TP – Super profit companies cannot be considered as comparable

IN THE ITAT MUMBAI BENCH ‘K’

Lintas India (P.) Ltd.

Versus

Assistant Commissioner of Income-tax – 3(2), Mumbai

IT APPEAL NO. 2024 (MUM.) OF 2007

[ASSESSMENT YEAR 2002-03]

NOVEMBER 9, 2012

ORDER

Per Bench – This is an assessee’s appeal against the orders of the CIT(A)-3 Mumbai, dated 02.01.2007. Assessee has raised five grounds which are as under:

“On the facts and in the circumstances of the case and in law:-

  1.  The ld. Commissioner of Income Tax (Appeals) erred in confirming a sum of Rs. 32,50,141/- spent on repairs as ‘capital expenditure’. Without prejudice, the ld. CIT(A) erred in not allowing depreciation on the same.

  2.  The ld. CIT(A) erred in confirming disallowance of a sum of Rs. 17,71,244/ – spent on computer software.

  3.  The ld. CIT(A) erred in confirming disallowance under section 14A a sum of Rs. 1,00,000/ – as ad-hoc estimated expenses on exempt income.

  4.  The learned CIT (A) erred in confirming add back of a sum of Rs. 7,81,80,823/- in respect of unclaimed liabilities. The learned CIT (A) erred in disregarding the ITAT order for the earlier years in the appellant’s own case.

  5.  (a) The learned CIT (A) erred in confirming the addition of Rs. 25,13,808/- under section 92CA(3).

(b) The learned CIT (A) erred in holding that there was no requirement to bring material on record before forming an opinion and before making a reference to the TPO that the arms length price was not correct”.

2. We have heard the learned Counsel and the learned DR in detail and their arguments are considered wherever necessary.

3. Ground No.1 is with reference to treating the expenditure claimed as repairs as capital in nature.

4. The facts of the case are that during the year under consideration assessee had incurred expenditure of Rs. 95,54,601/- on repairs and maintenance of various residential flats and office buildings owned by it. During the assessment proceedings AO examined the nature of these expenses. After examination, he came to the conclusion that the expenses of Rs. 33,12,482/- were of capital nature. The details of the expenses treated by AO as capital expenditure have been given at page 3 and 4 of the assessment order.

5. Before the CIT (A), it was submitted that assessee is a leading advertising agency in India. It is a part of the International LOWE Lintas Group. Every year, it has to incur substantial expenditure on the upkeep of its premises since assessee being an advertising agency, has to keep the premises updated regularly. According to assessee these expenses are day to day expenses needed for the upkeep and regular maintenance of the premises. No new asset has come into existence. The expenses incurred relate to paining, plumbing, electrical repairs and carpentry work. These expenses are required to be treated as revenue expenses. It was submitted that similar issue had come up for hearing before the Hon’ble ITAT in the case of assessee for assessment year 1993-94 to 1995-96 and after detailed discussion it was held that such expenses were of revenue in nature. Even the CIT (A) for assessment year 1996-97 to 1999-2000 has decided the appeals in favour of assessee. Therefore, it was contended that the entire expenses amounting to Rs. 95,54,601/-are required to be treated as revenue expenditure.

6. The learned CIT (A) however, went into the details of the expenditure and discussed the issue item-wise to come to a conclusion that only an amount of Rs. 62,341/- was revenue in nature, whereas the balance expenditure is capital in nature. However, there is no direction for allowance of depreciation on the capitalized amount either by AO or by the CIT (A).

7. After considering the nature of expenditure and the detailed arguments by both the Counsels, we are of the view that most of the expenditure is incurred on the existing buildings or structures in the nature of repairs for maintenance of the asset as such, except the expenditure incurred on Mohandev Building, item No.8, 9 and 10 listed in the CIT (A)’s order. As seen from the details the amount of Rs. 11.00 lakhs and Rs. 4,85,970/- were incurred in connection with the sofa, recreation central table etc., which seems to be for creation of new assets and cannot be considered as repairs of the existing assets. Likewise the amount of Rs. 3.00 lakhs was spent on electrical fittings and Rs. 1.00 lakhs was spent for design consultancy and supervision charges. Therefore, in our view this expenditure is in the nature of capital expenditure and therefore, we uphold the disallowance to that extent. AO is however, directed to allow depreciation as per the rules by capitalizing this expenditure to the assets. Balance of the expenditure in our view is revenue in nature as this is for maintenance/repairs of the existing assets. The findings of the ITAT in earlier years on the same issue are equally applicable to the year which are as under:

