Amadeus India Pvt. Ltd., New Delhi vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH 'I(2)', NEW DELHI Before Sh. N. K. Saini, AM And Sh. I. C. Sudhir, JM ITA No. 469/Del/2013 : Asstt. Year : 2008-09 Amadeus India Pvt. Ltd., Vs Additional Commissioner of Income E-9, Connaught House, Tax, Range-I, Connaught Place, New Delhi New Delhi-110001 (APPELLANT) (RESPONDENT) PAN No. AAACA0364L Assessee by : Sh. Tarandeep Singh, Adv. Revenue by : Sh. Rahul Garg, Sr. DR

Date of Hearing : 15.05.2015 Date of Pronouncement : 10.06.2015

ORDER Per N. K. Saini, AM:

This is an appeal by the assessee against the order dated 27.11.2012 of the AO.

2. Following grounds have been raised in this appeal:

"1. That on facts and in law the orders passed by the Assessing Officer (hereinafter referred as the "AO")/Dispute Resolution Panel (hereinafter referred to as the "DRP)/ Transfer Pricing Officer (hereinafter referred as the "TPO:") are bad in law and void ab- initio.

2. that on facts and in law, the assumption of jurisdiction by the AO/TPO to determine Arm's Length Price is bad in law and void ab-initio.

2 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

2.1 That on facts and in law the show cause notice dated 27 th October, 2011 issued by the TPO is bad in law and void ab-initio.

3. That on facts and in the law the TPO/DRP erred in making/upholding an addition to total income of Rs.5,06,86,319/- under Chapter X of the Income Tax Act, 1961 (hereinafter referred as "the Act").

4. That on facts and in law the AO/TPO/DRP erred in not appreciating that once while applying the Transactional Net Margin Method (TNMM) as recognized by the provisions of the Act, the accepted Profit Level Indicator (PLI) of the assessee was 28.39% whereas the accepted mean PLI of comparable companies was 13.81% no further adjustment on account of advertising, marketing and promotional expenditure (hereinafter referred to as "AMP") was called for.

4.1 That on facts and in law the AP/TPO/DRP erred in not appreciating that benchmarking on the basis of expenses incurred by an assessee is not permissible while applying TNMM as per the provisions of the Act.

5. That on facts and in law the TPO erred in holding and the DRP inter alia erred in upholding/observing that:

(i) the assessee had incurred AMP expenditure totaling to Rs.55,13,71,181/- on promotion of proprietary marks and for development of a marketing intangible for the benefit of AE.

3 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

(ii) the AMP expenditure of Rs.55,13,71,181/- incurred by the assessee is an "International Transaction" u/s 92B of the Act;

(iii) the expenditure of Rs. 51.19 cr. Incurred by the assessee on payment of incentives to subscribers is in the nature of AMP;

(iv) the assessee has not incurred AMP expenditure to enhance its revenues.

(v) the AE is directly benefited by any expenditure incurred by assessee on AMP

(vi) the legal ownership of the marketing intangible would get transferred to the AE without any consideration on termination of the Distribution Agreement.

6. That without prejudice on facts and in law the TPO/DRP erred in making/upholding the applicability of a markup of PLR+2.5% (i.e. 15%) on the alleged AMP expenses incurred by the assessee in India on behalf of the Associated Enterprise.

7. That without prejudice on facts and in law the AO/DRP erred in not granting the benefit for adjustment of the Arm's Length Price ("ALP") by ± 5% as per the proviso to Section 92C(2).

8. That on facts and in law the AO/DRP erred on reducing the claim for deduction u/s 10A to Rs.18,48,62,009/- as against Rs.18,82,54,651/- claimed by the assessee.

4 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

8.1 That on facts and in law while computing deduction u/s 10A of the Act the AO/DRP erred in reducing/upholding reduction of 'Export Turnover' by Rs.1,26,20,436/- being the amount unrealized till 30 th September, 2008.

9. That on facts and in law the AO/DRP erred in charging/upholding the interest u/s 234B & 234C of the Act.

That the appellant prays for leave to add, alter, amend and/or vary the grounds of appeal at or before the time of hearing."

3. Ground Nos. 1 to 7 are co-related and relates to the addition of Rs.5,06,86,319/- made by the AO under Chapter X of the Income Tax Act, 1961 (hereinafter referred to as the "Act").

