AI Drafter 
TaxTMI 
TaxTMI 
2015 (8) TMI 923
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....5,204,416,770/- as against the returned income of INR 9,099,853,004/-. 3. That on the facts and circumstances of the case and in law, the Hon'ble DRP 1 learned AO have erred in disallowing net marketing expenditure of INR 774,839,472 (total expenditure of INR 911,575,849 net of tax depreciation @ 15 percent) incurred on account of mobile handsets issued free of cost to After Marketing Service Centres ('AMSCs'), Dealers and Employees. 3.1 The Hon'ble DRP/ learned AO have erred in concluding that expenditure incurred annually on mobile handsets issued free of cost to AMSCs, Dealers and Employees results in benefit of enduring nature. 3.2 Without prejudice, on the facts and circumstances of the case and in law, the learned AO has erred in not granting depreciation in respect of written down value of mobile handsets treated as capital expenditure in the earlier assessment years, despite specific direction in this regard by the Hon'ble DRP and the fact that no revenue expenditure has been granted to the appellant in respect of the said expenditure in the past. 4. That, on the facts and circumstances of the case and in law, the Hon'ble DRP / learned AO have erred in disallowi....
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....iled to comprehend that, the appellant had not incurred any expenditure to "promote" the brand name of "Nokia" and that the entire expenditure as had been incurred by it on advertisement and marketing, had been incurred by it, solely for the purpose of its own business in India and any incidental benefit arising to its parent could not result in an adjustment in the hands of the appellant. 6.6 That the learned DRP has erred in concluding that in light of the explanation added to section 92B(2) by Finance Act, 2012, advertisement expenditure incurred by the appellant qualifies as international transaction under section 92B of the Act. The learned DRP has failed to take cognizance of the fact that section 92B read with Section 92F(v), which together define an 'international transaction', do not apply in the absence of any arrangement/ understanding/ action in concert between the appellant and its overseas associated enterprises 6.7 That on the facts and the circumstances of the case and in law, the learned TPO/ Hon'ble DRP has erred in ignoring that the advertisement and marketing expenses incurred by the appellant represents only domestic transaction(s) undertaken with third p....
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....ny basis. 6.14 That on the facts and the circumstances of the case and in law, without prejudice, if at all a markup of 12.5 percent was to be applied, the same should have been applied on the value added expenses incurred by the appellant for providing the alleged service in the nature of brand promotion as contended by the learned TPO. 6.15 That, the learned AO/TPO have erred in making transfer pricing adjustment amounting to INR 354,167,266 in relation to provision of software development services by the appellant to its AEs. 7.1 That on the facts and the circumstances of the case and in law, the learned TPO/ Hon'ble DRP ignored the fact that the appellant (vis-a-vis its Research & Development ['R&D'] segments) is entitled to a tax holiday under section 10A of the Act on its profits and therefore does not have an ulterior motive of shifting profits outside India. 7.2 That the learned TPO erred in rejecting the comparables selected by the appellant to benchmark its international transaction relating to software development services without assigning any cogent reasons for rejection of the same 7.3 That the learned TPO grossly erred in not appreciating that a transf....
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....se and in law, the learned AO / TPO / Hon'ble ORP have erred in law in not applying the Proviso to section 92C of the Act and failing to allow the benefit of downward variation of 5 percent in determining the ALP. 9. That on the facts and circumstances of the case and in law, the learned AO has erred in levying consequential interest under section 234B and section 234D of the Act. 10. That on the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 271 (1)(c) of the Act." 2. The relevant facts of the case are that the assessee in the year under consideration declared an income of Rs. 909,98,53,004/- by way of e-filing its return on 30.09.2008. After being processed u/s 143(1), it was selected for scrutiny and notice u/s 143(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act" or "Income Tax Act") was issued in 18.08.2009. It was followed by notice u/s 143(2)/142(1) of the Income Tax Act along with detailed questionnaires which as per record were complied with on behalf of the assessee. The Assessing Officer (hereinafter referred to as "AO") after issuance of draft assessment order incorporated....