“9.7 We further find identical issue had come up before the Tribunal in assessee’s own case in the preceding years. We find the Tribunal vide ITA Nos.2041/Mum /98, 2042/Mum/98 and 3256/Mum/99 for AYs 1993-94 to 1995-96respectively vide order dated 19.1.2005 at Paras 12 & 13 of the order has decided the issue in favour of the assessee by holding as under:

“12 We have heard the rival submissions and considered the facts and materials on record including the decisions cited before us by both the parties, even though, we are mentioning only those decisions which are relevant to our finding, which we are giving in the succeeding sentences. As regards, the expenses incurred on leased property, the Hon’ble Supreme Court in the case of CIT v. Madras Auto Service P Ltd., cited supra has held that by spending money on constructing the new buildings on the leased premises, the assessee did not acquire any capital asset and the only advantage which the assessee derived by spending money was that it got the lease of a new building at low rent and from the business point of view, the assessee got the benefit of reduced rent and the expenditure is to be tread as revenue expenditure. In that case, the assessee was carrying on the business of sale of motor parts. Its head office was at Madras and it had branch at Bangalore. Under an agreement of lease, the assessee obtained certain premises for a period of 39 years under certain terms and conditions of the lease, the lessee (assessee) had the right to demolish existing premises at its own cost and appropriate to itself all the material thereof, without paying to the lessors of any compensation and construct a new building thereof to suit the purpose of their business as per the plan approved by the lessors. The lease agreement further provided that the new construction shall, right from the commencement of the work be the property of the lessors; and upon completion of the work of construction, the lessee would have only right to be a tenant for a period of 39 years under the existing lease, subject to the payment of rent and observation of other terms and conditions of the lease. On the above facts, the Hon’ble Supreme Court held the expenditure incurred by the assessee on construction of new building on leased premises as revenue expenditure.

13. In the facts of the case on hand also, the assessee had spent huge sums on major repairs, it is also found from the record that lease rent was fixed only at Rs. 26 per sq ft as the premises was in a highly dilapidated condition. The assessee has converted the premises into a modern office premises by making the entire structural charges, re-plastering, paining, retiling, rewiring, re-partitioning and repairing of sanitary fittings, equipping with furniture and various office applications. Thus, we find in the case dealt with by the Hon’ble Supreme Court, the entire building was reconstructed which was treated as revenue expenditure and on similar facts and circumstances, in the present case on hand, the rent was fixed at Rs. 26 per sft. In view of the dilapidated condition of the building and the assessee had sent huge sums on the renovation of the building to suit the purpose of the assessee’s business. Thus, in this case on hand, the asset did not get any ownership of the building and therefore, by spending the money, the assessee did not acquire any capital asset as held by the Hon’ble Supreme Court in the case of Madras Auto Services P Ltd (supra) from the business point of view, therefore, the assessee got the benefit of reduced rent and the assessee obtained business advantage. Therefore, the expenditure is to be treated as revenue expenditure by applying the ratio decidendi in the case of Madras Auto Services P Ltd (supra).When the Hon’ble Supreme Court has held so, in our view, the decision of the Tribunal in the case of M/s Vams Fort Motor Pvt. Ltd may not advance any support to the case of the revenue. The Hon’ble Bombay High Court in the case of CIT v. Hede Consultancy P Ltd and another, on similar facts held that since assets created by the said amounts did not belong to the assessee but the assessee got the business advantage of using modern business premises on low rent, thus saving considerable revenue expenditure for a considerably long period, the Tribunal was perfectly justified in coming to the conclusion that the expenditure should be looked upon as revenue expenditure. In this case also, the assessee had spent Rs. 9,20,436/- for converting go-down premises into office by renovating it by incurring expenses on interior decoration, plastering of walls and construction of bathrooms and WCs etc. Thus, the Hon’ble jurisdictional High Court also had laid down the principle that the sums spent on leased premises for renovation are to be treated as revenue expenditure. Thus, whether expenditure incurred on renovation of building on leased land is revenue or capital is settled by the Apex Court and the Hon’ble Jurisdictional High Court in favour of the assessee by holding that such expenditure is revenue in character. Once it is revenue in character as discussed above and it is purely business expenditure (not personal expenditure), as per section 37 this expenditure is allowable to the assessee, even for argument sake, it is also allowable u/s 32(1) explanation (1). Further, the decision of Hon’ble Bombay High Court in the case of Hede Consultancy P Ltd, dealt with assessment year 88-89, when the explanation was introduced to sec. 32(1). Thus, we find that even when the explanation was part of the statute, the Hon’ble Bombay High Court has laid such expenditure as revenue expenditure u/s 37 of the Act. In that case also it has been noted on page 382 of the report (R) that the expenditure was disallowed by the Assessing Officer u/s 32. In this view of the matter, it can be said that Hon’ble Jurisdictional High Court was aware of the explanation 1 of the section 32(1). Thus, this Tribunal is bound by the decision of the Hon’ble Jurisdictional High Court. Hence, following the decision of the Hon’ble Jurisdictional High Court reported in 250 ITR 380, in turn applying the ratio of Apex Court 233 ITR438(SC), we are inclined to allow the claim of the assessee. Thus, this ground of the assessee succeeds.”

