Intercontinental Hotels Group (India) Pvt. Ltd. Vs DCIT (ITAT Delhi)
Hon’ble High Court in Philip Morris had directed that M/s. Apitco Ltd. was not good comparable of concerns providing business support services, on the ground that in case of Government enterprises, profit motive is not relevant consideration and the Government company worked for public undertakings.
Further, GPCL has been held to be not comparables by the Hon’ble Delhi High Court in Philips Morris (supra) itself on the ground that the company was established by the Government to provide Ancillary Management Support Services to Government Departments or their agencies.
The assessee before us is engaged in providing support services to its AE in the nature of marketing and other support services. The assessee is reimbursed on cost plus basis for rendering the said services to its AE i.e. Continent Hotels INC. The assessee had applied Transactional Net Margin Method for benchmarking its international transaction for Provision of Ancillary Management Support Services to its AE being the most appropriate method and had computed its margin at 10.28% by applying OP/OC as PLI. The assessee in the transfer pricing study report has selected six comparable companies as functionally comparable, whose mean margins worked to 9.84 % and had claimed the international transaction to be at arm’s length. However, the TPO applied filters selected by the assessee but also used additional filters and drew list of nine comparables as finally selected to benchmark the international transaction of Provision of Ancillary Management Support Services by the assessee to its AEs.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal filed by assessee is against order of CIT(A)-1, Gurgaon dated 29.03.2016 relating to assessment year 2010-11 against the order passed under section 143(3) r.w.s 144C of the Income-tax Act, 1961 (in short ‘the Act’).
2. The assessee has raised following grounds of appeal:-
1. “On the facts and circumstances of the case and in law, the Hon’ble Commissioner of Income Tax (Appeals) – 1 (“Hon’ble CIT(A)”) has erred in confirming the addition to the extent of INR 1,30,45,059 to the taxable income of the Appellant on account of adjustment to the Arm’s Length Price (‘ALP’) of the Appellant’s international transaction of provision of ancillary management support services with its Associated Enterprises (“AEs”).
2. On facts and circumstances of the case and in law, the Hon’ble ClT(A) has erred in confirming the TPO’s action of including “Design and engineering expenses”, an expense wholly attributable to the non-AE activities of the Appellant, to compute the operating margin for AE transactions. In doing so, the CIT(A) erred in-
2.1. Ignoring the functions, asset and risk profile of the Appellant and violated the provisions of Rule 10B(1)(e) of the Income Tax Rules, 1962.
2.2. Disregarding the fact that the design and engineering expenses are incurred by the Appellant to provide services only to third parties /non-AEs and not to its AEs; and
2.3. Confirming the TPO’s action of limiting the amount of design and engineering expenses to the extent of revenue from technical services (earned from non-AEs) which violates the provisions of Section 92C(3) and Section 92CA(3) of the Income Tax Act, 1961;
3. On facts and in law, the Hon’ble CIT(A) erred in confirming Apitco Limited, Global Procurement Consultants Limited and TSR Darashaw Limited as alleged comparables to the Appellant, disregarding the significant difference in the functional profile of these companies vis-a-vis the Appellant.
4. On facts and in law, the Hon’ble CIT(A) erred in rejecting two comparable companies – Educational Consultants (India) Limited and Spectrum Business Solutions Limited, disregarding the fact that these two companies are appropriate comparables having functional profile similar to that of the Appellant.
5. On facts and in law, the Hon’ble ClT(A) erred in not agreeing to the Appellant’s plea on the correct computation of margins of HSCC (India) Limited at 8.96 percent vis-a-vis at 18.32 percent computed incorrectly by the Assessing Officer.
6. On facts and in law, the Hon’ble CIT(A) erred in not allowing a risk adjustment under Rule 10B(1)(e) of the Rules for determination of the ALP to account for the difference in the risk profile of the Appellant and of comparable companies.
7. On facts and in law, the Hon’ble CIT(A) erred in disregarding the Appellant’s use of multiple year / prior years’ data in contravention of the provision of section 92C of the Act read with Rule 10B and Rule 100(4) of the Rules.
8. On the facts and circumstances of the case and in law, the Ld. Deputy Commissioner of Income Tax, Assessing Officer (“Ld. AO”) has erred in charging interest under section 234B of the Act on the assessed income.
9. On the facts and circumstances of the case and in law, the AO has further erred in initiating penalty proceedings u/s 271(1)(c) mechanically and without recording any adequate satisfaction for this initiation even when no such penalty is warranted in the present case.
All the above grounds are without prejudice to each other.”
3. The issue raised in the present appeal is against the benchmarking of international transaction of provision of Ancillary Management Support Services by providing marketing support services to the Associated Enterprises (in short “AE”).
