Relief to Bloomsbury Publishing in Transfer Pricing Case

Bloomsbury Publishing India Private Ltd. Vs ACIT (ITAT Delhi)

Relief to Bloomsbury Publishing as matter regarding Transfer Pricing and Corporate Tax was redirected to AO/TPO to verify additional evidences

Conclusion: Matter regarding discrepancies in transfer pricing and corporate tax of UK-origin publishing giant Bloomsbury Publishing India Private Ltd. ( Bloomsbury ) was remitted back to AO/TPO to benchmark the international transactions based on the additional evidences brought on record by assessee to render a decision right in law.

Held: Assessee was primarily engaged in the business of publishing and trading of books and other related services. BDIPL distributes both UK and US Bloomsbury imprints which embraces a rigorous academic list focuses on business, fiction, non-fiction, children’s academic, economics and management etc.. During the year, assessee had entered into following international transactions. TPO verified the Class-VI transactions relating to purchases of books from Macmillan Distributors Ltd., Holtzbrink Publishers and Marston Publishers. Assessee had submitted operating profit from the trading of books submitted in its TP study. TPO proposed 6 comparables and the final assessment order was passed with the following TP adjustment with final comparables.  It was held that transactions and FAR of assessee were similar to AY 2021-­22 and as per the records brought to our notice, there was no change in the activities carried out by assessee in the current assessment year and subsequent assessment years. It was brought to our notice that assessee had filed the segmental report at the time of TP study, however the data was incomplete. Therefore, TPO rejected the TP study submitted by assessee. Assessee had prepared the segmental report by following the similar allocation of expenses relating to the segment. Since the books of account maintained by assessee were exactly similar, it was only a re-appreciation of facts and allocation of expenses following allocation key of respective sales. The above additional evidences were relevant and accepted. For the sake of complete justice, this issue was remitted to the file of AO/TPO to verify the allocation of expenses and the segmental report prepared by the assessee based on the accepted method of allocation in AY 2021-22 and also the details of discount offered by its AE and may be compared with the discount offered by AE in the uncontrolled transactions and directed to compare the internal CUP available in this case to benchmark the transactions of purchase of books from its AE. Therefore, AO/TPO was directed to benchmark the international transactions based on the additional evidences brought on record by assessee as per law after giving proper opportunity of being heard to the assessee.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. This appeal is filed by the assessee against the final assessment order dated 07.04.2021 passed u/s 143(3) r.w.s.144C (13) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) subsequent to the directions of the Ld. Dispute Resolution Panel (DRP)/TPO vide order dated 04.02.2021 for Assessment Year 2016-17.

2. The assessee has taken the following concise grounds of appeal :-

“Ground of Appeal: General

1 That the DRP-1/Assessing Officer/National e-Assessment Center [“NeAC”] erred in assessing the total income of the appellant at Rs 4,55,58,130/- against the returned loss of Rs.1,19,17,501/- pursuant to the order of the Dispute Resolution Panel-I, New Delhi.

Ground of Appeal: Transfer Pricing

2. Treatment of Foreign Exchange Gain/loss as operating Income/expense in case of purchase of goods in foreign currency. (?)

2.1     The TPO/DRP-1/National e-Assessment Center erred on fact and in law in holding that the Foreign exchange gain pertaining to international transaction of purchase of books do not form part of the operating income and thus removing the amount of Rs.39,93,000 from the operating income of the appellant.

3. Selection of comparables functionally non-comparable to the business activity of the appellant while computing arm’s length price using the Transactional Net Margin Method.

3.1     The TPO/DRP-1/National e-Assessment Center erred on fact and in law in making the adjustment amounting to Rs. 59,07,000/- on account of international transaction for segment relating to books purchase from Macmillan Distributors Ltd.[“MDL”] by rejecting the Transfer Pricing documentation of the appellant. The TPO/DRP-1/National e-Assessment Center erred in rejecting the comparables companies selected by the appellant on the ground of persistence losses despite such comparables are functionally most comparable to the business operations of the appellant.

