Bertelsmann Marketing Services India Pvt. Ltd., New Delhi V. ACIT, Circle- 4(2), New Delhi

ITA 7661/DEL/2017

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 1509 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I
• Next Hearing Date: 05-10-2022
• Assessment Year: 2013-2014
• Appeal Filed On: 20-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Unabsorbed depreciation
• Section: 143(3); 92; 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES “I” : DELHI BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND SHRI NARENDRA KUMAR BILLAIYA, ACCOUNTANT MEMBER ITA.No.7661/Del./2017 Assessment Year 2013-14 M/s. Bertelsmann Marketing Services Pvt. Ltd., 215, 2 nd Floor, Suneja Tower-II, District Centre Janakpuri, New Delhi-058. PAN AABCB8378G [vs. The ACIT, Circle-4(2), Room No.398D, C.R. Bldg., New Delhi PIN – 110 001 (Appellant) (Respondent) For Assessee : Shri Vishal Kalra, Advocate & Ms. Sumisha Murgai, C.A. For Revenue : Shri Bhaskar Goswami, CIT-DR Date of Hearing : 06.10.2022 Date of Pronouncement : 07.10.2022 ORDER PER SHRI CHANDRA MOHAN GARG, J.M. : This appeal by Assessee has been directed against the order of the Assistant Commissioner of Income Tax, Circle-4(2), New Delhi dated 24.10.2017 giving effect to the directions of the Disputes Resolution Panel-1 [in short 2 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. “DRP”], New Delhi, dated 30.08.2017 relating to A.Y. 2013- 14. 2. Briefly stated facts of the case are that the assessee-company was incorporated on 31.03.2000 and is engaged in the business of IT enabled services. The Company is also operating and managing the activities of BPO centres, call centres and providing warehousing facility service to various customers. It filed it’s return of income on 22.11.2013 declaring NIL income after setting-off unabsorbed depreciation of Rs.6,97,59,054/- under normal provisions of the I.T. Act, 1961. The case of the assessee company was selected for scrutiny and notice under section 143(2) of the I.T. Act, 1961 was issued on 05.09.2014 and was duly served upon the assessee company. Subsequently, notices under section 142(1) of the I.T. Act, 1961 along with questionnaire were issued on 12.05.2015 and 27.07.2016 calling the assessee to file requisite details. The Authorised Representative of the assessee company appeared before the A.O. and filed necessary details as called for. The A.O. noted that during the previous year under consideration the 3 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. assessee had entered into international transaction with Associated Enterprises [“AE"] within the meaning of Section 92B of the I.T. Act, 1961 and the details of said transactions were also mentioned by the assessee company in prescribed Form No.3CEB. The A.O. referred the issues pertaining to transfer pricing to Transfer Pricing Officer [“TPO”] as per provisions of Section 92CA(4) of the I.T. Act, 1961 after obtaining necessary statutory approval from the Commissioner of Income Tax, Delhi-1, New Delhi for computation of Arm’s Length Price [“ALP”] in relation to the international transactions. Subsequently, the TPO passed order dated 19.09.2016 under section 92CA(3) of the I.T. Act, 1961 by determining the total ALP adjustment of Rs.60,94,597/-. The A.O. after discussing the case with the Learned Authorised Representative of the assessee company added the proposed ALP determined by the TPO of Rs.60,94,597/- to the total income of the assessee company in the draft assessment order dated 15.11.2016. 2.1. Aggrieved by the draft assessment order dated 15.11.2016, the assessee-company filed it’s objections 4 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. before the DRP and the DRP under section 144C(5) of the I.T. Act, 1961 issued directions dated 30.08.2017 to the TPO by reducing the transfer pricing adjustment amounting to Rs.49,33,499/- as against a sum of Rs.60,94,597/- proposed by the TPO. Pursuant to the directions of the DRP dated 30.08.2017, the TPO gave effect to DRP directions vide order dated 17.10.2017 and reduced the transfer pricing adjustment to Rs.49,33,499/-. The A.O. by following the directions of DRP/TPO passed the assessment order dated 24.10.2017 and determined the total income of the assessee at Rs.1,82,24,622/- under section 143(3) r.w.s.144C of the I.T. Act, 1961. 3. Aggrieved by the assessment order passed by the A.O. dated 24.10.2017 under section 143(3) r.w.s.144C of the I.T. Act, 1961, the assessee carried the matter in appeal before the Tribunal by raising the following grounds : 1. “That on facts and in the circumstances of the case and in law, the Learned Assessing Officer ("AO") / Learned Transfer Pricing Officer ("TPO") / Hon'ble Dispute Resolution Panel ("DRP") erred in making an addition of 5 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. Rs.49,33,499 to the returned income of the Appellant by re-computing the arm's length price (ALP) of the international transactions under section 92 of the Income-tax Act, 1961 ("the Act"). 