Income Tax Appellate Tribunal - Bangalore
Levi Strauss (India) Private Limited, ... vs The Deputy Commissioner Of Income Tax, ... on 13 June, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH : BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
IT(TP)A Nos. 926 & 927/Bang/2022
Assessment Years : 2017-18 & 2018-19
M/s. Levi Strauss
(India) Pvt. Ltd.,
ITC Green Centre,
The Deputy
No. 18, 4th & 5th Floor,
Commissioner of
West Wing,
Income Tax,
North Tower,
Circle - 4(1)(1),
Banaswadi Main Road,
Vs. Bangalore.
Maruthiseva Nagar,
Bengaluru - 560 005.
PAN: AAACL3092Q
APPELLANT RESPONDENT
Assessee by : Shri Chavali Narayan, CA
Shri Sankar Ganesh K, Addl.
Revenue by :
CIT (DR)
Date of Hearing : 25-04-2023
Date of Pronouncement : 13-06-2023
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeals are filed by the assessee against the final assessment order dated 29.07.2022 passed by the Ld.DCIT, Circle - 4(1)(1), Bangalore for A.Y. 2017-18 and order dated 27.07.2022 for A.Y. 2018-19.
2. It is submitted by the Ld.AR that, the common issues contested by the assessee for both the assessment years under Page 2 IT(TP)A Nos. 926 & 927/Bang/2022) consideration arises out of identical facts and that the details of the international transactions that the assessee had with its AE for the years under consideration are also the same. Accordingly the view taken for A.Y. 2017-18 would apply mutatis mutandis to A.Y. 2018-19.
AY 2017-18:
"Based on the facts and circumstances of the case and in law, Levi Strauss (India) Private Limited (hereinafter referred to as the Appellant'), respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income Tax Circle 4(1)(1), Bangalore (hereinafter referred to as the "learned AO"), dated 29 July 2022 for the Assessment Year ("AY") 2017-18, under section 143(3) read with section 1440(13) of the Income-tax Act, 1961 ("the Act") pursuant to the directions issued by the Dispute Resolution Panel, Bangalore (hereinafter referred to as the 'Honorable DRP') dated 17 June 2022 under section 1440(5) of the Act, inter-alia on the following grounds which are without prejudice to each other:
That on the facts and circumstances of the case and in law:
1. The order of the learned AO pursuant to the directions of the Honorable DRP, erred in making an addition of transfer pricing adjustment of INR 1,33,98,897 to the returned income of INR 20.36,31.280 reported by the Appellant and also erred in non- adjustment of brought forward losses of INR 64.12.28,095, non-grant of MAT credit available for set-off which are discussed below:
Grounds relating to transfer pricing matter
2. The learned AO/Transfer Pricing Officer (-TPO") erred in making an addition of INR 1,33,98.897 to the total income of the Appellant on account of transfer pricing adjustment in the arm's length price of the international transactions entered by the Appellant with its associated enterprise:
3. The learned TPO and the learned AO have erred, in law and in facts, by not accepting the TP documentation and economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("Rules"), conducting a fresh economic analysis for the determination of the ALP in connection with the international transaction involving provision of sourcing support services. and holding that the Appellant's international transaction is not at arm's length;
Page 3 IT(TP)A Nos. 926 & 927/Bang/2022)
4. The learned TPO and the learned AO have erred, in law and in facts, by rejecting the following comparable companies based on unreasonable criteria for determining the arm's length margin in relation to provision of sourcing support services without appreciating the fact that the comparable companies identified by the appellant is functionally comparable and has satisfied all the filters adopted by the TPO:
Companies forming part of Appellant's TP documentation
a) Adhaan Solutions Private Limited; and
b) Overseas Manpower Corporation Limited
5. The learned TPO and the learned AO have erred, in law and in facts. by selecting the following companies based on unreasonable criteria for determining the arm's length margin in relation to provision of sourcing support services without appreciating the fact that the comparable companies identified by the TPO are not functionally comparable;
a) Goldmine Advertising Limited;
b) Ugam Solutions Private Limited;
c) Axience Consulting Private Limited;
d) Majestic Research Services & Solutions Private Limited;
e) Platinum Advertising Private Limited;
f) Pressman Advertising Limited;
g) Scarecrow Communications Limited;
h) Cheil India Private Limited;
i) Red Baron Integrated Services Private Limited: and
j) Lintas India Private Limited;
6. The learned TPO and the learned AO have erred. in law and in facts, in computing the operating margins of the following comparable companies basis the annual reports for determining the arm's length margin in relation to provision of sourcing support services;
a) ICRA Management Consulting Services Limited;
b) Kestone Integrated Marketing Services Private Limited:
and
c) India Tourism Development Corporation Limited General Grounds relating to rectification
7. The learned AO has erred in not adjusting the brought forward losses of INR 64,12,28,095 (comprising of business loss INR 56.63,08.692 and unabsorbed depreciation of INR 7.49.19.403) pertaining to earlier years as per the provisions of section 72 of the Act while computing tax liability on assessed income:
8. The learned AO has erred in not adjusting the MAT credit available for AY 2017-18 out of the available brought forward MAT Credit of INR 24.69.83.717 Page 4 IT(TP)A Nos. 926 & 927/Bang/2022) pertaining to earlier years as per the provisions of section 115JAA of the Act while computing tax liability on assessed income:
9. The learned AO have erred. in levying the interest under section 234B and section 234D of the Act while computing tax liability on assessed income;
10. The learned AO has erred in law and in facts in initiating penalty under section 274 read with section 270A of the Act.
The Appellant submits that each of the above grounds is independent and without prejudice to one another. 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 Honorable Tribunal to decide on the appeal in accordance with the law."
