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TMI Blog2018 (4) TMI 503X X X X Extracts X X X X X X X X Extracts X X X X ..... Royal Philips is organized into the following product divisions:- (i) Philips Consumer Electronics: This division develops, manufactures and markets a wide range of television, audit, video, communications and interactive media systems. (ii) Philips Domestic Appliance and Personal Care : This division makes a wide range of electrical products for personal care and household convenience. (iii) Philips Lighting: This division is the global leader in lamps, luminaries, lighting electronics, automotive lighting, special lighting, UHP & LCD backlighting and lumileds. (iv) Philips Medical Systems : This division is one of the world leaders in diagnostic imaging systems and related services. (v) Philips Semiconductors : This division supplies silicon system solutions for mobile communications, consumer electronics, digital displays, contactless payments and connectivity and in-car entertainment and networking. (vi) Other Activities : relates to Corporate Technology, Corporate Investments etc. The assessee had made international transaction with its associated enterprises (AEs) during the year and the same was referred to the Transfer Pricing Officer (TPO) u/s 92CA of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld involve very costly and burdensome accounting procedures ; and WHEREAS, it is finally recognized that such a system of separate payments does no justice to the continuous efforts of Philips to generate and obtain new resources for the benefit of the Company and other member companies of the Philips concern and, accordingly, the parties have agreed on a remuneration system which is based on the relation existing from year between the activities of the Company and the activities of Philips and its Associated Companies. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS ARTICLE 1 - DEFINITIONS ................... ................... "Concern Services" : Any and all activities performed by Philips in respect of the matters specified in Article 2 hereto. .................. .................. ARTICLE 2 - Services in commercial, accounting, auditing, financial, fiscal, social and legal matters and in all other fields in which Philips has resources These services for which resources are available with KPENV were sought to be rendered to PEIL (assessee herein). The assessee explained Article 2 before the ld TPO elaborately as under:- i. In case of commercial matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (acting at the same time for its Associate Companies, and referred to as 'Philips' jointly and severally in the MSSA) has substantial resources in commercial, financial, accounting and other matters which would be beneficial to successfully conducting a business. These resources 'would be employed for the benefit of individual member companies of the Philips concern' (i.e KPENV and its Associated Companies). Thus, it would appear that KPENV, on the basis of the resources available at its disposal, has decided to employ those resources for the benefit of its Associated Companies. The assessee also stated that it is mentioned in the Preamble that it is PEIL (assessee) which, wishing to ensure the continuity in its business operations, is interested to take advantage of and secure access to the aforementioned resources. Further, it is PEIL which has acknowledged the necessity of 'paying an appropriate consideration for that purpose'. It was further stated that the Preamble also asserts that it is recognized by each party to the Agreement that a system requiring payments for resources on each separate occasion poses great problems in view of the fact that for certain Concern Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e concerned, they have been benchmarked through a separate benchmarking study which has relied on data from Pan-Asia comparables. It needs to be mentioned that this selection of the comparables is not appropriate as the recipient of services, with its specific functional profile of a low-risk distributor for consumer life style sector and speciality lighting sector and a near zero-risk distributor in case of health care sector and a general manufacturer for domestic consumption in case of lighting sector, is based in India with its specific economic and market conditions. If the margins are at all to be compared, then the comparables need to be selected from India. 