TMI Blog2023 (1) TMI 1076X X X X Extracts X X X X X X X X Extracts X X X X ..... ng material is provided by company to the assessee at no cost and even when assessee prepares localized products, the copyrights are always with the company. The routine marketing activity primarily includes attending conferences, exhibitions, seminars to showcase the product to the targeted customers. When an order is received from the customer by MSC India that would be submitted to AE with specific type quantity of the product name and e-mail address of the customer and the requisite delivery date. However, the AE has the discretion either to accept or reject that order. If accepted, the delivery of the product is the responsibility of AE. The company will deliver the product directly to the customer and company will provide the assessee just a notification of such delivery. The customer makes payment to the assessee, the assessee retains 3.5% of revenue from the receipts from customers and the remaining amount is passed on to the company i.e. AE. The copy of agreement with customer is done in a format which also to be approved by the AE. AE has right to call for periodic report regarding the activities of the assessee and verify the books of account of assessee as evident fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be used with FAR analysis of assessee's in Marketing Support Services, also? 3. When as per the agreement the assessee is entitled to retain only 3.5% of its sales to third party, whether the CIT(A) was correct in holding that the revenue transaction is not a tainted transaction and allowing the assessee to consider PLI at OP/OR level instead of OP/OC? 4. Whether on the facts and circumstances of the case the learned CIT(A) has erred in concluding that Dynacons Technologies, Integra Telecommunications and JMD Telefilms are functionally comparable to MSC India? 5. It is observed that this appeal is time barred by 68 days and the ld. AR raised no objection regarding condonation of delay. Having heard the submissions of the parties, the delay is condoned and the case is heard on merits. 6. The issue for adjudication in this appeal is broadly whether the assessee is in distribution support services or is doing marketing support services as held by the TPO. The ld. TPO has given his finding at para 6.1 of his order analysing the relevant clauses of the agreement between the assessee and the Associated Enterprise (AE) and has held as follows: 6.1 Purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of such delivery. Customer makes payment to assessee. Assessee retains 3.5% of revenue from the receipts from customers and remaining amount is passed on to company i.e. AE. The copy of agreement with customer is done in a format approved by Company. Further Company has right to call for periodic report regarding activities of assessee and verify its books which assessee has to comply, (Clause 3.8 and 3.9 of the agreement) Thus as can be seen from the above discussion, the main activity of the assessee is marketing activity. Otherwise ownership of the product is with AE, the power to determine whether to accept/ reject order and pricing is with AE. So assessee is getting remunerated for marketing function only with a fixed mark up. 7. Thus, the TPO held that the main activity of the assessee is the marketing activity. Otherwise ownership of the product is with the AE, the power to determine whether to accept / reject the order and pricing is with the AE. Therefore, the assessee is getting remunerated for marketing function only with a fixed mark-up. Once the functions of the assessee were understood, FAR analysis of comparables was undertaken to verify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting of products. The ownership and inventory of products is with AE. The orders are placed by assessee to AE and finally delivery is also given by AE. Thus role of assessee is marketing of products and support services. Thus the comparables selected by assessee cannot be considered as comparables due to different functional profile. Thus herewith it is held that activity of assessee is marketing support activity. 8. The ld. CIT(A) on the other hand, allowed the appeal of the assessee holding the activities of the assessee to be distribution support services while relying on the assessee‟s own case for A.Y. 2013-14 where the predecessor CIT(A) has accepted the software distribution functions of the assessee. It was held that since there is no change in the facts for the year under consideration as compared with the facts of A.Y. 2013-14 relief was provided to the assessee by holding that the assessee is into distribution support services. 9. We have perused the case records, heard the rival contentions and analyzed the facts and circumstances in this case. We have also perused the Reseller agreement between the assessee and its AE and in this agreement the very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Products in the Territory. Reseller shall and hereby does assign to Company or its designee any and all copyrights and/or other proprietary rights in such Product descriptions, promotional materials, and other related localized materials effective upon the date of creation thereof by Reseller. 