TaxTMI 
TaxTMI 
2013 (4) TMI 872
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....consistent approach in applying single year data to only one set of transactions. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 11,92,75,955/- made by the AO on account of royalty paid to SEC Korea. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 68,68,216/- made by the AO on account of provision for warranty/after sale service compensation. 4. On the facts and circumstances of the case and in laws, the Ld. CIT(A) erred in deleting the addition of Rs. 4,56,75,050/- made by the AO on account of advertisement and sale promotion expenses (brand promotion). 5. On the facts and circumstance of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 4,56,75,050/- made by the AO on account of advertisement and sale promotion expenses (being capital in nature). 6. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 35,36,485/- made by the AO on account of purchase of computer software. 7. On the facts and circumstances of the case and in ....
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....d 1.3.2005 determined the arms length price in respect of the transactions entered into by the assessee company with its foreign associated Enterprise. In the first appeal the assessee raised (i) General Grounds (ii) Corporate Tax Issue (iii) Transfer Pricing Issues (TP issues). On the relief given by the Ld. CIT(A), the revenue is in appeal before us. Ground Nos. 1, 1.1, 1.2, 2 and 3 to 5 6. The relevant facts are that AO noticed the following international transactions entered into by the assessee with its AE during the year :- Description of the international transaction Book value of the transaction(in Rs.) Arm's length price computed by the appellant (Rs.) Purchase of raw material 1,242,617,458 1,242,617,458 Sale of raw material 236,408 Purchase of spares 54,006,189 54,006,189 Purchase of finished goods for resale 684,832,976 684,832,976 Purchase of capital items 102,003,362 102,003,362 Repair and Maintenance Expenses 3,009,253 3,009,253 Payment of Royalty 119,275,955 119,275,955 Cost Recharges 3,647,905 3,647,905 Reimbursement of expenses 175,....
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....assessee before the Ld. CIT(A) on several grounds. The Ld. CIT(A) after discussing the issue in detail has deleted the addition of Rs. 24,03,22,940/- made by the AO on account of Arms Length Price which has been questioned by the revenue with this contention that the Ld. CIT(A) has erred in applying current years' data for the comparability analysis when the issue of the multiple data both by the assesee and TPO was not under challenge before him. It has been further contended that the Ld. CIT(A) has erred in not following a consistent approach while preferring application of single year data to only one set of transactions. 12. In support of the grounds the Ld. DR submitted that the Ld. CIT(A) was not justified in selectively altering the very basis of functional and economic comparability carried out by the TPO and while doing so he has destroyed the uniformity and consistency of approach adopted by the TPO, while applying current years' data to one set of transaction and leaving the other set of transaction with multiple year data. He submitted that in the same order of assessment , two different kinds of data can not be used - multiple year for one transaction ....
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....nies would be comparable on the basis of functions performed, assets used and the risks undertaken (FAR) and it is only after this primary exercise that the profit margins are obtained to find out the ALP. The Ld. CIT(A) could not have simply substituted the profit margins of comparable companies from the current year data without doing this exercise. He contended that it would not be legally valid to start with a presumption that if a company is comparable on the basis of earlier year's financials, it would ipso facto be comparable on the basis of next year financials as well. There may be several extraordinary receipts/expenses, there could be related party transaction, there could be new set of wholly uncomparable activities in the current year which may render the comparables as wholly uncomparable. He submitted that the use of separate set of data would make it absolutely necessary to go for a fresh search of comparables as many new companies would have entered the data base which would render the earlier search as wholly eschewed. It would, therefore, not be possible for the revenue to make any comment on the chart so filed unless the comparability is examined afres....
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....followed by ClT(A) in deciding to use current year's data, since he had put Assessee as well as TPO on notice of his intention of doing so by seeking an explanation from both of them. Assessee strongly refutes unsubstantiated proposition that assessee and TPO were not given a chance to explain their position on use of current year data. The Order of the CIT(A) in paragraph 11.2 clearly records that "the appellant as well as the TPO were asked to explain why only current year data should not be used for ALP determination keeping in view the provisions of Rule 10B(4)." It may be noted that Rule 10B(4), (as reproduced in paragraph 11.6 of his Order) statutorily requires that the data to be used shall be the data relating to the relevant financial year. Thus both, the appellant and the TPO were given a reasonable opportunity of being heard and actually both availed of this opportunity by filing their written submissions. The appellant furnished its written submissions dated 18/11/2008 which was duly considered by the CIT(A) in paragraph 11.3. Similarly, the TPO offered its written submissions on 25/2/2009 which was duly considered by the CIT(A) in paragraph 11.4 of his Order. It is....
