TMI Blog2022 (12) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... y comparing the expenses incurred by the Assessee with comparable companies. No reasons whatsoever to take a different view. Respectfully following the above view, we redirect the Ld.AO/TPO to delete the addition made towards AMP expenses. Comparable selection - Persistent Systems Ltd. and L T Infotech Ltd. - HELD THAT:- As in assessee s own case for preceding assessment year [ 2020 (11) TMI 1082 - ITAT BANGALORE] we direct the Ld.AO/TPO to exclude Persistent Systems Ltd and L T Infotech Ltd from the final list. - IT(TP)A No. 726/Bang/2017 - - - Dated:- 29-4-2022 - Shri. B.R. Baskaran, Accountant Member And Smt. Beena Pillai, Judicial Member For the Assessee : Shri Percy Pardiwala, Sr. Advocate For the Revenue : Dr. Manjunath Karkihalli, CIT (DR) ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 23/01/2017 passed by the Ld.ITO, Ward-1(1)(4), Bangalore for assessment year 2012-13 on following revised grounds of appeal: Based on the facts and circumstances of the case and in law, Alcon Laboratories (India) Private Limited (hereinafter referred to as Appellant ), respectfully c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned DRP, erred in law and in facts. by arbitrarily considering 25% of the distributor's commission as incurred towards warehousing facilities and treating the balance as part of AMP expenditure: 7. The learned AO I TPO and the learned DRP have erred, in law and in facts. by considering -distributor's commission'', sales promotion expenses and seminar and conventions expenses' as part of AMP expenditure while measuring the so called -intensity of AMP expenditure : 8. Without prejudice to the above grounds the learned AO / TPO and the learned DRP have erred, in law and in facts. in computing the excessive or extraordinary AMP expenditure while computing the transfer pricing adjustment using the Bright Line Test ('BLT ) which is not recognized under the Indian transfer pricing regulations: 9. Without prejudice to the above grounds. the learned AO / TPO and the learned DRP have erred, in law and in facts. in selecting the Comparable Uncontrollable Price ( CUP ) method and not applying it in the manner prescribed under the Act. read with the Income-tax Rules, 1962 (the Rules ) to benchmark the alleged international transaction of AMP expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and the learned AO / TPO based on unreasonable comparable criteria: 17. The learned AO / TPO and the learned DRP have erred, in law and in facts. by rejecting comparable companies additionally proposed by the Appellant during the assessment proceedings before the learned TPO by applying / modifying the following qualitative and quantitative filters: a) Turnover exceeding Rs.1 crore: b) Different year ending filter; c) Employee cost greater than 25%; d) Export earnings greater than 75%: 18. The learned AO / TPO and the learned DRP have erred, in law and in facts, by determining the arm's length margin/ price using only Financial Year ( FY ) 2011-12 data: 19. The learned AOTTPO and the learned DRP have erred. in law and in facts, by incorrectly computing the working capital adjustment benefit: 20. The learned AO/TPO and the learned DRP have erred in incorrectly computing the operating margin of some of the comparable companies; 21. The learned AO / TPO and the learned DRP have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparables: 22. The learned AO / T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Marketing Support Services 191,539,792 Reimbursement of expenses from AE 740,526 Total 2,976,732,357 2.5 The Ld.TPO observer that, the assessee classified its transactions under 2 segments being ophthalmic surgical and pharmaceutical distribution and provision of marketing support services. The Ld.TPO called upon assessee to provide the segmental financials with IT support service as a separate segment. The assessee filed following details: 2.6 The Ld.TPO noted that, in the marketing support services, assessee had aggregated transactions relating to IT support service, (software development services). 2.7 The Ld.TPO was of the view that the marketing support services and IT support services cannot be said to be interlinked and word to be separately analysed. He thus carried out an independent analysis of the IT support service segment. 2.8 The Ld.TPO, after considering various submissions of assessee shortlisted following 10 comparable is having a margin of 22.63%. 2.9 The Ld.TPO thus proposed shortfall being ₹ 1,11,42,238/-as an adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that, the assessee purchases ophthalmic pharmaceuticals and ophthalmic surgical products from its AE is for distribution in India. It was submitted that assessee also renders services in relation to the products during and after warranty period. The Ld.AR submitted that, on one hand the revenue accepts the distribution activities and marketing activities carried on by assessee to be at arm s length whereas on the other hand while making the AMP expenditure the Ld.TPO holds that the selling and distribution expenses incurred by assessee promotes the intangibles of AE in India and the distribution expenses incurred being towards the products amounts to advertisement. 9.2 The Ld.AR submitted that, the Ld.TPO did not consider that the sales promotion expenses and the seminars and conventions carried on ease to educate the Indian market in respect of the products distributor by the assessee within the Indian territory he submitted that by these expenditures the assessee is promoting its own business in India as a distributor. The details of the expenditure are as under: Turnover 5,24,73,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting segment. As per the TP study the description of activities carried on by the assessee that has been allegedly characterised by the Ld.TPO towards the promotion of brand are as under: Sl.No. Nature of sales and distribution expenditure Brief description 1. Distributor's commission Comprises of commission paid to the third party distributor of ophthalmic surgical and ophthalmic pharmaceutical products on the basis of sales effected by them. The amount of commission includes consideration for various services provided by consignment agents to Alcon India like warehouse charges, collection charges, charges for distribution activities in 38 locations across India. 