Ground No.1 is partly allowed.

8. Ground No.2 is with reference to the claim of software expenses.

9. It was fairly admitted that this matter should be referred to AO for fresh adjudication in the light of the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises v DCIT, 301 ITR (AT), as was done in the earlier years. Accordingly this issue is restored to the file of AO for fresh adjudication in accordance with the law and the principles governing this issue and after giving due opportunity of being heard to assessee.

10. Ground No.3 is regarding disallowance under section 14A which was not pressed, hence treated as withdrawn.

11. Ground No.4 pertain to the issue of taxing an amount of Rs. 9,81,80,823/- in respect of unclaimed liability in addition to the amount of Rs. 2,99,14,525/- offered by assessee in the return of income.

12. The facts of the case are that in Schedule 13 to the Profit & Loss A/c assessee had shown income on account of ‘unclaimed liabilities no longer required’ at Rs. 4,67,40,197/-. The said amount consisted of the following:

AO further found that the ‘Rates & Sizes account’ out of which an amount of Rs. 2,99,14,525/- was written back, appeared in assessee’s books as under:

13. During the assessment proceedings, AO asked assessee to explain as to why only an amount of Rs. 2,99,14,525/- has been written back out of the amount outstanding in ‘rates and sizes’ account leaving behind the closing balance of Rs. 7,81,80,823/-. It was submitted by assessee that in some cases, the press over bills wrongly for an advertisement placed with them by assessee. They may bill assessee wrongly for the size of advertisement or for the rate. Assessee asks the press publication for a correction and makes payment only in respect of the correct amount leaving some excess with assessee out of the amount recovered from the advertisers. In case the client makes claim, the amount is paid back by assessee. Similarly, sometimes the press publication undercharges assessee. Assessee makes provision in the books so as to make payment to the publication in case the under charging is noticed by the publication. Such provisions are retained for 2 years and if no claim is made within that time, the provision is written back as other income and offered to tax after 2 years. However, AO did not accept the contention of assessee. According to him the method adopted by assessee by creating artificial liability shifted assessee’s liability of income tax to the later years. Accordingly he added back the amount of Rs. 7,81,80,823/- to the income of assessee.

14. Before the CIT (A) assessee reiterated the submissions made before AO. It was further submitted that the liabilities outstanding under the head ‘rates and sizes’ relate to various customers/press. They were shown in the balance sheet since the concerned parties could make the claim on assessee. If the clients or the press made claim, assessee was bound to make payment to them. It was stated that if these liabilities are not claimed within the period of 2 years, they are written back to the Profit & Loss A/c and offered as income. The method of write back is based on the law of limitation as per which the liability to make a payment exists for 3 years i.e. the current year plus 2 more years. It has further been stated that the opening balance of Rs. 7,83,32,994/- has either been written back in the books in the succeeding years or credited to the accounts of the clients and suppliers. Out of the said amount, an amount of Rs. 27.00 lakhs approx. has been credited to the accounts of clients and suppliers. According to assessee, AO has not given any convincing reason for not accepting the method followed by assessee.

