2020 (9) TMI 319 - AT - Income Tax

TP Adjustment - addition on account of AMP expenditure incurred by the taxpayer in a trading segment as well as network segment - TPO used the “intensity approach” by comparing the VAE (Value Added Expenditure)/Sales ratio of each comparable with that of the taxpayer - HELD THAT:- We are of the considered view that merely by applying the BLT method which has no legal existence and merely on the basis of MDF agreement vide which taxpayer has received part reimbursement of the AMP expenses incurred by it duly disclosed this expenditure in Form 3CEB and in TP study, so called excessive AMP expenditure of the taxpayer cannot be treated as international transactions u/s 92B of the Act. So, we cannot infer the existence of international transactions qua AMP expenses between taxpayer and AE beyond the reimbursement already made by the AE under MDF Agreement.

TPO by adopting the intensity approach qua trading segment and network segment proceeded to make alternative benchmarking as a substantive adjustment. In AY 2012-13, similar adjustment was made by the ld. TPO by adopting the intensity approach which was held not to be sustainable by the coordinate Bench of the Tribunal for AY 2012-13 order [2020 (1) TMI 404 - ITAT DELHI] in taxpayer’s own case by following the order passed by the coordinate Bench of the Tribunal in taxpayer’s own case in earlier years.

Scope and value of the international transactions cannot be extended to the so-called excessive expenditure incurred by the taxpayer on account of nonroutine AMP beyond the reimbursement already received by the taxpayer under MDF agreement and as such, adjustment made by the TPO on account of AMP expenses is not sustainable in the eyes of law, hence ordered to be deleted.

Comparable selection - Functional dissimilarity - HELD THAT:- OTS E-Solutions Private Ltd. (OTSE) is a routine distributor/supply chain shows that the functions performed, risk assumed and expected reward is not comparable to the taxpayer. The taxpayer is also performing critical functions such as quality control and post sale/warranty support as a routine distributor whereas OTSE being an aggregator provides a platform for sale of electronic products of multiple brands and as such having a different business model vis-à-vis taxpayer having routine buy-sell model. So, in these circumstances, we are of the considered view that OTSE is not a suitable comparable vis-à-vis the taxpayer hence ordered to be excluded.

Exclusion of Sataytej as a comparable on ground of different business profile as well as on the ground that the TPO has resorted to cherry picking by using Sataytej and at the same time, rejected other comparables, namely, ADS Diagnostics Ltd., Advanced Micronic Devices Ltd. and Frontline Electro Medical Ltd. on the same reasoning that these comparables are engaged in sale of medical equipments - Sataytej is into the sale of surgical and medical equipment which is not comparable to taxpayer. Even otherwise, when the taxpayer has himself rejected other 3 comparables on the ground that those comparables are engaged in sale of medical equipments which is not comparable to the business of the taxpayer, he is required to adopt the principle of consistency. However, since it is a factual issue the same must be reexamined by the TPO. So, this comparable is remitted back to the TPO to examine afresh after providing an opportunity of being heard to the taxpayer.

Spice Mobility Ltd - DRP have rejected this comparable on the ground that it fails different financial year ended filter. We are of the considered view that no comparable can be rejected merely on the ground that its financial year is different particularly when result can be extrapolated using quarterly results. This position of law has not been disputed by the ld. DR for the Revenue. So, in these circumstances, this comparable is also remitted back to the ld. TPO to decide afresh by proving an opportunity of being heard to the taxpayer and shall provide necessary data to extrapolate the results by using quarterly results.

Incorrect Margin computation by taxpayer of comparables - Since this is a factual aspect and taxpayer’s computation stated to be consistent throughout in the earlier years and accepted by the ld. TPO, the issue is remitted back to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer.

Working capital adjustment - DRP allowed the working capital adjustment to the taxpayer but TPO at the time of giving effect to the ld. DRP order has failed to grant the working capital adjustment. The taxpayer has already given the detailed working capital calculation before the TPO as well as DRP, as is evident, during the TP as well as DRP proceedings. Working capital adjustment was also granted to the taxpayer consistently from AYs 2005-06 to 2011-12. So, in these circumstances, TPO is directed to grant the working capital adjustment to the taxpayer after due verification.

Adjustment made to the proportion of international transactions with AE - HELD THAT:- Since this is a factual issue not controverted by the ld. DR for the Revenue the issue is remitted back to the TPO to make correct computation of proportionate adjustment of international transactions of the taxpayer with its AE after providing an opportunity of being heard to the taxpayer.

Disallowance of salary expenditure paid to the expatriate employee of SEC, Korea u/s 37(1) - HELD THAT:- This issue is covered in case of taxpayer’s parent company, SEC, Korea [2018 (3) TMI 1206 - ITAT DELHI]. In these circumstances, disallowance made by the AO and accepted by the ld. CIT (A) is ordered to be deleted.