International Merchandising Corporation, India Branch Office, Gurgaon V. DDIT, New Delhi

ITA 222/DEL/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8310 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 19-01-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 11-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K AGGARWAL
• Keywords: Transfer pricing; Opportunity of being heard; Additional evidence; Non-deduction of tax; Revised return
• Section: 143(3); 92E; 139(5); 10B; 92

Judgement Text

1 ITA NO . 222/DEL/2013 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SHRI N. K. SAINI, ACCOUNTANT MEMBER AND SMT SUCHITRA KAMBLE , JUDICIAL MEMBER I.T.A .NO.- 222/DEL/2013 (ASSESSMENT YEA R-2004-05) INTERNATIONAL MERCHANDISING CORPORATION, INDIA BRANCH OFFICE IMG HOUSE, 5 TH FLOOR, TOWER A, BUILDING 9, DLF PHASES-III, CYBER CITY GURGAON AAAC18025Q (APPELLANT) VS DDIT CIRCLE-1(2), INTERNATIONAL TAXATION NEW DELHI (RESPONDENT) AND I.T.A .NO.- 6449/DEL/2012 (ASSESSMENT YEA R-2004-05) DCIT CIRCLE-1(2), ROOM NO. 410, DRUM SHAPED BUILDING, I.P. ESTATE NEW DELHI (APPELLANT) VS INTERNATIONAL MERCHANDISING CORP. IMG HOUSES, 4 TH FLOOR 268, MASJID MOTH, UDAY PARK NEW DELHI AAACI8025Q (RESPONDENT) APPELLANT BY SH.HEMANT GUPTA, SR. DR RESPONDENT BY SH. S .K. AGGARWAL, C.A ORDER PER SUCHITRA KAMBLE, JM ITA NO. 222/DEL/2013 THESE CROSS APPEALS ARE FILED AGAINST THE ORDER DAT ED 30/10/2012 PASSED BY CIT (A)-XXIX, NEW DELHI. FIRST, WE WILL DEAL WI TH THE APPEAL OF THE ASSESSEE IN ITA NO. 222/DEL/2013. DATE OF HEARING 19.01.2016 DATE OF PRONOUNCEMENT .04.2016 2 ITA NO . 222/DEL/2013 2. THE GROUNDS OF APPEAL ARE AS FOLLOWS:- 1. PAYMENT TO ASSOCIATION OF TENNIS PROFESSION (ATP)-R S.19,22,663 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW: THE LD. CIT (A) HAS ERRED IN CONFIRMING THE DISALLO WANCE MADE BY THE A.O OF THE PAYMENT OF RS.1,922,663/- MADE TO ATP U/S 40 (A)(I) OF THE ACT. THE CIT (A) HAS ERRED IN RELYING ON THE CLAUSES OF THE ATP OFFICIAL RULE BOOK WHILES CONFIRMING THE DISALLOWANCE, WITHOUT GI VING THE APPELLANT AN OPPORTUNITY OF BEING HEARD IN THIS REGARD. THE CIT(A) HAS ERRED IN OBSERVING THAT PAYMENTS MAD E AS SANCTION FEE TO ATP ARE DIRECTLY RELATED TO USE OF ATP LOGO AND THE REFORE, PARTAKES THE CHARACTER OF ROYALTY UNDER DOMESTIC LAW AS WELL UND ER THE PROVISIONS OF INDIA-US TREATY AND ACCORDINGLY, CHARGEABLE TO TAX AND SUBJECT TO WITHHOLDING TAX U/S 195 OF THE ACT. THE CIT (A) HAS ERRED IN NOT RELYING ON THE FINDING S OF THE CIT (A) IN THE ASSESSMENT YEARS 2005-06 AND 2006-07, WHERE THE ISS UE HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT. 2. ADDITION ON ACCOUNT OF MARK-UP TO BE RECOVERED B Y THE APPELLANT ON REIMBURSEMENT OF EXPENSES RECEIVED FROM ASSOCIATED ENTERPRISES (AE) AND RE-COMPUTATION OF ARMS LENGTH PRICE (ALP) ON ACCOUN T OF PROVISION FOR SERVICES OF RS.9,42,641/- AND RS.49,812/- RESPECTIV ELY. ADJUSTMENT TO NET PROFIT MARGIN BASED ON COST (NCP MARGIN): ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW: (A) THE CIT(A) HAS ERRED IN OBSERVING THAT THE APPELLAN T HAS PROVIDED LOGISTIC SERVICES TO ITS AES AND HELD THAT SERVICES PROVIDE D BY THE APPELLANT TO ITS AES DO REQUIRE ARMS LENGTH MARK-UP ON ITS COST BAS E. 3 ITA NO . 222/DEL/2013 (B) THE CIT (A) HAS ALSO ERRED IN HOLDING THAT THE PAYM ENTS MADE BY AES TO THE APPELLANT DO NOT REPRESENT PASS THROUGH COSTS. (C) WITHOUT PREJUDICE TO THE ABOVE, THE CIT (A) HAS ERR ED IN DETERMINING THE ARMS LENGTH PROFIT MARGIN AT A RATE OF 11.6% ON IN TERNATIONAL TRANSACTIONS BY REJECTING THE FIVE COMPARABLE INDEPENDENT COMPAN IES RECOGNIZED BY THE APPELLANT TO DETERMINE ALP UNDER THE PROVISIONS OF SECTION 92 OF THE ACT AND RULE 10B TO RULE 10D OF INCOME TAX RULES 1962, WITHOUT GIVING SATISFACTORY REASONS FOR SUCH REJECTION. (D) WITHOUT PREJUDICE TO THE ABOVE, THE CIT (A) HAS ERR ED IN REJECTING THE FOREIGN COMPANIES TAKEN AS COMPARABLES BY THE APPELLANT ON THE PREMISE THAT THEY ARE LOCATED IN DIFFERENT GEOGRAPHIC MARKETS AN D ARE NOT COMPARABLE TO THE APPELLANT. THE CIT (A) HAS ALSO ERRED IN STATI NG THAT THE CONDITIONS PREVAILING IN THE MARKETS IN WHICH PARTIES OPERATE INCLUDING GEOGRAPHICAL LOCATION ARE VITAL TO JUDGE THE COMPARABILITY. (E) THE CIT (A) HAS ERRED IN UPHOLDING THE ACTION OF TH E A.O THAT COMPARABILITY ANALYSIS IS TO BE CONDUCTED ON THE BASIS OF CURRENT YEAR DATA ONLY AND REJECTING MULTIPLE YEAR DATA USED BY THE APPELLANT FOR COMPUTING THE NET PROFIT MARGIN OF THE COMPARABLE COMPANIES. (F) THE CIT (A) HAS ERRED IN NOT ALLOWING FOR A VARIAT ION/REDUCTION OF 5% FROM ARITHMETIC MEAN TO ARRIVE AT ALP OF THE INTERNATION AL TRANSACTION, AS PER PROVISIONS OF THE PROVISO TO SECTION 92C(2) OF THE ACT. (G) THE CIT (A) HAS ERRED IN HOLDING THAT IN CASE THE D IFFERENCE BETWEEN THE TRANSFER PRICING PRICE AND ALP EXCEEDS 5% THEN THE ENTIRE DIFFERENCE SHALL BE TRANSFER PRICING ADJUSTMENT AND IS TO BE ADDED T O THE INCOME WITHOUT GIVING ANY SORT OF STANDARD DEDUCTION. APPLICATION OF THE ADJUSTED NCP MARGIN TO THE SERVI CE INCOME OF THE APPELLANT (H) THE CIT (A) HAS ERRED IN RE-COMPUTING ALP CHARGED B Y THE APPELLANT FOR THE PROVISION OF SERVICE TO ITS AE BY APPLYING THE ADJU STED NCP MARGIN FOR EVENT MANAGEMENT WITHOUT APPRECIATING THE FACT THAT THE SERVICES RENDERED BY APPELLANT TO ITS AES INCLUDE BOTH ACTI VITIES IN NATURE OF PRODUCTION MANAGEMENT SERVICES AND EVENT MANAGEMENT WHICH HAVE BEEN ANALYZED SEPARATELY IN TRANSFER PRICING REPORT. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO AND INDE PENDENT OF ONE ANOTHER. 4 ITA NO . 222/DEL/2013 3. INTERNATIONAL MERCHANDISING CORPORATION (IMC) IS A FOREIGN COMPANY INCORPORATED UNDER THE LAWS OF UNITED STATES OF AME RICA (USA). IT IS A TAX RESIDENT OF USA WITHIN THE MEANING OF ARTICLE 4 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT ENTERED INTO BETWEEN INDIA AND USA (INDIA-US TREATY). IN INDIA, IMC IS OPERATING THROUGH A BRANCH OFFICE SET UP AFTER OBTAINING APPROVAL OF RESERVE BANK OF INDIA AND HENCE, ASSESSED AS A F OREIGN COMPANY. THE ASSESSEE COMPANY REPRESENTS ATHLETES, PERFORMING AR TISTS, WRITERS, FASHION MODELS, BROADCASTERS, LEADING CORPORATION WORLD-CLA SS EVENTS CULTURAL INSTITUTIONS AND RECREATIONAL RESORTS. THE PRODUCTI ON CENTERS ARE LOCATED IN NEW YORK, LONDON, HONG KONG, SYDNEY AND NEW DELHI. IT I S THE LARGEST INDEPENDENT PRODUCER PACKAGE AND DISTRIBUTOR OF SPORTS PROGRAMM ING IN THE WORLD. INTERNATIONAL MERCHANDISING CORPORATION, INC. USA ( IMC INC., USA) IS A PART OF THE IMG GROUP. IMG COMMENCED OPERATIONS IN INDIA BY ESTABLISHING A BRANCH OFFICE OF IMC INC. THE INDIAN BRANCH IS ENGAGED IN THE FOLLOWING ACTIVITIES: I. ACTIVITIES RELATING TO SPORTS AND ARTS AND TO RE PRESENT LOCAL SPORT BODIES ASSOCIATIONS AND INDIVIDUALS FOR EXPLOITATIO N OF COMMERCIAL RIGHTS; AND II. SALE OF TELEVISION RIGHT AND PRODUCTION OF TELE VISION PROGRAMMES PROVIDED THAT THE BRANCH OFFICE DOES NOT UNDERTAKE ANY BROADCASTING FROM INDIAN SOIL. 4. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E WAS PRIMARILY ENGAGED IN THE BUSINESS OF MARKETING, ORGANIZING AND MANAGE MENT OF INTERNATIONAL SPORT EVENTS AND FASHION EVENTS, TELEVISION PRODUCT ION AND MANAGEMENT OF COMMERCIAL RIGHTS OF SPORTS PERSONS AND SPORTS ASSO CIATIONS IN INDIA. 5. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E FILED ITS RETURN OF INCOME ON 31.10.2004 DECLARING LOSS OF RS. 28,162,4 88/-. SUBSEQUENTLY, A REVISED RETURN OF INCOME U/S. 139(5) OF THE ACT WAS FILED ON 31.03.2006 WHEREIN THE ASSESSEE REVISED THE LOSS TO RS. 30,038,768/-. THE ASSESSING OFFICER PASSED 5 ITA NO . 222/DEL/2013 THE ASSESSMENT ORDER UNDER SECTION 143(3) OF THE AC T DATED 26.12.2006, WHEREIN THE LOSS OF THE ASSESSEE UNDER THE ACT WAS REDUCED TO RS. 12,882,028/-. THE FOLLOWING DISALLOWANCES/ADDITIONS WERE MADE BY THE ASSESSING OFFICER: SR. NO. DESCRIPTION OF DISALLOWANCES AMOUNT (RS.) 1 EXPENDITURE INCURRED ON SANCTIONS AND RIGHTS 12,8 63,376 2 SHORT TERM CAPITAL LOSS ON SALE OF MOTOR CAR 341, 794 3 PERSONAL EXPENSES 1,650,326 4 ADDITION ON ACCOUNT OF FOLLOWING: MARK-UP ON REIMBURSEMENTS OF EXPENSES RECEIVED FROM ASSOCIATED ENTERPRISES (AES) AND; RE-COMPUTATION OF ARMS LENGTH PRICE ON ACCOUNT OF PROVISION OF SERVICES 2,058,017 243,227 6. IN RESPECT OF REIMBURSEMENT OF RS. 1,05,21,562/- , THE ASSESSING OFFICER HELD THAT THESE SERVICES PROVIDED BY THE ASSESSEE T O ITS AES AND WORKED OUT UPWARD ADJUSTMENT OF RS. 20,58,017/- AND IN RESPECT OF PROVISION FOR SERVICES OF RS. 24,29,844/-, THE ASSESSING OFFICER WORKED OU T UPWARD ADJUSTMENT OF RS. 2,43,227/-. THE ASSESSING OFFICER HAD ALSO NOT ALLO WED THE BENEFIT OF 5% RANGE TO THE ASSESSEE, WHILE DETERMINING THE PROPOSED ADD ITION ON ACCOUNT OF ARMS LENGTH PRICE. 6 ITA NO . 222/DEL/2013 7. AGGRIEVED BY THE SAID ASSESSMENT ORDER, THE ASSE SSEE FILED APPEAL BEFORE THE CIT (A). 8. THE CIT(A) HELD THAT THE EXPENSES REPRESENT PAYM ENTS MADE FOR HOTELS, AIRLINES, MOBILE SERVICE PROVIDERS, PHOTOGRAPHERS, PRINTING PRESS, CAR HIRE CHARGES, SECURITY AGENCIES, SPORTS GOODS, COURIER C HARGES ETC. THE SAME WAS APPARENT FROM PERUSAL OF THESE EXPENSES THAT THE AS SESSEE WAS PROVIDING LOGISTIC SERVICES TO ITS AES. THE PAYMENTS MADE BY IT ON BEHALF OF ITS AES DO NOT REPRESENT PASS THROUGH COSTS PER SE. THE SERVIC ES PROVIDED BY THE ASSESSEE TO ITS AES DO REQUIRE ARMS LENGTH MARK-UP ON ITS COST BASE. THE CIT(A) DECIDED THE SAID ISSUE AGAINST THE ASSESSEE. AS RELATES TO BENEFIT OF 5% RANGE TO THE ASSESSEE ON ACCOUNT OF ARMS LENGTH PRICE, THE CI T(A) HELD THAT THE PROVISION OF SECTION 92C(2) STATE THAT IF DIFFERENCE BETWEEN ARMS LENGTH PRICE AND TRANSFER PRICE DOES NOT EXCEED 5% OF ARMS LENGTH PRICE, THE N NO TP ADJUSTMENT SHOULD BE MADE. THE CIT(A) FURTHER HELD THAT WHERE SUCH DI FFERENCE EXCEEDS 5%, THEN ENTIRE DIFFERENCE HAS BEEN ADDED TO THE INCOME WITH OUT GIVING ANY SORT OF STANDARD DEDUCTION OUT OF IT AND HAS TO BE TREATED AS TP ADJUSTMENT. THUS THE CIT(A) DECIDED THIS ISSUE AGAINST THE ASSESSEE. NO W THE ASSESSEE IS IN APPEAL. 