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....es to the tune of Rs. 77,48,39,472/- has been made. It was his submission that the said issue in the earlier years has been set aside to the file of the AO by the Tribunal in assessee's own case. Attention was invited to the copies of the orders attached in the paper book. 3.1. The facts qua the said issue are found discussed at page 3 of the impugned order, it is seen that the assessee claimed marketing expenses amounting to Rs. 491,32,60,014/-. The AO observed that similar claims have been made in the earlier years. The marketing expenditure including cost of mobile handsets free of cost are issued to AMSC (after marketing service centres); dealers and employees, the same was stated to be provided free of cost as they are to be put to use for promoting the business of the assessee. It was stated that these handsets are not forming part of the trading activities of the assessee company and was not part of the purchases in the P&L account but was instead shown as a separate expense under the head of "marketing expenses". It was claimed that the cell phones and accessories given to service centres, dealers and employees free of cost could be put to use in the business use of the ....
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....l expenditure or revenue expenditure. 2.8. Furthermore, the assessee has not produced any evidence of withdrawal of appeal on this issue. Hence, the depreciation on WDV of previous year FOC pertaining to the earlier years can only be considered after finalization of appeals of earlier years before ITAT. Even the directions of DRP-II on this issue are conditional, inasmuch as, no relief should have been provided by any appellate authorities in respect of the same. Hence, respectfully following the directions of DRP-II, supra, no further depreciation is granted to the assessee as the request of the assessee is not accompanied by withdrawal of pending appeal on this issue more so, since the issue is yet to attain finality." 3.5. Aggrieved by this, the assessee is in appeal before the Tribunal. Whereas the Ld. AR relying upon the past history of the issue stated that the issue may be restored to the AO. The Ld. CIT DR placed reliance on the impugned order. However the Ld. CIT DR did not controvert the fact that the issue in the earlier years has been restored to the file of the AO by the orders of the Tribunal in assessee's own case. 3.6. Having heard the rival submissions and....
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....hey would be required to sell the handsets at a price lower than the one at which the same were purchased from the assessee). Accordingly in the year under consideration, the assessee incurred an amount of Rs. 359,96,66,863/- as price protection provided to various distributors. The assessee also placed on record and relied upon confirmations from few distributors confirming the amount of price protection provided to them by Nokia India namely HCL Info Systems amounting to Rs. 237,76,70,795/-. 4.1. In the said background, the AO considering the reply of the assessee was of the view that as per the claim of the assessee, price protection is provided against 'probable loss' that the distributor may suffer due to fall in the prices of handsets. The fact that the assessee also at the same time provides discounts and incentives to its dealers to enhance its sales as such the need for price protection was questioned. In support of the claim despite specific opportunity, the AO observed that the assessee failed to furnish price protection policy of the company nor any basis of computation of the price protection was furnished. It was further observed that no details were also provided ....
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.... protection has been passed equally to the customers and it was merely a book entry without any basis and without supporting documentary evidences. As such it was held that the assessee had failed to adduce any cogent evidence to show that the "price protection" offered to its distributors actually related to the business needs of the assessee company. 4.3. However taking note of the fact that the in 2007-08 assessment year, the DRP-II had directed that price protection expenses in respect of HCL Info System claimed by the assessee be allowed, the same was allowed in the year under consideration also and the balance was added to the income of the assessee. 4.4. The said action was challenged by the assessee before the DRP-II who confirmed the action of the AO observing as under :- "2.4. We have considered the submissions of the assessee and have perused the material on record. In the assessee's own case for the asstt. Year 2007-08, the DRPII vide its directions dated 09.08.2011 u/s 144C(5) of the Income Tax Act, 1961 has directed to allow the Price Protection expenses relating to HCL Infosystems Ltd. while confirming the addition on the balance Price Protection expenses. T....
