9911796707
TMI Blog2013 (4) TMI 872X X X X Extracts X X X X X X X X Extracts X X X X ..... nly one set of transactions. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of ₹ 11,92,75,955/- made by the AO on account of royalty paid to SEC Korea. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of ₹ 68,68,216/- made by the AO on account of provision for warranty/after sale service compensation. 4. On the facts and circumstances of the case and in laws, the Ld. CIT(A) erred in deleting the addition of ₹ 4,56,75,050/- made by the AO on account of advertisement and sale promotion expenses (brand promotion). 5. On the facts and circumstance of the case and in law, the Ld. CIT(A) erred in deleting the addition of ₹ 4,56,75,050/- made by the AO on account of advertisement and sale promotion expenses (being capital in nature). 6. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of ₹ 35,36,485/- made by the AO on account of purchase of computer software. 7. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of ₹ 4,40,92,460/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions entered into by the assessee company with its foreign associated Enterprise. In the first appeal the assessee raised (i) General Grounds (ii) Corporate Tax Issue (iii) Transfer Pricing Issues (TP issues). On the relief given by the Ld. CIT(A), the revenue is in appeal before us. Ground Nos. 1, 1.1, 1.2, 2 and 3 to 5 6. The relevant facts are that AO noticed the following international transactions entered into by the assessee with its AE during the year :- Description of the international transaction Book value of the transaction(in Rs.) Arm's length price computed by the appellant (Rs.) Purchase of raw material 1,242,617,458 1,242,617,458 Sale of raw material 236,408 Purchase of spares 54,006,189 54,006,189 Purchase of finished goods for resale 684,832,976 684,832,976 Purchase of capital items 102,003,362 102,003,362 Repair and Maintenance Expenses 3,009,253 3,009,253 Payment of Royalty 119,275,955 119,275,955 Cost Recharges 3,647,905 3,647,905 Reimbursement of expenses 175,232,846 175,232,846 7. The assessee has segregated its two separate and distinct line of business namely (a) manufacturing activities - classigfed as class ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion that the Ld. CIT(A) has erred in applying current years' data for the comparability analysis when the issue of the multiple data both by the assesee and TPO was not under challenge before him. It has been further contended that the Ld. CIT(A) has erred in not following a consistent approach while preferring application of single year data to only one set of transactions. 12. In support of the grounds the Ld. DR submitted that the Ld. CIT(A) was not justified in selectively altering the very basis of functional and economic comparability carried out by the TPO and while doing so he has destroyed the uniformity and consistency of approach adopted by the TPO, while applying current years' data to one set of transaction and leaving the other set of transaction with multiple year data. He submitted that in the same order of assessment , two different kinds of data can not be used - multiple year for one transaction and the current year for the other transaction unless one or the other set falls in the exceptions provided under Rules. Ld. DR submitted that there is irrationality in the approach of the Ld. CIT(A) on transfer pricing. He pointed out that the TPO had made the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit margins of comparable companies from the current year data without doing this exercise. He contended that it would not be legally valid to start with a presumption that if a company is comparable on the basis of earlier year's financials, it would ipso facto be comparable on the basis of next year financials as well. There may be several extraordinary receipts/expenses, there could be related party transaction, there could be new set of wholly uncomparable activities in the current year which may render the comparables as wholly uncomparable. He submitted that the use of separate set of data would make it absolutely necessary to go for a fresh search of comparables as many new companies would have entered the data base which would render the earlier search as wholly eschewed. It would, therefore, not be possible for the revenue to make any comment on the chart so filed unless the comparability is examined afresh by making a search on the basis of current year's data. The LD. DR pointed out that it is precisely for this reason that revenue is aggrieved with the approach adopted by the Ld. CIT(A). If he decided to apply the current year's data on his end he should ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven a chance to explain their position on use of current year data. The Order of the CIT(A) in paragraph 11.2 clearly records that "the appellant as well as the TPO were asked to explain why only current year data should not be used for ALP determination keeping in view the provisions of Rule 10B(4)." It may be noted that Rule 10B(4), (as reproduced in paragraph 11.6 of his Order) statutorily requires that the data to be used shall be the data relating to the relevant financial year. Thus both, the appellant and the TPO