AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (7) TMI 81
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....nto international transactions with Associated Enterprises ("AEs"), as detailed below:- S.N. Nature of transaction Method used by assessee Value of transaction 1. Purchase of raw material TNMM OP/OR 65,467,751 2. Sale of raw material TNMM OP/OR 1,333,743 3. Import of finished goods TNMM OP/OR 2,76,784,829 4. Finished goods capitalized TNMM OP/OR 4,224,946 5. Provision of services TNMM OP/OR 20,460,099 6. Availing of services TNMM OP/OR 1,10,819,241 7. Payment of license fees TNMM OP/OR 7,54,399 8. Cost of reimbursement No benchmarking 1,95,668 2.1. The assessee in its transfer pricing study had divided the entire business in two categories which were- (i) Vision care; (ii) Surgical equipment. 2.2. The AO noted that for vision care segment the assessee had used transactional net margin method ("TNMM") as the most appropriate method with adjusted operating profit/ sales as the profit level indicator. 2.3. The assessee's contention was that for Vision Care Segment the PLI being operating profit/ sales of comparable on single year data basis was 6.19% as....
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....rat Terce Laboratories Ltd. Company is in brand building phase and hence 6. Solumiks Herbaceuticals Ltd. Accepted 7. Serum International Ltd. Data N/A hence rejected. 2.7. Thus, in final analysis TPO accepted only two comparables for distribution segment viz. Aditya Medisales Ltd. and Abbott India Ltd. No new comparables was taken by TPO. The TPO has not made any adjustment in the profit margin of the taxpayer arising in the distribution segment. However, the ld. TPO after considering the TP documentation, also examined the advertisement, marketing and promotional expenses incurred by assessee and observed that the assessee being distributor of Bausch & Lomb products, manufactured by its group companies i.e. the AE and other subsidiaries, by incurring expenditure on advertisement marketing and promotional activities (AMP), was developing marketing intangible for Bausch & Lomb products. The AO noted from the P&L A/c, that during the given year the assessee had undertaken AMP expenditure to the tune of Rs. 10,98,24,331/-. He noted that the ratio of AMP/ total revenue was 9.14%. He further observed that after including the expenditure like commission on sal....
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....ion expenses incurred by B&L India as part of brand building expenses while benchmarking the AMP expenses. - The TPO erred in making selection of inappropriate companies as comparables for computation of the bright line. - The TPO erred in concluding that the assessee had rendered brand building services to its AE and it should have charged mark up on cost incurred for rendering such services. 2.11. Ld. DRP, after considering the assessee's objections, concluded as under: (i) AMP expenditure incurred by the taxpayer can be regarded as international transaction; (ii) The AEs of the taxpayers were the guiding factors in deciding the strategy of AMP function discharged by the taxpayer and, therefore, the expenditure on advertising and marketing activity was not solely for assessee's own business purposes. (iii) Ld. DRP further held that the TPO was justified in invoking the concept of bright line for benchmarking of the expenditure to be considered excessive and, accordingly, was justified in making adjustment. (iv) On the issue of comparables, ld. DRP directed the TPO to verify the results of the search from the annual reports of the comparables for the calculation of o....
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....dia, being payments made to third parties, can be characterized as an 'intemational transaction' as per the provisions of the Act, without appreciating the following: (a) There was no understanding/arrangement between the Appellant and its associated enterprises ("AEs") for incurrence of such expenditure on behalf of the AEs; (b) The transaction in question was undertaken by the Appellant with unrelated domestic third parties; (c) Selective reliance cannot be placed on portions of submissions and information provided to presume existence of international transaction (d) Deeming fiction cannot be expanded out of context purely based on presumptions to include transactions not expressly covered in law 4. That on the facts and circumstances of the case and in law impugned order erred in recharacterising amounts paid by the Appellant to domestic third-parties, for availing services required for its business, as cost base for services rendered to AEs. 5. That on the facts and circumstances of the case and in law, the ld. DRP erred in upholding TPO's action, issued much beyond legitimate jurisdiction, in questioning the reasonableness, quantum, and commercial exp....
