TMI Blog2019 (10) TMI 845X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure which is stated to be much above the bright line of the average AMP spend of the comparable companies. This approach, to our mind, is contrary to law and untenable. A perusal of the terms of the MDF agreement shows that the reimbursement of a portion of the advertising and marketing expenditure incurred by the assessee by its AE is on a preapproval basis and under an annual budget decided solely by the AE. The nature of reimbursement received is a form of assistance or subsidy and does not arise on account of any service rendered by the assessee. There is no obligation on the AE to approve any particular item of expenditure. It is solely on its own volition that the AE determines the activity it wants to finance/reimburse/assist. Therefore, it is not possible to infer the existence of an international transaction beyond what has been reimbursed. The arrangement and understanding were limited to the amounts agreed to be paid as assistance under the MDF Agreement. The amounts incurred as AMP expenditure by the appellant under the MDF Agreement have already been received as reimbursement/assistance and have indisputably been disclosed as an international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f an entity and a reputation is built over a long period of time primarily on the basis of trust it invokes. Year to year AMP expenditure may vary due to market conditions, but the brand value does not get altered in proportion to expenditure. AMP function itself is a complex activity involves several nuanced aspects of marketing management targeted towards increasing sales. Such an exercise is sometimes premised on product promotion and sometimes brand messaging and occasionally for brand familiarization. But the core of brand value is not determined by the quantum of expenditure incurred but the overall level of trust inspired in the minds of the consumers. If the Indian distributor has been deprived of the opportunity of recovering its investment in AMP, it could be a valid reason for a transfer pricing adjustment because third parties would not agree to a premature termination of this kind without demanding compensation. Therefore, the question of compensating the taxpayer for any loss suffered due to excess AMP spend would arise only at the time of such premature termination and not during the pendency of the distributorship arrangement. Thus, in case of a routine distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re sufficient numbers of comparables are available by applying a lower threshold, the same should be preferred as the results are likely to be more accurate. The same view has been expressed by the coordinate Bench in the case of Motorola Solutions India Pvt. Ltd [ 2014 (10) TMI 358 - ITAT DELHI] . We accordingly hold that since in the given situation sufficient numbers of comparables are available even by following the lower level of threshold of 15%, the same should be followed. Deferred revenue expenditure - AO held that the benefit of expenditure on recruitment and training of employees is not restricted to one year and accordingly has to be apportioned over 6 years - HELD THAT:- The said issue is covered by decision of Hon ble Delhi High Court in Assessee s own case for AY 1999-2000, 2002-03 and AY 2003-04 wherein the Delhi High Court affirmed the decision of this Hon ble Tribunal allowing the deduction of expenditure incurred on recruitment and training of employees. The Ld. Counsel submitted that the Ld. AO erred in treating it as a deferred revenue expenditure on the assumption that recruitment expenses will result in long term benefit. He failed to appreciate that suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be allowed to be reduced in computing the total income else it would lead to double taxation of the same. The decision of the coordinate Bench in the case of Johnson Matthey India Pvt. Ltd. [2013 (8) TMI 830 - ITAT DELHI] cited by the appellant is applicable to the present facts - we allow this ground and direct the AO to allow this deduction. - I.T.As. No.3248, 3410/DEL/2012, 5856/Del/2010, 5315/Del/2011,52/Del/2013, 1567/Del/2014, 6741/Del/2014, 868/Del/2016 & 2511/Del/2018 - - - Dated:- 4-10-2019 - PRASHANT MAHARISHI [ACCOUNTANT MEMBER] AND AMIT SHUKLA [JUDICIAL MEMBER] Appellant by: S/Shri Himanshu Sinha, Shri Bhuwan Dhooper, Adv. Ms. Vrinda Tulsan, Adv. Respondent by: Shri H.K. Choudhary, CIT-D.R. ORDER PER BENCH: The appeals in ITA Nos. 3248/Del/2012, 5856/Del/10, 5315/Del/11, 52/Del/13, 1567/Del/2014, 6741/Del/2014, 868/Del/2016 2511/Del/2018 have been filed by the assessee in respect of the assessment years 2005-06 to 2011-12 respectively. Whereas, the appeal in ITA No. 3410/Del/2012 is a cross appeal filed by the Revenue for the AY 2005-06. Since the issues involved in all these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motion material Cost Plus Method (CPM) Gross Profit /Input Cost 33.60% 23.78% Class II Distribution (Consumer Electronics, Home Appliances, Monitors and other IT Telecom Products) Import of finished goods Import of spare parts Export of spare parts Purchase of samples Export of samples Payment for packing R D expenses Purchase of sales promotion material Resale Price Method ( RPM ) Gross Profit/Sales 14.48% 6.45% Class III Sales and Post-sales support Service Income Transactional Net Margin Method( TNMM ) Operating Profit /Total Cost 20.43% .12% Class IV Contract Software Development Software development services Transactional Net Margin Method ( TNMM ) Operating Profit / Total Cost 15% 13% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross profit earned by the comparable companies, hence it was reported that the international transactions in which Class-I (manufacturing) segment were at arm s length price. 6. In Class-II (distribution) segment, assessee was engaged in the distribution of consumer electronic goods, home appliances, monitors, IT products and telecom products. For this segment, Resale Price Method (RPM) was chosen by the assessee as the most appropriate method to determine the ALP with Gross Profit margin (gross profit /sales) as the profit level indicator. The economic analysis carried out on the database showed 5 uncontrolled independent comparable companies whose mean gross profit margin arrived at 6.45%. Since the gross profit margin of the appellant in the distribution segment was higher at 14.48%, hence it was concluded that the international transactions in Class-II segment were at arm s length. 7. The transfer pricing officer (TPO) rejected the most appropriate method adopted by the assessee and discarded the CPM for Class-I (manufacturing) segment; and RPM for the Class- II (distribution) segment. As per the TPO for both the segments, Transactional Net Margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at a set of 12 comparable companies for the Class-I manufacturing segment and set of 13 comparables for the Class-II distribution segment. The arithmetic mean of the operating profit margin (OP/OR) of these comparables for the manufacturing segment was computed at 1.25%. Similarly, the profit margin of the comparables in the distribution segment was carried out at (-) 0.447%. To compute profit level indicators of the comparable companies, the TPO used multiple years data (current and two previous years to the extent of availability of data). The margins computed by the TPO are after making adjustments on account of working capital differences. Based on the above approach, the TPO worked out an adjustment to the arm s length price of the international transactions pertaining to manufacturing segment at ₹ 112,642,9851/- which was subsequently reduced to ₹ 110,586,5807/- vide an order under section 154 dated 19/01/2009. In respect of distribution segment, the adjustment to the arm s length was worked out to be at ₹ 592,809,324/- which was subsequently reduced to ₹ 572,545,869/- vide aforesaid order dated 19/01/2009. 8. The TPO also carried out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of ₹ 1,72,98,334 was treated as capital expenditure and not allowable as a revenue expenditure u/s 37 of the Act; (b) Loss arising on account of fluctuation of foreign exchange currency amounting to ₹ 7,79,52,000 was disallowed as being notional and contingent in nature. Subsequently, the Ld. AO passed an order (u/s 154) dated July 24, 2009 deleting the addition made on this account; (c) Depreciation on UPS, printers and servers was restricted to 15% as against 60% claimed by the appellant leading to a disallowance of ₹ 3,21,617. 11. The assessee being aggrieved by the orders of the TPO and AO preferred an appeal before the Commission of Income Tax (Appeals)-XXIX, New Delhi (CIT(A)) contesting the aforesaid additions made to the total income of the assessee on various grounds. 12. The CIT (A) disposed off the appeal filed by the assessee vide his order dated 27th April 2012, partly allowing the appeal on following lines: (a) CIT (A) held that the reference made by the AO to the TPO for determination of ALP of the international transactions did not suffer from any illegality and was a valid on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years as well but the same had been negated by his predecessors in A.Yrs. 2002-03 to 2004-05. By relying on these prior years orders, he held that the reimbursement of ₹ 142.39 crores was to be treated as operating income and profit as well. (i) The CIT(A), however, approved the secondary analysis carried out by the TPO in respect of the AMP expenditure whereby he had made a protective assessment on account of excessive AMP expenditure incurred by the appellant to promote the Samsung brand. As per the TPO, since the appellant s combined AMP expenditure for this year at 7.7% of sales was much higher than 1.05% of sales (the three years average AMP spend by the comparables in the manufacturing and trading segments), the excess of 6.65% (corresponding to ₹ 264.65 crores) represented a brand promotion service rendered by the appellant company to its parent which ought to have been received as reimbursement under the arm s length principle. However, the TPO had not proposed any separate addition on this account as he had taken a view that the reimbursement of marketing expenditure of ₹ 142.39 crores received by the appellant did not form part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant at (- ) 0.64% as against the comparables mean profit margin at (-) 7.37% using current year data for the Class I manufacturing segment leading to the deletion of the TP adjustment made in this segment. Further, the margin of the Class II Distribution segment of the appellant was worked out to be 0.21% as against the mean margin of the comparables at 0.38% leading to adjustment of ₹ 3,30,33,800 in this segment. The margins were computed after giving effect to the CIT(A) s findings on treatment of reimbursement, exclusion of certain comparables and use of current year data for the comparables. (l) As regards the disallowance pertaining to treatment of recruitment and training expenses as capital expenditure and not revenue expenditure, the CIT(A) deleted the disallowance by relying on the decision of its predecessor in AY 2004-05, as well as the ITAT on this issue in appellant s case for A.Y. 1998-99. The CIT(A) observed that an appeal filed against the order of the ITAT has been dismissed by the Delhi High Court on 11/01/2010. Facts being same as in earlier years, he held that these expenses are fully deductible. (m) The CIT(A) while examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the fact of the same, being a domestic transaction undertaken by the parties, does not fall under the purview of Section 92 of the Act. GROUND NO. 3.4: The AO/CIT (A) has erred in concluding that the appellant has incurred excess advertising expenditure vis- vis comparable companies and should have accordingly, been reimbursed for the same. GROUND NO. 3.5: The AO/CIT (A) has erred in not appreciating that the advertisement expenditure was incurred exclusively for promotion of products of the appellant in India and was in the nature of business expenditure allowable as deduction. Ground NO. 3.6: The CIT(A) has erred in upholding the secondary analysis undertaken by the TPO when the arm s length price of the appellant s transactions with the AEs have already been tested under the transactional net margin method. The grounds and issues pertaining to AMP taken up by the appellant in other AYs are similar and are not being reproduced herein for the sake of brevity. 15. From AY 2005-06 to AY 2011-12 (except for AY 2006-07), the TPO has made similar adjustments on account of AMP expenses incurred by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be known as the Bright line test which has been subject matter of extensive litigation before the ITAT and the High Courts. The Special Bench of this Tribunal in the case of L.G. Electronics [2013] 140 ITD 41 had approved this approach and had held that excessive expenditure could be treated as a separate international transaction that could be subjected to arm s length exercise on its own. While holding so, the Special Bench had laid down extensive guidelines to determine the value of the international transaction and the ALP of the same. Subsequently, the Hon ble Jurisdictional Delhi High Court in the case of Sony Ericsson [2015] 374 ITR 118 has held that the Bright line test was not a valid test of determining the ALP of the AMP transaction as it was not statutorily mandated. The High Court further laid down numerous guidelines and principles to determine the ALP of AMP transaction. Subsequent to this the Hon ble Delhi High Court expanded the jurisprudence in this regard in the cases of Maruti Suzuki [2016] 381 ITR 117, Whirlpool [2016] 381 ITR 154 and Bausch Lomb [2016] 381 ITR 227 by holding that existence of an international transaction merely on the ground of exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 92B, the Revenue has to show that there existed an agreement or understanding or arrangement, that the Indian entity would incur AMP expenditure for or on behalf of the AE which owns the brand. In the absence of such action in concert , no international transaction can be said to exist. If the existence of international transaction cannot be established with any degree of certainty, the question of determining the ALP of the same would not arise. 