Lockheed Martin India Pvt. Ltd., New Delhi V. ACIT, CIRCLE- 15(2), New Delhi

ITA 3971/DEL/2017

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 9242 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 4 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-11-2021
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I1
• Assessment Year: 2012-2013
• Appeal Filed On: 15-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DHEERAJ JAIN
• Assessee Lawyers: SUMIT MANGAL
• Keywords: Transfer pricing; International transaction
• Section: 92C; 143(3); 144C; 92CA

Judgement Text

Page | 1 IN THE INCOME TAX APPELLATE TRIBUNAL [DELHI BENCH “I–1”: NEW DELHI] BEFORE SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER AND SHRI K.N.CHARY, JUDICIAL MEMBER (Through Video Conferencing) ITA. No. 3971/Del/2017 (Assessment Year: 2012-13) Lockheed Martin India Pvt. Ltd., ITC Maurya Hotel, Room No. 1720, Diplomatic Enclave, S. P. Marg, New Delhi – 110 021. PAN: AABCL4556E Vs. ACIT, Circle : 15 (2), New Delhi. (Appellant) (Respondent) Assessee by : Shri Sumit Mangal, Advocate; & Shri Mayank Aggarwal, Adv.; Department by: Dr. Dheeraj Jain, Sr. D. R.; Date of Hearing : 11/11/2021 Date of Pronouncement : 11/11/2021 O R D E R PER PRASHANT MAHARISHI, A. M. 1. This appeal is filed by the assessee against the order passed by the ACIT, Circle-15(2), New Delhi (ld AO) for assessment year 2012-13 on 26/08/2016 u/s 143(3) read with section 144C(1) of the Income Tax Act. 2. The assessee has raised the following grounds of appeal:- “1. The order dated August 26, 2016 passed by the Learned Assessing Officer (“Ld. AO”) under Section 143(3) read with Section 144C of the Income Tax Act, 1961 (“the Act”), pursuant to the directions of the Hon’ble Dispute Resolution Page | 2 Panel (“Hon’ble DRP”) dated June 27, 2016, is bad in law and on the facts and circumstances of the case. 2. The Learned Transfer Pricing Officer (“Ld. TPO”), Ld. AO and the Hon’ble DRP have erred in rejecting the Arm’s Length Price (“ALP”) determined by the appellant. 3. The Ld. TPO, Ld. AO and the Hon’ble DRP have erred in rejecting the use of data pertaining to multiple years, and in applying data pertaining only to the current year, i.e. of Financial Year 2011-12, to benchmark international transactions undertaken by the appellant. 4. The Ld. TPO, Ld. AO and the Hon’ble DRP have erred in rejecting / modifying certain quantitative filters applied by the appellant and in introducing certain incorrect additional quantitative filters for selection of comparables to benchmark the international transactions undertaken by the appellant. 5. The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in applying the quantitative filters proposed by the Ld. TPO over the final set of comparables chosen by the appellant instead of the initial set of potential comparables / full population of potential comparables. 6. The Ld. TPO, Ld. AO and the Hon’ble DRP have erred in rejecting comparables selected by the appellant to benchmark its international transactions on the basis of incorrect reasons such as peculiar economic circumstances, declining sales, current year losses, rejection of segmental data etc. 7. The Ld. TPO, Ld. AO and the Hon’ble DRP have erred in computing working capital adjusted margins of comparables to benchmark the international transactions undertaken by the appellant. 8. The Ld. TPO, Ld. AO and the Hon’ble DRP have erred in not making appropriate adjustments to account for differences between the risk profile of the appellant vis-a- vis the comparables, while computing the ALP of the international transactions undertaken by the appellant with its associated enterprises during the Financial Year 2011-12. 3. Brief facts shows that the assessee is a company engaged in the business of marketing, promotion and advertising of products manufactured and produced by Lockheed Martin Corporation and its group companies. It mainly acts as a communication Page | 3 channel between its parent entity and potential customers in India. Some of the main functions undertaken in India are as follows: (a) Providing information about Lockheed Martin Corporation (LMC) to Indian companies; (b) Undertaking market research and providing information on Indian market to the parent entity; (c) Collating information about competitors of Lockheed Martin group in India and providing information on the same to its head office; (d) Distribution of brochures to promote Lockheed Martin in India and provide information to potential customers; (e) Acting as liaison and communication channel between potential Indian customer and group entities; (f) Providing information on various queries raised by group entities." 4. Appellant deploys necessary assets for performing marketing support services. However, at the same time, it does not own any marketing or other intangibles for rendering these services. For providing the aforementioned services, the appellant employs non-technical people who possess general skills. Employees are not technical people like engineers, PhDs, software experts, etc. The appellant does not bear any risk since it is providing marketing support services and is compensated on cost plus basis @ 10%. Market risk and related product liability risk is borne by LMC and/or its group companies, since they sell the products to unrelated parties directly. 