Abercrombie & Kent India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5742/DEL/2011

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6492 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 2 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 20-12-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 23-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Corroborative evidences; Royalty expenses; Surrender of tenancy right
• Section: 92C; 143(3); 92E

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCHES : I 1 NEW DELHI ] BEFORE SHRI I. C. SUDHIR, JUDICIAL MEMBER A N D SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA. NO. 4229/DEL/2010 AND ITA. NO. 5742/DEL/2011 ASSESSMENT YEARS : 2006-07 & 2007-08. ABERCROMBIE & KENT INDIA PVT. LTD., ASSTT. CIT, B6/20, LOCAL SHOPPING CENTRE, VS. CENTRAL CIRCLE : 23, SAFDARJUNG ENCLAVE, NEW DELHI. NEW DELHI 110 029. PAN : AAACA 5951 D (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI P. C. YADAV, AD V., SHRI RISHABH JAITELY, ADV.; DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT [DR] DATE OF HEARING : 20.12.2016 DATE OF PRONOUNCEMENT : 09 .03.2017 O R D E R PER I. C. SUDHIR, J.M. : ITA. NO. 4229/DEL/2010 : THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN HI S APPEAL FOR ASSESSMENT YEAR 2006-07 :- 2 1. WITHOUT PREJUDICE, THE ASSESSING OFFICER APPLI ED TRANSACTIONAL NET MARGIN METHOD (TNMM) AND THEN ERRED IN LAW IN DETER MINING THE ARMS LENGTH PRICE (ALP) IN RELATION TO AN INTERNATIONAL TRANSACTION UNDER THE TNMM BY COMPUTING THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE AT ENTITY LEVEL (AT 15.98%) AND NOT ON THE BASIS OF TH E NET PROFIT MARGIN REALIZED BY THE ASSESSEE ONLY FROM ITS INTERNATIONA L TRANSACTIONS (AT 23.91%) AS MANDATED BY RULE 10B(1)(E) AND BY HONBL E ITAT, MUMBAI IN THE CASE OF T TWO INTERNATIONAL PVT. LTD. , TARA JEWELS EXPORTS PVT. LTD. TARA ULTIMO PVT. LTD., UCB INDIA P. LTD. VS. ASSTT. COMM. OF INCOME TAX, DY. CIT VS. STARLITE [2010]6 TAXMANN.COM41, ADDL. C IT VS. TEJ. DIAM [2010]37 SOT 341 (MUM). 2. THE ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN REJECTING THE COMPARABLE UNCONTROLLED PRICE (CUP) WORKINGS (BASED ON INTERNAL TNMM DERIVED FROM COMPARISONS OF SIMILAR TRANSACTIO NS BETWEEN AES AND NON AE) SUBMITTED BY THE ASSESSEE AND RELIE D UPON BY THE ASSESSING OFFICER. 3. THE ASSESSING OFFICER HAS GROSSLY ERRED ON FACTS AN D IN LAW BY NOT ACCEPTING THE TRANSFER PRICING METHODOLOGY IN SPITE OF THE FACT THAT THE ASSESSEE HAD UNDERTAKEN SIMILAR TRANSACTIONS WI TH NON-AES AMOUNTING TO RS. 25,19,30,724/- (42.55 % OF TOTAL S ALES) AND WITH AES AMOUNTING TO RS. 34,02,16,704/- (57.45 % OF TOT AL SALES) AND EVIDENTLY DEMONSTRATED THROUGH AUDITED SEGMENT ACCO UNTS THAT IT EARNED A MARGIN OF 23.91% FROM ITS AE TRANSACTIONS AND 03.43% FROM ITS NON-AE TRANSACTIONS. 4. THE ASSESSING OFFICER APPLIED TNMM AND THEN ERRED I N USING INCORRECT PROFIT MARGIN CALCULATED AT ENTITY LEVEL (15.98 %) FOR THE ASSESSEE, INSTEAD OF THE CORRECTLY COMPUTED PROFIT MARGIN FROM INTERNATIONAL TRANSACTIONS WITH AES (23.91%), EARNE D BY THE ASSESSEE AND HAS FURTHER ERRED IN NOT CALCULATING T HE ALP IN RELATION TO THE INTERNATIONAL TRANSACTIONS OF THE INCOME TAX RULES, 1962) AND DIRECTLY COMPARED THE INCORRECT MARGIN OF 1598% WIT H THE MARGIN OF ALLEGEDLY COMPARABLE COMPANIES. 5. THE TRANSFER PRICING ADJUSTMENT IS BASED ON THE MEA N MARGIN FORMULAE WHICH THE ASSESSING OFFICER HAS CALCULATED BY DIVIDING OP OR 3 OPERATION PROFIT {(WHICH IS TAKEN AS NET PROFIT) WI TH OC OR OPERATING COST (WHICH IS TAKEN AS GROSS PROFIT)} THE ASSESSI NG OFFICER HAS ERRED IN LAW AND ON FACTS BY APPLYING THE RESULTING MEAN MARGIN PERCENTAGE (21.53% FOR COMPARABLES) ON THE GROSS A MOUNTS OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE INSTEAD OF CALCULATING THE NET PROFIT BASED ON THE GROSS PROFIT OF THE INTERNA TIONAL TRANSACTIONS OF THE ASSESSEE (AS PER THE FORMULAE WORKED OUT BY THE AO FOR CALCULATING THE MEAN MARGIN). 6. WITHOUT PREJUDICE, THE ASSESSING OFFICER ERRED IN L AW AND FACTS IN WRONGLY REJECTING THE COMPARABLE COMPANY I.E. TRAVE L CORPORATION OF INDIA LIMITED (TCI) (CARRYING ON THE SIMILAR BUSINE SS OF HANDLING INBOUND TOUR AS THAT OF THE ASSESSEE) IDENTIFIED BY THE ASSESSEE, BASED UPON THE LOGICAL SEARCH PROCESS (I.E. CAPITAL INE). 7. THE ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN CONCLUDING THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING CO MPREHENSIVE TRAVEL AND TOUR RELATED SERVICES, WHEREAS IN FACT, DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS PRIMARILY EAR NED ITS REVENUE FROM INBOUND TOURS ONLY. THE ASSESSING OFFICER HAS FURTHER ERRED IN UNILATERALLY IDENTIFYING OTHER COMPANIES (I.E. COX & KINGS INDIA LTD, INTERNATIONAL TRAVEL HOUSE LTD, AND SHREERAJ TRAVEL S AND TOURS LTD) AS COMPARABLE, THAT WERE NOT COMPARABLE WITH THE AS SESSEE, OPERATIONALLY AND / OR FUNCTIONALLY. 