TMI Blog2013 (4) TMI 872X X X X Extracts X X X X X X X X Extracts X X X X ..... 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/- made by the AO on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price in respect of other transactions. 11. The TPO determined the arm's length price of class I transactions at ₹ 1,05,62,97,960/- as against their book value of ₹ 1,29,66,23,647/-. TPO thus proposed an adjustment of ₹ 24,03,22,940/- to the purchase of raw material and purchase of spares transactions with the associated enterprises. The basis of adjustment to class I transaction by the TPO remained allocation of advertisement expenses, rejection of Kirloskar Airtec Ltd. as a comparable etc.. This action of the TPO was questioned by the assessee before the Ld. CIT(A) on several grounds. The Ld. CIT(A) after discussing the issue in detail has deleted the addition of ₹ 24,03,22,940/- made by the AO on account of Arms Length Price which has been questioned by the revenue with this contention 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data and OP/sales as profit level indicator for class I activity. Accordingly he adjudicated that no adjustment is warranted on account of transfer pricing. 13. Ld. DR contended that during the course of oral arguments, a chart was filed by the assessee showing that no adjustment could arise in class II transaction if the current year data is applied. The Ld. DR submitted that the application of current year or multiple data is not only about margins earned by the comparable companies. The data is chosen to make a comparability analysis to find out whether the companies would be comparable on the basis of functions performed, assets used and the risks undertaken (FAR) and it is only after this primary exercise that the profit margins are obtained to find out the ALP. The Ld. CIT(A) could not have simply substituted the profit 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atter of appeal but extend to subject matter of assessment (CIT Vs Ahmedabad Crucible Co. : 206 ITR 574 and CIT Vs Ranicherra Tea Co ltd. : 207 ITR 979). Further, the supreme Court has held in Jute Corporation of India Vs CIT: 187 ITR 688 and CIT Vs Nirbheram Daluram : 224 ITR 610 that appellate authority's powers are co-terminus with that of Assessing Officer, and there is no reason as to why he can't modify the assessment order on just basis even if not raised before the ITO. He further submitted that no fault can be found with regard to the process followed by ClT(A) in deciding to use current year's data, since he had put Assessee as well as TPO on notice of his intention of doing so by seeking an explanation from both of them. Assessee strongly refutes unsubstantiated proposition that assessee and TPO were not given 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 para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (120 TTJ 865)(SB) 9. CIT V s Hotel Hilltop (313 ITR 116)(Raj) 10. Daimler Chrysler India Pvt. Ltd. Vs Dy, CIT (2009- TIOL-68-IT AT -Pune) 15. Having gone through the orders of the authorities below and the decisions relied upon in view of the above submissions by the parties, we find that the TPO had made allocation of advertisement expenses and rejection of Kirloskar Airtech Ltd. as a comparable as a basis of adjustment to class I transaction. He had desired the arms length price of Class I transactions at ₹ 1,05,62,97,960/- as against their book value of ₹ 1,29,66,23,647/-. The TPO thus proposed an adjustment of ₹ 24,03,22,940/- to the transfer prices of class I transactions of the purchase of raw material and purchase of the spares parts with the AEs. Class II transactions were accepted to be at arm'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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us year incurred expenditure of ₹ 45,67,50,504/-on advertisement and sales promotion. The assessing officer observed that the brand name of 'Samsung' is the registered property of SEC, Korea and it has only permitted the appellant to sell its goods in India and no rights whatsoever have been assigned in respect of the brand 'Samsung' to the appellant. The assessing officer in the assessment order alleged that the said expenses were incurred in promoting the brand 'Samsung' in India, the benefit of which was ultimately to be derived by the foreign joint venture partner, SEC. The assessing officer also held that there were several 'Samsung' products which were being dealt by persons other than assessee and benefit of such expenditure on advertisement and brand promotion is to be derived by such products being dealt by the other persons. The assessing officer on the basis of the aforesaid allegation made ad hoc disallowance of ₹ 4,56,75,050 being 10% of the expenditure on advertisement and sales promotion allegedly relatable to the promotion of 'Samsung' brand in India. The assessing officer while making the above disallowance did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld by the AO or not, the Ld. AR pointed out that the revenue has accepted the order of the Tribunal (Delhi) in favour of the assessee for the asstt. years 2000-01 and 2001-02 as they did not prefer appeal before the Hon'ble High Court against this order. Cited decisions of the Tribunal in the case of the assessee are referred as under :- Samsung India Electronics Ltd. vs. JCIT ors. ITA No. 3164/D/2000 Ors. (A.Ys 1996-97 to 1996-99) order dated 28.11.2008 Samsung India Electronics Ltd. vs. DCIT ITA Nos. 4085/Del/2003 ors. (asstt. years 1999-2000) order dated 19.12.2008 Samsung India Electronics Ltd. vs. ACIT ITA No. 532/D/2004 (Asstt. year 2001-02) order dated 17.4.2009. 