5. Assessee filed on 30/11/2012 at Rs. 2,64,25,620/-. The assessee has entered into certain international transaction and therefore the matter was referred to the ld TPO in terms of section 92C of the Act to determine the arm's length price. The Page | 4 ld TPO passed the order u/s 92CA (3) of the Act on 28.01.2016. The ld TPO determined the arm's length price of the international transaction related to “Provision of marketing support services” of Rs. 2,11,26,934/- and therefore the same was added to the total income of the assessee and draft assessment order was passed on 16/202/2016 at an income of Rs. 4,75,52,550/-. 6. Assessee preferred objection before the ld DRP-1, New Delhi. The objection of the assessee were disposed off vide direction dated 27/06/2016. The ld TPO passed an order giving direction to the above ld DRP and shortfall of the transfer price of the ALP was determined at Rs. 1,85,39,276/-. Consequent to that the assessment order was passed determining total income of Rs. 4,49,64,896/- against the return of income of the assessee at Rs. 2,64,25,620/-. Thus, the only addition was made on account of arm's length price on international transaction where the addition was made of at Rs. 1,85,39,276/-. 7. The appeal of the assessee was filed late. The appeal should have been filed on or before 29.10.2016 however, it was filed having a delay of 230 days. The assessee submitted an application for condonation of delay vide letter dated 16/06/2017 stating that there was a change in the roles and responsibilities of the employee handling over the taxes and secretarial matter. Mrs. Pinto was responsible for handling the tax matter but there was change and Mr. Ritesh Sharma was directed to look after the above matter. A there was no organized handing over of the responsibilities, which skipped the attention of Mr. Ritesh Sharma to file the appeal. Further, there was a change in the address of the assessee and there was certain infrastructure work carried on at the new premises. Therefore, Page | 5 the matter skipped attention of Mr. Sharma. In the month of June 2017 it came to his notice, he filed the appeal, and therefore it was stated that there was a „sufficient cause‟ causing the delay of 230 days and maybe condoned. The ld AR also supported the same argument. He also referred to several judicial precedents for condonation of delay. An affidavit was also filed stating the above facts. 8. The ld DR submitted that the delay in filing of the appeal should not be condoned, as there was no sufficient reason given by the assessee. 9. We have carefully considered the rival contentions and find that there was a delay, which is caused due to the sufficient cause. Hence, we condone the delay. We are also supported by the decision of the Hon'ble Supreme Court in case of Collector Land Acquisition, vs Mst. Katiji & Ors 1987AIR1353 (SC). Accordingly, the delay is condoned. 10. Coming to the merits of the addition, we find that assessee has entered into an international transaction of provision of marketing support services with its associated enterprises amounting to Rs. 17,49,56,698/-. Assessee adopted Transactional Net Margin Method [TNMM] as the most appropriate method. The operating margin of the assessee was determined by adopting the profit level indicator of operating profit/ operating cost [OP/OC]. The margin of the assessee is at 14.94%. The assessee selected set of seven comparables and the margin of the comparable was worked out at 7.39 % by adopting weighted average for 3 years and stated that international transactions are at arm's length. Page | 6 11. The ld TPO rejected the transfer pricing analysis and adopted the current year data. He retained only two comparables namely ICRA Management Consulting Services limited having a margin of 6.62% and in Inmacs Management Service Private Limited whose margin is 51.02 %. The average of the margin determined at 28.82% and he computed the adjustment of Rs. 2,11,26,934/- . 12. The ld DRP directed the ld AO to keep foreign exchange loss as operating expenditure and directed to allow the working capital adjustment. Accordingly, the average margin of the comparable was completed at 29.23% and after granting working out capital adjustment, it was computed at 27.12%. Accordingly, the shortfall of transfer price was determined at Rs. 1,85,39,276/-. 13. The only dispute raised by the assessee is with respect to the exclusion of following three comparables by the ld TPO. a. Cyber Media Research Private Limited b. Indian Tourism Development Corporation Limited c. In House Products Ltd (Segmental). 