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....rmations and faulted the same on the ground that these were stereo type confirmations from different parties wherein the language of confirmations is almost the same and in some of the confirmations even the telephone numbers of the distributors were not given as such it was held that the benefit of price protection charges as per assessee's claim could not be made available. Considering the evidence of the remaining 57 distributors, it was held that the assessee could not file any confirmations and had only filed copies of ledger accounts which were held to be lacking corroborative value. In the above background, it was stated that the assessee has now been able to obtain confirmations from 56 out of the 57 parties wherein complete name, amount, address along with VAT registration no, PAN has been provided and in these circumstances it was submitted that the confirmations are crucial for deciding the issue and the said evidence be admitted. Reliance was placed upon Rule 29 of the ITAT Rules 1963 and order of the Tribunal in the case of UOP LLC 108 ITD 186. It was argued that suspicion has guided the reasoning for ignoring the evidence on the ground that the language was stereo-typ....
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....on or that the assessee was liable to make such a payment had been filed which would have been the relevant evidences as some Agreements would have been entered into. No argument that any regular stock audit was done by the company to identify the type of handsets lying with the distributors has been filed which requires to be protected by the alleged price protection policy of the assessee. Apart from that, it was also submitted that no price protection policy has been filed nor any basis of calculation inspiring any confidence in the book entry passed was ever made available to the department and even now relevant and necessary evidence is not sought to be filed and only stereo-typed confirmations are being relied upon. It was his arguments based on the assessment order that the AO has specifically faulted the assessee on the ground that no details of any dates/period on which the price protection was given for which model has never been provided and in the absence of relevant material irrelevant material is being argued to be a justification for the book entry made. 4.8. We have heard the rival submission and perused the material available on record. On a consideration of the....
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....by the AO. Obsolescence of Inventory 5. The facts pertaining to the next issue agitated by the assessee are found discussed at pages 13-16 of the impugned order in paras 6 to 6.7. A perusal of the same shows that the assessee in the year under consideration had debited a sum of Rs. 9,98,40,000/- under the head provision/(Release) for obsolescence. Referring to the position in assessment years 2003-04, 2004-05 & 2006-07 wherein the AO had made a disallowance on this count to the extent of 25% following the upholding of the said disallowance by the CIT(A) and the ITAT. Since the facts were similar in the year under consideration, the AO required the assessee to explain why a similar disallowance for the provision made for obsolescence of inventory amounting to Rs. 2,49,60,000/- not to be made (25% of Rs. 9,98,40,000/-). 5.1. The assessee explained in response thereto that it consisted of non-moving inventory of Nokia mobile phone, handsets, models and spare parts, accessories which had been phased out from the market; which was stated to be one of the major cases for fall in the profitability of mobile companies; that these sets are a source of real loss and as per the compa....
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....n the said years had categorically stated that it was open to the taxpayer to lead necessary evidence and get necessary relief in other years. 5.5. The CIT DR placed reliance upon the impugned order however he did not dispute the factual position that in 2006-07 & 2007-08 assessment years, the issue for considering the evidence was restored by the Tribunal to the AO. 5.6. We have heard the rival submissions and considered the order of the Coordinate Benches in the immediately preceding assessment years and the judgement of the Hon'ble High Court where for want of necessary evidences the action of the AO was confirmed. It is seen that the Hon'ble High Court while deciding against the assessee also observed that the assessee was not precluded from placing necessary evidences in subsequent years in support of its claim. Accordingly, following the orders of the Co-ordinate Benches which are supported by the judgement and order of the Jurisdictional High Court, the issue is restored to the AO. While doing so, it is directed that the assessee shall place necessary supportive evidences justifying its claim by way of it Global Obsolescence Policy, establishing that specific models/ac....
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....Income Tax Act in respect of the international transaction entered into by the assessee during the financial year 2007-08. The TPO vide his order dated 24.10.2011 u/s 92CA(3) of the Income Tax Act, 1961 determined the ALP margin on AMP amounting to Rs. 372,86,01,144/- and Contract Software Development Segment (referred to hereinafter as the "CSD") amounting to Rs. 58,22,14,849/-. The AO was directed to enhance the total income of the assessee by Rs. 431,08,15,993/-. Advertising, Marketing, Promotional Expenses (AMP) 6.4. On the AMP issue, the appeal of the assessee was not allowed by the DRP. The findings of the TPO were confirmed holding that significant proportion of AMP activities were aimed at creating/enhancing value of the Nokia brand in India. The DRP also upheld the application of the bright-line test (average marketing and distribution expenditure incurred by companies engaged in distribution of similar goods whose brands are not owned by them) considering the fact that the total sales were Rs. 210,38,78,78,000 and the AMP expenses were Rs. 491,32,60,000/- which gave the AMP/sales ratio was 2.33% as compared to the bright-line of 0.76%. The mark-up of 12.5% applied b....