9. THE LD. AR SUBMITTED THE PAYMENT OF RS.1,922,66 3/- WAS MADE TO ASSOCIATION OF TENNIS PROFESSIONALS, USA (ATP)DURIN G THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD ORGANIZED A MENS P ROFESSIONAL TENNIS CHAMPIONSHIP IN INDIA (CHENNAI OPEN/TOURNAMENT) . FOR ORGANIZING THE TOURNAMENT, THE ASSESSEE HAD OBTAINED THE SANCTIONS /APPROVALS FROM ATP (WHICH IS THE GOVERNING BODY OF WORLDWIDE MENS PRO FESSIONAL TENNIS) TO RECOGNIZE THE EVENT AS AN ATPS EVENT, AND THUS, TH IS EVENT WAS RECOGNIZED AS AN OFFICIAL ATP MENS INTERNATIONAL SERIES TENNIS C HAMPIONSHIP. SUCH PAYMENTS HAVE BEEN GROUPED UNDER THE HEAD SANCTION AND RIGHTS IN THE PROFIT AND LOSS ACCOUNTS. IT WAS FURTHER STATED THAT WITHO UT OBTAINING THE APPROVALS FROM ATP, THE EVENT WOULD HAVE NOT GOT INTERNATIONA L RECOGNITION AND IN ABSENCE OF SUCH RECOGNITION, NO INTERNATIONAL PLAYE R WOULD HAVE AGREED TO PLAY 7 ITA NO . 222/DEL/2013 IN THE TOURNAMENT. FURTHER, SINCE THE INCOME FROM THE TOURNAMENT HAS BEEN DULY OFFERED TO TAX BY IMC IN INDIA, THE EXPENDITUR E INCURRED FOR EARNING THE SAID INCOME IS ALLOWABLE AS LEGITIMATE BUSINESS EXP ENDITURE. FOR THE AFORESAID EXPENSES THE LD. COUNSEL FOR THE ASSESSEE FURNISHED A CHART WHICH READ AS UNDER: PARTICULARS AMOUNT (IN RS) NATURE OF PAYMENT TOURNAMENT FEE 1,046,063 PAID FOR OBTAINING PERMISSION TO GET THE EVENT RECOGNITION AS AN ATPS EVENT. PLAYERS WELFARE CONTRIBUTION 876,600 APART FROM BEING THE GOVERNING BODY OF THE WORLDWIDE MENS PROFESSIONAL TENNIS CIRCUIT, ATP TAKES CARE OF THE BENEFITS OF THE PLAYERS AFFILIATED WITH IT. DURING THE YEAR, AN AMOUNT OF RS.876,600 IS PAID BY THE APPELLANT TOWARDS FUNDS (VIZ. RETIREMENT CONTRIBUTION, KIDS FUND CONTRIBUTION, WORLD DOUBLES CONTRIBUTION) CREATED FOR THE BENEFIT FOR THE PLAYERS . ATP IS ONLY COLLECTING THE AMOUNT FROM THE APPELLANT TOWARDS CONTRIBUTION OF WELFARE FUNDS OF THE PLAYERS. TOTAL 1,922,663 10. THE LD. AR SUBMITTED IN RESPECT OF GROUND NO. 2 RELATING TO LEVY OF MARK-UP ON COST TO COST REIMBURSEMENT OF EXPENSE RE CEIVED FROM ASSOCIATED ENTERPRISES (AES) ADDITIONS OF RS. 942,641/- TH AT IN THE COURSE OF ITS BUSINESS, THE ASSESSEE REIMBURSES THE AMOUNT INCURR ED BY THE GROUP 8 ITA NO . 222/DEL/2013 COMPANIES IN VARIOUS COUNTRIES ON ITS BEHALF AND SI MILARLY, IT RECEIVES REIMBURSEMENT OF EXPENSES INCURRED BY IT ON BEHALF OF GROUP COMPANIES ON COST TO COST BASIS. THE DETAILS OF THE AMOUNT PAID TO THE GROUP COMPANIES AND THE AMOUNT RECEIVED FROM GROUP COMPANIES TOWARDS RE IMBURSEMENT OF COSTS ON COST TO COST BASIS AS PER FORM 3CEB FOR THE A.Y 200 4-05 UNDER RULE 10E, SECTION 92E OF THE ACT (PAPER BOOK PAGE NUMBER 158) IS AS UNDER: DETAILS OF AMOUNT PAID TO THE GROUP COMPANIES SL. NO. NAME OF AE DESCRIPTION AMOUNT (IN RS) 1 INTERNATIONAL MERCHANDISING CORP. AMOUNT PAID ON BEHALF OF BRANCH BY AE 1,075,330 2 INTERNATIONAL MERCHANDISING CORP. REIMBURSEMENT OF EXPENSES INCURRED 86,472 3 IMG UK INC 306,901 4 IMG SOUTH AFRICA 17,623 5 TRANS WORLD INTERNATIONAL UK LTD. 958,509 6 IMGO SPAIN 272,402 7 TWI INTERACTIVE LTD. 51,397 8 IMG SINGAPOR PTE LTD. 52,267 9 IMG OVERSEAS, HONG KONG 283,233 10 IMG OF AMERICA PTY LTD. 7,466,794 11 INTERNATIONAL MERCHANDISING CORP. AMOUNT RECEIVED BY 509,119 12 TRANS WORLD INTERNATIONAL UK LTD. BRANCH ON BEHALF OF AE 738,586 TOTAL 11,818,633 9 ITA NO . 222/DEL/2013 DETAILS OF AMOUNT RECEIVED FROM THE GROUP COMPANIES S. NO. NAME OF AE DESCRIPTION AMOUNT (IN RS) 1 TRANS WORLD INTERNATIONAL INC REIMBURSEMENT OF EXPENSES INCURRED BY BRANCH 318,666 2 IMG UK LTD. 3,894,301 3 TRANS WORLD INTERNATIONAL UK LTD. 1,099,280 4 IMG HONG KONG 2,267,000 5 IMG SINGAPORE PTE LTD. 108,871 6 IMG OVERSEAS, HONG KONG 90,381 7 IMGO MALAYSIA 164,674 8 IMG SPORTS DEVELOPMENT (SHANGHAI) LTD. 183,041 (A) TOTAL AMOUNT OF REIMBURSEMENT OF EXPENSES 8,126,215 9 INTERNATIONAL MERCHANDISING CORP. INCOME RECEIVED BY AES ON BEHALF OF BRANCH 1,197,536 10 IMG HONG KONG 1,129,814 11 TRANS WORLD INTERNATIONAL UK LTD. 67,996 1 0 ITA N O. 222/DEL/2013 (B) TOTAL AMOUNT OF INCOME RECEIVED BY AES AND THEN PAID BACK TO APPELLANT. 2,395,347 TOTAL (A+B) 10,521,562 11. THE LD. AR SUBMITTED THAT THE A.O IN THE ASSESS MENT ORDER TREATED THE AMOUNT OF REIMBURSEMENT RECEIVED FROM GROUP COMPANI ES BY THE ASSESSEE ON COST TO COST BASIS, AS SERVICES RENDERED BY THE ASS ESSEE TO AES AND APPLIED A MARK-UP OF 19.56% (THE MARK-UP COMPUTED BY THE A.O FOR EVENT/PRODUCTION MANAGEMENT SERVICES PROVIDED TO GROUP COMPANIES) AN D MADE THE FOLLOWING ADDITIONS: PARTICULARS AMOUNT (IN RS). REIMBURSEMENT OF EXPENSES RECEIVED FROM AES(A) 10,521,562 ARITHMETIC MEAN OF NCP (NET COST PLUS) OF COMPARA BLE COMPANIES AS COMPUTED BY THE LD. A.O (COMPUTED WITH RESPECT TO EVENT/PRODUCTION MANAGEMENT SERVICES) (B ). 19,56% ADDITIONS MADE TO THE INCOME IN THE ASSESSMENT ORDER BY WAY OF MARK-UP ON REIMBURSEMENT OF EXPENSES RECEIVED FROM AES (A* B) 2,058,017 THE LD. AR SUBMITTED THAT WHILE MAKING THE ABOVE AD DITION, THE A.O IGNORED THE SUBMISSIONS OF THE ASSESSEE THAT THE TRANSACTIO NS WITH AES WERE IN THE NATURE OF MERE REIMBURSEMENT OF EXPENSES WHICH WERE INITIALLY PAID BY THE ASSESSEE ON BEHALF OF ITS AES AND LATER ON RECEIVED BY THEM ON COST TO COST BASIS. THE ASSESSEE HAD SUBMITTED SAMPLE COPIES OF INVOICES/DEBIT NOTES WHICH WERE RAISED BY THE ASSESSEE ON ITS AES IN CON NECTION WITH REIMBURSEMENT OF EXPENSES TO SUBSTANTIATE THAT SUCH REIMBURSEMENT DOES NOT 1 1 ITA N O. 222/DEL/2013 INVOLVE RENDERING OF ANY SERVICES TO AES AND HENCE, DOES NOT REQUIRE CHARGING OF ANY COST PLUS MARK-UP AS NO MARK-UP HAS BEEN PAI D ON SIMILAR REIMBURSEMENTS PAID TO AES (PAPER BOOK PAGE NUMBERS 420 TO 474). 