2020 (12) TMI 583 - AT - Income Tax

Tribunal Decision: Appeal partially allowed, remanded for verification. AMP expenses, trading segment, margin adjustment considered.

The Tribunal partially allowed the appeal, remanding certain issues back to the TPO for verification and correct computation. It decided in favor of the ... TP Adjustment - adjustment on account of AMP - TPO made adjustment on account of AMP to the IT Segment (Contract Software Segment) using the intensity based a project wherein the Selling, General and Administrative (SG&A)/sales ratio of each comparable was compared with that of the assessee - HELD THAT:- As decided in own case [2020 (9) TMI 319 - ITAT DELHI] merely by applying the BLT method which has no legal existence and merely on the basis of MDF agreement vide which taxpayer has received part reimbursement of the AMP expenses incurred by it duly disclosed this expenditure in Form 3CEB and in TP study, so called excessive AMP expenditure of the taxpayer cannot be treated as international transactions u/s 92B of the Act. So, we cannot infer the existence of international transactions qua AMP expenses between taxpayer and AE beyond the reimbursement already made by the AE under MDF Agreement. Comparable selection - HELD THAT:- OTS ESolutions Pvt. Ltd. was held as not comparable in subsequent assessment year i.e. A.Y. 2014-15 [2020 (9) TMI 319 - ITAT DELHI] by the Tribunal. The functional dissimilarity is apparent on record and there are no changes in the present assessment year. Hence, we direct the TPO to exclude this comparable from the final list of comparables. Celkon Impex Pvt. Ltd company is in designing and manufacturing of mobile phones while the assessee company is in trading of consumer electronics, home appliances, computers and IT peripherals which is different portfolio all together. From the perusal of the records it can be seen that Celkon Impex Pvt. Ltd. was held as not comparable in subsequent assessment year i.e. A.Y. 2014- 15 by the DRP. The functional dissimilarity is apparent on record and there are no change in the present assessment year. Hence, we direct the TPO to exclude this comparable from the final list of comparables. Micromax Informatics Limited ompany is also functionally dissimilar to the assessee company. The company undertakes all business activities and undertakes all associated business risks. The company outsources manufacturing activities to third party contractors and sells the products under its own brand name as an entrepreneur. The DRP in subsequent year i.e. 2014-15 has excluded Micromax Informatics Limited from the comparable list. The functional dissimilarity is apparent on record and there are no change in the present assessment year. Hence, we direct the TPO to exclude this comparable from the final list of comparables. United Telelinks (Bangalore) Pvt. Ltd is also functionally dissimilar to the assessee company. It has brand owning and outsources manufacturing activities to third party contractor. Redington India Limited company is engaged in distribution of IT products such as computers, printers, software storage systems and also a leading supply chain solutions provider for global brands of IT hardware and software product which appears to be similar to that of assessee’s functions. Therefore, we direct the TPO to look into the portfolio of this company and applying the filters, this comparable may be included in the final comparable list. Tech Pacific (India) Limited (later name changed to 'Ingram Micro’) engaged it is trading in IT hardware and software products which appears to be similar to that of assessee’s functions. Therefore, we direct the TPO to look into the portfolio of this company and applying the filters, this comparable i.e. Tech Pacific (India) Limited (later name changed to 'Ingram Micro’) may be included in the final comparable list. HCL Infosystems Limited company is engaged in distribution of telecommunication and digital lifestyle products such as cellular phones, computers, printers, scanners etc. and hence functionally similar to the assessee company. Besides this fact, this company is allowed as comparable in A.Y. 2005-06 to 2011-12 by the Tribunal and there are no different facts emerging as relates to function conducted by the present assessment year to that of previous assessment years. Therefore, we direct the TPO to look into the portfolio of this company and applying the filters, this comparable may be included in the final comparable list. Incorrect margin adjusted for working capital of computation of comparables - HELD THAT:- From the perusal of records, it appears that the margin adjusted for working capital of computation of comparables is incorrect and the same fact was not denied by the Ld. DR during the course of hearing. Therefore, we remand back this issue to the file of the TPO with the direction to compute the margin adjusted for working capital of computation of comparables correctly. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice Incorrect computation of proportionate adjustment by TPO for Trading Segment - HELD THAT:- Computation of Proportionate adjustment by TPO for Trading Segment is not in consonance with the computation provided by the assessee and the same needs verification. Hence, this issue is remanded back to the file of the TPO for proper verification as per the directions of the DRP. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Issues Involved:1. Transfer Pricing Adjustment on AMP Expenses2. Transfer Pricing Adjustment in Trading Segment3. Incorrect Margin Adjusted for Working Capital of Comparables4. Incorrect Computation of Proportionate Adjustment for Trading Segment5. Denial of Relief of +/- 3% under Proviso to Section 92C (2)6. Charging Interest under Section 234B7. Penalty under Section 271(1)(c)Detailed Analysis:1. Transfer Pricing Adjustment on AMP Expenses:The appellant contested the transfer pricing adjustment of Rs. 3,01,87,69,854/- made by the AO/DRP/TPO, which included Rs. 46,38,28,605/- for AMP expenses and Rs. 2,55,49,41,249/- for the trading segment. The appellant argued that the AMP expenditure was not an international transaction under the Act, and the intensity-based approach adopted was not prescribed under the Income Tax Rules. The appellant also contended that there was no evidence of any understanding or arrangement with its Associated Enterprises (AEs) concerning AMP spend and that the expenses were focused on generating domestic sales. The Tribunal found that the issue was covered in favor of the appellant based on earlier years' decisions, where it was held that the AMP expenditure incurred by the appellant was not an international transaction and the Bright Line Test (BLT) approach was untenable in law. Therefore, the Tribunal allowed Ground Nos. 3 to 15.2. Transfer Pricing Adjustment in Trading Segment:The appellant challenged the upward adjustment of Rs. 2,55,49,41,249/- made by the AO/DRP/TPO in the trading segment. The Tribunal examined the comparability of certain companies included and excluded by the TPO. It directed the exclusion of OTS E-Solutions Pvt. Ltd., Celkon Impex Pvt. Ltd., Micromax Informatics Ltd., and United Telelinks (Bangalore) Pvt. Ltd. due to functional dissimilarities. It also directed the inclusion of Redington India Limited, Tech Pacific (India) Limited (later Ingram Micro), and HCL Infosystems Limited, as they were functionally similar to the appellant. Thus, Ground Nos. 17 and 18 were allowed.3. Incorrect Margin Adjusted for Working Capital of Comparables:The appellant argued that the TPO incorrectly computed the margin adjusted for working capital of comparables. The Tribunal found merit in this argument and remanded the issue back to the TPO for correct computation, ensuring the appellant is given an opportunity to examine the figures used by the TPO. Ground No. 19 was partly allowed for statistical purposes.4. Incorrect Computation of Proportionate Adjustment for Trading Segment:The appellant contended that the TPO incorrectly computed the proportionate adjustment for the trading segment. The Tribunal noted the need for verification of the computation and remanded the issue back to the TPO for proper verification as per DRP's directions. Ground No. 20 was partly allowed for statistical purposes.5. Denial of Relief of +/- 3% under Proviso to Section 92C (2):The Tribunal did not adjudicate this ground as it was consequential to the primary issues.6. Charging Interest under Section 234B:Similarly, the Tribunal did not adjudicate this ground as it was consequential.7. Penalty under Section 271(1)(c):The Tribunal did not adjudicate this ground as it was consequential.Conclusion:The Tribunal allowed the appeal partly for statistical purposes, remanding certain issues back to the TPO for verification and correct computation, while deciding other issues in favor of the appellant based on precedents from earlier years.