4. Facts related to this issue in brief are that the assessee was engaged in the business of providing data processing and relating services to its associated enterprises (AE's). It enables software access to the subscribers of the Amadeus products and computer database within Indian subcontinent, for that purpose it provides connectivity to host systems by creation/modification of computer programs online. The assessee claimed deduction of Rs.55,33,71,181/- on account of selling expenses and filed the return of income on 19.09.2008 5 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

declaring an income of Rs.16,46,86,670/- which was processed u/s 143(1) of the Act. Later on, the case was selected for scrutiny. During the course of assessment proceedings the AO noted that during the year under consideration, the assessee entered into International Transactions with Associated Enterprises (AEs) within the meaning of Section 92C of the Act. The details of the said transactions were mentioned in Form No. 3CEB filed alongwith the return of income. Therefore, the case was referred to the Transfer Pricing Officer (TPO) who suggested to make an adjustment of Rs.5,06,86,319/- attributable to Arm's Length Price of the International Transactions entered by the assessee with AEs. The AO asked the assessee to show cause as to why an adjustment of the aforesaid amount to its income should not be made being the difference in Arm's Length Price as determined by the TPO vide his order dated 17.10.2011. The AO was not satisfied from the submission of the assessee and passed a draft assessment order by making an addition of Rs.5,06,86,319/- in the income of the assessee being difference between the Arm's Length Price.

5. Being aggrieved the assessee filed the objections against the draft assessment order with the Dispute Resolution Panel, 6 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

New Delhi on 27.01.2012 against the proposed addition on account of Transfer Pricing by taking the following objections:

"1. That on facts and in law order's passed by both the Assessing Officer (hereinafter referred as "AO") and the Transfer Pricing Officer (hereinafter referred to as the TPO) are bad in law and void ab-initio.

2. That on facts and in law the AO/TPO has erred in proposing an addition to total income of Rs.5,06,86,319/- under Chapter X of the Income Tax Act, 1961 ("the Act").

3. That on facts the TPO has erred in:

(a) Proposing an adjustment to the AO vis-à-vis "international transaction" not referred to him by the AO u/s 92CA(1) of the Act;

(b) Holding/observing that the Assessee had incurred advertising, marketing and promotional expenditure totaling to Rs.55,13,71,181/- on the promotion of proprietary marks and for development of a marketing intangible for the Associate Enterprise;

(c) Holding/observing that the said expenditure having been incurred for the benefit of the Associate Enterprise called for a reimbursement of the same;

(d) Holding the percentage of advertisement, marketing and promotional ("AMP") 7 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

expenses/sales incurred by the Assessee company at 36.50% which is actually 2.61%;

(e) Holding/observing that the economic ownership of the marketing intangible is with the Assessee and its legal ownership is with the Associate Enterprise;

(f) Holding/observing that the legal ownership of the marketing intangible would get transferred to the Associate Enterprise without any consideration on termination of the contact;

(g) Presuming that the Associate Enterprise has received benefits from the enhanced brand value and increase in sale of products;

(h) Holding that AMP expenditure of Rs.55,13,71,181/- is an international transaction u/s 92B(1);

(i) Holding/observing that the nature and purpose of providing incentive to the subscribers is to generate more revenue for the Associate Enterprise.

4. That on facts and in law the AP/TPO has erred in proposing that the Assessee was required to be reimbursed with the mark-up of PLR + 2.5% (i.e. 15%) on the non-routine AMP expenses incurred by it in India on behalf of the Associate Enterprise.

5. That on facts and in law the AO/TPO erred in not granting relief under proviso to section 92C(2) of the Act."

8 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

6. The DRP considered Objection No. 1 & 2 as general in nature and did not find merit in other objections. Thereafter the AO passed the assessment order by making the addition of Rs.5,06,86,319/-.

7. Being aggrieved the assessee is in appeal. The ld. Counsel for the assessee at the very outset stated that the identical issue having similar facts was a subject matter of the assessee's appeal for the preceding assessment year in ITA No. 4584/Del/2011 wherein the adjustment made for incentive amounting to Rs.54.75 crores was directed to be deducted from the total AMP expenses of Rs.58.66 crores and the remaining expenses to the tune of Rs.3.91 crores were directed to be considered for fresh determination of AMP in terms of guidelines issued by the Special Bench of the ITAT Delhi Benches in the case of LG Electronics India Pvt. Ltd. Vs ACIT reported at (2013) 140 ITD 41. It was pointed out that the department challenged the said order dated 06.03.2014 before the Hon'ble Jurisdictional High Court wherein the decision of the ITAT with regard to Rs.54.75 crores was upheld and for the balance amount of Rs.3.91 crores, the matter was remitted for fresh consideration to the AO to be decided by keeping in view the judgment of the Jurisdictional High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. Vs 9 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

CIT-III (ITA 16/2014 decided on 16.03.2015). The ld. Counsel for the assessee also furnished a chart of AMP expenses as per the TPO's order for the year under consideration and for the preceding Financial Years 2005-06 and 2006-07 which read as under:

Particula rs Amount in Rs. Amount in Rs. Amount in Rs.

