Philips India Limited (Earlier known as Philips Electronics India Limited), Kolkata V. ACIT, Circle - 12(2), , Kolkata

ITA 218/KOL/2019

AI Insights

Philips India Limited appealed against the order of the Assistant Commissioner of Income Tax, which included adjustments related to the Arms' Length Price (ALP) for advertisement, marketing, publicity expenditure (AMP), and software services segment. The Tribunal considered previous decisions and the principle of consistency, noting that similar issues had been decided in favor of the assessee in earlier assessment years. The Tribunal also examined the comparability of companies used for determining ALP in the software services segment and found that the remaining comparable, Tata Elexi, met the criteria for comparability but the adjustment made was within the acceptable tolerance limit.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 125278 (ITAT-KOLKATA)
• Duration Of Justice: 4 year(s) 1 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 10-01-2023
• Assessment Year: 2010-2011
• Appeal Filed On: 06-02-2019
• Other Referred Cases: Maruti Suzuki India Limited Vs. CIT, Sony Ericsson Mobile Communications India (P.) Ltd, The Development Bank of Singapore Vs. DDIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Rectification of order; International transaction; Rule of consistency; TDS
• Section: 143(3); 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH KOLKATA BEFORE SHRI RAJPAL YADAV, VICE PRESIDENT AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No.218/Kol/2019 Assessment Year: 2010-11 Philips India Limited (Earlier known as Philips Electronics India Limited) 3 rd floor, Tower-A, DLF Park, 08 Block AF, Major Arterial Road, New Town (Rajarhat), Kolkata-700156. (PAN: AABCP9487A) Vs. Assistant Commissioner of Income Tax, Circle-12(2), Kolkata. (Appellant) (Respondent) Present for: Appellant by : Shri P. J. Pardiwalla & Shri Ketan Ved, AR Respondent by : Shri G. Hukugha Sema, CIT Date of Hearing : 11.01.2023 Date of Pronouncement : 27.03.2023 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the order of ACIT, Circle-12(2), Kolkata u/s. 143(3) r.w.s. 254, 144C(5) & 92CA(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) Act dated 04.01.2021 against the direction of Dispute Resolution Panel-2, New Delhi vide Order No. F. No. DRP-2/Del/2018-19/416 dated 28.09.2018 passed u/s. 144C of the Act. 2. This is third round of litigation by the assessee and the relevant facts in this respect are as under: 2 ITA No.218/Kol/2019 Philips India Ltd. AY 2010-11 “The AO passed a draft assessment order for the impugned assessment year on 31.03.2014. The assessee preferred appeal before the DRP, Kolkata. The Ld. DRP vide its order dated 31.12.2014 had issued directions u/s. 144C of the Act. The AO passed a final assessment order u/s. 143(3) r.w.s. 144C on 26.02.2015. Aggrieved the assessee again preferred further appeal before the ITAT. The Tribunal, on the ground that the DRP has not passed a speaking order, restored the matter to the ld. DRP for fresh adjudication, vide its order dated 10.08.2015. Consequently, the DRP issued directions on 31.08.2016 u/s. 144C(5) of the Act. The assessing Officer passed an order on 25.10.2016 giving effect to the directions of the DRP dated 31.08.2016. Being aggrieved, the assessee again filed appeal before the Hon’ble ITAT, Kolkata. As per order in ITA No. 505/Kol/2015 dated 27.06.2017, ITAT, Kolkata were restored the file to DRP for fresh adjudication as per law the issues of adjustment in respect of ALP for software services segment, AMP and lease rental disallowances.” 3. The present appeal arises from the consolidated order by the ITAT, Kolkata vide order dated 27.06.2017 in ITA No. 505/Kol/2015 (department appeal) arising from DRP, Kolkata order dated 31.12.2014 and in ITA No. 2408/Kol/2016 (assessee appeal) arising from DRP, Delhi order dated 31.08.2016. 3. Grounds raised by the assessee in the present appeal relate to the following issues : i) Determination of Arms’ Length Price (ALP) for advertisement, marketing, publicity expenditure (AMP) of Rs.19,59,57,024/-. ii) Rule of consistency in respect of adjustment made for AMP expenses since the coordinate bench in assessee’s own case for AYs 2011-12, 2012-13 and 2013-14 had already held that AMP does not constitute an international transaction and thus, not applying the Rule of Consistency on the said finding. iii) Determination of arms’ length margin with software segment and making an upward adjustment of Rs.6,82,12,102/-. iv) Not granting the range benefit of 5% variation as per proviso to Sec. 92(C)(2) of the Act from the arithmetic mean. v) Short grant of TDS of Rs.57,79,428/-. vi) Levying of interest u/s. 234A of Rs.9,10,881/-. 