AY 2018-19:
"Based on the facts and circumstances of the case and in law, Levi Strauss (India) Private Limited (hereinafter referred to as the Appellant'), respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income Tax Circle 4(1)(1), Bangalore (hereinafter referred to as the "learned AO"), dated 27 July 2022 (received on 28 July 2022) for the Assessment Year ("AY") 2018-19, under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ("the Act") pursuant to the directions issued by the Dispute Resolution Panel, Bangalore (hereinafter referred to as the 'Honorable DRP') dated 17 June 2022 under section 144C(5) of the Act, inter-alia on the following grounds which are without prejudice to each other:
That on the facts and circumstances of the case and in law:
1. The order of the learned AO pursuant to the directions of the Honorable DRP, erred in making an addition of transfer pricing adjustment of INR 1,46,50,812 to the returned income of INR 92,61,54,200 reported by the Appellant which are discussed below:
Grounds relating to transfer pricing matter
2. The learned AO/Transfer Pricing Officer ("TPO") erred in making an addition of INR 1.46,50,812 to the total income of the Appellant on account of transfer pricing adjustment in the arm's length price of the international transactions entered by the Appellant with its associated enterprise;
3. The learned TPO and the learned AO have erred, in law and in facts, by not accepting the TP documentation and economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Page 5 IT(TP)A Nos. 926 & 927/Bang/2022) Income Tax Rules, 1962 ("Rules"), conducting a fresh economic analysis for the determination of the ALP in connection with the international transaction involving provision of sourcing support services, and holding that the Appellant's international transaction is not at arm's length;
4. The learned TPO and the learned AO have erred, in law and in facts, by rejecting the following comparable companies based on unreasonable criteria for determining the arm's length margin in relation to provision of sourcing support services without appreciating the fact that the comparable companies identified by the appellant is functionally comparable and has satisfied all the filters adopted by the TPO;
Companies forming part of Appellant's TP documentation
(a) Adhaan Solutions Private Limited;
(b) ICRA Management Consulting Services Limited;
(c) Aristotle Consultancy Private Limited;
(d) Russel Reynolds Associates India Private Limited;
(e) India Tourism Development Corporation Limited;
(f) PR Pundit Public Relations Private Limited;
(g) UBM India Private Limited; and
(h) Overseas Manpower Corporation Limited;
5. The learned TPO and the learned AO have erred, in law and in facts, by selecting the following companies based on unreasonable criteria for determining the arm's length margin in relation to provision of sourcing support services without appreciating the fact that the comparable companies identified by the TPO are not functionally comparable;
(a) Goldmine Advertising Limited;
(b) Scarecrow Communications Limited;
(c) Ugam Solutions Private Limited;
(d) Confluence Integrated Services Private Limited;
(e) Axience Consulting Private Limited;
(f) Dun & Bradstreet Information Services India Private Limited;
(g) Pressman Advertising Limited;
(h) Focus Suites Solutions & Services Limited;
(i) EgonZehnder International Private Limited;
(j) Lintas India Private Limited;
(k) Adfactors P R Private Limited;
(l) Majestic Research Services & Solutions Private Limited;
(m) Cheil India Private Limited; General Grounds
6. The learned AO has erred in law and in facts in initiating penalty under section 274 read with section 270A of the Act.
Page 6 IT(TP)A Nos. 926 & 927/Bang/2022) The Appellant submits that each of the above grounds is independent and without prejudice to one another. 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 Honorable Tribunal to decide on the appeal in accordance with the law."
3. Brief facts of the case are as under:
3.1 Levi Strauss India Private Limited (hereinafter referred to as "the Assessee" or "LSIL" or "the Company" or the "Appellant") is a company incorporated under the Companies Act, 1956. It is a wholly owned subsidiary of Levi Strauss Mauritius Limited and is part of Levi Strauss & Co. ("LS&Co.") Group. It is engaged in the business of marketing and distributing of apparels (denims, tops, bottoms etc) and certain non- apparel products (caps, bags, belts, socks, gloves etc).
3.2 Assessee filed its return of income for years under consideration on 30.11.2017 and 30.11.2018 respectively declaring total income to be Nil after set off of brought forward losses of Rs.65,02,14,370/- for A.Y. 2017-18 and declaring total income of Rs.57,13,70,760/- for A.Y. 2018-19. 3.3 The case was selected for scrutiny and since there were international transactions covered u/s. 92B of the Act, a reference was made to the transfer pricing officer for computing the arms length price of the international transactions. The Ld.TPO on receipt of the reference, called upon the assessee to file economic details of the international transactions that assessee had with its associated enterprise. For A.Y. 2017-18, following were the international transactions between the assessee and its AE.
Page 7 IT(TP)A Nos. 926 & 927/Bang/2022) Assessment Year 2017-18:
Received/ Paid/
Particulars
Receivable Payable
Purchases of Finished
40809180
Goods
Sales return of
408787
Finished goods
Payment of Royalty 619839976
Provision of sourcing
158724548
support services
payment made
towards Corporate 244001228
Cost Sharing
Recovery of expenses 19672253
Trade Payables 348202327
Trade Receivables 40623395
Assessment Year 2018-19:
Receivables/ Payable Method
Received /Paid adopted
Particulars
(amount in (amount in by
INR) INR) assesseee
Import of finished goods 60140047 RPM
Internal
Payment of royalty 649502906
CUP
Payment towards
268915397 TNMM
corporate cost sharing
Provision of sourcing
154974332 TNMM
support services
Other
Recovery of expenses 24805703
method
Reimbursement of Other
962119
expenses method
3.4 The Ld.TPO noted that the assessee had used TNMM as the most appropriate method and PLI to be OP/OC. The assessee had computed 8% to be its margin. The only disputed segment Page 8 IT(TP)A Nos. 926 & 927/Bang/2022) by the Ld.TPO was of sourcing support service. For benchmarking the segment, the assessee used a set of 7 comparables for A.Y. 2017-18 and a set of 11 comparables for A.Y. 2018-19, with the median of 9.51%, thereby treating the transaction to be at arms length.