were given a reasonable opportunity of being heard and actually both availed of this opportunity by filing their written submissions. The appellant furnished its written submissions dated 18/11/2008 which was duly considered by the CIT(A) in paragraph 11.3. Similarly, the TPO offered its written submissions on 25/2/2009 which was duly considered by the CIT(A) in paragraph 11.4 of his Order. It is important to note that the TPO did not express any objection on using current year data and made no grievance whatsoever of any other nature. He was satisfied with the opportunity afforded to him and therefore, it is not permissible in the appellate proceedings b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s length. So far as allocation of advertisement expenses for adjustment is concerned, the assessee had incurred ₹ 87.86 crores as expenditure on advertisement, marketing and sales promotion etc. Out of this expenditure , the assessee had received ₹ 19.17 crores on reimbursement from its overseas AEs. In its books of accounts the assessee reduced the amount received as reimbursement from the total expenditure incurred on account of advertisement, marketing, sales promotion and after sales service. Thus, net expenditure of ₹ 67.69 crores was shown in the assesssee's profit and loss account for the year. The TPO while computing the arms length price of the international transactions did not consider reimbursement of ₹ 19.17 crores received from its AE as part of operating income while treating such marketing expenses to be part of operating expenses. The TPO allocated advertisement expenditure reimbursed by AEs of ₹ 19.17 crores to Class I and Class II transactions in proportion of the sales of these segments and recasted the segmental profit and loss account of the assessee as under :- Class 1 (Mfg) Sales ₹ 6,48,96,73,238 Class 1 (Trading) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was derived entirely by the assessee. The assessing officer made further disallowance of ₹ 4,56,75,050 being 10% of the total expenditure on advertisement and sales promotion holding the same to be capital expenditure resulting in an enduring benefit. 16. The Ld. CIT(A) following the decision of Delhi Bench of the Tribunal in the case of Sony India (P) Ltd. (Supra) and having regard to purpose of the expenditure and to the extent expenses were for the benefit of AEs held that the reimbursement received from the AEs are tobe treated as part of operating profits of the taxpayer. He accordingly held that exclusion of ₹ 19.17 crores from the operating profits of the taxpayers based on the given facts and circumstances of the case is not justified. The Ld. DR pointed out that issue of marketing and advertisement expenses has been recently decided by the Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. vs. ACIT, ITA No. 5190/D/2011 (AY. 2007-08) & Others vide order dated January 2013. The Ld. AR on the other hand submitted that the issue raised before the Special Bench in the case of LG Electronics & ors. is different, hence it is not helpful in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the overall net profit earned by the assessee is greater than others. It has been held that earning overall higher profit rate in comparison to other comparable cases cannot be considered as a license to the assessee to record other expenses in international transactions without considering the benefit, service or facilities out of such expenses at arms length. All the transactions are tobe separately viewed. The issue before the Special Bench was as to whether on the facts and in circumstances of the case, the AO was justified in making transfer pricing adjustment in relation to advertisement, marketing of sales promotion expenses incurred by the assessee? And secondly as to whether the AO was justified in holding that the assessee should have earned a mark up from the associated enterprise in respect of AMP expenses alleged to have been incurred for and on behalf of AE? In para No. 9.10 the Special Bench has held that there can be no impediment on the power of the assessee to spend as much as he likes on advertisement. The fact that the assessee has spent proportionately more on advertisement can , at best be a cause of doubt for the AO to trigger examination and satisfy hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational manner" would do tied with the fact of the assessee also simultaneously advertising the brand of its foreign AE. The Special Bench reverting to the context of AMP expenses has observed further that one needs to find out as to how much AMP expenses would an independent enterprises behaving in a commercially rational manner, incur. Once by making such a comparison, the result follows that the Indian AE, prominently displaying brand of its foreign AE in its advertisement has incurred expenses proportionately more than that incurred by independent enterprises behaving in a commercial rational manner then it becomes eminent to recharactersation the transaction of total AMP expenses with a view to separate the transaction of brand building for the foreign AE. The special bench has referred United Nations Transfer Pricing Manual which provides for the allocation of such cost between the MNE and its