3.5. The ld TPO applied the Comparable Uncontrolled Price (CUP) Method as the MAM for determination of Arm's Length Price (ALP) in respect of this transaction. In this regard, the ld TPO observed as under:- (a) The application of the arm's length principle would be to see whether the charges paid by the taxpayer for intra group services reflect the same charges for the services that would have been, or would reasonably be expected to be, levied between independent parties dealing at arm's length for comparable service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in intra group services. The taxpayer has to prove with proper documentation and evidence that the services are actually rendered and payment is commensurate with the benefit derived therefrom. (g) Understandably, when expenditure is incurred for the benefit of the group as a whole, no charging of such expenditure is required as such expenditure is not incurred in connection with any individual member of the group and the benefit of such expenditure would be available to all the members of the group. Similarly, if no benefit is received or the benefit is remote or for the benefit of entire group, the same should not be charged. Therefore, unless it is shown that tangible and direct benefit has been derived by such payment and that the payment made is commensurate to the benefit derived or expected to be derived when parties deal with each other at arm's length, the arm's length price of such payment for intra group services is to be treated either as Rs. Nil or to the extent of the benefit actually derived from such payment. Thus, payment for intra group services to be treated at arm's length only when it is proved substantially by the taxpayer that such services were actuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; MSSA R&D Services Total Lighting 153,99,23,000 23,50,27,000 177,49,50,000 CL 50,01,13,626 15,59,47,539 65,60,61,165 Healthcare 48,02,04,785 35,53,951 48,37,58,735 Healthcare (CM) 4,58,24,015 16,47,89,341 21,06,13,356 Corporate 43,79,43,934 4,04,52,004 47,83,95,938 Total 300,40,09,360 59,97,69,835 360,37,79,195 The assessee provided the details about the receipt of services and the benefits from them by way of mails received from KPENV and Group entities and on the basis of these mails and their description, it was of the belief that the benefit test was substantiated. The assessee submitted the entire series of emails for each division under MSSA and voluminous documents together with detailed explanations submitted vide their letters dated 16.8.2016, 9.9.2016, 19.9.2016, 28.9.2016, 7.10.2016, 20.10.2016 and 21.10.2016 and demonstrated the benefits received on account of such services received. The ld TPO analysed the entire emails and other correspondences filed before him supra and rejected the same. The ld TPO by placing reliance on the decision of the Hon'ble Supreme Court in the case of Morgan Stanley & Co dated 13.2.2006 and concluded that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h guidance from the parent set up which may not have enough expertise. Further, the production by the Indian entity may be as per specification from the parent, but this cannot extend to the office and market operations of the sourcing etc. of the assessee. The ld DRP observed that the ld Counsel for the assessee contended that assessee is a risk bearing manufacturer - in this context it is quite illogical that the entity is magnifying its costs by availing of services which at best can be duplicate in nature and content. It observed that the examination of the financials leads to this conclusion. It finally held that the service content does not appear to be of the nature of stewardship nature and the ld TPO is well within his statutory domain to determine the ALP for the intra group services rendered apparently per force to the assessee. The ld DRP placed reliance on the decision of the Hon'ble Delhi High Court in the case of EKL Appliances reported in (2012) 345 ITR 241 (Del) wherein it was held that :- 22. "Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties on the AE for the services rendered by them to the assessee. Thus, the DRP rightly directed the TPO to examine these invoices and allowability of the same as expense to be decided. From the review of the services and benefit report and the supporting documents submitted by the assessee, it can be seen that the assessee company is benefited from the supervision and guidance of the group's functional experts. Though, the annexures show that the assessee was benefitted significantly from the intra-group services received from its AEs, it failed to give the supporting evidence such as invoice, confirmation from parties to prove the same. The assessee has also undertaken a detailed cost benefit analysis in order to demonstrate the cost savings achieved by it by availing the said services from the AEs. Therefore, when AEs transact with each other, for the purpose of transfer pricing, they must replicate the dynamics of market forces, as there is no concept of free lunch in business dealings. Thus, the DRP rightly held that the benefit test which is well recognized by OECD and other developed countries Tax regime have to be seen for allowing the payment in case of Intra-Group Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... geable services. The perusal of e-mails and other contemporaneous record only goes to reveal that incidental and passive association benefit has been provided by the associate