20. The same principle has been upheld in numerous other judgments of the Delhi High Court as cited below:- Goodyear India Limited (ITA 77/2017 CM Nos. 3072- 73/2017, ITA 78/2017 CM Nos. 3074-75/2017, ITA 79/2017 CM No. 3076/2017) Amadeus India Pvt. Ltd. (ITA 154/2017) Casio India Company Private Limited (ITA 309/2016) Maruti Suzuki India Ltd (ITA No. 110/2014) Whirlpool of India Ltd. (ITA No. 610/2014) Honda Siel Power Products Ltd.(ITA No. 127/2017 CM Nos. 4906-4907/2017 346/ 2015) Bausch Lomb Eyecare India Pvt. Ltd. (ITA No. 643/2014). 21. The Ld. Counsel vociferously argued by applying the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt which provided for assistance in respect of marketing activities pertaining to the Samsung brand in print and electronic media. These obligations, in his view, showed that the appellant was acting in concert with its AE in respect of the brand promotion in India. 23. In rejoinder, the Ld. Counsel, Mr. Sinha submitted that it is an admitted position of the assessee that there is an understanding or arrangement under the MDF agreement in respect of AMP expenditure. However, such a transaction or arrangement is strictly limited to the value of reimbursement (₹ 142.39 crore) received by the appellant under the agreement. These reimbursements have been received against pre-approved invoices under a budget/cap stipulated by the AE at the beginning of the year. There is no tangible material or evidence to show that even a rupee beyond this amount was spent under an understanding or arrangement or action in concert with the parent AE. As per the ratio of Maruti Suzuki, Whirlpool (supra) and other decisions, no presumption can be made about the existence of an international transaction. It was also pointed out that the appellant has no right to demand any assistance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that selling costs cannot form part of the AMP transaction. Only those expenses which related to promotion of brand and advertising of brand can be taken. Sales related costs like dealer commission, discounts, sales promotions and trade event expenditures cannot be taken as part of the advertising costs. In this case, the TPO and the CIT (A) have erred in not distinguishing between the sales and brand promotion costs leading to a distorted picture. It was accordingly submitted that if at all the AMP expenditure was to be permitted to be taken as a separate international transaction, the value and ALP of the same has to be limited to the brand promotion related expenses and should exclude selling costs.The Ld. Counsel also submitted that for AYs 2007-08 to 2010-11, the TPO has also erroneously considered rebates discounts, in addition to sales promotion and selling expenditure, as a part of AMP. Further, the TPO himself for AY 2005-06 2011-12 did not include rebates and discounts as part of AMP. In this respect, the he contended that Rebates and discounts and expenses in connection with sales do not lead to brand promotion and cannot be attributed to brand promotion as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a separate transaction at this stage of second appeal. 28. The Ld. CIT (DR) submitted that despite having examined all the international transactions in a bundled manner under TNMM, the Ld. TPO and Ld. CIT (A) are justified in subjecting the AMP transaction to a Cost Plus Method on a standalone basis, because this expenditure has been incurred to benefit the brand Samsung which is owned by the Appellant s parent company and no remuneration for this brand promotion service has been received. 29. The Ld. Counsel then submitted that the Revenue has grossly erred in equating AMP expenditure with brand building and in alleging that excessive AMP expenditure beyond the bright line is a brand promotion service. He submitted that brand is a capital asset and it would be fallacious to treat any and all AMP expenditure as leading to brand building. Brand-building leads to enhancement of value of the brand and benefits the brand owner as much as it helps the brand-exploiter like a licensed manufacturer or a distributor. Brand-building is in the realm of capital and brand-promotion targeted towards sale of goods or services is in the realm of revenue transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic return on investment (ROI) can be inferred in respect of expenditure incurred on advertisement. To support this proposition he referred to a scholarly article authored by Justin M. Rao of Microsoft and Randall A. Lewis of Google titled The Unfavourable Economics of Measuring the Returns to Advertising published in The Quarterly Journal of Economics (2015) 1941-1973, Oxford University Press which contains a rigorous analysis of correlation between advertising spend and increase in sales. The conclusion drawn in this article is that it is not possible to quantify the extra sales that can be generated based on incremental AMP spend. It also contains empirical data showing wide variation of AMP spend among competitors in the same sector or industry. Based on the above, it has been submitted that it is not possible to determine the impact of increased intensity of advertising function on profit margin, because the impact of advertising on sales cannot be determined and quantified. In the absence of a quantifiable measurement, it is not possible to make a reasonably accurate adjustment to the profit margins of the comparable companies as mandated under law.In view of the above, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view, can be inferred from the terms of the agreement and the conduct of the assessee. 32. The Ld. Counsel for the Appellant in his rejoinder submitted that in the present case, there is no clause in the MDF agreement between the assessee and its foreign AE which shows that the assessee represented interests of the foreign AE in India. Further, the assessee has already disclosed the reimbursement of ₹ 142.39 crores in its Form 3CEB as an international transaction and has justified its ALP in the TP report using CUP method for AY 2005-06. Similar disclosures have been made in other years as well. The amount reimbursed is in the nature of assistance received against specific pre-approved invoices under a capped budget specified in advance. The value of this international transaction cannot be extended or stretched beyond the amount reimbursed because the understanding between the appellant and its AE is limited to ₹ 142.39 under the terms of the MDF agreement itself. Accordingly, it was not possible to rely on this agreement to argue that the entire AMP expenditure (or the amount beyond the so-called bright line) be treated as a separate international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that such an approach is impermissible in law. Protective assessment cannot be made in the hands of the same assessee on an alternative basis. It has a limited application to cases where a single item of income is assessed in the hands of two distinct persons as the identity of the real owner of income is not known or is not clear. In this regard he relied on the decision of the ITAT in the case of MSD Pharmaceuticals (P.) Ltd. v. ACIT [2018] 191 TTJ 702 (Delhi Trib.).The Ld. Counselalso placed reliance on the decision of Hon ble Supreme Court in the case of Lalji Haridas v Income Tax Officer: [1961] 43 ITR 387 wherein it was held that protective assessment can only be made in respect of two separate entities to ensure that income does not escape taxation. Ld. CIT(DR) relied on the order of the lower authorities. DECISION 36. We have heard the rival submissions, perused the relevant findings given in the impugned orders as well as material referred to before us in respect of transfer pricing issue pertaining to AMP adjustment made by the TPO. We have already discussed in detail, the brief facts and background of the cases in the light of the mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the two related parties, the onus rests on the Revenue to demonstrate the same before it can apply the provisions of Chapter X on the AMP expenditure. In the present case, the only ground on which the Ld. TPO and the Ld. DRP have concluded that the AMP expenditure constitutes an international transaction is the excessive quantum of expenditure which is stated to be much above the bright line of the average AMP spend of the comparable companies. This approach, to our mind, is contrary to law and untenable. 38. Our view is bolstered by the various decisions of the Hon ble Delhi High Court and coordinate benches of this Tribunal in this regard. In Whirlpool of India Ltd. v. DCIT (2016) 381 ITR 154 (Del), the following relevant principles have been laid down by the Court which have been reiterated/followed in other decisions as well: (a) Sections 92B to 92F contemplate the existence of an international transaction as a pre-requisite for commencing the TP exercise. The Court observed that to begin with there has to be an international transaction with a certain disclosed price. The TP adjustment envisages the substitution of the price of such inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t such an international transaction was entered into by the assessee. In Court s words, It is in this context that it is submitted and rightly by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction could be ascertained, it cannot be left entirely to surmises and conjectures of the TPO. (Para 39). The Court further held that after the invalidation of the Bright line test by the Delhi High Court in Sony Ericsson (supra), existence of an international transaction of AMP expenditure has to be established de hors the Bright line test. 39. It is also pertinent that the Hon ble Court further held that as per the principles laid down by the Apex Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC), in the absence of a machinery provision, bringing an imagined transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this agreement in all these years have also been indisputably disclosed and explained in the Form 3CEB and in the TP study. The question that requires our adjudication is whether by virtue of this agreement, the so-called excessive AMP expenditure of the assessee (which is much higher than the assistance received under the MDF agreement) can be treated as an international transaction u/s 92B. For this we need to advert to the terms of the MDF agreement. Relevant clauses of the MDF agreement applicable for A.Y. 2005-06 (the agreements pertaining to other years are materially similar) are extracted as below: Marketing Fund Agreement THIS AGREEMENT made and entered into this 1st day of January, 2004 by and between Samsung Electronics Co., Ltd., a corporation duly organized and existing under the laws of the Republic of Korea, having its head office at Samsung Main Bldg, 250-2Ka Taepyung-Ro, Chung-Gu, Seoul, Korea (hereinafter referred to as SEC ) and Samsung India Electronics a corporation duly organized and existing under the laws of INDIA, having its principal office at 3rd, IFCI Tower, Nehru Place, New Delhi, INDIA (hereinafter referred to as DIST ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd marketing expenditure incurred by the assessee by its AE is on a preapproval basis and under an annual budget decided solely by the AE. The nature of reimbursement received is a form of assistance or subsidy and does not arise on account of any service rendered by the assessee. There is no obligation on the AE to approve any particular item of expenditure. It is solely on its own volition that the AE determines the activity it wants to finance/reimburse/assist. Therefore, it is not possible to infer the existence of an international transaction beyond what has been reimbursed. 42. In a similar situation, coordinate Bench of this Tribunal has examined the issue of existence of an international transaction in the case of PepsiCo India Holdings Pvt. Ltd. v. Addl. CIT (I.T.As. No. 1334/CHANDI/2010, 1203/ CHANDI /2011, 2511/DEL/2013, 1044/DEL/2014 4516/DEL/2016) where the assessee, an Indian company had reimbursed a portion of the sponsorship expenditure (for international cricket events) incurred by the AE for the benefit of certain group companies including the assessee. The Revenue had contended that by virtue of this reimbursement the entire AMP expenditure of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tsoever on any other international transaction with the AE, other than reimbursement of expenditure of ₹ 33.60 crores as discussed above. 53. Section 92B defines the international transaction in the following manner: - (1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. From the plain reading of the aforesaid Section, it is quite clear that: (i) the transaction has to be between two or more associated enterprises either or both of whom are non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as international transaction. Clause (v) of Section 92F reads as under: 92F (v). 