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TMI Blog2025 (4) TMI 847X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014-15. 3. The relevant facts are that assessee/appellant YKK India is a wholly owned subsidiary of YKK Japan and is primarily engaged in the Manufacture of slide fasteners (zippers). YKK India manufactures metallic, viz. aluminum, golden brass and antique brass and non-metallic, viz. plastic, vislon and polyester zippers. YKK India has increasingly been incurring expenditure on anti-counterfeit action/protection of brand name, trademarks etc. in addition, customer education is another area of focus of the Company. 4. The assessee's return of income for AY 2014-15 was selected for scrutiny under compulsory category as the assessee's international transaction with associated enterprise was above the threshold. Notices u/s 143(2) and u/s 142(1) of the Act were issued by the AO and, thereafter, the case was referred to TPO u/s 92CA with the approval of the competent authority. The TPO examined the transfer pricing documentation provided by the assessee and with regard to international transactions of nature of payment of royalty, provision of support services and payment of technical fee, transfer pricing adjustments. Further, the AO has made disallowance u/s 40A(7) of the Act. Aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to its AEs 3.1. That the Ld. TPO/ Hon'ble DRP erred in not conducting the analysis of selecting the Most Appropriate Method (MAM) as prescribed under Rule 10C of the Rules and accordingly not documented the same as prescribed under Rule 10D of the Rules. 3.2. The Ld. TPO/ Hon'ble DRP erred in law by upholding the determination of the ALP of the international transaction using Comparable Uncontrolled Price ('CUP') method without following the manner of applying the CUP method prescribed under Rule 10B(1)(a) of the Rules. 3.3. The Ld. TPO/ Hon'ble DRP have erred upholding the adoption of CUP method as the most appropriate method for determining the arm's length price in respect of payment of technical know-how fee and royalty paid to its AEs without identifying any comparable uncontrolled transaction(s) for the computation of the ALP as prescribed in Section 92F(ii) of the Act. 4. Transaction pertaining to Payment of Technical Fee 4.1. The Ld. TPO/ Hon'ble DRP erred in making an adjustment of INR 8,69,41,250/- to the ALP of the impugned transaction ignoring the true nature of the international transaction and based on a preoccupied mind reached at an inappropriate conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of INR 17,86,156/- to the ALP of the impugned transaction on account of differences in the operating margin of the Appellant vis-à-vis comparable companies. In doing so, the Ld. TPO/Hon'ble DRP erred in law and on facts in :- a. Not providing details of the filters applied while conducting the independent search; b. Wrongly rejecting 5 comparable companies out of 7 comparable companies, identified by the Assessee; and c. Considering 7 additional functionally dissimilar companies as comparable to the Assessee, which are not comparable in view of the functional profile i.e. provision of post-sales services. 7. Disallowance under section 37 of the Act 7.1. On the facts and circumstances of the case and in law, the Ld. AO has erred in disallowing an amount of Rs. 4,14,899/- towards club entrance fees paid during the subject assessment year. 7.2. The Ld. AO has erred in disallowing the club entrance fee by considering the same to be personal in nature. 8. Initiation of penalty proceedings under Section 271(1)(c) of the Act 8.1. On facts and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) read with section 274 of the Act again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order. 6. In this regard we have gone through the order of TPO and are of view that while issuing notice the TPO has thread bare examined each of the three disputed international transactions and in the notice which was issued, the TPO has repeatedly referred to the licence agreement between the assessee and the AE, YKK, Japan and based upon the understanding of transactions affecting the business of the assessee and the FAR analysis, the TPO had questioned the disputed international transactions proposing to determine the payment of royalty to related parties and payment of technical fee and payment of expenses to related parties at Nil. As with regard to the provisions of post sales service to customers of AE also, the TPO had examined the comparables as selected or rejected by the assessee. Thus, although not mentioned in specific words that the TPO was not inclined to accept the transfer pricing study of the assessee and rejected the same, the manner in which the TPO had narrated his opinion with regard to the determination of ALP by the assessee, establishes that when the assessee was show caused by the TPO and the reply was filed by the assessee on 10.10.2017, the whole int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f remand to the Assessing Officer/TPO. The endeavour should be to ascertain and satisfy whether the gross/net profit margin would duly account for AMP expenses. When figures and calculations as per the TNM or RP Method adopted and applied show that the net/gross margins are adequate and acceptable, the appeal of the assessed should be accepted. Where there is a doubt or the other view is plausible, an order of remand for re- examination by the Assessing Officer/TPO would be justified. A practical approach is required and the tribunal has sufficient discretion and flexibility to reach a fair and just conclusion on the arm's length price. Answers to Substantial Questions of Law 194. In view of the aforesaid discussion, substantial questions