3 ITA No.218/Kol/2019 Philips India Ltd. AY 2010-11 4. Brief facts are that assessee is a part of the Royal Philips organisation, headquartered in Netherlands. The ultimate parent company of the group is Koninklijke Philips NV. Royal Philips Electronics of the Netherlands is a diversified Health and well-being company. Philips India Ltd. i.e. the assessee, operates in different segment viz., consumer, life-style and heathcare. Ld. TPO made an AMP adjustment of Rs.19,59,57,024/- by applying bright line method. Before the Dispute Resolution Panel (DRP), decision of the Coordinate Bench of ITAT, Kolkata decided in favour of the assessee in respect of AMP adjustment was referred. Details from the said order, dated 07.02.2018 in ITA No. 612/Kol/2017 for AY 2012-13, reported in (2018) 90 taxman 357, were submitted wherein the upward adjustment were directed to be deleted. However, DRP requested the Ld. AO to provide an updated status of the order of ITAT for AY 2009-10 in ITA No. 1141/Kol/2016 and for AY 2011-12 in ITA No. 863/Kol/2016 to which it was submitted that department has filed appeals before the Hon’ble High Court of Calcutta. Considering this status update, the Ld. DRP took a view to uphold the action of TPO and accordingly, directed for the upward adjustment towards AMP. 4.1. In respect of other issue relating to software service segment for which an upward adjustment of Rs.6,82,12,102/- has been made, Ld. DRP directed that the comparable of Sasken Communication Technologies Ltd. (SASKEN) was not comparable. For Tata Elxsi Ltd., Ld. DRP directed to retain the said comparable. For the third 4 ITA No.218/Kol/2019 Philips India Ltd. AY 2010-11 comparable of Persistent Computers Ltd. (Persistent), Ld. DRP directed Ld. TPO to verify the P&L Account of Persistent to identify if it has only one stream of revenue and consider software service segment if segment data is available, otherwise it should be excluded. The relevant direction of Ld. DRP are reproduced as under: “2. Software services segment: With regard to the TPO’s adjustment, Hon’ble ITAT, Kolkata (in assessee’s appeal No. 2408/Kol/2016 has directed as under: 14. Ground no. 4 is on the issue of determination of ALP for Software segment. The only contention raised before us is whether the DRP is right in holding that M/s. TATA Elxsi Ltd. and Persistent Systems Ltd. are comparable companies. The DRP had not adjudicated the assessee's contentions that these two companies are not functionally comparable and that both these companies have R&D activity and hence should be eliminated from the list of comparable companies for the purpose of determination of ALP. In the case of Persistent Systems Ltd., it was further submitted before the DRP that there is no segmental data and that it has related party transactions, There is no finding of the DRP on these issues. 14.1 In our view, the DRP should have passed a speaking order on the contentions of the assessee. Thus, we restore these issues to the file of the DRP with a direction to pass a speaking order." 2. DRP Directions: The TPO has selected three comparables namely Persistent Computers Ltd. (Persistent), Sasken Communication Technologies Ltd. (Sasken) and Tata Elxsi Ltd (Software Development and Services Segment) with an average margin of 22.32% as compared to 10.53% of the assessee (operating cost includes IT charges of 5.71 Crores). The DRP vide order dated 31.12.2014 and subsequently vide order dated 31.08.2016 has held that Sasken was not comparable to the assessee having different FAR. 2.2. With regard to Tata Elxsi Ltd. it is submitted by the assessee that it is functionally different and it has substantial IPR. It is noted that the TPO has considered only the relevant segment where the existence of IPR is irrelevant. The assessee has failed to demonstrate as to how the IPR was material with regard to the price received by the company for the software development services. Further the trading activity of the company is insignificant with regard to software development services. The 5 ITA No.218/Kol/2019 Philips India Ltd. AY 2010-11 R&D expenditure of Rs.10.80 crores is also insignificant and irrelevant. In view of the above, TPO is directed to retain the comparable . 2.3. With regard to 'Persistent', it is noted that this comparable was not contested by the assessee before the DRP and it has been raised before the Hon'ble ITAT for the first time. The assessee has contested that it is functionally not comparable and that it has related party transaction (15.12%). Assessee has also relied on the decision of Hon'ble Delhi High Court in case of Cash Edge India Ltd. and Fiserv India Pvt. Ltd. where the company was held to be not comparable in view of the fact that segmental data for services and products were not available. 'Persistent' is into software development and RPT and R&D expenditure is irrelevant and insignificant. FAR is similar to that of the assessee. However, the AO/TPO is directed to verify the P&L account of 'Persistent' as to whether it has only one stream of revenue, i.e. sale of software services, and not from product development, and as to whether there is any stock in trade, and if so consider software services segment if segment data is available, and if not it should be excluded.” 5. Before us, Shri P. J. Pardiwalla & Shri Ketan Ved, AR represented the assessee and Shri G. Hukugha Sema, CIT represented the revenue. 