M/s Enchanting Travels Pvt Ltd , Bangalore V. The Income Tax Officer Ward-2(1)(4), Bangalore

ITA 444/BANG/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0012 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 23-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NEERA MALHOTRA BENGALURU
• Assessee Lawyers: NARENDRA JAIN
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Services rendered outside India
• Section: 43B; 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT (TP) A NO. 444/BANG/2017 ASSESSMENT YEAR : 2012 - 13 M/S. ENCHANTING TRAVELS PVT. LTD., NO.660/1, AKSHAYA, 100 FT. ROAD, INDIRANAGAR, BANGALORE 560 038. PAN: AABCE 3501A VS. THE INCOME TAX OFFICER, WARD 2(1)(4), BANGALORE. APP ELL ANT RESPONDENT A PP EL LANT BY : SHRI NARENDRA JAIN, CA RE SPONDENT BY : MS. NEERA MALHOTRA , CIT(DR)(ITAT), BENGAL URU. DATE OF HEARING : 18.07 .201 8 DATE OF PRONOUNCEMENT : 14.09 .201 8 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE FI NAL ORDER OF ASSESSMENT DATED 11.01.2017 OF ITO, WARD 2(1)(4), B ANGALORE PASSED U/S. 143(3) R.W.S. 144C(13) OF THE INCOME-TAX ACT, 1961 [THE ACT] RELATING TO ASSESSMENT YEAR 2012-13. 2. THE ASSESSEE HAS FILED REVISED GROUNDS. GROUN D NOS.1 TO 4 REVISED BY THE ASSESSEE ARE WITH REGARD TO ADDITION MADE TO THE TOTAL INCOME CONSEQUENT TO DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF AN INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE (AE). IT(TP)A NO.444/BANG/2017 PAGE 2 OF 9 3. THE ASSESSEE IS CARRYING ON BUSINESS OF TOURS AN D TRAVELS. ENCHANTING-TRAVELS AG, GERMANY (HEREINAFTER REFERRE D AS 'ENCHANTING AG') HOLDS 99.96% SHARES IN ENCHANTING INDIA. ENCHA NTING AG IS A BOUTIQUE TRAVEL COMPANY SPECIALIZING IN HIGH-QUALIT Y TAILOR-MADE TRAVELS TO INDIA, SOUTH AMERICA, AFRICA AND ASIA. ENCHANTING A G AIMS AT CREATING UNIQUE AND PERSONALIZED TRAVEL EXPERIENCES BACKED B Y EXCEPTIONAL LEVELS OF GUEST SERVICES. ALL ITS TRAVELS ARE MANAGED BY I TS HIGHLY PROFESSIONAL, EFFICIENT AND HOSPITABLE STAFF OR BY ITS CERTIFIED PARTNERS WHO HAVE BEEN PERSONALLY SELECTED BY THE COMPANY TO ENSURE UTMOST ATTENTION TO DETAIL AND PASSIONATE GUEST CARE. THE SERVICES OF ENCHANT ING AG INCLUDE: (I) TAILOR-MADE TRAVELS, UNIQUE ITINERARIES THAT SUIT CUSTOMER'S NEEDS AND INTERESTS. (II) PRE-TRIP PLANNING, ADVICE AND TIPS. (III) PERSONALIZED TRAVEL GUIDE FOR TRIPS CONTAINING AL L RELEVANT INFORMATION ON HOTELS, TRAVEL MANAGER, ETC. (IV) HIGH-QUALITY ENGLISH, GERMAN, FRENCH AND SPANISH SPEAKING TOUR GUIDES. (V) RELIABLE CHAUFFEURS WITH COMFORTABLE AIR-CONDITIO NED TRANSPORT ARRANGEMENTS. (VI) UNIQUE HOTELS THAT HAVE ALL BEEN PERSONALLY TESTE D BY THE ENCHANTING INDIA TEAM. (VII) ITS OWN WELL TRAINED, EFFICIENT, COURTIES KNOWLED GEABLE TRAVEL MANAGERS AND REPRESENTATIVES TO SUPPORT AND HELP DU RING TRIPS. (VIII) 24-HOUR EMERGENCY HELPLINE CONTACT PERSON IN ALL DESTINATIONS. 