TaxTMI 
TaxTMI 
2019 (10) TMI 845
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....cs Pvt. Ltd. (SIEL), is a company incorporated in India under the Companies Act, 1956 and is primarily engaged in the business of manufacture and sale of consumer electronics and home appliances goods such as colour televisions, refrigerators, air conditioners, washing machines, microwave ovens, computer peripherals etc. The appellant company is a part of the Samsung group of companies. It is 100% subsidiary of Samsung Electronics Co. Ltd. Korea ('SEC'). One common ground permeating in all the years except for the appeal for AY 2006-07 is the ground pertaining to transfer pricing adjustment made on account of advertising and marketing promotion (AMP) expenditure incurred by the appellant, which shall be dealt firstly and subsequently, all other grounds shall be taken up. AY 2005-06 3. Facts in brief for the AY 2005-06 are that, the appellant had filed its return of income on 31 October 2005, declaring a loss of Rs. 6,35,44,316. The assessing officer referred the case to the Transfer Pricing Officer - II (2), New Delhi (TPO) for determination of the arm's length price (ALP) of the international transactions entered into by the appellant with its associated enterprises. During th....
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.... services, software development service and other miscellaneous transactions, i.e., payment on royalty and reimbursement of expenditure. 5. In respect of Class -I (manufacturing) segment, following transactions have been grouped together by the appellant in its transfer pricing study prepared under rule 10B of the Income Tax Rules 1962 (Rules); i) Import of raw-materials; ii) Import of spare parts' iii) Export of financial goods; iv) Purchase of goods on sample basis; v) Purchase of sales promotion material; As stated above, assessee is engaged in the manufacturing of consumer electronic goods, home appliances and colour monitors. Cost Plus Method (CPM) was chosen qua this segment as the most appropriate method in its transfer pricing study. The profit level indicator taken was taken as gross profit/input costs. For the benchmarking exercise, an economic analysis was carried out in the TP study leading to identification of 11 uncontrolled comparable companies. Since appellant had earned gross profit margin of 36.6% which was much higher than the gross profit earned by the comparable companies, hence it was reported that the international transactions in which Cla....
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....99 crores was shown as the net advertisement expenditure. The TPO concluded that this was an erroneous approach and was of the view that the entire amount of Rs. 306.38 crores incurred under the head "advertisement" should be taken into account to compute operating profit and the operating profit margin. This approach and calculation of the TPO was based on a similar approach adopted in the prior assessment years. Accordingly, while the operating expenditure under the head advertisement was increased from Rs. 163.99 crores to Rs. 306.38 crores leading to fall in operating profit and margin, the corresponding reimbursement of Rs. 142.39 crores received from the appellant's parent company was not included as part of the revenue. Based on this approach, the operating profit margin (OP/OR) of the manufacturing segment was determined at (-) 4.34% and the distribution segment at (-) 3.5%. The TPO further proceeded to undertake a fresh benchmarking analysis of the uncontrolled comparable companies and arrived at a set of 12 comparable companies for the Class-I manufacturing segment and set of 13 comparables for the Class-II distribution segment. The arithmetic mean of the operating profit....
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....ondary analysis (Rs.) on protective basis 1,222,579,910 However, no addition was made by the TPO/AO in this respect and this analysis was meant to the used if the additions made under TNMM for Class I and II were deleted in appeal. This was an alternate and without prejudice analysis given by the TPO. 10. The AO incorporated the adjustment to the ALP made by the TPO and further made the following additions to total income:- (a) Recruitment and training expenses of Rs. 1,72,98,334 was treated as capital expenditure and not allowable as a revenue expenditure u/s 37 of the Act; (b) Loss arising on account of fluctuation of foreign exchange currency amounting to Rs. 7,79,52,000 was disallowed as being notional and contingent in nature. Subsequently, the Ld. AO passed an order (u/s 154) dated July 24, 2009 deleting the addition made on this account; (c) Depreciation on UPS, printers and servers was restricted to 15% as against 60% claimed by the appellant leading to a disallowance of Rs. 3,21,617. 11. The assessee being aggrieved by the orders of the TPO and AO preferred an appeal before the Commission of Income Tax (Appeals)-XXIX, New Delhi (CIT(A)) contesting the afores....