6. On the first two issues relating to upward adjustment towards ALP and following the Rule of Consistency, it was submitted that the issue is recurring in nature from AY 2011-12 to AY 2016-17 and is covered in favour of the assessee by the decision of Coordinate Bench of ITAT, Kolkata in assessee’s own case, in all these assessment years. Ld. Counsel also referred to the recent decision in assessee’s own case for AY 2016-17 in ITA No. 226/Kol/2021 dated 06.09.2022 wherein also this issue has been held in favour of the assessee by following the earlier decision in assessee’s own case. 6 ITA No.218/Kol/2019 Philips India Ltd. AY 2010-11 6.1. Relevant extract on this issue from the order of AY 2011-12 in ITA No. 863 & 539/Kol/2016 dated 15.12.2017 is extracted below for ease of reference: “43. We have heard the rival submissions and perused the materials available on record. The primary issue here arises whether the AMP expenses constitute the international transactions so as to attract the provisions of transfer pricing of the Income Tax Act. The claim of the Id. AR is that the AMP transaction does not represent the international transaction between the AE's therefore no question of determining the ALP of AMP transactions. We find force in the argument of the Id. AR in the given facts & circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support & guidance from the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited Vs. CIT reported in 381 ITR 117 wherein it was held as under "51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson Mobile Communications India (P.) Ltd. case (supra) holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses." In view of we note that the facts of the above case are identical to the present issue, thus the principle laid down by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited (supra) are applicable to the instant case. Respectfully following the same we dismiss the ground of appeal filed by the Revenue.” 6.2. When these assertions and submissions were confronted to the Ld. CIT, DR, he fairly agreed that the issue is squarely covered in favour of the assessee by the decision of earlier years, though he placed reliance on the order of Ld. DRP. 7 ITA No.218/Kol/2019 Philips India Ltd. AY 2010-11 7. We have perused the material available on record and the earlier decisions of the Coordinate Bench in assessee’s own case in respect of upward adjustment towards AMP and find that the issue is squarely covered in favour of the assessee since there is no material change in the facts and applicable law. Accordingly, by taking a consistent view, we allow the ground nos. 1 and 2 taken by the assessee and delete the addition made in this respect. 8. On the next issue relating to upward adjustment in respect of software service segment, we note that during the TP proceedings, the ld. TPO had rejected six out of seven comparable companies identified by the assessee in its transfer pricing study report and had selected two new comparable companies namely, Sasken and Tata Elxsi for the purpose of determining ALP of the said transaction. The Profit Level Indicator (PLI) was revised by the Ld. TPO at 22.32% compared to 10.53% reported by the assessee. Subsequently, Ld. DRP gave its directions as noted above, wherein Sasken was directed to be removed as a comparable. Tata Elexi was directed to be retained as a comparable and Persistent was also held to be not comparable by the Ld. DRP vide its directions dated 28.09.2018. Thus, after the directions of Ld. DRP only one comparable namely, Tata Elexi remained in the comparable set. Ld. Counsel for the assessee submitted that the adjusted margin of Tata Elexi is computed at 13.61% as against 10.53% reported by the assessee. 8 ITA No.218/Kol/2019 Philips India Ltd. AY 2010-11 8.1. He stated that by considering the benefit of tolerance limit of +/- 5% as available u/s. 92C(2) of the Act, the impugned transaction is at arms length. According to ld. Counsel, the benefit of tolerance limit is available even in a situation where only one price or comparable is considered for the purpose of bench-marking. Once, this contention is accepted, according to the Ld. Counsel, the impugned adjustment made in the software development service segment will stand deleted. To buttress his contention, Ld. Counsel referred to the decision of Coordinate Bench of ITAT, Mumbai in the case of The Development Bank of Singapore Vs. DDIT in ITA No. 6631/Mum/2006 and CO No. 248/Mum/2009 dated 17.05.2013, wherein two provisos contained in section 92C(2) of the Act have been explained for their operability and benefit of tolerance limit available under the said Section read with the two provisos. 