ITAT DELHI BENCH ‘A’
American Express Services India Ltd.
versus
Deputy Commissioner of Income-tax, Circle 1(1), New Delhi
IT Appeal NO. 5585 (Delhi) OF 2011
[ASSESSMENT YEAR 2007-08]
AUGUST 24, 2012
ORDER
S.V. Mehrotra, Accountant Member
This appeal filed by the assessee is directed against the order of AO dated 10/10/2011 for AY 2007-08 passed in terms of directions of Dispute Resolution Panel (DRP) u/s 144C(5) dated 02/08/2010.
2. The assessee company was incorporated in the year 1999 as a joint venture between American Express International Inc. and Tata Group. However, in the year 2002, American Express International Inc. became the holding company by acquiring stake from Tata Group. Presently 99.99% of share capital of the company is owned by American Express International Inc. and remaining .01% is owned by Tata Group. The assessee company is providing following services: –
(1) Distribution of AEE charge, credit cards and other cards.
(2) Distribution of AEB personal loans and other retail lending products.
(3) Support for marketing and promotion of products, scheme etc. of AEB.
3. The assessee had filed its return of income declaring loss of Rs. 6,62,96,780/-. The AO noticed that assessee had undertaken International transactions with its associated enterprise to the tune of Rs. 7,03,224/-. Therefore, in accordance with the provisions of section 92CA of the Income Tax Act, the International transaction entered into by the assessee with the associate enterprise was referred to the Transfer Pricing Officer (in short “TPO”) for determining the arm’s length price. The TPO passed the order u/s 92CA(3) on 7th October, 2010 making an upward adjustment of Rs. 3,42,63,209/- to the income of the assessee, being the difference between arms length price and the price charged by the assessee. The AO passed the draft assessment order after considering the assessee’s submissions and made the addition of Rs. 3,42,63,209/- to the income of the assessee. The assessee filed objections before Dispute Resolution Panel (in short “DRP”) and the DRP issued directions u/s 144C(5) on 2nd August, 2011 confirming the TPO’s action.
4. Being aggrieved, the assessee is in appeal before us and has taken following grounds of appeal on this issue: –
1. ‘The order passed by the Additional Director of Income Tax, Transfer Pricisng-1(1) (“Learned TPO”), draft assessment order passed by Deputy Commissioner of Income Tax, Circle 1(1), New Delhi (“the Learned AO”) and the final assessment order passed by the ld. AO on the directions of the Hon’ble Dispute Resolution Panel (“Honorable DRP”), are bad in law and void ab initio.
2. That on facts and in law, the ld. AO has erred in determining the total income of the Appellant at Rs. 109,122,855 as against NIL returned income.
Part 1
3. That on facts and in law, the ld. AO has erred in assuming jurisdiction to refer and in making the reference to the ld. TPO despite the absence of requisite preconditions being met in law.
4. That on facts and in law, the ld. TPO has erred in not discharging the statutory onus to establish that the Appellant’s case is covered under any of (a) to (d) clause of section 92C(3) of the Income Tax Act, 1961 (“the Act”).
5. That on facts and in law, the Honorable DRP has erred in confirming and accordingly, the ld. TPO/AO have erred in making/upholding an upward adjustment of Rs. 34,263,209/- in respect of the international transaction pertaining to marketing services in respect of credit cards and personal loans in the order of assessment.
5.1 That on facts and in law, the Honorable DRP has erred in confirming and accordingly, the ld. TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant and conducting a fresh search for identifying the comparable companies to the Appellant.
5.2 That on facts and in law, the Honorable DRP has erred in confirming and accordingly, the ld. TPO/AO have erred in rejecting the Appellant’s claim for use of multiple year data for computing the arm’s length price and, instead used single year data of companies to conclude the arm’s length price of the international transaction.
5.3 That on facts and in law, the Honorable DRP has erred in confirming and accordingly, the ld. TPO/AO have erred in cherry picking comparables to accomplish pre- conceived conclusions, with the sole objective of rejecting comparables selected by the Appellant and arriving at skewed results.
5.4 That on facts and in law, the Honorable DRP has erred in confirming and accordingly, the ld. TPO/AO have erred in accepting functionally dissimilar company namely Sundaram Finance Distribution Limited as functionally comparable to the Appellant.
5.5 That on facts and in law, the Honorable DRP has erred in confirming and accordingly, the ld. TPO/AO have erred by selecting certain companies earning super normal power as comparable to the Appellant.