3.2     That the DRP/National e-Assessment Center erred on fact and in law in applying the TNMM as MOM on the entity level, ignoring the fact that under transfer pricing regulations, the adjustment can only be made on the value of International Transaction with the Associated Enterprise.

Ground of Appeal: Corporate Tax

4. Increment in sundry creditors (?) added to total income.

4.1     The AO erred on fact and in law in making an addition of Rs.5,15,68,635 on account of increase in sundry creditors-holding that the confirmation from the creditors was not filed by the appellant before the AO, ignoring the confirmations filed before him.

4.2 The AO/TPO erred on fact and in law in holding that the appellant failed to provide the identity and genuineness of transactions, completely ignoring the fact that the list of creditors and confirmation of M/S Macmillan Distributor was filled before the Assessing Officer.

4.3     The DRP-1/National e-Assessment Center erred on fact and in law in sustaining the addition of Rs.5,15,68,635/- on account of increase in sundry creditors- despite the confirmation of all the creditors was filed before the DRP-1.

4.4     The DRP-1/National e-Assessment Center erred on fact and in law in sustaining the addition of Rs.5,15,68,635/- on account of increase in sundry creditors- by holding that the appellant has failed to substantiate the financial crises and evidence that the import payment was difficult.

5. Interest U/s 234B. 234C and 2340 of the Income Tax Act 1961

5.1 The DRP/National e-Assessment Center New Delhi erred in charging of interest under the provision of section 234B, 234C & 234D of the Income Tax Act in their order.

6. Other Grounds

1. The appellant craves leave to urge, add or alter other ground or grounds at the time of hearing.”

3. Grounds No.1 & 6 are general in nature and Ground No.2 is not pressed by the assessee.

4. With regard to Ground No.3 the relevant facts are, assessee filed its return of income declaring loss of Rs.1,19,17,501/- on 25.11.2016. The case was selected for limited scrutiny under CASS and accordingly, notice under section 143(2) of the Income Tax Act, 1961 (for short ‘the Act’) was issued and served on the assessee. The case was selected for limited scrutiny for the following reasons :-

(i) Large increase in sundry creditors and reduction in business income as compared to preceding year.

(ii) Large current liability in comparison to total asset in Balance Sheet.

(iii) Deemed international transactions by person other than AE in pursuance of a prior agreement (T.P. Risk Parameters).

5. Ld. AR of the assessee attended and submitted the relevant information as called for.

6. The assessee is engaged in the business of printing and publishing. The assessee has filed Form 3CEB along with return of income and it was observed that assessee had entered into international transactions with its Associated Enterprises (AE)/concerns during the year. Accordingly, the matter was referred to Transfer Pricing Officer (TPO).

7. A notice u/s 92CA (3) was issued to the assessee and in response, ld. AR of the assessee submitted the relevant information as called for. The assessee also submitted documentations prescribed under Rule 10D of the Income-tax Rules, 1962 (for short ‘the Rules’).

8. The TPO observed that the assessee is primarily engaged in the business of
publishing and trading of books and other related services. BDIPL distributes both UK and US Bloomsbury imprints which embraces a rigorous academic list focuses on business, fiction, non-fiction, children’s academic, economics and management etc.. During the year, assessee has entered into following international transactions :-

9. The TPO verified the Class-VI transactions relating to purchases of books from Macmillan Distributors Ltd., Holtzbrink Publishers and Marston Publishers. The assessee has submitted operating profit from the trading of books submitted in its TP study and the same are reproduced below :-

10. Based on the information submitted by the assessee, ld. TPO benchmarked the Class-VI transactions which is deemed international transactions and he observed that assessee has benchmarked OP/OR of 1.79% by selecting following comparables :-

11. After considering the above comparables, ld. TPO rejected 5 comparables and retained only Harvard Business School Publishing India Pvt. Ltd. and Informatics India Ltd. selected by the assessee. The TPO proposed further 5 comparables and after considering the objections of the assessee, the TPO finally retained following comparables to benchmark the transactions. Accordingly, he determined the average OP/OR of 8.32% as under :-

12. Based on the above chart, he proposed the adjustment of Rs.1,03,37,000/- in respect of segment relating to purchase of books from MDIL as under :-

