TaxTMI 
TaxTMI 
2015 (9) TMI 483
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....Arms Length Prices (hereinafter referred to as the "ALP") for the international transaction undertaken by the assessee with its Associated Enterprises (hereinafter referred to as the "AEs"). 2.1. The TPO completed the transfer pricing assessment u/s 92CA(3) of the Act thereby making a transfer pricing adjustment of INR 69,94,95,650/- vide his order dated 20.10.2011. As a result of this, the assessment was proposed at an income of 1,35,48,98,720/- vide draft assessment order dated 07.12.2011 u/s 144C of the Act. 3. Aggrieved by this draft assessment order, the assessee filed its objection before the Dispute Resolution Panel ((hereinafter referred to as the "DRP"). The DRP vide its order dtd. 27.09.2012 did not concur with the main arguments of the assessee however granted a partial relief. Pursuant to the DRP's order dtd. 26.11.2012 was passed u/s 143(3) read with section 144C of the I.T.Act. Aggrieved by this, the assessee has filed the present appeal before the Tribunal on the following grounds :- "1. On the facts and circumstances of the case and in law, the assessment order/directions passed by the Assessing Office (AO)/ Transfer Pricing Officer (TPO)/ Dispute Res....
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....as grossly erred in applying the 'Bright Line Method' for determining the arm's length advertisement and marketing expenditure incurred by the assessee as the same is not a prescribed method under the provisions of section 92C of the Act nor is the same notified by the Central Board of Direct Taxes under section 92C(1)(f) of the Act. 11. The learned DRP has failed to appreciate that once the TPO has accepted that the Transactional Net Margin Method (TNMM) was the most appropriate method, he would not and cannot undertake an analysis of the individual elements of cost as the approach is inconsistent with the tenets of application of the TNMM. 12. That the learned TPO has incorrectly held both on facts and in law that, the AMP expenses incurred by the appellant to "excessive" on the basis of a "bright Line Limit" arrived at by considering inappropriate comparables not having similar product, brand profile and market circumstances as the Appellant. 13. That the learned TPO/DRP has committed gross error in considering selling and distribution expenses as a part of the advertisement and marketing expenses for computation of transfer pricing adjustment. ....
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....rder. 22. That the AO/DRP erred in law and in facts and circumstances of the case in making arbitrary disallowance of 10% of advertisement and selling expenses holding the same as capital in nature which is not supplemented by proper examination of facts. PENALTY FOR CONCEALMENT OF INCOME 23. That on facts and in law, the AO/DRP erred in holding that the Appellant has furnished inaccurate particulars of income in respect of each item of disallowance/additions and in initiating penalty proceedings under section 274 read with section 271 of the Act which are not established on facts." 4. The stand of the Ld. AR relying on the written submission was that the issue has to be go back to the TPO for re-computing, the AMP on the basis of the guidelines given in L.G. Electronics Ltd. case rendered by the Special Bench. The Ld. CIT DR in response stated that he would oppose the said prayer as before the Hon'ble High Court the Revenue's Counsel has categorically taken a stand that a remand may not be warranted as such he would be opposing the stand of the assessee and it would be his endeavour to argue that the impugned order has to be confirmed. Attention was invited by the Ld. ....
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....fore referring to the arguments of the respective parties in detail, we think it appropriate to refer to the facts on record. 5.1. The relevant facts of the case in regard to the profile of the assessee and Sony Ericson group as appearing in the TPO's order u/s 92CA(3) are as under :- "2. Profile of the assessee and Sony Ericson Group:- 2.1 The Sony Ericson offers mobile multimedia devices, including feature-rich phones and accessories, PC cards and M2M solutions for end users. The assessee company was incorporated in India on April 23, 2007 and is a subsidiary of Sony Ericson Mobile Communication AB, a company incorporated under the laws of Sweden. The Sweden entity is a 50:50 joint venture between Telefonaktiebolaget LM Ericson (Sweden) and Sony Corporation (Japan). As stated in the transfer pricing report the group companies own significant valuable intellectual property rights (know-how, patents, copyrights etc.) and other commercial or marketing intangibles (brand names, trademarks, logos etc.) and are involved in complex product development, manufacturing and brand development of the products. Group Companies also bear significant business and entre....