3.5 The Ld.TPO dissatisfied with the comparables selected by the assessee, carried out fresh search and short listed set of 11 comparables for A.Y. 2017-18 and 13 comparables for A.Y. 2018- 19 with the median of 17.86% for A.Y. 2017-18 and 19.94% for A.Y. 2018-19.
3.6 Working capital adjustment was denied to the assessee for both the assessment years by the Ld.TPO. The Ld.TPO thus computed the proposed adjustment in the hands of the assessee for sourcing support service segment as under:
Assessment Year Proposed adjustment 2017-18 Rs.1,45,01,216/-
2018-19 Rs.1,71,33,271/-
3.7 On receipt of the order u/s. 92CA, the Ld.AO made proposed addition in the hands of the assessee in respect of royalty and corporate cost sharing expenses amounting to Rs.1,45,01,216/-
for A.Y. 2017-18 and for A.Y. 2018-19, the Ld.AO observed that the above expenses have been covered while considering the arms length price of the international transactions. For the Assessment Year 2017-18, we also note that Ld.AO proposed another addition towards project development expenses disallowed u/s. 40(a)(ia) amounting to Rs. 96 Lakhs. 3.8 On receipt of the draft assessment order, the assessee filed objections before the DRP for both years under consideration.
Page 9 IT(TP)A Nos. 926 & 927/Bang/2022) The DRP after considering various objections of the assessee, directed as under:
A.Y. 2017-18 "The DRP directed for inclusion of 2 comparables (MCI Management and Concept Public Relations) out of the 4 comparables forming part of TP study and confirmed the order of the TPO with regards to inclusion of 11 comparables proposed by TPO and rejected the arguments of the assessee. In the Order Giving Effect to the DRP directions, 1 of the comparable company (Focus Suites) forming part of TPO set was excluded thereby including the other 10 comparables proposed by TPO." A.Y. 2018-19 "The DRP directed for inclusion of 1 comparable (MCI Management) out of the 9 comparables forming part of TP study and confirmed the order of the TPO with regards to inclusion of 13 comparables proposed by TPO and rejected the arguments of the assessee. In the Order Giving Effect to the DRP directions, 3 comparable companies (Focus Suites, Egon Zehnder and Adfactors P R) forming part of TPO set were excluded thereby including the other 10 comparables proposed by TPO."
3.9 On receipt of the DRP directions, the Ld.AO passed the impugned assessment orders for the years under consideration by making addition in the hands of assessee amounting to Rs.1,33,98,897/- for A.Y. 2017-18 and Rs.1,46,50,812/- for A.Y. 2018-19.
3.10 Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal.
4. For the sake of convenience, we shall first adjudicate the issues raised by the assessee in A.Y. 2017-18.
5. Before we undertake the comparability analysis, it is sinequa non to understand the functions performed, assets owned and risks assumed by assessee.
Page 10 IT(TP)A Nos. 926 & 927/Bang/2022) We note that the Ld.TPO recorded the functions performed by assessee as under:
Profile of the taxpayer:
LSIL was set up in Bangalore, as an indirect subsidiary of LS&Co on 31 March 1994• LSIL is mainly engaged in the marketing and distribution of apparel and garments under the various brands of LS&Co. LSIL has introduced a wide range of brands covering a range of products from quintessential classics to innovative fashion looks like Levi's® Red Tab, Levi's® Red Loop, Levi's® Engineered Jeans ®, Levi's® Cargos, Levi Signature® by LS&CoTM, Levi's® CommuterTM, etc. LSIL's business model LSIL is engaged in the business of sourcing, marketing and distributing products in India/ neighboring countries under the various licensed brands of LS&Co. Pursuant to such arrangement, LSIL operates in the following business segments:
Apparel segment This segment comprises garments in the denims and non-denim fabric segments across a range of tops (i.e., shirts) and bottoms (i.e., trousers), which are being sold under LS&Co's brands names being, Levi's® Red tab jeans, 501® jeans, Levi's® Engineered Jeans ®, Levi Signature® by LS&COTM, etc. Non Apparel segment This segment comprises accessories like caps, bags, belts, key chains, socks, gloves, etc., bearing LS&Co's brand names and trademarks. These accessories are presently being marketed and sold through sub-licensing arrangements with distributors, who are authorized to procure such accessories from approved manufacturers. In return, LSIL receives a license fee/ commission from such distributors, for granting them various rights/ licenses including the right to use/ apply Levi's brand names/ trademarks (subject to certain conditions).
Functions performed by LS India:
Requirement generation Manufacture/Procurement of finished goods Quality control Shipment of finished garments Stocking the finished garments Marketing and distribution of finished goods Functions performed by Sourcing Support Services by LS India: Identifying suppliers Page 11 IT(TP)A Nos. 926 & 927/Bang/2022) Entering into contracts with suppliers Monitoring pre-production and production activities Assistance in inspection of the sourced goods Assets In the TP study, the assets owned by the assessee are only the office equipment, leasehold improvements and data processing equipment. All the intangibles in terms of trade market are owned by the AE.
Risks It is submitted that assessee undertakes Nil risk in terms of the functions performed except for the market risk which is limited. In the TP study, we note that assessee only provides services to its AE and does not have to approach third parties to market its services and negotiate price unlike an Indian independent service provider. All other risks including foreign exchange risk, financial risk, credit and collection risk and product liability risk are owned by the AE alone. In terms of foreign exchange risk, any fluctuation in the foreign currency is said to be considered while considering the mark-up and thus the assessee is very much insulated from foreign exchange risk arising out of the transaction.