FY 2007-08 FY 2006-07 FY 2005-06 Data Processing/Sof t wa re 1,510,709,117 1,329,741,475 1,042,479,453 Export Receipts Agents Tra ining 102,842 137,659 26,396 Adverti sement and 10,885,930 5,993,804 10,248,839 Publicity Entertain ment 5,687,606 5,027,002 2,088,999 Incentive 511,935,575 547,544,112 398,231,608 Pro motion al Expen ses 15,509,155 19,956,432 6,496,601 Exhibition and 3,988,146 4,925,396 6,160,675 Conf eren ce Public Relat ion Service 3,261,928 3,046,084 2,861,100 Total AMP exp enses a s 551,371,181 586,630,490 426,114,219 per TPO % of AMP with Revenue 36.50% 44.11% 40.87% AMP Expenses a s per 3,94,35,606 ITAT order f or A Y 07-08 (i.e. exclu ding incentives) AMP/Sales as per ITAT 2.61% order AY 07-08 Compa rabl e AMP/Sales 33.58% as p er TPO o rder p age 114

8. It was submitted that if the incentive amounting to Rs. 51.19 crores in the year under consideration is to be excluded then the AMP/Sales will come out at 2.61% as against 33.58% in the case of comparable which was considered by the TPO.

10 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

9. In his rival submissions the ld. DR supported the order of the AO as well as of the TPO but could not controvert this contention of the ld. Counsel for the assessee that the issue under consideration is covered by the judgment of the Hon'ble Jurisdictional High Court is assessee's own case for the preceding year.

10. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that an identical issue having similar facts was a subject matter of the departmental appeal before the Hon'ble Jurisdictional High Court in ITA No. 535/2014 wherein vide order dated 15.04.2015, their lordships observed as under:

"The assessee contended that these were direct expenditure passed on to assessee's distributors and local dealers, who were performing the role of travel agents to intensively utilize all services and the media group's website. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) who was of the opinion that these expenses constituted advertising, marketing and promotional expenditure, i.e. AMP expenses. An adjustment of Rs.52,33,73,988/- was proposed. The assessee's appeal to the DRP succeeded partly, in that the judgment reduced the amount to Rs.33,52,43,720/-. The revenue appealed to the ITAT, which in the light of the Special Bench decision in LG Electronics (supra) allowed the 11 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

assessee's contentions and held that the expenses to the tune of Rs.54.75 crores should be deducted from the total AMP expenses of Rs.58.66 crores. The ITAT, however, directed that the balance Rs.3.91 crores should be considered by the AO for fresh determination of AMP in terms of the guidelines in LG Electronics (supra).

The decision of the LG Electronics (supra) and all the questions concerning the tax implications and transfer pricing arising there from in AMP related matters was considered by the Division Bench judgment of this Court in Sony Ericsson Mobile Communications India Private Limited Vs CIT-III (ITA 16/2014, decided on 16.03.2015). In the said decision, direct selling expenses such as the one which are the subject matter of these proceedings - including incentives paid to distributors and dealers for services rendered are treated as AMP expenses and, therefore, held to be excluded from the determination of transfer pricing. In the light of this decision, this Court is of the opinion that the main question as to the correctness of the ITAT's decision with respect to Rs.54.75 crores is concerned, we notice that the matter was remitted for fresh consideration to the AO who was bound by the decision in Sony (supra). The revenue's appeals - ITA 535/2014 and ITA 729/2014, therefore, do not involve any substantial question of law."

11. We, therefore, in view of the above findings given by the Hon'ble Jurisdictional High Court direct the AO to deduct the incentive expenses amounting to Rs.51.19 crores from the total AMP expenses. As regards to the remaining expenses of 12 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

Rs.3.94 crores, the AO is directed to determine the AMP afresh in accordance with the terms and guidelines issued by the Hon'ble Jurisdictional High Court in the case of M/s Sony Ericsson Mobile Communications India Pvt. Ltd. Vs CIT (supra).