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....be the economic owner of the brand/ that the trade name and trade mark were provided to the assessee without any charges/ that the assessee purchases the products at resale price minus transfer price/ that the price is adjusted according to the price level development in the marketing and operating cost changes in the sales subsidiary. Accordingly, the pricing of products between the assessee and the AE is regulated in a manner that ensures that the assessee earns an arms length return with respect to distribution activity. Therefore, based on the price level development in the market, it was stated that if at the year end, the assessee is not able to achieve the arm's length return with respect to its distribution activity then as per its distribution policy it receives credit notes from its AE to achieve an arms length return on sales. 5.5. Accordingly in the year under consideration, the assessee it was stated received credit note of Rs. 73,83,70,409/- from the AE in order to achieve an arms length result. It was further stated that there is no agreement for the use of brand name between the overseas AE and the assessee and the assessee has not made any payment to its AE for ....
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.... in industry events, advertising in all forums of media channel, which includes magazines, newspaper, television, radio etc." 5.10. Further taking note of the Audited financials, he observed that the assessee company does not own any intangibles in the nature of brand name or marketing intangibles and the assessee had incurred the following expenses relating to AMP, the same are reproduced here under :- "Advertisement expenses Rs. 660,556,778/- Business Promotion & Selling Expenses Rs. 496,658,381/- Total Expenditure on AMP Rs.1,157,215,159/- 5.11. In the above background, the TPO was of the view that huge expenditure on AMP has been done to promote the brand, trade name, Sony Ericson which is beneficially owned by the AE resulting in benefiting the AE for which the assessee should have been compensated. Holding the same to be an international transaction within the meaning of section 92B(1) of the Act read with 92F(v) of the Act, the TPO proposed to determine the arm's length price of the same. Accordingly after issuing a show cause notice and considering the explanation, the TPO proposed to benchmark appling the bright line test. The TPO accordin....
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.... Rs. 1,127,273,275/- 5.13. The TPO required the assessee to make its submission thereon. The reply of the assessee is extracted in page 12 of the TPO's order. The same is reproduced hereunder:- "I. Assessee's pricing model compensates the Assessee for the alleged 'excess' AMP expenses, if any; II. AMP expenses incurred by the Assessee represent purely domestic transaction(s) undertaken by it towards third parties which are not covered under the purview of Section 92 of the Income Tax Act, 1961 ('Act'). III. Analysis of such domestic transactions undertaken with third parties, in respect of which no reference has been made by the Assessing Officer ('AO') to the TPO, is beyond the powers vested with the TPO under Section 92CA of the Act. IV. Having accepted TNMM as the most appropriate method to benchmark the Assessee's international related party transactions, challenging/analyzing individual elements of costs (like AMP expenses) by the TPO is in violation of fundamental TP principles and inconsistent with the tenets of application of TNMM. V. AMP expenses incurred by the Assessee are on its own accord and for its own business purposes and benefit; any ....
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....e Rs. 1,157,215,159/- Expenditure in excess of bright line Rs. 608,257,087/-" 5.15. The TPO being of the view that an independent enterprise would also have been remunerated for its efforts after considering the reply of the assessee held that the markup of 15% to be a reasonable mark-up over and above the reimbursement of the expenditure incurred by the assessee. The said mark-up according to the TPO would take care of the interest cost that the assessee would have borne on the money invested by it in developing, marketing intangible. 5.16. Consequently, TP adjustment of Rs. 699,495,650/- was computed as under :- Computation of TP adjustment (In Rs.) Value of Gross Sales 16,386,808,123 AMP/Sales of the Comparables 3.35% Amount that represents bright line 548,958,072 Expenditure on AMP by assessee 1,157,215,159 Expenditure in excess of bright line 608,257,087 Mark-up at 15% 91,238,563 Reimbursement that assessee should have received 699,495,650 Reimbursement actually received NIL Adjustment to assessee's income 699,495,650 5.17. The AO accordingly passed a Draft assessment order pursuant to ....