8. THE ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN NOT CARRYING OUT THE FUNCTION, ASSETS AND RISK ANALYSIS (FAR) WHILE SELECTING THE COMPARABLES. 9. THE ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN NOT CONFORMING THE ASSESSEE WITH THE COMMENTS OF THE TPO SOUGHT BY DISPUTE RESOLUTION PANEL (DRP) DURING THE PROCEEDINGS OF TH E DRP. 10. THE ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN ADOPTING DIFFERENT BASIS FOR DETERMINING OP/OC FOR COMPARING THE PROFITS MARGINS TO MAKE TRANSFER PRICING ADJUSTMENTS. 11. THE ASSESSING OFFICER ERRED IN LAW AND ON FACTS OF THIS CASE IN RELYING ON THE DATA DURING THE COURSE OF ASSESSMENT WHICH WAS NOT 4 AVAILABLE TO THE ASSESSEE AT THE TIME OF PREPARING TRANSFER PRICING DOCUMENTATION. 12. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN CI RCUMSTANCES OF THE CASE AND IN LAW COMPLETELY IGNORING THE DULY AU DITED SEGMENT- WISE REPORT FILED BEFORE DRP ON THE FINANCIAL RESUL TS FOR DETERMINATION OF ALP BASED UPON TNMM IN RESPECT OF TRANSACTIONS WITH AE AND NON-AE. 2. HEARD AND CONSIDERED THE ARGUMENTS ADVANCED BY T HE PARTIES IN VIEW OF ORDERS OF THE AUTHORITIES BELOW, MATERIAL AVAILABLE ON RECORD AND THE DECISIONS RELIED UPON. 3. THE GENERAL FACTS IN BRIEF ARE THAT THE ASSESSE E COMPANY IS A PART OF ABERCROMBIE & KENT PVT. LTD. (IN SHORT A & K) GROUP . IT PROVIDES PERSONALIZED LUXURY TOUR AND TRAVEL SERVICES. A & K INDIA (ASSE SSEE) PRIMARILY OPERATES DESTINATION MANAGEMENT COMPANY THAT SPECIALIZES IN HANDLING FREE INDIVIDUALS TRAVELERS, GROUP TRAVELERS, SPECIAL INTEREST GROUP, WHO INTENDS TO VISIT INDIA, NEPAL, SRI LANKA. ASSESSEE WAS ESTABLISHED IN THE YEAR 1985 AND PRESENTLY HAS ITS OFFICES IN NEW DELHI. THE ASSESSEE ARRANGES TW O TYPES OF TOUR, (I) IN BOUND TOURS, INVOLVES NON-RESIDENTS TRAVELLING IN INDIA A ND (II) OUT BOUND TOURS, INVOLVES RESIDENTS TRAVELLING OUTSIDE INDIA. DURIN G THE YEAR THE ASSESSEE HAS UNDERTAKEN THREE TYPES OF TRANSACTIONS AND HAD APPL IED INTERNAL CUP FOR BENCH MARKING THESE TRANSACTIONS. THE LD. TPO, HOW EVER, APPLIED TNMM FOR FINDING OUT THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS AT 5.54%. HE HAS ALSO APPLIED 4 COMPARABLES INCLUDING COX & KING S (INDIA) LTD., IGNORING THE OBJECTION OF THE ASSESSEE. THE ACTION OF THE T OP HAS RESULTED IN ADJUSTMENT OF RS.2,05,69,692/-. THE ASSESSEE QUEST IONED THE SAME BEFORE THE LD. DRP, BUT COULD NOT SUCCEED. 5 4. IN SUPPORT OF THE GROUNDS THE LD. AR, SHRI P.C. YADAV, HAS SUBMITTED THE FOLLOWING WRITTEN SYNOPSIS :- 1. ASSESSEE IS A COMPANY AND PART OF A&K GROUP; IT PRO VIDES PERSONALIZED LUXURY TOUR AND TRAVEL SERVICES . A&K INDIA PRIMARILY OPERATES DESTINATION MANAGEMENT COMPANY THAT SPECIA LIZES IN HANDLING FREE INDIVIDUALS TRAVELERS, GROUP TRAVELER S, SPECIAL INTEREST GROUP WHO INTENDS TO VISIT INDIA, NEPAL, S RILANKA. A&K INDIA WAS ESTABLISHED IN 1985 AND PRESENTLY HAS ITS OFFICES IN NEW- DELHI. 2. IT IS PERTINENT TO MENTION HERE THAT A&K IS ARRANGI NG TWO TYPE OF TOURS A. INBOUND TOURS, INVOLVES NON RESIDENTS TRAVELLING IN INDIA B. OUTBOUND TOURS, INVOLVES RESIDENTS TRAVELLING OUTSI DE INDIA 3. CERTAIN DATES WHICH ARE RELEVANT TO DECIDE CERTAIN ADMITTED FACTS ARE AS UNDER:- DATE EVENT REMARKS 22.10.2006 ROI DECLARING AN INCOME OF RS 1,37,39,380/- WAS FILED 26.10.2007 ROI FILED BY THE ASSESSEE WAS PROCESSED U/S 143(1) OF THE ACT CASE OF THE ASSESSEE WAS REFERRED TO TPO OBSERVING INTERNATIONAL TRANSACTIONS. 6 19.10.2009 TPO AFTER MAKING AN ADJUSTMENT REFERRED THE MATTER BACK TO THE AO 22.10.2009 ASSESSEE FILED AN APPLICATION BEFORE THE DRP RAISING ITS OBJECTIONS 23.04.2010 DRP HEARD THE MATTER 30.06.2010 DRP AFFIRMED THE ORDER OF TPO 26.07.2010 AO AFFIRMED THE ORDER OF DRP 4. IT IS SUBMITTED THAT DURING THE YEAR UNDER CONSIDER ATION ASSESSEE HAS UNDERTAKEN THREE TYPES OF TRANSACTIONS AS MENTI ONED ON PAGE NO-2 OF TPO ORDER. ASSESSEE HAS APPLIED INTERNAL CU P FOR BENCHMARKING THESE TRANSACTIONS. THE JUSTIFICATION FOR APPLYING CUP WAS THAT OUT OF THE TOTAL SALES OF THE ASSESSEE COMPANY 57% WAS MADE TO AE AND 43% WAS MADE TO NON-AES. SEE PAGE NO-5 OF PB 4 IN THIS REGARD. AND SUBMISSIONS OF THE ASSESSEE BE FORE TPO DATED 27.11.2008 PAGE NO-112 TO 121 OF PB -3. 5. IT IS SUBMITTED THAT THE TPO HAS APPLIED THE TNMM M ETHOD FOR FINDING OUT THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. LD TPO WITHOUT APPLYING FAR TEST AND HAS CHOSEN FOU R COMPARABLES AND HAS MADE THE ADJUSTMENT TO THE INTE RNATIONAL TRANSACTIONS. IT WORTHY TO MENTION HERE THAT ALL TH ESE COMPARABLES HAVE BEEN DROPPED IN NEXT AY I.E AY 2007-08 AND COMPARABLE CHOSEN BY THE ASSESSEE NAMELY TCI HAS BEEN ADOPTED AS CORRECT IN NEXT AY AND NO ADJUSTMENT OF ANY AMOUNT ON ACCOUNT OF PAYMENTS MADE FOR SERVICES HAS BEEN MADE IN NEXT YEAR. 7 6. THE MAIN REASON FOR REJECTING THE METHOD OF ASSESSE E AS ASSIGNED BY THE TPO IS THAT ASSESSEE HAS NOT SUBMITTED AUDIT ED SEGMENT OF THE TRANSACTIONS ENTERED WITH AE AND NON-AE AND HEN CE SEGMENTS PRODUCED BY ASSESSEE ARE NOT RELIABLE. 