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. This definition of transaction has to be read in conjunction with the definition given in section 92B, which means that the transaction has to be first in the nature given in Section 92B (1); and then when such transaction includes any kind of arrangement, understanding or action in concert amongst the parties, whether in writing or formal, then too it is treated as international transaction. Here the conjoint reading of both the sections lead to an inference that in order to characterized as international transaction, it has to be demonstrated that transaction arose in pursuant to an arrangement, understanding or action in concert. Such an arrangement has to be between the two parties and not any unilateral action by one of the parties without any binding obligation on the other or without any mutual underst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brands owned by the AE. The relevant observation and the finding of the Hon'ble High Court in paragraph 60 reads as under: 60 Even if the resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL is any other transaction having a bearing on its profits, income or losses for a transaction there has to be two parties. Therefore, for the purposes of the means part of clause (b) and the includes part of clause (c,) the revenue has to show that there exists an agreement or arrangement or understanding between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand SMC 61 Even if the word transaction to include arrangement , understanding or action in concert , whether formal or in writing , it still incumbent on the revenue to show the existence of an understanding or an arrangement or action in concert between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the means part and the includes part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the excessive AMP expenditure incurred by the Appellant. This excessive amount has been treated as a separate international transaction and subject to transfer pricing adjustment. The bright line test which was first approved by a Special Bench of this Tribunal in LG Electronics now stands rejected by the Delhi High Court decision in Sony Ericsson. In Sony Ericsson, the Hon ble High Court examined the concept of bright line in the context of domestic law and international jurisprudence and arrived at a conclusion that such an approach is untenable and contrary to law and not sanctioned by international jurisprudence. The concluding remarks of the Hon ble High Court are as below: 127. We agree and accept the position in the portion reproduced above in bold and italics. The object and purpose of Transfer Pricing adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. There should be adequate and proper compensation for the functions performed including AMP expenses. Thus, we disagree with the Revenue and do not accept the overbearing and orotund submission that the exerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture are being tested under TNMM, it would not be open for the Revenue to segregate one item of expenditure/income for a separate benchmarking unless for cogent reasons it is of the view that a TNMM is not the most appropriate method to test all the international transactions together. In such a situation the Revenue would have to test each of the transactions separately and not leave any of the transactions untested leading to an incongruous situation. We are fortified in our view by the decision of the Hon ble Delhi High Court in the case of Sony Ericsson (supra) wherein the Court observed as below: 101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uantum of expenditure incurred but the overall level of trust inspired in the minds of the consumers. The Hon ble Delhi High Court in the case of Sony Ericsson (supra) has examined this aspect in detail. The relevant observations are extracted below: 103. Brand has been described as a cluster of functional and emotional values. It is a matter of perception and reputation as it reflects customers' experience and faith. Brand value is not generated overnight, but is created over a period of time, when there is recognition that the logo or the name guarantees a consistent level of quality and expertise. Leslie de Chernatony and McDonald have described a successful brand is an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant, unique, sustainable added values which match their needs most closely. The words of the Supreme Court in Civil Appeal No.1201 of 1966 decided on 12th February, 1970 in Khushal Khenger Shah v. Mrs. Khorshedbanu, DabridaBoatwala, to describe 'goodwill', can be adopted to describe a brand as an intangible asset being the whole advantage of the reputation and connections for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough elements remain which may perhaps be gathered up and be revived again . 104. Brand has reference to a name, trademark or trade name. A brand like 'goodwill', therefore, is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. To use words from CIT v. Chunilal Prabhudas Co. AIR 1971 Cal 70, it would mean: ' It has been horticulturally and botanically viewed as a seed sprouting or an acorn growing into the mighty Oak of goodwill . It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the attracting force . In terms of comparative dynamics, goodwill has been described as the differential return of profit. Philosophically it has been he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. There are a good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also cases where in spite of extensive and large scale advertisements, brand values have not been created. Therefore, it would be erroneous and fallacious to treat brand building as counterpart or to commensurate brand with advertisement expenses. Brand building or creation is a vexed and complexed issue, surely not just related to advertisement. Advertisements may be the quickest and effective way to tell a brand story to a large audience, but just that is not enough to create or build a brand. Market value of a brand would depend upon how many customers you have, which has reference to brand goodwill, compared to a baseline of an unknown brand. It is in this manner that value of the brand or brand equity is calculated. Such calculations would be relevant when there is an attempt to sell or transfer the brand name. Reputed brands do not go in for advertisement with the intention to increase the brand value, but to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Setty [1981] 2 SCC 460, a decision relating transfer to goodwill. Goodwill, it was held, was a capital asset and denotes benefits arising from connection and reputation. A variety of elements go into its making and the composition varies in different trades, different businesses in the same trade, as one element may pre-dominate one business, another element may dominate in another business. It remains substantial in form and nebulous in character. In progressing business, brand value or goodwill will show progressive increase, but in falling business, it may vain. Thus, its value fluctuates from one moment to another, depending upon reputation and everything else relating to business, personality, business rectitude of the owners, impact of contemporary market reputation, etc. Importantly, there can be no account in value of the factors producing it and it is impossible to predicate the moment of its birth for it comes silently into the world unheralded and unproclaimed. Its benefit and impact need not be visibly felt for some time. Imperceptible at birth, it exits unwrapped in a concept, growing or fluctuating with numerous imponderables pouring into and affecting the business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Bajaj, Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of brand names. They incur substantial AMP expenditure. If we apply the 'bright line test' with reference to indicators mentioned in paragraph 17.4 as well as the ratio expounded by the majority judgment in L.G. Electronics India (P) Ltd case (supra) in paragraph 17.6 to bifurcate and segregate AMP expenses towards brand building and creation, the results would be startling and unacceptable. The same is the situation in case we apply the parameters and the 'bright line test' in terms of paragraph 17.4 or as per the contention of the Revenue, i.e. AMP expenses incurred by a distributor who does not have any right in the intangible brand value and the product being marketed by him. This would be unrealistic and impracticable, if not delusive and misleading. (Aforesaid reputed Indian companies, it is patent, are not to be treated as comparables with the assessed, i.e. the tested parties in these appeals, for the latter are not legal owners of the brand name/trademark.). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisement, marketing expenditure which is benefitting the brand/trademark of the AE would not be correct approach. Thus, this line of reasoning given by the TPO is rejected. 49. In PepsiCo (supra), this Tribunal, while examining the AMP issue examined the implications of the recent developments in transfer pricing spearheaded by OECD in its Base Erosion and Profit Shifting (BEPS) project and observed as below: 61. Further in the final report of Action 8-10 of Base Erosion and Profit Shifting Project (BEPS) of OECD titled as Aligning Transfer Pricing Outcomes with Value Creation . It has been suggested that no adjustment is required on AMP expenditure incurred by full-fledged manufacturers. The report contains various examples pertaining to manufacturer. The following passage from the report is quite relevant which for the sake of ready reference is quoted hereinbelow: 6.40 The legal owner will be considered to be the owner of the intangible for transfer pricing purposes. If no legal owner of the intangible is identified under applicable law or governing contracts, then the member of the MNE group that, based on the facts and circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng title. From the above quoted passage, it can be seen that the guidelines clearly envisage that legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by MNE group from exploiting the intangibles, even though such returns is initially accruing to the legal owner as a result of its legal/contractual right to exploit the intangible. The return depends upon the functions performed by the legal owner, assets it uses, and the risks assumed; and if the legal owner does not perform any relevant function, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, then the legal owner of the intangible will not be entitled to any portion of the return derived by the MNE group from the exploitation of the intangible other than the Arm s Length compensation if any for holding the title. 50. In view of the above, we hold that in case of licensed manufacturers like the appellant who bear the full risks and rewards of manufacturing and selling their goods in the Indian market, the concept of brand promotion being for the benefit of the AE has no application at all. As regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement of ambiguity as to in whose hands the said income can be rightly brought to tax. That's not the case before us. In our humble understanding, therefore, the concept of 'protective assessment', as is known to the income tax law, has no application in the cases like the one before us. 52. The last issue before us is: If AMP expenditure incurred by the Appellant is held to be an international transaction, can it include selling costs within its ambit? Further, would the Appellant be eligible to receive a mark-up on the AMP expenditure to capture the arm s return on the cost? Since we have held that there is no international transaction in the nature of AMP expenditure which needs to be subjected to Chapter X analysis, these issues are rendered infructuous and academic. 53. Thus, in view of our finding given above we hold that, no adjustment can be made in the case of the appellant on account of AMP expenses and same is directed to be deleted. OTHER GROUNDS IN ITA No. 3248/DEL/2012)AY 2005-06 GROUND NO. 4: The CIT has erred in not appreciating that no adjustment is warranted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F= E/A 0.21% Arm s length OP/Sales G 0.38% Arm s Length OP H=A*G 73,840,260 Shortfall in Appellant s OP I=H-E 32,585,913 Arm s length AE costs J=B-I 9,172,828,040 105% of Arm s length AE costs K=J*1.05 9,631,469,442 TP adjustment (if any) L=B-K Nil 55. The Ld. Counsel submitted that no adjustment to the ALP could be made as under the Proviso to Section 92C(3), if the difference between the price recorded in the books and the ALP determined was less than 5%, no adjustment could be made. The Ld. CIT (DR) relied on the orders of the TPO and the CIT(A). 55. In view of the details submitted by the assessee which have not been disputed or controverte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be accepted. In this case, he submitted that components of colour TVs are being manufactured by this comparable, which falls under the broad category of consumer goods. He also argued that prior years precedents should not be applied to questions of fact. 60. The Ld. counsel for the Assessee while supporting the order of the CIT (A) submitted that the company should not be taken as a comparable due to following reasons: (a) Videocon did not form a part of SIEL s TP Study and the same was included by the TPO by merely relying on its own order for AY 2004-05 without conducting any functional analysis. (b) It may be noted that Videocon was excluded as a comparable by CIT (A) in AYs 2003-04 and 2004-05 as well. Also, the Department did not file an appeal on this issue against the order of the CIT (A) for AY 2004-05. There is no change in the facts and circumstances of the case from AY 2004-05 and AY 2005-06. The functional description of this company and that of the appellant has remained the same and hence the decision of the prior year should be followed. (c) The company is engaged in backward integration and indigenous manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not be taken as comparable. Even for AY 2004-05, in Assessee s own case, Khaitan Electricals Ltd was excluded as it had RPT in excess of 15%. Based on above, Ld. CIT (A) excluded Samtel as a comparable. 