17. We find that in its recent decision dated January, 2013 the Special Bench of the Tribunal in the case of M/s. LG Electronics India Pvt. Ltd. and others. Vs. ACIT (supra) vide para No. 21.6 of the order have held that when there are different unrelated international transactions, the application of TNMM on entity level for examining one of such transactions, is itself as incorrect approach. Notwithstanding that the Special Bench deemed it fit to deal with the arguments of the Ld. AR that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the foreign AE on this score. As in the case of an express agreement , the incurring of AMP expenses for brand building draws strength from such express agreement, in the like manner, the incurring of proportionately more AMP expenses coupled with the advertisement of brand or logo of the foreign AE gives strength to the inference of some informal or implied agreement in this regard, held the Special Bench. In para No. 9.10 of its decision the Special Bench did not agree with the contention of the Ld. DR that the mere fact of the assessee having spent proportionately higher amount on advertisement in comparison that similarly placed independent entities be considered as conclusive to infer that some part of the advertisement expenses were incurred towards brand formation for the foreign AE. In para No. 9.12 the Special Bench has noted further that what is relevant to consider is as to whether an independent enterprise behaving in a commercially rational manner would incur the expenses to the extent the assessee has incurred. If the answer to this question is affirmative, then the transaction cannot be recharacterized. If, however, the answer is in negative, then the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed expenditure of ₹ 45,67,50,504/- on advertisement and sales promotion. The AO observed that the brand name of 'Samsung' is the registered property of SEC, Korea and it has only permitted the assessee to sell its goods in India and no rights whatsoever have been assigned to other persons. The Assessing Officer on the basis of the aforesaid allegation made adhoc disallowance of ₹ 4,56,75,050 being 10% of the expenditure on advertisement and sales promotion allegedly relatable to the promotion of 'Samsung' brand in India. The AO 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. We thus find that without alleging that the assessee had spent proportionately higher amount on AMP expenses, the AO presumed that it had spent 10% of expenditure on advertisement and sale promotion allegedly relatable to the promotion of 'Samsung' brand in India. As discussed above the decision of Special Bench in the case of LG Electronics India Pvt. Ltd. is not relevant in the fact and circumstances of the present case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal in the case of the assessee for assessment year 1998-99. Paragraphs 26, 27 and 28 deal with the issue. The issue was decided in favour of the assessee by following the decision in the case of Sasoon J. David Company (P) Ltd. (supra). For the sake of ready reference, these paragraphs are reproduced below:- 26. From the records, we found that assessee in addition to its activities in consumer durables, had its own manufacturing facilities. The expenditure was incurred to promote the brand and to increase its presence in the market so as to sale its entire production. The total expenditure incurred on advertisement and sales promotion was RS.29.4 crores. In terms of its agreement with the parent company, the expenditure on advertisement amounting to RS.13 crores was reimbursed by the parent company, since part of such expenditure resulted in benefit to them. There is no dispute to the fact the expenditure on advertisement is being laid out for competing in the trade. for promoting its products having direct nexus with the sales of the products in India. We also found that due to incurring of such expenses, the sales of the assessee company had increased substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-02 and there is no allegation by the TPO / AO that assessee has spent proportionately high expenditure on promoting the foreign brand to follow the Special Bench decision in the case of L.G. Electronics. The action of Ld. CIT(A) in this regard is thus upheld. In the result ground Nos. 4 and 5 are rejected. 21. No such dispute like promotion of brand owned by Foreign AE involved in the claimed reimbursement of warranty and service expenses is there. A three year agreement was entered into by the assessee before incurring such expenses and thus the assessee was aware of the reimbursement before it incurred such expenses. Provision of ₹ 68,68,216/- was made on account of warranty / after sale service. Like in the case of reimbursement of AMP expenses, the TPO neither disputed the bonafide of the agreement nor that it was meant for business purposes. He had made addition of ₹ 68,68,216/- in this regard on equating it with wind fall gain or some adhoc payment. The Ld. CIT(A) has deleted the addition on the basis that the reimbursement received from the overseas AEs was under prior agreement and was directly connected with the corresponding expenditure incurred and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial available on record and the decisions relied upon, we find that Ld. CIT(A) has accepted the claimed royalty payment as revenue in nature on the basis that running royalty payment linked to sale price for technical assistance