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....Class I transactions at Rs. 1,05,62,97,960/- as against their book value of Rs. 1,29,66,23,647/-. The TPO thus proposed an adjustment of Rs. 24,03,22,940/- to the transfer prices of class I transactions of the purchase of raw material and purchase of the spares parts with the AEs. Class II transactions were accepted to be at arm's length. So far as allocation of advertisement expenses for adjustment is concerned, the assessee had incurred Rs. 87.86 crores as expenditure on advertisement, marketing and sales promotion etc. Out of this expenditure , the assessee had received Rs. 19.17 crores on reimbursement from its overseas AEs. In its books of accounts the assessee reduced the amount received as reimbursement from the total expenditure incurred on account of advertisement, marketing, sales promotion and after sales service. Thus, net expenditure of Rs. 67.69 crores was shown in the assesssee's profit and loss account for the year. The TPO while computing the arms length price of the international transactions did not consider reimbursement of Rs. 19.17 crores received from its AE as part of operating income while treating such marketing expenses to be part of operating exp....
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....ndia. The assessing officer while making the above disallowance did not appreciate that the assessee was the exclusive dealer for Samsung consumer electronic products and home appliances in India and entire expenditure on advertisements and sales promotion was incurred for promoting the sales of such products of the appellant in India, benefit of which was derived entirely by the assessee. The assessing officer made further disallowance of Rs. 4,56,75,050 being 10% of the total expenditure on advertisement and sales promotion holding the same to be capital expenditure resulting in an enduring benefit. 16. The Ld. CIT(A) following the decision of Delhi Bench of the Tribunal in the case of Sony India (P) Ltd. (Supra) and having regard to purpose of the expenditure and to the extent expenses were for the benefit of AEs held that the reimbursement received from the AEs are tobe treated as part of operating profits of the taxpayer. He accordingly held that exclusion of Rs. 19.17 crores from the operating profits of the taxpayers based on the given facts and circumstances of the case is not justified. The Ld. DR pointed out that issue of marketing and advertisement expenses has been r....
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....nding that the Special Bench deemed it fit to deal with the arguments of the Ld. AR that if rate of net profit of the assessee is better than other comparables, then no adjustment can be done under Chapter X in para No. 21.8 of the decision, the Special Bench has held that there is no bar on the power of the TPO in processing the international transactions under the TP provision when the overall net profit earned by the assessee is greater than others. It has been held that earning overall higher profit rate in comparison to other comparable cases cannot be considered as a license to the assessee to record other expenses in international transactions without considering the benefit, service or facilities out of such expenses at arms length. All the transactions are tobe separately viewed. The issue before the Special Bench was as to whether on the facts and in circumstances of the case, the AO was justified in making transfer pricing adjustment in relation to advertisement, marketing of sales promotion expenses incurred by the assessee? And secondly as to whether the AO was justified in holding that the assessee should have earned a mark up from the associated enterprise in respect....
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.... transaction cannot be recharacterized. If, however, the answer is in negative, then the transaction needs to be provoked further for determining as to whether its recharacterisation is required. Such recharacterisation can be done with the help of the ratio -decidendi of the said judgment itself, being making a comparison with what "independent enterprises behaving in a commercially rational manner" would do tied with the fact of the assessee also simultaneously advertising the brand of its foreign AE. The Special Bench reverting to the context of AMP expenses has observed further that one needs to find out as to how much AMP expenses would an independent enterprises behaving in a commercially rational manner, incur. Once by making such a comparison, the result follows that the Indian AE, prominently displaying brand of its foreign AE in its advertisement has incurred expenses proportionately more than that incurred by independent enterprises behaving in a commercial rational manner then it becomes eminent to recharactersation the transaction of total AMP expenses with a view to separate the transaction of brand building for the foreign AE. The special bench has referred United Na....
