Case Law Details
M/s. Enchanting Travels Pvt. Ltd. Vs The Income Tax Officer (ITAT Bangalore)
We find that TPO has already taken the total 10 comparables and with respect to 8 comparables, assessee has no objections. With respect to Kerala Travels Interserve Ltd., we have carefully perused its financial statements and we find the main revenue is from different activities and not from the tour operations. Therefore, Kerala Travels Interserve Ltd., cannot be held to be the good comparable and we accordingly direct the AO/TPO to exclude this company from the list of comparables.
We find that undisputedly the cox & Kings has its own brand value and is also engaged in multifarious activities. From the financials, it is also clear that under the head income, revenue from operation was of Rs.37,227 lakhs out of which income from travel & tour commission was at Rs.34,627 lakhs and other operating income was only Rs.110 lakhs. Therefore, the main revenue of this company is not generated from the tour operation in India. The main revenue is generated from the travel and tour commissions. We have also carefully examined the judgments of Hon’ble Delhi High Court in which it has been held that the brand of the company plays its own role in price or cost determination. While dealing with the brand value of Wipro Ltd., their Lordship of the Hon’ble High Court has held that the brand value plays an important role in price or cost determination. The relevant observation of the Hon’ble High Court is extracted hereunder for the sake of reference:
“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 profits and negotiate contracts. Thus, while considering the comparables, the likelihood of profits derived or attributable to the brand having regard to the consistency of the quality of services that an entity is able to offer would relevant; although functionally, the two entities may be similar in terms of the services or products they offer, brand does play its own role in price or cost determination. If this singular aspect is kept in mind, the ITA T’s approach cannot be faulted with.”
In the light of the aforesaid judgments of Hon’ble Delhi High Court and the annual report of the Cox & Kings, we find that Cox & Kings is involved in different activities besides tour operation and has its own brand value. Therefore, it cannot be held to be a good comparable for determination of the ALP.
FULL TEXT OF THE ITAT JUDGMENT
This appeal is preferred by the assesse against the order of the AO passed consequent to the Direction of DRP, inter alia, on following grounds:
1. The lower authorities (the learned Assessing Officer, learned Transfer Pricing Officer and Honorable Dispute Resolution Panel) have erred in passing the Order which is bad in law and disregarding the principles of natural justice.
Le2al Grounds relatin2 to Transfer Pricing:-
2. The AO has erred in making a reference to Transfer Pricing Officer for determining arm’s length price of international transactions. The learned DRP has erred in confirming the action of the AO.
3. The lower authorities have erred in
a) Not appreciating that there is no amendment to the definition of “income” and the charging or computation provision relating to income under the head “Profits & Gains of Business or Profession” do not refer to or include the amounts computed under Chapter X and therefore addition under Chapter X is bad in law.
b) Passing the order without demonstrating that the Appellant had motive of tax evasion.
Computation of Arm’s Length Price:-
4. Without prejudice, the lower authorities have erred in
c) Rejecting the transfer pricing analysis undertaken by the Appellant on unjustifiable grounds and conducting a fresh transfer pricing analysis despite absence of any defects in the transfer pricing analysis submitted by the Appellant;
d) Not appreciating that M/s Kerala Travels Interserve Ltd. is functionally different since it is engaged in various activities, like authorized dealers of foreign exchange, air ticket commission, etc and there is no separate segmental reporting comparable to the functions carried out by the
e) Adopting Cox & Kings Ltd. as a comparable without appreciating that it is a large company having brand intangibles and is functionally different;
f) Not making proper adjustment for enterprise level and transactional level differences between the Appellant and the comparable companies
g) Not recognizing that the Appellant was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account; and
h) Not allowing the benefit of the +/-5% range mentioned in the proviso to section 92C (2).
5. The Appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another.
6. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law.
The Appellant prays accordingly.
2. Though various grounds are raised, but they all relate to the exclusion of 2 comparables i.e., M/s. Kerala Travels Interserve Ltd., and Cox & Kings Ltd., from the final list of comparables for determination of the arm’s length price on international transactions entered into between the assessee and its AE. The facts in brief borne out from the record are that the appellant company is engaged in providing tourism services to customers of Enchanting India (AE) as well as to independent customers. Enchanting India is a tourism service provider in the Indian region. A reference was made to the TPO for evaluation of the transfer pricing transactions entered into by the appellant with its AE to see whether they are at arm’s length. In transfer pricing study, assessee has submitted a transfer pricing study report before the TPO and has taken the 7 comparables which are as under:
i. VMV Holidays Ltd.,
ii. Mahasagar Travels Ltd.,
iii. Ace Tours Worldwide Ltd.,
iv. Mercury Travels Ltd.,
v. Crown Tours Ltd.,
vi. Tamarind Tours Pvt. Ltd.,
vii. Globe Forex & Travels Ltd.,
3. The TPO has taken 3 more comparables in addition to the comparables taken by the assessee in transfer pricing study. The final list of comparables prepared by the TPO is also extracted hereunder:
i. Cox & Kings Ltd.,
ii. Kerala Travels Interserve Ltd.,
iii. India Asia leisure services Ltd.,
iv. Ace Tours Worldwide Ltd.,
v. Tamarind Tours Pvt. Ltd.,
vi. VMV Holidays Ltd.,
vii. Mahasagar Travels Ltd.,
viii. Mercury Travels Ltd.,
ix. Crown Tours Ltd.,
x. Globe Forex & Travels Ltd.,
4. The assessee filed an objection before the DRP but did not find favour with him. Now the assessee is before us and during the course of hearing he candidly admitted that he has no objection with regard to inclusion of India Asia leisure services Ltd. He raised an objection with regard to inclusion of Cox & Kings Ltd., and Kerala Travels Interserve Ltd. He accordingly sought exclusion of both the com parables.