12. THE LD. AR SUBMITTED THAT THE COST TO COST REIM BURSEMENTS IS NOT IN NATURE OF RENDERING SERVICES, BUT IT IS MERELY FOR ADMINISTRATIVE CONVENIENCE. IT WAS FURTHER SUBMITTED THAT THE NET AMOUNT OF RS.8,1 26,215 REPRESENTS REIMBURSEMENTS RECEIVED FROM GROUP COMPANIES BEING THIRD PARTY COSTS PAID BY THE ASSESSEE IN THE FIRST INSTANCE AND RECOVERED FR OM THE GROUP COMPANIES, AS A MEASURE OF ADMINISTRATIVE CONVENIENCE. IT WAS POI NTED OUT THAT THE CIT(A) ON THE BASIS OF THE COPIES OF THE BILLS SUBMITTED (PAP ER BOOK PAGE NUMBERS 420 TO 474), HAS STATED THAT THE EXPENSES REPRESENT PAYMEN T MADE FOR HOTELS, AIRLINES, MOBILE SERVICE PROVIDERS, PHOTOGRAPHERS, PRINTING P RESS, CAR HIRE CHARGES, SECURITY AGENCIES, COURIER CHARGES, SPORTS GOODS, E TC. AND HAS CONCLUDED THAT THE ASSESSEE IS PROVIDING LOGISTICS SERVICES TO ITS AES. IT WAS FURTHER SUBMITTED THAT THE REIMBURSEMENTS RECEIVED FROM AES BY THE AS SESSEE ARE PURELY OF COST TO COST REIMBURSEMENT NATURE AND THAT BY ADMINISTRA TIVELY FACILITATING PAYMENTS TO INDIAN THIRD PARTY PETITE VENDORS, THER E IS NO INTENT OF THE ASSESSEE TO RENDER ANY SERVICES TO AES, THEREFORE, THE COST REIMBURSEMENTS DO NOT REQUIRE ARMS LENGTH MARK-UP ON THE COST BASE. IT WAS ALSO SUBMITTED THAT SIMILAR COSTS PAID BY GROUP COMPANIES ON RECIPROCAL BASIS ARE REIMBURSED BY THE ASSESSEE WITHOUT ANY MARK-UP, SUCH TYPES OF RE IMBURSEMENTS ON RECIPROCAL BASIS ARE ONLY DUE TO ADMINISTRATIVE CON VENIENCE AND CANNOT BE EQUATED TO RENDERING OF SERVICES REQUIRING BENCH MA RKING FOR MARK-UP. IT WAS CONTENDED THAT THE PERUSAL OF EXPENSES DEMONSTRATE S THAT THE EXPENSES REIMBURSED INCLUDED TRAVEL/ACCOMMODATION AND OTHER MISCELLANEOUS THIRD PARTY EXPENSES INCURRED BY THE ASSESSEE ON BEHALF O F AES, THESE EXPENSES REPRESENTS THIRD PARTY EXPENDITURE PAID BY THE ASSE SSEE ON BEHALF OF AES MERELY FOR ADMINISTRATIVE CONVENIENCE AND DO NOT IN VOLVE ANY SERVICES RENDERED BY THE ASSESSEE. THUS, FROM AN ARMS LENGTH PERSPE CTIVE, THESE EXPENSES 1 2 ITA N O. 222/DEL/2013 SHOULD BE PERMITTED TO BE PASS THROUGH EXPENSES W HICH SHOULD BE REIMBURSED ONLY ON COST TO COST BASIS. 13. AS REGARDS TO RE-DETERMINATION OF ARMS LENGTH PRICE MARGIN FOR INCOME FROM PRODUCTION AND EVENT MANAGEMENT SERVICES OF TH E ASSESSEE, THE LD. A.R SUBMITTED THAT THE AO IN THE ASSESSMENT ORDER MADE ADDITION BY REWORKING THE MARK-UP ON PRODUCTION / EVENT MANAGEMENT SERVICES F ROM 9.55% TO 19.56% WHICH HAS BEEN REDUCED TO 11.60% BY THE LD. CIT(A). THE NET ADDITION MADE IS AS UNDER: PARTICULARS AMOUNT (IN RS) COST OF RENDERING SERVICES 2,429.844 ALP MARKUP (@11.6%) 281,862 LESS: MARKUP ALREADY EARNED BY ASSESSEE 59.55%) 232,050 AMOUNT OF ADDITION 49,812 14. THE LD. A.R ALSO SUBMITTED THE CHART SHOWING NC P MARGIN OF COMPARABLES AS PER FOLLOWING DETAIL:- S. NO. COMPARABLE NAME AVERAGE NCP MARGIN OF COMPARABLES (%) AS PER TP REPORT AS PER ASSESSMENT ORDER AS PER CIT(A) ORDER REMARKS 1 IGE (INDIA) LTD. 21.92 21.92 21.92 ACCEPTED BY THE LD. A.O 2 ZIGMA SOFTWARE LTD. 17.21 17.21 17.21 ACCEPTED BY THE LD. A.O 1 3 ITA N O. 222/DEL/2013 3 CONCEPT MARKETING & ADVERTISING LTD. -4.35 - -4.35 EXCLUDED BY THE LD. A.O ON ACCOUNT OF LOSSES INCURRED BY THE COMPARABLE. HOWEVER, THE CIT(A) ACCEPTED THIS COMPARABLE AS IT IS NOT A PERSISTENT LOSS MAKING COMPANY AND HAS A POSITIVE NET WORTH. 4 LE PUBLIC SYSTEME 1.25 - - EXCLUDED BY THE LD. A.O/ CIT(A) ON ACCOUNT OF BEING A FOREIGN COMPANY 5 WIGE MEDIA AG 2.38 - - EXCLUDED BY THE LD. A.O/ CIT(A) ON ACCOUNT OF BEING A FOREIGN COMPANY 6 PICO FAR EAST HOLDING LTD. 4.05 - - EXCLUDED BY THE LD. A.O/ CIT(A) ON ACCOUNT OF BEING A FOREIGN COMPANY 7 INTERADS LTD. NA - - 8 NIS SPARTA LTD. 13.9 - - NO REJECTED REASON GIVEN BY THE LD. A.O/CIT(A). ARITHMETIC MEAN 8.05 19.56 11.60 15. THE LD. AR FURTHER SUBMITTED THAT AN INAPPROPRI ATE REJECTION OF FOREIGN 1 4 ITA N O. 222/DEL/2013 COMPARABLE COMPANIES BY THE CIT(A) HAS GIVEN THE CO NSTRAINT OF NON- AVAILABILITY OF SUITABLE INDIAN COMPANIES, THE ASSE SSEE HAD SELECTED FOREIGN COMPARABLES (AS MENTIONED AT S. NO. 4 TO 6 IN THE A BOVE TABLE) IN ORDER TO BROAD BASE THE SET OF COMPARABLE COMPANIES. IT WAS STATED THAT THE CIT(A) ERRONEOUSLY CONCLUDED THAT SUCH COMPARABLES SHOULD NOT BE CONSIDERED AND OUT RIGHTLY REJECTED THESE COMPARABLES ON ACCOUNT O F HAVING OPERATIONS IN DIFFERENT GEOGRAPHICAL MARKETS. THE LD. AR FURTHER SUBMITTED THAT, EVEN CONSIDERING THE NCP MARGIN AS DETERMINED BY THE CIT (A) THE NCP MARGIN OF THE ASSESSEE FALLS WITHIN THE +/- 5% ARM'S LENGTH RANGE AND NO ADJUSTMENT NEEDS TO BE MADE. IT WAS ALSO SUBMITTED THAT ACTUAL NCP MARK-UP EARNED I.E. 9.55%, BY THE ASSESSEE FALLS WITHIN THE RANGE OF 6. 