissions of both the parties and perused the material f acts on record as well as the orders of revenue authorities. The f acts are, the assessee had sold "IP" (Jungle Book) to its "AE" on 30/09/2009 at the development stage. It was not f ully developed to generate revenue immediately. As per ld. AR, "AE" was in a position to generate revenue in the last quarter of 2009-10 i.e. Jan-March, 2010. But TPO adopted the whole revenue generated by "AE" in the whole year to arrive the prof it arithmetically to the Indian Entity. The main issue bef ore us is, whether the TPO justif ied to determine the prof it attributable to Indian entity (assessee) when he himself determined the sale consideration of IP (Jungle Book). When the TPO ITA No. 151 /Hyd/2015 D.Q. Entertainment (International) Ltd. agreed that there is a outright sale, there ends the international transaction. Now, TPO is trying to go beyond sales and making TP adjustments. We are asking ourselves, whether there is any international transaction exists. In our considered view, there is no international transaction af ter outright sale. There is no international transaction exists as per section 92B of the Act as there is no transaction exists between assessee and with it's AE. We are inclined to reject the stand of the TPO.5 ITA Nos. 546/Hyd/2016
M/s DQ Entertainment (International) Ltd, Hyderabad.
15.1 Moreover, af ter the completion of the sale process, the "AE" has done transaction with the outsiders or outside the jurisdiction of the Indian territory but there is no transaction done with the assessee involving the above IP (jungle book) to consider that there exists a international transaction. Once, the IP is sold and Arm's length price is determined, the "IP" becomes the property of "AE". The assessee has no locus stand to claim any benef it neither the revenue.
15.2 The revenue has grievances on the arrangement and existences of group companies. There is no doubt, there exists tax planning. There can be tax planning within the four corners of the taxation laws. There is enough mechanism in the existing Act and also there is DTAA - arrangement with Ireland, which will take care of the situations of tax avoidance. The revenue has not brought any cogent evidence to prove that there exists any tax avoidance. In our considered view, the action of the TPO is not justif ied and accordingly, the grounds raised by assessee are allowed."
5.1. We also find that this decision has been followed by the Coordinate Bench of the Tribunal in 441/Hyd/2017 dated 12.01.2018 for the A.Y 2012-13 in the assessee's own case for holding that there is no international transaction during the relevant financial year. Respectfully following the said decisions, the grounds of appeal No. 2 and 3 are allowed.
6. As regards ground No. 4, we find that this issue is also covered in favour of the assessee by the decision of the Tribunal in the assessee's own case for 2012-13, wherein the Tribunal has followed the decision of the Tribunal in the assessee's own case for 6 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad. the A.Y 2008-09 in ITA No. 62/Hyd/2013 dated 30.10.2015. The relevant paras of the ITAT orders are reproduced here under:
"10. Having regard to the rival contentions and the material on record, we f ind that during the A.Y 2012-13, the assessee paid an amount of Rs.2,14,06,307 to its AE at Mauritius towards Management Consultancy services received. The assessee had claimed that the payment was made to the Board of Directors of the AE as they were rendering invaluable advice and guidance to the assessee company. The TPO however, held that the assessee f ailed to furnish any evidence in support of the receipt of the benef it f or which the payment was made by the assessee to its AE and hence computed the ALP at "Nil" and suggested the adjustment. We f ind that very same issue had arisen in the assessee's own case for the A.Y 2008- 09 in ITA No.62/Hyd/2013 dated 30th October, 2015 and at Paras 6.2 to 6.7 the Tribunal has held as under:
"6.2. As can be seen from the above, the TPO analysed the accounts of DQ Entertainment Plc and DQE Mauritius in analyzing the nature of payment. Out of the total amount of US$ 7,99,000 paid, the actual Management Consultation Charges were only US$ 4,27,000 along with administrative and audit fee of US$ 14,000. As per the agreement, there is a markup of 5%. This expenditure only can be considered, in our view, as the Management Consultancy Service Fee, whereas the foreign exchange loss of US$ 3,21,000 cannot be considered as intra group service. We notice f rom the documents placed on record that instead of quarterly bills being raised as per the agreement, DQE Mauritius has raised only one bill for the whole of the year, which was placed at page 170 of the Paper Book. As can be seen from the details of payments made, placed at page 171 of the Paper Book, the amount of US$ 799,174 charged on 31-03- 08 was paid in three installments of US$ 3,00,000 on 14-09-2010, US $ 1,99,174 on 25-10-2010 and US$ 3,00,000 on 04-01- 2011. It is noticed that even though invoice was raised on 31-03-2008 for whole year instead of quarterly billing, the payments were 7 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad.
made f rom September, 2010 to January, 2011 with substantial delay. The reasons f or such delayed payments were not explained. Theref ore, we are of the view, that in the given circumstances, the foreign exchanges losses or gains in the hands of DQE Mauritius cannot be considered as services rendered by the DQE Mauritius to assessee which should be on it's own account. To the extent of the above amount, we are in agreement with the observation of the TPO in para 8.3 of his letter dt. 08- 11-2012, that foreign exchange loss does not pertain to any management and consultancy services. To that extent his order has to be approved.