7. THE LD TPO AFTER REJECTING THE METHOD OF ASSESSEE A PPLIED TNMM, AND MADE THE ADJUSTMENT OF RS2,05,69,692/- AND THE AO AND DRP HAS AFFIRMED THE ORDER OF TPO. 8. AGGRIEVED WITH THE ORDER OF THE TPO ASSESSEE FILED APPLICATION BEFORE DRP AND RAISED HIS OBJECTIONS POINTING OUT T HAT APPROACH OF THE TPO WAS PATENTLY WRONG. 9. LD DRP WITHOUT CONSIDERING THE SUBMISSIONS OF THE A SSESSEE DISMISSED THE APPEAL OF ASSESSEE AND NOW THE ASSESS EE IS BEFORE THIS HONBLE ITAT SUBMISSIONS OF THE ASSESSEE ARE ASUNDER :- 10. IT IS PERTINENT TO MENTION HERE THAT TOTAL SALES OF THE ASSESSEE WITH AE IS 34,02,16,704/- AND TOTAL SALES WITH NON AE OF ASSESSEE IS 25,19,30,724/-( SEE PAGE NO-41 AND 42 OF PB-4 AND VOUCHER WISE BREAKUP IS GIVEN AT PAGE NO115 ONWARDS OF PB-2 ). THE TPO WHILE MAKING ADJUSTMENT AND COMPUTING ALP HAS T AKEN THE TOTAL RECEIPTS TO SUCH TUNE AS HAS BEEN SHOWN BY TH E ASSESSEE AND 8 FIGURE OF SALES WITH AE AS CORRECT. HOWEVER THE TPO REJECTED THE FIGURES OF SALE VIS--VIS NON AE WITHOUT APPORTIONI NG ANY EXPENSES TO SUCH SALES ON THE GROUND THAT ASSESSEE FAILED TO SUBMITTED THE AUDITED SEGMENTS OF THE TRANSACTIONS WITH AE AND NO N AE AND HENCE ALLOCATION OF EXPENSES IS NOT CORRECT. SUBMIS SIONS IN THIS REGARD ARE MADE HEREUNDER:- 11. IT IS SUBMITTED THAT LD TPO HAS SELECTED FOUR COMPA RABLES AS MENTIONED AT PAGE NO-10 OF TPO ORDER FOR AY 2006-07 . WHEN THESE COMPARABLES CONFRONTED TO ASSESSEE THE ASSESS EE, SUBMITTED HIS OBJECTIONS VIDE LETTER DATED 05.10.2009- SEE PAGE NO- 170 OF PB -1, RELEVANT SUBMISSIONS ARE AT PAGE NO-191 OF T HE PB. IN THESE SUBMISSIONS THE ASSESSEE HAS POINTED OUT THAT COMPARABLES CHOSEN BY THE TPO ARE NOT SIMILAR WITH THE ASSESSEE . HOWEVER, THE LD TPO WITHOUT APPLYING THE FAR TEST IN A CORRE CT PERSPECTIVE, DISMISSED THE CONTENTIONS OF THE ASSESSEE. 12. IT IS SUBMITTED THAT ASSESSEE, WITHOUT ADMITTING AN Y OF THE COMPARABLES, JUST WISH TO DISTINGUISH THE COX & KIN G AND DESIRE THE EXCLUSION OF THE SAME FROM THE LIST OF COMPRABL ES. IN OTHER WORDS IT IS SUBMITTED THAT IF COX & KING ALONE IS E XCLUDED FROM THE COMPARABLES THEN THE MEAN OF THE COMPARABLES WOULD BE 19.24% WHICH IS WITHIN THE RANGE OF + 5% OF THE TOTAL PROFITS OF THE ASSESSEE THAT IS 15.98% AS ADOPTED BY THE TPO. 9 COX AND KING ASSESSEE FUNCTIONS OF C&K IT IS SUBMITTED THAT COX& KING IS MAINLY OUT BOUND TOUR OPERATOR. MEANS IT SEND INDIANS ABROAD AND IN LIEU OF THIS OPERATION IT GETS COMMISSIONS. IT IS PERTINENT TO MENTION HERE THAT IN THE IMPUGNED YEAR IT HAS INCOME FROM COMMISSION TO THE TUNE OF RS 63.17 CRORE AND HAS NOT EARNED ANY INCOME FROM TOUR OPERATIONS- SEE PAGE NO-109 OF PB -2 IT IS SUBMITTED THAT 2 ND NATURE OF RECEIPT IS SURRENDER OF TENANCY RIGHTS, THIS HAS BEEN EXLUDED BY THE TPO HIMSELF AT THE TIME OF PASSING THE ORDER IT IS SUBMITTED THAT ASSESSEE IS AN INBOUND TOUR OPERATOR. IT ARRANGES TOURS FOR FOREIGNERS TRAVELLING TO INDIA. FUNCTIONS OF ASSESSEE ARE VERY WELL EXPLAINED IN T.P STUDY REPORT. SEE PAGE NO-14 OF PB-3 . THE FUNCTIONS OF THE ASSESSEE ARE REPRODUCED HEREUNDER:- A) A&K ON RECEIPT OF BOOKING ORDER, WILL CONTACT THE CUSTOMER AND PROVIDE THE CUSTOMER WITH REQUISITE INFORMATION AND DETAILS B) A&K INDIA WILL COORDINATE, ARRANGE AND ORGANIZE THE ENTIRE TRIP OF THE CUSTOMER INCLUDING INTERACTION WITH HOTELS, GUIDES, TRANSPORTERS ETC. C) A&K INDIA WILL KEEP THE CUSTOMER INFORMED OF ANY DELAY OR ANY OTHER SPECIFIC INFORMATION WHICH A&K INDIA BELIEVES CAN MATERIALLY AFFECT THE TRIP. D) A&K INDIA FROM THE MOMENT THE CLIENT SET FOOT IN INDIA GREET WITH TRADITIONAL NAMASTE GESTURE- TWO HANDS JOINED TOGETHER IN WELCOME AND WITH THIS JOURNEY IN INDIA STARTS AND BECOMES 10 MEMORABLE. IT IS SUBMITTED THAT INCOME OF THE ASSESSEE FROM THE TOUR OPERATIONS IS TO THE TUNE OF RS 59,21,47,427/- . ALL IN FOREIGN EXCHANGE- SEE PAGE NO- 19 OF PB-1 . IT IS PERTINENT TO MENTION HERE THAT INCOME FROM COMMISSION OF ASSESSEE IS VERY MEAGER I.E. RS 75000/- ONLY SEE PAGE NO-112 OF PB-1 THE FACT OF THE MATTER THAT ASSESSEE IS EARNING 99% OF ITS RECEIPTS FROM INBOUND TOURS IS ACCEPTED BY THE DRP IN AY 2008- 09- SEE PAGE NO-121 OF THE COMPILATION IN VIEW OF THE ABOVE FACTS AND FIGURES IT CAN BE SAID THAT THE FUNCTIONS PERFORMED BY THE ASSESSEE AND C&K ARE ENTIRELY DIFFERENT AND NATURE OF INCOME IS ALSO DIFFERENT. RECENTLY HONBLE DELHI HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS LTD VS CIT REPORTED IN 377 ITR 533(DEL) HAS HELD THAT THOUGH ENTITIES RENDERING VOICE CALL SERVICES AND A KPO