02% TO 17.18 . THUS, IN LIGHT OF PROVISO TO SECTION 92C(2) OF THE ACT, THE ERRONE OUS UPWARD ADJUSTMENT AS MADE BY THE CIT(A), WAS NOT CALLED FOR. IN SUPPORT OF THE ABOVE CONTENTION THE LD. A.R FURNISHED THE FOLLOWING CALCULATIONS:- COMPUTATION OF +/-5% RANGE AS PER PROVISO TO SECTIO N 92C(2) OF THE INCOME TAX PARTICULARS IMC INDIA AT ARMS LENGTH PRICE AS PER CIT(A) MINUS 5% PLUS 5% A E REVENUE 2,661,894 2,711,706 2,576,121 2,847 ,291 NON-A E REVENUE 188,552,451 OPERATING REVENUE 191,214,345 2,711,706 2,576,121 2,847,291 OPERATING EXPENSE 174,545,272 2,429,844 2,429,844 2,429,844 OPERATING PROFIT 16,669,073 281,862 146,277 417,447 NCP(%) 0.55 11.60 6. 02 17.18 1 5 ITA N O. 222/DEL/2013 16. THE LD. AR SUBMITTED THAT THE ASSESSEE IS A FOR EIGN BASED COMPANYS BRANCH AND THE MAIN COMPANY IS SITUATED IN USA. TH E AR SUBMITTED THAT GROUND NO. 1 IS COVERED AGAINST THE ASSESSEE IN ASS ESSEES OWN CASE FOR THE SUBSEQUENT ASSESSMENT YEARS. THE AR SUBMITTED THAT ONLY THING IN THE SUBSEQUENT YEARS DECISION BY THE ITAT WAS THAT IT HAS NOT TAKEN INTO CONSIDERATION THAT PAYMENT OF TOURNAMENT FEE AND PL AYERS WELFARE CONTRIBUTION ARE TWO DIFFERENT ASPECTS AND PLAYERS WELFARE CONTR IBUTION CANNOT BE TREATED AS THE FEES. THUS, THE SAID AMOUNT SHOULD BE EXEMPTED FROM THE TAX PURVIEW. IN FACT THE US ENTITIES ARE TAX EXEMPTED ASSOCIATION. 17. AS RELATES TO GROUND NO. 2, THE ASSESSEE RELIED UPON THE DECISION OF THE I.T.A.T HYDERABAD IN THE CASE OF HSBC ELECTRONIC DA TA PROCESSING INDIA LTD. VS. ADD. CIT 2(2) REPORTED AT TS-174-ITAT-2013 (HYD .) WHEREIN THE RE- IMBURSEMENT ISSUE WAS DECIDED IN FAVOUR OF THE ASSE SSEE. THE ASSESSEE RELIED UPON THE DECISION OF ACIT, CIRCLE 3(1), NEW DELHI V S. CITY FINANCIAL CONSUMER FINANCE INDIA LTD. IN ITA NO. 2848 & 6305/DEL/2012, ORDER DATED 17/08/2015, WHEREIN THE ITAT HAS HELD THAT IF THE A LP FALLS WITHIN THE RANGE OF +/- 5% OF THE RANGE THEN NO ADDITION SHOULD BE MADE . 18. THE LD. DR RELIED UPON THE ORDER OF THE ASSESSI NG OFFICER. THE LD. DR ALSO POINTED OUT THAT THERE WAS AN ADDITIONAL EVIDE NCE FURNISHED BY THE ASSESSEE AND THE CIT(A) SHOULD HAVE NOT CONSIDERED THE SAME. AS REGARDS TO RE-IMBURSEMENT OF EXPENSES, THE LD. DR RELIED UPON THE CIT(A)S ORDER AS WELL AS ASSESSING OFFICERS ORDER. 19. WE HAVE PERUSED ALL THE RECORDS AND HEARD BOTH THE PARTIES GROUND NO. 1 IN ASSESSEES APPEAL IS ALREADY COVERED BY THE IT AT DELHI BENCH IN ASSESSEES OWN CASE FOR THE SUBSEQUENT YEARS I.E A.YS 2006-07 TO 2009-10 IN ITA NOS. 4679 & 525/DEL/2011 AND 686 & 687/DEL/2013 RESPECTI VELY WHEREIN IT HAS BEEN HELD IN PARA 11 OF THE ORDER DATED 25/3/2015 A S UNDER:- 1 6 ITA N O. 222/DEL/2013 IT IS EVIDENT THAT SECTION 194E READ WITH SECTION 115 BBA APPLY TO PAYMENTS MADE TO A NON-RESIDENT SPORTS ASSOCIATION OR AN INSTITUTION. IN THE INSTANT CASE, ATP IS UNDISPUTEDLY A GOVERNING BODY OF THE WORLD WIDE MENS PROFESSIONAL TENNIS CIRCUIT, RESPONSIBLE FOR RANKIN G OF ITS PLAYERS AND COORDINATING THE TENNIS TOURNAMENT IN THE WORLD. I N SUCH CIRCUMSTANCES WE ARE OF THE OPINION THAT ATP IS A NON-RESIDENT SPORT S INSTITUTION AND THEREFORE SECTION 194E APPLIES TO THE PAYMENTS MADE BY THE AS SESSEE TO THE ATP. IN THE LIGHT OF THE ABOVE, THE ORDER OF THE CIT (A) IS REVERSED AND THE ORDER OF THE ASSESSING OFFICER IS RESTORED. SO, RESPECTFULLY FOLLOWING THE ABOVE SAID ORDER, GR OUND NO. 1 IS DECIDED AGAINST THE ASSESSEE. 20. AS RELATED TO GROUND NO. 2, THE REIMBURSEMENT COSTS HAS TO BE EXCLUDED AS THE SAME DO NOT INVOLVE ANY FUNCTIONS TO BE PERF ORMED SO AS TO CONSIDER IT FOR PROFITABILITY PURPOSES. THUS WE DIRECT AO/TPO T O EXCLUDE REIMBURSEMENT COSTS WHILE WORKING OUT THE OPERATING COSTS. BESIDE S THE SAID ISSUE IS DECIDED IN CASE OF M/S. HSBC ELECTRONIC DATA PROCESSING IND IA LTD. VS. ADDL. CIT [ITA NO. 1624/HYD/2010 DECISION DATED 28.06.2013 HYD. (T RI.)] IN FAVOUR OF THE ASSESSEE AND THE FACTS OF THE ASSESSEES CASE ARE S IMILAR TO THAT OF HSBC ELECTRONIC DATA PROCESSING INDIA LTD. (SUPRA). HENC E, GROUND NO. 2 OF THE ASSESSEES APPEAL IS ALLOWED. 21. AS RELATES TO GROUND NO. 3, THE DIRECTIONS GIV EN IN CASE OF ACIT VS. M/S. CITI FINANCIAL CONSUMER FINANCE INDIA LTD. [ITA NO. 2848/DEL/2012 DECISION DATED 17.08.2015 DEL. (TRI.)] HAS TO BE FOLLOWED W HEREIN IT HAS BEEN HELD THAT IF THE ARMS LENGTH PRICE COMES WITHIN THE RANGE OF +/ - 5% OF THE RANGE THEN NO ADDITION HAS TO BE MADE. WE HAVE CONSIDERED THE SUB MISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVA ILABLE ON THE RECORD. IN THE PRESENT CASE, IT APPEARS THAT THE GRIEVANCE OF THE DEPARTMENT ONLY RELATES TO THE EXCLUSION OF MEGA SOFT LTD. AS COMPARABLE AND INCLU SION OF ORIENT INFORMATION TECHNOLOGY LTD. IN THE SET OF COMPARABLES. AS REGA RDS TO THE INCLUSION OF 1 7 ITA N O. 222/DEL/2013 ORIENT INFORMATION TECHNOLOGY LTD. IS CONCERNED, TH E TPO HAD NOT GIVEN ANY PARTICULAR REASON FOR ITS EXCLUSION. THE SAID COMP ANY ALSO DESIGNS, DEVELOPS AND DEPLOYS CUSTOMIZED SOFTWARE SOLUTION AND APPLIC ATION, SO ITS FUNCTIONALITY WAS COMPARABLE WITH THE ASSESSEE. THE SAID COMPANY WAS