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....fication on certain issues and the parties were heard at length again. 5.19. On behalf of the assessee, it was argued that the advertising, marketing activity is a function performed by the assessee as a distributor and the profits are earned on the sale of goods and not merely on the activity of purchase of goods. Accordingly for the purpose of facilitating sales the distributor needs to undertake the entire gamut of functions likes sales budgeting, inventory scheduling, packaging and logistics, marketing, distribution channel, sales and warranty etc. As such it was argued these are part and parcel of its activities as a distributor. It was submitted that the FAR analysis of the assessee at pages 19 to 25 of the first paper book has not been disturbed by the TPO. As such after accepting that advertising and marketing are functions of the distribution activity, the TPO/DRP are contradicting themselves. It was submitted that by extending the reasoning, the argument that warehousing services, packaging service, carrying and forwarding services, logistics services, sales support service are all separate transactions. If it was so it was submitted then the TPO should have held that ....
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....te of 1.25 per unit 125 Less: Cost of purchase of 100 units of goods at the rate of 1.25 per unit 125 Gross margin 25 Gross margin 25 Less: Advertising and marketing cost 25 Less: Advertising and marketing Cost NIL Less: Other overhead costs 15 Less: Other overhead costs 15 Net margin (-) 15 Net margin 10 Add: Subsidy from manufacturer by way of credit note adjusted against COGS 25 Add: Subsidy from manufacturer by way of credit note adjusted against COGS NIL Adjusted gross margin 50 Adjusted gross margin 25 Adjusted net margin 10 Adjusted net margin 10 • The above table clearly demonstrates our argument that as compared to a distributor who has limited role and responsibilities, a distributor who undertakes greater functions and responsibility will be left with a higher gross margin to account for the additional functions and expenses. • This higher gross margin may come by way of a lower price of goods at the time of purchase or even by way of a subsidy at a later stage. • The Special Bench in the case of LG India has held that comparable g....
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....Chapter 10 is different from other chapters in its conception, however. It represent an outline of particular country administrative practices as described in some detail by representatives of those countries, and it was not considered feasible or appropriate to seek a consensus on how such country practices were described. Chapter 10 should be read with that difference in mind." 5.19.6. Based on the above, it is sought to be canvassed that the views expressed in Chapter 10 of the UN TP Manual are the views of the Country's Tax Administration. For the said purpose, reliance is further placed upon the following extract from the practical Manual on Transfer Pricing Manual on Transfer Pricing of Developing Countries (from page 24 vol.-3 of the paper book) :- "10.3.8.15. The important issue in the determination of ALP in these cases is to examine who benefits from the extraordinary AMP expenditure. Taxpayers generally claim that such extraordinary expenditure helps the business of the Indian entity also in addition to parent MNE. However, the tax authorities in India have found that Indian distributors are claimed to be no risk or low risk bearing entities and are getting fixed a....
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....oduct or a reduction in royalty rate." 5.19.9. Similarly, it is stated that identical example has been illustrated by the Australian Tax Office (ATO) in its guidance for Marketing Intangibles wherein the market/distributor bears the costs and risks of its marketing activities and has a royalty-free contractual arrangement (with exclusive right) with the owner of the brand. Attention is invited to example 3 at page 11 of Vol.-3 of the paper book which as simplified and explained in page 27 of the written submissions and extracted hereunder :- "Facts : Distributor (B) receives no reimbursement from brand owner (A) in respect of any expenditure it incurs or any other indirect or implied compensation from A and expects to earn its reward solely from the sales of branded watches to third party customers in the Australian market. ATO's guidance : If A was compensating B for its marketing activities, it would've charged higher for products sold to B and consequently, the profit earned by B would have been lower than comparables who undertake their own marketing. Since the profits earned by B were similar as that of comparable companies, the benefits obtained by B resu....