subsidiaries. The Special Bench accordingly held that in that case in the facts and circumstances of that case before it that there was a transaction between the assessee and the foreign AE under which the assessee incurred AMP expenses towards promotion of brand which was legally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reimbursement of expenses with its AE and the genuineness or bonafide of the agreement was not doubted or disputed at any stage of proceedings by the TPO /AO. The TPO has also accepted in the TP order that the reimbursement receipt was spent by the assessee to wholly and exclusively for its business operations. In this regard the Ld. CIT(A) has taken strength from the decision of Delhi Bench of the Tribunal in the case of Sony India (P) Ltd. (supra) holding that the reimbursement should be included as part of operating income of the tax payer. The Ld. CIT(A) has accordingly held that exclusion of ₹ 19.17 crores from the operating profit of the tax payer based on given facts and circumstances of the case is not justified. The TPO has held as to whether an expenditure is operating or non operating does not depend on the source of its funding, the source of an expenditure may be traced back to equity, debt or windfall gain but the source does not characterise the nature of such expenditure. We thus find that the TPO has discussed the very principle for verification of the nature of the claimed AMP expenses to which there is no dispute. Besides the issue raised in ground Nos. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure is to be seen from the point a businessman as held by Hon 'ble Supreme Court in case of Walchand & Co. (65ITR 381) and Delhi High Court in case of Dalmia Cements Pvt. Ltd. (254 ITR 377). However, :allowance u/s 40A (a) can be made on account of expenditure being unreasonable or excessive, in the instant case it is body's case that persons to whom payments has been made on account of advertisement expenses, were covered by the provisions of Section 40A(2). Presumption of the A.O. that by incurring the expenditure, incidental advantage to the parent company will be obtained which owned Samsung brand, that ::t alone would not seek to distract from the deductibility of expenditure in the hands of the assessee company. Since the expenditure was incurred by the assessee company wholly and exclusively for the purpose of its business, in view of the decision of Hon'ble Supreme Court in case of Sasoion J Daud Co. ( 118 ITR 261), the same is to be allowed. 28. In view of above discussion, we do not find any merit in the action of the A.O. for disallowing the expenditure of advertisement incurred by the assessee company and claimed , revenue expenditure. " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable to M/s. Samsung Electronics Company, Korea (SEC) in terms of agreement signed with them. The AO asked the assessee to clarify why whole of the royalty payment should not be disallowed as royalty is ordinarily incurred not for the purpose of business but for procuring a right and inherent ability to do business, and ability to do business by procuring certain rights / assets / knowhow information etc. is a capital asset and not a revenue expenditure. The AO was not satisfied with the reply furnished by the assessee to him. The AO was of the view that royalty agreement is meant to be for indefinite period of time . Technical know-how which assists in manufacture of goods is a capital asset u/s 32(i)(ii) and the assessee can be regarded as the beneficiary owner of the technology help. The AO while relying on the decisions in the cases of Pingle Industries Ltd. Vs. CIT, 40 ITR 67 and Abdul Khan vs. CIT 4 ITR 689 treated the claimed expenses on royalty as capital expenditure. The Ld. CIT(A) has however accepted the claimed payment as revenue expenditure, which has been questioned by the revenue. 23. In support of the ground the Ld. DR has placed reliance on the assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the currency of agreement SEC would continue to remain the ownership of the technology and the assessee would at no stage acquire propriety rights therein. The ratio that running royalty payment linked to sale price for technical assistance provided in the course of production is revenue in nature and now is an established preposition of law by the above cited decisions of Hon'ble Supreme Court and Hon'ble High Courts. Taking strength from these decisions the Ld CIT(A), in our view, has rightly held that the claimed royalty payment was deductible as revenue expenditure. The same is upheld. Ground No. 2 is accordingly rejected. 