NOT CONSIDERED BY THE TPO BECAUSE IT WAS A LOSS MAKING COMPANY BUT TH AT CANNOT BE A REASON TO EXCLUDE IT FROM THE SET OF COMPARABLE, IN VIEW OF T HE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF YUM RESTAURANTS INDIA LTD. IN ITA NO. 5122/DEL/2010 WHEREIN IT HAS BEEN HELD THAT MERELY A COMPANY SHOW ING LOSS WOULD NOT LOSE ITS STATUS OF COMPARABLE IF OTHER CRITERIA DEPICTED STATUS OF COMPARABLE. SAME VIEW HAS BEEN TAKEN BY THE ITAT DELHI BENCH IN THE CASE OF SONY INDIA LTD. REPORTED AT 114 ITD 448. THUS THIS ISSUE IS REMANDE D BACK TO THE ASSESSING OFFICER FOR VERIFICATION OF THE CALCULATIONS FURNIS HED BY THE LD. A.R OF THE ASSESSEE AND TO BE DECIDED AFRESH IN ACCORDANCE WIT H LAW. 22. IN RESULT, THE APPEAL IS PARTLY ALLOWED FOR STA TISTICAL PURPOSES. ITA NO. 6449/DEL/2012 THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORD ER DATED 30/10/2012 PASSED BY LD. CIT (A)-XXIX, NEW DELHI. 23. THE GROUNDS OF APPEAL ARE AS FOLLOWS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(APPEALS) HAS ERRED IN CONSIDERING THE COMPARABL E HAVING NEGATIVE NCP MARGIN FOR THE YEAR 2004 AND HENCE GIV ING THE RELIEF TO THE ASSESSEE ON THE ISSUE OF DETERMINATION OF ALP. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN ADMITTING THE ADDITIONAL EVIDENCE UNDER RU LE 46A ON THE ISSUE OF ALLOWANCE OF SANCTIONS AND RIGHTS EXPENSES AND FURTHER ALLOWING THE SAME IN FAVOUR OF THE ASSESSEE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE YEA R, THE LD. CIT(A) HAS ERRED IN ALLOWING THE DEDUCTION OF PERSONAL EXPENSE S WITHOUT MENTIONING ANY REASON BEHIND THE RELIEF ALLOWED TO THE ASSESSEE. 1 8 ITA N O. 222/DEL/2013 24. THE LD. DR SUBMITS THAT THE ASSESSING OFFICER H AS PROPERLY TAKING INTO ACCOUNT ALL THE RELEVANT MATERIAL. THUS THE COMPARA BLES HAVING NEGATIVE NCP MARGIN FOR THE YEAR 2004 AND THE RELIEF GIVEN TO TH E ASSESSEE ON THE ISSUE OF DETERMINATION OF ALP BY THE CIT(A) IS WITHOUT ANY A PPLICATION OF MIND. AS REGARDS TO GROUND NO. 2, THE LD. DR SUBMITTED THAT THE ASSESSING OFFICER HAS ALREADY TAKEN INTO ACCOUNT ALL THE ASPECTS IN CONSI DERATION AND HAS RIGHTLY REJECTED THE CONTENTIONS OF THE ASSESSEE AT THE REL EVANT TIME RELATED TO THE EXPENSES AND ALLOWANCE OF SANCTIONS. AS REGARDS TO GROUND NO.3, THE LD. DR SUBMITTED THAT THE PERSONAL EXPENSES WERE RIGHTLY R EJECTED BY THE ASSESSING OFFICER. 25. AS REGARDS TO GROUND NO. 1, THE LD. AR SUBMITTE D THAT THE A.O IN THE ASSESSMENT ORDER HAS EXCLUDED CONCEPT MARKETING & A DVERTISING LTD FROM THE LIST OF COMPARABLES WHILE DETERMINING ARMS LENGTH MARK-UP IN RELATION TO PRODUCTION/EVENT MANAGEMENT SERVICES PROVIDED BY TH E RESPONDENT ASSESSEE TO ITS AES, ON THE GROUND THAT IT IS A LOSS MAKING COMPANY. HOWEVER, THE CIT(A) ACCEPTED THE SUBMISSION OF THE RESPONDENT AS SESSEE THAT THIS COMPRABALE COMPANY IS NOT A CONSISTENT LOSS MAKING COMPANY AND HAS POSITIVE NET WORTH AND HENCE CANNOT BE EXCLUDED. THE DEPART MENT IS IN APPEAL AGAINST THE AFORESAID DECISION OF THE CIT(A). THE LD. AR SU BMITTED THAT THE A.O ERRED IN ALLEGING THAT THE COMPARABLE COMPANY IS CONTINUOUSL Y LOSS MAKING. IT IS SUBMITTED THAT CONCEPT MARKETING & ADVERTISING LTD HAS INCURRED LOSSESS ONLY IN THE SUBJECT ASSESSMENT YEAR (PB PAGE NO. 436 FOR COMPUTATION OF THE MARGINS EARNED BY THE COMPARABLE COMPANY OVER A PER IOD OF 3 YEARS). THE NET WORTH OF THE COMPARABLE COMPANY IN THE SUBJECT A.Y WAS AROUND 0.93 CRORES. THE INCLUSION OR EXCLUSION OF COMPARABLE COMPANY ON THE GROUND THAT IT IS A LOSS MAKING COMPANY IS CONTRARY TO THE OECD DRAFT N OTES ON COMPARABILITY RELEASED FOR PUBLIC COMMENTS ON MAY 10, 2006. THE ASSESSEE ALSO RELIED ON THE DECISION OF THE ITAT, DELHI IN THE CASE OF SONY INDIA (P) LTD VS. DCIT (ITA NO. 1189/DEL/2005, 819/DEL/2007 & 820/DEL/2007, (2008-T IOL-439-ITAT- DEL). 1 9 ITA N O. 222/DEL/2013 26. AS REGARDS TO GROUND NO. 2 THE LD. AR SUBMITS T HAT DURING THE A.Y 2004-05, THE RESPONDENT ASSESSEE INCURRED EXPENDITU RE UNDER THE HEAD SANCTIONS AND RIGHTS IN INDIAN RUPEES PAID/PAYABL E TO INDIAN RESIDENTS AMOUNTING TO INR 1,07,57,455 AND TO NON-RESIDENTS I N FOREIGN CURRENCY AMOUNTING TO INR 24,80,983 AGGREGATING TO INR 1,32, 38,483 (DEBITED TO THE PROFIT & LOSS ACCOUNT). IT WAS FURTHER SUBMITTED TH AT THE DEPUTY DIRECTOR OF INCOME TAX, CIRCLE 1(2), INTERNATIONAL TAXATION, NE W DELHI (THE A. O) IN THE ASSESSMENT ORDER DISALLOWED SANCTIONS AND RIGHTS EXPENSES AMOUNTING TO INR 128,63,376, OUT OF THE TOTAL EXPENDITURE OF INR 1,3 2,38,483, UNDER SECTION 40(A) (I) OF THE ACT FOR NON-DEDUCTION OF TAX AT SO URCE, WRONGLY TREATING THE ENTIRE EXPENDITURE AS PAID/PAYABLE TO NON-RESIDENTS IN FOREIGN CURRENCY. IT WAS POINTED OUT THAT DURING THE COURSE OF THE ASSES SMENT PROCEEDINGS, IN REPLY TO THE A.OS QUERY REGARDING SANCTIONS AND RIGHTS EXPENSES PAID IN FOREIGN CURRENCY AND TAX DEDUCTED AT SOURCE THEREON, THE AS SESSEE VIDE LETTER DATED 21 DECEMBER 2006 SUBMITTED THE DETAILS OF INR 54,40,23 0 WHICH REPRESENTED THE PAYMENTS IN FOREIGN CURRENCY TO VARIOUS FOREIGN PAR TIES IN A.Y 2004-05. WHILE FURNISHING THE ABOVE DETAILS, INADVERTENTLY