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....crued incidentally and does not require any compensation. 5.19.14. Without prejudice to the other arguments, it was also argued that the mark-up of 12.5% was high excessive and unwarranted. 5.20. The Ld. CIT DR on the other hand argued that the credit notes do not state that they relate to the AMP expenditure and have already been rejected by the TPO so no purpose would be served by restoring the same for verification. It was his vehement stand that with hindsight after the decision of the Special Bench the arguments of the taxpayers have been that subsidy has been received for AMP it was his vehement argument that do the records show that it was sent for this specific purpose. It was his argument that the record would show that the assessee has been contesting till date that it is not an international transaction and the assessee has not even documented it as an international transaction accordingly how can the assessee now be allowed to argue that the subsidy received is for the high AMP expenditure. Addressing the order of the Mumbai Bench in Fine Jewellery case relied upon by the Ld. AR, it was stated that the same is not in the context of transfer pricing as such does no....
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....ived the same. 3. Subsidy received. 30,000 It has not been specified, as to the purpose for which subsidy has been received. According to the assessee, the subsidy is to be applied to AMP expenditure. If such is the situation then ALP or AMP expenditure, according to the assessee, would be Rs. (-) 10,000/-, (Rs. 20,000 being ALP of AMP expenditure less Rs. 30,000 being subsidy). This is an absurd result. Revenue's contention is that since the AMP expenditure towards Brand Building (or creation or feeding of Intangibles etc.) has not been reported as an international transaction, at all, how can subsidy be attributed to AMP (or Brand Building or creation of Intangibles etc). This is too far-fetched a proposition and an afterthought. Subsidy could not have been given for a transaction which the assessee claims is not an international transaction. Even the Hon'ble ITAT, in the case of M/s. LG Electronics (as referred above), has held, on pages 101 & 102, point nos. 9 & 10, as follows- "In our considered opinion, following are some of the relevant questions, whose answers have considerable bearing on the question of determina....
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....ficially owned by the AE however promoted by the assessee for which the assessee has not been compensated." (Refer 3.4 to 3.6 on page 7 of main appeal set). The above approach of the TPO is not only contrary to the view held by all international literature on the fundamentals of transfer pricing but also contrary to the principle upheld by the Special Bench in the case of LG Electronics India Private limited (ITA No. 5140/Del/2011). Relevant extract of order are as follows: "Para 19......... If there is no subsidy in a comparable case but the assessee has received some amount of subsidy from its foreign AE on imports or in any other manner, which fact otherwise needs to be specifically established by the assessee, then the initial amount so computed would require reduction to the extent of such subsidy or vice versa" In the present case, it was respectfully submitted that during the course of the transfer pricing assessment it was specifically stated by the assessee that it has received subsidy from its parent amounting to Rs. 73.83 crores so as to maintain its profitability above 2% in any case. It would be seen that the TPO has made an adjustme....
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.... to brand promotions and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction. In view thereof, we direct the Assessing Officer to exclude the expenses incurred by the assessee in connection with the sales totaling Rs. 5500.86 lacs as the4 same do not fall within the ambit of AMP expenses and hence not to be considered for computing the const/value international transaction. The assessee vide ground no.4 had raised the issue against the disallowance of consumer market research expenses of Rs. 567. 49 lacs. In view of our decision in allowing the claim of the assessee being relatable to sales promotion expenses, this ground of appeal is thus allowed. The ground nos. 2.14 to 2.16 and ground no 4 are thus allowed". Similar approach has been followed by Delhi ITAT in the case of Canon India Pvt. Ltd Vs. DCIT Cir 3(1) (ITA No. 4602/Del/2010, 5593/Del/2011 and 6086/Del/2012) in para 7.7 (Copy of order is attached herewith) Therefore, it is humbly submitted that following Special Bench and coordinate bench order the expenses in connection with sales are incurred post occurrence of a....