13. Aggrieved with the above order, assessee filed objections before the ld. DRP-1, New Delhi. After considering various objections of the assessee, finally TPO proposed 6 comparables and the final assessment order was passed with the following TP adjustment with final comparables. The same are benchmarked as under :-

–

14. Aggrieved with the above, assessee is in appeal before us.

15. At the time of hearing, ld. AR of the assessee filed additional evidences with the prayer that in the TP study, the assessee submitted that the assessee has computed the operating net margin of the assessee company applying the profit level indicator of OP/OR which it computed to 1.79% from the segment of “books purchased from MDL” and “Transaction other than AE”. He submitted that in the said computation of OP/OR, the sale value of books were bifurcated in two segments on the basis of value of books purchased during the year from deemed AE. It was further submitted that rest of the expenditures were allocated applying the allocation key of ratio of sales value in the each segment. He submitted that this allocation key did not provide the true picture of allocation of sales turnover and the expenditure allocated between the two segments.

15.1 It was further submitted that there are certain expenditure which are directly allocable to one segment but could not be so allocated due to defective allocation key. Now the assessee has prepared a more robust segmental accounts on the basis of actual sales undertaken in both the segments and directly allocatable expenditure have been allocated directly to that segments. It was further submitted that number of books sold in each segment provides an unblemished allocation of expenditure as it represents the efforts put in each segment. Accordingly, few expenditure has been allocated applying the ratio of no. of books sold in each segments. He further submitted that there are few expenditures, which have been allocated in the ratio of 50-50. This segmental account is more precise and uses lessor approximation, which offer a better clarity on the profitably from both the segments.

15.2 Ld. AR submitted that during the Transfer Pricing Proceedings the TPO computed the OP/OR of the assessee company at Rs.-11.66 lakhs from the segment of sale of traded books [Purchased from deemed AE] against the profit of 28.27 lakhs computed by the assessee after reducing the gain arising from foreign exchange. The TPO computed the arm’s length net operating margin of the final comparable companies at 8.32% and proposed a variation of Rs. 1,03,37,000 to the taxable income of the assessee on account of ALP computation of transaction of purchase of books from deemed AE.

15.3 Further ld. AR submitted that on objection filed before ld. Dispute Resolution Panel, the DRP accepted some of the comparable considered by the assessee but rejected by the TPO, however on some of the comparable selected by TPO the DRP upheld the decision of TPO. The TPO following the direction of DRP passed the order u/s 144C and determined the ALP margin of the assessee company at 5.52% being the median of the final set of comparables (after incorporating DRP directions) as the assessee OP/OR of 1.79% from the segment of (traded books) was less than the 35th and 65th percentile of the comparables.

15.4 He further submitted that the Arm’s Length Range i.e. 35th percentile and 65th percentile of the comparable companies considered by the TPO/NFAC in the final set in his order falls between to 3.88% to 7.15%. The OP/OR of the trading segment as computed by the assessee in the revised segmental accounts is 7.08%, which is well within the Arm’s Length Range computed by the TPO and the Audited revised segmental account is attached with this application as Annexure 1.

15.5 As stated above, he submitted that assessee is in business of publishing and trading of books and other related services and it has purchased books primarily from Macmillan Distributor (MDL) MDL is the worldwide distributor of Bloomsbury PLC UK who supply books to assessee and also to third parties in India. MDL offers discounts on the print price of the books to assessee and third- party customers in India. He submitted that on the sales made to third parties, the MDL. Provides discount between 45%-65% of the title print prices. However, in case of the assessee the discount avowed on the title print price is minimum 70% or some time even more. He submitted that an internal mail of the AE declaring the policy of giving 70% discount to all the subsidiary companies is attached herewith as Annexure 2.

15.6 He further contended that the discount offered on print price to assessee and third parties is a good third party Comparable Uncontrolled Price [CUP] available to organise the comparability of the transaction of purchase of books from MDL and other distributors of BBPLC and the price charged from assessee for the goods purchased can be compared due to availability of third party comparable, thus for the transaction of purchase of books from MDL, considering the nature of the transaction, the discount offered by MDL to the assessee and the third party in India can be compared alternatively for applying the CUP method to be the most appropriate method to determine the ALP.

