Belkin India Pvt. Ltd., Gurgaon V. ACIT, New Delhi

ITA 2292/DEL/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3147 (ITAT-DELHI)
• Duration Of Justice: 7 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 17-04-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: KOUSHLENDRA TEWARI SENIOR
• Assessee Lawyers: MANKUSH SONI CAS
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 92D; 234B; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.2292/DEL./2017 (ASSESSMENT YEAR : 2011-12) M/S. BELKIN INDIA PRIVATE LIMITED, VS. ACIT, CIRCLE 4 (2), 27, 1 ST FLOOR, BABAR LANE, NEW DELHI. BENGALI MARKET, NEW DELHI 110 001. (PAN : AADCB7453L) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI ATUL JAIN & MANKUSH SONI, CAS REVENUE BY : SHRI KOUSHLENDRA TEWARI, SENIOR DR DATE OF HEARING : 21.11.2017 DATE OF ORDER : 12.12.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. M/S. BELKIN INDIA PRIVATE LIMI TED (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 15.03.2017, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. CIT (A)/TPO UNDER SECTION 250 / 143 (3) READ WITH S ECTION 144C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2011-12 ON THE GROUNDS INTER ALIA THAT :- ITA NO.2292/DEL/2017 2 1 ON FACTS, CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) - 19, NEW DELHI [HEREIN REFERRED TO AS 'LD. CIT(A)'] ERRED IN CONFIRMING AN ADDITION OF INR 15,503,946 T O THE TAXABLE INCOME OF THE APPELLANT ON ACCOUNT OF DETERMINATION OF ARM'S LENGTH PRICE OF THE INTERNAT IONAL TRANSACTION U/ S 92CA(3) OF THE INCOME-TAX ACT, 196 1 (THE ACT'). 2 ON FACTS AND IN LAW, THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION OF THE DEPUTY COMMISSIONER OF INCOME-TAX, TRANSFER PRICING OFFICER - 1(1)(2) ('LD . TPO') OF DISREGARDING THE ECONOMIC ANALYSIS CARRIED OUT BY THE APPELLANT U/ S 92D OF THE ACT READ WITH RULE 10D OF THE INCOME TAX RULES, 1962 (LITHE RULES'), B Y MODIFYING FILTERS AND ARBITRARILY REJECTING THE COM PANIES SELECTED BY THE APPELLANT WHICH ARE FUNCTIONALLY COMPARABLE. 3 ON FACTS AND IN LAW, THE LD. CIT(A) GROSSLY ERRE D IN CONFIRMING THE ACTION OF LD. TPO OF INCLUDING ME DIA RESEARCH USERS COUNCIL AS A COMPARABLE COMPANY. 4 THE LD. AO ERRED ON FACTS AND IN LAW IN INITIATI NG PENALTY PROCEEDINGS UNDER SECTIONS 271(1)(C) OF TH E ACT. 5 THE LD. AO, BASED ON DIRECTIONS OF LD. CIT(A), ERRED ON FACTS AND IN LAW IN CHARGING INTEREST UNDE R SECTION 234B AND 234C OF THE ACT. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : BELKIN INDIA PVT. LTD., T HE TAXPAYER IS A 99% SUBSIDIARY OF BELKIN B.V. ENGAGED IN MARKETING SUPPORT FOR COMPUTER AND MOBILITY EQUIPMENT, ACCESSORY AND RELA TED PRODUCTS AND ARE PERFORMING THE FUNCTIONS VIZ. PROVIDING INF ORMATION ON INDIAN MARKET, PRODUCT AWARENESS, INFORMATION ON RE GULATORY ITA NO.2292/DEL/2017 3 ENVIRONMENT IN INDIA AND COORDINATING IN RESPECT OF LOGISTIC SERVICES. 3. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISE (AE) TO THE FOLLOWING EFFECT :- SL.NO. NAME OF THE INTERNATIONAL TRANSACTION AMOUNT (INR) 1 PROVISION OF SUPPORT SERVICES 171,249,543 2 PURCHASE OF FIXED ASSETS 2,683,783 3 REIMBURSEMENT OF EXPENSES PAID 2,030,640 4 REIMBURSEMENT OF EXPENSES RECEIVED 495,209 4. THE TAXPAYER IN ORDER TO BENCHMARK ITS INTERNATI ONAL TRANSACTION SELECTED 6 COMPARABLES HAVING AVERAGE N ET COST PLUS (NCP) AT 8.22% AS AGAINST NCP MARK UP OF TAXPAYER A T 9.99% AND FOUND ITS INTERNATIONAL TRANSACTIONS AT ARMS LENGT H. 5. HOWEVER, TPO REJECTED 6 COMPARABLES CHOSEN BY TH E TAXPAYER AND RETAINED 2 AND INTRODUCED 2 NEW COMPAR ABLES AND CALCULATED NCP MARK UP OF 4 COMPARABLES AT 26.34% A S AGAINST NCP MARK UP OF TAXPAYER AT 9.99% AND PROPOSED THE A DJUSTMENT ON ACCOUNT OF ARMS LENGTH PRICE AT RS.2,54,52,714/-. 6. THE TAXPAYER HAS NOT APPROACHED THE LD. DRP RATH ER RAISED OBJECTIONS BEFORE THE LD. CIT (A) WHO HAS ORDERED T O EXCLUDE ONE COMPARABLE VIZ. INFO EDGE INDIA LTD. FROM THE FINAL LIST OF ITA NO.2292/DEL/2017 4 COMPARABLES. CONSEQUENTLY, AVERAGE NCP MARK UP OF 3 COMPARABLES WAS RECOMPUTED AT 19.95% VIS--VIS NCP MARK UP OF TAXPAYER AT 9.99% THEREBY REDUCING TP ADJUSTMENT TO RS.1,55,03,946/-. 7. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFO RE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUNDS NO.1, 2 & 3 9. TPO WHILE BENCHMARKING THE INTERNATIONAL TRANSAC TIONS QUA MARKET SUPPORT SERVICE SEGMENT AFTER APPLYING VARIO US FILTERS SELECTED 4 COMPARABLES WHICH ARE AS UNDER :- SL.NO. COMPANY NAME OP/OC 1 QUADRANT COMMUNICATION LTD. 14.58 2 CONCEPT COMMUNICATION LTD. 4.73 3 INFO EDGE (INDIA) LTD. 45.53 4 MEDIA RESEARCH USERS COUNCIL 40.53 AVERAGE 26.34 AND PROPOSED TP ADJUSTMENT U/S 92CA AT RS.2,54,52,7 14/-. 10. HOWEVER, LD. CIT (A) AFTER CONSIDERING THE CONT ENTIONS RAISED BY THE TAXPAYER ORDERED TO EXCLUDE INFO EDGE (INDIA) LTD. FROM THE FINAL SET OF COMPARABLES. CONSEQUENTLY, T HE AVERAGE NCP ITA NO.2292/DEL/2017 5 MARK UP OF 3 COMPARABLES COMES DOWN TO 19.95% AS AG AINST NCP MARK UP OF 9.99%. PURSUANT TO THE ORDER PASSED BY THE LD. CIT (A), AO PASSED FRESH ASSESSMENT ORDER DATED 15.03.2017 R EDUCING THE TP ADJUSTMENT TO RS.1,55,03,946/- FROM RS.2,54,52,7 14/- WHICH IS UNDER CHALLENGE BEFORE THE TRIBUNAL. 11. AT THE VERY OUTSET, THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE TAXPAYER ONLY CHALLENGES INCLUSION OF ONE COMPA RABLES VIZ. MEDIA RESEARCH USERS COUNCIL (MRUC). FUNCTIONAL PROFILE OF THE TAXPAYER IS NOT IN QUESTION. METHOD FOR BENCHM ARKING THE INTERNATIONAL TRANSACTION HAS ALSO BEEN ACCEPTED BY THE LD. TPO. NOW, WE WILL EXAMINE THE SUITABILITY OF MEDIA RESEARCH USERS COUNCIL (MRUC) IN THE LIGHT OF THE CONTENTIONS RAISED