TMI Blog2023 (1) TMI 1242X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard are allowed for statistical purposes. TP adjustment on account of excess AMP expenditure - DRP has upheld the analysis of the TPO stating that the cost of AMP incurred by the Appellant has benefitted AEs and accordingly AMP is an international transaction - HELD THAT:- For the year under consideration the net profit margin of the assessee in Trading Segment is 1.19% and the net profit margin of the comparable companies in 35th percentile to 65th percentile range is 0.13% to 1.48%. Since the margin of the assessee is within this range, the assessee had concluded that the price charged with respect to the Trading Segment is within arm s length. We notice that no adverse inference drawn by the TPO in respect of the Trading segment results in the order passed under section 92CA and has directly proceeded to treat AMP expenses as international transaction. This in our view mean that the TPO has accepted the entity level margins earned by the assessee with respect to Trading Segment but proceeded to make TP adjustment on AMP expenses. The Hon ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. 2015 (3) TMI 580 - DELHI HIGH COURT] held that o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er (AO) National Faceless Assessment Centre (NFAC) passed u/s.143(3) r.w.s.144C(13) of the Income Tax Act (the Act) dated 28.01.2022 for the assessment year 2017-18. 2. The assessee is a company incorporated under the Companies Act 1956. The assessee primarily imports Personal Computers ( PCs ) from its Associated Enterprises ( AEs ) and resells the same in India via its distribution channels. The assessee also assembles PCs in India using the components it imports from its AEs and subsequently sells them in the Indian market. The assessee filed the return of income filed for the AY 2017-18 on 30.11.2017 declaring a total income of NIL. The case was selected for scrutiny assessment proceedings under CASS and the statutory notices were duly served on the assessee. During the course of the assessment proceedings, the AO made a reference of international transactions entered into by the assessee to the Transfer Pricing Officer ( the Ld. TPO ) for determining the Arm s Length Price ( ALP ) of such transactions under Section 92CA of the Act. The TPO made a total adjustment of Rs.168,5,82,798 the break up of which is as follows - (i) Adjustment to the manufacturing segment Rs. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the records submitted by the assessee - In relation to the manufacturing activity, the assessee assumes most of the risks including market risk, inventory risk, credit and collection risk, forex risk, warranty and idle capacity risk and on the functions and risks performed the assessee is characterized as a full-fledged manufacturer for its manufacturing activity. The basis of benchmarking the aforesaid transaction is provided below: During the FY 2016-17, Lenovo India imported 402 different varieties of products from its AEs which can be identified on the basis of a distinctive code. Out of 402 products, 262 products were purchased from its AEs exclusively while the rest 140 were purchased from AEs as well as from unrelated third-party vendors. To identify internal CUPs, Lenovo India has prepared a list of the products imported from its AEs for the FY 2016-17. This list provides for the weighted average of the prices paid during the year for the products imported from AEs. Each of these parts is identified based on a distinctive product code. With respect to the imports from AEs, the Company conducted a search (based on product code) to identify sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ared with the purchases made from AEs / Non-AEs since the level of obsolesce in the computer hardware industry is very high 3. Industry average billing rate cannot be considered in this method by relying on the decision of the Bangalore ITAT in the case of Aztec Software Technology Services vs ACIT 4. There is no publicly available information on prices charged in independent transactions of similar or identical nature, so external CUP cannot be applied. 10. Upon rejection of CUP method adopted by the assessee, the TPO applied the Transaction Net Margin Method (TNMM) as the MAM and determined ALP which resulted in an addition of Rs. 57,52,661(Manufacturing Segment) to the returned income. 11. The assessee filed objection to the proposed addition before the Dispute Resolution Panel (DRP) but the DRP upheld the order of the Ld. TPO by accepting the reasons given by the TPO. The DRP also upheld application of TNMM as MAM and methodology adopted to determine ALP under the TNMM by the Ld. TPO. 12. The ld AR submitted that as far as the issue of MAM in the case of the assessee, the objections to each of the reasons put forth by Ld. TPO / DRP for the rejection of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... components have distinctive codes by which they are known in the industry and the measurement of the prices is not subjective. Case law was based on the fact that the taxpayer had received income from services rendered to its AE and Appellant s transactions in the present case pertains to expenses that have been incurred. Lastly, in the case law relied upon by the Ld. TPO, the taxpayer relied upon external CUP whereas Appellant has relied upon internal CUP in benchmarking its international transaction. 4. There is no publicly available information on prices charged in independent transactions of similar or identical nature, so external CUP cannot be applied. In the instant case, Appellant has considered internal CUP and not external CUP. 13. The ld AR is also submitted that the coordinate bench of the Tribunal in assessee's own case has been consistently holding that the application of CUP Method adopted by the assessee to be the MAM benchmarking the manufacturing segment for AY 2006-07, 2009-10 to 2010-11, and 2012-13 to 2015-16. 14. The ld DR relied on the orders of the lower authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as reproduced hereinabove. As the submissions advanced are on identical facts that has already been considered by this Tribunal, for preceding assessment years as well as assessment year 2015-16, respectfully following the above view, we direct the Ld.TPO to replace the TNMM with CUP as most appropriate method. 