5.6 That on facts and in law, the Honorable DRP has erred in confirming and accordingly, the ld. TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-à-vis the comparables and in the process also neglected the Indian transfer pricing regulations. OECD guidelines on transfer pricing and judicial precedence.
6. That on facts and in law, the Honorable DRP has erred in confirming and accordingly, the ld. TPO/AO have erred by not considering that the adjustment to the arm’s length price, if any, should be limited to the lower end of the 5 per cent range as the Appellant has the right to exercise this option under the pre-amended second proviso to sec. 92C(2) of the Act.
6.1 That on facts and in law, the Honorable DRP has erred in confirming and accordingly, the ld. TPO/AO have erred in applying the amendment to section 92C(2) retrospectively and in the process have neglected the Indian transfer pricing regulations and judicial precedence.’
5. Ground Nos. 1 & 2 are general in nature and do not require any specific adjudication. Ground Nos. 3 to 6.1 are in respect of determination of arm’s length price by TPO and consequent adjustment to the assessee’s income.
6. Brief facts apropos the adjustments made by TPO are that the assessee company had entered into an agreement with American Express Bank Limited of USA having its Indian office at Gurgaon for providing the following services: –
1. Distribution of AEB Charge, Credit Cards and other Cards.
2. Distribution of AEB Personal Loans & other Retail Lending products.
3. Support for Marketing & promotion of products, schemes, etc. of AEB.
7. The TPO has noted salient terms and conditions of the agreement as under: –
“3.1 The assessee is entitled to the following fee and charges in accordance with the terms and conditions of this agreement is effective from 1st April 2004:
1. Retainer fees Rs. 114 lakhs per month.
2. Service Fee:
(i) Rs. 2280 per approved consumer card.
(ii) 3.5% of personal loans disbursed.
The above agreement was modified with effect from 1st December, 2004 and the retainer fee was increased to Rs. 140 lakhs per month. The service fee on personal loan disbursed was increased 3.75%. Further amendments were carried out to the agreements on 24th May, 2005 with effect from 1st June, 2005 and the retainer ship fee was increased to Rs. 200 lakhs per month and the service fee on personal loan disbursed was reduced to 3.50%. Another amendment was effected on 22nd November, 2005 with immediate effect through which the charges for the consumer card were revised as under:
(i) Rs. 1800/- per approved card sourced through its sub-contracted third parties who source card applications.
(ii) Rs. 1800/- per approved card sourced through its sub-contracted third parties who source loan applications.
3.2 The assessee has entered into another Service Agreement with American Express International Inc. on 25th September, 2006 w.e.f. 1st January, 2006 to provide the following services:
1. Analysis and trending of financial and back office data to identify out of pattern activity.
2. Root cause analysis and subsequent investigation with follow-up.
3. Remote control reviews with focus on protection of company assets and adherence to policies and procedures.
4. TID review and analysis.
5. Initiatives such as 6 Sigma, BCP coordination and adherence to GFES policies.
The fee for the above services is payable to the AESIL as under:
i. The Fees payable by AEII to AESIL for the services shall be arrived at by taking into account the total cost incurred by AESIL for providing the services plus a mark up of 15.09%.
ii. The fees shall be payable on a quarterly basis by inward remittance into India of the amount of the fees.
iii. The fees shall be payable within 30 days from the completion of the period to which the fees relate.
iv. AESIL shall provide AEII with a detailed breakup of the total cost incurred by AESIL and further furnish all such clarification as may be required by AEII in this connection.”
8. The TPO noticed that assessee had applied TNMM method for determining arm’s length price in regard to provision of the marketing services to Amex India in respect of credit cards and personal loans. He noted that the profitability of the company had been computed at 12.81%. He observed that for arriving at this profit margin assessee had selected six companies as comparables the operating profit/operating cost of which was used as PLI. He further observed that the data for F.Ys. 2005-06, 2006-07 was used and weighted average was arrived at 17.33%. The assessee exercised its option under proviso to section 92C(2) of the Act and arm’s length price was determined at -5% of arithmetic mean of the comparable prices. The TPO noticed that assessee had not made any addition in the Transfer Pricing Study. The TPO further noted that in order to bench mark the International transactions, the taxpayer had not used the data of the current financial year i.e. F.Y. 2006-07 in respect of following six comparable companies: –