2. That on facts and in the circumstances of the case and in law, the reference made by the AO to the TPO suffers from jurisdictional error as the AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the TPO for computation of ALP, as is required under section 92CA(1) of the Act. 3. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. 4. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in rejecting the Internal Transactional Net Margin Method ("TNMM") applied by the Appellant and thereby applying external TNMM to 6 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. benchmark the international transactions of the Appellant. 5. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in rejecting the segmental accounts maintained by the Appellant by merely stating that the segments created in the TP report are artificial. 6. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in application of external TNMM by identifying companies which are not comparable to the Appellant in terms of functions, assets and risk profile. 7. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in the computation of related party transactions filter ("RPT filter") as well as the computation of margins of comparable companies as proposed by the TPO. 8. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in treating the over-due receivables from AEs as an international transaction. 7 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. 9. Without prejudice, the DRP/AO/TPO erred on facts and in law by adopting incorrect methodology of the ALP of the alleged international transaction of receivables as on March 31, 2013. 10. That on the facts and circumstances of the case and in law, the AO/TPO erred in initiating the penalty proceedings u/s 271 (1) (c) of the Act mechanically and without recording any adequate satisfaction for such initiation. The above grounds of appeal are mutually exclusive and without prejudice to each other. That the appellant craves leave to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal as they may be advised. That, the above grounds are independent and without prejudice to each other.” 4. Grounds of appeal No.1 is general in nature, which need not be adjudicated. 8 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. 5. During the course of hearing, the Learned Counsel for the Assessee has not pressed grounds of appeal Nos.2, 3, 8 and 9. Therefore, grounds of appeal Nos.2, 3, 8 and 9 are dismissed as not pressed. 6. Grounds of appeal No.10 is of consequential in nature, which need not be adjudicated. 7. Grounds of appeal Nos.4 and 5 relating to rejection of internal TNMM applied by the assessee company. 7.1. During the course of hearing, the Learned Counsel for the Assessee, drew the attention of the Bench to Paper Book at page No.792 contending, inter alia, that similar issue has been decided by the Coordinate Bench of Delhi I-I, Bench, Delhi in ITA.No.6577/Del./2016 vide order dated 12.11.2021 wherein the Tribunal allowed the claim of assessee i.e., to adopt internal TNMM for bench marking provisions of ITEs. The Learned Counsel for the Assessee prayed that since the present grounds are squarely covered by the aforesaid order of the Coordinate Bench of the 9 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. Tribunal dated 12.11.2021 (supra), similar directions may please be passed by allowing the claim of assessee company in respect of adopting internal TNMM. 8. The Ld. D.R. on the other hand strongly relied on the orders of the authorities below. He submitted that the assessee-company failed to distinguish the services rendered by it to the AEs [ITeS] and non-AEs [BPO]. Since the functions of AEs and non-AEs are not the same and, therefore, the authorities below adopted non-AE [external] segment as the assessee-company was failed to explain the allocation of costs amongst these two segments. He, prayed that the orders of the authorities below be confirmed. 9. We have considered the rival submissions of both the parties and perused the material available on record. We find that similar issue on similar facts has been decided by the Coordinate Bench of the Tribunal in ITA.No.6577/ Del./2016 for the A.Y. 2012-13 vide order dated 12.11.2021 in the case of Majorel India Pvt. Ltd., New Delhi vs., ACIT, Circle-4(2), New Delhi, wherein the Tribunal directed the 10 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. TPO/A.O. to adopt internal TNMM for benchmarking provision of ITes. The relevant observations of the Coordinate Bench of the Tribunal dated 12.11.2021 read as under : “10. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the nature of services rendered by the assessee to non-AEs broadly comprised of customer care and technical support, viz., payroll, recruitment, IT support etc. The business operations of the assessee are divided into various operational processes that it performs for its customers (AE’s and non AE’s). While processes carried out for the AE and non AE may differ, the fundamental functions performed by the assessee under each of these processes are the same and fall under the category of ITeS Industry. These aspects were never disputed by the TPO/AO at any stage. In fact, the TPO/AO simply stated that the nature of services performed in AE segment are totally different from nature of services in non-AE segment. But how the 11 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. services are fundamentally different has not been demonstrated by the Assessing Officer. In fact, in broader context the services rendered to AE and non-AE are that of customer care and technical support. Thus, rejecting the internal TNMM on this ground is not valid as internal TNMM is the method which makes it easy to find comparable companies and reasonably determine the arm’s length nature of related as well as unrelated transactions. Besides this the TPO/AO has also rejected internal TNMM on the ground that there were no audited segments maintained. But at the same time, the TPO/AO has not pointed out any discrepancy related to segmental analysis based on valid allocation keys furnished by the assessee in its TP study. Therefore, these two aspects cannot be valid for rejecting the internal TNMM. The DRP was not correct in considering the services/scope of work from the agreement entered into by the assessee with its AE for ‘procurement of IT Services’ and comparing the same with the back-end ITeS Services provided by the assessee to AEs. In the 12 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. present case best suited method is that of internal TNMM. The financial data pertaining to internal segmentation is more reliable and accurate, as compared to financial data of external comparable companies, therefore, it will be appropriate to apply internal benchmarking analysis over external benchmarking analysis. This finds support from the “OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” which highlight the preference of internal comparables over external comparables. (relied upon Para 3.27 and 2.58 of OECD guidelines). In fact, the United Nations Practical Manual on Transfer Pricing for Developing Countries, released in 2013 (UN manual) also provides that TNMM is less dependent on product comparability because net margins are less influenced by differences in products and functions, as compare to other methods like CUP. Therefore, we direct the TPO/AO to adopt internal TNMM for benchmarking provision of ITeS. Ground Nos. 4 and 5 are allowed.” 13 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. 9.1. We find on identical facts the Coordinate Bench of the Delhi Tribunal passed the above order dated 12.11.2021 (supra) and the grounds raised by the assessee company in the present appeal are squarely covered by the order of Coordinate Bench of the Tribunal dated 12.11.2021 referred above. We, therefore, respectfully following the reasons for decision, direct the TPO/A.O. to adopt internal TNMM for benchmarking provision of ITeS. Accordingly, the grounds of appeal nos.4 and 5 of the assessee company are allowed. 10. Grounds of appeal Nos.6 and 7 are pertains to application of external TNMM and Related Party Transactions filter [“RPT filter”]. 11. The Ld. D.R. strongly relied on the order of the TPO/A.O. and directions of the DRP on these grounds. 12. We have heard both the parties and perused all the relevant material available on record. Since, we have already accepted the grounds of appeal Nos.4 and 5 of assessee’s appeal, thereby allowing internal TNMM, these 14 ITA.No.7661/Del./2017 M/s. Bertelsmann Marketing Services India Pvt. Ltd., New Delhi. grounds becomes infructuous. Hence, grounds of appeal Nos.6 and 7 of the assessee company are dismissed. 13. In the result, appeal of the assessee is partly allowed. Order pronounced in the open Court on 07.10.2022. Sd/- Sd/- [NARENDRA KUMAR BILLAIYA] [CHANDRA MOHAN GARG] ACCOUNTANT MEMBER JUDICIAL MEMBER Delhi, Dated 07 th October, 2022 VBP/- Copy to 1. The appellant 2. The respondent 3. Ld. CIT(A) concerned 4. CIT concerned 5. DR ITAT “I” Bench, Delhi 6. Guard File //By Order// Assistant Registrar, ITAT, Delhi Benches, Delhi.