64. Being aggrieved by the CIT (A) s order, the Department is in appeal before this Tribunal for inclusion of this comparable. It is the Department s contention that RPT filter should be 25% instead of 15% as it is a reasonable threshold for comparability. The Ld. CIT (DR), further submitted that the Tribunal in numerous decisions has approved a 25% threshold and the same should be followed in this case as well. 65. The Ld. Counsel for the Assessee submitted that the company should not be taken as a comparable on the ground of consistency as the TPO in subsequent year i.e. AY 2006-07 has himself excluded companies having RPT in excess of 15%. Further, even after applying RPT filter of 15%, if sufficient number of comparable companies are available for determination of arm s length price, then such tolerance limit is proper.The Ld. Counsel for the Assessee placed reliance on LSI Technologies India Private Limited vs. ITO (IT (TP)A Nos.1380 1381/B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. 68. Control Print (India) Limited (Class II- Distribution): This comparable was introduced by the Ld. TPO in the final list of comparables by merely relying on his predecessor s order for AY 2004-05. The company operates in only one segment and is engaged in coding, marking systems and development of digital printing systems for various markets applications including packaging applications, specialty industrial applications, textile printing and security printing. 69. On appeal by the Assessee, the Ld. CIT (A) excluded this comparable by relying on his predecessor s order for AY 2004-05 wherein it was held that the company s functional/business profile of the company vis- -vis the Assessee is dissimilar. 70. The Ld. CIT (DR) submits that the company has been taken as a comparable after conducting a detailed functional analysis and is functionally similar to the appellant. He emphasized that under TNMM broad level of product similarity is required and some degree of divergence is acceptable both in respect of product difference and functional difference. 71. The Ld. Counsel for the Assessee submitted that the company shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a comparable due to following reasons: (a) ________________________________ Gemini is engaged in the business of providing solutions on networking and communications with products of companies like Cisco, Nortel, Avaya, etc. (b) ________________________________ The same was excluded by the CIT (A) for AY 2004-05 but the Department did not file an appeal on this issue. Since, Department has accepted it as a comparable in one year, it cannot change its stand and challenge it in the subsequent year, if there is no change in the facts and circumstances of the case. (c) ________________________________ Further, the major products dealt by it are communication equipment and its major source of revenue is sale of network products as well as network service solutions. It is a leading networking solutions and technical service provider. 76. We have perused the orders of the lower authorities and the Annual Report of this company. We find that this company is a leading networking solutions service provider. As part of the networking solutions it provides to its clients, it sells communication equipment as well. The solutions compris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... November 29, 2006, declaring an income of ₹ 36,26,44,434. A summary of the international transactions and the appellant s approach in determining their ALP is given in the table below: Particulars Most Appropriate Method as per TP study Profit Level Indicat or (PLI) as per TP Study Margin earned by the Appellant as per TP study No. of comparables considered as per TP study Arm s Length Marginas per TP study Class I Manufacturing (Consumer Electronics, and Home Appliances) Import of raw materials, Import of stores and service parts, export of finished goods, payment of royalty, import of fixed assets Transactional Net Margin Method ( TNMM ) OP/OR 2.22% 6 2.52% Class II Trading (Consumer Electronics, and Home Appliances) Import of finished goods, import of stores and service parts, export of finished goods, payment of royalty, import of fixed A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d other IT products. For Class-II and Class-IV segments, Resale Price Method (RPM) was chosen as the most appropriate method to determine the ALP with Gross Profit margin (gross profit /sales) as the profit level indicator. The economic analysis carried out in the TP Study for Class-II and Class-IV segments resulted in identification of 12 and 9 uncontrolled independent comparable companies respectively. Since the appellant had earned gross profit margin of 24.78% and 10.15% in the Class-II and Class-IV segments respectively which was higher than the profit margin earned by the comparables, it was concluded that the international transactions were at arm s length. 83. The TPO rejected the most appropriate method adopted by the assessee. He discarded the Resale Price Method for Class-II (trading) and Class-IV (trading) segment. As per the TPO, for both the segments Transactional Net Margin Method (TNMM) was the most suitable method for determining of arm s length price. Under TNMM he selected operating profit margin on revenues (OP/OR; OP = operating profit/ OR = operating revenue) as the profit level indicator for both the segments. Further, the TPO while computing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles for the Class-II trading segment and 11 comparables for Class-IV trading segments. The arithmetic mean of the operating profit margin (OP/OR) of these comparables for the Class-I manufacturing segment was computed at 2.74%. Similarly, the profit margin of the comparables in the Class-II and Class-IV trading segments were carried out at 2.45% and 1.61% respectively. To compute profit level indicators of the comparable companies, the TPO used multiple years data (current and two previous years to the extent of availability of data). The margins computed by the TPO are after making adjustments on account of working capital differences 85. Based on the above approach, the TPO worked out an adjustment to the arm s length price of the international transactions pertaining to Class-I manufacturing segment at ₹ 439,163,419/-. In respect of Class-II and Class-IV trading segments, the adjustment to the arm s length was worked out to be at ₹ 509,049,110 and ₹ 300,466,885 respectively. There was no adjustment made to the Class III and Class V segments. 86. The AO incorporated the adjustment to the ALP made by the TPO and also made the followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s only in the current financial year and immediately preceding financial year. It has recorded a profit in the financial year 2003- 04 and therefore it is factually incorrect to treat this company as a persistently loss-making company. Under Rule 10B(4) data of current year and two immediately prior years can be considered if the same has a bearing on the profitability of the company. This Tribunal in numerous cases held that to check whether a persistently loss company should be excluded, data of at least three years (current plus two prior years) have to be seen. 90. The Ld. Counsel argued that Voltas cannot be said to be categorized as a persistently loss-making entity because persistent loss-making entities imply that losses are suffered year after year leading to erosion of net worth. In the present case, a company suffering losses only in two years cannot be said to be persistent loss-making company. Further, it has been pointed out that turnover of the company has increased over the years, and it had no intention to close down its business and is in the market for the long run. The Ld. Counsel contended that the courts have consistently held that if a company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uartile are retained for comparability. For the AY under consideration, Arithmetic Mean Method has been applied and thus, comparables with higher profits/losses cannot be excluded. 92. Further, the Ld. Counsel submitted that the exclusion of persistent loss-making companies has been in the context of IT companies which is a booming sector where the industry trend has been of growth and persistent losses is not normal. However, this approach cannot be ipso facto extended to other industries such as consumer electronics etc. which are very competitive industries as is evident from the low margins of the comparable companies. 93. The Ld. CIT (DR) relied vehemently on the orders of the Ld. TPO and DRP and submitted that two years of continuous losses demonstrated that the company was in a downward trend and was experiencing a situation that was different from that of the appellant. On account of the extraordinary situation, this company cannot be taken as a comparable. The Ld. CIT (DR) further submitted that the Tribunal in various decisions has upheld the application of persistent loss making as a filter. 94. We have perused the orders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net margin method to benchmark the international transactions under Class II (trading of consumer electronics and home appliances segment) 95. The Ld. TPO has included this comparable on ground that it is functionally similar and has been accepted as comparable by the Appellant in FY 2004-05. The Ld. DRP has upheld the Ld. TPO s reasoning. The Ld. Counsel for the Appellant submitted that Bajaj is engaged in manufacturing and distribution of various lighting, consumer durables, galvanized structures and other products. It has four segments as below: 'Lighting' includes Lamps, Tubes and Luminaries; 'Consumer Durables' includes Appliances Fans; 'Engineering Projects' includes Transmission Line Towers, Telecommunications Towers, Highmast, Poles and Special Projects; 'Others' includes Die-casting and Wind Energy. 96. The Ld. Counsel pointed out that the gross-profit margin of Appliance products were computed from the product schedule and used for Resale Price Method (RPM) computation in the TP report. However, when RPM was discarded in favour of TNMM by the TPO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re consumer durable segment of Bajaj Electricals which includes both Appliances and Fans. Most significantly the function in relation to fans in this segment is of manufacturing and not trading. From the Annual Report, it emerges that during the year, Bajaj Electricals had manufactured 537,000 pieces of fans. While the consolidated sales quantity of fans has been given at 1,784,000, the segmental breakup of manufactured fans and traded fans is not provided. In these circumstances it is not possible to determine the net profit margin derived from the sale of traded fans. We also note that the range of traded products of the assessee does not include fans and is limited to consumer products like Colour TVs, Air conditioners, Washing Machines, Microwave ovens and refrigerators. We therefore order the exclusion of this comparable for determination of ALP of the international transactions of the segment pertaining to trading of consumer products of the assessee. This ground is accordingly allowed. GROUND NO. 4.4: That on facts and in law, the TPO/AO has erred in additionally identifying Control Print Limited and Gemini Communications Limited as a comparable comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted. Further, it was held that based on evidence on record, the recoveries directly correspond to actual expenses incurred by the assessee and such expenditure was incurred in line with terms of aforesaid agreement. 103 Further, the CIT(A), in AY 2005-06 (as well as in the earlier years), based on merits of the case and placing reliance on ITAT judgment in case of Sony India (P) Ltd supra decided the matter in favour of the assessee by treating AMP recovery as operating income at para no. 105.4 of the said order. It has been submitted that it has clearly been held that the prior agreement provided for reimbursement of specific AMP expenses and genuineness or bona fide of the agreement cannot be questioned. Also, there are evidences on record to prove that the expenses directly correspond to actual expenses incurred. The Ld. Counsel contends that the issue stands squarely covered in favour of the Appellant in its own case for three prior years by this Hon ble ITAT. 104. Ld. DR argued that the Marketing Development Fund entered into by the appellant with its AE was for promotion of brand of the AE in India. Thus, action of the Ld. TPO of making an additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (c) ________________________________ CIT v. Thyssen Krupp Industries India (P.) Ltd. ITA No. 2201 OF 2013, [2016] 381 ITR 413 (Bombay) (paras 3 and 4) (d) ________________________________ Tasty Bite Eatables Ltd. v. ACIT ITA NO. 1682/PN/2011 (para 37) 107. Ld. CIT (DR) relied on the order of Ld. TPO and DRP and contended that proportionate adjustment should not be given to the Appellant. Ld. TPO has allowed proportionate adjustment in AY 2014-15 AY 2015-16. 