6.3. What the TPO has missed is with reference the amounts other than f oreign exchange loss. In the absence of any comparable f igures and in the absence of any f urther enquiry and having the f act that services have been rendered to assessee as accepted by DRP also, TPO cannot take the amount of ALP at NIL, ignoring the payment by assessee of US$ 4,27,000. As per the agreement, all the costs incurred by the DQE Mauritius with 5% markup had to be charged to assessee. Therefore, as per the details f urnished by assessee bef ore the TPO, the actual management fee of US$ 4,27,000 with administration charges of US$ 14000 and markup of 5%, at the exchange value as on the date of 31-03- 2008, can be considered as 'service charges' for the intra group services rendered. This can be taken as ALP. Theref ore, modif ying the order of TPO, we determine the Management Consultancy Fee as detailed above and AO is directed to modif y the order accordingly.
7. In arriving at the above, we have considered the OECD Transfer Pricing guidelines 2010, Chapter-V II pertaining to 'special considerations f or intra group services'. Considering the assessee's agreement with DQE Mauritius which in turn has an agreement with DQ Entertainment Plc, and the reimbursement of cost f rom one company to another, we agree with the TPO's observation that foreign exchange loss in f inancial transactions cannot be considered as 'service charge' f or the intra group and therefore, we af ter considering the f acts of the 8 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad.
case, restrict the amount to the actual management fees charged by the DQE Mauritius along with other cost of administration and audit and mark up at 5%".
11. Since the f acts and circumstances are the same for the A.Y bef ore us, respectf ully following the decision of the Coordinate Bench (to which both of us are signatories), we allow the assessee's ground of appeal. 6.1. Since the facts and circumstances before us for the relevant assessment year also the same, respectfully following the decision of the coordinate Bench this ground of appeal is allowed.
7. As regard ground No. 5, we find this issue also has arisen before the Tribunal in the assessee's own case for the A.Y 2010-11 and the Tribunal at paras 23 to 28 are reproduced here under:
"23. As regards ground No. 9 pertaining to mark up on travel and other expenses reimbursed by the AE of Rs. 77,36,985/-, it is observed that DQE India had incurred expenses on behalf of DQE Ireland in the nature of travel & other expenses. DQE India recovered the same f rom DQE Ireland on the basis of actual costs incurred. It was explained by assessee to the Ld. TPO that, reimbursement of travel and other expenses were incurred solely on behalf of DQE Ireland, This transaction did not impact the P&L of DQ India and that it was at cost and did not amount to any service rendered. The assessee raised bills against DQE (Ireland) at cost, and explained to Ld. TPO that it is in general practice among group companies to incur expenses on behalf of group companies and to recover the same at cost, and that these transactions have no impact on prof it & loss account.
24. Ld. TPO applied mark -up on reimbursement of travel and other expenses @ 10%, stating that the same was reasonable which any independent party would be willing 9 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad.
to pay. Assessee submitted that it is only reimbursement of expenses incurred by the company on behalf of its AE and there is no services rendered. This resulted in an adjustment of Rs 7,73,699/- to the prof it of the assessee company.
25. When the assessee raised objection before the DRP, the DRP observed that the receipt of reimbursement has not been routed through books of account. No independent party would render such services without any mark up. Even other wise, recovery of expenses always forms part of operating cost in the case of independent comparable companies. Thus these expenses incurred by the taxpayer and subsequently reimbursed by AEs need to be suitably marked up. The TPO held a mark-up of 10% for rendering services. The DRP, theref ore, hold that the TPO was justif ied and accordingly, declined to interfere with the order of the TPO and the ground of objection was rejected.
26. Ld. AR submitted that DQE India had incurred expenses on behalf of DQE Ireland in the nature of travel & other expenses. DQE India recovered the same f rom DQE Ireland on the basis of actual costs incurred. During the assessment year 2010-11 the assessee incurred amount of Rs.77, 36, 985/- on behalf of its AE DQE (Ireland) towards travel expenses and other expenses. It was submitted that, Reimbursement of travel and other expenses were incurred solely on behalf of DQE Ireland, This transaction did not impact the P&L of DQ India and that it was at cost and did not amount to any service rendered. It is submitted that the assessee raised bills against DQE (Ireland) at cost, and submitted that it is in general practice among group companies to incur expenses on behalf of group companies and to recover the same at cost, and that these transactions have no impact on prof it & loss account.