15. The CIT (A) considered the issue and upheld the addition by stating as under:-

“6.2 I have carefully considered the submissions made by the appellant. It is the claim of the appellant that the amount of Rs. 7,81,80,823/- represents the amount either excess charged from the clients or less paid to the media in respect of advertisements. It is its claim that the said liability has been kept alive since the clients or the media might make claim of the amount excess charged or lower paid to them. To understand the exact nature of the liability, the figures appearing in the ‘rates and sizes’ account for various years are reproduced as under:

The percentage of amounts lying in the rates and sizes account of the appellant as claimed by the clients or the suppliers I various years is as under:

6.3 From the above, it is very clear that in all the years, only a very small part of the amount outstanding under the head ‘rates and sizes’ account has been paid back to the clients or to the suppliers. Had the provision created by the appellant under the head ‘rates and sizes’ account been genuine and reasonable, a major part of the same would have been paid back by the appellant to the clients or the suppliers. The appellant appears to have adopted the modus operandi of crediting a part of the receipts to the ‘rates and sizes’ account with a view to postpone its tax liability. In the case of New Holland Tractors (I) Pvt. Ltd. V s. JCIT 83 ITD 137 (Del), it has been held as under:

“In the income-tax proceedings, each assessment year is an independent assessable unit and the real income of each assessment year shall be ascertained and taxed. Even postponement of tax liability from one year to another year is not permissible. The assessee has made an attempt to postpone the tax liability. The assessee is liable to compute the profits and gains of business in accordance with the method of accounting regularly employed by the assessee. If the method of accounting employed by the assessee does not reflect the true picture or real profit of the assessee and the proper profit cannot be deduced from that account and account is not complete to the satisfaction of the AO, the AO has the liberty to compute the profit. “

The appellant has written back the unclaimed liability in its books and offered the same to tax after 2 years from the end of the year in which the liability was created. It is a settled legal position that accounting entries do not determine the character of the receipt. If the income has accrued in a year, it has to be taxed in that year only. Taxability cannot be postponed on the basis of entries made in the books of accounts. Since the liability amounting to Rs. 7,81,80,823/- outstanding in the books is not the real liability, AO was justified in bringing the same to tax in assessment year 2002-03 (Addition confirmed – Rs. 7,81,80,823/-). Accordingly the action of AO is upheld. Therefore, the fifth ground is rejected”

16. The learned Counsel objected to the above order on three reasons. The first one is that the opening balance for this assessment year is Rs. 7,83,32,994/- whereas the closing balance is Rs. 7,81,80,823/- which indicates that the entire closing balance which was brought to tax during this year does not pertain to this assessment year at all. The second reason is that assessee is consistently following the same method of accounting for its liabilities and waiting for period of two years after the closure of the financial year and then adding back the amount which was not claimed. He referred to the Table as stated in CIT (A) order to submit that assessee is writing back the income every year as can be seen from the table on a consistent accounting method being followed which was accepted in earlier years. Therefore, on principles of consistency alone the method of accounting being followed by assessee should be accepted. The third reason stated is that there is no difference in tax rates over a period of time and assessee is consistently offering the amount which is at 33 to 35% of the tax rates including the various sur-taxes etc and submitted a table to indicate that the adjustment so made by the Department in fact would result in refund to assessee in respective assessment years as made out in the table. Therefore, the argument of AO and the CIT (A) that assessee is postponing the tax liability is not correct. In the alternate, it was submitted that the amounts which are brought to tax in this year offered by assessee should be excluded and the amount which were offered in next year should also be excluded if consistent practice is to be followed as per AO.