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.... India Pvt. Ltd. is not relevant in the fact and circumstances of the present case. 20. It is pertinent to note over here that the TPO /AO have equated the reimbursement of expenses with equity or windfall gain or subsidy or some adhoc payment whereas the Ld. CIT(A) has accepted the claim of the assessee on the basis that the assessee had entered into prior agreements for reimbursement of expenses with its AE and the genuineness or bonafide of the agreement was not doubted or disputed at any stage of proceedings by the TPO /AO. The TPO has also accepted in the TP order that the reimbursement receipt was spent by the assessee to wholly and exclusively for its business operations. In this regard the Ld. CIT(A) has taken strength from the decision of Delhi Bench of the Tribunal in the case of Sony India (P) Ltd. (supra) holding that the reimbursement should be included as part of operating income of the tax payer. The Ld. CIT(A) has accordingly held that exclusion of Rs. 19.17 crores from the operating profit of the tax payer based on given facts and circumstances of the case is not justified. The TPO has held as to whether an expenditure is operating or non operating does not depe....
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.... that due to incurring of such expenses, the sales of the assessee company had increased substantially as demonstrated below. June 99 Dec.99 Mar.00 Mar.01 Mar.02 Sales Qty. 41,254 60,644 54,542 56,779 76,386 Sales Value 53,70,40,746 74,18,78,271 66,16,91,561 77,29,82,225 88,31,12,779 27. The genuineness of the expenditure has not been doubted, the reasonableness of the expenditure is to be seen from the point a businessman as held by Hon 'ble Supreme Court in case of Walchand & Co. (65ITR 381) and Delhi High Court in case of Dalmia Cements Pvt. Ltd. (254 ITR 377). However, :allowance u/s 40A (a) can be made on account of expenditure being unreasonable or excessive, in the instant case it is body's case that persons to whom payments has been made on account of advertisement expenses, were covered by the provisions of Section 40A(2). Presumption of the A.O. that by incurring the expenditure, incidental advantage to the parent company will be obtained which owned Samsung brand, that ::t alone would not seek to distract from the deductibility of expenditure in the hands of the asse....
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.... this effect. The assessee had also made no claim for deduction and no debit to profit & loss account was made in this year. Under these circumstances, we are of the view that the Ld. CIT(A) was justified in deleting the addition treating the same as part of operating profit of the taxpayer. The same is upheld. The ground No. 3 is thus rejected. Ground No. 2 22. During the year the assesssee had incurred an expense of Rs. 11.92 crores on account of royalty payable to M/s. Samsung Electronics Company, Korea (SEC) in terms of agreement signed with them. The AO asked the assessee to clarify why whole of the royalty payment should not be disallowed as royalty is ordinarily incurred not for the purpose of business but for procuring a right and inherent ability to do business, and ability to do business by procuring certain rights / assets / knowhow information etc. is a capital asset and not a revenue expenditure. The AO was not satisfied with the reply furnished by the assessee to him. The AO was of the view that royalty agreement is meant to be for indefinite period of time . Technical know-how which assists in manufacture of goods is a capital asset u/s 32(i)(ii) and the ....
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.... owner of it. From the terms and conditions of the agreement it appears that the agreement can be terminated by giving 6 days notice on which the assessee is required to stop using the technical know how and was to return the technical information to SEC. As per the agreement the assessee was required to maintain secrecy of the technical information etc. and was not permitted to sub license, the right under the agreement. The agreement did not vest in the assessee proprietary rights in the technology of SEC. Even during the currency of agreement SEC would continue to remain the ownership of the technology and the assessee would at no stage acquire propriety rights therein. The ratio that running royalty payment linked to sale price for technical assistance provided in the course of production is revenue in nature and now is an established preposition of law by the above cited decisions of Hon'ble Supreme Court and Hon'ble High Courts. Taking strength from these decisions the Ld CIT(A), in our view, has rightly held that the claimed royalty payment was deductible as revenue expenditure. The same is upheld. Ground No. 2 is accordingly rejected. 26. Till now we have a....
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..../ TC for economic analysis. The Ld. CIT(A) noted that almost all of the transactions of the assessee with its AEs are on the cost side, the cost base of the assessee includes controlled transactions with AEs for comparability analysis. Hence the Ld. CIT(A) was of the view that the PLI to be used should have its base which should not be controlled. Therefore, for better comparability analysis OP / Sales is to be used as the PLI. While examining the issue of the data to be used for ALP determination, the Ld. CIT(A) noted that both the assessee and TPO have used past two years average data. He accordingly asked both the assessee as well as TPO to explain why only current year data should not be used for ALP determination, keeping in view the provisions of Rule 10B(4). In response the assessee submitted that it has prepared the transfer pricing documentation for the financial year 2001-02 thereby applying contemporaneous documentation requirements prescribed by Rule 10D(4) which requires the documentation should exist latest by the due date of filing the assessee's tax return i.e. October 31, 2002. It was submitted that it is apparent from the TP report that the assessee'....