Characterisation In the TP study based on the above FAR analysis, assessee has been concluded to be a licensed distributor for its AE that bears normal risk which a distributor is expected to bear.
6. Ground nos. 1-3 are general in nature and do not require any adjudication.
Page 12 IT(TP)A Nos. 926 & 927/Bang/2022)
7. The Ld.AR submitted that Ground nos. 4-6 raised by assessee are in respect of the addition made in relation to transfer pricing adjustment.
8. It is submitted that assessee seeks inclusion of two comparables being Adhaan Solutions Pvt. Ltd. and Overseas Manpower Corporation Ltd. based on functional similarities. It is submitted that these comparables have been raised by assessee in ground no. 4 and exclusion of 10 comparables in ground no. 5.
9. Ground no. 4 - assessee is seeing inclusion of the following comparables.
a) Adhaan Solutions Pvt. Ltd.
The Ld.AR submitted that this comparable is functionally comparable with the assessee, as it is engaged in the business of providing long term staffing services as per the annual report placed at page 810 of the paper book. It is submitted that this company earns revenue from recruitment and payrolling services.
b) Overseas Manpower Corporation Ltd. In respect of this comparable, the Ld.AR reiterated that this comparable is into provision of manpower services. The Ld.AR requested that the above comparables may be considered for inclusion as they are into routine service provider that can be compared with the assessee.
On the contrary, the Ld.DR submitted that merely because these comparables are into business support services, it cannot be compared with assessee as assessee is admittedly engaged in marketing and distribution of apparels and garments under various brands covering a wide range of products from quintessential classics and innovative fashion looks. He Page 13 IT(TP)A Nos. 926 & 927/Bang/2022) submitted that the functions of the comparables sought for inclusion is nowhere similar or identical with that of assessee. We have perused the details filed in the paper book being annual reports of these comparables.
We also note that Adhaan Solutions Pvt. Ltd. has not been pressed by assessee in para 20 of the order for A.Y. 2016-17 in IT(TP)A No. 223/Bang/2021 dated 13.09.2022. We also agree with the submissions of the Ld.DR that these comparables cannot be functionally compared with that of the assessee. We direct the Ld.AO to exclude Adhaan Solutions Pvt. Ltd. and Overseas Manpower Corporation Ltd. from the final list. Accordingly, ground no. 4 raised by assessee stands dismissed.
10. Ground no. 5 is raised by the assessee seeking exclusion of following comparables.
a) Goldmine Advertising Limited;
b) Ugam Solutions Private Limited;
c) Axience Consulting Private Limited;
d) Majestic Research Services & Solutions Private Limited;
e) Platinum Advertising Private Limited;
f) Pressman Advertising Limited;
g) Scarecrow Communications Limited;
h) Cheil India Private Limited;
i) Red Baron Integrated Services Private Limited; and
j) Lintas India Private Limited;
10.1 The Ld.AR submitted that Ugam Solutions Pvt. Ltd., Axience Consulting Pvt. Ltd. and Platinum Advertising Pvt. Ltd. has already been excluded in assessee's own case for A.Y. 2016-17 in IT(TP)A No. 223/Bang/2021 by order dated 13.09.2022 by observing as under:
Page 14 IT(TP)A Nos. 926 & 927/Bang/2022) "Ugam Solutions Private Limited (assessee seeking exclusion) [Ground 5(b)]
23. The assessee is seeking exclusion of the above company for the reason that the said company is functionally different from the assessee. The assessee submits that Ugam
24. Solutions Private Limited is engaged in provision of managed analytics services. It prov ides services to Global Market Research firms and the services include research operations, technology infrastructure transition, data warehousing, aggregation and visualization, sample management optimization, global program management, custom panel solutions, reporting solutions and mobile solutions. Whereas assessee is engaged in assistance of sourcing of materials, the chemicals used in dying colours etc. which is completely different from the services provided by Ugam. Ugam is engaged more on the technology front by doing the analysis of data gathered by it and then selling the result of their analysis. Ugam requires personnel of different technical competence more so on the information technology side and deals with gathering data of wide range of different industries which is completely different from the services rendered by the assessee. Hence the same should be rejected as functionally different criteria.
25. 26. The DRP held that the said company is functional comparable as the assessee assisted in identifying suppliers and monitoring the progress of pre-production and production activities of the identified suppliers. It gives assistance in inspection of the sourced goods. Ugam passes through all the filters applied by the TPO and has been correctly included in the set of comparables.
26. We have heard rival submissions and perused the material on record. This company is engaged into business of managed analytical services, which is clear from annual report placed at page 941 of paper book. Our view is also supported by the decision of the Bangalore Tribunal in the case of M/s.Epson India Pvt. Ltd. v. DCIT, in IT(TP)A No.206/Bang/2021 for A.Y. 2016-2017, wherein it was observed as followed with respect of Ugam Solutions:-
"20.1.3 We have perused submissions advanced by both sides on the basis of records placed before us. Admittedly this company is into managed analytical Page 15 IT(TP)A Nos. 926 & 927/Bang/2022) services and provides solutions to global market research firms, retailer, leading brands as has been observed by DRP in para 8.2.1. On comparing the functions rendered by the assessee to the associated enterprise, this company cannot be a fit comparable, due to functional dissimilarities and risk assumed by this company."
28. Therefore, we direct the TPO to exclude this company from the comp arable list as it is functionally different from the assessee.
29. In the result, ground 5(b) is allowed. Axience Consulting Private Limited (assessee seeking exclusion) [Ground 5(d)]
33. The assessee is seeking exclusion of the above company from the list of comparables as the said company functionally different as the same is engaged the business of providing consultancy and advisory services in the field of finance, market research and business administration. Whereas the assessee is not in the business of market research. Market research could pertain to various fields including research for manufactured products, various types of services, customer satisfaction research etc. Further Axience cannot be compared with the assessee who is merely providing sourcing support services. It is merely using its knowledge acquired while doing its marketing and distribution services and cannot be said to be related to market research.