enterprise. In this view of the matter there could neither be any cost contribution or cost reimbursement nor payment for such services to the AE. The TPO, therefore, has rightly adopted Nil value for benchmarking the arm's length price in respect of both these services. We, therefore, do not find any reason to interfere with the well reasoned conclusion reached by the AO on this count. The grounds raised in appeal in this respect, therefore, stand rejected. " 3.7.3. Based on the aforesaid observations and judicial precedents relied upon, the ld DRP held that the services are not of the nature of stewardship in nature but also not meeting the benefit test so as to merit allowance of the same and accordingly upheld the ALP determined by the ld TPO though not as stewardship service. Aggrieved, the assessee is in appeal before us on the following grounds:- 2. Determination of arm's length price by the AO, TPO and DRP for Management Support Services received by the Appellant 2.1. On the facts and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt being a part of multinational enterprise wherein many processes are centralized to facilitate the group entities to attain operational efficiency and a competitive edge in their respective countries. These arrangements are meant for the beneficiary of such pooled services; 2.12. Not taking cognizance of the fact that rational and scientific allocation keys for the payment of Management support service fees were provided by the Appellant and that the Appellant has maintained proper documentation and global auditor's certificate to demonstrate the basis of the charge. 2.13 Without prejudice to the above arguments, not taking cognizance of the fact that the AO in the case of KPNV (i.e the associate enterprise of Philips India from which it avails MSSA services), for the same AY, has held that the services provided by KPNV to the Appellant are for the survival and success of the Appellant, which view has also been upheld by the DRP Panel in the case of KPNV and thereby resulting in a contradictory approach. 4. Rule of consistency 4.1 The Learned AO, DRP and TPO erred in disallowing the payments made for management support services by the Appellant in the year under a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge-out mechanism; and * The ALP of the transaction. Nature of activities In Transfer Pricing's context, it is essential to draw a line of distinction between a business activity and a service. Essentially the guiding principle that goes in determining the existence of an intra-group service is whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. An in-depth analysis, following the aforementioned conceptual difference between business activities and services, clears the air on many common business activities erroneously perceived to be in the nature of intragroup services. This includes: * Activities without any benefit: any activity which does not lead to an incremental commercial or economic value addition for the recipient cannot be regarded as a service. In the case of Gemplus India (P.) Ltd vs ACIT, [2010] 8 taxmann.com 170 the Bangalore Tribunal upheld the adjustment made by the TPO where the payments to be made to AE were not dependent on the nature and volume of service and even the appellant failed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an activity leading to duplication of benefits cannot be construed as a service and therefore does not require any remuneration. Surmising the above, for an activity to qualify as a service, the fundamental factor that need to be considered is: * Whether an independent enterprise would have been willing to pay for the activity; or * Whether an independent enterprise would have performed the activity inhouse itself. Evaluating the needs and benefits of Intra-group services It involves identifying the incremental economic or commercial value that has arisen to the services recipient. A direct nexus between the services received and the corresponding value created should be established. An intra-group service should be analysed to see how it helps the service recipient make gains through increased profitability be it by increasing sales or by reducing costs. In order to understand the value creation aspect of intra-group services, it is necessary to break the same into bits and pieces and analyse it further. The value of an Intra-group services can segregated into its reference value and its differential value. The reference value of an Intra-group service would necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit analysis, if any undertaken at the time of entering into the agreement. Third party quotes for similar services if arranged for at the time of entering into the agreement, should also be made available * Functional analysis: The functional analysis should cover all basic questions like: * Who is doing what and for whom; * Where are they doing it; * Why are they doing it; * Who are they doing it; * What property is