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....using multiple year data of comparables. It was submitted that use of multiple year data for the purpose of computation of arm's length price is permitted under the Indian Regulations. Through use of multiple year data of comparables difference due to factors such as business or product cycles can be effectively taken into account and comparability can be reliably determined. 30. It was submitted further that a tax payer would generally always have regard to the past year's data before actually determining the transfer prices for a particular year. Past year's data would include evaluating the information on several aspects internal as well as external . It was accordingly submitted that reference of past two years data for the purpose of comparability analysis (as per proviso to Rule 10B(4) should be an automatic, adequate and sufficient compliance of the provisions of Rule 10B(4). 31. Para No. 1.49 and 1.50 of OECD guidelines were quoted to say that the multiple year data is also useful in providing information about the relevant business and product life cycles of the comparables. It was submitted that difference in business or product life cycle may have mater....
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....emained that in his order the TPO has relied on the TP report submitted by the assessee for using the data for comparability analysis. It was reported that this was the first year of transfer pricing assessment where the issues had not crystallized. Based on the availability of the data the comparables were selected or the weighted average financial data was used for benchmarking purpose. 35. Considering the above reactions of the parties the Ld. CIT(A) has come to the following conclusion :- FINDINGS 11.5 The appellant in its comparability analysis had used the financial year data for the period 1999-2000 &2000-01 to compute OP/TC for... the comparables and used the current financial year data of 2001-02 for computing OP / TC for the appellant. The TPO / AO also used the current year data for computing the OP / TC of the appellant and used weighted average of financial years 2000-01 and 2001-02 for computation of OP/ TC for comparables. This issue is discussed in the light of the provisions of Rule 10B(4) of the Rules. 11.6 Rule 10B (4) of the Rules specifies the requirement regarding data to be used for analyzing the comparability of an uncontrolled ....
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....tion is supplementary in nature. 11. 9 The OECD Guidelines in Para 1.49 to 1.51 have acknowledged the use of multiple year data under special circumstances. Use of multiple year data is considered useful to smooth out the fluctuations caused by business/economic/product life cycle. However, the mere claim that there exists a cycle is not sufficient. Whenever a claim is put forward regarding existence of a cycle and thereby justifying the use of multiple year data, the taxpayer would be expected (0 explain why it believes that there is a cycle, what type of cycle it is, duration of a cycle and to what extent the cycle is expected to impact the data to be used. Thus multiple year data should be used only when it adds value to the TP analysis. 11.10 Under section 92D(1) of the Act, every person entering into an international transaction, is required to keep and maintain such information and document, in respect thereof, as being prescribed under the Rules. Rule 10D(1) of the Rules, requires maintenance of a record of the analysis performed to evaluate comparability as well as a record of the actual working carried out for determining the ALP. Rule 10D(....
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....ant has not brought on record any cogent relevant and reliable evidence to prove that the data for preceding two years revealed facts, which could have an influence on the determination of ALP. The existence of any product/economic/business cycle affecting the performance of the appellant and those of the comparables has not been documented for by the appellant. 11.14 The issue relating to use of current year data is well settled now in view of the decision of Bangalore Tribunal in the case of Aztec Software& Technology Services Ltd. and reaffirmed in the case of Mentor Graphic Pvt. Ltd. Even in the recent order dated 10.02.2009 in the case of, Honeywell Automation India Lid Vs Den the ITAT Pune Bench (2009-TIOL- 104-ITAT-Pune) has also reaffirmed this issue. Therefore, I hold that unless specific reasons are brought on record, the comparability analysis is to be conducted on the basis of current year data. 11.15. In view of the foregoing discussions, ex-post analysis carried out by the appellant for justifying its transfer prices relying on prior year data is not acceptable. Therefore, I am of the considered view in the light of discussions in the preceding sub- ....