34. The DRP held that the said company is functional comparable to the assessee as the business of Axience is comparable to the support services rendered by the assessee. Axience passes through all the filters applied by the TPO and has been correctly included in the set of comparables.
35. We have heard rival submissions and perused the material on record. As per page 1143 of paper book, Axience is engaged in the business of providing consultancy and advisory services in the field of finance, market research and business administration to corporate and non-corporate. The segmental break up of revenue between above different kinds of services is not available in annual report. Therefore, in the absence of segmental data, we direct the TPO to exclude Axience from the final list of comparables. It is ordered accordingly.
37. In the result, ground 5(d) is allowed.
Page 16 IT(TP)A Nos. 926 & 927/Bang/2022) Platinum Advertising Private Limited (assessee seeking exclusion) [Ground 5(f)]
40. The assessee seeking to exclude the above company from the list of comparable companies for the reason that the dissimilarity in functioning of this company with that of the assessee. According to the assessee Platinum Advertising is engaged in providing an entire range of communication services, which include advertising, media planning and buying, media research, sales promotion, corporate communication and public relations. Engagement with media, media research cannot be by any stretch of comparison be compared with sourcing support services. Also, activities related to sales promotion are where assessee has to reach out to vendors, whereas in sourcing, the vendors reach out to the assessee.
43. The DRP held that this company is functionally comparable to that of the assessee. The DRP was of view that the assessee which is engaged in identifying suppliers and monitoring the progress of pre-production and production activities of the identified suppliers is akin to advertisement and sales promotion. Therefore, it was concluded that the business of Platinum is comparable to the support services rendered by the assessee. Further, it was held that Platinum passes through all the filters applied by the TPO and has been correctly included in the set of comparables.
44. We have heard rival submissions and perused the material on record. On review of company background from the annual report at page 1327 of the paper book, we find that the contention of the learned AR is correct. This company is engaged in an entire range of communication services, which include advertising, media planning and buying, media research, sales promotion, corporate communication and public relations. Media activity cannot be compared with sourcing or marketing activities. Therefore, we hold tha t this company is functionally different and should be excluded from the final list of comparables. It is ordered accordingly.
45. In the result, ground 5(f) is allowed."
Page 17 IT(TP)A Nos. 926 & 927/Bang/2022) Respectfully following the above view, we direct the Ld.AO/TPO to exclude Ugam Solutions Pvt. Ltd., Axience Consulting Pvt. Ltd. and Platinum Advertising Pvt. Ltd. from the final list. 10.2 Pressman Advertising Ltd. & Cheil India Pvt. Ltd. The Coordinate Bench of this Tribunal in case of M/s. TiVo Tech Pvt. Ltd. vs. ACIT in IT(TP)A No. 862/Bang/2022 by order dated 30.0.2023 for A.Y. 2018-19 has held as under:
"(iii) Pressman Advertising Ltd.
It is submitted that the primary business activity of Pressman is providing advertising services, selling of space for advertisement in print media. It has earned revenue solely from advertising services (such as corporate advertising, brand advertising, financial advertising, social advertising, government advertising, media buying). This being the case, the company cannot be comparable to marketing support functions provided by the Assessee. Reliance in this regard is placed on the decisions of coordinate bench of this Tribunal in case of Radisys India Ltd. v. DCIT reported in (2022) 145 taxmann.com 294 for the AY 2017-18. The assessee therein was engaged in providing similar service as the assessee before us. This Tribunal directed exclusion of this company from the final list of comparables. It is submitted that since the profile for the assessment year 2018-19 is same, the company ought to be excluded from the final list of comparables. The Ld.DR relied on the orders passed by the authorities below.
We have perused the submissions advanced by both sides in light of records placed before us.
At page 4818 of the annual report placed in the paper book, we note that this company is providing services in the field of advertising, PR and allied services. Further in the notes to the financial statements at page 4843, this company is said to be engaged in selling of space for advertisement in print media and public relations business. At page 4844, income from services has been said to be recognised from advertising, public relations and allied services however in the profit and loss account at page 4840, the entire income has been categorised to be under revenue from operations with the segmental details available as advertising services and other operating income under schedule 18. In note 28 at page 4855, it has been stated that the company's business activity falls Page 18 IT(TP)A Nos. 926 & 927/Bang/2022) within a single business segment i.e. advertising, selling of space for advertisement in print media and public relations and hence no additional disclosure other than those made in the financial statements are required under indas 108 "operating segments". Thus it is clear that under the advertising services, this company also earns revenue from selling of space for advertisement in print media and public relations for which no bifurcation has been provided. In any event, advertisement services provided by this company also cannot be compared to the services rendered by assessee to its AE under the marketing support services which is limited to presale support activities.
Accordingly, we direct this comparable to be excluded from the final list."
(vi) Cheil India Pvt. Ltd.
It is submitted that Cheil is engaged in providing digital solutions, analytical solutions (data analytics) which are not akin to the services rendered by the Assessee. It derives its income primarily from advertising, communication, publicity and merchandising and undertakes consultancy services and training. It is submitted that an advertising agency undertakes functions such as attracting clients who are advertisers, developing an advertising strategy, creation of advertisements by a creative team consisting of writers, designers and copy writers. They also undertake research activities to understand a client's market situation, competition, customers in the process of planning an advertisement campaign etc. Therefore, the aforementioned activities are not similar to the functions performed by the Assessee in the nature of product marketing, targeted campaign creation and management, public relations, customer and associate lead generation and distribution, etc. Further, it also uses a separate charging mechanism for services rendered by it to its customers, and revenue is recognised based on such charging mechanism (outsourcing in nature). The company has also entered into an agreement with its customers under which it procures advertising services on behalf of the customers and bills the customers on cost-to-cost basis without charging any mark-up. The company earns revenue from commission income, fee from production job, transaction processing job, etc. which is different from the services rendered by the assessee.