15.7 Ld. AR submitted that the assessee placed a detail of some of the invoices [sample basis] raised by AE along with the copies of the invoices on assessee and the third-party customers clearly demonstrating that the discount offered to the assessee is 70% of the print prices or more while the discount offered to third parties ranges between 45% to 65% and referred to Annexure 3. He further submitted that along with the copies of invoices on sample basis, screen shots of the various print prices of the titles appearing on the website of the BBPLC are also attached with the invoices. He brought to our notice that the Bench can verify the print prices of the titles sold by the AE to assessee and third party customers and the discounts offered.

15.8 Further, it was submitted that all the titles published by any publisher carry an International Standard Book Number [ISBN], ISBN is a 13-digit number that uniquely identifies books and book-like products published internationally. It was further submitted that in all the invoices raised by BPPLC on the third parties or BPIPL, submitted as above, the ISBN is mentioned with the print prices. He further submitted that on the third party invoices, the discount offered in the print price is also mentioned with net prices charged. However, in the case BPIPL, only net prices after discount are mentioned and no discount rate is written on them. He submitted that the website of the BPBLC has a search feature of finding a book by ISBN and the assessee has picked the ISBN of the book from the invoices and searched it on the website of BPPLC, which shows the print price matching with the prices mentioned in the invoices. He submitted that in the case of third party billing, the discount provided comes to between 45%-65% which is also demonstrated by the net prices of the title as mentioned in such invoices. In case of invoices raised on assessee, the discount provided comes 70% and above which can be verified by the process of finding the print price on the website of BPPLC and the net price charged in the invoice and in this regard, he referred to Annexure 4 attached with the application.

15.9 Ld. AR submitted that the above verification is imperative because the Assessee’s than counsel representing before the TPO did not file such important document to establish the Arm’s Length nature of the transaction of trading of books. However, he submitted that since the present appeal is yet to be adjudicated and the conclusions of Hon’ble Bench are likely to influence by non submission of the additional evidences at this stage. He pleaded that to avoid irreparable injury to the assessee, the additional evidences should be taken on record and considered while adjudicating the present appeal.

16. With the above submissions, ld. AR also made a prayer that the ITAT would be obliged to exercise its discretionary power for calling additional evidences. Reliance was placed for similar provisions under Civil Procedure Code, 1908 and also relied on the decision of Hon’ble Supreme Court in the case of Arjan Singh vs. Kartar Singh AIR 1951 SC 193, decision of Hon’ble Gujarat High Court in the case of Pari Mangaldas Girdhardas vs. CIT (1977) CTR (Guj.) 647 and prayed that the additional evidences may be considered for adjudication.

17. Ld. AR submitted that the assessee has submitted additional evidences for the reason that in AY 2021-22, the assessee has submitted segmental report for the transactions involving purchases of books from MDIL having exactly similar transactions as in the present assessment year and the TPO has appreciated the above segmental reports and completed the assessment based on the available segmental report. Accordingly, due to non-availability of allocation key of ratios, the assessee could not allocate the expenditure and prepared the proper segmental report for the current assessment year and he submitted that the assessee has prepared segmental reports by applying proper keys and allocated the expenditure based on the segments. He prayed that the operations carried on by the assessee are exactly similar in the current assessment year and subsequent assessment years. The facts are identical and he prayed that the issue may be remitted back to the TPO/AO for verification of he same and benchmarked by adoptin g the procedure laid down in the AY 20 21-22. Accordingly, he submitted the segmental Profit & Loss account in he form of annexure. For the s ake of clarity, it is reproduced below : –

18. Further he submitted that the assessee also purchases various books from its AE to the extent of 70% discount or above. He submitted that there is an internal CUP available so that TPO can verify that assessee purchases books from its AE availing huge discount and at the same time, they also supply to the third parties with the lesser discount. He also submitted the relevant information in the form of Annexure-3 along with various invoices in support of the above submissions in the form of additional evidences. He prayed that both the issues may be remitted back to AO/TPO for verification and proper information of the facts on record to benchmark the international transactions.