BY THE LD. AR FOR THE TAXPAYER AS WELL AS LD. DR FOR THE REVEN UE. 12. THE LD. AR FOR THE TAXPAYER CHALLENGED THE INCL USION OF MRUC AS A COMPARABLE FOR BENCHMARKING THE INTERNATI ONAL TRANSACTION QUA MARKET SUPPORT SERVICE SEGMENT ON G ROUNDS OF FUNCTIONAL DISSIMILARITY; THAT MRUC IS A NOT-FOR-PR OFIT ORGANISATION; THAT MRUC OUTSOURCES MOST OF ITS ACTI VITIES TO THIRD PARTY; THAT MRUC DOES NOT QUALIFY THE FILTER APPLIE D BY THE TPO QUA RELATED PARTY TRANSACTION (RPT) AND RELIED UPO N THE DECISION OF M/S. LINKED IN TECHNOLOGY IN ITA NO.706/DEL/2016 . ITA NO.2292/DEL/2017 6 13. HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVE NUE TO REPEL THE ARGUMENTS ADDRESSED BY THE LD. AR FOR THE TAXPA YER CONTENDED THAT WHEN THE FUNCTIONAL PROFILE OF A COMPANY IS SI MILAR TO THE TAXPAYER, IT CANNOT BE EXCLUDED FOR BENCHMARKING IN TERNATIONAL TRANSACTION MERELY BECAUSE OF THE FACT THAT IT IS A NOT-FOR-PROFIT ORGANISATION. 14. UNDISPUTEDLY, MAJOR SOURCE OF REVENUE OF MRUC I S THE INCOME FROM ITS MEMBERS IN THE SHAPE OF MEMBERSHIP FEE AND SUBSCRIPTION FEE FOR INDIAN READERSHIP SURVEY (IRS) AND INDIAN OUTDOOR SURVEY (IOS) REPORTS. WHEN WE REFER TO REL EVANT PAGE 374 OF THE ANNUAL REPORT OF MRUC, AVAILABLE IN THE PAPE R BOOK, IT IS REFERRED AS A NOT-FOR-PROFIT ORGANISATION REPRESENT ING FOUR DIFFERENT STAKEHOLDERS IN MEDIA RESEARCH COVERING MEDIA SELLE RS AND BUYERS, OPERATIVE PORTION THEREOF IS EXTRACTED FOR READY RE FERENCE AS UNDER:- MEMBERSHIP THE COUNCIL HAS FROM THE BEGINNING, BEEN A NON-FOR- PROFIT ORGANISATION REPRESENTING FOUR DIFFERENT STAKEHOLDE RS IN MEDIA RESEARCH COVERING MEDIA SELLERS AND BUYERS. ON 31 ST MARCH 2011, MRUC HAD MEMBERS AS FOLLOWS :- NO. ADVERTISERS 58 PUBLISHERS 107 ADVERTISING AGENCIES 51 BROADCAST AND OTHER MEDIA 33 249 ITA NO.2292/DEL/2017 7 15. WHEN WE EXAMINE THE ISSUE OF COMPARABILITY OF T AXPAYER VIS--VIS MRUC IN THE LIGHT OF RULE 10B (2) OF THE INCOME-TAX RULES, 1962 (FOR SHORT THE RULES), WE ARE OF THE CONSIDERED VIEW THAT THE TAXPAYER CANNOT BE COMPARED WITH MRUC BECA USE OF FUNCTIONAL DISSIMILARITY AS NO RISK IS ASSUMED BY T HE MRUC BEING A NOT-FOR-PROFIT ORGANISATION AND ONLY SERVES THE INT EREST OF ITS MEMBERS AND ASSETS EMPLOYED ARE ONLY FROM THE MEMBE RSHIP FEE AS WELL AS SUBSCRIPTION FEE COLLECTED FROM ITS 249 MEM BERS. 16. FURTHERMORE, BENEFITS / PROFITS OF THE MRUC ARE NOT DIVIDED BETWEEN THE MEMBERS, IT BEING A NOT-FOR-PROFIT ORGA NISATION. SO, THE MRUC DOES NOT QUALIFY THE PARAMETERS LAY DOWN U NDER RULE 10B (2) OF THE RULES, NECESSARY FOR COMPARABILITY A NALYSIS. EVEN OTHERWISE, SURPLUS OF MRUC ARE NEITHER DISTRIBUTED AMONG THE MEMBERS NOR ARE OFFERED FOR INCOME-TAX PURPOSES. 