3.3 End-User Agreements. Reseller shall cause each customer to which any of the Products are delivered to agree to an End-User Agreement in a form which has been approved by Company which is attached hereto as Exhibit A. Reseller shall provide Company with copies of each End-User Agreement in accordance with those policies communicated by Company to Reseller from time to time. 3.4 Sub-reseller Agreements. Reseller shall have the right to appoint Sub-reseller(s). Reseller shall cause each Sub-reseller (if any) to execute a Sub-reseller Agreement which contains substantially similar terms as those contained herein. Upon request, Reseller shall provide Company with copies of each Sub-reseller Agreement in accordance with those policies communicated by Company to Reseller from time to time. 3.5 Personnel and Facilities. Reseller shall occupy and maintain facilities adequate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of marketing and promotional materials to assist Reseller in its marketing activities hereunder. 4.2 Technical Support. Company shall provide Reseller with reasonable technical assistance with respect to the Products in the Territory. 4.3 Performance of Maintenance Contracts. The Parties acknowledge and agree that Company shall be responsible for providing Enhancements, as that term is defined in the Company's standard end-user agreement, and unless otherwise agreed, that Reseller shall be responsible for the performance of technical support services under the maintenance contracts sold by Reseller hereunder; provided that Reseller may, from time to time, request Company to assist with the performance of such services, on such terms as agreed between the Parties. Section 5 - Purchase Orders and Delivery 5.1 Orders. All orders for the Products submitted by Reseller to Company (the Purchase ) shall be placed as instructed by Company. On receipt of orders for the Products by Reseller from a customer. Reseller shall submit to Company a corresponding order for the Products. All orders for the Products submitted by Reseller to Company shall specify the type ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowances, returns, refunds, and deferred revenue items which were previously recognized for transfer pricing purposes, with respect to such Products and excluding any consumption tax or similar taxes applied to such Products. For purposes of calculating the Operating income under this Agreement, Costs shall mean all direct and indirect costs incurred by Reseller in connection with marketing and selling the Products, maintenance contracts and support services to third parties in the Territory (excluding the Purchase Price specified in Section 6.1), computed under US GAAP. For the avoidance of doubt, Costs relate only to the marketing and support activities performed by Reseller hereunder, and exclude stock based compensation, foreign exchange gains/losses, interest income/expense, and other extraordinary or non-recurring items (e.g., restructuring costs). 6.2 End of Month Adjustment and Payment. Within thirty (30) calendar days after the end of each month, the Parties shall determine Reseller's Operating Income for the month. Within ninety (90) days after the end of each month, to the extent necessary, Company shall pay to Reseller (or Reseller shall refund to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions are as follows: 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in dismissing the following grounds of appeal (Ground 2.2, 2.3, 2.4, 2.7, 2.8 and 2.10) of the respondent raised before the Ld. CIT(A) considering them academic: 2.2. Disregarding the benchmarking analysis adopted as part of TP Study Report 2.3 Selection/ rejection of filters and failing to provide the accept reject matrix and search process 2.4 Correct profitability if the Respondent is to be compared to marketing support service providers 2.7 Not giving due consideration to the pricing arrangement for the selection of comparables 2.8 Selection of functionally non comparable companies for the purpose of determining the ALP 2.10 Allowing economic adjustments for differences between Respondent and comparables 2. On the facts and in circumstances of the case and in law, the learned Deputy Commissioner of Income-Tax Circle-7, Pune ('Ld. AO') has erred in making transfer pricing addition to the Appellant's income and the learned Commissioner of Income-tax (Appeals)-13, Pune ['Ld, CIT(A)'] has erred in partially uphold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n activity of the assessee stands as a marketing support services. This has been reversed by the ld. CIT(A) relying on earlier order of the assessee for A.Y. 2013-14 where the then CIT(A) has held the activity of assessee as distributor, support services. The ld. CIT(A) has not dealt with the findings of TPO specifically as regards the actual functional profile of the assessee and has not brought out a speaking order regarding the transfer pricing study report analysis benchmarking the transactions. Therefore, the ld. CIT(A) was not correct in holding that the grounds raised by the assessee on these various issues were merely academic. The ld. CIT(A) should re-adjudicate as per law and give specific finding. In view thereof, grounds No.1 and 3 of Cross Objection are remanded back to the file of ld. CIT(A) for re-adjudication while complying with the principles of natural justice. Accordingly, grounds of objection in CO of assessee are partly allowed for statistical purposes. In the result, CO is partly allowed for statistical purposes. 16. In the combined result, the appeal of Revenue is allowed and the Cross Objection of assessee is partly allowed for statistical purposes. O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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