19. On the other hand, ld. DR of the Revenue objected to the filing of additional evidences at this stage and the assessments were completed based on the information provided by the assessee and available on record. However, he has not objected additional evidences considering the fact that the nature of business and functions are exactly similar and he prayed that this issue may be remitted back to AO/TPO for proper verification.

20. Considered the rival submissions and material placed on record. We observed that transactions and FAR of the assessee are similar to AY 2021­22 and as per the records brought to our notice, there is no change in the activities carried out by the assessee in the current assessment year and subsequent assessment years. It is brought to our notice that the assessee has filed the segmental report at the time of TP study, however the data was incomplete. Therefore, the TPO rejected the TP study submitted by the assessee. Now based on the detailed findings in the AY 2021-22, the assessee has prepared the segmental report by following the similar allocation of expenses relating to the segment. Since the books of account maintained by the assessee are exactly similar, it is only a re-appreciation of facts and allocation of expenses following allocation key of respective sales. In our considered view, the above additional evidences are relevant and accepted. For the sake of complete justice, we are inclined to remit this issue to the file of AO/TPO to verify the allocation of expenses and the segmental report prepared by the assessee based on the accepted method of allocation in AY 2021-22 and also the details of discount offered by its AE and may be compared with the discount offered by the AE in the uncontrolled transactions and directed to compare the internal CUP available in this case to benchmark the transactions of purchase of books from its AE. Therefore, we direct the AO/TPO to benchmark the international transactions based on the additional evidences brought on record by the assessee as per law after giving proper opportunity of being heard to the assessee. Accordingly, ground no.3 raised by the assessee is allowed for statistical purposes.

21. With regard to ground no.4 relevant facts are, the Assessing Officer observed that sundry creditors outstanding shows that there is an enhancement in the trade payables/creditors amounting to Rs.5,15,68,635/- from the preceding years. The assessee has not furnished any information or document on the abovesaid issue. He observed that there is a considerable increase in sundry creditors by 50%. The assessee was asked to explain the same and the assessee submitted that it has started its operation in India from FY 2013-14 onwards. It has availed credit terms ranging from 90 to 180 days. Due to financial crisis, it was not able to make their import payment to M/s. MacMillan Distributors. Therefore, the value of sundry creditors increased to that extent. After considering the submission of the assessee, assessee was asked to submit the relevant confirmation from the creditors. However, assessee has not filed any confirmation despite allowing several opportunities. In absence of the same, unverifiable sundry creditors added to the income of the assessee.

22. Aggrieved, assessee preferred objections before the ld. DRP and on the direction of the ld. DRP, the same was considered while passing the final assessment order. In absence of non-availability of confirmations,, the addition was sustained in final assessment order.

23. Aggrieved, assessee is in appeal before us.

24. At the time of hearing, ld. AR submitted that the relevant confirmations and explanations were readily available during assessment proceedings and now he submitted that all the relevant evidences of the transactions which are regular business transactions and the relevant confirmations are available on record and he prayed that the same may be accepted and remitted the same before the Assessing Officer to verify the relevant information available on record.

25. On the other hand, ld. DR has no objection to remit this issue back to the file of Assessing Officer.

26. Considered the rival submissions and material placed on record. We
observed that the relevant confirmations and explanations were not readily available during assessment proceedings. However, it is brought to our notice that all the confirmations and other details are available, accordingly ld. AR of the assessee prayed that the same may be accepted and remitted the same before the Assessing Officer to verify the relevant information available on record. In this view of the matter, we remit the issue to the file of the AO to verify the relevant information available on record and then decide the issue as per law after giving proper opportunity of being heard to the assessee. Accordingly, ground no.4 raised by the assessee is allowed for statistical purposes. We also direct assessee to make proper submissions and  appear before the Assessing Officer on the date of hearing and cooperate with the tax authorities.

27. In the result, the appeal filed by the assessee is allowed for statistical purposes.

Order pronounced in the open court on this 22^nd day of January, 2025.