TMI Blog2019 (6) TMI 696X X X X Extracts X X X X X X X X Extracts X X X X ..... made by it. Assuming, yet not accepting that the assessee should have been compensated by its AE towards AMP and such compensation as worked out by the TPO is ₹ 69.94 crores, then also no adjustment is required since the assessee has received credit notes worth 74.83 crores and has been suitably compensated. Thus as the assessee company has been suitably compensated by its AEs and, therefore, no further adjustment is required - decided in favour of assessee - SA No. 856/DEL/2018 And ITA No. 883, 2106/DEL/2016 - - - Dated:- 14-5-2019 - SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, And SHRI KULDIP SINGH, JUDICIAL MEMBER Assessee By: Shri Nageshwar Rao, Adv, Shri Sandeep S. Karhail, Adv Department By: Shri H.K. Choudhary, CIT-DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER: - The above two cross appeals by the assessee and revenue are preferred against the order dated 28.01.2016 framed u/s 144C r.w.s 143(3) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] pertaining to assessment year 2011-12. 2. The quarrel revolves around the Transfer Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order. The letter dated 27/01/2016 is made part of this final order as Annexure-3. 3.5 In view of the above, giving effect to the direction of Hon'ble Dispute Resolution Panel-2, New Delhi an addition of ₹ 5,90,87,389/- is being made on account of Transfer Pricing Adjustment. 3.6. Since I am satisfied that the assessee has furnished inaccurate particulars of its income, penalty proceedings under section 271(l)(c) are initiated separately. (Addition of ₹ 5,90,87,389/-) 4. The assessable income is proposed to be computed as under: Total income as per return of income ₹ 20,66,73,870/- Add: As discussed in para 3 above ₹ 5,90,87,389/- Total income ₹ 26,57,61,259/- Rounded off ₹ 26,57,61,260/- 4. Both the assessee and the Revenue are in appeal before us. 5. At the very outset, the ld. counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s group companies. The Indian entity is a distributor of branded products, the brand being owned by the overseas supplier. The sale of a branded products to a distributor carries with it the stated or implied right to use the supplier s trade mark or trade name only for the purpose of reselling the supplier s products. As per the TP report, the assessee undertakes the market risk, product liability risk, credit risk, manpower risk and foreign currency risk. 11. During the course of TP assessment proceedings, it was noticed that the assessee had incurred huge costs on AMP. It is seen from the audited financials of the company that it does not own any intangibles in the nature of brand name or marketing intangibles. It was found that the following expenses relating to AMP were incurred: Advertisement expenses ₹ 27,980,240 Business Promotion and Selling expenses ₹ 668,216,561 Total AMP ₹ 845,257,786 Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and its AEs appears to be more of reimbursement of excess price charged by the AEs which, later on, is credited to the assessee s account by way of credit. The TPO was of the firm belief that the credit notes amounting to ₹ 42,46,40,697/- have no relation to with the expenditure that the assessee has incurred on the AMP for which no compensation/reimbursement has been made by the AE. The TPO concluded by holding that this is an international transaction within the meaning of sec. 92B(1) r.w.s 92F(v) of the Act. 16. Accordingly, show cause notice was issued to the assessee vide letter dated 12.12.2014. We find that the entire exercise is in sync with the exercise done in assessment year 2008-09. 17. The list of 23 companies which were qualitatively analysed for using them as comparable, are as under: S. No. Company Name Sales Selling distribution expenses AMP/Sales Ratio 1 Compuage lnfocom Lid. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Wep Peripherals Limited As per the annual report, the entire sales is on account of manufactured goods even though the expenditure shows the purchase of traded goods .In the absence of accurate data, this company is not being considered as comparable. 6 Aanchal Computers Limited It is accepted as comparable. 7 Compuage lnfocom Limited Discussed below in Annexure 1 8 Redington (India) Limited Discussed below in Annexure 1 9 SreeBihariji mills Limited No data for FY2010-11, 10 Beetel Teletech Ltd Discussed below in Annexure 1 11 Cerebra Integrated Technologies Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 Savex Computers Ltd. 1867 11.33 0.61% 8 Vivek Ltd. 335.06 13.91 4.15% 9 Munoth Industries Limited 12.84 0.11 0.86% Aangha! Computers Limited 8.60 0.03 0.35% AVERAGE 1.17% 19. In its submissions, the ld. counsel for the assessee strongly argued that as per the business model followed by it, an OP/sales margin of 2.07% has been earned which was higher than the Arm s Length Margin of (-)0.12% accepted by the TPO. It was further cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a range of closely-linked products (e.g. in a product line] when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm's length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis. The above guidelines in very clear terms point out that ideally the transactions should be benchmarked using transaction by transaction approach. 