26.1 Ld. AR submitted that despite the submissions made Ld TPO applied mark -up on reimbursement of travel and other expenses @ 10%, stating that the same was reasonable which any independent party would be willing to pay. It is submitted that it is only reimbursement of expenses incurred by assessee on behalf of AE and there is no services rendered This resulted in an adjustment of Rs 7,73,699/- to the prof it of the assessee company.
26.2 Ld. AR submitted that according to Black's Law "reimburse means to pay back, to make restoration, to repay that expended, to indemnif y or make whole". As per Concise Oxford Dictionary the term reimburse means "repay (a person who has expended money) or repay( a person's expenses)" In view of the above def inition being reimbursement of actual cost there is no income element in 10 ITA Nos. 546/Hyd/2016 M/s DQ Entertainment (International) Ltd, Hyderabad.
embedded in such payment and is merely in the nature of reimbursement. Hence to apply a markup of 10% based on the prof it earned by the assessee is factually and legally incorrect.
26.3 Ld. AR submitted that in M/s. Cognizant Technology Solutions India Pvt. Ltd v, ACIT ITA Nos.114 & 2100(Mds)/2011 the Bench held that "The next issue raised by the assessee is against the addition made by the Transfer Pricing Officer on the ground of reimbursement of expenses. The Transfer Pricing Off icer has made a mark up of 5 per cent on certain travel cost incurred by the assessee and reimbursed by its associate enterprise and treated as additional income to be taxed as part of transf er pricing adjustment. But the f act is that the reimbursement was made on cost to cost basis and there is no rendering of any service and it does not involve service element. What is incurred is reimbursed. So, therefore, there is no prof it element in the reimbursement. In such situation there is no justif ication in making a mark up of 5 per cent. This addition is accordingly deleted. This issue is decided in favour of the assessee."
27. Ld. DR submitted that the TPO considered markup of 10% on these reimbursements and accordingly computed the ALP and adjustment of Rs. 7,73,699/- was computed. He submitted that the assessee submitted that the markup adopted by the TPO of 10% is incorrect and the reimbursements received are at arm's length. Ld. DR submitted that the TPO has considered 10% markup as no independent party would render such services without any markup. Hence, the mark up made is correct and accordingly, the ALP on reimbursements and the adjustment thereon is correct.
28. Considered the submissions of both the parties and perused the material f acts on record as well as the orders of revenue authorities. The assessee as a group company, incurred travelling and other expenditure on behalf of DQE, Mauritius. Assessee had raised the bill for reimbursement on cost to cost basis, it is normal in the case of group companies. There is no element of service in these transactions. These transactions are not in any way connected to the nature of business of assessee. These are the services rendered by outsiders f or the AE's and only payment was made by assessee and got reimbursement from "AE". Since there is no element of service by the assessee, adding markup on these kind of transactions are not justif ied. As held in the case of M/s Cognizant Technologies Solution (spra), the additions made were deleted by Chennai Bench of ITAT. Accordingly, the grounds raised by the assessee are allowed.
11ITA Nos. 546/Hyd/2016
M/s DQ Entertainment (International) Ltd, Hyderabad. 7.1. Since the facts and circumstances before us are the same, also for the assessment year before us, the ground of appeal No. 5 is allowed.
8. As regards Ground No. 6, the Ld. Counsel for the assessee submitted that there is a computation error while computing the eligible amount of deduction u/s 10A of the Act. We, therefore, deem it fit and proper to remit this issue to the file of the A.O for verification and if the assessee's contention is found to be correct, the same shall be rectified by the A.O. Accordingly, this ground of appeal is treated as allowed for statistical purposes.
9. In the result, the appeal filed by the assessee is partly allowed.
Pronounced in the open court on 06th April, 2018.
Sd/- Sd/-
(B. RAMAKOTAIAH) (P. MADHAVI DEVI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 06 th April, 2018
12
ITA Nos. 546/Hyd/2016
M/s DQ Entertainment (International) Ltd, Hyderabad. KRK 1 M/s DQ Entertainment (International) ltd., C/o Prasad & Prasad CAs, Flat No. 301, MJ Towers, 8-2-698, Road No. 12, Banjara Hills, Hyderabad.
2 The ACIT, Circle-14(1), Hyderabad 3 DRP-1, Bengaluru.
4 The Pr. Commissioner of Income tax-5, Hyderabad. 5 The DR, ITAT Hyderabad 6 Guard File