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.... which has a direct nexus with its earning of income. The amounts have been spent it was submitted with the sole objective of earning profit for its own benefit. The principle focus of the assessee it was submitted was to promote Nokia products and their sales and that the assessee is limited risk distributor who receives support from AE. Inviting attention to page 687 and 688 of the paper book which is a copy of the written submissions dated 31.07.2012 addressed to the DRP (659 to 697), and internal page 8 of the DRP, it was submitted that the assessee's remuneration model as a limited risk distributor has been explained that it receives support from its AE if its remuneration is less than 5%. In the year under consideration, it was submitted the assessee has received Credit Notes of Rs. 186 Crores for ensuring its margin. Referring to page 687 of the paper book, it was stated that it is an Annexure attached with the copy of submission placed by the DRP dated 31.07.2012 at pages 659-697 of the paper book. The said page it was stated is the Global Policy on Transfer Pricing. Inviting attention to para 3.2 at page 688, it was submitted that the assessee is a Distributor which discus....
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....agree to restoring the issue. However no arguments could be given as to why the parameters set out by the Special Bench in L. G. Electronic's case should not be considered in the facts of the present case. His only care and concern expressed was that the assessee with hindsight should not be allowed to get an advantage of the Special Bench which has held that it may be an area of consideration to determine whether subsidy etc has been received. It was his stand that the purpose of the Credit Note received cannot now be allowed to be changed or improved and if the assessee wants to argue that it was for high AMP spend then it must be borne in mind that the assessee never acknowledged it as an international transaction. 6.6. We have heard the rival submission and perused the material available on record and also the decision relied upon by the parties before the Bench. It is seen that in the facts of the present case the assessee before the tax authorities has argued that it is the sole responsibility of the assessee to improve its business market and the AMP expenditure incurred is in pursuance of the goal of earning income and has a direct nexus with it. The principle focus for ....
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....sal of the order of the Special Bench, it is seen does lay down the said proposition and following the same, the issues for verification have been restored to the TPO/AO by various Co-ordinate Benches. We reproduce the said para of the Special Bench here under :- "17.4. In our considered opinion, following are some of the relevant questions, whose answers have considerable bearing on the question of determination of the cost/value of the international transaction of brand/logo promotion through AMP expenses incurred by the Indian AE for its foreign entity :- 1. Whether the Indian AE is simply a distributor or is a holding a manufacturing licence from its foreign AE. 2. Where the Indian AE is not a full fledged manufacturer, is it selling the goods purchased from the foreign AE as such or is it making some value addition to the goods purchased from its foreign AE before selling it to customers? 3. Whether the goods sold by the Indian AE bear the same brand name or logo which is that of its foreign AE? 4. Whether the goods sold bear logo only of foreign AE or a logo which is only of the Indian AE or is it a joint logo of both the Indian entity a....
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....he Special Bench Question No-1 would show that it has been so held by the Special Bench that the answer to the said question amongst others would have considerable bearing on the question of determination of the cost/value of the international transaction. As such it is necessary to first characterize the assessee and then do the FAR analysis in order to determine the functions taken on by the assessee on the basis of the documents and the conduct of the assessee. Considering the assets deployed and the risks assumed, characterization and FAR analysis is mandated by law and it is the bedrock on which the foundation of transfer pricing facts are structured and these are the facts to which the legal principles having precedental value shall apply. The specific facts of a case i. E characterization and FAR analysis should be the beacon in whose light the settled legal principles applicable can be discerned. Any shortcut method avoiding this enquiry would be against Rule 10B(2) framed u/s 92C of the Income Tax Act and against the spirit and intention of the legislature. The issue necessarily for correct appreciation of facts has to be restored. 6.6.2. Similarly, in the facts of the ....