10.6 The fundamental rule for benchmarking under Indian Transfer Pricing regulations is to benchmark based on a transactional approach. There should be some prior understanding, design or commercial logic as to why two transactions can be cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmined the ALP in respect of AMP expenses: S.No Particulars AMP/Sales i, Dynalog (India] Ltd. 4.44 ii. Lalani Computech Ltd. 0.80 iii. Savex Computers Ltd. 0.61 iv. Vivek Ltd. 4.22 V, Munoth Industries Limited 0.86 vi, Infiniti Retail Ltd. 2.17 Average 2.18% 19. Computation of ALP i.r.o AMP Expenses: 20.1 Thus, in view of the above discussion, the amount which represents the br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per the final comparables selected (2.65% as per the discussion above) This figure is total operating expenditure less selling and Based ca the above segmental data of operating expenses {excluding AMP) for the assesses and the average margin of the comparables identified, the sales figure for distribution segment is identified so that the margin f this segment is at arm's length After determining the value of sales, the balance figure of sales would correspond to the sates attributable to AMP function. Considering the value of resultant sales and the total AMP cost of ₹ 36,70,36,207/-. the profit margin of AMP Particulars Distribution Total AMP Operating income A B Operating Expenses (Excluding AMP and S D) 625,49,95,909 Selling and Distribution expenses(as per remand report) 47,82,21,579 Advertisement, Marketing and Promotion expense( AMP ] - 36,70,36.207 Total Operating Expenses 673,32,17,488 , Operating margin/sales (Arms Length) As per the final comparables selected (2.65% as per the discussion above) This figure is total operating expenditure less selling and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e segment are not appropriate and contention i.r.o the comparables are already made above, It is again reiterated that the comments are made in few of the limited time available and should not be considered as exhaustive and stand of this office vi For determination of arm's length price corresponding to AMP Junction, the distribution related return is identified for the segment on the basis of comparables. For this purpose the expenditure considered is total expenditure without AMP, as discussed in detail above, vii After ascertaining the distribution related return for the 'segment, the remaining return shown by the assesses is attributed to AM? function and the same is benchmarked using comparables. viii. In case the return is more than the comparables, no adjustment is to be carried out else the adjustment would be made to consider the transactions at arm's length . 24. Having understood the factual matrix as discussed hereinabove, we find that the facts are identical to the facts considered by the Tribunal in assessment year 2008-09 in ITA No. 6410/DEL/2012. But the only distinguishing factor is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and services move from concept to the customer. It includes the coordination of four elements: (i) identification, selection and development of a product, (ii) determination of its price, (iii) selection of a distribution channel to reach the customer's place, and (iv) development and implementation of a promotional strategy. 42. Items 1, 2 and 4 mentioned hereinabove are not applicable in the case of the assessee company. Further, marketing is based on thinking about the business in terms of customer needs and their satisfaction. Marketing differs from selling because Selling concerns itself with the tricks and techniques of getting people to exchange their cash for your product. It is not concerned with the values that the exchange is all about. And it does not, as marketing invariable does, view the entire business process as consisting of a tightly integrated effort to discover, create, arouse and satisfy customer needs. In other words, marketing has less to do with getting customers to pay for your product as it does developing a demand for that product and fulfilling the customer's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee achieves an arms length return on sales made by it. 48. Assuming, yet not accepting that the assessee should have been compensated by its AE towards AMP and such compensation as worked out by the TPO is ₹ 69.94 crores, then also no adjustment is required since the assessee has received credit notes worth 74.83 crores and has been suitably compensated. 49. If the AMP expenses are considered as an independent transaction and combined transaction approach is not considered, then also excessive profit derived by bench marking of distribution segment should be adjusted with alleged excessive AMP expenditure thereby providing benefit of set off. This view finds support from the judgment of the Hon'ble High Court of Delhi in its findings at clause xii at page 140 in Tax Appeal No. 16/2014 at para 136 to 146. 50. But this will only be considered when the Assessing Officer/TPO has rejected the comparables adopted by the assessee as a bundled transaction. In the case in hand, and as mentioned elsewhere, the Assessing Officer/TPO has accepted the comparables adopted by the assessee as bundled transaction and, therefore, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to inure to the benefit of the AE, which was otherwise a well known brand overseas. Similarly, the nature of its marketing and business expenditure was considered. The revenue s grouse that the TPO had treated the AMP expenditure as a bundled one, is not also tenable. Sony Ericsson itself indicates that there cannot be a dogmatic approach as to whether bundled transactions of the kind ought to be segregated and that the entire issue is a fact dependent exercise. The TPO treated the transactions as a bundled one; this court holds that as such that is not a question of law. Lastly, both on the credit notes as well as the fact that in the case of comparables, the margins were in fact lower; the ITAT therefore, correctly, in the opinion of this court recorded its findings that the assessee had been suitably compensated by its AEs. 14. For the foregoing reasons, this court holds that there is no substantial question of law; the appeal is therefore dismissed, but without order on costs 27. It would not be out of place to mention here that the arguments of the revenue taken before the Hon'ble High Court are similar to the arguments taken by the ld. 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