TMI Blog2018 (4) TMI 636X X X X Extracts X X X X X X X X Extracts X X X X ..... n is taken as distribution as agreed to between the parties, then the TP analysis would go to increase the loss. If the provisions of section 92(3) would apply, then the provisions of sub-sections (1) and (2A) of section 92 would not be attracted. Since, we have already held that the transaction is a distribution transaction and not service agreement, then the TP analysis has to be done afresh and then it has to be seen if the provisions of section 92(3) would apply. Additional grounds of appeal raised by the assessee are allowed and AO/TPO is directed to conduct fresh TP analysis by treating the assessee’s transaction as a distribution agreement and by determining the most appropriate method afresh and after allowing the necessary adjustments. If the loss declared by the assessee is increased by such TP study, then no TP adjustment can be made as provided in section 92(3) of the Act. - Decided partly in favour of assessee - ITA No.343/Hyd/2016 - - - Dated:- 11-4-2018 - Smt. P. Madhavi Devi, Judicial Member AND Shri B. Ramakotaiah, Accountant Member For The Assessee : Shri Darpan Kirpalani For The Revenue : Shri J. Siri Kumar, DR ORDER Per Smt. P. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of Arm's Length Price ( ALP ) in respect of international transactions with Associated Enterprises ( AEs ) 1) A) Not appreciating the fact that the Transfer Pricing regulations can't be applied to the distribution activity or services provided when no payments have been made to the AE for the import of software. B) Determining ALP @ 1.26% by making adjustments of ₹ 1,54,47,842. 2) Not allowing the directions provided by DRP to reject the company Dynacons Technologies Ltd for computing the Arm's Length Margin. 3) Disregarding the inter-company Transfer Pricing methodology for recovery of losses incurred by Comm Vault India in the initial years of distribution. 4) Selection of most appropriate method Rejection of RPM and selection of TNMM as the most appropriate method for determination of ALP for distribution activity. - 5) Rejection of use of multiple year data Rejecting the use of multiple year data and using data for the FY 2010-11 only. 6) Rejection of comparables Not undertaking an objective comparative analysis and interalia rejecting the following comparable software distributing companies for dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Simpana Software, a scalable unified data and information management software designed to replace several products. The products were supplied to the assessee free of cost and sales were made by the assessee to domestic parties. Therefore, the assessee did not treat the same as an international transaction. The assessee, vide letter dated 10.11.2014, had explained to the TPO that it has started the distribution activity with a separate team of 6 employees and the office is located in Mumbai and therefore, it has incurred loss in this year. It was also submitted that as per the agreement, the AE will not charge any amount to the assessee if the operating cost is more than the revenue earned. The TPO, however, was not convinced with the assessee s explanation. He held that even though the cost price to the assessee is nil , the product has a price and that the sales are made on behalf of the AE and that the assessee company should be compensated by way of a suitable mark-up. Thus, he was of the opinion that the arrangement is nothing but in the nature of service agreement requiring a markup. The TPO, therefore, issued a show-cause notice to the assessee. 7. In reply to the show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly, para 7 thereof, wherein the assessee has reported that the goods are supplied to the assessee at Nil cost and therefore, the TP proceedings are not applicable to such distribution activity. Further, he also argued that the TPO u/s 92CA of the Act, can only compute/determine the ALP of the international transactions but cannot re-characterize the transaction according to his understanding. 9. The learned DR, however, supported the orders of the authorities below and submitted that the assessee was providing services of selling the products of AE in India and therefore, it should be considered as a service agreement and should be compensated with a markup. 10. Having regard to the rival contentions and the material on record, we find that admittedly, the assessee has received the goods from its AE free of cost and the assessee has not made any payment whatsoever to the AE during the relevant A.Y or in the subsequent A.Ys till the A.Y 2013-14. We have also gone through the copy of the agreement between the assessee and its AE wherein it was clearly spelt out that the assessee is a distributor and is not required to make the payments to the AE for the goods supplied to it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as undertaken for the distribution activity and has relied upon the provisions of section 92(3) of the Act. For the sake of clarity and ready reference, the provisions of section 92(3) are reproduced hereunder: Section 92(3) ( 3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) [or sub-section (2A)] or the determination of the allowance for any expense or interest under [that sub-section], or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) [or sub-section (2A)], has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction [or specified domestic transaction] was entered into. 13. Thus, from the recitals in the agreement, it can be seen that the intention of the parties is clear that the assessee shall be a distributor of AE s products in India. The Hon'ble Delhi High Court in the case of Sony Ericson Mobile Communications India (P) Ltd. v. CIT reporte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the loss, as the as may be, computed by the assessee on the basis of entries in the books of account. Income chargeable to tax or loss as computed in the books is with reference to the previous year. The effect of sub- section is that the profit or loss declared, i.e. computed by the assessee on the basis of entries in the books of account shall not be enhanced or reduced because of transfer pricing adjustments under sub-section (2) or (2A) to Section 92. It states the obvious and apparent. In case the assessee has declared better and more favourable results as per the entries in the books of account, then the income chargeable to tax or loss shall not be decreased or increased by reason of Transfer Pricing computation. Thus, transfer pricing adjustments do not enure to the benefit or advantage the assessed, thereby reducing the income declared or enhancing the declared loss. Pertinently, the Sub- Section makes reference to the income chargeable to tax or increase in the loss on the basis of the entries in the books of account. The concept of set off or adjustments was/is well recognized and accepted internationally and by the tax experts/ commentators. In case the legislative i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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