of law in the appeals filed by the assessee are answered as under: "Q.1. Whether the additions suggested by the Transfer Pricing Officer on account of Advertising/Marketing and Promotion Expenses (AMP Expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by the Assessing Officer, having regard to retrospective amendment to Section 92CA of the Income Tax Act, 1961 by Finance Act, 2012" In terms of and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. In other words, the economically relevant characteristics of the two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate the effect of such differences on the price or margin. Thus, identification of the potential comparables is the key to the transfer pricing analysis. As a sequitur, it follows that the choice of the most appropriate method would be dependent upon availability of potential comparable keeping in mind the comparability analysis including befitting adjustments which may be required. As the degree of the comparability increases, extent of potential differences which would render the analysis inaccurate necessarily decreases. (iv) The assessed, i.e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not chargi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form of widespread popularity and universal approval and acceptance in the eyes of the customer. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. (x) Parameters specified in paragraph 17.4 of the order dated 23 rd January, 2013 in the case of L.G. Electronics India Pvt Ltd (supra) are not binding on the assessed or the Revenue. The 'bright line test' has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate 'routine' and 'non-routine' AMP or brand building exercise by applying 'bright line test' of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be 'NIL', or at best would mean the amount or compensation expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to treat the segregated transactional value as 'NIL' when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th question whether AMP expenditure is a separate international transaction and further on the methodology to be adopted to benchmark such transaction and the Hon'ble High Court upheld the tax department's proposal that AMP was a separate international transaction in the batch of cases under consideration. However, reference to paragraphs 193 and 194 would show that even where AMP is a separate international transaction, it is permissible under the Act to benchmark the same as a closely connected transaction with the core distribution business. Concept of set-off has also been dealt with in detail. Noting that the purpose of chapter X was to be construed harmoniously with the objective under the Act viz., assessment of income for the purpose of levying tax, Hon'ble Court concluded that the concept of set-off is embedded in the provisions of chapter X. These paras 193 and 194 show that once margins are found to be at arm's length by application of TNNM then same deserves to be accepted as benchmarking all transactions including AMP transaction involved in that batch of case. 9. As we examine the issues involved in context to the facts of present case we find that major internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has entered into an international transaction of purchase of machinery and parts worth Rs.29.83 crores which has been found to be at arms' length and not disturbed from TNMM. The allegation that the assessee is running a full- fledged business in India so there is no justification that personnel belonging to a company located in Singapore will need to travel to India to support on marketing procurement etc., is based on mere conjectures. Such reasoning also establishes that there was no reason to question the applicability of TNMM at entity level. 13. Then, we find that the TPO has not been able to substantiate the rejection of the transfer pricing study of the assessee by any significant evidences, reasoning or conclusions. The reasons may have been sufficient to show cause the assessee for rejecting the TPS but while reaching a different pricing the reasons should have been substantiated, on the basis of tests of comparability, which is not done. 14. In this context, though not relevant to the ground before us, if we take into consideration, for conclusiveness, how after rejecting the aggregation approach with regard to disputed transaction, the TPO went on to exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the assessee while calculating the margins of 16.99%, which stands accepted. So the case relied is very distinguishable and rather helps the assessee before us, as here the assessee has combined transactions which are intrinsically related to manufacture of single line of product. 16. Then, the judgement in the case of Bombardier Transportation India Pvt. Ltd., ITA No.1626/Del/2015, order dated 04.11.2015 was in regard to a company engaged in manufacturing metro trains and supply of coaches under a consortium. The assessee in that case had preferred CUP as MAM method, but, tax authorities were of the view that TNMM is the most appropriate method. We are of the considered view that without establishing that the nature of transactions under scrutiny are similar in regard to similarly situated assessee, such the judicial pronouncements cannot come to the rescue of the Revenue. 17. As far as the contention of ld. DR is concerned that issue may be restored to the TPO for fresh determination of comparability, ld. Counsel has invited our attention to the decision of Hon'ble Gujarat High Court in Rajesh Bhabhubhai Damania [2001] 251 ITR 54, that there cannot be multiple opportunit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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