BBC World (India) Pvt. Ltd [TS-653-ITAT-2023(DEL)-TP]

• BBC World India Pvt Ltd (“the assessee”) had entered into an agreement with BBC World Ltd and BBC World Distribution Ltd covering various services, including market advertisements, sponsorships, research, and distribution activities.

• Certain expenses related to advertisement and publicity, business promotion, and trade event participation were incurred at the request of the overseas Associated Enterprise (“AE”).

• ITAT agreed with CIT(A)’s finding that the AE controlled the budget for these expenses, and the risk and outcome were borne or attributed to the AE.

• The expenses for buying advertisement space in newspapers were considered pass-through costs due to the high cost and low effort involved in such activities.

• ITAT confirmed that, other than the specified three items, all other expenses should be part of the cost base of the assessee and subject to markup.

• The ITAT distinguished Revenue’s reliance on a coordinate bench ruling for AYs 2002-03 & 2003-04, emphasizing the absence of an agreement between the assessee and its AE in that case before the lower authority.

• The ITAT also affirmed CIT (A)’s finding that foreign exchange loss is non-operating, and therefore, forex fluctuation loss and interest expense should be excluded when calculating the Profit Level Indicator (PLI) of the assessee.

• The ITAT relied on a Mumbai ITAT ruling in DHL Express (India) Pvt. Ltd regarding the exclusion of forex fluctuation loss and interest expense from PLI.

• Delhi ITAT upheld the CIT (A)’s treatment of expenses related to advertisement as pass-through costs for BBC World (India) Pvt Ltd for the assessment year 2004-05.

• Consequently, the ITAT dismissed the Revenue’s appeal.

L & T Technology Services Limited [TS-649-ITAT-2023(Mum)-TP]

• L & T Technology Services Limited is a global Engineering R&D service company.

• TPO made TP adjustments related to corporate guarantees by taking the corporate guarantee rate @ 1.85% per annum, whereas the assessee’s had taken the rate at 0.65% for AY 2018-19.

• The ITAT observes that the assessee obtained a sanctioned facility from both IDBI Bank and ICICI Bank, with an average bank guarantee fee quoted at 0.65%.

• The TPO gathered information on guarantee commission from HDFC and SBI Banks and also observed that the assessee did not furnish any comparable data for benchmarking these transactions.

• The TPO gathered information under section 133(6) without providing detailed financials of the entities under examination, the rates provided by the banks cannot be deemed as suitable quotations for analysis.

• The ITAT held that the internal CUP can be used in this case since the assessee has received sanction quotes from both ICIC and IDBI banks. Further ITAT concluded that reliance on External CUP by the TPO, without actual financials is unwarranted.

• The ITAT deleted the TP adjustment proposed by the TPO.

- Rejects use of information under Section 133(6) of the Act as external CUP for guarantee benchmarking. Opines the rates given therein cannot be considered as proper quotes for analysis - L & T Technology Services Limited [TS-649-ITAT-2023(Mum)-TP]

Facts

• The Assessee has given a corporate guarantee on behalf of its wholly owned subsidiaries and has received corporate guarantee fee @ 0.65% p.a from the AEs.

• The Assessee adopted Other Method and used sanction received letter received from ICICI Bank and IDBI Bank to justify the guarantee at arm’s length.

• The TPO used rate of 2.05% by adopting CUP method and used the information collected from the banks under Section 133(6) of the Act. Accordingly, the TPO proposed an adverse adjustment.

• DRP upheld the approach of the TPO.

Hon’ble Tribunal

Deleting the adjustment and rejecting the approach of the TPO, Hon’ble Tribunal observed as under:

• It is normal for the banks to give card rate of charges without considering the financials of the tested parties.
• Since the TPO has collected this information through show cause notice under Section 133(6) of the Act without giving specific financials of tested parties the rates given by those banks cannot be considered as proper quotes for analysis.
• It is unwarranted to rely on External CUP by the TPO which were not based on actual exposure.

- Deletes penalty on the Assessee as Base Erosion’ a debatable issue - Shell Global Solutions International BV [TS-620-HC-2023(GUJ)-TP]

Facts

• The Assessee is a non-resident deriving income from royalties or fees for technical services.

• The TP adjustment made by the TPO was upheld by Hon’ble Tribunal and the Assessee is now in appeal before the Hon’ble High Court. The Hon’ble Tribunal in uploading the adjustment, rejected the Base Erosion Theory relied on by the Assessee.

• AO levied penalty under Section 271(1)(c) of the Act which was upheld by CIT(A).

• Hon’ble Tribunal deleted the penalty against which the Revenue department preferred an appeal before the Hon’ble High Court.