The Ld.DR relied on the orders passed by the authorities below.
Page 19 IT(TP)A Nos. 926 & 927/Bang/2022) We have perused the submissions advanced by both sides in light of records placed before us.
From the annual report placed at page 5447 of the paper book, this company is described to be a full-fledged advertising service company. It is only the entire revenue earned by this company is from advertising services as observed at page 5485. The general information provided at page 5582 of the paper book reveals that this company is engaged in the business of advertising, communication, publicity and merchandising including undertaking market research, planning and providing consultancy services and training in the same field. There is no segmental details available and the entire revenue is disclosed as revenue from sale of services. In light of the above, we do not find this company to be functionally similar with that of assessee.
Accordingly, we direct this comparable to be excluded.
10.3 Goldmine Advertising Ltd.
Assessee is seeking exclusion of this comparable as it is engaged in the business of providing complete range of advertising services of all mass media platform. The Ld.AR submitted that it has only a single segment reporting being advertising and publicity and the revenue generation is shown to be from sale of services. It is the submission of the Ld.AR that functionally this comparable cannot be compared with assessee which is into distribution / marketing of various garments and apparels of various brands in India. The Ld.DR on the contrary, relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
We note that the annual report of this comparable placed at page 2987 reveals that this company is into advertising activities on different mass media platforms whereas the assessee before us is a licensed distributor of various apparels and garments under Page 20 IT(TP)A Nos. 926 & 927/Bang/2022) various brands covering a wide range of products. Accordingly, we do not find this comparable to be functionally similar with that of assessee.
We direct the Ld.AO/TPO to exclude this comparable from the final list.
10.4 Red Baron Integrated Services Pvt. Ltd. The Ld.AR submitted that this comparable is functionally not similar with that of assessee and is engaged in special design activities. It is submitted that this comparable derives its income from branding and consultancy services. It is the submission of the Ld.AR that this comparable cannot be compared with the functions performed by assessee is not similar to that of this comparable. Referring to page 1406 of paper book, the Ld.AR submitted that in the annual reports, the background of the company is stated to be providing advertising and creative branding, designing, consultancy services rendered to its client in India and abroad.
On the contrary, the Ld.DR relied on the orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
We note that this company is into providing branding and consultancy services and is into advertising whereas the assessee is into marketing and distribution of apparels and garments under various brands. In our view primarily, the functions performed by the comparable cannot be similar to that of assessee. Accordingly, at the outset, the same cannot be held to be good comparable.
Page 21 IT(TP)A Nos. 926 & 927/Bang/2022) The Ld.AO is directed to exclude the same from the final list. 10.5 Lintas India Pvt. Ltd.
This comparable has been sought for exclusion by assessee as it is engaged in advertising and marketing communications. It is submitted that it is functionally not similar with that of assessee as it is a full-fledged advertising agency which is involved in outdoor advertisement, newspaper advertisement, magazine advertisement and hoarding advertisement services. On the contrary, the Ld.DR relied on the orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
We note that Lintas India is an advertisement agency catering to various kinds of clients and rendering services in all verticals. We therefore do not find it functionally similar with that of assessee who is into marketing of apparels and other items under various brands.
Accordingly, we direct the Ld.AO/TPO to exclude this comparable from the final list.
10.6 Majestic Research Services & Solutions Pvt. Ltd. Assessee seeks exclusion of this comparable as it is functionally not similar with that of assessee. It is submitted that this comparable is engaged in provision of quantitative and qualitative market research it has a wide range of offerings to deliver powerful insights into effective branding, advertisement based on consumer choices. The Ld.AR submitted that this comparable has been rejected by the Ld.TPO himself in assessee's own case for A.Y. 2016-17 for functional dissimilarity.
Page 22 IT(TP)A Nos. 926 & 927/Bang/2022) On the contrary, the Ld.DR relied on the orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
We note that this comparable has been admittedly excluded for A.Y. 2016-17. The DRP has upheld its inclusion only for the reason that this company operates in one seeking being marketing and that has been held functionally similar with assessee.
We have perused the submissions advanced by both sides in the light of records placed before us.
From the corporate information in the annual report of this comparable placed at page 1319, we note that this company is engaged in providing market research services. The revenue recognition has been only from market research and related services whereas assessee is into marketing of apparels under various brands. In our view, the services rendered by assessee cannot be compared to the services rendered by the comparable under challenge.
We therefore direct the Ld.AO/TPO to exclude this comparable from the final list.
10.7 Scarecrow Communications Ltd.
This comparable has been sought for exclusion by assessee as it is involved in advertisement services through press, television, radio and public relations services. The Ld.AR has thus submitted that this is functionally not similar with that of assessee.
Page 23 IT(TP)A Nos. 926 & 927/Bang/2022) On the contrary, the Ld.DR relied on the orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
We note that in the company overview forming part of the annual reports of this comparable placed at page 1430 of paper book, it is said to be catering clients in the field of advertising. It has been recorded that this company is involved in creating advertisement that has a lasting shelf life. It is further noted that the team works towards creating communication that permeate popular culture. Further, we note that the income generated by this comparable has been categorised only under the category of sale of services and at page 1435, the sale of services has been identified to be retainership fees, shoot / production receipt, service receipt and other fees. In our view, this comparable cannot be compared with that of assessee which is only involved in marketing of apparels and other products under different brands.
We accordingly, direct this comparable to be excluded from the final list.
Accordingly, ground no. 5 raised by assessee stands allowed.