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....bruary 2013." 6. We have heard the rival submissions and perused the material available on record including the decisions and judgements relied upon for our consideration. We propose to consider and discuss the judgements and decisions separately as Transfer Pricing issues are very fact driven as such, we first propose to refer to the Transfer Pricing Study made available to the TPO by the assessee. The same is placed on paper book pages 1-53. 6.1. A perusal of the same shows that as per the Transfer Pricing study available on record, it is claimed that Sony Ericson is a company incorporated in India on 23.04.2007 and is a subsidiary of Sony Ericson Mobile Communication AB, a company incorporated under the laws of Sweden. The Swedish entity is a 50:50 joint venture between Telefonaktiebolaget LM Ericson (Sweden) and Sony Corporation (Japan). The ownership pattern depicted in the Transfer Pricing study is as under:- "1.2.2. SEIN is a company incorporated in India on April 23, 2007 and is a subsidiary of Sony Ericsson Mobile Communications AB , a company incorporated under the laws of Sweden. The Sweden entities a 50:50 joint venture between Telefonaktiebolaget LM Eric....
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....pricing i.e. the profitability support the view that the international transactions of SEIN were in accordance with "Arm's Length' standard required under the Indian Regulations. 1.4.2. It is important to note that the results of the transfer pricing analysis and the recommendations are based on facts and financial data for FY 2007- 08 and are pertinent to financial year ended on March 31,2008. On a going forward basis, the results would need to be altered so as to incorporate latest financial results and any changes in the functions performed, risks assumed and the level of tangible and intangible assets owned and employed by SEIN and its AEs. Also, we recommend that SEIN reviews and update its transfer pricing arrangements to reflect changes in the market or changes in the nature of its intra-group transactions." (Bold-texted by the Bench) 6.1.3. The Group Companies Overview unique strength, background, role performance are addressed in the TP study as under:- "2.2.1. Sony Ericson Mobile Communications AB, a company incorporated in Sweden, is a 50:50 Joint Venture (JV) between the world renowned Sony Corporation and Ericson group. The JV entity was launched as a....
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....marily engaged in the business of trading of Sony Ericsson mobile handsets in India. As part of this activity, the company undertakes the promotion, sales, marketing and distribution of mobile handsets. The company also provides related post sales support/warranty services." (Bold-texted by the Bench) 6.1.5. A perusal of Industry Overview at pages 11 to 18 of the TP study shows that the background has been discussed presumably to address the competition in the market. A perusal of the same shows that from a situation where there was regulated monopoly enjoyed by the Department of Telecommunications (DoT) the Indian telecommunication industry entered a deregulated market competition where there are stated to be multiple players like Reliance, Bharti, Tatas, HFCL etc offering parallel networks to those of Dot/Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL). The growth in the industry is attributed to favourable telecom regulations, reduction in call rates and rise in FDI limit and increasing competition among the service providers. The study points out the performance of earlier entrants using GSM and Code Division Multiple Access (CDMA), the competit....
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....tential. 3.3.30. Major Mobile vendors have realized importance of distribution network, it is evident from number of retail outlets, until last year there were 79,000 mobile outlets, out of which 72,000 were of Nokia, other vendors realizing importance of these outlets helped in increasing total mobile outlets to 1,30,000 out of which 75,000 belonged to Nokia. Hence, implying that while Nokia had registered an increase of 4% in number of retail outlets over last year, the other players registered a staggering growth of 684% in number of retail outlets over last year. 3.4.1. Mobile phones have moved to the masses in urban areas, but the challenge is how to address semi-urban and rural areas. Mobile operators already cover most of the urban market and the 40% of new subscribers are coming from rural market. By the end of FY 2007-08, rural subscribers accounted for close to 25% of the total mobile user base in the country. The rural population is likely to reach 800 million by 2010, which is indicates that there is a huge potential market waiting to be tapped by the telecom companies. According to Voice and Data estimates, of the next 250 million users as many as 100 million wil....
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....ce of competitive actions, this is especially true in case of entry-level segment. So many companies are shifting their focus towards mid to premium level segment, whose value added phones provide some degree of protection against margin erosion, but economic slowdown can affect telecom sector as luxury end of handset market is particularly prone to economic slowdown. Besides that, there is significant pressure on telecom companies to reduce cost that will require efficient distribution of resources. In short, Telecom handset companies might have to fight on all fronts to stay in the race or even survive. (Bold-texting provided for emphasize) 6.2. The functions of the assessee are stated to be local marketing of mobile phones distributor of mobile phones/products; provision for repair and maintenance services which involve, determining long-term and short term policies in relation to the market in India; framing and implementing market penetration and future growth strategies. Based on the broad guidelines provided by the AEs who is responsible for all Research, Core, strategic and complex decisions, it may be relevant to extract para 4.4.5, 4.4.6, 4.4.8 & 4.4.9 of the TP stu....
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....s that the intangible are owned by the AE/Group Companies and the assessee is only a distributor owning normal routine tangible assets like office premises, warehousing facility, furniture & fixtures, computers & office equipments, vehicles etc. For ready-reference, we extract para 4.5.4 of the TP study as under :- "4.5.4. The trade name "Sony Ericson" is owned by overseas Group Companies. Accordingly, the Indian entity is a distributor of branded products, the brand being owned by the overseas supplier. The sale of a branded product to a distributor carries with it the stated or implied right to use the supplier's trademark or trade name only for the purpose of reselling the supplier's products. SEIN does not have nay other additional rights to use or exploit the marketing intangibles (trademarks or trade names) owned by Group Companies." 6.4. As per the risk profile the assessee is characterized as a normal risk distributor carrying out sales marketing and distribution activities. Before we proceed to consider how and to what extent the decision of the Special Bench in the case of L.G. Electronic's case is applicable to the facts of the present case, it is necessary t....
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....s to the meaning of the words used by the Legislature. The same cannot necessarily be always said of a decision which deals with a certain given set of facts for answering the specific question posed to the Judges. The Judges while deciding the same may dwell on various possibilities without the benefit of the facts in those cases and consequently arguments thereon which they may deliberate and at times without the benefit of specific arguments on those facts. The observations which may have been made in passing in these deliberations do not form the ratio decidendi of the decision. It would be too much to ascribe and read precise meaning to words in a decision which the judges who wrote them may not have had in mind. In support of the above legal position, we may make specific reference to CWT vs Dr. Karan Singh and Others. (1993) 200 ITR 614 (SC); CIT vs K. Ramakrishnan (1993) 202 ITR 997 (Kerala) and KTMTM Adbul Kayoom & another vs. CIT (1962) 44 ITR 689. The observations of the Hon'ble Apex Court in the case of CIT vs. Sun Engineering Works Pvt. Ltd. (1992) 198 ITR 297 (SC) specifically observed that it is neither desirable nor permissible to pick out a word or a sentence from ....
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....ess model of the assessee and the contractual terms entered into with the AE along with a detailed FAR analysis so as to characterize the transactions and the business model. After charactering the taxpayer on the basis of FAR analysis, a selection of comparable Companies has to made where functional similarity qua the transaction on the basis of the FAR analysis of the comparable companies is necessarily required to be done. In order to decide the applicability of any section, rule or principle underlying the decision or judgement which would be binding as a precedent in a case, an appraisal of facts of the case in which the decision has been rendered is necessary since "the scope and authority of a precedent should never be expanded unnecessarily beyond the needs of a given situation' as held by the Hon'ble Supreme Court in P.A.Shah vs. State of Gujarat AIR 1986 SC 468. More so in the case of transfer pricing the detailed analysis cannot be over looked as only thereafter the applicability of the decision to the facts of a case to which it is sought to be applied can be considered. 6.8. The need in the facts of the present case is more so, as transfer pricing legislation and th....
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....ly vary or on the contrary it may be borne out that the terms of the contract are identical however the conduct of the parties evidenced despite a similarity in the significant terms of the contract may be diametrically different. As such the conclusions qua the functions performed vis-a-vis the functions assumed would be entirely different. 6.10. In the facts of the present case on behalf of the assessee, the stand has been that keeping its legal claim alive the issue may be restored considering the "without prejudice" arguments, in terms of the decision of the Special Bench in L.G. Electronic's case. The claim of the department on the contrary has been that the legal issues having been decided against the assessee, the order may be confirmed as the issue is "covered". Accordingly, considering the above legal principles addressing the precedent value of decision, we hold that in order to decide the issue reference has to be made to the specific facts of the case and then apply the legal principle which can be said to constitute a precedent for deciding the issues. It would be a grave error of judgement to blindly rely upon a decision as a precedent for all future cases simply b....
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....ributor applying the bright-line test, following the precedent has to be decided against the assessee and assertions to the contrary that these are routine functions for a distributor would have no relevance. 6.12. On facts the bright-line from 3.35% will be needed to be calculated again as considering the partial relief granted by the DRP as a result of excluding Rediton India Ltd. and Compuage Infocom will result in 4.02% as the bright line. Applying this bright line there is still a difference in 7.06% and 4.02% as there is still expenditure in excess to the extent of 3.04% (7.06-4.02=3.04). Thus applying the precedent, the expenditure to that extent shall constitute non-routine functions as a result of which the brand owned by the AE has benefited resulting in service to the AE which has been done at the cost of the profits of the assessee earned in India. Accordingly upholding the application of the bright line test and upholding the finding that assessee has entered into an international transaction, the legal issues to that extent are decided against the assessee following the precedent in the decision of the Special Bench in L.G. Electronics case. Consequently, the groun....
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....ble to achieve an arm's length margin after considering total operating costs. It is seen that submissions on similar line had been made before the TPO and the DRP stating that as per the Global Pricing Policy, assessee is assured of 2% profit. Reliance in the course of the arguments has been placed on the Practical Manual on Transfer Pricing Manual on Transfer Pricing for Developing countries where India has been represented through the Representative of the Revenue. Para 10.3.8.15 (extracted in the earlier part of this order) addresses the concern of the Revenue on which it has been argued that the concern expressed is in the context of distributors who are stated to be no risk/low risk entities showing negative incomes/huge losses. From a perusal of page 23-26 paged written submission numbering 60 pages, it is seen that in the recently released Practical Manual on Transfer Pricing Manual for developing countries which includes the working of various authors including Representatives of Revenue, Govt. of India as is evident from the Forward to the Manual the concerns address loss making distributors who are stated to be no risk//low risk distributor. The participation of the Repr....
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....he comparables compensation may not still be due. The record shows that the net profit of the assessee is 2.5% and that of the comparables is 0.35% the higher margin can be argued to be received for the services rendered. The remuneration model of a distributor as per OECD TP Guidelines Manual and Australian Tax Office Guidelines also supports the argument that a distributor can be rewarded by pricing adjustment; direct payment of fees for services rendered and also by subsidies and credit notes etc. In the facts of the present case, it needs to be kept in mind that the assessee is characterized as a distributor and considering its FAR analysis it has performed a higher intensity of services when compared to its comparables. The distinguishing feature that whereas the assessee has received Credit notes worth 78 crore odd is a fact, the position whether the comparables have also received any such benefit or subsidy as observed in para 19 in the case of the L.G. Electronics needs to be considered as submitted on behalf of the assessee who requests similar enquiry qua the comparables may also be done. As seen the Special Bench in the case of L.G. Electronics was considering the fac....
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.... due on account of the pricing adjustment considering para 4.8.8 and 4.4.9 in the TP study report available on record and the credit notes of Rs. 78 crore odd received by the assessee and Question No-1,9,10 & 12 of para 17.4 of L.G. Electronic case keeping in mind our finding that the assessee is a distributor whose remuneration model is not only supported by International Tax Jurisprudence as available in the OECD Guidelines and Australian Tax Guidelines but is also found supported by Questions 1,9 & 10 of the L.G. Electronics case as considered by the Special Bench. The assessee has made a reference to its Global Pricing Policy on which the TP study is based, the same may be produce before the TPO/AO. As such the arguments of the assessee to the above extent are upheld. 6.15. On the issue of mark-up if still so warranted on facts the arguments of the Ld. AR have been that the same is excessive. It is seen that there is no discussion in the TPO's order as to why a mark-up of 15% is adequate. Similarly DRP also does not give any justification for reducing the same to 12.5%. We refrain from substituting the arbitrary mark-up by our own arbitrary estimate in the absence of any fac....