14. The ld AR submitted that a. Cyber Media Research Limited is excluded by the TPO for the reason of decline in sales. It was stated that the ld DRP has accepted the above comparable for Assessment Year 2010-11 and 11-12. It was therefore stated that exclusion of the above item merely for decline in sales and in absence of any extraordinary circumstances cannot be the reason for rejection of the same. b. With respect to In House Production Limited it was submitted that the assessee itself has not considered such company as comparable, however, in response to the show Page | 7 cause notice the assessee requested for inclusion of the above comparable as the assessee included the same for financial year 2011-12. The ld TPO rejected the same stating that no information is available of the above company segmental data in public domain in respect of services rendered under the health care segmental services. It was submitted that now the data is available in public domain and therefore it should be included. c. With respect to the Indian Tourism And Development Corporation Limited ld TPO did not include the same because the Segmental data of the above company in marketing support services was not available. The ld TPO also stated that this segment in segmental information also shows that it has incurred losses in financial year 2011-12 and 2010-11 respectively and therefore this is not suitable. The ld AR submitted that segmental data are available with respect to Ashoka Reserve And Marketing Services arms segment and therefore it should be included in the comparability analysis. 15. The ld DR vehemently supported the orders of the ld TPO and direction of the ld DRP. On the above facts, we have carefully considered the rival contentions and perused the orders of the lower authorities. 16. We find that in case of the assessee the coordinate bench had dealt with the comparables for Assessment Year 2010-11 in ITA NO. 1701/Del/2015 reported in 116 Taxmann.com 452. The coordinate bench has considered the inclusion of Inhouse Production Limited vide para Nos. 38 to 40 in case of the assessee as under :- Page | 8 “In house Production Limited 38. The ld. counsel for the assessee vehemently stated that this company was erroneously excluded by the TPO whereas this company fulfills all the criteria of comparability with the assessee. The ld. counsel for the assessee further stated that even segmental data is available for healthcare division. Therefore, this company can be compared with that of the assessee on the basis of segmental data. 39. Per contra, the ld. DR read the observations of the TPO for excluding this company. 40. We find that the main reason for excluding this company given by the TPO is that it also runs a knowledge process outsourcing centre. Hence this company is more akin to an ITES provider. In our considered view, since the segmental data is available for healthcare information, the same can be compared with the assessee. We, accordingly, restore this issue to the file of the TPO. The TPO is directed to decide the inclusion of this company afresh after considering the segmental data of this company.” 17. In paragraph 40 the coordinate bench held that since the segmental data of this company is available for healthcare segment same cannot be compared with the assessee. It was further stated that comparable company is more akin to its ITES provider and hence it is functionally comparable. Exclusion by the ld TPO was only for the reason that no data was available of the above company of respective segment for this year. Now the ld AR submitted that the data is available. Hence, now there cannot be any dispute that the functional profile of the comparable company is similar to the assessee company for assessment year 2010-11 as the coordinate bench set aside the issue back to the file of the ld TPO. The ld TPO was directed to decide the inclusion of this comparable company afresh after considering the segmental data of this company. 18. Therefore, respectfully following the decision of the co-ordinate bench in assessee‟s own case for assessment year 2010-11 and in absence of any change in the facts and circumstances of the case, we also direct the assessee to produce the data with respect Page | 9 to this company before the ld TPO and ld TPO is directed to decide the inclusion of this company afresh after considering the above data. 19. The Indian Tourism Development Corporation Limited was also part of the dispute between the parties for Assessment Year 2010-11. The co-ordinate bench for assessment year 2010-11 also considered this comparable vide para No. 41 to 44 of that order as under :- “India Tourism Development Corporation Limited 41. The main reason for excluding this company given by the TPO is that its segment Ashok Reservation and Marketing Service Division [ARMS] can be considered as comparable to the assessee but other segments like Sound and Light Shows [SEL] and miscellaneous operations cannot be considered a company as they are not even in the nature of business services. The TPO further observed that it is not clear from the Annual Report whether ARMS is the predominant sub-segment out of three sub-segments. Income bifurcation of this segment can be understood from the following chart: Division Income in AY 2010- 11 (in Crores) In % Ashok Reservation and Marketing services ("ARMS") 7.2 58% Sounds and Light Show ("SEL") 0.73 6% Ashok Institute of Hospitality and Tourism Management ("AIH & TM") 4.45 36% Total 12.38 100% 42. From the above chart, it can be seen that ARMS segment is the dominant sub-segment and since the TPO himself has accepted that ARMS can be compared with the assessee, looking to the aforementioned chart, we are of the considered view that this company should be taken as good comparable. 