5. With regard to Kerala Travels Interserve Ltd., the learned Counsel for the assessee has contended that the income of Kerala Travels Interserve Ltd., is more than 50% from the airlines commissions. The appellant further contended that the assessee is engaged in tours and travels within India which is totally different from the business of Kerala Travels Interserve Ltd. He has also invited our attention to the annual report of Kerala Travels Interserve Ltd., appearing at page Nos. 246-271 of the compilation. He has also invited our attention to the financial statements of Kerala Travels Interserve Ltd., where from it is evident that it has travel income of 3,31 ,68,615/- and tour income was only of Rs.1 ,28,33,676/-. Besides, it also has other income from visa, passport, cancellation charges, etc., at Rs.5,18,69,860/- meaning thereby the tour income of Kerala Travels Interserve Ltd., is only approximately 17% of the total income whereas the assessee’s international services income is Rs.33,22,44,842/- and other income was only at Rs.59,72,278/-. In the light of these financials of comparables and the assessee company, the Kerala Travels Interserve Ltd., cannot be called to be the good comparables for computing the arm’s length price for the international transactions.
The learned DR on the other hand has placed reliance upon the order of the AO/DRP.
6. Having carefully examined, we find that TPO has already taken the total 10 comparables and with respect to 8 comparables, assessee has no objections. With respect to Kerala Travels Interserve Ltd., we have carefully perused its financial statements and we find the main revenue is from different activities and not from the tour operations. Therefore, Kerala Travels Interserve Ltd., cannot be held to be the good comparable and we accordingly direct the AO/TPO to exclude this company from the list of comparables.
7. With regard to Cox & Kings, the learned Counsel for the assessee has contended that this company is engaged in wide range of services and is having a high brand value along with the high turnover. In support of his contention, he invited our attention to the annual report of Cox & Kings available at page Nos. 160 to 245 of the compilation. From the profile, the learned Counsel for the assessee invited our attention that this company owns brand value and is engaged in different types of tours and activities. They have also received awards and recognition. Details have been listed out at page No. 189 of the compilation. From the financials, it is also been demonstrated by the learned Counsel for the assessee that out of total revenue from operations, travel and tours commission was of Rs.34,627 lakhs and other operating income was only of Rs.110 lakhs. The income from Forex division was also at 2,490 lakhs. Meaning thereby, the major chunk of revenue was collected from the activities other than tour operations whereas the assessee was subsidiary of its AE and is a captive service provider for tour operation to its AE in India. Under these circumstances, the Cox & Kings cannot be held to be a good comparable. Their Lordship further held that if similar aspect is kept in mind, the ITAT’s approach cannot be at fault
8. The learned Counsel for the assessee has also placed reliance upon the judgment of the Hon’ble Delhi High Court in the case of Principal CIT Vs. Oracle +(OFSS), BPO Service Pvt. Ltd., in ITA No. 124/18 dated 5/2018 in which their Lordship has held that while considering the comparables, the likelihood of profits derived or attributable to the brand having regard to the consistency of the quality of service from entities able to offer would be relevant although functionally the two entities may be similar in terms of services or products they offer, brand does play its own role in price or cost determination.
The learned DR placed reliance upon the order of the AO and DRP.
9. Having carefully examined the orders of authorities below and the material available on record in the light of rival submissions, we find that undisputedly the cox & Kings has its own brand value and is also engaged in multifarious activities. From the financials, it is also clear that under the head income, revenue from operation was of Rs.37,227 lakhs out of which income from travel & tour commission was at Rs. 34,627 lakhs and other operating income was only Rs.110 lakhs. Therefore, the main revenue of this company is not generated from the tour operation in India. The main revenue is generated from the travel and tour commissions. We have also carefully examined the judgments of Hon’ble Delhi High Court in which it has been held that the brand of the company plays its own role in price or cost determination. While dealing with the brand value of Wipro Ltd., their Lordship of the Hon’ble High Court has held that the brand value plays an important role in price or cost determination. The relevant observation of the Hon’ble High Court is extracted hereunder for the sake of reference:
“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 profits and negotiate contracts. Thus, while considering the comparables, the likelihood of profits derived or attributable to the brand having regard to the consistency of the quality of services that an entity is able to offer would relevant; although functionally, the two entities may be similar in terms of the services or products they offer, brand does play its own role in price or cost determination. If this singular aspect is kept in mind, the ITA T’s approach cannot be faulted with.”
10. In the light of the aforesaid judgments of Hon’ble Delhi High Court and the annual report of the Cox & Kings, we find that Cox & Kings is involved in different activities besides tour operation and has its own brand value. Therefore, it cannot be held to be a good comparable for determination of the ALP for the international We accordingly direct the AO/TPO to exclude this company from the list of comparables while determining the ALP for international transactions. Accordingly, we direct the AO/TPO to exclude these two comparables and recompute the ALP in terms indicated above after setting aside the assessment order in this regard.
11. In the result, appeal of the assessee is allowed for statistical purposes.
Pronounced in the open court on this 08thday of June, 2018.