being used or transferred in connection therewith; * Benefit test documentation: Services may be received by way of conference calls, occasional visits and mails / presentations / tool kits exchanged from time to time. The actual evidence of receipt of services can be established with the help of the policies / e mails / guidelines / presentations used during the rendition of services. In addition to these, copies of time sheets of the service provider's personnel, cost centre reports and global Transfer Pricing documentation can also be helpful in substantiating and justifying Intra-group services. The table below gives an illustrative list of few generic services and the corresponding benefit test documents that may be submitted: Nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raining programme; - Documents depicting any review of employment contracts by the service provider on behalf of recipient; - Reports demonstrating benefits of a centralized human resource system like lowering of attrition rate, lesser personnel employed in the human function than required, people survey results. Before proceeding with determining the ALP, it is essential to establish the chargeout mechanism for the intra-group services rendered. For this, it is essential to distinguish between services that benefit a particular affiliate directly and services that benefit several affiliates or the group as a whole. There are two charge-out mechanisms: * The direct charge mechanism * The indirect charge mechanism The direct charge mechanism involves charging AEs directly for specific services. The OECD advocates the use of direct charge mechanism in cases where similar services are provided to AEs. Essentially, the cost pool for services rendered to associate concerns needs to be distinguishable and there should be a comparable open market transaction to facilitate pricing. Under the indirect charge method, the chargeable cost pool is identified, aggregate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurate to the volume and quality of the service and that such costs were comparable. The Tribunal further held that when commensurate benefit against the payment of service is not derived, the TPO is justified in making an adjustment under ALP. The Tribunal had determined the ALP at nil keeping the factual position as to whether in a comparable case, similar payment would have been made or not in terms of the agreements Similarly, in the cases of M/s Knorr-Bremse India Pvt. Ltd vs ACIT and Gemplus India (P.) Ltd vs ACIT, discussed above, the payments made in congruence of intragroup service arrangement were disallowed by determining their as nil on the grounds that they failed the benefit test. Therefore, in this case the TPO in his order has exhaustively discussed with reasons 'as to why the services rendered amount to shareholder activities and in the absence of proper documentary evidence,he arrived ALP at NIL and adjustment accordingly. Even the DRP has at length dealt the issue and further on the failure of assessee to prove conclusively with necessary evidences has upheld the order of TPO. In view of the factual position of the assessee and also the case laws discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in all other fields in which Philips has know-how and experience. Philips shall make available to the Company such knowhow, expertise and experience in the aforesaid areas as Philips now and in the future may possess and may freely and unconditionally furnish to the Company, and render assistance in this connection, all to the extent reasonably required to improve the Company's business operation. The assistance may relate to : a. the distribution and trading of products, particularly with respect to advertising, sales promotion, public relations, market research (in particular, information and trends on the world market), labeling, packaging, shipping and forwarding, long-term export business and international public tendering and purchasing from Third parties; b. advice and support with respect to the supply of requirements of the Company from other resources ; c. financial, accounting and auditing matters relating to such subjects as: i. accounting and auditing principles and methods; ii. budgeting methods; iii. capital structure, loans, exchange risks, financial research, warranties and guarantees, credit management, the establishment and management of financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advertising, sales and distribution activities. 