26. Till now we have already discussed the basis of adjustment made by the TPO i.e. credit for reimbursement of advertising, marketing sales promotion and after sales service expenses etc. and now we have to discuss the issue of use of current year vs. multiple year data for an economic analysis. The contention of the Ld. DR remained that the Ld. CIT(A) has adjudicated the issue of current year vs multiple year data which was not raised before him. He was thus not justified in altering the very basis of functional and economic comparability c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO have used past two years average data. He accordingly asked both the assessee as well as TPO to explain why only current year data should not be used for ALP determination, keeping in view the provisions of Rule 10B(4). In response the assessee submitted that it has prepared the transfer pricing documentation for the financial year 2001-02 thereby applying contemporaneous documentation requirements prescribed by Rule 10D(4) which requires the documentation should exist latest by the due date of filing the assessee's tax return i.e. October 31, 2002. It was submitted that it is apparent from the TP report that the assessee's search for uncontrolled comparables relied primarily on an electronic database named prowess. It was pointed out that most current year company accounts will not have been entered on the database before the target taxpayer has filed their tax return. It was submitted that OECD Guidelines also acknowledge that there are timing issue in comparability with respect to the documentation concerning the comparability factors and comparable uncontrolled transactions that are used in the comparability analysis. Referring para No. 5.9 of the guidelines provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ast year's data would include evaluating the information on several aspects internal as well as external . It was accordingly submitted that reference of past two years data for the purpose of comparability analysis (as per proviso to Rule 10B(4) should be an automatic, adequate and sufficient compliance of the provisions of Rule 10B(4). 31. Para No. 1.49 and 1.50 of OECD guidelines were quoted to say that the multiple year data is also useful in providing information about the relevant business and product life cycles of the comparables. It was submitted that difference in business or product life cycle may have material effect on transfer pricing conditions that need to be assessed in determining comparability. It was also submitted before the Ld. CIT(A) that in view of the contemporaneous documentation requirements in the Rules, lack of information available at the time of preparing the transfer pricing documentation, flexibility granted by the law and for appropriate determination of transfer pricing policies, it is prudent to select multiple year data for a true and fair comparability analysis. 32. It was however emphasized by the assessee that benchmarking / economic an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad used the financial year data for the period 1999-2000 &2000-01 to compute OP/TC for... the comparables and used the current financial year data of 2001-02 for computing OP / TC for the appellant. The TPO / AO also used the current year data for computing the OP / TC of the appellant and used weighted average of financial years 2000-01 and 2001-02 for computation of OP/ TC for comparables. This issue is discussed in the light of the provisions of Rule 10B(4) of the Rules. 11.6 Rule 10B (4) of the Rules specifies the requirement regarding data to be used for analyzing the comparability of an uncontrolled transaction with an international transaction reads as under: "Rule 10B(4),- The data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le and to what extent the cycle is expected to impact the data to be used. Thus multiple year data should be used only when it adds value to the TP analysis. 11.10 Under section 92D(1) of the Act, every person entering into an international transaction, is required to keep and maintain such information and document, in respect thereof, as being prescribed under the Rules. Rule 10D(1) of the Rules, requires maintenance of a record of the analysis performed to evaluate comparability as well as a record of the actual working carried out for determining the ALP. Rule 10D(4) of the Rules, requires that the information and documentations to be maintained under Rule 10D(1), should be contemporaneous as far as possible and should exist latest by the due date of filing of the Income-tax Return. The primacy given to ex-ante documentation based on contemporaneous data is evident from the provisions in clause (f) of Rule 10D(I) of the Rules. It is to be noted that the requirement of existence of information and documentation by the due date of filing of return, does not override the provisions of Rule 10B(4) of the Rules regarding mandatory use of current financial year data for conducting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oneywell Automation India Lid Vs Den the ITAT Pune Bench (2009-TIOL- 104-ITAT-Pune) has also reaffirmed this issue. Therefore, I hold that unless specific reasons are brought on record, the comparability analysis is to be conducted on the basis of current year data. 11.15. In view of the foregoing discussions, ex-post analysis carried out by the appellant for justifying its transfer prices relying on prior year data is not acceptable. Therefore, I am of the considered view in the light of discussions in the preceding sub- paras that both the appellant. and the TPO committed errors in relying on prior years' data for computation of OP / TC of the comparable companies. The relevant data be used for determination of arm's length price is the current financial year of 2001-02. 