TMI Blog2017 (7) TMI 949X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of such an international transaction is not proved, there shall not be any transfer pricing addition. However, in case the international transaction is proved to be existed, then the TPO will determine such international transaction in the light of the judgment rendered by Hon’ble jurisdictional High Court after providing an opportunity of being heard to the assessee. Disallowing write off of demonstration equipment inventory - whether such inventory should have been valued at cost disregarding the fact that Net Realizable Value (NRV) or demonstration inventory is lower than the cost - Held that:- DRP predominantly decided the issue on the ground that taxpayer has failed to discharge the onus cast upon it to disprove that NRV actually remains sufficiently above the cost price of the equipment and hence as per the accounting policy of the company and the AS-2 of ICAI prescribing valuation of the closing stock, the taxpayer should have adopted cost value of the valuation of the closing stock of the demo equipment. DRP also held that it appears that the provision of demo equipment is based upon pure assumption, hence the same cannot be treated as real expenses and before the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking all the risks relating to its business of distribution and instead, wrongly characterizing the appellant as a limited/ no risk distributor; 3.2 disregarding the nature of AMP expenses incurred by the appellant and incorrectly holding that such expenses results in developing marketing intangibles for the AEs; 3.3 misinterpreting/ placing incorrect reliance on the international guidance from OECD, US TP Regulations and Australian Tax Office ( ATO ) and making several erroneous/ factually incorrect and contradictory statements/ observations in the TP order, which are not relevant to the instant case, only in order to justify an otherwise inappropriate and unwarranted TP adjustment; 3.4 incorrectly holding the AMP expenses incurred by the Appellant to be excessive on the basis of a bright line limit arrived at by, erroneously rejecting companies similar in functional profile to the Appellant on basis of inappropriate reasoning; 3.5 disregarding the fact that the premium gross profit earned by the Appellant more than compensate the allegedly excessive AMP spends, if any, incurred by it; 3.6 alleging that the AMP expenses incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant's contention in ground No.4 above, the Ld. AO erred in not providing a deduction of 1/5th of the advertisement expenses pertaining to the preceding years in assessing the income for the year under consideration. 6. That the Ld. AO (following the directions of the Ld. DRP) erred in disallowing an amount of ₹ 45,61,318 being write-off of demonstration equipment inventory by holding that such inventory should have been valued at cost disregarding the fact that the Net Realizable; Value ( or 'NRV') of demonstration equipment inventory is lower than the cost. 6.1 That the Ld. AO erred in equating the NRV of normal / new inventory with the demonstration equipment inventory disregarding the fact that the latter undergoes excessive wear and tear in the course of display; 6.2 That the Ld. AO erred in holding that the provision for demo inventory was created purely on estimation basis and cannot be treated as real expense without appreciating that the same is in the nature of an actual write-off; 6.3 That the Ld. AO erred in not appreciating that the write-off of demonstration equipment also needs to be allowed on account of 'R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns entered into by the assessee during FY 2008-09, ld. TPO issued a notice and assessee filed necessary documents through its authorized representative and also attended the proceedings from time to time. 6. During the year under assessment, the assessee has entered into international transactions as under :- S.No. Description of the transaction Amount (in Rupees) 1 Purchase of finished goods and spares 309,415,090 2 Support Service Income 33,720,836 3 Purchase of Capital Goods 5,967,973 4 Reimbursement of expenses paid 2,724,717 7. Assessee company declared income during the year under assessment at ₹ 4,09,24,720/- and as per P L account, the total revenue of the assessee amounting to ₹ 1,06,60,46,669/- from following segments :- Nature of income Amount (in INR) Sales (Traded) 99,22,28,546/- S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g study; that the expenditure incurred by the assessee company is for the advantage of its AE since the brand name and trade name is owned by the AE for which the assessee company should have been suitably compensated by the AE; that the assessee has not received any payment in this regard from the AE. 12. On the basis of TP study, TPO adjusted ₹ 7,92,95,484/- on account of AMP expenditure for the benefit of AE along with mark-up of 15.27%. 