16. We notice that the assessee had adopted CUP as MAM to benchmark its international transaction of Import of parts and components for manufacture of PCs pertaining to its manufacturing segment and that the functions performed for undertaking its manufacturing activity for all the years i.e., AY 2006-07 to AY 2016-17 have remained the same. Accordingly respectfully following the decision of the coordinate bench we hold that CUP is to be considered as the MAM for the year under consideration also and we direct the TPO to replace TNMM with CUP. Grounds raised in this regard are allowed for statistical purposes. TP adjustment on account of excess AMP expenditure 17. The Assessee is engaged in the business of manufacturing and distribution of desktop, laptop, servers, and smartphones. During the relevant previous year, the Assessee incurred expenditure in conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord. For the year under consideration the net profit margin of the assessee in Trading Segment is 1.19% and the net profit margin of the comparable companies in 35th percentile to 65th percentile range is 0.13% to 1.48% (page 2084 of paper book Vol III). Since the margin of the assessee is within this range, the assessee had concluded that the price charged with respect to the Trading Segment is within arm s length. We notice that no adverse inference drawn by the TPO in respect of the Trading segment results in the order passed under section 92CA and has directly proceeded to treat AMP expenses as international transaction. This in our view mean that the TPO has accepted the entity level margins earned by the assessee with respect to Trading Segment but proceeded to make TP adjustment on AMP expenses. The Hon ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 held that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. Rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The Honourable DRP and the learned AO / TPO has erred in law and on facts in making TP adjustment of INR 10,79,07,460 to the returned income of the Assessee and in holding that the international transactions undertaken by the Assessee with its AEs in the Sales Facilitation Service segment and Administrative and Business Support Services segment were not at arm s length. 38. The Honourable DRP and the learned AO/ TPO has erred in not rejecting the following companies despite the same not being comparable to that of the Assessee due to various factors such as functional dissimilarity, extra ordinary events etc. a) Red Baron Integrated Services Pvt Ltd b) Platinum Advertising Pvt Ltd c) Majestic Research Services Solutions Ltd d) Cheil India Pvt Ltd e) Lintas India Pvt Ltd 39. The Honourable DRP and the learned AO / TPO has erred in law and on facts in rejecting the following companies selected by the Assessee in its TP Documentation which are comparable to the Assessee: a) MCI Management (India) Limited b) Concept Public Relations India Limited c) Kestone Integrated Marketing Services Private Limited (Segmental) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven below SI.No. Company Name F.Year wise OP/OC (%) Wt. Average 2016-17 2015-16 2014-15 1 Goldmine Advertising Ltd. 5.71 6.12 5.21 5.68 2 Ugam Solutions Pvt. Ltd. 6.72 7.88 14.06 9.55 3 Focus Suites Solutions Services Ltd. 19.15 19.18 4.08 15.76 4 Axience Consulting Pvt. Ltd. 18.48 24.84 8.19 17.11 5 Pressman Advertising Ltd 24.95 14.96 15.93 18.62 6 Scarecrow Communications Ltd. 12.10 21.21 27.34 19.53 7 Red Baron Integrated Services Pvt Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gin of comparable set 17.11% Adjustment Required (if PLI 35 th Percentile) Yes Median Margin of comparable set M 19.53% Arm's Length Price ALP=(1+M)*OC 293833985 Price Received OR 20406914 Shortfall being adjustment ALP-OR 23427071 28. The DRP confirmed the adjustment. Aggrieved the assessee is in appeal before the Tribunal. 29. The ld AR made a detailed written submission with regard to each of the comparables for which inclusion / exclusion is sought. The extract of the submissions are as given under Exclusions 1. Red Baron Integrated Services Private Limited ( Red Baron ) It is submitted that Red Baron was engaged in the activity of specialized design services. The same is evident from the Annual Report given in page 182 of the Appeal set. It is observed that Red Baron is engaged in the business of branding and design activities for ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which boosted the operating margins of Majestic Research significantly. A comparison of the margin progression over the past 3 years is provided below: Particulars FY 2016-17 FY 2015-16 FY 2014-15 Operating Revenue A 2,293.04 1112.96 550.77 Total Operating expenditure B 1,570.97 831.92 463.76 Operating profit (A-B) 722.07 281.04 87.01 Margin on cost 45.96% 33.78% 18.76% As seen from the above, there is a significant increase in the operating margins of FY 2015-16 and FY 2016-17 as compared with FY 2014-15. Hence, it is clear that the increase in the operating margins of the company is attributable to the extraordinary events that took place and therefore, Majestic Research is not functionally comparable to the Appellant and ought to be rejected. Further, in the case of Epson India Private Limited [ITA No. 206/Bang/2021], ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and has rejected the contention by making a cryptic observation that 7.1 Panel: The taxpayer has not used appropriate filters and therefore the panel is of the opinion that the TPO has rightly rejected the TP documentation given by the taxpayer. In view of the reason cited by the TPO, we have come to the conclusion that the data used in computation of ALP is neither reliable nor correct. After careful analysis of the facts, it is seen that the filters measure applied by the TPO has lcd to selecting the proper comparables. Further, the objections of the taxpayer to the comparables selected by the TPO has been disposed of by the TPO with proper reasoning and functional analysis. Therefore, we find no reason to interfere in the adjustments so proposed by the TPO. 31. Therefore we are of the considered view that this issue should be remitted back to the DRP with a direction to do consider the submissions of the assessee and examine the facts based on evidences before deciding the inclusion/exclusion in accordance with law. Needless to say that the assessee should be given a reasonable opportunity of being heard. It is ordered accordingly. 32. The TPO is directed t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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