SERVICE PROVIDER EMPLOYS IT BASED DELIVERY SYSTEM BUT THE CHARTERSTICS OF SERVICES, FUNCTIONAL ASPECTS, BUSINESS ENVOIRNMENT RISK AND QUALITY OF HUMAN RESOURCES EMPLOYED ARE MATERIALLY DIFFERENT 11 AND HENCE CANNOT BE COMPARED WITH EACH OTHER. RISK NO SUCH RISK IS UNDERTAKEN BY C&K RISK UNDERTAKEN BY ASSESSEE A) A&K INDIA GUARANTEE OPEN 365 DAYS 24 HOURS A DAY IN CASE OF AN EMERGENCIES B) A&K INDIA GUARANTEE IN HOUSE QUALITY CONTROL DEPARTMENT C) A& K INDIA GUARANTEE HIGHLY EXPERIENCED LICENSED TOUR ESCORTS, GUIDES AND NATURALISTS WHO ARE EXPERT SPEAKERS, SKILLED GROUP LEADERS AND EXPERIENCE PROBLEM SOLVERS D) A*K INDIA GUARANTEE GUEST RELATION TEAM ASSISTS GUESTS THROUGHOUT THE STAY OF CLIENTS E) ASSESSEE GUARANTEE RESPONSE TO QUERY WITH IN 24 HRS F) FURTHER PAGE NO 72 OF PB-3 IS AN EXAMPLE OF SERVICES PROVIDED BY ASSESSEE. THIS IS ITINERARY OF THE FOREIGNERS COMING TO INDIA ASSETS IT IS SUBMITTED THAT ASSETS OF THE C&K IN THE IMPUGNED YEAR WERE RS 13.07 CORE SEE PAGE NO-108 ASSETS OF ASSESSEE THE TOTAL ASSETS OF THE ASSESSEE ARE TO THE TUNE OF RS 3.2 CORE AND AFTER DEPRECIATION WOULD BECOME RS 1.63 12 OF PB-2 AND BESIDE THIS THERE WAS INVESTMENT OF RS 35.87 CRORE SEE PAGE NO-108 CORE SEE PAGE NO11 OF PB - 1 AND ALSO PAGE NO 15 OF PB-3 13. IT IS SUBMITTED THAT ABOVE TABLE WOULD PROVE BEYOND DOUBT THAT C& K AND ASSESSEE ARE EXAMINED ON THE BASIS OF FAR TEST THEN ONE CAN INFER THAT C&K AND ASSESSEE ARE NOT AT ALL COMPARABLES WI TH EACH OTHER AND THE TPO HAS ERRED IN TAKING C&K AS COMPARABLE. IT I S SUBMITTED THAT IF FAR TEST IS APPLIED IN CORRECT MANNER THEN C&K IS R EQUIRED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. AND HENCE T HE MEAN OF THE REST OF THE COMPARABLES FALLS WITHIN THE AMBIT OF + 5% A ND HENCE NO ADJUSTMENT IS REQUIRED TO BE DONE. 14. SIMILARLY FOR OTHER COMPARABLES THE ASSESSEE HAS SU BMITTED ITS OBJECTIONS. HOWEVER THE SAME WERE REJECTED BY THE T PO. SEE PAGE NO 191 TO 194 OF PB-1 15. IT IS FURTHER PERTINENT TO MENTION HERE THAT IN AY 2007-08 THE SAME TPO HAS EXCLUDED ALL THE COMPARABLES AND HAS BENCHMARKE D THE TRANSACTION WITH THE COMPARABLE GIVEN BY THE ASSESSEE NAMELY TCI , AND HAS NOT MADE ANY ADJUSTMENT ON THE AMOUNT CHARGED IN LIEU O F SERVICES RENDERED BY THE ASSESSEE. SEE TPO ORDER PAGE NO- 22 OF COMPILATION. 16. IT IS SUBMITTED THAT NOW IT IS SETTLED POSITION OF LAW THAT IF SOME CLAIM HAS BEEN ACCEPTED IN SUBSEQUENT YEAR THEN SUCH CLAI M IS TO BE ALLOWED 13 IN PREVIOUS YEAR ALSO. RIETA INDUSTRIES- 309 ITR 154(P&H) . RECENTLY HONBLE DELHI HIGH COURT IN THE CASE OF CRAIN U.K- 359 ITR 268(DEL) HAS HELD THAT THAT THERE HAS TO BE CONSISTENCY UNIFORMI TY IN THE APPROACH OF REVENUE WHILE DEALING IN TAXATION MATTERS. RELEVANT OBSERVATIONS OF THE HIGH COURT ARE AS UNDER:- CERTAINTY IS INTEGRAL TO RULE OF LAW. CERTAINTY AN D STABILITY FORM THE BASIS FOUNDATION OF ANY FISCAL LAWS. HIGHL IGHTING THIS FACT IN VODAFONE INTERNATIONAL HOLDING B.V. VS. UNI ON OF INDIA, (2012) 341 ITR 0001, THE SUPREME COURT HAS OBSERVED THAT FOREIGN DIRECT INVESTMENT FLOWS TOWARDS A LOCATION WITH A STRONG GOVERNANCE INFRASTRUCTURE WHICH INCLUDES ENFORCEMENT OF LAWS AND HOW WELL THE LEGAL SYSTEM W ORK. THERE SHOULD BE CONSISTENCY AND UNIFORMITY IN INTER PRETATION OF PROVISIONS AS UNCERTAINTIES CAN DISABLE AND HARM GOVERNANCE OF TAX LAWS. AUTHORITY SHOULD FOLLOW THE IR EARLIER VIEW, UNLESS THERE ARE STRONG GROUNDS AND REASONS T O TAKE A CONTRARY VIEW, BUT IN THE PRESENT CASE THERE IS NO COMPELLING JUSTIFICATION AND REASON TO OVERRIDE AND DISTURB TH E EARLIER VIEW 17. FURTHER ASSESSEE SEEKS TO RELY ON THE FOLLOWING JUD GMENTS WHEREIN IT HAS BEEN HELD THAT COMPARABLES WHICH ARE EXCLUDED I N SUBSEQUENT YEARS ARE REQUIRED TO BE EXCLUDED FROM PREVIOUS YEAR. 14 I) APTEAN SOFTWARE IN DIA (P.) LTD. VS. IN COME TAX OFFICER REPORTED IN 152 ITD 311(BANG) II) DEPUTY COMMISSIONER OF IN COME TAX VS. AT&S IN DIA (P) LTD. 170 TTJ 129(KOL) 18. IT IS NEXT SUBMITTED THAT FOR DISCARDING THE INTERN AL TNMM AS APPLIED BY THE ASSESSEE, ONE OF THE ALLEGATION OF THE REVENUE IS THAT ASSESSEE HAS NOT SUBMITTED AUDITED SEGMENT OF FINANCIAL OF INTERNATI ONAL TRANSACTIONS WITH AES OR NON AES AND EXPENSES ARE ALLOCATED WI THOUT ANY BASIS IN AN ARBITRARY MANNER. 19. IN THIS REGARD IT IS SUBMITTED THAT IT IS AN ADMITT ED FACT THAT ASSESSEE HAS DULY SUBMITTED THE AUDIT REPORT ALONG WITH AUDITED BALANCE SHEET AND PORFIT AND LOSS ACCOUNT IN TERMS OF SECTION 92E OF THE ACT, WHICH PROVIDES THAT EVERY ASSESSEE WHO IS ENTERING INTO I NTERNATIONAL TRANSACTION WOULD SUBMIT REPORT IN TERM OF RULE 10E IN FORM 3CEB. COPY OF THE REPORT FURNISHED BY THE ASSESSEE IS AT PAGE NO27 OF PB-1 . 