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TMI Blog2019 (12) TMI 1483X X X X Extracts X X X X X X X X Extracts X X X X ..... 03,450 at Rs. 52,89,44,734. Transfer Pricing Grounds 3. That on the facts and in the circumstances of the case and in law, the Learned AO erred in upholding the adjustment made by the Learned Transfer Pricing Officer (''TPO'') of INR 364,127,428 to the income of the Appellant. 4. That on the facts and in the circumstances of the case and in law, the Learned TPO erred by taking suo moto cognizance of an alleged international transaction on account of Advertisement, Marketing and Promotion ('AMP') expenses of Appellant. 5. That on the facts and in the circumstances of the case and in law, the Learned TPO/AO/Dispute Resolution Panel erred in adopting an incorrect and unjustified interpretation of section 92C of the Act by assuming the AMP expense would satisfy the jurisdictional pre-requisite of being an "international transaction". 6. That on the facts and in the circumstances of the case and in law, the Learned AO/Dispute Resolution Panel ("DRP")/TPO erred in holding that AMP expenses paid to unrelated third parties in India by Appellant for itself is an "international transaction" within the meaning of section 92B of the Act in absence of any agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concluding AMP expenditure to be excessive. 14. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by identifying incorrect set of comparables. 15. That on the facts and in the circumstances of the case and in law, the learned AO / DRP / TPO erred by excluding few companies from the set of comparables while benchmarking the percentage of AMP expenditure incurred by the Appellant against the percentage of AMP expenditure incurred by comparable companies in an ad-hoc manner. Further, learned AO erred by stating that no arguments were providing against Rathi Graphics Limited and excluding the same from the set of com parables while benchmarking the percentage of A&P expenditure. 16. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by making a mechanical comparison between the AMP expenditure of the Appellant and other comparable companies and concluding it to be excessive. 17. That on the facts and in the circumstances of the case and in law, the Learned AO erred by not following the directions received from Learned DRP. 18. That on the facts and in the circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t's own case deleting a similar disallowance in earlier year. Disallowance of depreciation on computer peripherals 28. That on the facts and circumstances of the case, the Learned AO has erred in law and facts in disallowing depreciation amounting to Rs. 8,89,960 on the assets written off. 29. That on the facts and circumstances of the case, Learned AO/DRP erred in law and facts by disallowing a sum of Rs. 8,26,071, by not allowing the depreciation at 60% on printers, routers, UPS SMF battery etc. as they fall under the definition of computer and computer system, and instead allowing 15% depreciation by treating them as 'Plant and Machinery'. Disallowance of Bad debts and advances written off 30. That on the facts and circumstances of the case, Learned AO/DRP erred in law and facts by disallowing a sum of Rs. 56,03,670 of bad debts and advances written off. Levy and withdrawal of interest u/s 234 Band 244 A respectively 31. That the Learned AO erred on facts and in law, in withdrawing interest under section 244A and levying interest under sections 234B and 234 D of the Act. Penalty proceedings wrongly initiated 32. That the Learned AO erred on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayer that no direct benefit accrues to any other Xerox enterprise or the holding company Xerox USA from the marketing activities carried out by the taxpayer, the TPO proceeded to hold that by incurring these expenses, taxpayer enhanced the value of intangibles that is owned by the parent company and determined the Arm's Length Price (ALP) qua AMP expenses resulting into creation of marketing intangibles in favour of AEs at Rs. 36,41,27,428/- 7. The taxpayer carried the matter before the ld. DRP by way of filing objections, who has confirmed the proposed adjustment incurred on account of AMP expenses by the taxpayer. Ld. DRP also confirmed the mark-up of 12.5% of AMP expenses charged by the TPO for the entrepreneurial effort including use of its infrastructure etc. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1 & 2 9. Grounds No.1 & 2 need no findings being general in nature and having n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales ORS 5,46,34,581 Normal commission paid to the dealers depending upon approved commission percentage 53300121 Dealer Commission on Paper Sales 1,14,40,125 Normal commission paid to the dealers depending upon approved commission percentage Total 660,74,706 12. Ld. TPO chosen 10 comparables with average of 1.18% to benchmark the AMP expenditure of the taxpayer which are as under :- Sl.No. Name AMP/Sales (%) 1 Dhoot Industrial Finance Ltd. 0.06% 2 Intex Technologies Ltd. 5.53% 3 HCL Infosystems Ltd. 0.58% 4 Iris Computers Ltd. 0.48% 5 Kilburn Office Automation Ltd. 1.04% 6 Priya Ltd. 0.06% 7 Savex Computers Ltd. 0.31% 8 SPS International Ltd. 0.38% 9 Spice Mobiles Ltd. 13.71% 10 Tyche Peripherals Ltd. 2.19% 11 Universal Print Systems Ltd. 1.20% Average 1.18% 13. In order to determine the mark-up, the TPO chosen 17 comparables with average of 22.24% which are as under :- Sl.No. Name PBIT/Cost (%) 1 Tamil Nadu Ex-Servicemen's Corpn. Ltd. 9.29% 2 Apitco Ltd. 49.35% 3 Best Mulyankayan Consultants Ltd 12.84% 4 Choksi Laboratories Ltd 29.18% 5 Genins India T P A Ltd. 9.11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transaction as under :- "The issue of AMP expenditure falls squarely within the definition of 'transaction' as per sec. 92F(v). Hence, there is no infirmity with the action of this office." 18. The ld. AR for the taxpayer further contended that continuous growing sales pattern of the taxpayer substantiates the fact that the benefit of AMP activities accrues to the taxpayer only and not to any other entity. However, the ld. TPO dismissed this argument of taxpayer by observing that growth in sales is actually incidental benefit and it is only the enhancement of brand value i.e. actual objective of this exercise. 