4. Briefly in the facts of the case the assessee was an Indian company and was part of Intercontinental Hotels Group (in short “IHG”), incorporated for managing and offering services mainly to the M/s. IHG. The assessee provided Ancillary Management Support Services to M/s. Continent Hotels INC. The Assessing Officer noted that the assessee had entered into several international transactions with its AEs and reference was made u/s 92CA(1) of the Act to benchmark the Arm’s Length Price of the international transaction undertaken by the assessee. The TPO has tabulated list of international transactions undertaken by the assessee at page 2 of the TPO’s order. We are concerned with the provision of Ancillary Management Support Services segment only. The assessee was providing the said services to AEs on account of three segments:-
(a) Marketing and Reservation System fund services;
(b) Brand support services; and
(c) Regional office services.
5. The assessee had entered into an Agreement with M/s. Continent Hotels INC for the provision of Ancillary Management Support Services with respect to hotels based in South West Asia region. The assessee received service fee based on the mark-up of 10% on service cost incurred for providing such services. The cost included costs and expenses of services incurred by the assessee company, directly or indirectly in connection with providing such services. The TPO noted that majority of risks were borne by the AE. The assessee had benchmarked its international transaction of provision of Ancillary Management Support Services and Operational Assistance Services by applying Transactional Net Margin Method with Operating Profit to Total Cost (in short (OP/TC) as Profit Level Indicator (in short “PLI”). The margins were calculated at 10.28% by the assessee as against average margins of the six comparables finally selected at 9.84%. Hence, the transaction was treated at Arm’s Length. The filters applied by the assessee were also adopted by the TPO, but show cause notice was issued on account of additional filters to be applied after search process adopted by the TPO. The TPO selected eight concerns as functionally comparable to the assessee whose mean margin worked out at 24.12% and proposed adjustment of Rs.1,76,76,141/- in the show cause notice. One of the filters which was applied by the TPO was the use of current year data as against multiple years data applied by the assessee. The assessee filed objections to the proposed adjustment made by the TPO against the final selection of comparables. However, the TPO in final analysis rejected two comparables of the assessee and introduced five new comparables working out the mean margins of the comparables at 21.66% and proposed an adjustment of Rs.1,30,45,059/-. The TPO also proposed an adjustment on account of outstanding receivables of Rs.72,62,421/-. The Assessing Officer passed draft assessment order and thereafter, final assessment order making the aforesaid adjustment, against which the assessee filed an appeal before the CIT(A). The adjustment on account of Provision of Ancillary Management Support Services was upheld in the hands of the assessee. However, adjustment made on account of outstanding receivable was deleted by the CIT(A). The appeal of the Revenue on this ground has been dismissed on the ground of low tax effect.
6. The assessee is in appeal against the adjustment made on account of Provision of Ancillary Management Support Services.
7. The Ld.AR for the assessee has objected to the inclusion of comparables which were introduced by the TPO i.e. (a) Apitco Ltd.; (b) Global Procurement Consultants Ltd.; and (c) TSR Darashaw Ltd. The assessee is also aggrieved by the rejection of the comparable i.e. Spectrum Business Solutions Ltd. (in short “SBSL”). Another aspect which is raised by the Ld.AR for the assessee before us is that SBSL was rejected by the TPO on arbitrary basis even though the company is functionally comparable to the assessee. The assessee is also aggrieved by erroneous computation of margin in case of HSCC (India) Ltd. at 18.32%. We shall deal with the submissions of both authorized representatives while deciding the issue in paras below.
8. The Ld.AR for the assessee pointed out that Ground of appeal No.1 raised by the assessee is general. Ground of appeal Nos. 2, 6 & 7 are not pressed. However, Ground of appeal No.3, partly Ground of appeal No.4 & Ground of appeal No.5 need to be adjudicated in the case of the assessee.
9. We have heard the rival contentions and perused the record. The assessee before us is engaged in providing support services to its AE in the nature of marketing and other support services. The assessee is reimbursed on cost plus basis for rendering the said services to its AE i.e. Continent Hotels INC. The assessee had applied Transactional Net Margin Method for benchmarking its international transaction for Provision of Ancillary Management Support Services to its AE being the most appropriate method and had computed its margin at 10.28% by applying OP/OC as PLI. The assessee in the transfer pricing study report has selected six comparable companies as functionally comparable, whose mean margins worked to 9.84 % and had claimed the international transaction to be at arm’s length. However, the TPO applied filters selected by the assessee but also used additional filters and drew list of nine comparables as finally selected to benchmark the international transaction of Provision of Ancillary Management Support Services by the assessee to its AEs. The final list of nine comparables is as under:-
