TaxTMI 
TaxTMI 
2017 (7) TMI 949
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....under section 143(3) read with section 144C of the Act is bad in law to the extent of additions/adjustments of Rs. 14,52,78,812 made in the impugned assessment order. 2. That on the facts and in circumstances of the case and in law, the Ld. AO [following the directions of Learned Dispute Resolution Panel ("Ld. DRP")] erred in assessing the returned income of the appellant of Rs. 4,09,24,720 at Rs. 18,62,03,530. 3. The Ld. Transfer Pricing officer (TPO)/ DRP erred on facts and circumstances of the case and in law in enhancing the income of the Appellant by Rs. 7,96,25,681 on account of. non-receipt of the reimbursement for "allegedly excessive" Advertising, Marketing and Promotion ("AMP") expenses incurred by the appellant and in doing so have grossly erred in: 3.1 disregarding the correct characterisation of the appellant's business i.e. being a normal risk bearing distributor undertaking all the risks relating to its business of distribution and instead, wrongly characterizing the appellant as a limited/ no risk distributor; 3.2 disregarding the nature of AMP expenses incurred by the appellant and incorrectly holding that such expenses results in developing marketi....
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....ing 4/5th of the total expenditure) paid towards advertisement charges by treating the same as deferred revenue expenditure. 4.1 That the Ld. AO has made the addition in an arbitrary manner by merely stating that whole of the expenditure incurred for advertising products through media in India cannot be allowed as revenue expenditure in one year itself; 4.2 That the Ld. AO relying on the Apex Court's decision which was rendered in a different context erred in alleging that the benefit of incurring such expenditure is stretched over a number of years and accordingly the expenditure needs to be amortized over a number of years; 4.3 That the action of the Ld. AO shall result in double whammy on the appellant as an addition has already been made on AMP expenditure by the Ld. TPO; 5. Without prejudice to the appellant's contention in ground No.4 above, the Ld. AO erred in not providing a deduction of 1/5th of the advertisement expenses pertaining to the preceding years in assessing the income for the year under consideration. 6. That the Ld. AO (following the directions of the Ld. DRP) erred in disallowing an amount of Rs. 45,61,318 being write-off of demonstratio....
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....annot be taken as a comparable for benchmarking AMP expenditure as it has different financial year ending vis-a-vis the assessee." 4. Briefly stated, facts of this case are : the assessee company is a wholly owned subsidiary of Bose Corporation, USA, (for short 'Bose US') and primarily engaged in the business of reselling high end audio products. It is a buy-sell distributor of Bose products and a support service provider. Bose India has divided its operation on two lines - one : retail sales; and two : professional sales; and marketing efforts in both the business lines is different. 5. On the reference made by the Assessing Officer under section 92CA (3) to determine the Arm's Length Price (ALP) in respect of international transactions entered into by the assessee during FY 2008-09, ld. TPO issued a notice and assessee filed necessary documents through its authorized representative and also attended the proceedings from time to time. 6. During the year under assessment, the assessee has entered into international transactions as under :- S.No. Description of the transaction Amount (in Rupees) 1 Purchase of finished goods and spares 309,415,090 2 Support Service Income....
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....rred by the assessee company is for the advantage of its AE since the brand name and trade name is owned by the AE for which the assessee company should have been suitably compensated by the AE; that the assessee has not received any payment in this regard from the AE. 12. On the basis of TP study, TPO adjusted Rs. 7,92,95,484/- on account of AMP expenditure for the benefit of AE along with mark-up of 15.27%. 13. The assessee company carried the matter by way of filing objections before the DRP and the same have been rejected. Feeling aggrieved, the assessee as well as Revenue has come up before the Tribunal by way of filing the present cross appeals. 14. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 15. Assessee company is engaged in the business of reselling high end audio products. In other words, it is a buy-sell of Bose products and a support service provider. Systems design and installation services are an essential feature in the market effort of Bose India and the price of these services is ge....
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....70% 20. Assessee company provided 14 comparables having GP/sales of 34.88% but all the comparables have been rejected by the TPO being not functionally comparable. However, TPO by recording that there has been no change in the functional profile of the assessee company as compared to last year, updated margin of the comparables used last year are being used for benchmarking AMP expenditure which are as under :- S.No. Company Name AMP/ Sales% 1 Adtech Systems Ltd. 3.97 2 Compuage Infocom Ltd. 0 3 Computer Point Ltd. 0.04 4 Dynacons Systems & Solutions Ltd. 0.1 5 Priya Ltd. 0.47 6 Sparc Systems Ltd. 0 7 Uniport Computer Ltd. NA MEAN 0.7633 21. On the basis of comparable study and by determining the "bright line" limit, the TPO came to the conclusion that any expenditure in excess of the bright line is for the promotion of brand / trade name which is owned by AE that needs to be suitably compensated by the AE and computed the amount representing bright line and the amount that should have been compensated as under :- Value of Gross Sales Rs.1,062,800,588 AMP / Sales of the comparables 0.7633% Amount that represent bright line 7,854,965 Expend....
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....n'ble jurisdictional High Court discussed in the preceding paras. Aforesaid decisions have consistently been followed by coordinate Benches of the Tribunal. In these circumstances, we are of the considered view that it would be in the interest of justice if the impugned order is set aside and the matter is restored to the file of TPO/AO for fresh determination of the question to determine, "as to whether AMP expenditure is international transaction", in the light of the judgments rendered by Hon'ble Delhi High Court discussed in preceding paras. In case the existence of such an international transaction is not proved, there shall not be any transfer pricing addition. However, in case the international transaction is proved to be existed, then the TPO will determine such international transaction in the light of the judgment rendered by Hon'ble jurisdictional High Court after providing an opportunity of being heard to the assessee. 28. Second ground raised by the assessee is : "as to whether AO/DRP have erred in disallowing an amount of Rs. 45,61,318/- being write off of demonstration equipment inventory by holding that such inventory should have been valued at cost disregarding ....
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....quipment : Rs. 110/- This means that the taxpayer company is claiming the NRV of the demo equipments at below the half the selling price (42% to be precise) of the normal equipment. The above position is illustrated for the demo equipment after the one year only. The gap is even wider for the second year and for each increasing year. Such a heavy discount is never given by the company as is evident from its sale records". It appears that the provision of demo equipments is based on pure estimation and hence the same cannot be treated as real expense. (ii) Before the AO, the taxpayer company could not produce any documentary evidence like sale bill etc to show that any of the demo equipments were sold at 42% (or lower for the older equipment) of its normal sale price. (iii) The demo equipments are not generally used for more than one year for display. These are mostly sold within that period. To keep pace with the competition, the models are changed frequently and the old inventories are sold to give space to the new range of equipments. The AO has noted clearly that the details of the demo equipment filed by the taxpayer reveals that the major portion of the demo equipm....