108. It is now well settled that the transfer pricing exercise is strictly limited to the transactions with AEs and transactions with unrelated parties do not come within its ambit. It has also been brought to our notice that in A.Y. 2013-14 the DRP itself has issued directions to the TPO to confine the adjustments to the proportionate value of the international transactions with AEs. Accordingly, the TPO is directed to restrict the amount of adjustment, if any, made under Chapter X of the Act limited and proportionate to the value of the international transactions with AEs. GROUND NO. 7: As this Ground has not been pressed by the assessee, it is dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... integra as there are numerous decisions of the High Courts and Tribunal where it has been held that depreciation on UPS is to be allowed at 60% and not 15%. The Ld. Counsel contends that UPS were purchased for the purpose of running the computer uninterruptedly during power cuts and to prevent the loss of data in the computer due to sudden, frequent power cuts. He stated that UPS also controls voltage fluctuation and prevents the damage of computer system and its parts such as hard disk, memory etc. These UPS were connected to LAN, PCs, servers, routers, V Sats, etc. and these would not have functioned properly without support from the UPS. Thus, UPS form a vital component of the computer system and therefore, the applicable rate of depreciation on such UPS systems should be considered as 60 percent (same as that of computers) under the category of Computers . The Ld. Counsel pointed out that 60% depreciation on UPS was allowed by the CIT (A) in assessee s own case for AY 2005-06. Ld. CIT (DR) relies on the order of the AO and the DRP. 112. We are in agreement with the Ld. Counsel of the Appellant that this issue is no longer res integra as this Tribunal has already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by the appellant pertains to the international transactions grouped under Class-II (Trading of Consumer Electronics and Home Appliances) segment and Class- III (Manufacturing of Colour monitors) segment. 115. In respect of Class -II (Trading of Consumer Electronics and Home Appliances) segment, the following transactions have been grouped together by the appellant in its transfer pricing study prepared under rule 10B of the Income Tax Rules 1962 (Rules); i) Import of finished goods; ii) Import of stores and service spares; iii) Export of service spares; iv) Service income from hand held phones. The appellant is engaged in the trading of consumer electronic goods and home appliances. Resale Price Method was chosen as the most appropriate method in its transfer pricing study. The profit level indicator taken was gross profit/ sales. For the benchmarking exercise, an economic analysis was carried out in the TP study leading to identification of 10 uncontrolled comparable companies. Since appellant had earned gross profit margin of 24.15% which was higher than the gross profit of 23.08% earned by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of creation of marketing intangibles, to its AE. The TPO was of the view that any AMP expenditure incurred by the Appellant over and above the average AMP spend of the comparable companies was extraordinary in nature and incurred for the benefit of the AE which owned the Samsung brand. The TPO worked out the average AMP spend of the comparables at 6.55% of Sales and that of the Appellant at 10.44% of Sales and treated the difference as the value of the brand promotion service which the Appellant had provided to its AE. He accordingly held that this amount should have been recovered by the Appellant from its AE. The approach followed by the TPO in respect of this adjustment is as follows: Particulars Amount (Rs.) Total Income (A) 44,89,80,86,000 Advertisement and sales promotion expenses incurred (B) 469,10,06,942 AMP / Total Income of SIEL (C) = (B)/(A) 10.44% Bright Line (AMP/total income of comparables) (D) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed in line with our findings and observations given in respect of Grounds 3.1 to 3.6 of ITA no. 3248/Del/2012. GROUND NOs. 1.4, 1.8 and 3: These Grounds are dismissed as not being pressed. GROUND NO. 3.1: That, on facts and in law, the Ld. TPO/ AO has erred in rejecting Voltas Limited as a comparable company for benchmarking the international transactions under Class II segment (trading of consumer electronics and home appliances segment)- 120. The inclusion of this comparable came up for our consideration in the appeal no. ITA No. 5856/Del/2010 under Ground no. 4.2 (and has been discussed at length above). As the facts and circumstances of this year remain the same (and the arguments of the two parties remain the same), we hold that the direction given by us in the prior year would apply for this year as well. The examination of this comparable company is, therefore, remanded to the file of the TPO with a direction to determine whether the twin conditions of persistent loss for three years and erosion of net worth are met. If a clear three years trend of persistent loss coupled with negative net worth is found, it can be excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it continues to have operations. He contends that de-facto rejection of a negative margin company is not correct. He further contended that if a company is functionally comparable, then it cannot be rejected merely on the basis of suffering losses. In this regard, he has placed reliance on the following judicial decisions: (a) DCIT vs. Exxon Mobil Company India Pvt. Ltd. (ITA No. 4389/Mum/2010) (Para 7) and Bobst India (P.) Ltd. v. DCIT (ITA No. 1380 (PN) of 2010): In both these cases, it was held that exclusion of a comparable merely on the ground that the comparable is incurring abnormal profit margin or persistent losses without considering the applicable law under Rule 10B of the Income Tax Rule, 1962 (Rules) is untenable under law; (b) DCIT vs. Quark Systems (P.) Ltd [2010] 38 SOT 307 (CHD.) (SB): In this case, it was held that if the company is functionally comparable and the turnover does not show declining trend then, merely on the basis that the comparable company is incurring losses, the comparable cannot be excluded; (c) Erhardt+Leimer (India) Private Limited vs. ACIT (ITA Nos. 3298/Ahd/2011 2880/Ahd/2012): Relying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent losses on a long-term basis. Further, the trend of sales on year-on-year basis shows that the company clearly has an upward trend. Therefore, it cannot be branded as a persistent loss maker. 126. The Ld. CIT (DR) vehemently argued that since VXL Instruments was persistently making losses, it was rightly rejected as a comparable by the Ld. TPO and the said rejection was rightly upheld by the DRP. He pointed out that this company has experienced losses in the current year, prior year and the subsequent year and on account of this trend it is evident that this company is a persistently loss-making company. He further submitted that this Hon ble Tribunal has held in various judgments that a persistently loss-making company cannot be taken as a comparable. 127. While examining the suitability of another comparable, viz., Voltas Industries Ltd. in this appeal as well in the prior year s appeal, we have examined the issue of persistent loss making entities that are sought to be used as functionally comparable companies under TNMM. We have already held that a persistent loss trend has to be carefully gleaned from the facts of the case to check whether this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factor for the purpose of comparison under TNMM. In our view the law clearly stipulates the time period for which the data can be used for determination of ALP. It is only in certain situations where the company maintains and publishes quarterly results, the results for April-March period can be accurately extrapolated. In other situations where quarterly results are not available, any effort to derive at April-March results by extrapolating the figures on a proportionate basis would be fraught with the risk of inducing inaccuracy in the comparability process. The Hon ble High Court s decision in Mckinsey Knowledge Centre (supra) was also rendered in the context of availability of quarterly results. In the present case, the extrapolated results submitted by the Ld. Counsel have not been drawn from published quarterly results but derived on a proportionate basis from the two overlapping years financials. This approach is not tenable and is accordingly rejected. This ground in respect of PCS Technology Ltd. is, accordingly, dismissed. Spice Mobile Ltd. 131. Ld. Counsel pointed out that the TPO erred in rejecting Spice Mobile Ltd. from the list of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are not available, the same cannot be used for TNMM benchmarking. We accordingly dismiss this ground pertaining to inclusion of Spice Mobiles Ltd. GROUND NO. 5: That, on facts and in law, the Ld. TPO/AO has failed to make appropriate adjustments to account for the differences in working capital employed by the appellant vis- -vis the comparables, thereby disregarding the provisions of the Indian transfer pricing regulations and several judicial pronouncements on this subject 134. The Ld. Counsel contends that appropriate adjustment to account for differences in working capital employed by the appellant vis- -vis comparables ought to be allowed. He submitted that the TPO erred in not granting the working capital adjustment to the appellant to account for differences in working capital employed by the appellant vis- -vis comparables. He argued that the TPO himself has allowed the working capital adjustments in two preceding years, i.e., AY 2005-06 2006-07. He further submitted that working capital adjustments usually include adjustments for accounts payable, accounts receivable and inventory. These adjustments ensure that the absolute levels of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this nature is also mandated by Rule 10B(3) and Rule 10B(1)(e)(iii). In light of this discussion, we allow this ground and hold that TPO should, while determining the net profit margins of the comparables should compute and allow suitable adjustments for differences in working capital. We also note that this is justified from the angle of consistency as well because the TPO himself had made working capital adjustments to the margins of the comparables in the two prior assessment years. GROUND NO. 6: That, on facts and in law, the Ld. TPO / Ld. DRP has erred in not restricting the transfer pricing adjustment in proportion to the value of impugned international transactions with the associated enterprise vis- -vis the total cost base of the various business segments which included the cost of uncontrolled transactions with independent third parties also GROUND NO. 6.1: Without prejudice, the ld. AO / Ld. DRP has erred in holding that the value of international transactions is approximately 50% of the total cost and therefore the international transactions have significant effect on the total profitability which is not true for Class II transactions for which adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fluctuations which impacts its export proceeds and import price it has to pay in the course of business enters into forward foreign exchange contracts from time to time. These contracts which remain open and unexpired on March 31st are marked to the market as per generally accepted accounting principles. If there is loss on the open contract the same is debited to the P L account and claimed as a deduction u/s 37 of the Act. The AO in his assessment order has held that the provisions of Act do not allow deduction of any such notional loss for which the liability has not crystallized. Therefore, Marked to Market (MTM) losses on account of revaluation of forex forward contracts are only notional and are deductible as business losses under income tax provisions. For the purpose of taxation, MTM Losses should be considered as just notional losses which do not involve any actual outgo as the assessee is not liable to pay such losses. This view of the AO has been upheld by the Ld. DRP. 141. The Ld. Counsel for the appellant-assessee submits that the Ld. AO has erred in holding that loss on exchange fluctuation debited to P L account on account of revaluation of open forwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Bharat Earth Movers v CIT: [2000] 245 ITR 428(SC), the Hon ble Apex Court had held that if a liability has definitely arisen in accounting year, deduction should be allowed although liability may have to be quantified and discharged at a future date but what should be definite is incurring of liability. The Ld. Counsel for the appellant has placed before us a copy of an order passed u/s 154 of the Act where similar forex losses in A.Yr.2005-06 has been allowed by relying on the Hon ble SC judgement of Woodward Governor (supra). Further, this Tribunal has examined and adjudicated this issue in favour of the assessee in ITA No. 6508/Del/2012 in the case of Samsung Technology India Pvt. Ltd which had subsequently merged with the assessee. In view of the above discussion and respectfully following the authority laid down by the Hon ble Supreme Court, this ground is allowed. AY 2008-09 (ITA No. 52/DEL/13) 143. The facts and business model in the present Assessment Year i.e. 2008-09 are similar to the facts already stated for AY 2005-06, 2006-07 2007-08. The appellant had filed its return of income on November 30, 2008, declaring an income of ₹ 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Development Services (Provision of contract software development services) TNMM Operating Profit /Operating Cost 17.60% 23 14.65% 144. The dispute in the present appeal (ITA No. 52/DEL/2013) filed by the appellant pertains to the international transactions grouped under Class-II (Trading of Consumer Electronics, Home Appliances and Mobile Phones) and Class-III (Manufacturing of Colour Monitors) segment. The other international transactions pertain to Classes I (Manufacturing of Consumer Electronics and Home Appliances), Class IV (Trading of Colour monitors and other IT products) and Class V (Contract software development services). There is no dispute in respect of these transactions. 