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.... (h) As regards the issue of re-computation of profit margin of the appellant by treating the reimbursement received from its AE as operating expenditure while not treating the same as operating income, the CIT(A) held the same to be unjustified. He held that this approach of the TPO had been adopted in prior assessment years as well but the same had been negated by his predecessors in A.Yrs. 2002-03 to 2004-05. By relying on these prior years' orders, he held that the reimbursement of Rs. 142.39 crores was to be treated as operating income and profit as well. (i) The CIT(A), however, approved the secondary analysis carried out by the TPO in respect of the AMP expenditure whereby he had made a protective assessment on account of "excessive" AMP expenditure incurred by the appellant to promote the "Samsung" brand. As per the TPO, since the appellant's combined AMP expenditure for this year at 7.7% of sales was much higher than 1.05% of sales (the three years average AMP spend by the comparables in the manufacturing and trading segments), the excess of 6.65% (corresponding to Rs. 264.65 crores) represented a brand promotion service rendered by the appellant company to its parent....
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....% provided in the Proviso to Section 92C(2) is not a standard deduction and if the difference between the transfer price and ALP exceeds 5%, the whole of such difference shall be treated as an adjustment. (k) The CIT(A) computed the profit margin of the appellant at (- ) 0.64% as against the comparables mean profit margin at (-) 7.37% using current year data for the Class I manufacturing segment leading to the deletion of the TP adjustment made in this segment. Further, the margin of the Class II Distribution segment of the appellant was worked out to be 0.21% as against the mean margin of the comparables at 0.38% leading to adjustment of Rs. 3,30,33,800 in this segment. The margins were computed after giving effect to the CIT(A)'s findings on treatment of reimbursement, exclusion of certain comparables and use of current year data for the comparables. (l) As regards the disallowance pertaining to treatment of recruitment and training expenses as capital expenditure and not revenue expenditure, the CIT(A) deleted the disallowance by relying on the decision of its predecessor in AY 2004-05, as well as the ITAT on this issue in appellant's case for A.Y. 1998-99. The CIT(A) obse....
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....isdiction assigned under the Indian transfer pricing regulations by analyzing the advertisement expenditure of the appellant, in plain disregard of the fact of the same, being a domestic transaction undertaken by the parties, does not fall under the purview of Section 92 of the Act. GROUND NO. 3.4: The AO/CIT (A) has erred in concluding that the appellant has incurred excess advertising expenditure vis-àvis comparable companies and should have accordingly, been reimbursed for the same. GROUND NO. 3.5: The AO/CIT (A) has erred in not appreciating that the advertisement expenditure was incurred exclusively for promotion of products of the appellant in India and was in the nature of business expenditure allowable as deduction. Ground NO. 3.6: The CIT(A) has erred in upholding the secondary analysis undertaken by the TPO when the arm's length price of the appellant's transactions with the AEs have already been tested under the transactional net margin method. The grounds and issues pertaining to AMP taken up by the appellant in other AYs are similar and are not being reproduced herein for the sake of brevity. 15. From AY 2005-06 to AY 2011-12 (except for AY 2006-07)....
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.... has come to be known as the "Bright line test" which has been subject matter of extensive litigation before the ITAT and the High Courts. The Special Bench of this Tribunal in the case of L.G. Electronics [2013] 140 ITD 41 had approved this approach and had held that excessive expenditure could be treated as a separate international transaction that could be subjected to arm's length exercise on its own. While holding so, the Special Bench had laid down extensive guidelines to determine the value of the international transaction and the ALP of the same. Subsequently, the Hon'ble Jurisdictional Delhi High Court in the case of Sony Ericsson [2015] 374 ITR 118 has held that the "Bright line test" was not a valid test of determining the ALP of the AMP transaction as it was not statutorily mandated. The High Court further laid down numerous guidelines and principles to determine the ALP of AMP transaction. Subsequent to this the Hon'ble Delhi High Court expanded the jurisprudence in this regard in the cases of Maruti Suzuki [2016] 381 ITR 117, Whirlpool [2016] 381 ITR 154 and Bausch & Lomb [2016] 381 ITR 227 by holding that existence of an international transaction merely on the ground....
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....enue has to show that there existed an agreement or understanding or arrangement, that the Indian entity would incur AMP expenditure for or on behalf of the AE which owns the brand. In the absence of such "action in concert", no international transaction can be said to exist. If the existence of international transaction cannot be established with any degree of certainty, the question of determining the ALP of the same would not arise. 20. The same principle has been upheld in numerous other judgments of the Delhi High Court as cited below:- * Goodyear India Limited (ITA 77/2017 & CM Nos. 3072- 73/2017, ITA 78/2017 & CM Nos. 3074-75/2017, ITA 79/2017 & CM No. 3076/2017) * Amadeus India Pvt. Ltd. (ITA 154/2017) * Casio India Company Private Limited (ITA 309/2016) * Maruti Suzuki India Ltd (ITA No. 110/2014) * Whirlpool of India Ltd. (ITA No. 610/2014) * Honda Siel Power Products Ltd.(ITA No. 127/2017 & CM Nos. 4906-4907/2017 & 346/ 2015) * Bausch & Lomb Eyecare India Pvt. Ltd. (ITA No. 643/2014). 21. The Ld. Counsel vociferously argued by applying the aforesaid principles in the instant case, where there was a marketing assistance agreement between the asses....