12. The next issue vide Ground No. 8 & 8.1 relates to the claim for deduction u/s 10A of the Act. The facts related to this issue in brief are that the assessee claimed deduction of Rs. 18,82,54,651/- u/s 10A of the Act which included a sum of Rs. 40,34,827/- on account of foreign exchange fluctuation. The AO was of the view that the said amount could not be said to be derived from export activity. For the aforesaid view, the reliance was placed on the following case laws:

Ø Nahar Industrial Enterprises Ltd. in ITA Nos. 2878 & 1820/Del/96 & 4257/Del/94 order dated 04.06.2002 (ITAT) (Del) Ø CIT Vs Sterling Foods Ltd. (1999) 237 ITR 579 (SC) Ø Nanji Topanbhai and Co. Vs ACIT (2000) 243 ITR 192 (Ker) Ø Cambay Electric Supply Industrial Company Ltd. Vs CIT (1978) 113 ITR 84 (SC) Ø Cement Distribution Ltd. (1994) 208 ITR 35 (Del) Ø CIT Vs Buildwell Assam Pvt. Ltd. (1996) 220 ITR 577 (Gau) 13 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

13. The assessee raised the objection before the DRP and submitted that on the date of raising an invoice in foreign currency the transaction is recorded in the books of accounts at the exchange rate prevailing on that date and as and when the relevant foreign currency invoice is realized the difference (gain/loss) in the realization amount is accordingly credited/debited to "exchange fluctuation account". It was further stated that as and when the foreign currency invoice are realized in the immediately succeeding accounting year the consequent Gain/Loss is recorded by credit/debit to the account for exchange fluctuation, therefore, the Gain/Loss debited in the "exchange fluctuation account" relates to the entirely export activity of the assessee. It was submitted that the exchange fluctuation amounting to Rs. 40,34,827/- included in the export turnover was entirely derived from the exports made by the assessee.

14. The DRP after considering the submissions of the assessee observed that exchange rate fluctuation was undoubtedly part of export business and it could not have been said as not derived from export activity. It was further observed that export turnover itself was defined as amount of export turnover brought to India into convertible, therefore the exchange rate difference was nothing but part of export 14 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

turnover. The DRP pointed out that the issue has been decided in favour of the assessee in the following cases:

Ø Sanyo LSI Technology Ltd. (ITAT) (Bang) Ø ACIT, Cir. 16(1) Vs Headstrong Services India Pvt. Ltd. order dated 31.07.2012 (ITAT) (Del) Ø CIT Vs Pentasoft Technology Ltd. (HC)(Bom)

The DRP directed the AO to consider the exchange fluctuation as eligible for deduction u/s 10A of the Act and accordingly sustained the objection of the assessee.

15. As regards to the claim of the assessee on sale proceeds in foreign exchange amounting to Rs. 1,26,20,436/- which remained unrealized even after the end of six months. The assessee submitted before the DRP that the requisite applications was filed on 16.10.2008 seeking extension of time of six months for realization of the export proceeds and since the export proceeds were realized within the time for which extension was sought the conditions specified u/s 10A(3) of the Act had been duly satisfied. With reference to the filing of the applications belated on 16.10.2008 for seeking extension of time, it was stated that there was no irregularity if the application was filed after the 30 th day of September of the relevant year. It was also stated that there was no irregularity if the application for seeking extension of time was moved by 15 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

the assessee through its bankers who are the authorized dealers as per the RBI Regulations. The reliance was placed on the following case laws:

Ø CIT Vs Morgan Stanley Advantage Services Pvt. Ltd. (2011) 202 Taxman 40

16. The DRP after considering the submissions of the assessee observed as under:

"4.3 The assessee's contention has been considered. In this regard, the various aspects of this issue are considered as under:

i) The assessee applied for extension of time limit well beyond the period of expiry of six months provided under sub-section (3) of section 10A.

ii) For its claim to be valid, the assessee should have applied before the expiry of six months, which is not the case here.

iii) The assessee has written for extension of the period to Standard Chartered Bank, Connaught Place, new Delhi. The assessee has not provided any evidence that this Bank was designated as competent authority for the FY 2007-08.

iv) The assessee has not enclosed any permission letter from any competent authority in this regard. Even in the case law of Morgan Stanley Advantage Services Ltd. Vs ITO, cited by the 16 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

assessee, it has been clearly held that the permission of the competent authority is must in this regard.

v) In the Morgan Stanley Advantage Services Ltd. Vs ITO, the assessee had applied for extension of time before RBI and had completed all formalities in this regard. In the case in hand, the assessee has not applied before the competent authority nor any permission letter has been obtained. Even the application has been made beyond the period prescribed under the Act. In the case cited above, the assessee had applied for extension within a period of six months as specified under the Act.

vi) The observation of Mumbai ITAT in the above case that the mere fact that the bankers are allowed to deal with foreign exchange does not make it to be a competent authority is quite relevant here as the assessee has applied to a bank and not RBI for extension of time.

vii) Even till date the assessee has not submitted any evidence that it has applied for extension of time before RBI as no evidence in this regard has been submitted.

viii) Even the form 56F submitted by the assessee calculates the deduction after excluding the unrealized portion of sale proceeds at Rs. 17,82,09,148/-.