provided in the course of production is a revenue expenditure incurred for the purpose of business and that in the assessment years 1999-200, 2000-01 and 2001-02 the first appellate authority has allowed this deduction. IT appeared from the orders of the authorities below that right from commencement of commercial production in the assessment year 1998-99 the assessee is paying running royalty @ of 5% of ex factory price of production under technology license agreement with SEC. In the assessment year 1998-99 this running royalty was allowed by the AO as revenue expenditure but he has been disallowing the same from the assessment year 1999-2000. In the above stated three years the Ld. CIT(A) has allowed the payment with this observation that royalty payment in this case is directly linked to sales on revenue account and is for providing technical assistance in the course of production of TV after setting up of manufacturing plant in Inida. Undisputedly t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the issue is fully covered by the decisions cited below which has been followed by the Ld. CIT(A) :- Aztec Sofware and Technology Services Ltd. vs. ACIT 107 ITD 141 (SB) (Bangalore) Mentor Graphics (Noida) Pvt. Ltd. vs. DCIT 109 ITD 101 (Delhi) Honeywell Automation India Ltd. vs. DCIT 2009 TIOL_ 104 _ ITAT-Pune 27. The Ld. AR submitted further that it is a settled position of law that powers of appellate commissioner are not confined to the subject matter of appeal but extend to subject matter of assessment. His further submission also remained that Ld. CIT(A) in deciding to use current year's data had put assessee as well as TPO on notice of his intention of doing so. The TPO did not express any objection on using current year data. It was further submitted that Benchmarking of class II transactions using current year data reveal that the assessees' margin of 4.4% is much higher than that of comparables ( at loss of 5.24%). Even if procal Electronics were to be excluded comparables margin will only increase to 1.63% which will still be less than the margins made by assessee. 28. On having gone through the orders of the lower authorities, we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed based on historical data the same has an influence on the transfer prices of the transactions being compared. Therefore if the issue is of fixation of price during the relevant period the data necessarily has to be that of the prior period and cannot be the one running parallel in time. It was accordingly submitted by the assessee that in the international transactions of the assessee, financial data of comparable companies for the years 2000, 2001 and for 2002 to the maximum extent possible, was used for the purposes of the benchmarking analysis. This was done in order to eliminate to the maximum extent possible any variance in results caused by extraneous factors such as short term differences in business cycles, product life cycles etc. and / or business strategies of the individual companies. 29. It was submitted before the Ld. CIT(A) that the results of any one-year may be distorted by differences in economic or market conditions. Further, enterprises may not be uniformly affected by business and product cycles and therefore differences between dealings may reflect differences in circumstances. Therefore a reasonable conclusion as regards to arm's length dealing bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision clearly indicate that documentation (including the benchmarking / economic analysis) is required to be maintained by a taxpayer to establish and support the arm's length nature of its international transactions. Further TP documentation is required to be maintained contemporaneously and should exist latest by October 31 of the relevant financial year. This makes it evident that legislature prevents the determination of arm's length beyond this date i.e. data used in determination of arms length should be available latest by October 31, and not beyond. Therefore, the use of current year data would be nothing but a hardship to the taxpayer and in contradiction to the intent of the legislature. Reference to CBDT Circular No. 12 of 2001 was also made in support of the submission that use of comparable company data for the year ended March 31, 2002 which is currently available but was not available at the time of determining the arms length price / creation of TP documentation is not the intent of the legislation and is outside the scope of the documentation required to be maintained by the assessee u/s 92D of the Act read with Rule 10D. 34. The reaction of TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to play only when proof of such influence is brought on record. 11.8 Contemporaneous transactions reflect similar economic conditions. Therefore, the use of current financial year data is more relevant and appropriate for ensuring a higher degree of comparability of uncontrolled transactions for arriving at reliable ALP in respect of the international transaction. The importance of contemporary economic and market conditions on price setting mechanisms is also reflected in the provisions of Rule 10B(3) of the Rules. The setting up of a price is after all a business decision. In an open market transaction, prices are set by contemporary economic realities of demand, supply, market structure and other relevant factors. Therefore, ex-ante documentation using contemporaneous data used at the time of setting the price' is the most appropriate way of supporting the transfer prices between the associated enterprises. However, the TP regulations also allow for documentation on the basis of ex-post analysis to supplement the ex- ante documentation, for justifying the prices already set at the time of the transaction. Nonetheless, ex-ante documentation is primary and ex-post docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be relevant to explain the discharge of the appellant's obligation of maintaining the prescribed documentation u/ s 92D( 1) of the Act read with Rule 10D of the Rules. 