19. Ld. TPO also observed that AMP expenditure of the taxpayer are more than the normal range of expenditure incurred by the routine distributor and such high level of AMP expenses is not incurred only for increasing its sales but to promote the brand which is evident from the fact that AMP/ sales ratio of taxpayer is 6.93% vis-à-vis 1.18% the AMP/sales ratio of routine distributors. We are of the considered view that all these findings are general in nature and are not factual objective findings based upon any evidence. Merely because of the fact that AMP e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis for determining the existence of or the ALP of an international transaction involving AMP expenses, the order of the TPO was unsustainable in law. The mere fact that the Assessee was permitted to use the brand name 'Valvoline' will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand 'Valvoline'. The onus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose." 24. When all these objections were raised by the taxpayer before the ld. DRP, same has been dismissed by using same ratio applied by the TPO firstly to declare the AMP expenditure as an international transaction and then to treat the AMP expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Panel is, therefore, of the view that it should have not been considered as a comparable." 25. By now, it is settled principle of law that BLT is not a valid method for determining the existence of international transaction or for determination of ALP of such transactions. 22. Hon'ble Delhi High Court in case of CIT vs. Whirlpool of India Ltd. (2016) 381 ITR 154 (Delhi) decided the identical issue by returning following findings :- "34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. 35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negative by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ........ 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as international transactions, the facts of each case would have to be examined for some deliberations. Whilst the TPO and the DRP undoubtedly held that the international transactions existed - that understanding apparently was passed upon the pre-existing regime, propounded in L.G. Electronics India Pvt. Ltd.(supra) with greater clarity on account of this Court's decision in Sony Ericsson Mobile Communications India Pvt. Ltd.(supra). The I.T.A.T. in our opinion, should have first decided whether in the circumstances of this case, the nature of the AMP reported, could lead to the conclusion that there was an international transaction. When doing so, it should have remitted the matter back for examination to the A.O. in this case. Accordingly, following the decision of Sony Ericsson Mobile Communications India Pvt. Ltd.(supra) and a subsequent decision in Daikin Airconditioning India Pvt. Limited v. Assistant Commissioner of Income Tax in ITA 269/2016, decided on 27.07.2016, this Court hereby remits the matter for a comprehensive decision by the I.T.A.T. In other words, the I.T.A.T. will decide whether the reporting of the AMP in regard to the outbound business constitutes an int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aras, we are of the considered view that firstly, there is not an iota of material with ld. TPO to prove the existence of an international transactions involving AMP expenses by the taxpayer. TPO rather proceeded on the premise that the AMP expenditure incurred by the taxpayer were far excess of AMP expenses incurred by the comparables. 32. TPO has also applied the BLT which has been discarded by the Hon'ble High Court in a number of judgments. Even otherwise, in the absence of any agreement, arrangement or understanding between the taxpayer and its AE, expressed or implied, that AMP spent of the taxpayer would also be beneficial to the AE or it would enhance the brand value of the AE in any manner, no international transaction can be inferred. 33. Moreover, on the other hand, the taxpayer has come up with specific pleading that it has analysed a principal to principal relationship with its AE and at no point, it has acted as agent of the AE. If this is so, AMP expenses which the taxpayer has incurred to boost up its sales cannot be treated to enhance the brand value and to create intangibles in favour of the AE. All these facts stand proved from the growing sale pattern of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se circumstances, he will also allow opportunity of being heard to the assessee. CORPORATE GROUNDS GROUNDS NO.26 & 27 37. AO/DRP have made adjustment of depreciation of Rs. 24,94,155/- on account of capital assets getting converted into stock-in-trade by following AY 2007-08. However, ld. AR for the taxpayer contended that this issue has been decided in favour of the taxpayer in AY 2007-08 by the Tribunal in ITA No.5389/Del/2011 order dated 12.12.2014 which has been confirmed by the Hon'ble Delhi High Court. Undisputedly, there is no change in the facts of the present case from the facts of AY 2007-08 and issue is also identical. Coordinate Bench of the Tribunal decided the identical issue in favour of the assessee by returning following findings :- "8. We have heard both the sides on the issue. The assessee is engaged in the business of trading of Xerographic Equipments, Printers, Scanners, Faxes, Multi Functional Devices and consumables parts thereof. The assessee leased out the equipments to the customers on an operating lease basis and these equipments are capitalised and depreciation is claimed for tax purposes in accordance with the provisions of the Act. These operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. BSES Yamuna Power Ltd. (supra), we are of the considered view that the taxpayer is entitled for depreciation @ 60% on computer accessories and peripherals. So, the AO is directed to calculate the same accordingly. Ground No.29 is determined in favour of the taxpayer. GROUND NO.30 42. The taxpayer has challenged the disallowance of Rs. 56,03,670/- on account of bad debts and advances written off on the ground that the entire evidence was there before the ld. DRP by way of additional evidence which was also given to AO during remand proceedings. 43. Ld. AR for the taxpayer drew our attention towards the submissions made by the taxpayer before AO during remand proceedings, available at page 623 to 627 of the paper book duly enclosed with details of advances/security deposits written off. But ld. DRP/AO have not considered the said evidence but disallowed the same on the basis of surmises. 44. In these circumstances, we are of the considered view that the issue is required to be remanded back to the ld. DRP to decide afresh after perusing the additional evidence brought on record by the taxpayer after providing opportunity of being heard to the taxpayer, consequently ground no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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