36. We find that the above finding of the Ld. CIT(A) on the issue of" use of current year vs. multiple year data" for computation of OP / TC of comparable companies for the purpose of determination of arm's length price is based on the above cited decisions of special bench of the Tribunal (Bangalore) in the case of M/s. Aztec Software and Technology Services Ltd. vs. CIT (supra), of Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment, the very and ultimate object of the I.T. Act, 1961. We thus do not find substance on the issue raised in ground Nos. 1,1.1 and 1.2 of the appeal. The same are thus rejected. 37. The next basis of adjustment made by the TPO remained the comparable company analysis. The TPO rejected Kirloskar Airtech Ltd. (KAL) as a comparable for the assessee under Class I, giving reasons such as operating loss, negative networth, meager turnover and expenditure, limited production and market share, possible expenses of related party transactions and that the company ceased to exist after the year 2000-01. After rejecting KAL, the TPO computed the arithmetic mean OP/TC of the remaining seven comparable companies at 7.25% (using average data of preceding two years). On the basis of the above a TP adjustment of ₹ 24,03,22,940/- was made to account for the difference between assessee's OP/TC (3.43%) and the mean arms length OP/TC (7.25%) computed by the /TPO. The AO upheld the adjustment made by the TPO in his order. In making the adjustment, the 5% range, as per provision to section 92C(2) was not allowed to the assessee by both the TPO and the AO. Against the action of the TPO in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96,73,238 Total Income 6,48,96,73,238 Cost of goods sold 3,52,34,28,562 Excise duty 88,20,70,206 Rates & Taxes 8,70,74,369 Value Added expenses 1,66,69,93,086 Total Costs (TC) 6,15,95,66,223 Operating Profit (OP) 33,01,07,015 OP / Sales 5.09% 12.2 Using current year data of comparables, the mean OP/Sales of the comparables used by the TPO in the TP Order is as follows :- S. No. Company Names OP/Sales for FY 2001-02 1. B.P.L Ltd. 9.55% 2. Godrej Appliances Ltd. -7.54% 3. Khaitan Electricals Ltd. 3.07% 4. Polar Industries -29.24% 5. Symphony Comfort Systems Ltd. 8.34% 6. Value Industries Ltd. 9.97% 7. Videocon Industries Ltd. 11.66% Mean 0.83% 12.3 The mean OP/Sales of comparable companies as above is 0.83% the appellant earned an OP / Sales of 5.09% in class I during FY 2001-02. Even if we analyse the above results after excluding the high loss making company viz. Polar Industries, the mean OP / Sales of comparables works out to 5.84%. Even in such a scenario the OP/Sales of 5.09% earned by the Appellant falls within the 5% range allowed by Proviso to Section 92C(2). Accordingly, I hold that the appellant's international transaction w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he grounds the Ld. DR has placed reliance on the assessment order. The Ld. AR on the other hand tried to justify the first appellate order on the issue. 41. Having gone through the orders of the authority below we find that the details of the software under consideration furnished are as follows :- S.No. Particulars Nature Purpose Amount Remarks 1 Site hosting Charges Hosting of Samsung India.com site 80.769 2 MS Visual Studio Version 6 Application based Used in software programming by Software Division 30,500 3 MS Office 2000 Application software Upgrade of MS Office 97 (200 nos.) & purchase of 200 new licences 3,233,370 Upgraded to MS 2003 in year 2005 4 Trend Ent. suit Application software Anti virus software 325,650 Replaced by Symantec in year 2005 5 Oracle 8i Application software Data base software 371,409 Upgraded to Oracle 9i in year 2002 Total 4,041,697 42. The assessee claimed that it is merely a licence user of these packaged software for a limited period of time and these products are not owned by it. Owing to frequent technical advancement in the field of IT, these licences are replaced in a short period of time by more advanced ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of a person other than a share holder. The contention of the assessee before the authorities below in this regard has not been rebutted that the depositor of inter-corporate deposits i.e. SEIIT is not a private limited since it is a subsidiary company of SEC, South Korea which is a widely held quoted company listed at recognised stock exchange in Korea. It was submitted that by virtue of Article 25 (4) of the India-Korea Treaty titled 'non-discrimination" it should be treated as widely held company u/s 2(18) of the Act. The Pune Bench of the Tribunal in the case of Daimler Chryster India Pvt. Ltd. vs. DCIT (supra) in which the Indian company being a subsidiary of a German listed company was held to be a widely held company u/s 2(18) has also decided the issue in favour of the assessee. Under these circumstances we are of the view the Ld. CIT(A) has rightly held that receipt of money from SEIIT cannot be taxed in the hands of the assessee u/s 2(22)(e) of the Act, as the assessee is not a shareholder of SEIIT and it will be violation of Article 25(4) of Korean Treaty if assessee is treated as a non 2(18) company. Thus the Ld. CIT(A) was justified in holding that the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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