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.... These obligations, in his view, showed that the appellant was acting in concert with its AE in respect of the brand promotion in India. 23. In rejoinder, the Ld. Counsel, Mr. Sinha submitted that it is an admitted position of the assessee that there is an understanding or arrangement under the MDF agreement in respect of AMP expenditure. However, such a transaction or arrangement is strictly limited to the value of reimbursement (Rs. 142.39 crore) received by the appellant under the agreement. These reimbursements have been received against pre-approved invoices under a budget/cap stipulated by the AE at the beginning of the year. There is no tangible material or evidence to show that even a rupee beyond this amount was spent under an understanding or arrangement or action in concert with the parent AE. As per the ratio of Maruti Suzuki, Whirlpool (supra) and other decisions, no presumption can be made about the existence of an international transaction. It was also pointed out that the appellant has no right to demand any assistance or subsidy beyond the amount agreed under the MDF. In the absence of any such right, the value of the international transaction cannot be extended ....
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.... costs like dealer commission, discounts, sales promotions and trade event expenditures cannot be taken as part of the advertising costs. In this case, the TPO and the CIT (A) have erred in not distinguishing between the sales and brand promotion costs leading to a distorted picture. It was accordingly submitted that if at all the AMP expenditure was to be permitted to be taken as a separate international transaction, the value and ALP of the same has to be limited to the brand promotion related expenses and should exclude selling costs.The Ld. Counsel also submitted that for AYs 2007-08 to 2010-11, the TPO has also erroneously considered rebates & discounts, in addition to sales promotion and selling expenditure, as a part of AMP. Further, the TPO himself for AY 2005-06 & 2011-12 did not include rebates and discounts as part of AMP. In this respect, the he contended that 'Rebates and discounts' and expenses in connection with sales do not lead to brand promotion and cannot be attributed to brand promotion as they represent 'point of sale' expenses. 25. The Ld. CIT(DR) in his reply contended that even selling costs should be included within the ambit of AMP expenditure as even th....
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.... (A) are justified in subjecting the AMP transaction to a Cost Plus Method on a standalone basis, because this expenditure has been incurred to benefit the brand "Samsung" which is owned by the Appellant's parent company and no remuneration for this brand promotion service has been received. 29. The Ld. Counsel then submitted that the Revenue has grossly erred in equating AMP expenditure with brand building and in alleging that "excessive" AMP expenditure beyond the bright line is a brand promotion service. He submitted that brand is a capital asset and it would be fallacious to treat any and all AMP expenditure as leading to brand building. Brand-building leads to enhancement of value of the brand and benefits the brand owner as much as it helps the brand-exploiter like a licensed manufacturer or a distributor. Brand-building is in the realm of capital and brand-promotion targeted towards sale of goods or services is in the realm of revenue transactions. Therefore, any distributor or licensed manufacturer like the assessee which incurs AMP expenditure for promoting the sales of its goods is not guided by the motive of enhancing brand value but purely by enhancing its sales. Incr....
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.... Unfavourable Economics of Measuring the Returns to Advertising" published in The Quarterly Journal of Economics (2015) 1941-1973, Oxford University Press which contains a rigorous analysis of correlation between advertising spend and increase in sales. The conclusion drawn in this article is that it is not possible to quantify the extra sales that can be generated based on incremental AMP spend. It also contains empirical data showing wide variation of AMP spend among competitors in the same sector or industry. Based on the above, it has been submitted that it is not possible to determine the impact of increased intensity of advertising function on profit margin, because the impact of advertising on sales cannot be determined and quantified. In the absence of a quantifiable measurement, it is not possible to make a "reasonably accurate" adjustment to the profit margins of the comparable companies as mandated under law.In view of the above, it was submitted that it would be erroneous to treat AMP as a separate international transaction and any attempt to benchmark such an imaginary transaction in any manner (whether as bundled transaction or on a stand-alone basis) would be an exer....
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.... AE which shows that the assessee represented interests of the foreign AE in India. Further, the assessee has already disclosed the reimbursement of Rs. 142.39 crores in its Form 3CEB as an international transaction and has justified its ALP in the TP report using CUP method for AY 2005-06. Similar disclosures have been made in other years as well. The amount reimbursed is in the nature of assistance received against specific pre-approved invoices under a capped budget specified in advance. The value of this international transaction cannot be extended or stretched beyond the amount reimbursed because the understanding between the appellant and its AE is limited to Rs. 142.39 under the terms of the MDF agreement itself. Accordingly, it was not possible to rely on this agreement to argue that the entire AMP expenditure (or the amount beyond the so-called bright line) be treated as a separate international transaction. It was also submitted that the Hon'ble Delhi High Court in the case of Whirlpool (supra) has held that a mere agreement providing for the involvement of the AE in the AMP function of an Indian assessee cannot be treated as a reason for presuming the existence of an int....