43. Before us, the ld. counsel for the assessee also argued that certain comparables were excluded on application of employee cost filter of 25%. The ld. counsel for the assessee stated that employee cost is not necessarily a true indicator of comparability of companies or their profitability. It is the say of the ld. counsel for the assessee that since the assessee has used TNMM to bench mark the impugned transactions, there is no need to arbitrarily reduce the number of comparables by applying employee cost to total cost ratio as long as the companies selected for comparison are functionally comparable to that of the tested party. Page | 10 44. We find force in the contention of the ld. counsel for the assessee. We are of the considered view that if the functions are comparable with those of the assessee, then the companies cannot be excluded as they fail to pass the employee cost filter. Considering the business profile of the assessee, and in particular the marketing support services provided by it to its AE, we do not find any merit in applying employee cost filter of 25%. We, therefore, direct the TPO to include all those companies which are otherwise functionally comparable but fail to pass the employee cost filter.” The co-ordinate bench has held that the functions of the ITDC with respect to the ARMS division function are comparable with the assessee. The segmental data are also available. Therefore, merely because that division has incurred loss in 2 years and it is not a case of persistent loss making division, respectfully following the decision of the coordinate bench in assessee‟s own case we direct the ld TPO to decide about the comparability of the ARMS segment of the comparable companies with the assessee. 20. The third comparable contested is exclusion of Cyber Media Research Limited. The rejection by the ld TPO of the above comparable is due to decline in sales. The reason given by the ld TPO was upheld by the ld DRP for the reason that the sales of the above company has fallen from Rs. 12.93 crores to Rs. 3.69 crores during the year. Therefore, because of this fact only this comparable company was rejected. For assessment year, 2010- 11 and 11-12 the ld TPO as well as the ld DRP has accepted this comfortable. There is no change in the facts and circumstances and only the decline in sales was pointed out. We find that only reason for exclusion is of decrease in sales in the comparable company could not be the reason for rejection of the comparable if it passes all the filters applied by the ld TPO. As no other peculiar economic circumstances such as demerger etc or substantial reduction in the functions or risk or in the assets employed in case of the comparable is shown, we do not find any reason to exclude the above comparable. Page | 11 21. Accordingly, we direct the ld TPO to include the same and decide the issue afresh. Accordingly, grounds Nos. 1 to 6 of the above appeal are allowed with above direction. 22. Ground No. 7 is with respect to the working capital adjustment. No argument was advances against the same and therefore it deserves to be rejected as the ld DRP has directed the ld TPO to compute the working capital adjustment. We find that as per objection No. 7 before ld DRP, assessee itself stated that ld TPO has not granted working capital adjustment. Accepting the objection of the assessee, the working capital adjustment was granted by ld DRP. However, when the order giving effect to the direction of the ld DRP was passed the assessee is aggrieved with that and has raised this ground. Therefore, due to changing stand of the assessee this ground is dismissed. 23. Ground No. 8 of the appeal of the assessee is saying that the AO and ld DRP erred in not making appropriate adjustment to account for difference between the risk profile of the appellant as well as assessee. The claim of the assessee is that assessee is 100% captive service provider and therefore it has lesser risk as compared to the comparable companies. Ld TPO and ld DRP has held that it is wrong to say that company is a low-risk enterprise. They held that the company is functioning in highly sensitive industries such as defense that carries high business risk. It was further held that the assessee being the AE of a highly reputed MNC the standard accepted from the company is very high. Therefore, other risk involved in the company is extremely high. For the earlier year, also the ld DRP has rejected this ground of the assessee. However the co-ordinate bench in Page | 12 assesse‟s own case for assessment year 2010-11 has considered this aspect in para 49-50 of that order as under :- “49. In so far as risk adjustment is considered, there is no quarrel that the assessee has a cost plus business model operating in a low risk or almost risk mitigated environment as compared to the comparable companies who are independent service providers and bear significant risks. 50. In our considered opinion, the assessee is very much entitled for risk adjustment accordingly.” 24. In view of this, we set aside this issue back to the file of the ld TPO with direction to the assessee to show the risk assumed by it and how the risk of the comparable companies are different. The ld TPO may consider the same and decide the issue accordingly. Accordingly, ground No. 8 of the appeal is allowed. 25. In the result of field of the assessee is partly allowed Order pronounced in the open court on 11/11/2021. -Sd/- -Sd/- ( K. N. CHARY ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 11/11/2021 *AKKEOT* Copy forwarded to 1. Appellant; 2. Respondent; 3. CIT 4. CIT (Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, New Delhi