13. The assessee company carried the matter by way of filing objections before the DRP and the same have been rejected. Feeling aggrieved, the assessee as well as Revenue has come up before the Tribunal by way of filing the present cross appeals. 14. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 15. Assessee company is engaged in the business of reselling high end audio products. In other words, it is a buy-sell of Bose products and a support service provider. Systems design and installation services are an essential feature in the market effort of Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business using advertisement, marketing and promotional expenditure (including trade discount and volume repaid), to the sales ratio for comparability analysis. TPO computed the ratio of AMP / sales in case of tested party as under :- Expenditure on AMP 76,364,766 Value of Gross Sales 992,228,546 AMP / Sales of the assessee 7.70% 20. Assessee company provided 14 comparables having GP/sales of 34.88% but all the comparables have been rejected by the TPO being not functionally comparable. However, TPO by recording that there has been no change in the functional profile of the assessee company as compared to last year, updated margin of the comparables used last year are being used for benchmarking AMP expenditure which are as under :- S.No. Company Name AMP/ Sales% 1 Adtech Systems Ltd. 3.97 2 Compuage Infocom Ltd. 0 3 Computer Point Ltd. 0.04 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2016) 380 ITR 637 (Del) and Sony Ericson Mobile Communications (India) Pvt. Ltd. or AY 2010-11 delivered on 28.01.2016 , Hon ble High Court restored the issue, as to whether AMP expenses is international transaction for fresh determination. 26. Furthermore, the issue in question as to whether AMP expenses are international transaction again cropped up before the Hon ble jurisdictional High Court in judgment cited as Rayban Sun Optics India Ltd. vs. CIT (dated 14.09.2016), Pr. CIT vs. Toshiba India Pvt. Ltd. (dated 16.08.2016) and Pr. CIT vs. Bose Corporation (India) Pvt. Ltd. (dated 23.08.2016) wherein the identical issue has again been restored for fresh determination in the light of the decisions rendered in Sony Ericsson Mobile Communications India Pvt. Ltd . supra). 27. Coming to the case at hand, we are of the considered view that when the TPO has determined the AMP expenses to be international transaction, he had no occasion to follow the ratio of the judgments in Rayban Sun Optics India Ltd. vs. CIT, Pr. CIT vs. Toshiba India Pvt. Ltd. and Pr. CIT vs. Bose Corporation (India) Pvt. Ltd. (supra) rendered by Hon ble jurisdictional High Court discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO in its draft order has clearly established that the NRV adopted by the taxpayer is drastically lower than the sale price of the equipment. It is also much lower the cost price of the equipment For better understanding, the said portion of the draft order is reproduced hereunder; In the taxpayer's case, the selling price of any normal equipment (other than demo equipment), is priced above 90% above the cost price on an average as is evident from the following workings; Total Sales made during the relevant previous year : Rs.99.22 Crores Cost of goods as declared in P L A/c : Rs.52.21 Crores Difference : Rs.47.01 Crores Percentage of difference of the cost price (47.01/52.21) x 100: 90% Going with statement of the taxpayer, it can be seen that there will be a difference of 110% in the sale price of the equipment other than demo equipment and estimated NRV of the demo equipment after one year as is illustrated below: Suppose, the cost of normal equipment : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s failed to discharge the onus cast upon it to disprove that the NRV actually remains sufficiently above the cost price, of the equipment and licence and hence as per the accounting policy of the company and the AS-2 of ICAI prescribed for the valuation of the closing stock, the taxpayer should have adopted the cost value of for valuation of closing stock of the demo equipments. The addition proposed to be made by the AO is therefore, upheld. 30. Ld. DRP predominantly decided the issue on the ground that taxpayer has failed to discharge the onus cast upon it to disprove that NRV actually remains sufficiently above the cost price of the equipment and hence as per the accounting policy of the company and the AS-2 of ICAI prescribing valuation of the closing stock, the taxpayer should have adopted cost value of the valuation of the closing stock of the demo equipment. DRP also held that it appears that the provision of demo equipment is based upon pure assumption, hence the same cannot be treated as real expenses and before the AO, taxpayer could not produce any documentary evidence like sale bill to prove that any of the demo equipments was sold at 42% of its normal sale price ..... X X X X Extracts X X X X X X X X Extracts X X X X
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