2. Sales promotion This predominantly comprises of education grants paid to hospitals and institutions 3. Seminar and convections Comprises of cost incurred on sponsorship towards All India Ophthalmic Society Conference, All State level Conferences, performing live surgeries and all other conference held in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered a part of the operating cost Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed. 13. The ld. counsel for the assessee pointed out that none of the reasons given by the TPO in the order for assessment year 2013-14, for not following decision of the ITAT can be sustained. In this regard, the ld. counsel brought to our notice th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est which was accepted by the Special Bench of ITAT in the case of L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1 (Del)(SB) was held by the Hon'ble Delhi High Court to be not correct. In the case of Maruti Suzuki (supra), the facts were Maruti Suzuki India Ltd. (MSIL) was engaged in the manufacture of passenger cars in India. It was a subsidiary of SMC, a Japanese company. MSIL started its business in 1982 as a Government of India owned company. SMC was selected as the business partner independently by MSIL. The co-branded trade mark Maruti-Suzuki was used since the inception of MSIL. A licence agreement was entered into between MSIL and SMC in October 1982 for its models M-800, Omni and Gypsy. By the agreement, MSIL was permitted to use the cobranded trade mark Maruti- Suzuki on the vehicles. In the assessment of MSIL for assessment year 2005-06, the AO invoked the provisions of section 92CA(1) of the Act and referred the case to the Transfer Pricing Officer for determination of the arm's length price in relation to the international transactions undertaken by MSIL with its associated enterprise, SMC. The Transfer Pricing Officer passed an order makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and categorised as an international transaction under section 92B of the Act. 18. In the case of Whirlpool of India Ltd. (supra), it was held that there had to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the arm's length price. The transfer pricing adjustment was not expected to be made by deducing from the difference between the excessive advertising, marketing and sales promotion expenditure incurred by the assessee and the advertising, marketing and sales promotion expenditure of a comparable entity that an international transaction existed and then proceeding to make the adjustment of the difference in order to determine the value of such advertising, marketing and sales promotion expenditure incurred for the associated enterprise. Thus, the bright line test had been rejected as a valid method for either determining the existence of an international transaction or for the determination of the arm's length price of such transaction. Although under section 92B read with section 92F(v), an international transaction could include an arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons whatsoever to take a different view. Respectfully following the above view, we redirect the Ld.AO/TPO to delete the addition made towards AMP expenses. Accordingly these grounds raised by assessee stands allowed. 11. Ground No.11-22: The Ld.AR submitted that assessee seeks to exclude the following 2 companies which were chosen as comparable companies by the Ld.TPO and retained by the DRP viz., a) Persistent Systems Ltd., and b) L T Infotech Ltd., 12. The ld.AR submitted that in assessee s own case for assessment year 2011-12, in IT(TP)A No.221/Bang/2016 CONo.33/Bang/2017 vide order dated 20/11/2020 , excluded these comparables by relying on the decisions of coordinate bench of this Tribunal in case of Applied Materials (I) Pvt. Ltd. in IT(TP)A No.17 39/Bang/2016 for assessment year 2011-12 and LG Soft India Pvt.Ltd vs. DCIT in IT(TP)A No.52/Bang/2016 by order dated 05/08/2020 for assessment year 2011-12. The Ld.CIT.DR relied on orders passed by the authorities below. We have perused the submission advanced by both sides in light of records placed before us. 13. We note that coordinate bench of this Tribunal in case of SAP Labs India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... precise information about the contribution made by such small sale of software products to the total profits of the company. As nc segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, it was directed to exclude Persystent Systems Limited from the list of comparables. In the present case also, it is noticed that Persystent Systems Limited is engaged in software products development. There is a difference between the outsourced software product development and IT services, which is evident from page nos. 973 and 974 of the paper book, as under:- Outsourced Software Product Development (OPD) is different from IT services. Unlike a typical IT services project, where requirements are fixed while time and money are variable, a software product development project starts with fixed time and money, thus leaving requirements as the only variable. Essentially, the product development team's task is to produce the best set of requirements within a fixed time and budget. Persistent Systems has emerged as a leader in the OPD segment - a segment which is fast growing. OPD and outsourced IT services: the differe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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