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.... In conclusion he held that relevant data be used for determination of arm's length price is the current financial year of 2001-02. The action of the Ld. CIT(A) can be appreciated in view of the decision of Hon'ble Supreme Court in the case of CIT vs. British Paints India Ltd. (supra) wherein the Hon'ble Court has been pleased to hold that it is not only the right but the duty of the Assessing Officer, to act in exercise of his statutory power, for determining what in his opinion, is the correct taxable income. There is no dispute that the first appellate authority has got co-terminus power with that of the Assessing Officer to achieve the just assessment, the very and ultimate object of the I.T. Act, 1961. We thus do not find substance on the issue raised in ground Nos. 1,1.1 and 1.2 of the appeal. The same are thus rejected. 37. The next basis of adjustment made by the TPO remained the comparable company analysis. The TPO rejected Kirloskar Airtech Ltd. (KAL) as a comparable for the assessee under Class I, giving reasons such as operating loss, negative networth, meager turnover and expenditure, limited production and market share, possible expenses of relate....
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....panies is less than 10-15% of their respective total revenues which is acceptable as per the decision of Tribunal in the case of Sony India Pvt. Ltd. vs. DCIT (supra). We find that the first appellate order in this regard is reasoned one and there is no reason to interfere therewith. The same is upheld. Determination of arms length price In view of adoption of use of current year data and taking reimbursement of expenses as part of operating profit, the OP/sales calculation of the assessee has ultimately been arrived by the Ld. CIT(A) as under :- Particulars Manufacturing segment (Class I) Sales (including Mgmt. Fees. Scrap sales & Export incentives) 6,48,96,73,238 Total Income 6,48,96,73,238 Cost of goods sold 3,52,34,28,562 Excise duty 88,20,70,206 Rates & Taxes 8,70,74,369 Value Added expenses 1,66,69,93,086 Total Costs (TC) 6,15,95,66,223 Operating Profit (OP) 33,01,07,015 OP / Sales 5.09% 12.2 Using current year data of comparables, the mean OP/Sales of the comparables used by the TPO in the TP Order is as follows :- S. No. Company Names OP/Sales for FY 2001-02 1. B.P.L Ltd. 9.55% ....
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.... Grounds Nos. 1,1.1,1.2,3,4 and 5 are accordingly rejected. Ground No. 6 39. During the year assessee had incurred expenses aggregating to Rs. 4041697 on purchase of various computer soft ware as shown in para No 12.1 of the assessment order. In response to query raised by the AO in this regard, it was submitted by the assessee that the expenditure did not result in an enduring benefit in capital field and therefore is not in the nature of capital expenditure. Relying on the decision in the case of CIT vs. Aravali Construction Co. Pvt. Ltd. 259 ITR 30 and others the AO held it to be an asset and after allowing 25% depreciation he made a net addition of Rs. 3536485/-. Being satisfied with the submission of the assessee the Ld. CIT(A) has deleted the addition. 40. In support of the grounds the Ld. DR has placed reliance on the assessment order. The Ld. AR on the other hand tried to justify the first appellate order on the issue. 41. Having gone through the orders of the authority below we find that the details of the software under consideration furnished are as follows :- S.No. Particulars Nature Purpose Amount Remarks 1 Site hosting Charges ....
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....e raised is fully covered in favour of the assessee by the decisions in the cases of ACIT vs. Bhawmik Color Pvt. Ltd. 20TTJ (SB) 865 and CIT vs. Hotel Hill top 313 ITR 116 (Raj.). He submitted further that provisions of section 2 (22)(e) of the Act are not applicable in the present case as assessee is not a shareholder of SEIIT i.e. lending company. A lender is to be treated as company in which it is substantially interested, being 100% a subsidiary of SEC Korea which is listed at Korean Stock Exchange. He also placed reliance on the decision of Pune Bench of the Tribunal in the case of Daimler Chrysler India Pvt. Ltd. 2009-TIOL-68- ITAT-Pune. 44. Having gone through the orders of the authorities below and the decisions relied upon we find that in the case of Bhaumik Color Pvt. Ltd. (supra) it has been held that deemed dividend u/s 2(22)(e) of the Act can be assessed only in the hands of the shareholder of the lender company and not in the hands of a person other than a share holder. The contention of the assessee before the authorities below in this regard has not been rebutted that the depositor of inter-corporate deposits i.e. SEIIT is not a private limited since it is a subs....