11. Ground no. 6 is raised by assessee for correction of margins in respect of the following 3 comparables.
a) ICRA Management Consulting Services Ltd.
b) Kestone Integrated Marketing Services Pvt. Ltd. and
c) India Tourism Development Corporation Ltd.
Page 24 IT(TP)A Nos. 926 & 927/Bang/2022) We direct the Ld.AO/TPO to compute the correct margins of these comparables for the purposes of arms length margin in accordance with law.
12. Ground nos. 7-9 are raised by assessee seeking directions in respect of following issues:
1) The Ld.AO has erred in not adjusting the brought forward loss of Rs.64,12,28,095/- pertaining to earlier years as per the provisions of section 72 of the act.
2) Not adjusting MAT credit available for A.Y. 2017-18 out of the available brought forward MAT credit pertaining to earlier years as per provisions of section 115JAA of the act.
3) Levying interest u/s. 234B and 234D while computing the tax liability on assessed income.
We direct the Ld.AO/TPO to grant necessary adjustment to assessee in respect of the above three issues in accordance with law. Assessee is also directed to file all relevant documents in support of its claim.
Accordingly ground nos. 7-9 raised by assessee stands allowed for statistical purposes.
Ground no. 10 is consequential in nature and therefore do not require any adjudication.
Accordingly, grounds raised by assessee for A.Y. 2017-18 stands partly allowed as indicated hereinabove. Accordingly, the appeal filed by assessee for A.Y. 2017-18 stands partly allowed as indicated hereinabove.
Page 25 IT(TP)A Nos. 926 & 927/Bang/2022) AY 2018-19:
13. It is submitted that the functional profile of the assessee is similar with that of A.Y. 2017-18 as noted down hereinabove in the preceding paragraphs.
14. The Ld.AR submitted that Ground nos. 1 to 3 are general in nature and therefore do not require any adjudication.
15. Ground no. 4 - assessee is seeking inclusion of the following comparables.
a) Adhaan Solutions Pvt. Ltd.
b) ICRA Management Consulting Services Ltd.
c) Aristotle Consultancy Pvt. Ltd.
d) Russel Reynolds Associates India Pvt. Ltd.
e) India Tourism Development Corporation Ltd.
f) PR Pundit Public Relations Pvt. Ltd.
g) UBM India Pvt. Ltd. and
h) Overseas Manpower Corporation Ltd. 15.1 Adhaan Solutions Pvt. Ltd.
The Ld.AR submitted that this comparable is functionally comparable with the assessee as it is engaged in the business of providing long term staffing services as per the annual report placed at page 810 of the paper book. It is submitted that this company also earns revenue from recruitment and payrolling services.
The Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
We also note that Adhaan Solutions Pvt. Ltd. has not been pressed by assessee for A.Y. 2016-17 in IT(TP)A No. Page 26 IT(TP)A Nos. 926 & 927/Bang/2022) 223/Bang/2021 vide order dated 13.09.2022. We agree with the submissions of the Ld.DR that these comparables cannot be functionally compared with that of the assessee. Accordingly, we direct the Ld.AO/TPO to exclude this comparable from the final list.
15.2 ICRA Management Consulting Services Ltd. The Ld.TPO rejected this comparable stating it to be persistent loss making company. We note that this comparable was accepted by the Ld.TPO in assessment year 2017-18. The Ld.AO/TPO shall compute the margin of this comparable in accordance with law.
We therefore direct this comparable to be included. 15.3 It is submitted that c) Aristotle Consultancy Pvt. Ltd., d) Russel Reynolds Associates India Pvt. Ltd. and e) India Tourism Development Corporation Ltd. were not considered by the Ld.TPO as they did not appear in the search process carried out by the Ld.TPO. The Ld.AR relied on the decision of Coordinate Bench of this Tribunal in case of Prism Networks vs. ACIT reported in (2022) 141 taxmann.com 163. We are of the opinion that merely because the comparables does not appear in the search process by the Ld.TPO, it cannot be excluded if assessee is able to file the annual reports which are verifiable.
We rely on the following observation in case of Prism Networks vs. ACIT (supra) in support of this contention.
"18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not to consider the claim of the Assessee for Page 27 IT(TP)A Nos. 926 & 927/Bang/2022) inclusion of comparable companies. The TPO excluded these companies only on the ground that information related to these companies was not available in the public domain and this fact was shown to be an incorrect assumption by the Assessee in the submissions before the DRP. In such circumstances, it was incumbent on the part of the DRP to have adjudicated the question of inclusion of these companies as comparable companies. The fact that these companies do not figure in the search matrix of the TPO is not and cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we are of the view that the issue regarding inclusion of the aforesaid companies as comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground No. 7 is treated as allowed for statistical purposes."
Respectfully following the above, we accordingly, remand these comparables to the Ld.AO/TPO to reconsider them in the light of the annual reports that will be filed by assessee. In the event they are found to be functionally similar with that of assessee, the same may be included in the final list. 15.4 PR Pundit Public Relations Pvt. Ltd. The Ld.AR submitted that there was no data available for this company when the Ld.TPO carried out its search process. It is the submission of the Ld.AR that this company is engaged in public relations and consultancy and earns its revenue from consultancy income. The Ld.AR submitted that the service offerings of this company include corporate communications, brand communications, influencer marketing, social media marketing, social purpose, issues management and crisis communication and media training. It is the submission of the Ld.AR that this comparable is functionally similar with that of assessee. The Ld.DR relied on the orders passed by authorities below.
Page 28 IT(TP)A Nos. 926 & 927/Bang/2022) We have perused the submissions advanced by both sides in the light of records placed before us.
We note that this comparable earns its revenue from consultancy services which in our view is not comparable with that of marketing apparels carried out by assessee under various brands.