20. IT IS NEXT SUBMITTED THAT NEITHER UNDER THE PROVISI ONS OF INCOME TAX ACT NOR UNDER THE PROVISIONS OF TP REGULATIONS, AN ASSE SSEE HAS TO SUBMIT AUDITED SEGMENTS OF TRANSACTIONS; ONLY THING WHICH IS REQUIRED UNDER LAW IS THE SUBMISSION OF AUDIT REPORT IN TERMS OF R ULE 10E. 21. IT IS SUBMITTED THAT DURING THE COURSE OF TRANSFER PRICING PROCEEDINGS THE ASSESSEE HAS FILED SEGREGATED DETAILS OF TRANSACTIO NS WITH AE AND NON AE 15 SEE PAGE NO 41 AND 42 OF THE PB-IV. THE LD TPO WITH OUT POINTING OUT ANY DEFECT IN THESE FIGURES AND WITHOUT DOUBTING TH E PRICE CHARGED BY THE ASSESSEE FROM ITS AE AND NON AE DISMISSED THIS CALCULATIONS, WHICH CALCULATIONS HAS BEEN EXTRACTED FROM AUDITED BOOKS OF ACCOUNT, AND ARE RELIED ON BY THE TPO HIMSELF WHILE MAKING THE FINAL ADJUSTMENT. 22. IT IS NEXT SUBMITTED THAT THERE IS NO ALLEGATION OF THE LD TPO THAT PRICE CHARGED FROM NON AE IS NOT CORRECT. IT IS SUBMITTED THAT TP ADJUSTMENT IS MEANT TO SEE THE PRICE CHARGED AND NOT TO SEE WHETH ER THE SAME IS AUDITED OR NOT. 23. IT IS SUBMITTED THAT ASSESSEE HAS ALLOCATED ROYALTY EXPENSES ON THE BASIS OF FORIGN EXCHANGE EARNED FROM AE AND NON AE. THIS ALLOCATION IS ACCEPTED BY THE DRP AS A PRUDENT AND RECOGNIZE MANN ER IN SUBSEQUENT YEAR I.E AY 2008-09 PAGE NO-122 OF COMPILATION PARA -4.6 AND 4.7. THE LD TPO HAS NOT POINTED OUT ANY DEFECT IN THIS METHO D. IT IS NEXT SUBMITTED THAT OTHER EXPENSES ARE ALLOCATED ON THE BASIS OF GROSS RECEIPT WHICH METHOD IS ALSO AN ACCEPTED METHOD OF ALLOCATI ON OF EXPENSES. IN THIS KEY ALSO THE TPO HAS NOT POINTED OUT ANY DEFEC T. THE TPO HAS REJECTED THE SEPARATE RESULT OF SEGMENT AND ALLOCAT ION OF EXPENSES BY A GENERALIZE OBSERVATION. RECENTLY HONBLE BOMBAY HIG H COURT IN THE CASE OF ALSTOM HAS HELD THAT EVEN IN ABSENCE ACTUAL SEGM ENTS ADJUSTMENT HAS TO BE DONE IN RESPECT OF TRANSACTIONS WITH AE ONLY AND NOT ON ENTITY LEVEL. 16 24. IT IS NEXT SUBMITTED THAT THE ISSUE WHETHER FURNISH ING OF AUDITED SEGMENTS IS SINE-QUA NON OR NOT IS RECENTLY CONSIDE RED IN FOLLOWING JUDGMENTS.. A. LUMMUS TECHNOLOGY HEAT TRANSFER BV VS DCIT- COPY ATTACHED IN JUDGMENT PAPER BOOK. B. CIT VS ALSTOM PROJECTS INDIA LTD ITA NO-362 OF 201 4(BOM) C. CIT VS KEIHIN PANALFA LTD- ITA NO- 11 OF 2015(DEL). 25. IN ALL ABOVE CASES IT HAS BEEN UNANIMOUSLY HELD THA T THE WHEN AUDITED ACCOUNTS HAVE BEEN PRODUCED IN TERMS OF RULE 10E AN D NO SPECIFIC DEFECT HAS BEEN POINTED OUT BY THE TPO EITHER IN TH OSE ACCOUNTS OR IN ALLOCATION KEYS THEN THE ALLEGATION THAT AUDITED SE GMENTS VIS--VIS INTERNATIONAL TRANSACTIONS WITH AE AND NON AE HAS N OT BEEN PRODUCED IS USELESS AND HAVE NO RELEVANCE. 26. IT IS NEXT SUBMITTED THAT THE TPO AND THE AO HAS NO T POINTED OUT ANY SPECIFIC DEFECT IN THE ALLOCATION KEYS USED BY ASSE SSEE FOR ALLOCATING EXPENSES AND HAS REJECTED THE METHOD OF ASSESSEE IN AN ARBITRARY MANNER. 27. WITHOUT PREJUDICE TO THE ABOVE :- IT IS NEXT SUBMITTED THAT UNDER THE TNMM METHOD, THE PROCESS IS SIMPLE TO INITIALLY FIN D OUT THE AVERAGE OF OPERATING PROFIT MARGIN OF THE COMPARABLE CASES. TH EN THIS BENCH MARK 17 MARGIN IS THEN COMPARED WITH THE OPERATING PROFIT M ARGIN FROM THE ASSESSEES INTERNATIONAL TRANSACTIONS WITH AE. IT I S NOT POSSIBLE TO COMPARE THE ASSESSEES TOTAL MARGIN EMANATING FROM NATIONAL AND INTERNATIONAL TRANSACTION WITH AE AND NON AE WITH T HE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLE CASES, 28. IT IS SUBMITTED THAT IN THE CASE OF THE ASSESSEE TH E TPO WHILE OBSERVING THE PROFITS OF THE ASSESSEE @ OF 15.98% HAS TAKEN T HE RESULTS OF ENTITY AND WHILE CALCULATING ALP FOR MAKING ADJUSTMENT HAS TAKEN FIGURES OF AE ONLY. THE DRP HAS AFFIRMED THE METHOD OF TPO WIT HOUT APPRECIATING THAT APPROACH OF TPO IS NOT CORRECT. 29. IT IS PERTINENT TO MENTION HERE THAT IF ONE CAN SEE THE PROFITS OF THE ASSESSEE IN RESPECT OF TRANSACTIONS ENTERED WITH AE ONLY AS SUBMITTED BY THE ASSESSEE BEFORE TPO THEN IT CAN BE SEEN THAT IT COMES TO 23.91% AND NOT 15.98% . WHICH MEANS THE PERCENTAGE OF ASSESSEE WAS ALREAD Y IN EXCESS TO ALP AS DONE BY THE TPO. HENCE IT IS SU BMITTED THAT TPOS ORDER IS NOT VALID IN THE EYES OF LAW AND HENCE ADJ USTMENT MADE BY HIM AND AFFIRMED BY AO ARE REQUIRED TO BE DELETED ON TH ESE GROUNDS ALONE. WITHOUT GOING INTO THE MERITS OF THE CASE. 30. IN SIMPLE WORDS IT IS THE SUBMISSION OF THE ASSESSE E THAT UNDER THE TNMM METHOD, THE PROCESS IS SIMPLE TO INITIALLY FIN D OUT THE AVERAGE OF OPERATING PROFIT MARGIN OF THE COMPARABLE CASES. TH EN THIS BENCH MARK MARGIN IS THEN COMPARED WITH THE OPERATING PROFIT M ARGIN FROM THE ASSESSEES INTERNATIONAL TRANSACTIONS WITH AE. IT I S NOT POSSIBLE TO 18 COMPARE THE ASSESSEES TOTAL MARGIN EMANATING FROM NATIONAL AND INTERNATIONAL TRANSACTION WITH AE AND NON AE WITH T HE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLE CASES 31. IT IS NEXT SUBMITTED THAT SO FAR AS THE PAYMENT OF ROYALTY IS CONCERNED THE DRP IN SUBSEQUENT YEARS HAS ACCEPTED THE RATE O F 5% AND REVENUE IS NOT IN APPEAL AND HENCE THE SAME IS APPLICABLE MUTATIS-MUTANDIS HERE ALSO. 5. THE LD. CIT [DR], ON THE OTHER HAND, TRIED TO JUSTIFY THE ORDERS OF THE AUTHORITIES BELOW. HE SUBMITTED THAT PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE IN THE INCOME TAX MATTERS, HENCE NON-APPLICATION OF THE COMPARABLES COX & KINGS BY THE TPO IN SUBSEQUENT ASSESSMENT YEAR 2007 -08 CANNOT BE A BASIS TO EXCLUDE THE SAME DURING THE YEAR. HE SUBMITTED THA T EVERY ASSESSMENT YEAR IS AN INDEPENDENT UNIT AND, HENCE FACTS OF THAT PARTIC ULAR ASSESSMENT YEAR CAN BE CONSIDERED ON AN ISSUE RAISED. 