4.2. We find that no adjustment on account of Management Support Service Charges were made in the past by the revenue from Asst Years 2005-06 to 2008-09 though the agreement is effective from 22.10.2004 onwards. We also find that Article 6 of MSSA enclosed in page 294 of the Paper Book on 'Taxes' is as under:- The costs, taxes, stamp duties and similar charges arising out of this agreement shall be borne by the Company (assessee) if such amounts are due in the Country, and by Philips if such amounts are due outside the Country with the exception of : a. taxes which can be claimed back or credited against tax by the Company in accordance with the legal provisions which shall be chargeable to the Company; and b. taxes which can be claimed back or credited against tax by Philips in accordance with the legal provisions, which shall be chargeable to Philips. The ld AR argued that the assessee had complied with the TDS obligations on the subject mentioned payments and the same has been accepted by the department. He also referred to the summary of emails from Pages 333 to 378 and further emails which are enclosed in Exhibit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l' to the personnel, which will enable the personnel to fulfill such specialized tasks on their own. Therefore the assessee's claim of not fulfilling the 'make available' condition is rejected. The ld DRP in in para 39 of the said order (enclosed in page 1040 of paper book) had further held that the consideration of all these facts leads to the conclusion that the deliverables under the MSSA are predominantly in the form of 'commercial knowhow' and not commercial services and therefore covered by the definition of the term 'Royalty' under Article 12 of the DTAA. 4.3.3.4. From the above it would be clear that the receipts in respect of MSSA would be taxable either as FTS (to the extent they are services rendered) or Royalty (to the extent it is providing commercial know-how or commercial experience). As both FTS and Royalty are taxable at the same rate under the DTAA, it does not matter that there is no clear cut separation or quantification in the MSSA of the service and the know-how portions. The entire receipts would be chargeable to tax in India under the DTAA as well as the I.T.Act. 4.2.1. Hence based on the aforesaid order of ld DRP in the hands of KPENV for the Asst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PENV which fact is also acknowledged by the ld DRP in the hands of KPENV as stated supra. The benefits derived by the assessee out of these services by way of substantial cost reduction and increase in turnover substantially cannot be swept under the carpet. We find that no adjustments to ALP was made in the Asst Years 2005-06 to 2008-09 in respect of the very same MSSA by the ld TPO for the assessee. We find that the principles of consistency need to be followed and cannot be given a go by when there is no change in the facts and circumstances of the case from the earlier years. Reliance in this regard is placed on the decision of the Hon'ble Supreme Court in the case of Radhasaomi Satsang vs CIT reported in (1992) 193 ITR 321 (SC). 4.6. We find that the decision relied upon by the ld AR on the Hon'ble Delhi High Court in the case of CIT vs Cushman and Wakefield (India) (P) Ltd reported in (2014) 367 ITR 730 (Del) is well founded wherein it was held that :- "35. The Transfer Pricing Officer's report is, subsequent to the Finance Act, 2007, binding on the Assessing Officer. Thus, it becomes all the more important to clarify the extent of the Transfer Pricing Officer's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied the same to the facts of the case in Bata India Ltd. In the said case (i.e Bata India Ltd supra) it was observed as under:- 27. The Hon'ble High Court of Delhi in the case of CIT v. EKL Appliances Ltd.[2012] 345 ITR 241/24 taxmann.com 199/209 Taxman 200 as well as CIT v. Cushman & Wakefield (India) (P.) Ltd.[2014] 367 ITR 730/46 taxmann.com 317 (Delhi), rendered similar ruling as was rendered in the case of Dresser-Rand India (P.) Ltd. (supra). In the case of Cushman & Wakefield India (P.) Ltd. (supra), the Hon'ble Delhi High Court observed that whether a third party - in an uncontrolled transaction with the Taxpayer would have charged amounts lower, equal to or greater than the amounts claimed by the AEs, has to perforce be tested under the various methods prescribed under the Indian TP provisions. In the context of cost sharing arrangement, the Hon'ble High Court opined that concept of base erosion is not a logical inference from the fact that the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to issue whether a transaction is at an arm's length price or not is not dependent on whether transaction results in an increase in assessee's profit; mere failure to establish that transactions resulted in a profit does not indicate that they were not at an arm's length price and even if profit is established, it does not necessarily follow that transaction was at an arm's length price - Held, yes [Para 21] We find that this judgement had approved the earlier decision of Hon'ble Delhi High Court in the case of Cushman and Wakefield (India) (P) Ltd supra and also the decision of EKL Appliances supra. 4.9. In view of the aforesaid findings and respectfully following the judicial precedent relied upon hereinabove, we hold that the determination of ALP for Management Support Services at Rs NIL is unwarranted and accordingly the upward adjustment made by the ld TPO in the sum of Rs. 125,27,30,863/- is deleted. Accordingly, the Ground Nos 2 & 3 raised by the assessee are allowed. We find that there is no change in the facts and circumstances during the year under appeal with regard to MSSA when compared to that in the earlier years and hence respectfully follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AMP costs are payments made to third parties in India that are not in any way related to either the assessee or any of its AEs. The assessee had the discretion of deciding the form, manner, content and timing of the advertising ; c) The assessee decides the extent of expenditure it needs to incur on advertisement to promote its sales and in the best interest of its business in its designated territories. 7.1. The assessee submitted that the AMP expenses incurred by it cannot be treated as marketing & distribution services rendered to the AEs and thereby as an international transaction as these AMP expenses represent purely payments made to third party vendors and are not covered under the purview of section 92 of the Act. The relevant extract of section 92F(v) of the Act which governs the definition of transaction is reproduced below:- "transaction includes an arrangement, understanding or action in concert.- (A) whether or not such arrangement, understanding or action is formal or in writing ; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings". Mere presumption just because of the assessee being a subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision was rendered after considering Sony Ericsson judgement. Accordingly, it was pleaded that the decision of Sony Ericsson cannot be applied as proposed by the ld TPO to determine the existence of an international transaction relating to marketing & distribution services to the AEs on account of the AMP expenses incurred by the assessee. The assessee also placed reliance on two more decisions of Hon'ble Delhi High Court in the case of CIT vs Whirlpool of India Ltd reported in (2015) 64 taxmann.com 324 (Delhi) and Honda Siel Power Products Ltd vs DCIT reported in (2015) 64 taxmann.com 328 (Delhi). The assessee stated before the ld TPO that since it does not believe AMP to be an international transaction, the assessee is not mandated to maintain TP documents in terms of section 92D read with Rule 10D of the Act. 7.2. The assessee submitted the details of AMP expenditure for the financial year 2012-13 as under:- Media Spend Agency Fees Lighting 22,59,34,147 14,61,97,113 Consumer lifestyle 31,74,94,505 5,23,20,770 Health care 67,85,293 96,76,586 Corporate 0 12,61,89,303 Total 55,02,13,945 33,43,83,772 Without prejudice to the claim of the assessee that AMP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y AMP expenditure incurred by the assessee does not result in an international transaction. The ld DRP held that mere absence of a formal agreement does not help the case of the assessee, whereas the conduct has the transaction written all across. In such a scenario, it does not help the case of the assessee as the assessee indeed undertakes the AMP action resulting in promotion of the brand. Accordingly the ld DRP held that the AMP expenditure to be an international transaction. The ld DRP on perusal of the tabulation of AMP expenses division wise done by the ld TPO observed that the profile of those expenses indicated direct and conspicuous role in buildup of the intangibles. Those expense heads have therefore been correctly categorized as AMP expenses. The ld TPO computed the ALP on such AMP expenses by imputing a mark up of 5% on such eligible expenses. The same is in line with Example 10 of BEPS guidelines. The said Example concluded that an entity, performing functions and incurring marketing expenditure substantially in excess of the level of function and expenditure of independent marketer / distributor / manufacturer in comparable transactions, is required to be compensate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eady factored in TNMM analysis and hence the same are not required to be evaluated separately; 3.7 The AO, DRP and TPO erred on facts and in law in holding that the Appellant has rendered services to its AE by incurring the alleged excess AMP expenses; 3.8 The AO, DRP and TPO erred on facts and in law in ignoring the fact that the AMP expense incurred by the Appellant were in respect of its own business purpose and requirements and that all the benefits resulting from such expenditure are to its own account; 3.9 The AO, DRP and TPO erred in completely disregarding the business and pricing model of the Appellant which compensates the Appellant for the AMP expenses incurred by it; 3.10 Without prejudice to the above arguments, the AO, DRP and TPO erred and failed to appreciate that comparable considered by the TPO for the purpose of determining the excess AMP spend are not valid comparables; 3.11 Without prejudice to the above arguments, the AO, Hon'ble DRP and Ld. TPO erred in not appreciating/acknowledging that Hon'ble DRP in Appellant's own case for AY 2010-11 and AY 2011-12 has accepted certain companies as comparables for AMP analysis and there is no occasion to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a distributor and thereby the decision of Sony Ericsson would apply to the case. We find that since the assessee is a manufacturer cum distributor as accepted by the lower authorities, the decision rendered in Maruti Suzuki supra would be applicable to the assessee's case, since the contention of the ld DR that assessee is only distributor, is not emanating from the records of the lower authorities. We find that the issue under dispute before us is squarely addressed by this tribunal in assessee's own case for the Asst Year 2011-12 supra wherein it was held :- "43. We have heard the rival submissions and perused the materials available on record. The preliminary issue here arises whether the AMP expenses constitute the international transactions so as to attract the provisions of transfer pricing of the Income Tax Act, 1961. The claim of the Ld. AR is that the AMP transaction does not represent the international transaction between the AE's therefore no question of determining the ALP of AMP transactions. We find force in the argument of the ld. AR in the given facts and circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has entered into service agreement with KPENV. Services rendered by PSC are covered in the above agreement. Based on said agreement, cost is charged back to KPENV with 10% mark up. Purchase of services, communication costs, support costs, hardware and other cost reimbursement PSC gets the costs of communication (diamond, code etc), apartment costs, liaison office costs and other support costs such as training costs, HR global service costs, ERP support costs and etc from its AEs. These costs are included in the cost base considered in respect of the provision of the software services by PSC to KPENV. Further there are certain project specific tools, which are either loaned to PSC to be returned after the completion of the project or sent free of cost to PSC for the purpose of testing of the software exported to the AEs. 12.1. PSC, as characterized by the TP study report, functions as an in-house software service provider to different sectors or divisions of the Philips Group for the products being developed and manufactured by the Philips as a whole. For these services, it is remunerated at cost plus 10% mark up. In the TP study report for PSC, the assessee selected the TNMM a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit (OP) 359.74 OP / OR 8.30% OP / OC 9.18% 12.5. Based on the above, the difference in ALP was determined by the ld TPO u/s 92CA(3) as below:- Details Amount (in millions) Operating Cost including IT charges 3974.26 Less : IT charges disallowed by this office 31.11 Operating Costs of PSC excluding IT charges 3943.15 Arm's Length mark up 21.08% Arm's Length service fee [ 3943.15*(1+21.08%)] 4774.37 Actual Sales of PSC 4334.00 Adjustments u/s 92C for PSC 440.365418 The ld TPO did not make any adjustment towards risk and working capital adjustments for want of proper details in that regard. The ld TPO made an upward adjustment of Rs. 44,03,65,418/- was made to the total income of the assessee. 12.6. The ld DRP with regard to E-Infochips Bangalore Ltd (comparable chosen by ld TPO), held that the same is functionally comparable and had directed as under:- As per the annual accounts the company as on 31/3/2013, has revenue from sale of products of Rs. 9,41,39,571 against total revenue of Rs. 148,10,97,923. Thus sale of products is about 6% of the total revenue. The TPO is directed to use segmental data of services segment if it is available. Otherwise at entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not accepting the ALP of the international transaction as recorded in the books of accounts by the Appellant. 5.2. Without prejudice to the generality of the above, the Learned AO, DRP and TPO erred in making a transfer pricing adjustment of Rs. 44,18,68,242/- on the basis that the Appellant should have made operating margin/total cost margin of 20.17% with respect to its software developmental services. 5.3. The learned DRP, AO and TRP erred in selecting a set of companies without following a methodical process. 5.4. Without prejudice to the functional non-comparability of one of the companies, namely Sasken Communication Technologies Ltd., the Learned AO, DRP and TPO erred in wrongly computing its operating profit/total cost margin. 5.5. The learned DRP, AO and TPO erred on facts and in law in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant. 5.6. The learned DRP, AO and TPO erred in rejecting some of the TP study comparables even though the same wee accepted by the DRP in its earlier year orders. 5.7. The learned AO and TPO erred in not granting the working capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l data is not available for E-Infochips Bangalore Ltd, the same is eligible to be included as comparable. This understanding of the ld TPO is unwarranted and is against the directions of the ld DRP. We also find that the ld AR placed on record that the said company has significant related party transactions of 24.55% on total operating revenues. Moreover, the ld AR also pointed out that the said comparable is engaged in sale of products, software development and IT enabled services and hence segmental data would be very crucial for comparison of the margins with the assessee for software development alone. Moreover the said company had incurred significant expenditure on account of R&D during the year. The details are enclosed in pages 1098 to 1105 of the paper book. Moreover, the said comparable had been excluded by the order of this tribunal in assessee's own case for the Asst Year 2011-12. Hence we hold that the said company is functionally not comparable and hence deserves to be excluded from the final list of comparables. 13.1. With regard to Thirdware Solutions Ltd, the said company is engaged in the provision of information technology enabled services (ITES) along with soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Ground Nos. 5 & 6 raised by the assessee are allowed for statistical purposes. 14. The Ground No. 7 raised by the assessee does not require any specific adjudication in view of our decisions rendered for the other grounds on the issue of transfer pricing. 15. DISALLOWANCE OF LEASE RENTALS - Rs. 6,86,60,107/- Ground Nos. 8.1 to 8.3 The brief facts of this issue is that the assessee claimed lease rental paid for motor car taken on finance lease from Citi Corp amounting to Rs. 8,38,64,111/-. The same was treated as capital expenditure by the ld AO based on the reliance placed in assessee's own case for the Asst Year 2003-04 which got confirmed by this tribunal. The ld DRP observed as under:- The lease rentals paid by the assessee for the year 2003-04 were disallowed and the action was upheld by the ITAT. Subsequent matters have been pending. Though this adjustment has been allowed in 2011-12, the panel upon consideration of the facts is not inclined to allow relief to the assessee. The proposed adjustment is upheld in view of the available adverse jurisprudence on identical facts. The objection is thus diposed off. Aggrieved, the assessee is in appeal before us on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute is covered by the decision of the Hon'ble Supreme Court in the case of ICDS Ltd supra in favour of the assessee. Hence respectfully following the same, we allow the Ground No. 8 raised by the assessee. 16. DEPRECIATION ON MOULDS Ground Nos. 9.1 to 9.4 The brief facts of this issue is that the ld AO during the course of assessment proceedings observed that assessee has claimed depreciation @ 30% on moulds instead of 15%. The ld AO further observed that the assessee is engaged in business of manufacturing, selling and trading of electronics and electrical products, electronic medical equipments and development of software services. Therefore, the assessee is entitled to claim depreciation @ 15% on moulds. The depreciation on moulds @ 30% is available to the assessee if these are used exclusively in rubber and plastic industries. As such, the assessee had no plastic factory. Therefore, the assessee is not entitled for depreciation @ 30% on moulds. Accordingly, the ld AO disallowed the excess depreciation claimed by assessee for Rs. 3,32,77,319/- and added to the total income of the assessee. Aggrieved, the assessee filed objections before the ld DRP. The ld DRP rejected th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in plastic factories. However, the amount of depreciation claimed by the assessee on moulds was disallowed by the assessee on the ground that higher rate of depreciation on moulds is available only if these are used in the plastic factory. The view taken by the AO was subsequently confirmed by the Ld. DRP. Now the issue before us arose whether assessee is eligible for depreciation on moulds at higher rate in the given facts and circumstances. It is undisputed fact that assessee has been claiming depreciation on moulds @ 30% in all the earlier years which was granted by the Revenue and no dispute with regard to rate of depreciation arose in the earlier years despite the fact that the assessments for earlier years were framed u/s 143(3) of the Act. In this regard, we observe that the assessee was allowed depreciation at higher rate in all the earlier years and no disallowance was made on account of this. However, we note that similar disallowance was also made by the ld. DRP for the A.Y. 2012-13 & 2013-14. The ld. AR before us has also not brought anything on record evidencing that the assessee had plastic factory. The Ld. AR has just verbally submitted that in most of the produc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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