9. Per contra, Ld. CIT, DR placed reliance on the order of ld. DRP and the Ld. AO. 10. From the facts of the case, we note that after giving effect to the direction of Ld. DRP only one comparable namely Tata Elexi remained in the comparable set in respect of benchmarking for software development service segment for which an upward adjustment has been made and the issue is under contest before us. We also noted that the adjusted margin of Tata Elexi is computed at 13.61% as against 10.53% reported by the assessee which clearly falls within the tolerance limit of +/- 5% as contained in Section 92C(2) of the Act. Ld. Counsel has contested before us for 9 ITA No.218/Kol/2019 Philips India Ltd. AY 2010-11 the claim of benefit of tolerance limit under the second proviso to Section 92C(2) of the Act in the present situation where only one price or comparable is considered for the purpose of benchmarking without arguing on the rejection of the comparables and inclusion of the company namely Tata Elexsi identified by Ld. TPO. 10.1. On the said contention of the Ld. Counsel, we would refer to the relevant provisions of Section 92C(2) of the Act which has been substituted by the Finance (No. 2) Act, 2009 w.e.f. 01.10.2009 the same is reproduced as under; "(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices. Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price.” 11. Applicability of second proviso to Section 92C(2) of the Act in a situation where only one comparable is available for benchmarking was considered by the Coordinate Bench of ITAT, Mumbai in the case of The Development Bank of Singapore (supra), wherein it was held that the second proviso has to be read distinctly from the 1 st proviso and the words “so determined” in the 2 nd proviso should apply to ALP determined under the main sub-section (2) by which the tolerance band also becomes available where only one price is determined as ALP. The relevant extract from the decision 10 ITA No.218/Kol/2019 Philips India Ltd. AY 2010-11 of the Coordinate Bench of ITAT, Mumbai (supra) is reproduced for ease of reference : "11. At this juncture, we consider it expedient to note that the above quoted proviso to section 92C(2) has been substituted by the Finance (No.2) Act, 2009 w.e.f. 1.10.2009 with two provisos. The first proviso states that: ‘Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices'. As per the second proviso if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed the specified percentage of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. Main sub-section (2) provides that the most appropriate method as per sub-section(1) shall be applied for the determination of ALP. As per the first proviso where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices. Per contra, if there is only one price which is determined by the most appropriate method, then as per the main sub-section (2) without the aid of proviso, that price shall constitute the ALP. The second proviso comes into play to deem the actual transacted price as the ALP. It provides that where the variation between the ALP. so determined' does not exceed the specified percentage, the price at which the international transaction has actually been undertaken 'shall be deemed to be the arm's length price'. The words 'so determined' as employed in the second proviso assume significance. As these have been used in the second proviso distinct from the subject matter of the first proviso, naturally these will apply to the ALP determined under sub-section (2) consisting of the main provision and also the first proviso. Resultantly, the option of 'deemed' ALP shall extend not only to a situation where more than one price is determined as ALP by the most appropriate method but also where only one price is determined as ALP. The net result is that the option to the assessee shall be available in both the situations, covered under main sub-section (2) and also the first proviso." 12. Considering the facts of the case and the difference in the benchmark margin of 13.61% vis-à-vis 10.53% of the assessee which falls within the tolerance limit of +/- 5% as contained in Section 92C(2) of the Act and the decision of the Coordinate Bench of ITAT, Mumbai, we hold that the benefit of tolerance limit under 2 nd proviso to Section 92(C)(2) of the Act is available to the assessee in the present 11 ITA No.218/Kol/2019 Philips India Ltd. AY 2010-11 case where only one comparable of Tata Elexsi is considered for the purpose of benchmarking. Accordingly, the upward adjustment made by the Ld. TPO in the software development segment is deleted. Ground no. 3 of the assessee is allowed. 13. Ground no. 4 relates to short grant of credit for TDS/TCS. Ld. Counsel did not press this ground as the credit has been granted vide subsequent rectification order. Accordingly, this ground is dismissed as not pressed. 14. Ground no. 5 is consequential in nature, therefore no need for adjudication and hence, the same is dismissed. 15. In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on 27 th March, 2023. Sd/- Sd/- (Rajpal Yadav) (Girish Agrawal) Vice President Accountant Member Dated: 27th March, 2023 JD, Sr. P.S. Copy to: 1. The Appellant: 2. The Respondent: 3. DRP, Panel-2, New Delhi 4. ACIT, Circle-12(2), Kolkata 5. DR, ITAT, Kolkata Bench, Kolkata //True Copy// By Order Assistant Registrar ITAT, Kolkata Benches, Kolkata