Hence, the contention of the assessee in this regard is rejected and deduction u/s 10A of the I.T. Act is 17 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

recalculated after excluding the sum of Rs. 1,26,20,436/- from the Export turnover in later part of this order."

The AO followed the directions of the DRP while passing the assessment order dated 27.11.2012.

17. Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee specifically explained to the AO vide letter dated 09.11.2011 that requisite foreign exchange had been duly realized against Invoice No. SW/07-08/001 dated 31.12.2007 for US Dollars 2,25,941 (Rs.87,48,436/-) and against Invoice No. SW/07-08/002 dated 31.12.2007 for US Dollars 1,00,000 (Rs.38,74,000/-) vide FIRCs No. 191644 dated 30.12.2008 and No. 195924 dated 23.03.2009 respectively. It was further stated that the provisions of section 10A(3) of the Act provides that the export proceeds can also be realized within such further period as competent authority may allow in this behalf. It was submitted that the assessee applied for extension of time vide letter dated 23.09.2008 to Standard Chartered Bank Ltd., Connaught Place, New Delhi and American Express Bank Ltd., Connaught Place, New Delhi for the outstanding amount of US Dollars 2,25,941 and US Dollars 1,00,000 (a reference was 18 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

made to page nos. 139 and 149 of the assessee's paper book). It was further submitted that the amount was realized within 12 months from export, in this regard a reference was made to the certificate of foreign inward remittance dated 30.12.2008 and 24.03.2009 (copies of which are placed at page nos. 159 and 160 of the assessee's paper book). It was further submitted that as per RBI Circular No. 25 dated 01.11.2004 relaxation had been given to 100% Export Oriented Units and units set up under the Electronics Hardware Technology Parks and Bio- Technology Parks to realize and repatriate the full value of export proceeds within a period of 12 months from the date of export (a reference was made to page nos. 119 and 120 of the assessee's paper book which is the copy of the aforesaid Circular No. 25 dated 01.11.2004). It was contended that since the assessee applied for extension of period to realize the full value of export to the competent authority and the value of export proceeds were realized within 12 month. Therefore, the assessee was entitled to the deduction and the AO was not justified in denying the claim of the assessee u/s 10A of the Act. The reliance was placed on the following case laws:

Ø Aster Tele Services, ITA No. 1758/Del/2008 dated 05.06.2010 (Hyd) Ø Morgan Stanley Advantage Services reported in 30 SOT 1 (Mum) 19 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

Ø Morgan Stanley Advantage Services reported in 202 Taxamn 40 (Mum) Ø CIT Vs Ajanta Electricals 215 ITR 114 (SC)

18. In his rival submissions the ld. DR strongly supported the order of the AO and further submitted that the RBI Circular referred by the ld. Counsel for the assessee was not furnished either before the AO or the TPO and the plea has been taken first time. It was further submitted that the matter may be remanded back to the AO for proper verification. The ld. Counsel for the assessee also agreed for remanding the matter back to the AO for proper verification and adjudication.

19. After considering the submissions of both the parties and the material available on record, it appears that the RBI Circular No. 25 dated 01.11.2004 which allow the eligible units to realize and repatriate the full value of export proceeds within a period of 12 months from the date of export subject to extension of the period for relaxation by the competent authority. In the present case, the assessee applied for extension and also claimed that the export remittances were realized within 12 months. We, therefore, considering the totality of the fact deem it appropriate to remand this issue back to the file of the AO to be adjudicated afresh in 20 ITA No. 469/Del/2013 Amadeus India Pvt. Ltd.

accordance with law after providing due and reasonable opportunity of being heard to the assessee.

20. As regards to the Ground No. 9 relating to charging of interest u/s 234B & 234C of the Act. It was the common contention of both the parties that it was consequential in nature. We order accordingly.

21. In the result, the appeal of the assessee is partly allowed for statistical purposes.

(Order Pronounced in the Court on 10/06/2015)

Sd/- Sd/-

(I. C. Sudhir) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 10/06/2015 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR