TMI Blog2022 (7) TMI 1377X X X X Extracts X X X X X X X X Extracts X X X X ..... of details for working out adjustments in comparable companies chosen. If we appreciate the argument advanced by Ld.CIT.DR, there would remain no comparables for the purpose of comparability analysis to determine ALP of an international transaction, and this would be fatal to entire exercise of transfer pricing analysis. Regarding comparable companies, one has to fall back upon only on information available in public domain. If that information is insufficient, it is beyond the power of the assessee to produce correct information about comparable companies. Revenue on the other hand has sufficient powers u/s.133(6) to compel production of required details from comparable companies. If this power is not exercised to find to get information required, then it is no defense to say that Assessee has not furnished required details to deny any adjustment on account of working capital differences. Therefore this objection of DRP is not sustainable. Therefore in, endeavor should be made to bring in comparable companies for the purpose of broad comparison and working capital adjustment claimed by Assessee should be analysed, keeping in mind, OECD guidelines. Based on the above discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) Not appreciating that the Appellant had incurred AMP expenses with third parties and there was no transaction with the Associated Enterprise ( AE ) (ii) Concluding that there exists international transaction between the Appellant and its AE. In the facts and circumstances of the case, there exist no international transaction of AMP in the case of the Appellant. (iii) Selecting inappropriate comparables for computing nonroutine AMP even though they are not comparable in terms of functions performed, assets utilized, risks assumed etc. (iv) Not appreciating that the alleged transaction of enhancement of marketing intangibles is closely linked to other international transactions in the distribution segment and when done so, it is discernable that an appropriate quantum of profits is offered to tax in India. v) Not appreciating that the premium profits in the distribution segment compensates more than any excess AMP expenses incurred by the Appellant. vi) Not appreciating once the net profit margin is tested on the touchstone of arm's length price under TNMM, it pre-supposes that the various components of income and expenditure considered in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s support services segment. 11. The lower authorities have erred in: (i) Rejecting comparables selected and the TP analysis undertaken by the Appellant on unjustifiable grounds. The lower income tax authorities have erred in rejecting following companies selected as comparables by the Appellant: Priya International Ltd ICRA Management Consulting Services Ltd MCI Management (India) Ltd Concept Public Relations India Ltd. (ii) Conducting a fresh TP analysis despite absence of any defects in the transfer pricing analysis submitted by the Appellant. (iii) Adopting inappropriate filters like persistent loss making, RPT filter etc. in the process of selecting comparables. (iv) Selecting inappropriate comparables and selecting companies as comparables even though they are not comparable in terms of functions performed, assets utilized, risks assumed, size, have unusual business circumstances, high margin, etc. The lower income tax authorities have erred in adopting the following companies as comparables: Ugam Solutions Pvt. Ltd. Killick Agencies and Marketing Ltd. Majestic Research Services Solutions Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. On receipt of the 92CA reference, the Ld.TPO called upon assessee to furnish economic details of the international transaction between assessee and the AE. The Ld.TPO noted that following were the international transaction reported in Form 3CEB. S. No. Transaction Total Amount 1. Purchase of traded goods 844,23,34,121 2. Sale of products 151,59,147 3 Commission received 1,34,80,501 4. Technical charges paid 2,88,74,478 5 License fees paid 18,37,619 6. Business Support Services 3,09,12,719 7 Reimbursement of expenses incurred by AEs on Epson India's behalf 3,51,69,479 8 Recovery of expenses incurred on behalf of AEs 6,52,56,491 2.3 The Ld.TPO was of the view that, the assessee did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmunications Ltd. Business services consultancy Business services consultancy 23.12% 9 Irunway India Pvt. Ltd. Business services consultancy Other consultancy 25.09% Particular Data OP/OC 35th percentile 3.15 12.99 Median 5.00 17.75 65th percentile 5.85 20.94 2.5 Assessee in reply relied on the following decisions Decision of Hon ble Delhi High Court in case of M/s. Sony Ericsson Mobile Communication India Pvt. Ltd. reported in 276 CTR 97 (2015) M/s. Maruthi Suzuki India Pvt. Ltd. in ITA No. 110/2014 and ITA 710/2015, CIT Vs Whirlpool of India Ltd. (129DTR169), Baush Lomb Eyecare (India) (P) Ltd. Vs. Addl.CIT (129DTR201) Yum Restaurants (India) Pvt. Ltd., Vs ITO (ITA No. 349/2015 dtd. 13/01/2016) and Honda Seil Products. 2.6 The Ld.TPO after considering the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.26% 13.98% 9 ICC International Agencies Ltd (Segmental) -15.64% 44.35% 14.13% 16.06% Arm s Length Range Data Place considered as per multiple year rule OP/OR (%) 35th Percentile 4 7.44% Median 5 8.69% 65th Percentile 6 8.77% The assessee used TNMM as the most appropriate method to determine the arms length price and as the margin was within the permissible limit, the transaction was held to be at arms length by assessee. 2.8 The Ld.TPO dissatisfied with the comparables selected by assessee, shortlisted following 9 comparables having average margin of 13.5%. SI. No. Company Name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 912/-. 2.12 Aggrieved by the impugned order, assessee is in appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that, Ground no. 1 is general in nature and therefore do not require adjudication. 4. Ground no. 2 has not been argued by the Ld.AR, however it is submitted that, the issue may be kept open to be argued in appropriate situation. Accordingly, we dismiss Ground no. 2 by keeping the issue open providing the right to argue the issue to the assessee in an appropriate assessment year. 5. Ground Nos. 3-9 are in respect of adjustment with respect to AMP expenses. 6. Ground no. 10 is general in nature and do not require adjudication. 7. Ground no. 11 is in respect of comparables sought for inclusion and exclusion. 8. The Ld.AR submitted that Ground no. 11(i) is raised seeking inclusion of only two comparables being: (i) ICRA Management Consulting Services Ltd. and (ii) Concept Public Relations India Ltd. It is submitted that, the other two comparables raised in this ground is sought to be not pressed by the assessee. Accordingly the remaining two comparables are dismissed as not pressed. 9. In ground no. 11(iv), the assessee seeks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm of AMP expenses. The TPO concluded that the assessee needs to be adequately compensated for such additional function undertaken and proceeded to compute the ALP following the Other Method . The TPO segregated the AMP expenses as routine and non-routine and made a TP adjustment by adding a margin @ 11.20% on the non-routine AMP expenses. The DRP confirmed the TP adjustment and accordingly the AO passed the final order. 6. The Ld AR submitted that (i) The functional profile of the assessee (pages 173-182 of paper book) identifies marketing activities as a key function performed by the assessee for distribution of products and the functional profile of the assessee has not been disputed by the TPO in his order. (ii) The assessee is procuring finished products from its AE and distributing them in India under the brand name of the AE. The Hon ble Delhi High Court in the case Sony Ericsson mobile communication India Private Limited 55 Taxmann.com 240 (Delhi) has held that the workings of section 92F and that Rule 10A explicitly states that the term transaction includes a number of closely linked to transaction thus making it clear that it was never the intent of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it margin of the assessee from undertaking distribution activities during the year under consideration resulted in gross profit of 17.87% on sales (Page 254 of the paper book). Since the assessee s margin is more than the arm s length range, the margin of the assessee from its distribution activities is considered to be at arm s length from TP perspective. In a corroborative analysis done under Transaction Net Margin Method (TNMM) the assessee s margin is taken to be at arm s length as the median of the comparables was 1.08% whereas the operating profit of the assessee from undertaking the distribution activities was 3.12% (Page 255 of the paper book). We notice that the while arriving at the operating profit of the assessee the Selling and Marketing expenses to the tune of Rs.68,16,40,898 has been included. The TPO in the order (Page 13 of TPO order para 4.7.5) has mentioned that TP analysis with respect to AMP and the mark up the methods as used by the assessee like RPM with GPM as the PLI and TNMM with OP/OC as the PLI are not suitable, however he had not rejected the TP analysis of the distribution segment. This issue is particularly dealt with by the Hon ble Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t relating to incurring of AMP expenses. Thus, we notice that there is no change in facts relating to this issue between the current year and the AY 201011/2011-12. It was also held that when TNMM method is applied to benchmark the entire international transactions, then there is no requirement of making separate TP adjustment on account of AMP expenditure. In the earlier paragraphs, we have also held that TNMM as most appropriate method and has also held that the international transaction of Exports to AEs is at arms length. Hence, no separate adjustment is required to be made in respect of AMP expenses on this account also. 10. We have considered the Ld DR s submission that the coordinate bench of the Tribunal in assessee s own case (supra) has remanded the case back to the TPO. In the said assessment years, the case was remanded back mainly for the purpose of determining whether the AMP expenses in an international transaction or now. The relevant para from the judgment is reproduced here for reference In the present case also TPO had not brought anything on record to show existence of international transaction whereby the assessee was obliged to incur AMP exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Before dealing with the comparability analysis, it is necessary sine qua non to understand the functions performed, assets owned and risks assumed by the assessee under the business support service segment. Functions Epson India is engaged in providing business support services to its parent entities Seiko Japan and Epson Singapore. These services are in the nature of business support and other customer support services. Strategic Management Functions Epson India operates under the broad strategy framework set out by its AEs. Epson India primarily performs the tactical managerial functions regarding day to day management of business. Corporate Services With respect to human resources, financial management, routine administration etc., Epson India is responsible for arranging the necessary resources. It is responsible for managing its accounts payable, accounts receivables, employee management, management information systems and day to day management of business. It undertakes the management of human resources/hiring and training is done by Epson India within the broad framework of policies defined by the Group. Epson India provides the services wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to page 832 of the paper book wherein the order dated 30/10/2017 passed by the Ld.TPO for A.Y. 2014-15 is placed. 18.3 The Ld.AR thus submitted that this company is functionally similar with that of the assessee and passed all filters applied by the Ld.TPO. 19. Concept Public Relations India Ltd. 19.1 The Ld.AR submitted that, this company is engaged in building relations and imaging for its clients. It is submitted that it also passes all the filters applied by the Ld.TPO. The Ld.AR submitted that, the Ld.TPO rejected this comparable, as it did not fall in the search matrix carried out by him. 19.2 On the contrary, the Ld.DR relied on orders passed by authorities below. 19.3 We note that, the DRP has not adjudicated the submissions of the assessee in respect of both the comparables. We find force in the argument of Ld.AR in respect of ICRA Management Consulting Services Ltd., wherein it was accepted by the Ld.TPO himself for A.Y. 2014-15. We therefore do not find any reason to reject the comparable from the final list. We direct the Ld.AO to include this comparable in the final list. 19.4 In respect of Concept Public Relations India Ltd., we note that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s argued before us that the comparable was functionally different, whereas the DRP held that, the business model and type of income does not matter with reference to functional comparability. The DRP also held that, the comparable provides lot of services which help the companies to sustain the market. We find that, Killick is engaged in acting as agent for various foreign principals for sale of dredgers, dredging equipment, steerable rudder propellers, maritime and aviation lighting, acoustic communication equipment etc. and sales services. Apart from this, the company is involved in exports of micro switches, engineering items, acoustics items headsets. It is engaged in the business of marine equipment like specialized propulsion systems, marine engines, industrial marine gear boxes, ballast water treatment system, special purpose sea going vessels, industrial marine exhaust system, ship lighting navigation lighting systems, dredges and dredge equipment, ship building presses, rescue boats and specialized davits, reverse osmosis water systems and special acoustic communication equipment for defence. Killick provides after sales services for the equipment's supplie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Ld.TPO. In support he referred to page 309 of Paper Book-I. We are of the view that this company is rendering advertisement functions which are not akin to Business Support Services rendered by the assessee. Therefore we do not hold this comparable to be included in the final list. Accordingly this comparable is directed to be excluded from the final list. 20.4 Scarecrow Communications Ltd. 20.4.1 We have considered the submissions advanced by both sides in the light of records placed before us. This company is rendering service pertaining to advertisement in radio and television and public shows which are different from the business support service rendered by the assessee. Pages 315316 of Paper Book Vol. I gives the details of revenue generated by this comparable. Further, this comparable is rendering services not on the similar profile as that of assessee. Therefore we do not hold this comparable to be included in the final list. Accordingly this comparable is directed to be excluded from the final list. Accordingly ground nos. 11(iv) raised by assessee stands allowed. 21. Ground no. 13 is on incorrect computation of margin. We direct the Ld.TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ably accurate adjustments should be made to eliminate effect of any such differences Paragraphs 13 to 16 of OECD guidelines, emphasizes need for working capital adjustment in terms of receivables and payables as under: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d party and comparables, and whether it should be the figures of receivables, inventory payable at the yearend or beginning of the year or average of these figures that should be considered;, 22.8 In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the assessee or the Department to show what is the Arm's Length Price. The data available with the assessee and Department should be the starting point and depending on the facts and circumstances of a case, further details can be called for. As far as the assessee is concerned, the facts and figures with regard to its business must be furnished. In so far as applying inventory, receivables and payables for computing working capital adjustment alleged by DRP/TPO in case of certain comparables, ITAT Delhi Bench in case of ITO v. E Value Servc.com reported in (2016) 75 taxmann.com 195 held that, insisting on daily balances of working capital requirements to compute working capital adjustment is not proper, as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. 22.9 It must not be forg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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