11.12 The TPO is empowered to determine the ALP by using the current financial year data available at the lime of transfer pricing proceedings and to conduct the comparability analysis by using such data if the situation so demands. As it is mandatory and absolute requirement of law to use the current financial year data, the TPO not only has the power but is also duty bound to determine ALP by using the current financial year data in the comparability analysis, even if such data was not available to the appellant in the public database at the time of preparation of the TP Report. The observations made by the Hon'ble Supreme Court in the case of CIT Vs. British Paints India Ltd reported in 188 ITR 44 that it is not only the right but the duty of the Assessing Officer, to act in exercise of his statutory power, for determining, what in his opinion, is the correct taxable income, are relevant under the current factual situation as well. 11.13 The appellant has not brought on record any cogent relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in its comparability analysis had used the financial year data for the period 1999-2000 2000-01 to compute OP/TC for the comparable and used the current financial year data of 2001-02 for computing OP/TC of the assessee and used weighted average of financial years 2000-01 and 2001-02 for computation of OP / TC for comparables. The Ld. CIT(A) after inviting comments of both the parties and discussing the provisions laid down in Rules 10B(4), 10D(4) OECD guidelines in para Nos. 1.49 to 1.51, sections 92D(1) of the IT Act as well as aforecited decisions of Aztec Software Technology Services Ltd. (supra), Mentor Graphic Pvt. (supra) and Honeywell Automation India Ltd. (supra) has held that unless specific reasons are brought on record, the comparability analysis is to be conducted on the basis of current year data. He has held that ex-post analysis carried out by the assesee for justifying its transfer prices relying on prior year data is not acceptable and that both the parties i.e. assesee and TPO have committed errors in relying on prior years' data for computation of OP/TC of the comparable companies. In conclusion he held that relevant data be used for determinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT(A) has held that selection of Videocon International Ltd. by the TPO should be rejected for the reason that the Videocon International is one of the largest Indian manufacturers of glass shells funnels (all key components)used in manufacture of color television. Videocon enjoys considerable cost benefits due to backward integration and indigenous manufacturing of components as reflected in the company's relevant annual report with the captive manufacturing of CTV shells the company enjoys cost advantage vis a vis the competitiors. It was also noted that the total turnover of Videocon International during 2001-02 was ₹ 4970/- as against the assesee's turnover of about ₹ 648 crores (under class I). The Ld. CIT(A) held that carrier Aircon, Hitaxhi, Life Solutions and Whirlpool of India are valid comparables and should be included for ALP determination. He observed that these coparables and should be included for ALP determination. He also observed that these companies manufacture consumer electronics and home appliance similar to assessee and percentage of related party transactions of these companies is less than 10-15% of their respective total revenues wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tries, 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 with AEs during the year meet the arm's length test. 38. We find that the first appellate order on the issues is comprehensive and reasoned one. It is based on the relevant provisions of law and the decisions relied upon. So far as the issue of variation of 5% is concerned it is allowable under proviso to section 92C(2) of the Act and is well covered in favour of the assessee by the decision of the Tribunal in the case of Sony India Pvt. Ltd. vs. DCIT (supra). The TPO held the expenses amounting to ₹ 19.17 crores reimbursement by the AEs as operating expenses . However he did not consider the reimbursement of ₹ 19.17 crores received from AEs as operational income of the assessee. The TPO thus recomputed the OP/TC of the assessee in class I at 3.43%. After rejecting KAL the TPO computed the airthmatic mean OP/TC of the remaining 7 comparables companies at 7.25% (using average data of preceding two year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 versions products hence have very short utility shelf life. It was thus argued that the expenditure did not result in acquisition of capital asset of enduring benefit of capital nature. In the above cited decisions by the Hon'ble D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 payment of sum paid by SEIIT to the assessee does not fall within the ambit of provisions of section 2(22)(e) of the Act. His action in deleting the addition made in this regard is upheld. The ground No. 7 is accordingly rejected. 45. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