4. ENCHANTING AG IS ABLE TO DELIVER THESE TAILOR MA DE TRAVEL PLANS IN INDIA BY THE USE OF THE SERVICES PROVIDED BY ENC HANTING INDIA I.E., THE ASSESSEE. THE STRUCTURING OF THESE TAILOR MADE TRAVEL PLANS IN THE INDIAN REGION ARE OFTEN MADE WITH THE COORDINATION OF BOTH ENCHANTING IT(TP)A NO.444/BANG/2017 PAGE 3 OF 9 AG AND ENCHANTING INDIA'S SPECIFIC ABILITIES TO DEL IVER THE SERVICE TO ITS ESTEEMED CLIENTS. 5. ENCHANTING INDIA THROUGH ITS COLLECTIVE EXPERTIS E AND ON-THE-GROUND PRESENCE TO CREATES TRAVEL PLANS THAT NOT ONLY REFL ECTS THE PERSONAL NEEDS AND INTERESTS OF GUESTS FROM AROUND THE WORLD, BUT ALSO DELIVERS AN AUTHENTIC EXPERIENCE OF THIS FASCINATING DESTINATIO N. HOWEVER, ONCE A CLIENT CHOOSES THE ENCHANTING AG AS ITS SERVICE PRO VIDER, ALL SERVICE CONTRACTS ARE EXECUTED BETWEEN THE CLIENT AND ENCHA NTING AG. 6. ENCHANTING INDIA WORKS AS A LIMITED TOURISM SERV ICE PROVIDER IN THE INDIAN REGION. ENCHANTING AG OWNS VIRTUALLY ALL THE VALUABLE INTELLECTUAL PROPERTY RIGHTS (KNOW-HOW, COPYRIGHTS ETC.) AND OTHER COMMERCIAL OR MARKETING INTANGIBLES (BRAND NAMES, T RADEMARKS ETC.) AND IS INVOLVED IN PROCURING CUSTOMERS AND MARKETIN G OF ITS SERVICES. ENCHANTING INDIA DOES NOT OWN ANY INTEREST IN THESE INTANGIBLES AND IS A MERE SERVICE PROVIDER. THUS, ENCHANTING INDIA PROVI DES LIMITED SERVICES AND HENCE IS ENTITLED TO RECEIVE COMPENSATION APPRO PRIATE TO THE FUNCTIONS PERFORMED (TAKING INTO ACCOUNT ASSETS USE D AND RISKS ASSUMED). BASED ON AN ANALYSIS OF THE FUNCTIONS PER FORMED AND RISKS ASSUMED BY ENCHANTING AG, ONE CAN CONCLUDE THAT ENC HANTING AG BEARS GREATER PART OF MARKETING RISKS. 7. THE BUSINESS ACTIVITIES OF ENCHANTING INDIA IS C LASSIFIED AS BELONGING TO THE 'TOUR OPERATOR SERVICES' SEGMENT, CONSIDERING THE LIMITED AVAILABILITY OF COMPANIES IN SIMILAR SPACE AS THAT OF ENCHANTING INDIA IN THE PUBLIC DOMAIN. THE INTERNATIONAL TRANSACTIONS OF EN CHANTING INDIA WERE AGGREGATED FOR THE PURPOSE OF BENCHMARKING. THE IN TERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS A E WAS AS FOLLOWS:- IT(TP)A NO.444/BANG/2017 PAGE 4 OF 9 ASSOCIATED ENTERPRISE DESCRIPTION OF TRANSACTION V ALUE IN INR RECEIVABLE/(PAYABLE) ENCHANTING TRAVELS AG, GERMANY TOUR SERVICES RENDERED 28,80,71,457 ADVANCES RECEIVED AGAINST EXPORT OF SERVICES (5,03,41,012) 8. IT IS NOT IN DISPUTE THAT SINCE THE ASSESSEE AND ENCHANTING TRAVELS AG ARE ASSOCIATE ENTERPRISES, THE TRANSACTION OF RE NDERING TOURISM RELATED SERVICES BY THE ASSESSEE TO ENCHANTING TRAVELS AG W AS AN INTERNATIONAL TRANSACTION AND INCOME FROM SUCH TRANSACTION HAD TO BE DETERMINED HAVING REGARD TO ARMS LENGTH PRICE U/S.92 OF THE A CT. IT IS NOT IN DISPUTE THAT TNMM WAS THE MOST APPROPRIATE METHOD FOR DETER MINING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS AE. THE PROFIT LEVEL INDICATOR (PLI) CHOSE N FOR THE PURPOSE OF COMPARISON WAS OPERATING PROFIT TO OPERATING COST ( OP/OC). THE OP/OC OF THE ASSESSEE AS COMPUTED BY THE TPO WAS AS FOLLO WS:- PROFIT AND LOSS ACCOUNT AMOUNT IN RS. INCOME FROM SALES 28.92,93,391 OPERATING INCOME (A) 28,92,93,391 EXPENSES TOUR ORGANIZATION EXPENSES 22,02,93,057 PERSONNEL COST 5,11,23,424 OTHER ADMINISTRATIVE AND OPE RATING EXPENSES 2,15,29,752 DEPRECIATION 16,07,634 OPERATING EXPENSES (B) 29,33,18,670 OPERATING PROFITS (C = A B) -40,25,279 OPERATING PROFIT MARGIN (C / B) -1.39 9. THE TPO ARRIVED AT THE FOLLOWING FINAL SET OF CO MPARABLE COMPANIES FOR THE PURPOSE OF COMPARISON OF THEIR PROFIT MARGI N WITH THAT OF THE ASSESSEE AND DETERMINED THE ADDITION TO THE TOTAL I NCOME ON ACCOUNT OF DETERMINATION OF ARMS LENGTH PRICE:- IT(TP)A NO.444/BANG/2017 PAGE 5 OF 9 FINAL SET OF COMPARABLE AND THE MARGIN IS GIVEN BE LOW. SL. NO. COMPANY NAME OP/OC 1 COX & KINGS LTD. 75.13% 2 CROWN TOURS LTD. 0.59% 3 T C TRAVEL & SERVICES LTD. - 7.65% 4 ACE TOURS WORLDWIDE LTD. 1% 5 ANCIENT INDIA TRAVELS PVT. LTD. 3% 6 APOLLO VOYAGES PVT. LTD. 4% 7 EXPLORE CULTURE AND TOURS (INDIA) PVT. LTD. 1% 8 KASH VENTURE TRAVELS PVT. LTD. 16% 9 TUSHITA TRAVELS PVT. LTD. 3% AVERAGE 10.67% 6. COMPUTATION OF ALP COMPARABLE: AS GIVEN ABOVE: 6.1 METHODOLOGY: TNMM (AS SELECTED BY THE TAXPAYER) 6.2 PROFIT LEVEL INDICATOR : OP/OC (AS SELECTED BY THE TAXPAYER) I.E. 10.67% 7. TOTAL ADJUSTMENTS U/S. 92CA ARMS LENGTH MEAN MARGIN ON COST 10.67% ADJUSTED MARGIN 10.67% OPERATING COST 293,318,670 ARMS LENGTH PRICE (ALP) 110.67% OF OPERATING COST 324,628,808 PRICE RECEIVED 35,335,417 SHORTFALL BEING ADJUSTMENT U/S. 92CA 35,335,417 5% OF PRICE RECEIVED 14,464,670 SINCE THE SHORTFALL IS EXCEEDING 5% OF THE INTERNATIONAL TRANSACTION, ADJUSTMENT IS MADE. TOTAL ADJUSTMENTS OF RS.3,53,35,417/- (RUPEES THREE CRORE FIFTY-THREE LAKHS THIRTY-FIVE THOUSAND FOUR HUNDRED AND SEVENTE EN ONLY) IS BEING TREATED AS AN ADJUSTMENT U/S. 92CA OF THE INCOME-TA X ACT, 1961. IT(TP)A NO.444/BANG/2017 PAGE 6 OF 9 10. AGGRIEVED BY THE AFORESAID ADDITION MADE TO THE TOTAL INCOME ON ACCOUNT OF ADJUSTMENT OF ALP, THE ASSESSEE FILED OB JECTIONS BEFORE THE DRP. THE SUBMISSIONS OF THE ASSESSEE BEFORE THE DR P WERE THAT COX & KINGS LTD., ONE OF THE COMPARABLE CHOSEN BY THE TPO HAD A TURNOVER OF RS.295.78 CRORES AND ASSESSEES TURNOVER WAS ONLY R S.28.80 CRORES. THE TURNOVER OF COX & KINGS LTD. WAS MORE THAN 10 TIMES THAT OF THE ASSESSEES TURNOVER AND THEREFORE IN THE LIGHT OF D ECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF MCAFEE SOFTWARE (I) P. LTD. [2016] 68 TAXMANN.COM 283 (BANG. TRIB.), A COMPANY WHOSE TURNOVER IS MORE THAN 10 TIMES THAT OF THE ASSESSEE SHOULD NOT BE CONSIDE RED FOR THE PURPOSE OF COMPARABILITY. THE ASSESSEE ALSO POINTED OUT THAT COX & KINGS LTD. HAD RELATED PARTY TRANSACTIONS (RPTS) WHICH WAS MORE TH AN 100%. ASSESSEE RELIED ON THE DECISION OF ITAT DELHI IN THE CASE OF MEDSO IMPORTS (I) P. LTD. FOR THE PROPOSITION THAT WHEREVER RPTS ARE HIGH, S UCH COMPANY SHOULD NOT BE TAKEN FOR THE PURPOSE OF COMPARABILIT