We therefore direct the Ld.AO/TPO to exclude this comparable from the final list.
15.5 UBM India Pvt. Ltd.
The Ld.AR submitted that this comparable has been rejected by the Ld.AO/TPO as it does not have any related party transaction. This observation has been recorded by the DRP at page 9 of the DRP order. In our view, not having any related party transaction is the test and therefore it satisfies the filter of less than 25% threshold.
Accordingly, we direct this comparable to be included in the final list.
15.6 Overseas Manpower Corporation Ltd. In respect of this comparable, the Ld.AR reiterated that this comparable is also into profession of manpower services. The Ld.AR thus requested that the above comparables may be considered for inclusion as they are into routine service provider that can be compared with the assessee. On the contrary, the Ld.DR submitted that merely because these comparables are into business support services, it cannot be compared with assessee as assessee is admittedly engaged in marketing and distribution of apparels and garments under various brands covering a wide range of products from Page 29 IT(TP)A Nos. 926 & 927/Bang/2022) quintessential classics and innovative fashion looks. He submitted that the functions of the comparables sought for inclusion is nowhere similar or identical with that of assessee. We have perused the details filed in the paper book being annual reports of these comparables.
We note that Adhaan Solutions Pvt. Ltd. has not been pressed by assessee for A.Y. 2016-17 in IT(TP)A No. 223/Bang/2021 vide order dated 13.09.2022. We agree with the submissions of the Ld.DR that these comparables cannot be functionally compared with that of the assessee.
We direct the Ld.AO to exclude Adhaan Solutions Pvt. Ltd. and Overseas Manpower Corporation Ltd. from the final list. Accordingly, ground no. 4 raised by assessee stands partly allowed.
16. Ground no. 5 raised by assessee is seeking exclusion of following comparables.
a) Goldmine Advertising Ltd.
b) Scarecrow Communications Ltd.
c) Ugam Solutions Pvt. Ltd.
d) Confluence Integrated Services Pvt. Ltd.
e) Axience Consulting Pvt. Ltd.
f) Dun & Bradstreet Information Services India Pvt. Ltd.
g) Pressman Advertising Ltd.
h) Focus Suites Solutions & Services Ltd.
i) EgonZehnder International Pvt. Ltd.
j) Lintas India Pvt. Ltd.
k) Adfactors P R Pvt. Ltd.
l) Majestic Research Services & Solutions Pvt. Ltd.
Page 30 IT(TP)A Nos. 926 & 927/Bang/2022)
m) Cheil India Pvt. Ltd.
16.1 The Ld.AR at the outset submitted that assessee do not wish to argue the following comparables.
a) Focus Suites Solutions & Services Ltd.
b) EgonZehnder International Pvt. Ltd.
c) Adfactors P R Pvt. Ltd.
Accordingly the above 3 comparables stands dismissed as not pressed.
16.2 In respect of the comparables, Goldmine Advertising Ltd., Scarecrow Communications Ltd., Ugam Solutions Pvt. Ltd., Axience Consulting Pvt. Ltd., Pressman Advertising Ltd., Lintas India Pvt. Ltd., Majestic Research Services & Solutions Pvt. Ltd. and Cheil India Pvt. Ltd, this Tribunal has already excluded them for A.Y. 2017-18 hereinabove.
Applying same, mutatis mutandis, these comparables stands excluded for A.Y. 2018-19 also.
16.3 Confluence Integrated Services Pvt. Ltd.:
The Ld.AR submitted that this comparable is functionally not similar with that of assessee as it is engaged in providing advertisement, printing of advertising materials, market research, public relation activities, direct mailing activities, production of commercial messages for radio, television and films. He thus submitted that this comparable may be excluded from the final list.
On the contrary, the Ld.DR relied on the orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
Page 31 IT(TP)A Nos. 926 & 927/Bang/2022) We note that this company has earned its income from advertisement and professional receipt as revealed at page 1167 being note to the financial statement. In our view, this comparable cannot be held functionally similar with that of assessee.
Accordingly, we direct the exclusion of this comparable from the final list.
16.4 Dun & Bradstreet Information Services India Pvt. Ltd.
The Ld.AR submitted that this company is primarily engaged in providing credit reporting services, risk management and sales and marketing solutions. The company also provides learning and economic insight services. Segmental information is not available in the financial statement for risk management, learning and insights and business information services provided by the company.
The Ld.AR thus submitted that this comparable cannot be included as it is functionally not similar with that of assessee. On the contrary, the Ld.DR relied on the orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
We note that in the annual report placed at page 1223 of paper book, the company background has been disclosed to be as under:
"Dun & Bradstreet Information Services India Private Limited (the 'Company' or 'D&B') is engaged in the business of providing risk management and sales and marketing solutions. The Company also provides learning and economic insight services. The Company offers a wide suite of information solutions and its services are used Page 32 IT(TP)A Nos. 926 & 927/Bang/2022) extensively by banks, financial institutions, multinationals, corporate entities, public sector undertakings, exporters and importers."
In the nutshell, this company is providing solutions to meet the needs of its customers / clients. It is not akin to the marketing function carried out by assessee as assessee is involved in marketing of apparels of various brands. We accordingly, direct exclusion of this comparable from the final list.
Accordingly, ground no. 5 raised by assessee stands partly allowed.
17. Ground no. 6 is consequential in nature and therefore do not require any adjudication.
Accordingly, the appeal filed by assessee for A.Y. 2018-19 stands partly allowed.
In the result, both the appeals filed by the assessee stands partly allowed.
Order pronounced in the open court on 13th June, 2023.
Sd/- Sd/-
(CHANDRA POOJARI) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 13th June, 2023.
/MS /
Page 33
IT(TP)A Nos. 926 & 927/Bang/2022)
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore