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2018 (4) TMI 636

case before us, there is no difference between the form and substance of the transaction of distribution to recharacterise the transaction as a service agreement. As per the agreement, the AE is entitled to a specified percentage of the distributorís sales revenue less operating costs/expenses of the distributor. Since the assessee had no revenue left after reducing the operating cost/expenses, the AE was not paid any percentage. The revenue generated by selling the goods is retained by the assessee. The TPO has instead computed the mark up on the operating cost of the assessee to determine the ALP and brought the notional income to tax which is not justified. Therefore, the additional grounds of appeal are allowed. - As regards the applicability of the provisions of section 92(3) is the contention of the assessee that if the transaction 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 agree .....

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r companies as comparables and arrived at the average margin of the comparable companies at 1.26% as against the assessee s margin of -81.54%. He accordingly, proposed an adjustment of ₹ 1,54,47,842. The AO accordingly proposed the draft assessment order against which the assessee preferred its objections to the DRP which were rejected and the final assessment order was accordingly passed against which the assessee is in appeal before us. The assessee has raised the following grounds of appeal along with Form 36B: Based on the facts and circumstances of the case and in law, the Learned Assessing Officer (" AO") / Learned Transfer Pricing Officer ("TPO") and the Hon'ble Dispute Resolution Panel, Hyderabad ('DRP') erred in: TRANSFER PRICING MATTERS - Relating to determination 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 mak .....

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luding credit risks • Appellant charges VAT/Sales Tax to third party customers in line with distributor and the service provider is not required to pay VAT/Sales Tax 2. Re-characterizing the Distribution activities of Appellant to a Service Provider and thereby making appellant earn notional income/ profit 5. Since the additional grounds are legal grounds and go to the root of the matter and all the relevant facts are on record, we deem it fit and proper to admit the same and proceed to adjudicate the same as under. 6. Brief facts relating to this issue are that the assessee had entered into an agreement dated 1-4-2010 with its AE to distribute the product of the AE in India i.e. 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 theref .....

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submitted that this financial year is the first year of the distribution activity of the assessee company and therefore, it had to take premises on rent and pay its employees for carrying on distribution work and thus has incurred the expenses resulting in a loss to the company and therefore, the assessee has not made any payment to the AE during the year and hence the provisions of section 92 do not apply. He placed reliance upon sub-section 3 of section 92 of the I.T. Act to argue that where no income is chargeable to tax or it goes to increase the loss, then the TP proceedings are not applicable. He has also drawn our attention to the T.P study of the assessee and particularly, 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 providi .....

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y Distributor to Comm Vault US shall be exclusive of all Indian taxes . 11. In Form No.3CEB, the assessee has reported as under: The company has received software free of cost from its Associate Enterprise i.e. Commvalut Systems Inc,for distribution in the Indian Market. Since no purchase price was paid for the software received, as per the management, section 92(3) of the Act provides that transfer pricing provisions do not apply in a case where computation has the effect of reducing the income chargeable to tax. Hence, no analysis was undertaken for the software received free of cost . 12. Thus, the assessee has reported as to why no T.P. analysis was 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 m .....

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herefore, the additional grounds of appeal are allowed. 15. As regards the applicability of the provisions of section 92(3), we find that the Hon'ble Delhi High Court has considered the issue at length in the case of Sony Ericson (cited Supra) and has held as under: 140. Sub-section (3), we do not think incorporates a bar or prohibits set offs or adjustments. It states that Section 92, which refers to computation of income from international transaction with reference to arm's length price under sub- section (2) or (2A), would not have the effect of reducing income chargeable to tax or increase 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 .....

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