145. In Class-II (Trading of Consumer electronics, Home Appliances and Mobile Phones) segment, the appellant was engaged in the trading of consumer electronics, home appliances and mobile phones and in Class-III (Manufacturing of Colour Monitors) segment, the appellant was engaged in the manufacturing of colour monitors. Transactional Net Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,903/- Reimbursement that assessee should have received 5,046,222,262/- Reimbursement actually received 496,786,817/- Adjustment to assessee s income 4,549,435,445/- 147. The assessee being aggrieved by the orders of the TPO and AO filed objections before the DRP, New Delhi contesting the aforesaid transfer pricing adjustments. The DRP disposed of the objections filed by the assessee vide its directions under section 144C of the Income Tax Act, 1961 dated 27 September 2012 and directed as follows: (a) ________________________________ The DRP directed the exclusion of Spice Mobiles Ltd. as a comparable for Class II segment and arrived at a final list of 6 comparables. The arithmetic mean of the Net Profit Margin of these 6 comparables was calculated at 5.10% vis- -vis 2.22% of the appellant. Thus, the adjustment for Classs-II segment was reduced to ₹ 48,40,26,768; (b) ________________________________ The DRP also directed the TPO to exclude three companies i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income: (a) Recruitment and training expense of ₹ 2,07,83,696 was treated as capital expenditure and not allowable as a revenue expenditure u/s 37 of the Act; (b) Foreign exchange fluctuation loss of ₹ 1,74,38,690 was not allowed as a deduction; (c) Depreciation on UPS, printers and servers was restricted to 15% as against 60% claimed by the appellant leading to a disallowance of ₹ 7,24,741. 150. Aggrieved by the order of the AO, the assessee has preferred the present appeal and has prayed for adjudication of the following grounds of appeal. GROUNDS IN APPELLANT S APPEAL (ITA NO. 52/DEL/13) FOR AY 2008-09 GROUND NO. 1 2: These grounds are general in nature. 151. GROUND NO. 2.1 to 2.12: These grounds pertain to the issue of AMP expenditure being treated as an international transaction and adjustment being made on the basis of the bright line test. We have already decided this issue in favour of the appellant in ITA no. 3248/Del/2012 for the A.Y. 2005-06 by examining this issue in detail. These grounds for this year are accordingly allowed and disposed-of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent as is evident from the table below: Particulars Amount (In INR) (In Lakhs) Total revenue from Turnkey projects and trading segment 15,893 Total revenue from traded goods 15,708 Ratio of traded goods to segmental revenue 99% 154. Ld. Counsel argued that in this case, no extraordinary economic factor leading to persistent losses are evident from the annual report of the company. Such losses are normal incident in the market and the purpose of providing for a computation of average under section 92C (2) of the Act, has been provided to account for profit as well as loss making companies. 155. The Ld. CIT (DR) vehemently relied on the order of the TPO and argued that Shyam Telecom was correctly excluded. He argued that since Shyam Telecom is a persistently loss-making company and it has a different functional profile, it cannot be included in the list of comparables to determine arm s length price. The Ld. CIT (DR) pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and traded fans are not provided. In the absence of these details Bajaj Electricals Ltd cannot be taken as a comparable. 158. Ground no. 5 pertains to two companies which have been sought to be included as comparables these are PCS Technology Ltd. and VXL Instruments Ltd. The suitability of these two companies as comparables for the Manufacturing Segment has already been examined by us in the appeal for A.Y. 2007-08, where identical questions and arguments had been raised by the two sides. In the said appeal (ITA No. 5315/Del/2011) while adjudicating Ground no.4 pertaining to these comparables, we have held that PCS Technology Ltd. is not a suitable comparable in the absence of accurate financials and for VXL Instruments, we have ordered a remand to the file of the TPO to determine whether the twin conditions of persistent loss (for current and two prior years) coupled with erosion of net worth are present. These directions would be equally applicable to these comparables for this year as well as the facts and circumstances remain the same. Accordingly, Ground nos. 4 and 5 are partly allowed. GROUND NO. 6: That, on facts and in law, the Ld. AO/T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated this issue in the appeals for prior years (A.Y. 2005-06, 2006-07 and 2007-08) and allowed the same. We have held that training and recruitment expenditure is fully allowable as revenue expenditure in the year in which it is incurred. There being no enduring benefit it cannot be treated as capital expenditure or deferred revenue expenditure. Ground no. 9 is therefore allowed and Ground no. 9.1 is dismissed as being infructuous. GROUND NO. 10: That, on facts and in law, the Ld. AO has erred in not treating UPS connected to computers as computer and instead regarding it as an item of general plant and machinery for the purpose of allowing depreciation and in doing so disallowed depreciation of ₹ 7,24,741 162. We have already adjudicated this issue in the appeals for prior years (A.Yrs. 2006-07 and 2007-08) and allowed the same. We have held that it is now settled that depreciation on UPS systems is allowable at the rate of 60% under the category of computer and not at 15% under the category of plant and machinery . Following the same, this ground is allowed. GROUND NO. 11: That, on facts and in law, the Ld. AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing expenses by AEs Transactional Net Margin Method ( TNMM ) OP/OR 4.13% 6 1.91% Class II Trading (Consumer Electronics, Home Appliances and Mobile phones) Import of finished goods, Import of stores and service parts, Export of finished goods, Services income, Reimbursement of marketing expenses by AEs TNMM OP/ OR 1.38% 8 2.14% Class III Trading (Colour Monitors and other IT products) Import of finished goods, Import of stores and services spares, Reimbursement of marketing expenditure by AE TNMM OP/OR 1.42% 9 -0.41% Class IV Contract Software Development Services Provision of contract software development services TNMM OP/ OC 15% 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount as peroriginal TP Order Amount as per original rectified TP Order Advertisement and Sales Promotion A 2,341,766,583 2,341,766,583 Rebates and discounts B 5,100,380,243 5,100,380,243 Reimbursement of marketing expenditure Class I transactions C 271,038,677 271,038,677 Reimbursement of marketing expenditure Class II transactions D 97,935,129 97,935,129 Reimbursement of marketing expenditure Class III transactions E 39,419,164 39,419,164 Total Expenditure on AMP F =A +B +C +D+E 7,850,539,796 7,850,539,796 Les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 March 2013 and computed the AMP adjustment at ₹ 455,53,39,101 as against ₹ 527,12,56,496 in his original order. 170. For computation of the Bright Line, the TPO selected a list of 10 comparables which is as under: S. No Name of the company AMP/ Sales (%) 1. Home Solutions Retail (India) Ltd. 4.77% 2. Vivek Ltd. 3.59% 3. Infiniti Retail Ltd. 4.64% 4. CCS Infotech Ltd. 0.72% 5. Iris Computers Ltd. 0.44% 6. Cellucom Retail India Pvt. Ltd. 8.16% 7. General Sales Ltd. 10.18% 8. Allie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Blue Star Infotech Ltd. (Consolidated) 17.64% 4. Bodhtree Consulting Ltd. 69.80% 5. Cat Technologies Ltd. 34.43% 6. CG Vak Software Exports Ltd. 2.7% 7. Goldstone Technologies Ltd. (Seg) 10.28% 8. Infosys Technologies Ltd. 40.74% 9. Larsen Toubro Infotech Ltd. 21.56% 10. LGS Global Ltd. 17.55% 11. Mindtree Ltd. 27.36% 12. Persistent Systems Ltd. 37.77% 13. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of ₹ 455,53,39,101 and on account of software development segment of ₹ 7,30,77,701. The AO also made the following additions to total income: (a) Recruitment and training expense of ₹ 4,61,16,829/- was treated as capital expenditure and not allowable as a revenue expenditure u/s 37 of the Act; (b) Foreign exchange fluctuation loss of ₹ 2,99,52,597/- was not allowed as a deduction; (c) Depreciation on UPS, printers and servers was restricted to 15% as against 60% claimed by the appellant leading to a disallowance of ₹ 2,87,820/- (d) Denied deduction claimed under section 10A of the Act amounting to ₹ 27,74,04,907/-. Aggrieved by the order of the AO (impugned order), the assessee has preferred the present appeal and has prayed for adjudication of the following grounds of appeal. GROUNDS IN APPELLANT S APPEAL(ITA NO. 1567/DEL/14) FOR AY 2009-10 174. GROUND NO. 1 to 12: These grounds pertain to the issue of AMP expenditure being treated as an international transaction and adjustment being made on the basis of the bright line test. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ld. TPO/AO/DRP have erred in treating gain arising from foreign exchange fluctuation as non-operating in nature while computing the profit margin of the appellant. GROUND NO. 22: The Ld. TPO/AO/DRP have erred in not making appropriate adjustments to account for differences in working capital employed by the appellant vis- -vis the comparable companies. GROUND NO. 23: The Ld. TPO/AO/DRP have erred in not allowing appropriate adjustments to account for differences in risk profile of the appellant vis- -vis the comparables. 175. The Ld. Counsel submitted that in this segment, out of final set of 17 comparables, the appellant is aggrieved by 5 comparables (namely Cat Technologies Ltd., Infosys Tecnhologies Ltd, Thirdware Solutions Ltd, Tata Elxi Ltd, Tata Consultancy Services Ltd.). Further, the appellant is also aggrieved by the erroneous exclusion of 9 comparable companies (namely Ancent Software International Ltd, Helios and Matheson IT Ltd, Indium Software (India) Ltd, KPIT Cummins Info Ltd, Maars Software International Limited, Qunitegra Solutions Ltd, SIP Technologies and Exports Ltd, Softsol India Limited, Zylog System ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be included in the list of comparables. He vehemently contended that there is a catena of judgments in which Infosys has been held to be an inappropriate comparable company. He listed out the judgments as follows: CIT vs. Agnity India Technologies Pvt. Ltd. (ITA 1204/2011 dated July 10, 2013) UT Starcom Inc. (India Branch) (ITA No.5848/Del./2011) Toluna India Pvt.Ltd. (ITA 393/2016 ITA 394/2016) Sumtotal Systems India Pvt. Ltd. (I.T.T.A. NO.660 OF 2014) Adaptec India Limited (I.T.T.A. No.638 of 2014) Virtusa (India) Private Limited [ITA No. 1962/Hyd/2011] Telcordia Tech nologies India Pvt. Ltd [ITA No.7821 /Mum/2011] Agnity India Technologies Pvt. Ltd. v. DCIT TS-265- ITAT-2013(DEL)-TP Mercedes Benz Research Development India Pvt. Ltd. [IT(TP)A No. 1222/Bang/2011] Transwitch India Pvt. Ltd. [IT(TP)A No. 948/Bang/2011] Yodlee Infotech Private Limited [ITA No. 1397/Bang/2010] Meritor LVS India (P) Ltd. [ITA No. 405/Bang/2011] Patni Telecom Solutions Pvt.Ltd.[ITA No. 1846/Hyd/2011] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of RPT (only revenues derived from related parties) is ₹ 12619.79 crore and the total revenue is ₹ 22,404 crores. Accordingly, the Ld. Counsel contended that the percentage of RPT as a ratio of total sales is 56.32% and fails the RPT filter of 25% applied by the Ld. TPO himself. (c) The Ld. Counsel pointed out that the company has 42 patents registered and over 150 applications pending registration. Further, the company has huge employee base which gives it an access to variety of talent. It has significant R D activities and has significantly higher assets of ₹ 2669.08 crores (Net book value as on 31 March 2009) as against ₹ 44.90 crores of the appellant. (d) The Ld. Counsel also submitted that Tata has a significantly higher turnover of ₹ 21535.75 cras against ₹ 123.20 Cr. in the case of the Appellant i.e. 175 times more than the latter. e) The Ld. Counsel contended that this company has to be rejected as a comparables also because it has on-site revenue of 51.19% of the total revenue. He submitted that the comparables Maars Software International Ltd. and Zylog Systems Ltd. have been exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors and reasons all of which cannot be documented and quantified. It is for this reason that Rule 10B(1)(e)(iii) contains the words could materially affect the amount of net profit margin in the open market . Therefore, the statute does not mandate that an economic factor is relevant only if it is positively correlated with net profit margin but as long as there is a likelihood of impact, the conditions are fulfilled. 177. We have heard the two sides and perused the orders and material on record. We are examining the suitability of both these companies (Infosys Technology and Tata Consultancy Services) together as these two are similar in many respects. As per their profile, function and volume of scale, they are reckoned as the leaders of the Indian IT sector and are often considered to be the most prestigious brands in this space. The process of selection of appropriate comparables under TNMM is to be guided by Rule 10B (2) which lays down the factors of comparability. These factors are functions, assets and risks, nature of the services, contractual terms, level of the market and other relevant economic parameters which have a material effect on profitability. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies which were only recently set up; Consideration of diagnostic ratios such as turnover per employee, ratio of net value of intangibles/total net assets value or ratio of research and development/sales etc.; and A focus on sales volume, fixed assets or numbers of employees. A perusal of the above principles along with the factors stipulated in Rule 10B(2) makes it amply clear that functions, assets and risks manifested in terms of scale, size, head-count, presence of valuable intangibles are very relevant considerations to be taken into account. 178. The exclusion/inclusion of Infosys Technology Ltd. as a comparable for captive software entities is an issue that has arisen in large number of cases (some of which have been cited above by the Ld. Counsel also). Infosys Technology Ltd. is one of India s leading IT companies have presence worldwide. Its turnover is in excess of ₹ 20,000 crore (as against ₹ 125 crore of the appellant) and its functions are highly diversified. One of the important attributes that sets Infosys apart from small captive IT companies is the presence of highly valuable IPRs by way of br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is operating at a much smaller level and sans any ownership of IPRs. Furthermore, the details given on Page 144 of the Annual Report demonstrate that more than 50% of its revenues are derived from related parties. It, accordingly, fails the RPT filter of 25% applied by the TPO. The reasons for excluding Infosys Technology are equally applicable to Tata Consultancy Services as well. We, therefore, hold that Tata Consultancy Services Ltd. is a wholly inappropriate comparable for the software development segment of the appellant. Working Capital Adjustment 180. The Ld. TPO rejected the request for working capital (WC) adjustment to the margin of the comparables by stating that out of the 3 components of WC adjustment, only one component is affected by the subject transaction i.e. receivables. On this basis, he stated that it is not justified to allow WC on 3 components. The Ld. DRP upholding the action of the Ld. TPO directed that the working capital adjustment is difficult to make due to lack of accurate and reliable data. It held that the Appellant has failed to demonstrate that difference in working capital deployed is making difference in the margi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Mum/2012 183. The Ld. CIT (DR) relied on the orders of the lower authorities and reiterated that the appellant had failed to show the differences between the working capital levels. 184. We have perused the orders of the lower authorities and the material on record. We find that the WC adjustment figures were furnished by the appellant which were disregarded by the TPO. On the issue of allowability of this adjustment we find that this issued has been settled by this Tribunal in numerous decisions (some of which have been cited by the Appellant) in favour of the assessees. The desirability of making the WC adjustment has also been endorsed by the OECD and UN Guidelines. The relevant extracts are as below: OECD Guidelines 2017 2.87 In those cases where there is a correlation between the credit terms and the sales prices, it could be appropriate to reflect interest income in respect of short-term working capital within the calculation of the net profit indicator and/or to proceed with a working capital adjustment. UN TP Manual 2017 5.3.2.14. x..x..Adjustment might be required to ensure con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as capital expenditure or deferred revenue expenditure. Ground no. 24 is therefore allowed and Ground no. 25 is dismissed as being infructuous. GROUND NO. 26: The Learned AO/DRP has erred in reducing the claim of depreciation on UPS without mentioning anything in the final assessment order and without assigning any reasons which is against the principle of natural justice GROUND NO. 27: Without prejudice to the above ground, the Learned AO/DRP has erred in not treating UPS connected to computers as 'computer' and instead regarding it as an item of general 'plant and machinery' for the purpose of allowing depreciation. 188. We have already adjudicated this issue in the appeals for prior years (A.Yrs. 2006-07, 2007-08 and 2008-09) and allowed the same. We have held that it is now settled that depreciation on UPS systems is allowable at the rate of 60% under the category of computer and not at 15% under the category of plant and machinery . Following the same, this ground is allowed. GROUND NO. 29: The Learned AO/DRP has erred in holding that loss on exchange fluctuation amounting to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Tribunal in ITA No. 6508/Del/2012 dated 23/05/2017 has been placed before us. Our attention has been drawn towards Paragraphs 19-30 of this order where the Tribunal has examined this issue in detail and has concluded that relocation of an unit from one place to another in order to meet shortage of space and to effect expansion of business does not amount to splitting or reconstruction of an existing business and would not disentitle the assessee from claiming the benefit of Section 10A of the Act. This order of the Tribunal was subsequently confirmed by the Hon ble Delhi High Court on this issue. Respectfully following the decision of the Tribunal and the Hon ble Delhi High Court we allow this ground of appeal. AY 2010-11 (ITA No. 6741/DEL/14) 191. The facts and business model in the present Assessment Year i.e. 2010-11 are similar to the facts already stated for AY 2005-06 to 2009-10. The appellant had filed its return of income on September 30, 2010, declaring an income of ₹ 7,52,20,73,240/-. A summary of international transactions entered into by the appellant and the appellant s approach in determining their ALP is given in the table b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions. 193. In Class-III (Contract software development) segment, the appellant was engaged in the provision of contract software development services. Transactional Net Margin Method was chosen as the most appropriate method in its transfer pricing study. The profit level indicator taken was operating profit/operating cost. For the benchmarking exercise, an economic analysis was carried out in the TP study leading to identification 4 uncontrolled comparable companies. Since the appellant had earned profit margin of 14.84% which was within +/-5% of the profit margin earned by the comparables, it was concluded that the international transactions were at arm s length. 194. The dispute in the present appeal filed by the appellant pertains to the adjustments made by the TPO vide order dated 30 January 2014 on account of: (a) alleged international transaction of Advertising, Marketing and Promotion (AMP) expenses and (b) software development segment. 195. Adjustments made on account of AMP expenses: The Ld. TPO proposed an adjustment of ₹ 7,401,552,834 (₹ 1,021,561,275 under the IT business and ₹ 6,379,991,559 under the Non-IT b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.11% 14 Thirdware Solutions Ltd. 36.54% 15 Cat Technologies Limited 2.13% 16 Maveric Systems Limited 13.19% 17 Persistent Systems and Solutions Ltd. 10.33% Arithmetic Mean (Page 61 of TP Order) 21.68% NPM of Samsung India (Page 5 of TP Order) 14.84% Adjustment (Rs.) 109,395,995 197. The Ld. DRP vide order dated 21 October 2014 upheld the action of TPO with respect to the adjustment made on account of AMP expenses. However, for the adjustment made on account of software development segment, the Ld. DRP directed the Ld. TPO to rectify arithmetical errors in margin computation of comparable companies. As a consequence, the Ld. TPO rectified the margin computation of one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable companies identified by the appellant using turnover less than INR 5 crores' as a comparability criterion. GROUND NO. 15: The Learned TPO/AO/DRP have erred in rejecting certain comparable companies identified by the appellant using 'export earnings less than 75 percent of operating revenues' as a comparability criterion. GROUND NO. 16: The Learned TPO/AO/DRP have erred, in rejecting certain comparable companies identified by the appellant on account of showing diminishing revenues trend GROUND NO. 17: The Learned TPO/AO/DRP have erred in rejecting certain comparable companies identified by the appellant using 'employee cost greater than 25 percent of total cost' as a comparability criterion GROUND NO. 18: The Learned TPO/AO/DRP have erred in wrongly rejecting certain companies from and adding certain companies to the final set of comparables for the said transaction on an ad-hoc basis, thereby resorting to cherry picking of comparable for benchmarking GROUND NO. 19: The Learned TPO/AO/DRP have erred in selecting certain companies (which are earning super ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and absence of segmental information. (c) The Ld. Counsel placed reliance on the judgment delivered by the coordinate Bench in the case of Steria India Ltd. (ITA No.107/Del/2016) wherein it has been held that the company is not functionally comparable as it is engaged in both software development and IT enabled services for which no bifurcation is available (as segmental information is not available). This judgment has also been upheld by the Hon ble Delhi High Court (ITA 762/2017). (d) The Ld. Counsel also placed reliance on the coordinate Bench ruling in the case of Headstrong Services (India) Pvt. Ltd. (ITA No. 714/Del/2015). (e) The Ld. Counsel further placed reliance on the following judgments wherein E-Infochips has been held to be functionally dissimilar and non-comparable to a software development company: Pegasystems worldwide India Pvt Ltd. (ITA No. 1758/Hyd/2014) Intoto Software India Pvt. Ltd. (1921/Hyd/2014 25/Hyd/2015) Allscripts India Pvt. Ltd. (ITA No. 771/Ahd/2014) Freescale Semiconductor India Pvt Ltd (ITA No1263 /Del/2015) Headstrong Services (Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to Software Development are part of overall Software Development, but the inclusion of ITES in the overall segment frustrates the comparability. We are currently dealing with the international transaction of `Provision of Software Development services and the international transaction of ITES is separate which has also been benchmarked distinctly. In our considered opinion, e- Infochips Bangalore Ltd. having a pool of both software developments and ITES segments into the overall segment designated as `Software development , cannot be considered as comparable on entity level with the international transaction of `Software development of the assesse. We, therefore, order for the exclusion of this company from the list of comparables. 206. We also do not find merit in the contention raised by the Revenue that since the communication expenses shown in the P L account is at a low level, the Company should be presumed to be not be engaged in ITeS. Such a conclusion is not based on evidence but is a mere speculation. In the face of a clear disclosure in the Annual Report, a speculative approach is to be discarded. We, accordingly, hold that E-Infochips Banga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services. As per the Annual Report, the Company provides end-to-end business solutions that leverage cutting-edge technology, thereby enabling clients to enhance business performance. The Company provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. In addition, the Company offers software products for the banking industry. 208. The Ld. CIT(DR) relied on the orders of the Ld. TPO and DRP and contended that scale, size, brand may impact profits but not profit margins. He reiterated that there is no positive correlation between turnover and profit margin. 209. We have heard both the parties, perused the orders of the TPO and the DRP and analysed the Annual Report of Infosys Technologies Ltd. The facts pertaining to the assessee s software segment and the business results of Infosys remain the same as in prior year. In appeal of the prior A.Y. 2009-10 (ITA No.1567/Del/2014) we have analyzed the suitability of this company as a comparable to the appellant s softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year-on-year increase (%) - 1496.85% 114.495% Debtors NIL 50,097,205 131,326,992 225,170,269 Year-on-year increase (%) - 162.14% 71.46% The Ld. Counsel submitted that the fact that this company has witnessed widely fluctuating growth rates (as depicted above) is indicative of the fact that the company was facing exceptional or peculiar circumstances and risks and cannot be said to be representative of the Indian software industry. In this regard, the Ld. Counsel placed reliance on the jurisdictional ITAT ruling in the case of M/s. Stryker Global Technology Center Private Limited vs. DCIT, (ITA No.6866/Del./2014) wherein the ITAT has examined the functional profile of Infinite Data Systems for AY 2011-12 and excluded it as a comparable. He also placed reliance on the jurisdictional ITAT ruling in the case of M/s Freescale Semico ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices in the nature of technical consulting, design and development of software, maintenance, system irrigation, implementation, testing and infrastructure management services. So, in view of the matter, we are of the considered view that Infinite is not a suitable comparable vis- -vis assessee company, hence ordered to be excluded. In light of the aforesaid we order the exclusion of this company from the list of comparables. 