17. The learned DR however, supported the order of the CIT (A).

18. We have considered the issue and examined the facts. As seen from the table extracted by the CIT (A) in Para 6.2 of the order the opening balance in assessee’s books of account of the unclaimed liabilities was to an extent of Rs. 7,83,32,994/- which is in fact more than the closing balance after writing back the amount of Rs. Rs. 2,99,14,525/- as income during the year and Rs. 26,89,487/- credited to the clients accounts. Therefore, what AO has brought to tax is the opening balance i.e. last year’s closing balance which cannot be brought to tax during this year as there is no accrual of liability or cessation of liability during the year. As rightly pointed out by the CIT (A) in Para 6.3, it is a settled position that the accounting entries do not determine the correct income and if the income has accrued in the year it has to be taxed in that year only. As seen from the table itself the amount of Rs. 3,24,51,841/- was only credited to this year out of which assessee has already offered Rs. 2,99,14,525/- (may pertain to earlier year but offered as income of this year which may have be to be excluded if AO’s opinion is to be accepted) and amount of Rs. 26,89,487/- credited to the clients accounts. Since whatever has accrued during the year has already been offered/adjusted, on the same principles as laid down by the CIT (A), no further amount can be brought to tax. In addition assessee is consistently following the same accounting principles and there is no escapement of income, nor there is any postponement of tax liability. In fact recognizing or not recognizing of a particular amount as income depends on the contract and work done. As rightly pointed out by assessee, these disputes arise because of the size of advertisement placed and short or excess charging than what was due. As and when the parties seek the amount which cannot be recognized as income, assessee is refunding the amount and once client does not seek any adjustment the same is accepted as income of the year after the end of three years limitation period as per assessee’s own accounting method. In view of this, we do not see any reason for supporting the action of AO in bringing to tax the entire credit in the account as income of the year without examining the principles governing the method of accounting followed by assessee and accrual of income. As explained above, there is no need for bringing to tax any amount. AO is directed to delete the above amount. Since the main addition is deleted, the alternate contention for excluding the amounts which were already offered in this year or in later years does not arise. Assessee’s ground is allowed.

19. Ground No.5 is against the action of AO in making addition of Rs. 25,13,808/- under section 92CA(3). The facts of the case are that during the year under consideration, assessee had entered into international transactions with some of its associate enterprises including M/s Initiative GmbH Germany and M/s Initiative Media Technologies, Paris. AO referred these two international transactions to the TPO who passed order U/S 92CA(3) on 30.04.2000 in respect of the two transactions. The order passed by the TRO i.e. Addl.CIT, Transfer Pricing I, Mumbai on the two issues is discussed hereunder:

(I) Transactions with Initiative Media GmbH (I M Hamburg)

Assessee had rendered services of media buying to IM Hamburg Germany for their client Allianz Group. Allianz and their affiliates had launched international image campaign to establish the Allianz group as the largest insurance group world wide. The contract with Allianz International was negotiated centrally by Initiative Media, Germany. This contract was executed world wide with the help of Initiative Media Network. Initiative Media India (I M India), a division of Lintas, released print advertisements of Allianz in various publications across India on behalf of I M Hamburg. Assessee received commission for the rendering of these services. It raised debit notes of Rs. 5,22,40,873/- for media payments, for Rs. 18,43,796/- as commission @ 3% on net payment, Rs. 92,1901- for service tax on commission. Assessee computed the arm’s length price of the transactions by calculating commission at Rs. 13,82,847/- by applying commission rate of 2.25% on the net payments. After adding the media payments of Rs. 5,22,40,873/-, the total arm’s length price of the international transaction with I M Hamburg was computed at Rs. 5,36,23,720/-. Assessee claimed that since the commission earned by assessee was more than the industry average, assessee qualifies the test of arm’s length principle. Before the TPO, the appellant also submitted a copy of minutes of the Eleventh meeting of the Executive Committee of Advertising Agencies Association of India held on 03.08.98 which deals with the remuneration policy of the association with regard to advertising services. It provides that, for the services rendered in the areas of media buying and media release, the agency will earn 2.5% media commission on releases made by it for brands which are handled by other advertising agencies of the advertisers. The other advertising agency will earn 12.5% commission. The TPO asked assessee to submit the details of foreign as well as Indian clients to whom services of media buying were rendered by the appellant. It was submitted by assessee that similar services were not rendered to any foreign client. However, it was stated that such services were rendered to Indian clients namely Aptech Ltd., Pantaloon Retail India Ltd, Siemens Telecom Ltd, Ever Ready Industries (India)) Ltd etc. Copies of agreements with these parties were filed by assessee before the TPO. Assessee had adopted the CUP (Comparable Uncontrolled Price) method for determining the arm’s length price. The TPO compared the commission of 3% received by assessee from IM Hamburg with controlled transactions entered into by the assessee with Indian clients. He found that assessee had received following commissions from various clients:

20. For working out the arm’s length price of the transactions with IM Hamburg, the TPO applied the rate of 3.375% to the net payments received from IM Hamburg. Accordingly, the arm’s length price of the transaction was computed by the TPO at Rs. 20,74,270/-. Further the TPO observed that the agreement of assessee with IM Hamburg provided for payment of tax within 30 days from the date of the bill. Similar agreements with Indian advertisers also provided for a credit of 30 days from the date of debit note. However, AO noticed that assessee had allowed average credit period of 97 days to the Indian clients. In the case of IM Hamburg, the dues remained unrealized for more than 97 days and in some cases of payments, the dues were realized after a period of 225 days. Considering these facts, the TPO worked out the opportunity cost of not realizing the receivables from IM Hamburg after providing benefit of credit period of 97 days. Applying the interest rate of 18% such opportunity cost was worked out at Rs. 13,22,632/-. Accordingly the TPO worked out the arm’s length price in respect of the commission received by assessee from IM Hamburg at Rs. 33,96,902/- as under:

The difference between the transaction value (Rs. 18,43,796/-) and the arm’s length price (Rs. 33,96,902/-) amounted to Rs. 15,53,105/-was added by AO to the income of assessee.

II. International transactions with Initiative Media Technologies Paris for customized software programme:

21. Assessee had paid an amount of Rs. 9,60,703/- to Initiative Media Technologies, Paris. In support of the payment, assessee had submitted copy of invoice dated 06.09.2001 issued by Initiative Media France. The TPO asked assessee to file the supporting evidence to prove the benefit received by it from the said payment. However, assessee expressed its inability in producing any document other than the invoice relating to Rs. 9,60,703/-. In absence of any document evidencing receipt of any services, the TPO held that no services were rendered by Initiative Media Paris to assessee and accordingly he compute the ALP of the transaction at Nil. The difference between the transaction value and its ALP computed at Rs. 9,60,703/- was added by AO to the income of assessee.

22. Before the CIT (A) assessee objected to the action of the TPO and that of AO in making addition of Rs. 25,13,808/- under section 92CA(3) on the following grounds:

(i)  AO has to have material on record on the basis of which he comes to an opinion that the matter has to be referred to the TPO. No such material has been brought on record by AO and accordingly the reference to the TPO was not valid.

(ii)  A show cause notice is required to be issued by AO to assessee before a matter can be referred to the TPO. No such show cause notice was issued by AO to assessee and hence the order passed by the TPO under section 92CA(3) was not in order.

(iii)  Before referring the matter to TPO, AO has to obtain approval from the CIT. No material has been brought on record to show that AO had taken the approval of the CIT before making the reference to the TPO. Further, AO can refer any international transaction to the TPO only if the transaction was not bonafide. No opportunity was given by AO to prove that the transaction was bonafide.

(iv)  Assessee and the TPO have adopted CUP method for computing the arm’s length price. The CUP method compares the price charged for services transferred in a comparable uncontrolled transaction in comparable circumstances. The transactions entered into between assessee and the two associate enterprises were the only transactions with foreign clients. The TPO has compared the international transactions with the domestic transactions which cannot be said to be comparable. The TPO has also not brought on record any other comparable transaction where a higher income has been earned.

(v)  The TPO has taken the mean value of all the transactions entered into by assessee with the Indian Companies to work out the commission rate of 3.375%. The transaction with Eveready Industries (I) Ltd was on the basis of fixed monthly fee of Rs. 1,45,000/- and not on the basis of any percentage. The TPO should have excluded the said transaction for working out the mean of commission paid to Indian clients.