Y. THE SUBMISSIONS OF THE ASSESSEE DID NOT FIND FAVOUR WITH THE DRP. TH E DRP HELD THAT TURNOVER CANNOT BE A CRITERION FOR EXCLUDING A COMP ANY. THE ASSESSEE HAS ALSO MADE SUBMISSION THAT FUNCTIONALLY COX & KI NGS LTD. WAS NOT COMPARABLE. THIS WAS ALSO REJECTED BY THE DRP. WI TH REGARD TO THE SUBMISSION THAT RPT IN THE CASE OF COX & KINGS LTD. WAS MORE THAN 25% AND THEREFORE SHOULD BE EXCLUDED, THE DRP OBTAINED A REMAND REPORT FROM THE AO IN WHICH THE AO REPORTED THAT RPT IN THE CAS E OF COX & KINGS LTD. WAS 16.89%. THE DRP APPLIED THE FILTER OF RPT BEIN G MORE THAN 25% AND SINCE RPT OF COX & KINGS LTD. WAS LESS THAN 25%, TH E DRP HELD THAT THE SAME SHOULD BE REGARDED AS A COMPARABLE COMPANY. 11. CONSEQUENTLY, THE ADDITION MADE BY THE AO ON AC COUNT OF DETERMINATION OF ALP WAS CONFIRMED BY THE DRP. AGG RIEVED BY THE AFORESAID ACTION OF THE DRP, WHICH WAS INCORPORATED BY THE AO IN THE FINAL IT(TP)A NO.444/BANG/2017 PAGE 7 OF 9 ORDER OF ASSESSMENT, THE ASSESSEE HAS RAISED GROUND NOS.1 TO 4 BEFORE THE TRIBUNAL. 12. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE FILED BEFORE US AN ORDER OF COORDINATE BENCH OF THE ITAT BANGALO RE IN ASSESSEES OWN CASE FOR THE AY 2013-14 IN IT(TP)A NO.2149/BANG/201 7, ORDER DATED 8.6.2018 WHEREIN THIS TRIBUNAL EXCLUDED COX & KINGS FROM THE LIST OF COMPARABLE COMPANIES BY FOLLOWING THE DECISION OF T HE HONBLE DELHI HIGH COURT IN THE CASE OF PR. CIT V. ORACLE (OFSS) BPO SERVICE PVT. LTD. IN I TA NO.124/2018. THE TRIBUNAL CONCLUDED ON THE COMPARABILITY OF COX & KINGS LTD. WITH ASSESSEE AS FOLLOWS:- 9. HAVING CAREFULLY EXAMINED THE ORDERS OF AUTHO RITIES BELOW AND THE MATERIAL AVAILABLE ON RECORD IN THE L IGHT OF RIVAL SUBMISSIONS, WE FIND THAT UNDISPUTEDLY THE COX & KI NGS HAS ITS OWN BRAND VALUE AND IS ALSO ENGAGED IN MULTIFARIOUS ACTIVITIES. FROM THE FINANCIALS, IT IS ALSO CLEAR THAT UNDER TH E HEAD INCOME, REVENUE FROM OPERATION WAS OF RS.37,227 LAKHS OUT O F WHICH INCOME FROM TRAVEL & TOUR COMMISSION WAS AT RS.34,6 27 LAKHS AND OTHER OPERATING INCOME WAS ONLY RS.110 LAKHS. T HEREFORE, THE MAIN REVENUE OF THIS COMPANY IS NOT GENERATED F ROM THE TOUR OPERATION IN INDIA. THE MAIN REVENUE IS GENERATED F ROM THE TRAVEL AND TOUR COMMISSIONS. WE HAVE ALSO CAREFULLY EXAMINED THE JUDGMENTS OF HONBLE DELHI HIGH COURT IN WHICH IT HAS BEEN HELD THAT THE BRAND OF THE COMPANY PLAYS ITS OWN RO LE IN PRICE OR COST DETERMINATION. WHILE DEALING WITH THE BRAND VA LUE OF WIPRO LTD., THEIR LORDSHIP OF THE HONBLE HIGH COURT HAS HELD THAT THE BRAND VALUE PLAYS AN IMPORTANT ROLE IN PRICE OR COS T DETERMINATION. THE RELEVANT OBSERVATION OF THE HON BLE HIGH COURT IS EXTRACTED HEREUNDER FOR THE SAKE OF REFERE NCE: AS TO THE EXCLUSION OF M/S WIPRO LIMITED, HERE TOO, THE COURT IS OF THE OPINION THAT THE BRAND VALUE OF AN ENTITY HAS A SIGNIFICANT ROLE IN ITS ABILITY TO GARNER PRO FITS AND NEGOTIATE CONTRACTS. THUS, WHILE CONSIDERING THE