TaxTMI 
TaxTMI 
2018 (4) TMI 636
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....d to the TPO u/s 92CA of the Act. 3. The TPO observed that the assessee has entered into three international transactions i.e.(i) provision of software development services, (ii)provision of maintenance & technical support services; and (ii) distribution activity of parent company's goods in India. He accepted the first two transactions to be at ALP. However, as regards distribution activity, he observed that the AE has supplied products to the assessee free of cost for sale in India and that this transaction was not reported in the TP document as the receipt of products was free of cost and the sales were to the domestic parties. The TPO was, however, of the opinion that even though the cost price is 'nil', the product has a price and that the assessee should have been compensated by way of a suitable mark up. He thereafter, proceeded to consider four companies as comparables and arrived at the average margin of the comparable companies at 1.26% as against the assessee's margin of -81.54%. He accordingly, proposed an adjustment of Rs. 1,54,47,842. The AO accordingly proposed the draft assessment order against which the assessee preferred its objections to the DRP which were rej....
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.... Imposing interest under section 234 D of the Act on the transfer pricing adjustments. 10) Levy of penalty under section 271(1)(C), 272BA and 271AA of the Act Imposing penalty under section 271(1)(C), 272BA and 271AA of the Act. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal". 4. In addition to the above, the assessee has also raised the following additional grounds of appeal: "On the facts and in the circumstances of the case, the Learned Dispute Resolution Panel/Learned Transfer Pricing Officer erred in facts and law by, 1. Re-characterizing the Distribution activities of Appellant to a Service Provider disregarding the following facts: * Sales are made and revenue earned by Appellant from third party customer and not from AEs * Appellant carries out functions of distributor and also takes risks of a distributor including credit risks * Appellant charges VAT/Sales Tax to third party customers in line with distributor and the service provider is not required to pay VAT/Sales Ta....
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....e margin was 1.26% as against the margin of the assessee at (-) 81.54%. Thereafter, he proposed the ALP adjustment at Rs. 1,54,47,842. The AO accordingly proposed the adjustment in the draft assessment order. The assessee filed its objections before the DRP, but the DRP confirmed the adjustment and the final assessment order was passed. 8. The learned Counsel for the assessee, while reiterating the submissions made before the authorities below, submitted that the agreement between the assessee and its AE was distribution agreement, but the TPO has characterized it as a service agreement and has held that a mark-up on the operational cost is to be made to determine the ALP. He submitted that undisputedly, the assessee is not making any payment to the AE in the relevant A.Y for the products supplied to it, because, according to the agreement between the assessee and its AE, the assessee is required to make the payment to the AE only in the year where the revenue exceeded the operating cost of the assessee i.e. on making of profit. He submitted that this financial year is the first year of the distribution activity of the assessee company and therefore, it had to take premises on r....
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....by mutual agreement of the parties to reflect changes in market conditions. If the parties determine necessary, the Specified Percentage will be revised in accordance with a transfer pricing study. b) For purposes of this Agreement, Operating Costs/Expenses include but are not limited to personnel costs. depreciation on fixed assets, rental costs, postage charges, telecommunications and processing costs, electricity and maintenance expenses, legal and accounting fees and expenses, and other similar expenses. Such Operating Costs/Expenses shall be determined and apportioned on a basis consistent with that used internally by Distributor for similar costs and expenses. c) If Distributor's Operating Costs/Expenses exceed the sales revenue of Distributor during a fiscal year, no Payment Amount shall be paid by Distributor to Comm Vault US in connection with that fiscal year and such excess Operating Costs/Expenses shall be considered in determining the Specified Percentage for the subsequent fiscal year. d) The Payment Amount paid by Distributor to Comm Vault US shall be exclusive of all Indian taxes". 11. In Form No.3CEB, the assessee has reported as u....
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....n accepts two exceptions to the said rule. The first being where the economic substance of the transaction differs from its form. In such cases, the tax authorities may disregard the parties' characterisation of the transaction and re-characterise the same in accordance with its substance. The second exception also mandates that the actual structure should practically impede the tax authorities from determining an appropriate transfer price. 14. In the case before us, there is no difference between the form and substance of the transaction of distribution to recharacterise the transaction as a service agreement. As per the agreement, the AE is entitled to a specified percentage of the distributor's sales revenue less operating costs/expenses of the distributor. Since the assessee had no revenue left after reducing the operating cost/expenses, the AE was not paid any percentage. The revenue generated by selling the goods is retained by the assessee. The TPO has instead computed the mark up on the operating cost of the assessee to determine the ALP and brought the notional income to tax which is not justified. Therefore, the additional grounds of appeal are allowed. 15. As ....