THE DET AILS WERE FURNISHED IN RESPECT OF AMOUNT REMITTED/PAID INSTEAD OF THE AMOUNT INCUR RED AND DEBITED TO THE PROFIT AND LOSS ACCOUNT DURING A.Y 2004-05. SECOND LY, THE AFORESAID DETAILS OF INR 54, 40,230 INCLUDED AN AMOUNT OF INR 10, 92,105 WHICH WAS INCURRED IN INDIAN RUPEES AND PAYABLE TO INDIAN RESIDENTS. THE REFORE, THE SANCTIONS AND RIGHTS EXPENSES PAYABLE TO NON-RESIDENTS IN FOREIG N CURRENCY WAS ONLY INR 35,73,088 (RECONCILIATION PROVIDED IN PARA 6.5 AT PAGE NO.7 O F THE ORDER OF THE CIT(A). IT WAS SUBMITTED THAT THE AO DISALLOWED INR 1,28, 63,376, WHICH IS ALMOST THE ENTIRE EXPENDITURE OUT OF THE TOTAL EXPE NDITURE OF INR 1,32,38,483, UNDER SECTION 40 (A) (I) OF THE ACT, WRONGLY ASSUMI NG IT TO BE PAYABLE TO NON- RESIDENTS (WHICH INCLUDED INR 1,07,57,455 PAID/PAYA BLE TO INDIAN RESIDENTS), WITHOUT GIVING ANY FURTHER OPPORTUNITY TO THE ASSES SEE TO EXPLAIN. IT WAS FURTHER SUBMITTED THAT DURING THE PROCEEDINGS BEFORE THE CI T (A), THE ASSESSEE SUBMITTED THE DETAILS OF SANCTIONS AND RIGHTS EXP ENSES INCURRED IN INDIAN RUPEES AND A COPY OF AGREEMENT ENTERED INTO WITH SH AW WALLACE DISTILLERIES LTD 2 0 ITA N O. 222/DEL/2013 (SWDL) AS ADDITIONAL EVIDENCE UNDER RULE 46A. THE A .O FILED HIS REMAND REPORT DATED 25 TH JUNE 2009 AGAINST THE DETAILS/ADDITIONAL EVIDENCE SENT BY THE LD. CIT (A) FOR HIS COMMENTS. THE ASSESSEE FILED THE R EJOINDER DATED 14 TH SEPTEMBER 2010 AGAINST THE AFORESAID REMAND REPORT OF THE A.O. THE CIT(A) AFTER DULY CONSIDERING THE REMAND REPORT OF THE A.O ADMITTED THE ADDITIONAL EVIDENCE VIDE PARA 7 OF HIS ORDER, WHICH IS REPRODU CED AS UNDER: DURING APPELLATE HEARING, THE APPELLANT FURNISHED DETAILS OF SANCTION AND RIGHTS EXPENSES INCURRED IN INR AND ALSO COPY OF AG REEMENT WITH SHAH WALLACE DISTILLERIES LTD. SINCE THESE WERE ADDITIO NAL EVIDENCES WHICH WERE NOT PRODUCED BEFORE ASSESSING OFFICER, THESE WERE S ENT TO A.O FOR REPORT U/S 46A AND A REMAND REPORT WAS REQUISITIONED. THE A.O FURNISHED REMAND REPORT WHICH WAS COMMUNICATED TO THE APPELLA NT FOR ITS REJOINDER. THE APPELLANT HAS FURNISHED REJOINDER VIDE LETTER D ATED 14/9/2010. I HAVE CONSIDERED VARIOUS SUBMISSIONS MADE BY THE A.O AND THE APPELLANT. THE BASIC ARGUMENT OF THE APPELLANT IS THAT IT COULD NO T FURNISH THESE DETAILS TO A.O BECAUSE A.O ASKED FOR DETAILS OF PAYMENTS IN FO REIGN CURRENCY ONLY. SINCE THESE DOCUMENTS ARE VITAL TO DECIDE THE ISSUE IN APPEAL. I HEREBY ADMIT THE ADDITIONAL EVIDENCE U/S 46 A IN VIEW OF F ACTS AND CIRCUMSTANCES OF THE CASE. 27. IT IS SUBMITTED THAT THE A.O HAS NEVER ASKED/CO NFRONTED THE ASSESSEE TO REPRODUCE ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE THAT SANCTIONS AND RIGHTS INCURRED IN FOREIGN CURRENCY WERE NOT LIABLE TO WIT HHOLDING OF TAXES, NO FURTHER OPPORTUNITY WAS GIVEN TO EXPLAIN THE FACTS/PROVIDE SUPPORTING DOCUMENTS FOR THE DISALLOWANCE MADE BY THE A.O. IT WAS STATED TH AT RULE 46A OF THE I.T. RULES READ ALONG WITH SECTION 250(4) OF THE ACT LAYS DOWN THE CIRCUMSTANCES UNDER WHICH AN ASSESSEE MAY BE PERMITTED TO PRODUCE BEFOR E THE FIRST APPELLATE AUTHORITY ANY EVIDENCE THAT WAS NOT PRODUCED OR COU LD NOT BE PRODUCED DURING THE COURSE OF THE PROCEEDINGS BEFORE THE A.O. THE L D. A.R FURNISHED A CHART IN RESPECT OF THE AMOUNTS PAID/PAYABLE TO NON-RESIDENT S, THE DEDUCTION ALLOWED/DISALLOWED AS PER THE ORDER OF THE CIT (A) IS AS UNDER: AMOUNT ALLOWED/DISALLOWED OUT OF PAYMENTS TO NON-RE SIDENTS 2 1 ITA N O. 222/DEL/2013 S.NO. PARTICULARS AMOUNT (IN INR) AMOUNT (IN INR) 1. TOTAL AMOUNT PAID/PAYABLE TO NON - RESIDENTS 24,80,983 2. DISALLOWANCES CONFIRMED BY THE LD. CIT(A): (I) AMOUNT PAID TO ATP AS TOUR FEES IN RELATION TO CHENNAI OPEN TOURNAMENT [PARA 7.3 (F) OF THE LD. CIT(A) ORDER] (II) AMOUNT PAID TO AFT ENTERPRISES PTY LTD FOR LAKME INDIA FASION WEEK [PARA 7.3 OF THE LD. CIT(A) ORDER] 19,22,663 1,00,750 20,23,413 3. AMOUNTS ALLOWED BY THE LD. CIT(A): (I) AMOUNT PAID TO BUSINESS GOLF CORPORATION IN F.Y 2003-04 FOR WORLD CORPORATE GOLF CHALLENGE TOURNAMENT, SPAIN [PARA 7.3 (A) OF THE LD. CIT(A) ORDER] (II) AMOUNT PAID TO ALLAN DONALD FOR INTERVIEW WITH J STEWART [PARA 7.3 (B) OF THE LD. CIT(A) ORDER] (III) COSTS REIMBURSED TO TWI UK FOR LEGAL COSTS IN UK IN CONNECTION WITH INDIAN TEAM CLOTHING ISSUE [PARA 7.3 (D) OF THE LD. CIT(A) ORDER]. 1,93,850 1 17,623 2,46,097 4,57,570 28. IT WAS SUBMITTED THAT FROM THE ABOVE DETAILS IT IS CLEAR THAT THE ASSESSEE SUBMITTED THE ADDITIONAL EVIDENCE ONLY IN RESPECT O F EXPENDITURE IN INDIAN RUPEES PAYABLE TO INDIAN RESIDENTS, WHICH HAS BEEN ALLOWED BY CIT (A) SINCE 2 2 ITA N O. 222/DEL/2013 THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT DO NO T APPLY TO PAYMENTS MADE TO INDIAN RESIDENTS. 29. THE LD. AR FURTHER SUBMITTED THAT THE A.O HAS M ADE THE DISALLOWANCE IN THE ASSESSMENT ORDER U/S 40(A)(I) OF THE ACT UNDER THE HEADING SANCTIONS AND RIGHTS EXPENSES INCURRED IN FOREIGN CURRENCY (PAGE 2 OF THE ASSESSMENT ORDER, ). FROM THE ASSESSMENT ORDER, IT IS SUBMITTED THAT THE A.O HAS DISALLOWED THE EXPENDITURE INCURRED IN INDIAN RUPEES PAYABLE T O INDIAN RESIDENTS ALSO WHILE DISALLOWING THE EXPENDITURE INCURRED IN FOREI GN CURRENCY U/S 40(A)(I) OF THE ACT WHICH DEALS WITH DISALLOWANCES OF AMOUNT PA ID TO NON-RESIDENTS WITHOUT DEDUCTING APPLICABLE TAX AT SOURCE. THEREF ORE, PROVISIONS OF SECTION 40(A)(I) OF THE ACT DO NOT APPLY IN RESPECT OF EXPE NDITURE/AMOUNT PAYABLE TO INDIAN RESIDENTS AND THUS, THESE EXPENSES CANNOT BE DISALLOWED U/S 40(A)(I) OF THE ACT. THE LD. AR FURTHER SUBMITTED THAT SECTION 40(A)(I) OF THE ACT RELATING TO DISALLOWANCE OF CERTAIN EXPENDITURE PAYABLE TO A RE SIDENT FOR NON-DEDUCTION OF TAX AT SOURCE WAS INSERTED BY THE FINANCE ACT, 2004 WITH EFFECT FROM 1 APRIL 2005 AND IS THEREFORE, APPLICABLE FROM A.Y 2005-06. HENCE, THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT DO NOT APPLY TO A.Y 200 4-05 WHICH IS THE ASSESSMENT YEAR UNDER CONSIDERATION. THEREFORE, NO DISALLOWAN CE CAN BE MADE IN RESPECT OF EXPENDITURE INCURRED IN INDIAN RUPEES PAYABLE TO INDIAN RESIDENT ON ALLEGATION OF NON-DEDUCTION OF TAX AT SOURCE IN RES PECT OF A.Y 2004-05 AS THERE WAS NO SUCH ENABLING PROVISION IN THE STATUTE. THER EFORE, THE CIT(A) RIGHTLY DELETED THE DISALLOWANCES IN RESPECT OF EXPENDITURE INCURRED IN INDIAN RUPEES PAYABLE TO INDIAN RESIDENTS 30. AS REGARDS TO GROUND NO. 3, THE LD. AR SUBMITT ED THAT DURING A.Y 2004- 05, THE ASSESSEE HAS GROUPED VARIOUS EXPENSES INCUR RED AMOUNTING TO RS.82,51,631 UNDER THE HEAD MISCELLANEOUS EXPENSES IN THE P &L A/C. THE A.O DISALLOWED 20% OF THE MISCELLANEOUS EXPENSES DEBITE D TO P &L A/C ON ADHOC BASIS, STATING THAT THE PAYMENTS/REIMBURSEMENTS MAD E BY THE ASSESSES TO ITS 2 3 ITA N O. 222/DEL/2013 EMPLOYEES ARE OF PERSONAL NATURE, IGNORING THE SUBM ISSIONS MADE BY THE ASSESSEE. 31. IT WAS FURTHER SUBMITTED THAT DURING THE A.Y 20 04-05, THE ASSESSEE HAS NOT DEBITED ANY PERSONAL EXPENSES RELATING TO ITS E MPLOYEES. IN THIS REGARD, REFERENCE WAS ALSO MADE TO CLAUSE 17(B) OF FORM 3CD FOR THE YEAR ENDED 31 ST MARCH 2004, WHEREIN IT WAS CLEARLY DISCLOSED THAT N O EXPENSE OF PERSONAL NATURE HAD BEEN DEBITED TO P &L A/C. IT WAS STATED THAT IN THE CASE OF A COMPANY, SUCH ADHOC DISALLOWANCE CANNOT BE MADE AND THAT THE ASSESSEE HAD A POLICY FOR MANAGING THE EXPENSES PERTAINING TO CR EDIT CARDS ISSUED TO THE EMPLOYEES, WHEREBY ANY EXPENSES INCURRED BY THE EMP LOYEES FOR OFFICIAL PURPOSES, THROUGH THE CREDIT CARDS WERE TO SETTLE B Y THEM PERSONALLY. THEY WERE ENTITLED TO THE REIMBURSEMENT FOR EXPENSES INC URRED BY THEM FOR OFFICIAL PURPOSE BY GETTING SUITABLE APPROVALS AND VERIFICAT IONS FROM THE RESPECTIVE SUPERVISORS/DEPARTMENTS. THUS THE LD. AR SUBMITTED THAT THE CIT (A) HAS RIGHTLY DELETED THE ADHOC ESTIMATED DISALLOWANCE OF MISCELLANEOUS EXPENSES, AND THIS GROUND OF THE DEPARTMENT APPEAL IS LIABLE TO BE DISMISSED. 32. THE LD. AR REFUTED ALL THE CONTENTIONS OF THE D R AND RELIED IN FOLLOWING CASE LAWS:- UNION OF INDIA VS. AZADI BACHAO ANDOLAN (263 ITR 70 6) CIT(A) VS. VISAKHAPATNAM PORT TRUST LTD (144 ITR 14 6). SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD VS. CIT(A)-III (ITA NO. 16/2014 AND CONNECTED MATTERS) DCIT VS. CHEIL COMMUNICATIONS INDIA PRIVATE LIMITED : ITA 712/DEL/2010, (2010-TII-60-ITAT-DEL-TP) HSBC ELECTRONIC DATAT PROCESSING INDIA LTD. VS. ADD L. CIT(A) 2(2) (ITA 1624 OF 2010), (TS-174-ITAT-2013 (HYD)-TP), HYDERABAD TRIBU NAL; COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LTD VS. A SST. CIT(A) LTU (ITA 114 & 2100 (MDS) OF 2011, AND 90 (MDS) OF 2011, ITAT CHEN NAI TRIBUNAL 2 4 ITA N O. 222/DEL/2013 33. WE HAVE PERUSED ALL THE RECORDS AND CONSIDERED SUBMISSIONS OF BOTH THE PARTIES. THE ISSUE RELATING TO PROPER ALP BY TAKIN G INTO NEGATIVE NCP MARGIN THE SAME IS ALREADY DISCUSSED IN ASSESSEES OWN CAS E IN ITA NO. 222/2013(SUPRA), OUR FINDINGS GIVEN THERE IN SHALL APPLY WITH THE SAME FORCE. AS REGARDS TO GROUND NO. 2 RELATING TO THE ADDITION AL EVIDENCE FURNISHED BY THE ASSESSEE, WE ARE OF THE VIEW THAT IT WAS RIGHTLY AL LOWED BY THE CIT (A) UNDER RULE 46A OF THE INCOME-TAX RULES 1962. IN OUR OPIN ION THE LD.CIT(A) APPRECIATED THE FACTS IN RIGHT PERSPECTIVE AND HIS FINDINGS GIVEN IN PARA 7.2 AND 7.3(E) OF THE IMPUGNED ORDER ARE WELL REASONED WHIC H DO NOT REQUIRE ANY INTERFERENCE ON OUR PART. AS REGARDS TO DISALLOWAN CE OF PERSONAL EXPENSES, WE ARE OF THE VIEW THAT THE A.O HAS NOT GIVEN ANY BASI S FOR MAKING THE ADHOC DISALLOWANCE. ON THE CONTRARY THE LD, CIT (A) PROPE RLY APPRECIATED THE FACTS AND RIGHTLY DELETED THE DISALLOWANCE MADE BY THE A.O. 34. IN RESULT, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 5TH OF APRIL 2016. SD/- SD/- (N. K. SAINI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 05/04/2016 *R. NAHEED* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 2 5 ITA N O. 222/DEL/2013 DATE 1. DRAFT DICTATED ON 18/01/2016 PS 2. DRAFT PLACED BEFORE AUTHOR 18/01/2016 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2016 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 6.4 .2016 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 6.4.2016 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.