COMPARABLES, THE LIKELIHOOD OF PROFITS DERIVED OR ATTRIBUTABLE TO THE BRAND HAVING REGARD TO THE CONS ISTENCY OF THE QUALITY OF SERVICES THAT AN ENTITY IS ABLE T O OFFER IT(TP)A NO.444/BANG/2017 PAGE 8 OF 9 WOULD RELEVANT; ALTHOUGH FUNCTIONALLY, THE TWO ENTI TIES MAY BE SIMILAR IN TERMS OF THE SERVICES OR PRODUCTS THEY OFFER, BRAND DOES PLAY ITS OWN ROLE IN PRICE OR COS T DETERMINATION. IF THIS SINGULAR ASPECT IS KEPT IN M IND, THE ITATS APPROACH CANNOT BE FAULTED WITH. 10. IN THE LIGHT OF THE AFORESAID JUDGMENTS OF HO NBLE DELHI HIGH COURT AND THE ANNUAL REPORT OF THE COX & KINGS , WE FIND THAT COX & KINGS IS INVOLVED IN DIFFERENT ACTIVITIE S BESIDES TOUR OPERATION AND HAS ITS OWN BRAND VALUE. THEREFORE, I T CANNOT BE HELD TO BE A GOOD COMPARABLE FOR DETERMINATION OF T HE ALP FOR THE INTERNATIONAL TRANSACTIONS. WE ACCORDINGLY DIRE CT THE AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COM PARABLES WHILE DETERMINING THE ALP FOR INTERNATIONAL TRANSAC TIONS. ACCORDINGLY, WE DIRECT THE AO/TPO TO EXCLUDE THESE TWO COMPARABLES AND RECOMPUTE THE ALP IN TERMS INDICATE D ABOVE AFTER SETTING ASIDE THE ASSESSMENT ORDER IN THIS RE GARD. 13. THE AFORESAID DECISION OF THE TRIBUNAL WILL A PPLY IN THE PRESENT ASSESSMENT YEAR ALSO. WE THEREFORE DIRECT EXCLUSIO N OF COX & KINGS LTD. FROM THE LIST OF COMPARABLES. THE AO/TPO IS DIRECT ED TO RECOMPUTE THE ALP AFTER EXCLUSION OF COX & KINGS LTD. NO OTHER G ROUNDS WERE PRESSED FOR ADJUDICATION. 14. AS FAR AS GROUND NO.5 RAISED BY THE ASSESSEE IS CONCERNED, IT IS WITH REGARD TO DISALLOWANCE OF EMPLOYEES CONTRIBUTI ON TO PROVIDENT FUND U/S. 36(1)(VA) OF THE ACT. IT IS NOT IN DISPUTE TH AT THE EMPLOYEES CONTRIBUTION TO PF WAS PAID BY THE ASSESSEE BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME FOR AY 2012-13. THE LD. COUNS EL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE DECISION OF THE HONBLE H IGH COURT OF KARNATAKA IN THE CASE OF ESSAI TERAOKA (P) LTD. V. DCIT (2014) 43 TAXMANN.CO M 33 (KAR) . IN THE AFORESAID DECISION, THE HONBLE HIGH COUR T HELD THAT PF CONTRIBUTION DEPOSITED ON OR BEFORE THE DUE DATE FO R FILING OF RETURN OF INCOME CANNOT BE DISALLOWED AND HAS TO BE ALLOWED A S DEDUCTION U/S. 43B R.W.S. 36(1)(VA) OF THE ACT. IN VIEW OF THE AFORES AID DECISION, THE ADDITION IT(TP)A NO.444/BANG/2017 PAGE 9 OF 9 MADE BY THE REVENUE AUTHORITIES CANNOT BE SUSTAINED . THE SAME IS DIRECTED TO BE DELETED. 15. THE OTHER GROUNDS OF APPEAL ARE WITH REGARD TO LEVY OF INTEREST U/S. 234B OF THE ACT, WHICH IS PURELY CONSEQUENTIAL AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL EFFECT. 16. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 14 TH DAY OF SEPTEMBER, 2018. SD/- SD/- ( INTURI RAMA RAO ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUD ICIAL MEMBER BANGALORE, DATED, THE 14 TH SEPTEMBER, 2018. / D ESAI S MURTHY / COPY TO: 1. APP ELL ANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.