23. The CIT (A) after considering the submissions of assessee has confirmed the additions by stating as under:

“7.2 I have carefully considered the submissions made by the appellant. As per section 92CA(1) of the I.T.Act, where any assessee has entered into an international transaction in any previous year and the AO considers it necessary or expedient to do so, he may, with the previous approval of the commissioner, refer the computation of the arm’s length price in relation to the said international transaction U/S 92C to the Transfer Pricing Officer. On receiving such reference, the TPO is required to determine the arm’s length price in relation to the said international transaction in accordance with sub-section (3) of section 92C. The said order is binding on the AO as per section 92CA(4). There is no requirement in section 92CA(1) that AO must bring any material on record to form an opinion that the matter is required to be referred to the TPO. He is also not required to issue any show cause notice to assessee before making reference to the TPO. Further, the reference under section 92CA is made to the TPO to find the arms length price of the international transaction. It is not that only non-bonafide transactions can be referred to the TPO for finding out the arms length price. The only requirement in section 92CA(1) is that AO should get the previous approval of the Commissioner before making reference to the TPO. In the instant case, AO obtained the approval of the CIT 3 Mumbai vide letter No.CIT III/Scru/03-04 dated 25.09.2003. Therefore, the objections taken by the appellant at Sr.No.(1) to (iii) above are rejected.

7.2.1 In this case, the appellant had rendered services of media buying to I M Hamburg, Germany. No such services were rendered to any other foreign enterprise. However, the appellant had rendered similar services to some of the Indian clients. The nature of services provided by the appellant to I M Hamburg and the Indian clients was the same. Therefore, both the transactions were comparable. The transactions entered into by the appellant with I M Hamburg was a controlled transaction and the transactions entered into by it with Indian Enterprises were uncontrolled. The appellant had adopted the CUP method for computing the arm’s length price. Under the said method, the arm’s length price of a controlled sale is equal to the price paid in comparable uncontrolled sale. Controlled sales are the sales in which the seller and buyer are the members of the same controlled group. In the case of uncontrolled sales, the seller and buyer are not members of the same group. Uncontrolled sales are considered comparable to controlled sales if the physical property and circumstances involved in the controlled sales are comparable to the uncontrolled transactions. Since the nature of services rendered by the appellant to Indian clients was similar to the nature of services provided to I M Hamburg, the TPO was justified in determining the arm’s length price of the international transaction entered into by the appellant with I M Hamburg by comparing the same with the similar transactions entered into by the appellant with Indian enterprises. Further, the TPO has converted the monthly payments made by Everready Industries (I) Ltd to the appellant in the percentage form before taking it as one of the comparables. Therefore, the action of the AO in applying the commission rate of 3.375% to the amount received from IM Hamburg is upheld. Accordingly, the addition of Rs. 15,53,105/ on this account is upheld.

As regards the arm’s length price in respect of the payment of Rs. 9,60,703/- made to (Initiative Media Technologies, Paris, it has been claimed by the appellant that it represents the payment for customized software programme obtained from the said enterprise. However, no evidence was tiled by the appellant before the AO to prove the benefit derived by it from the said payment. Even before me, no such evidence has been filed. In case any assessee claims any expenditure, onus lies on him to prove its nature and the benefit derived by him from the said expenditure since the appellant has failed to file any evidence in support of the expenditure of Rs. 9,60,703/- the TPO was justified in taking its arm’s length price at nil. Accordingly the addition of Rs. 9,60,703/- made by AO on this account is confirmed”.

24. The learned Counsel made his arguments elaborately on the issue of commission received from the Initiative Media IM Hamburg. It was his submission that the commission reported against Eveready Industries Ltd is not a commission agreement, whereas it is a fixed remuneration agreement. He referred to the submissions made before the TPO reproduced in page 8 of the order vide Para 4.1.5 to submit that assessee is receiving its monthly fixed fee of Rs. 1.45 lakhs. This amount could not be converted to percentage commission as the commission was not involved in the transactions with the Eveready Industries as the services are rendered on fixed fee basis. It was his submission that the adoption of the commission of 7% is not correct and that should be excluded. If the same is excluded the average of the above commission comes to 2.65% whereas assessee has earned the commission at 3%. Therefore, there is no need to adjust any amount as ALP on this issue.

25. The learned DR however, supported the orders of the TPO and the CIT to submit that the average rate of commission is to be fixed at 3.375%.