213. The other grounds of the software segment are not being adjudicated as being academic in nature in view of the submission made by the Ld. Counsel regarding the international transaction of software segment being at arm s length on the basis of deletion of the three aforesaid comparables, viz., Infosys Technologies, EInfochips Bangalore and Infinite Data Systems. GROUND NO. 25: The Learned AO/DRP has erred in holding that expenditure on recruitment and training of employees leads to enduring benefit to the appellant and in holding to allow only 1/6th of the total expenditure in the current year and deferring the balance to be allowed in next five years GROUND NO. 26: Without prejudice to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertaking from one location to another tantamount to non-fulfilment of conditions laid down in section 10A(2)(ii)/(iii) of the Act 216. This issue has already been decided by us in ITA No. 1567/DEL/14 for A. Yr. 2009-10 under Ground no. 32 wherein we have allowed the ground. Following the same, this Ground is allowed. AY 2011-12 (ITA No. 868/DEL/2016 and ITA No. 2511/DEL/2018 arising out of order passed u/s 154) 217. The facts and business model in the present Assessment Year i.e., 2011-12 are similar to the facts already stated for AY 2005-06 to 2010-11. The appellant had filed its return of income on November 29, 2011, declaring an income of ₹ 1,73,33,95,170/-. A summary of international transactions entered into by the appellant and the appellant s approach in determining their ALP is given in the table below: Particulars Most Appropriate Method as per TP study Profit Level Indicat or(PLI) as per TP study Margin earned by the Appellant as per TP study No. of comparables consider ed as per TP study ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant had earned profit margin of 15.01% which was higher than the profit margin earned by the comparables, it was concluded that the international transactions were at arm s length. 219. The dispute in the present appeal filed by the appellant pertains to the adjustments made by the TPO vide order dated 29 January 2015 on account of (a) alleged international transaction of Advertising, Marketing and Promotion (AMP) expenses and (b) software development segment. 220. Adjustments made on account of AMP expenses: The Ld. TPO was of the view that the Appellant has provided certain services in respect of creation of marketing intangibles to its AE. Therefore, he proposed an adjustment of ₹ 11,884,138,456 (₹ 1,222,238,922 under the IT business and ₹ 10,661,899,534 under the Non-IT business) with respect to AMP expenses incurred by the appellant. The Ld. TPO applied the bright line test ( BLT ) to compare the AMP/sales ratio of the appellant with that of the comparable companies and application of a mark-up equivalent to SBI s PLR. 221. ALP determination for Provision of contract software development services (Class III) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15 Mindtree Ltd.(Seg) 11.22% 16 Sankhya Infotech Limited(Seg) 24.13% 17 Tata ElxsiLtd(Seg) 13.34% 18 Thirdware Sol (Seg) 19.54% 19 Zylog Systems Limited 27.56% Arithmetic Mean (Page 84 of TP Order) 24.62% NCP of Samsung India (Page 5 of TP Order) 15.01% Adjustment (Rs.) 216,107,588 220. The Ld. DRP vide order dated 23 December 2015 upheld adjustments made by the Ld. TPO and stated that incurring AMP expenses constitutes an international transaction. The Ld. DRP directed for exclusion of routine selling and distribution expenses while computing the AMP adjustment of comparables. The Ld. DRP also directed for imputing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. TPO dated 28 April 2016, 19 May 2016 and 22 March 2018. A rectification order dated 27 March 2018 was passed by the Ld. TPO ignoring the Appellant s contentions and enhanced the total adjustment amount as below: 224. Adjustments made on account of AMP expenses: The Ld. TPO enhanced the AMP adjustment from ₹ 394,368,561 (i.e. ₹ 313,105,771 under the non-IT segment and ₹ 81,262,790 under the IT segment) to ₹ 1,936,311,967 (i.e. ₹ 1,936,311,967 under the non-IT segment and nil under the IT segment) on account of: Revision in the AMP/ Gross Profit ( GP ) ratio of comparable companies to 13.14% from 22.47% [on account of revision in the AMP/ GP margins of two comparables namely Dynalog (India) Ltd. and Wep Peripherals Ltd. from (427.78%) and 21.36% to 3.65% and 7.48% respectively.] Revision in the AMP/ GP ratio of SIEL to 22.82% from 27.55%. 225. ALP determination for Provision of contract software development services (Class III): The Ld. TPO re-computed the operating margin of SIEL by treating foreign exchange gain as operating income instead of adjusting the same against operating exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant using 'export earnings less than 75 percent of operating revenues' as a comparability criterion GROUND NO. 15: The Learned TPO/AO/DRP have erred, in law and on facts and circumstances of the case, by rejecting certain comparable companies identified by the appellant on account of showing diminishing revenues trend GROUND NO. 16: The Learned TPO/AO/DRP have erred in rejecting certain comparable companies identified by the appellant using 'related party filter less than 25 percent of total cost' as a comparability criterion even though they satisfy the same on a consolidated basis GROUND NO. 17: The Learned TPO/AO/DRP have erred, in rejecting certain comparable companies identified by the appellant for having different accounting year (i.e. having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) GROUND NO. 18: The Learned TPO/AO/DRP have erred in selecting certain companies (which are functionally dissimilar or which are earning super normal profits) as comparable to the appellant to benchmark the said transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reference Income from export of software services (A) 163,443,751 Page no. 68 of annual report for AY 2011-12 Income from operations (B) 260,384,251 Page no. 33 of annual report for AY 2011-12 Revenue from comparable segment (A/B) 62.77% (c) The Ld. Counsel argued that E-Infochips incurred significant R D expenses of 4.15% of the total cost during the year whereas the Appellant has not incurred any amount towards R D in this segment. He further contended that the company is functionally dissimilar to the Appellant on account of undertaking diversified business operations since it has derived income from hardware and such income accounts for 15% of the total revenue. It is evident from the table below: Particulars Amounts (In INR) Reference Income from computer hardware(A) 39,248,562 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort have been examined by us and we agree that these filters are not met. We also note that this company derives a material part of its revenues from computer hardware which is commingled with the revenues from software and the Annual Report does not provide bifurcation of profitability between hardware and software development. In such a situation this company is not suitable to be taken up for a TNMM comparison. 232. We also draw strength from various decisions of the Tribunal in this respect where this comparable was held to be incomparable to a software service company for the reasons discussed above. These aspects have been discussed in detail in the decision of a coordinate bench of this Tribunal in Saxo India Pvt. Ltd. (supra) and Intoto India Pvt. Ltd. (supra). In view of the above factual aspects and the numerous decisions of this Tribunal, we hold that E-Infochips is not a suitable comparable and is directed to be excluded from the list of comparables. Wipro Technologies Limited ( Wipro Technology ) 233. The Ld. Counsel pointed out that, as per the Annual Report (Page No. 38) of Wipro Technology for AY 2011-12, Wipro Technology is engaged in pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables. The Ld. Counsel also relied on the following decisions of the coordinate Bench of this Tribunal wherein exclusion of this comparable has been upheld in the case of a software development company: Intoto Software India Private Ltd. [2013] 35 taxmann.com 421 (Hyderabad - Trib.) M/s. FCG Software Services (India) Pvt. Ltd. Vs. ITO, I.T(T.P) A.No. l242/Bang/2012 Vodafone India Services Vs. DCIT, ITA No.7140 /Mum/2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this company from the list of comparables. The view taken by the coordinate bench in Saxo India (supra) was subsequently approved by the Hon ble High Court and followed in numerous other cases (listed above). In light of the peculiar facts which permeate during the year under consideration and respectfully following these precedents we hold that Wipro Technology Services Ltd. cannot be taken as a comparable as it is not an uncontrolled entity and accordingly fails the essential requirement of transfer pricing analysis. 236. Caliber Point Business Solutions Limited ( Caliber ) and R System International Ltd. (R System): The Ld. TPO excluded Caliber and R System as comparables for the reason that these two companies adopt financial year ending in December and not in March. The Ld. DRP upheld order of the Ld. TPO. 237. The Ld. Counsel submits that different financial year ending is not a criterion to reject a comparable company. He pointed out that no adverse inference was made by the TPO in AY 2012-13 wherein Caliber was accepted as a comparable by the Appellant in its TP Study even though in that year too, the financial year of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of McKinsey Knowledge Centre (supra) which was affirmed by the High Court wherein extrapolation of figures from quarterly statements was permitted. In the present situation, it has been submitted that the quarterly results of R System is available in public domain as it is a listed company and is required to file quarterly statements with the stock exchanges and regulators. However, the same has not been verified by the TPO. As regards Caliber it is not clear whether the quarterly statement of this company is available in the public domain. The extrapolated figures given by the appellant appear to be a weighted average mean. In our view this is not permissible. We accordingly remand the determination of these facts to the file of the TPO who is directed to examine whether quarterly results of R System and Caliber is available in public domain so that their annual profit margin can be determined in an accurate way. If such information is available, the comparable can be included. If such information is not available, the comparable cannot be included merely on the basis of extrapolated figures derived from weighted average basis. This ground is disposed off in terms of our ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit and loss account in the current year with the amount of expenses of the previous years which have been so reversed, without appreciating that the reversal of provisions was made in the profit and loss account, by crediting the amount in respective heads of expenses and thereby increasing the income GROUND NO. 29: The Ld. AO/DRP has erred in not appreciating that the said amount of ₹ 889,984,961 has already been disallowed in the preceding year, i.e., AY 2010-11 when it was debited to the P L account, accordingly, the same has to be reduced in computing the total income when it is credited to the P L account at the time of reversal in the current year, otherwise it would lead to double disallowance/taxation of the same amount GROUND NO. 30: The Ld. AO has erred on facts in observing that the reversal of expenses of ₹ 889,984,961 establishes the said expenses as prior period expenses which cannot be claimed in the current year, as he failed to understand that during the year under consideration the appellant had only reversed the said amount of ₹ 80,99,04,961 by crediting the P L account 242. Ground nos. 25 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced before us. The Ld. Counsel placed reliance on Johnson Matthey India Pvt. Ltd. [I.T.A. No. 4397/Del/2011] where in similar circumstances the Tribunal had deleted the disallowance made by the AO. It has been submitted by the Ld. Counsel of the appellant that as the said amount has already been disallowed in the preceding year i.e. AY 2010-11 when it was debited in the P L account, the same is to be reduced in the computing the total income when it is credited to the P L account at the time reversal in the current year i.e. AY 2011-12. 244. Ld. CIT(DR) relied on the orders of the AO and the DRP and contended that since no TDS had been deducted and deposited in this year, the disallowance made by the AO was justified because the same is mandated by Section 40(a)(i)/(ia).It has also been submitted that the reversal of provision made by the assessee in its books is in conformity with the generally accepted accounting principles consistently followed by the assessee to represent a true and fair view of the state of affairs of the financial statements and the same has been certified by the statutory auditors of the company as well. 245. We have heard both s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be reduced in computing the total income else it would lead to double taxation of the same. The decision of the coordinate Bench in the case of Johnson Matthey India Pvt. Ltd. [I.T.A. No. 4397/Del/2011] cited by the appellant is applicable to the present facts. In this case, the issue before the Tribunal was whether the reversal of provision (created in preceding years), which was disallowed in those years, should be taxed in the year of reversal. The Tribunal while holding in favour of the assessee held as below: 14. Each year the assessee has been making a provision for inventory in the books of account maintained by the company. While filing its return of income, this provision for inventory made in the books of account, is added back to the income under the head Profits and Gains of business or Profession, for the reason that it is not allowable under the IT Act. In other words the provision for slow moving/obsolete inventory, which is created each year in the profits loss account and balance sheet prepared in accordance with the Companies Act, 1956, has been specifically added back while computing taxable income under the IT Act, while filing the retu ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