6. HAVING GONE THROUGH THE SUBMISSIONS OF THE PAR TIES IN VIEW OF THE ORDERS OF THE AUTHORITIES BELOW, THE GRIEVANCES OF THE ASSESSEE IN THE PRESENT APPEAL CAN BE SUMMARIZED AS :- (I) THE CUP METHOD APPLIED BY THE ASSESSEE WAS THE MOST APPROPRIATE METHOD SINCE THE RATIO OF THE TRANSACTION WITH AE A ND NON-AE WAS APPROXIMATELY SIMILAR INASMUCH AS THE TRANSACTIONS WITH AE WERE 57% AND WITH NON-AE AT 43%; 19 (II) THE TPO HAS NOT APPLIED THE FAR TEST BEFORE SELECTI NG THE COMPARABLES CORRECTLY AND IN THE IMMEDIATELY NEXT A SSESSMENT YEAR I.E. AY 2007-08, THE SAME TPO HAS IGNORED THE COMPA RABLES INCLUDING COX & KINGS APPLIED IN THE YEAR UNDER CON SIDERATION. THE TPO HAS ACCEPTED THE RESULTS OF THE COMPARABLES, NA MELY, TCI SELECTED BY THE ASSESSEE AS CORRECT RESULTING INTO NO ADJUSTMENT; & (III) WITHOUT PREJUDICE TO THE ABOVE GRIEVANCES, IF THE W ORKING OF MARGIN OF THE ASSESSEE IS SEEN WITH RESPECT TO TRANSACTION S WITH AE ONLY, THEN IT IS CLEAR THAT THE PROFIT RATIO IS 23.21%, W HICH IS MORE THAN THE ADJUSTMENT MADE BY THE TPO. 6.1 THE LD. AR, MR. YADAV EMPHASIZED THAT IF ON LY ONE COMPARABLE, NAMELY, COX & KINGS IS EXCLUDED THEN THE MEAN OF OTHER COMP ARABLES WOULD COME TO 19.24%, WHICH IS WITHIN + - 5% OF THE PROFIT MARGIN DECLARED BY THE ASSESSEE, HENCE NO ADJUSTMENT IS REQUIRED TO BE MADE FOR WORK ING OF THE ARMS LENGTH PRICE ON INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE DURING THE YEAR. 6.2 WE THUS FIND THAT IF WE FIRSTLY CONFINE O URSELVES ON THE APPLICABILITY OF THE COMPARABLE COX & KINGS DURING THE YEAR, THE GRI EVANCE OF THE ASSESSEE WILL BE ADDRESSED. WE FULLY CONCUR WITH THE SUBMISSION OF THE LD. CIT [DR] THAT THE PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE IN THE INCOME TAX MATTERS. HOWEVER, IT IS AN ESTABLISHED PROPOSITION OF LAW THAT CONSIS TENCY IN THE APPROACH ON AN ISSUE UNDER SIMILAR SET OF FACTS IS REQUIRED TO BE MAINTAINED IN THE ACTION OF THE REVENUE. THERE IS NO DISPUTE ON SIMILARITY OF FACT S ON THE ISSUES RAISED IN THE 20 GROUNDS DURING THE YEAR IN COMPARISON TO THE SUBSEQ UENT YEAR. THUS, FOLLOWING THE PRINCIPLE OF MAINTENANCE OF CONSISTEN CY IN ITS APPROACH BY THE REVENUE ON AN IDENTICAL ISSUE UNDER SIMILAR SET OF FACTS, WE ARE INCLINED TO ACCEPT THE CONTENTION OF THE LD. AR THAT IF THE COM PARABLE COX & KINGS AS EXCLUDED BY THE TPO IN THE SUBSEQUENT ASSESSMENT YE AR 2007-08 UNDER SIMILAR FACTS IS EXCLUDED DURING THE YEAR, THEN THE MEAN OF OTHER COMPARABLES WOULD COME TO 19.24%, WHICH IS WITHIN + - 5% OF THE PROFIT MARGIN DECLARED BY THE ASSESSEE. THUS, NO ADJUSTMENT IS REQUIRED T O BE MADE BY THE TPO DURING THE YEAR FOR WORKING OUT THE ARMS LENGTH PR ICE RELATING TO THE INTERNATIONAL TRANSACTIONS ENTERED INTO DURING THE YEAR. IT IS ORDERED ACCORDINGLY. APART FROM THIS FINDING, EVEN OTHERWI SE, WE FIND SUBSTANCE IN THE CONTENTION OF THE LD. AR THAT MEAN HAS TO BE APPLIE D TO THE TRANSACTIONS RELATED TO AE ONLY AND TRANSACTIONS RELATED WITH NON-AE ARE TO BE EXCLUDED FROM THE NET PROFIT MARGIN. THE ASSESSEE AT PAGE NOS. 41 AN D 42 OF THE PAPER BOOK IV HAS MADE AVAILABLE THE COMPLETE WORKING VIS-A-VIZ T RANSACTIONS WITH AE AND NON-AE, PERUSAL OF THE SAME SHOWS THAT THE MARGIN O F THE ASSESSEE WITH RESPECT TO TRANSACTIONS WITH AE GIVES THE PROFIT RA TIO OF 23.91%, WHICH IS MORE THAN THE ADJUSTMENT MADE BY THE TPO. IT IS HELD A CCORDINGLY. THE ASSESSEE SUCCEEDS ON THIS ACCOUNT AS WELL. IN RESULT, THE ADJUSTMENT IN QUESTION MADE AND UPHELD BY THE AUTHORITIES BELOW IS HELD AS NOT JUSTIFIED. THE GROUNDS ARE ACCORDINGLY ALLOWED. 7. IN RESULT, APPEAL IS ALLOWED. 8. ITA. NO. 5742/DEL/2012 : THE ASSESSEE HAS QUESTIONED THE ORDER OF THE DRP ON THE FOLLOWING GROUNDS :- 21 THE ADDITION AMOUNTING TO RS 36,242,182 UNDERTAKE N BY THE LD. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE (1), NEW DELHI, (THE LD. AO) VIDE FINAL ASSESSMENT ORDER DATED OCTOBER 20, 2011 (SERVED ON THE APPELLANT ON OCTOBER 27, 2011) PASSED UNDER SEC TION 143(3) READ WITH SECTION 144C(13) OF THE INCOME TAX ACT, 1 961 (THE ACT) IS NOT IN ACCORDANCE WITH LAW AND THEREFORE NOT SUS TAINABLE. TRANSFER PRICING (TP) ADJUSTMENT RS 3,62,42,182 THAT THE HONBLE DISPUTE RESOLUTION PANEL, NEW DELH I (DRP) HAS ERRED BOTH IN LAW AND ON FACTS BY REJECTING THE APP ELLANTS OBJECTIONS TO THE DRAFT ORDER DATED DECEMBER 28, 2010 PASSED B Y THE LD. AO UNDER SECTION 143(3) READ WITH SECTION 144C(1) OF T HE ACT. THE HONBLE DRP WHILE ISSUING DIRECTIONS UNDER SECTION 144C OF THE ACT DID NOT CONSIDER THE FACTS AND MERITS OF APPELL ANTS OBJECTIONS TO THE PROPOSED ADJUSTMENTS, AND MERELY RELIED ON THE REASONING GIVEN BY THE ADDITIONAL COMMISSIONER OF INCOME TAX, TRANS FER PRICING OFFICER I(1) (TPO) VIDE ORDER UNDER SECTION 92C A(3) OF THE ACT DATED OCTOBER 28, 2010 (TP ORDER). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. TPO AND THE LD. AO HAVE ERRED IN PROPOSING AND THE HONBLE DRP HAS FURTHER ERRED IN CONFIRMING THE TRANSFER PRICIN G ADJUSTMENT OF RS 3,62,42,182 ON THE FOLLOWING GROUNDS: 1.1 BY ADOPTING A MATERIALLY DEFECTIVE APPROACH IN DISREGARDING THE COMPOSITE NATURE OF THE FOREIGN TECHNICAL COLLA BORATION AGREEMENT (HEREINAFTER REFERRED TO AS THE AGREEMEN T) AND CONVENIENTLY OVERLOOKING THE FACT THAT THE ITEMS CO VERED BY THE AGREEMENT FORMED INSEPARABLE AND INDIVISIBLE CONSTI TUENTS OF BUNDLED BENEFITS DERIVED BY THE APPELLANT; 1.2 BY REACHING AN ERRONEOUS CONCLUSION THAT ONLY 2 % ROYALTY PAID UNDER THE AGREEMENT QUALIFIED THE ARMS LENGTH TEST, BY ARTIFICIALLY DISSECTING THE COMPENSATION BASED ON T HE CONJECTURE THAT INDEPENDENT BENEFITS COULD BE DERIVED UNDER EACH OF THE CONSTITUENTS OF THE AGREEMENT IN ISOLATION OF THE O THERS. WHILE TAKING THE DISPUTED POSITION, THE DRP ALSO OVERLOOKED THE WELL ESTABLISHED MARKET PRACTICE WHEREIN A THIRD PARTY LICENSOR ACTI NG UNDER UNCONTROLLED CONDITIONS WOULD NOT OFFER PIECEMEAL T ERMS UNDER A SIMILAR CONTRACT FOR USE OF INTELLECTUAL PROPERTY R IGHTS; 22 1.3 BY FAILING TO DISCHARGE THE STATUTORY OBLIGATIO N OF PROVIDING SUPPORTING EVIDENCE / DATA / INFORMATION TO JUSTIFY 2% ROYALTY BEING PAID UNDER SIMILAR CONTRACTS BETWEEN UNRELATED PART IES, AFTER HAVING REACHED THE FIRM CONCLUSION THAT CUP METHOD QUALI FIED AS THE MOST APPROPRIATE METHOD U/S 92C(1) OF THE ACT FOR TESTIN G THE ARMS LENGTH NATURE OF ROYALTY PAYMENTS ARISING UNDER THE AGREEMENT; 1.4 BY MISCONSTRUING THE APPELLANTS BUSINESS MODEL AND BY CONVENIENTLY OVERLOOKING THE SUPPORTING EVIDENCE AN D ARGUMENTS THAT THE APPELLANT FILED / ADDUCED DURING THE COURS E OF THE PROCEEDINGS TO SUPPORT THE REAL BENEFITS IT RECEI VED IN RETURN FOR THE ROYALTY PAYMENT. IN THIS REGARD, THE OBSERVATIONS M ADE BY THE DRP (IN PARA. 3.2 OF THE DRP DIRECTION) ARE PERVERSE ON FACTS AND BASED ON MISPLACED NOTIONS OWING TO, BUT NOT LIMITED TO, THE FOLLOWING: A. THE DRP FAILED TO APPRECIATE THAT THE MARKETING BRO CHURES, LAYOUTS, ETC. WERE SPECIFICALLY DEVELOPED AND CUSTO MIZED TO PROMOTE THE BUSINESS INTERESTS OF THE APPELLANT BY CANVASSING TOURIST DESTINATIONS IN INDIA TO INTERNATIONAL TRAV ELLERS / POTENTIAL CUSTOMERS; B. BY MISCONSTRUING TECHNICAL INPUTS AND MARKETING SUP PORT AS SHAREHOLDER ACTIVITY (STEWARDSHIP EXPENSES) WITHOUT APPRECIATING THE UNDERLYING NATURE OF SERVICES AND TANGIBLE OPER ATING BENEFITS DERIVED BY THE APPELLANT THEREFROM; C. BY MAKING MISPLACED REFERENCE TO OECD GUIDELINES, W HEREAS THEY ARE NOT APPLICABLE TO THE FACTS OF THE CASE; D. BY CONVENIENTLY OVERLOOKING RELEVANT EVIDENCE PRODU CED BY THE APPELLANT DURING THE COURSE OF PROCEEDINGS, INCLUDI NG THE FACT THAT IT HAD INCURRED NEGLIGIBLE EXPENDITURE ON MARKETING AND PROMOTION IN INDIA, WHICH CLEARLY DEMONSTRATED THE APPELLANTS RELIANCE AND DEPENDENCE ON THE AGREEMENT FOR GENERA TING SALES; E. BY REACHING A SELF CONFLICTING CONCLUSION THAT TECH NICAL INPUTS AND MARKETING SUPPORT QUALIFIED AS SHAREHOLDER ACTIVITY , AFTER HAVING HELD THAT THESE WERE INTEGRAL TO ACQUISITION OF CUS TOMERS TO 23 PROMOTE THE SALES OF THE APPELLANT AND THEREFORE CO ULD BE CHARACTERIZED AS INTRA GROUP SERVICES (IGS); 1.5 BY ASSIGNING NIL VALUE TO IGS BASED UPON CONJ ECTURES AND SURMISES, BY DISREGARDING SUBSTANTIVE PROVISIONS OF SECTION 92(2) OF THE ACT AND WITHOUT APPLYING MACHINERY PROVISIONS R EGARDING CHOICE OF MOST APPROPRIATE METHOD U/S 92C(1); 1.6 BY ERRONEOUSLY CONCLUDING THAT TRANSACTIONAL NE T MARGIN METHOD (TNMM) CANNOT BE USED AS A CORROBORATIVE A NALYSIS TO JUSTIFY THE ARMS LENGTH NATURE OF ROYALTY PAYMENT, WITHOUT APPRECIATING THAT ROYALTY IS INTRINSICALLY LINKED T O THE INBOUND TOUR OPERATIONS OF THE APPELLANT; BENCHMARKING ANALYSIS 1.7 BY SUMMARILY IGNORING / DISREGARDING / OVERLOOK ING THE INTERNAL GROSS MARGIN ANALYSIS PRESENTED BY THE APP ELLANT RELATING TO ITS INBOUND TOUR OPERATIONS WITH THE AES VIS-A-VIS THE THIRD-PARTIES TO DEMONSTRATE THE ARMS LENGTH COMPLIANCE OF ROYALTY PAYMENT. 1.8 BY NOT GIVING ANY CONSIDERATION TO THE INFORMAT ION ON THE COMPARABLE UNCONTROLLED LICENSE AGREEMENT IN THE TR AVEL INDUSTRY PLACED ON RECORD BY THE APPELLANT DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS. THE ABOVE GROUNDS OF APPEAL ARE ALL INDEPENDENT A ND WITHOUT PREJUDICE TO ONE AND ANOTHER. THE APPELLANT CRAVES LEAVE TO SUPPLEMENT, TO CANCEL, AMEND, ADD AND /OR OTHERWISE ALTER / MODIFY ANY OR ALL THE GROUNDS OF THE APPEAL STATED HEREINA BOVE. 9. HEARD AND CONSIDERED THE ARGUMENTS ADVANCED BY THE PARTIES IN VIEW OF ORDERS OF THE AUTHORITIES BELOW, MATERIAL AVAILA BLE ON RECORD AND THE DECISIONS RELIED UPON BY THE PARTIES. 24 10. BEFORE FURNISHING THE FOLLOWING WRITTEN SYN OPSIS, THE LD. AR, SHRI P.C. YADAV, POINTED OUT THAT THE ISSUE OF ROYALTY F OR THE USE OF TRADE MARK IS FULLY COVERED BY THE ACTION OF THE REVENUE ITSEL F IN THE SUBSEQUENT ASSESSMENT YEARS 2008-09 TO 2013-14 IN WHICH THE LD . DRP HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND THE REVENUE DID NOT PREFER APPEAL AGAINST THE ORDER OF THE DRP. ASSESSEE IS A COMPANY AND PART OF A&K GROUP; IT P ROVIDES PERSONALIZED LUXURY TOUR AND TRAVEL SERVICES . A&K INDIA PRIMARILY OPERATES DESTINATION MANAGEMENT COMPANY THAT SPECIA LIZES IN HANDLING FREE INDIVIDUALS TRAVELERS, GROUP TRAVELERS, SPECIA L INTEREST GROUP WHO INTENDS TO VISIT INDIA, NEPAL, SRILANKA. A&K INDIA WAS ESTABLISHED IN 1985 AND PRESENTLY HAS ITS OFFICES IN NEW-DELHI. IT IS SUBMITTED THAT IN THIS YEAR THE LD TPO HAS DI SALLOWED THE ENTIRE SUM OF ROYALTY PAID BY ASSESSEE. AND LD DRP AFTER A PPRECIATING THE FACTS AND SUBMISSION OF THE ASSESSEE ALLOWED THE APPEAL O F THE ASSESSEE IN PARTS IN AS MUCH AS IT HAS ALLOWED THE PAYMENT OF R OYALTY TO THE TUNE OF 2%. AND NOW ASSESSEE IS IN APPEAL BEFORE THE ITAT. IT IS SUBMITTED THAT ROYALTY HAS BEEN PAID BY ASSES SEE IN TERMS OF AGREEMENT COLLABORATION AGREEMENT DATED 11.06.2005( COPY IN PB-1 PAGE NO-55 ONWARDS). RELEVANT CLAUSE ON PAGE NO-82 OF PB-1 . IT IS SUBMITTED THAT THE ASSESSEE HAS PAID THE ROYALTY FO R THE USE OF TRADE MARK, MARKETING SUPPORT AND TECHNICAL INPUTS AMOUNT ING TO RS 5,43,63,274/- OUT OF THIS AMOUNT AN AMOUNT OF RS 2, 50,72,047/- WAS PAID TO AE AND RS 2,80,91,469 WAS PAID TO NON AE AN D SERVICE TAX OF RS 25 57,97,590 AND EXCHANGE FLUCTUATION RS 11,99,758/-. SEE PAGE NO 23 OF THE PB FOR AY 2007-08 IT IS SUBMITTED THAT HONBLE DRP IN ITS ORDER FOR A Y 2008-09 TO AY 2013- 14 HAS ACCEPTED THE ARRANGEMENT OF THE ASSESSEE VIS --VIS PAYMENT OF ROYALTY. SEE PAGE NO-121 TO 132 PARA 4.3 OF COMPILA TION. IT IS NEXT SUBMITTED THAT DRP HAS FIRST INTERPRETAT ED THE COLLABORATION AGREEMENT VERY METICULOUSLY AND THEN RELIED ON THE SURVEY REPORT OF FRANCHISE WORLD. IN THIS REPORT IT IS CLEARLY MENTI ONED THAT IN TRAVEL INDUSTRY ROYALTY @5.6% IS PERMISSIBLE. SEE FINDING OF DRP IN THIS REGARD AT PAGE NO-132 OF COMPILATION . COPY OF THE REPORT IS AT PAGE NO 285 OF PB FOR AY 2007-08. IN VIEW OF THE ABOVE IT IS SUBMITTED THAT THE SAME REPORT MAY ALSO BE RELIED IN THE CASE OF ASSESSEE FOR THE IMPUGNED YEA R AND FOR AY 2006-07. 11. THE LD. CIT [DR], ON THE OTHER HAND, PLACED R ELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. HE SUBMITTED THAT EACH ASSESSME NT YEAR IS HAVING ITS OWN FACTS AND CONSIDERING THE FACTS OF THE CASE IN THE PRESENT ASSESSMENT YEAR, THE LD. DRP HAS ALREADY GIVEN SUFFICIENT RELIEF BY CONF IRMING THE ADDITION TO THE EXTENT OF ROYALTY OF 4% AGAINST 6% CLAIMED BY THE ASSESSEE. HE SUBMITTED THAT IN THE AGREEMENT 3 COMPONENTS WERE THERE TOWAR DS ROYALTY I.E. (I) TRADE MARK, (II) MARKET SUPPORT SERVICES; & (III) TECHNIC AL SERVICES. 26 12. CONSIDERING THE ABOVE SUBMISSIONS, WE FIND T HAT IN THE IMMEDIATELY SUBSEQUENT ASSESSMENT YEAR 2008-09, THE LD. DRP FOL LOWING SURVEY REPORT BY THE PUBLICATION FRANCHISING WORLD HAS OBSERVED TH AT THE AVERAGE ROYALTY PERCENTAGE IN TRAVEL INDUSTRY IS 5.6%. IN THE ABSE NCE OF ANY DATA TO THE CONTRARY AND NON-SPECIFIC COMMENT OF THE TPO IN THI S REGARD, THE LD. DRP HAS TAKEN GUIDANCE FROM THE SAID SURVEY REPORT AND SINC E THE ROYALTY PAID BY THE ASSESSEE WAS LOWER THAN 5.6%, IT HELD THE ROYALTY P ERCENTAGE AT 5.6% IS JUSTIFIABLE IN THE CASE OF ASSESSEE. FOLLOWING THE SAME, WE FIND IT REASONABLE AND JUSTIFIABLE TO DIRECT THE TPO TO ALLOW THE AVER AGE ROYALTY PERCENTAGE AT 5.6% DURING THE YEAR AS WELL AGAINST THE CLAIMED RO YALTY PERCENTAGE OF 6% BY THE ASSESSEE. THE GROUNDS ON THE ISSUE ARE THUS PA RTLY ALLOWED, TO THE ABOVE EXTENT. 13. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. 14. IN SUMMARY, APPEAL FOR ASSESSMENT YEAR 2006- 07 IS ALLOWED AND THAT OF 2007-08 IS PARTLY ALLOWED. 15. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON : 09.03.2017. SD/- SD/- (PRASHANT MAHARISHI) ( I. C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: THE 09 TH MARCH, 2017 *MEHTA* 27 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2. RESPONDENT; 3. CIT; 4. CIT (A); 5. DR; BY ORDER ASSIS TANT REGISTRAR