26. We have considered this issue. As seen from the order of the TPO as well as the orders of the CIT (A), there is no dispute with reference to the fixed monthly fee received from Eveready Industries Ltd. Assessee is not charging any commission as it has entered into fixed fees arrangement with Eveready Industries Ltd. The nature of the service and the fees being charged to the Eveready Industries are entirely different when compared to the other clients which are considered as comparable. Therefore, in our view, the fixed fee received from Eveready Industries cannot be used for comparison in this method as it is not comparable to the transactions of commission undertaken by assessee with the other clients. Not only that the working given by the TPO shows that it is earning 7% commission, whereas as per the industry policy as decided by the AAAI the service on media agency earns commission of 2.5%. On that reason also, since it is an extreme case of earning 7% commission (in our view it is wrongly considered), on the principles that the extreme profit companies are to be excluded, this company cannot be considered as comparable for the purpose of arriving at the average mean. Therefore, we direct AO/TPO to exclude the above comparable i.e. Eveready Industries Ltd and work out the mean of the commission on the other companies taken as comparables. If the mean of the above is less than the commission charged for IM Hamburg, then there is no need for making any adjustment on these transactions.

27. With reference to the calculation of interest on the so called credit period made available to the foreign company, After considering the rival contentions, in our view there is no need for charging any interest on the so called credit made available. First of all assessee is not charging any interest to any clients for the services rendered/ debit notes provided for delay in payments as a policy. As seen from the chart for working out the average credit period at 97 days, the average debit note period for Aptech Ltd is about 155 days. On seeing the details furnished in the paper book, what we notice is that some of the transactions with the Aptech Ltd has credit period ranging from 5 days to 476 days, which indicate that the clients will not pay amount unless they verify the bills and services rendered. This naturally involve substantial time even though a standard bill is given to the clients that interest at 18% will be charged. Since assessee is not charging interest to any client on the transactions for the credit period available, in our view the facts does not require charging of interest on the credit period made available to AE. Since it is a practice of assessee not to charge interest to any client, this aspect should not be considered as an international transaction exclusively in the case of AE as it is not a policy to provide to any credit to any client specifically. Moreover, assessee, with protest, has submitted that the rate of interest that would be charged at 18% was not the market rate and further being a foreign company the rate of interest can be considered at LIBOR rate or +2% to LIBOR rate as is being done for loans and advances given by foreign company. This aspect was not at all considered by the TPO or by the CIT (A). As assessee as an alternative contention submitted that the interest can be worked out at 7% as per the European standard which would come to Rs. 5,14,357/-. Without discussing this issue at all and without considering the fact that assessee has not charged any interest to any client, in our view both the TPO as well as the CIT (A) wrongly considered the issue of making available credit to the foreign company. We are not in agreement with the action of AO on the facts of this case. We agree with assessee’s contentions that assessee is not charging any interest to any client whether Indian or foreign, nor there is any credit extended to the foreign company in the guise of debit notes raised. In view of this, we are of the opinion that no interest can be charged. Accordingly we direct AO to delete the addition made on account of interests at Rs. 13,27,623/-.

28. The third issue under the transfer pricing provisions is with reference to the payments made to Initiative Media Technology, Paris for customized software programme of Rs. 9,60,703/- which is an associate concern. Assessee submitted an invoice dated 6.9.2001 in support of the payments made. On the reason that assessee does not have any evidence of service rendered said payment was disallowed fully treating the ALP at nil. The CIT (A) also confirmed the same.

29. After considering the rival submissions and seeing the nature of the payment, we are of the opinion that this matter requires fresh examination by the TPO. This payment was made for purchase of software for use in the business of advertising and media services. Assessee claimed deduction under section 37(1) for purchase of software and reported it as related international transactions. The TPO under the provisions of transfer pricing cannot determine the ALP at nil was as held by the Hon’ble Delhi High Court in the case of EKL Appliances Ltd 2012 TII-I (SC) (Del)TP dated 29.03.2012. Therefore, we are of the opinion that determination of ALP at nil cannot be sustained. However, since the TPO also observed that assessee could not furnish necessary documents evidencing service(sic), in the interest of justice we restore the issue to the file of TPO to examine the said payment for customized software afresh and determine the appropriate method for arriving at the ALP after giving due opportunity to assessee. With these directions, the third issue is restored to the file of the TPO for considering it afresh. For this purpose the order of AO and the CIT (A) on this issue are set aside with a direction to re-examine the international transaction to the extent of payment to Initiative Media Technology, Paris for customized software of Rs. 9,60,703. This ground is considered as allowed for statistical purposes.

30. In the result the appeal filed by assessee is partly allowed.