Hon’ble High Court

Hon’ble High Court dismissing Department’s appeal held as under:

• Merely because quantum appeals at the hands of the Assessee are admitted, would not itself entitle the Revenue to press for admission of the penalty appeals.

• The additions on which penalty has been levied is a debatable issue. This is evident from the fact that ‘Base Erosion’ issue was dealt by the Special Bench - Kolkata ITAT and independently by Pune ITAT and both had different views.

• The fact that Gujarat High Court has admitted the issue for consideration also supports the Assessee’s contention that the issue involved is debatable.

• Further, even if the deemed provision on the basis of Explanation 7 is pressed into service, then also there can be a case based on good faith and it cannot be termed as concealment.

- Hon’ble Tribunal deletes adjustment for mark-up on pass-through costs - BBC World (India) Pvt.Ltd [TS-653-ITAT-2023(DEL)-TP]

Facts

• The Assessee incurred payment to third party vendor for marketing and research for the channel which were reimbursed at cos by the AE.

• The TPO held that so called “pass through cost” is incurred by the Assessee in carrying out its contractual obligation with its AEs. Therefore, the TPO imputed a mark-up on these costs.

• CIT(A) on appeal deleted the adjustment.

• Revenue department filed an appeal before the Hon’ble Tribunal.

Hon’ble Tribunal

• Hon’ble Tribunal upholds CIT(A)’s treatment of expenses relating to advertisement as pass through cost in case of BBC World (India) Pvt Ltd for AY 2004-05.

• Notes that Assessee entered into an agreement with BBC World Ltd and BBC World Distribution Ltd (AE) which covered all the activities on which Assessee is expected to provide the services to its AE (market advertisements and sponsorships on BBC World Channel, to carry out research in respect of performance and viewership of BBC and to carry out distribution and marketing activities of BBC).

• Notes that there were certain expenses related to advertisement & publicity, business promotion and participation in trade events which were undertaken by the Assessee at the request of the overseas entity.

• Concurs with CIT(A)’s finding that the budget related to said expenses are controlled by the AE and that risk and outcome of these expenses were also borne or attributed to the AE.

• Further notes that expenses relating to advertisement were on buying of advertisement space in the newspapers and that in such activities, the cost involved is too high and effort required to buy such space is not much.

• Accordingly, confirms CIT(A)’s observation that the said expenses should be treated as pass through cost and that other than these three items, all other items should be considered as part of the cost base of the Assessee and be marked up.

• Distinguishes Revenue’s reliance on coordinate bench ruling in Assessee’s own case for AYs 2002-03 & 2003-04 on the premise that unlike in the given case, no agreement between Assessee and its AE was before the lower authorities.

- Holds NCD as loan while upholding AE relationship under Section 92A(2)(c) of the Act - Neovantage Innovation Park Private Limited [TS-576-ITAT-2023(HYD)-TP]

Some of the key observations of Hon’ble Tribunal are summarized as under:

• The Assessee contested that the condition provided under Section 92A(1) and Section 92A(2) of the Act are required to be cumulatively certified for treating enterprises as an AE. DB International (Asia) Limited was neither having participation in the management nor control of the Assessee and therefore ought not to be considered as AE. This regard, the Hon’ble Tribunal noted that as per section 92A(2)(c) of the Act, when one enterprise advances loan to another and such loan constitutes more than 51% of the total book value of the assets of the other enterprises, then, the enterprises (M/s. DB International (Asia) Limited) shall be deemed to be the associated entity of the Assessee. Undoubtedly, M/s. DB International (Asia) Limited had invested the amount as an advance/loan in the form of NCD which is more than 51% of the total book value of the assets, hence, there is no error in the application of the transfer pricing regulations to the subject transaction.

• The argument of the Assessee is that the threshold point for determining the AE would be prior to the point of time when the investment was made. Though a cursory look of the transaction and the submission of the Assessee appears to be correct that the point of determination would be prior to entering into agreement and not thereafter, however, this view is not correct and contrary to the literal meaning of Section 92A(2) of the Act which has not restricted the application of the provision, based on prior or subsequent transaction.

• Regarding the Real Estate industry filter applied by the TPO for selection of comparable for NCD, Hon’ble Tribunal noted “the assessee is in the business of developing building and leasing of life sciences and biotechnological parks which in our view is nothing but a real estate activity and, therefore, the authorities below have committed no error in taking the real estate filter as an appropriate filter for selecting the comparables.”

• Credit rating is an important factor for quantifying the spread and benchmarking the interest on loan from AEs.

• As there is no comparable available with which the rate of the Assessee can be compared, take a guidance from the Safe Harbour Rule and Section 194 LD and hold that 12.275% interest rate (SBI base rate +300 basis points) would be the appropriate ALP for the purposes of benchmarking the interest paid by the Assessee on NCD to M/s. DB International as against 13.13%.