17. FURTHERMORE UNDER SECTION 10B(1)(E) UNDER TRANS ACTIONAL NET MARGIN METHOD (TNMM), NET PROFIT MARGIN ESTABLI SHED BY THE TP ANALYSIS IS TAKEN INTO ACCOUNT TO ARRIVE AT THE ARMS LENGTH PRICE QUA INTERNATIONAL TRANSACTIONS. IN CASE OF MRUC BE ING A NOT-FOR- PROFIT ORGANISATION, PROFIT MAKING IS NOT THE MOTIV E RATHER IT IS OPERATING IN MEDIA RESEARCH COVERING MEDIA SELLERS AND BUYERS FOR SOME SPECIFIC MOTIVE OF THE COMPANY. SO, A NOT-FOR -PROFIT ITA NO.2292/DEL/2017 8 ORGANISATION CANNOT BE COMPARED WITH THE TAXPAYER W HICH IS A COMPANY ESTABLISHED FOR MAKING PROFIT. 18. FURTHERMORE IT IS EVENT FROM PAGE 386 OF THE AN NUAL REPORT OF MRUC, AVAILABLE IN THE PAPER BOOK, THAT MRUC PAID E XPENSES TO THE TUNE OF RS.9,27,95,904/- (IN THE EARLIER YEAR R S.8,19,52,193/-) TO THE THIRD PARTY RESEARCH AGENCY FOR GENERATING I NCOME FROM ITS MEMBER BY WAY OF SUBSCRIPTION FEE FOR IRS/IOS, MEAN ING THEREBY MRUC OUTSOURCING EXPENSES COMES TO 85% OF THE TOTAL EXPENSES. SO, IN THE GIVEN CIRCUMSTANCES, MRUC CANNOT BE COMP ARED WITH THE TAXPAYER WHICH DOES NOT OUTSOURCE ANY OF ITS AC TIVITY. 19. FURTHERMORE MRUC DOES NOT QUALIFY TURNOVER FILT ER OF RS.5 CRORES APPLIED BY THE TPO FOR SELECTING THE COMPARA BLES AS IS EVIDENT FROM PAGE 382 OF THE PAPER BOOK WHICH IS IN COME AND EXPENDITURE ACCOUNT AND TOTAL INCOME IS SHOWN AT RS .2,64,37,978/-. BY APPLYING THE FILTERS OF RS.5 CRORES, THE TPO HAS REJECTED OTHER COMPARABLES OF THE TAXPAYER VIZ. SPORTING & OUTDOO R AD AGENCY LTD.. SO, THE MRUC IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES ON GROUND OF TURNOVER FILTER OF RS.5 CR ORES ALSO. 20. EVEN OTHERWISE, THE MAJOR TRANSACTIONS OF MRUC IS RELATED PARTY TRANSACTIONS AS ITS SUBSTANTIVE INCOME IS GEN ERATED FROM MEMBERSHIP FEES AND SUBSCRIPTION FEES FOR IRS/IOS R EPORTS AND AS SUCH, PRICE CANNOT BE CONSIDERED AS INDEPENDENT CO NTROLLED PRICE ITA NO.2292/DEL/2017 9 AS THE MAJOR REVENUE IS EARNED FROM ITS 249 MEMBERS . SUITABILITY OF MRUC AS A COMPARABLE HAS COME UP BEFORE THE COOR DINATE BENCH OF THE TRIBUNAL IN LINKED IN TECHNOLOGY (SUPRA) AND HAS BEEN ORDERED TO BE EXCLUDED FOR THE REASON DISCUSSE D IN THE PRECEDING PARAS. 21. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT MRUC IS NOT A SUITABLE COMPARA BLE VIS--VIS THE TAXPAYER FOR BENCHMARKING THE INTERNATIONAL TRA NSACTIONS QUA MARKET SUPPORT SERVICES SEGMENT. CONSEQUENTLY, GRO UNDS NO.1, 2 & 3 ARE DETERMINED AGAINST THE TAXPAYER. GROUND NO.4 22. GROUND NO.4 NEEDS NO FINDINGS BEING PREMATURE. GROUND NO.5 23. GROUND NO.5 QUA LEVY OF INTEREST U/S 234B AND 2 34C OF THE ACT NEED NO SPECIFIC FINDING BEING CONSEQUENTIAL IN NATURE. 24. RESULTANTLY, THE APPEAL FILED BY THE ASSESSEE I S DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 12 TH DAY OF DECEMBER, 2017. SD/- SD/- (B.P. JAIN) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 12 TH DAY OF DECEMBER, 2017 TS ITA NO.2292/DEL/2017 10 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.