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....creating the marketing intangibles is also upheld as no un-related party would have blocked its funds and provided service to the AE for building the brand belonging to the AE without any expectation of remuneration over and above the cost incurred. 6.6.6. While so holding it is seen that the assessee has assailed as per internal page-9 of the DRP's order in para (viii) that the TPO has incorrectly relied upon International Guidance from OECD, US-TP Regulation and Australian Tax Office (ATO). The said argument does not have any merit as the TPO is very much within his rights to be guided by International Tax Jurisprudence in the absence of any Domestic Provision Rule and Regulation in order to determine the evolving issues. The fact that Transfer Pricing as a subject alongwith issues pertaining to marketing intangibles is a constantly evolving and growing area of concern not only for India but also the developed and developing tax jurisdictions of different countries is a glaring phenomena of the present times. There is no reason why the benefit of work and experience of International Tax Jurisdictions of different countries, the guidance available in UNTP Model or OECD or Austr....
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....R&D Centre in Hyderabad focuses on developing the low-end Internet Security Appliances as well as support remote sites in developing and testing of NES"s platforms along with its Network Management and SSL/VPN solutions. In the year ended 31 March 2008, the scope of R&D activity for the NES R&D unit was to develop software, develop documentation and conduct testing for some products belonging to the portfolio of NES US. NPM R&D Dvision The NMP R&D division in Banglore provides software development and testing services for the Nokia range of products that include technology platforms for mobile phones. NMP (Nokia Mobile Phones) R&D Division in Mumbai focuses on R&D Work on CDMA Mobile phone, in performance, protocol and application level. They test it in simulated environment and also on live customer environment in India and abroad. Thus, Nokia India only performs the routine service function in the product development life cycle, which shows that all high value functions are performed by the AEs. Nokia India maintains the requite infrastructure for undertaking its activities complies with local legal requirements and performs routine functions like finance and ac....
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....ile discussing the R&D filter, if the filter of service income were applied correctly, this filter has no relevance. The same arguments made above will apply here. 5. Companies having average sales of less than Rs. 1 Crore during the time period were rejected This is not an appropriate filter since it presupposes the use of multiple year data. It has already been pointed out that the use of multiple year data without any supporting reasons, violates the mandate of Rule 10D(4). The correct approach would be to use current year data and reject companies that have a turnover of less than Rs. 1 Crore. 6. Companies with negative net worth were rejected. This is not an appropriate filter as the reasons for a company having net worth may lie in another financial year. This will have to be seen on a case by case basis. 7. Companies with ratio of advertising, marketing and distribution expenses to sales of less than 3% were selected. This is not an appropriate filter. The reasons that have been put forward for the rejection of the R&D filter will apply in this case also. 8.1.1. The TPO instead selected the application of the following filters for the ....
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....hat companies with significant related party transactions need to be excluded form the benchmarking process. On the issue of threshold of related party transactions, it can be stated that when the RPT exceeds 25% of sales, it can be said to be the stage when it will start affecting the price paid/received. The rationale given for the use of the limit of 25% is sound and this threshold limit has been approved explicitly an implicitly in quite a few judicial pronouncements. (vi) Companies that have employee cost that is less than 25% of total cost:- The rationale for this filter is that companies that are engaged in software development will require a minimum level of expenditure on personnel expenses. There are judicial pronouncements that support the contention that expense on personnel that is extremely low may lead to the conclusion that the company is not engaged in software development. (vii) Companies that are affected by some peculiar economic circumstances :- Companies that are affected by factors like persistent losses, declining sales, extraordinary income or expense, mergers and acquisitions or other such factors should not be used as comparables as they will not pr....
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.... ALP at a margin of 26.4% : Rs.3,436,206,849 Price received : Rs.2,853,992,000 Difference : Rs.582,214,849." 8.2. A perusal of the DRP's order shows that the argument advanced that the assessee was eligible for tax holiday u/s 10A on its profits and therefore did not have any motive of deriving a tax advantage by manipulating transfer prices of its international transactions was rejected relying on the first proviso to sub-section (4) of section 92C. The same reads as under :- "(4) Where an arm's length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm's length price so determined: Provided that no deduction under section 10A [or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section." 8.2.1. The DRP considering the submissions on behalf of the assessee removed Aricent Technologies (Holdings) Ltd. and Cybermate Infotek Ltd. from the list of comparables. The margins calculated....