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.... the arm's length margin earned by it. Without prejudice, the further direction to verify and modify the adjustment is also contrary to express provisions of law. 14. That on the facts and circumstances of the case and in law, learned AOIDRP/TPO were not justified in considering discounts, selling and promotion expenses, and other such expenditure while calculating the AMP expenditure of the Appellant. Without prejudice, the conclusions reached are contrary to the very same decisions which are relied upon by the tax authorities. 15. That on the facts and circumstances of the case and in law, learned AO/TPO/DRP have erred in incorrectly applying the Comparable Uncontrolled Price ("CUP") method for determination of the cost base while benchmarking the alleged international transactions of the Appellant relating to AMP. 16. That on the facts and circumstances of the case and in law, learned AOIDRP/TPO have erred in benchmarking the AMP expenditure incurred by the Appellant in India without correctly applying CUP in the manner prescribed under Rule 10B of the Rules. 17. That on the facts and circumstances of the case and in law, learned AO/DRP/TPO have erred in considering the ....
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.... that assessee is primarily a distributor and at the entity level average profit earned was 18.45% for the two basic segments viz. vision care; and surgical equipment. 5.1. Ld. counsel pointed out that the ld. DRP has given direction to TPO to verify the results of the search from the annual reports of the comparables for the calculation of operating margin and AMP of sales ratio. However, the TPO has not correctly applied the said filter and, therefore, the matter should be restored to the file of TPO to correctly apply the trading filter. Ld. TPO had applied the trading filter of 75% of revenue of comparables from trading income. However, ld. RP applied a filter of 66.67% to total sales. 5.2. Ld. counsel for the assessee submitted that in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. (ITA no. 16/2014, decision dated 16-3- 2015), the Hon'ble Delhi High Court has rejected the bright line test applied by the Spl. Bench of ITAT in the case of L.G. Electronics India Pvt. Ltd. In this regard he referred to paras 126, 127 and 135 of the decision of Hon'ble High Court. Ld. counsel further referred to para 101 of the said decision of Hon'ble High Court to submit that s....
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....ability analysis and the most reliable means of determining arm's length price. ....... . (xii) When segmentation or segregation of a bundled transaction is required, the question of set off and apportionment must be examined realistically and with a pragmatic approach. Transfer pricing is an income allocating exercise to prevent artificial shifting of net incomes of controlled taxpayers and to place them on parity with uncontrolled, unrelated taxpayers. The exercise undertaken should not result in over or double taxation. Thus, the Assessing Officer/TPO can segregate Al\1P expenses as an independent international transaction, but only after elucidating grounds and reasons for not accepting the bunching adopted by the assessed, and examining and giving benefit of set off. Section 92(3) does not bar or prohibit set off." 3.7. Ld. counsel further submitted that before ld. TPO the assessee had furnished a list of comparables for bench marking the AMP expenditure but the said comparables were rejected on the ground that they could not be considered as routine distributors. He submitted that ld. TPO accepted Aditya Medisales Ltd. and Abbott India Ltd. for bench marking the....
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....liciter which is sin the present case. 4.1. Ld. CIT(DR) submitted that the discount and incentive that the assessee is passing on to the dealers is the tool which it employs to create a brand loyalty among them and, therefore, the commission and sales discount facilitates the company to create a loyalty among the chain of organization and personnel who are link between the asessee of the AE and the ultimate consumers. He, therefore, submitted that selling and distribution expenses cannot be excluded while computing AMP expenditure. 5. We have considered the rival submissions and have perused the record of the case. As per transfer pricing study, the assessee had identified various international transactions which have been reproduced earlier but the same did not consider the AMP expenditure as an international transaction. Admittedly, the said transactions were bench marked adopting TNM method and it was demonstrated that the PLI of the Vision care segment was 21.23% as against 6.19% of the comparables and in the case of Surgical equipment segment the PLI of the assessee was 13.81% as against 5.97% of the comparables. The TPO had, accordingly, not made any adjustment in regard to....
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....as a whole is so interrelated that it will be more reliable means of determining the arm's length consideration for the controlled transactions. It was further observed that there are often situations where separate transactions are inter wined and linked or are continuous that they cannot be evaluated adequately on separate basis. Secondly, the controlled transaction should ordinarily be based on the transaction actually undertaken by the AEs as has been struck by them. Hon'ble jurisdictional High Court cautioned that it was not advocating the a broad-brush approach but, a detailed scrutinized ascertainment and determination whether or not the aggregation or segregation of transactions would be appropriate and proper while applying the particular method. 5.4. Thus, before the PLI determined at entity level is to be taken as the determining factor of bench marking various international transactions along with the AMP expenditure, it is to be clearly demonstrated how the transactions of the advertisement expenditure is closely linked to the other transactions in the distribution segment. Ld. TPO in para 10.4 has observed that assessee company has not been able to demonstrate that t....