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....ve a case. However referring to the facts, it was his argument that all along the assessee has been confronted at every stage and has been heard it was emphasized that at all stages its arguments have been considered by speaking orders and at no stage despite ample opportunity the assessee made any such submission requesting that let the filters be applied to the complete data base. Instead the assessee has chosen to contest the filters and the comparables which arguments have been considered by the TPO with a speaking order. Similarly, the arguments of the assessee before the DRP have also been considered resulting in reducing the average OP/TC margin from 26.42% to 18.03%. It was submitted that the arguments against the filters applied by the TPO have been rejected by the DRP and the TPO's action has been upheld. It was also submitted that no arguments were ever advanced before the DRP that "cherry picking" has been done and to now argued that "cherry picking" has been done without any facts it was submitted should not be accepted. It was his vehement stand that if the issue has to go back then the assessee needs to first provide a justification for the request. It was his stand ....
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.... accept/reject matrix for this search process by your submission dated 29.08.2011. This has been critically re-visited in the light of the discussion on the appropriateness of the filters used by you and the filters that should be actually applied. The comments on some of the comparables are tabulated below:- Sl. No. Name of comparable Reasons for rejection by the assessee Remarks of this office 1. 3K Technologies Ltd. The company is into diversified activities- services include Strategy Studies. Package Implementation, custom Development, Testing Services, BPO/IT Enabled Services. The annual report of the company has been perused. The entire income of the company is from software exports. It also passes all the appropriate filters. This can be used as a comparable. 2. Aricent Technologies (Holdings) Ltd. Fails on quantitative screens This comparable has been rejected on account of the NFA/Sales filter. It has already been discussed that this filter is not an appropriate one. This company is a software developer and passes all appropriate filters. This shall be used as a comparable. 3. Cybermate Infotek Ltd. The company is into diversifi....
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....opriate. This company passes all filters and the software segment shall be used as a comparable. 11. Tata Elxsi Ltd. Fails on quantitative screens The filter on which this company has been rejected. The company passes all filters. This shall be used as a comparable. 12. Zenith Infotech Ltd. Fails on quantitative screens The NFA/Sales filter on which the company has been rejected is not appropriate. The company passes all relevant filters. This shall be used as a comparable." 8.7.1. It is seen that as a result of this, the TPO selected these 15 comparables (12+3) and show-caused the assessee why on the basis of the average OP/TC percentage of 30.84% ALP adjustment of Rs. 70,23,54,339/- be not made. 8.7.2. It is seen that the reply to the same was made by the assessee vide letter dated 19.10.2011 which has been considered and found discussed in detail in para 6.2, 6.3 to 6.3.5, 6.4 to 6.4.4, 6.5 to 6.5.13, 7 to 7.1.5 at pages 25 to 45 by the TPO. This has resulted in reducing the average OP/TC percentage from 30.84% which was initially communicated to 26.42% resulting in proposing the ALP adjustment of Rs. 58,22,14,849 instead of Rs. 70,23,54,3....
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....rm the basis that following years also warrant a remand. It is also seen that no effort has been made on behalf of the assessee to demonstrate that the results would vary if a fresh search is done as no effort to move fresh evidence has been made on behalf of the assessee despite the fact that the hearings took place on 20.02.2013, 14.03.2013 and concluded on 19.03.2013. Thereafter, it is seen that on 26.03.2013, the appeal was fixed for clarification and the Ld. AR was required to give justification in support of the claim as in para 4.2, it had been alleged that the TPO has resorted to "cherry picking". The parties were heard on 04.04.2013 and 11.04.2013 and finally the hearing was concluded on 03.05.2013. Despite more than adequate time being repeatedly granted to the assessee despite that nothing has been placed on record to show that the results would vary and remand in the interests of justice is warranted on facts. In the absence of any such submission and evidence to show that the assessee has been prejudiced as the only arguments made are that the TPO has not confronted the assessee with his search methodology/reasoning the request of remand is rejected. 8.7.5. The argu....