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....TAT in the case of MSD Pharmaceuticals (P.) Ltd. v. ACIT [2018] 191 TTJ 702 (Delhi - Trib.).The Ld. Counselalso placed reliance on the decision of Hon'ble Supreme Court in the case of Lalji Haridas v Income Tax Officer: [1961] 43 ITR 387 wherein it was held that protective assessment can only be made in respect of two separate entities to ensure that income does not escape taxation. Ld. CIT(DR) relied on the order of the lower authorities. DECISION 36. We have heard the rival submissions, perused the relevant findings given in the impugned orders as well as material referred to before us in respect of transfer pricing issue pertaining to AMP adjustment made by the TPO. We have already discussed in detail, the brief facts and background of the cases in the light of the material on record and as captured in the arguments placed by the parties. From the discussion made above, we will deal with various issues relating to AMP adjustment. The first issue for our consideration is:- Whether AMP expenditure incurred by the assessee during the year is an international transaction? In the present context can the value of the AMP transaction be extended or expanded beyond the amount rece....
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....omparable companies. This approach, to our mind, is contrary to law and untenable. 38. Our view is bolstered by the various decisions of the Hon'ble Delhi High Court and coordinate benches of this Tribunal in this regard. In Whirlpool of India Ltd. v. DCIT (2016) 381 ITR 154 (Del), the following relevant principles have been laid down by the Court which have been reiterated/followed in other decisions as well: (a) Sections 92B to 92F contemplate the existence of an international transaction as a pre-requisite for commencing the TP exercise. The Court observed that "to begin with there has to be an international transaction with a certain disclosed price. The TP adjustment envisages the substitution of the price of such international transaction with the ALP". (Para (b) The Court went to hold that, "the TP adjustment is not expected to be made by deducing the difference between the excessive AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. It is for this reason th....
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....ther how the ALP of such a transaction could be ascertained, it cannot be left entirely to surmises and conjectures of the TPO." (Para 39). The Court further held that after the invalidation of the Bright line test by the Delhi High Court in Sony Ericsson (supra), existence of an international transaction of AMP expenditure has to be established de hors the Bright line test. 39. It is also pertinent that the Hon'ble Court further held that as per the principles laid down by the Apex Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC), in the absence of a machinery provision, bringing an imagined transaction to tax is not possible. If such a transaction with an ascertainable price is not shown to exist, Chapter X cannot be invoked. The aforementioned principles have also been applied by the Hon'ble Delhi High Court in the case of Valvoline Cummins Private Ltd. (ITA 158/2016) wherein the Court observed as below: "17....... The mere fact that the Assessee was permitted to use the brand name 'Valvoline' will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance ....
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....r years are materially similar) are extracted as below: "Marketing Fund Agreement THIS AGREEMENT made and entered into this 1st day of January, 2004 by and between Samsung Electronics Co., Ltd., a corporation duly organized and existing under the laws of the Republic of Korea, having its head office at Samsung Main Bldg, 250-2Ka Taepyung-Ro, Chung-Gu, Seoul, Korea (hereinafter referred to as "SEC") and Samsung India Electronics a corporation duly organized and existing under the laws of INDIA, having its principal office at 3rd, IFCI Tower, Nehru Place, New Delhi, INDIA (hereinafter referred to as "DISTRIBUTOR") Article 1. Purpose 1.1 The objectives of this Agreement are to provide for terms and conditions of the Marketing Fund activities as set forth in Article 4.3 which shall be carried out by DISTRIBUTOR on behalf of SEC in the territory to further enhance Samsung corporate and brand images therein. 1.2 The Marketing Fund shall mean a strategic fund specifically reserved by SEC to support activities for upgrading corporate and brand images in the target markets and developing new opportunities to promote the sales of the target products therein. Article 4. Scope ....
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....ponsorship expenditure (for international cricket events) incurred by the AE for the benefit of certain group companies including the assessee. The Revenue had contended that by virtue of this reimbursement the entire AMP expenditure of the assessee should be treated as an international transaction and subject to determination of arm's length price under Chapter X of the Act. This view was categorically repelled by the Coordinate Bench by observing as below: "52....... In any case, if at all, ALP was to be determined then it should have been strictly circumscribed to the reimbursement of the cost aggregating to Rs. 33,60,15,501/-. Further, the transaction of reimbursement of expenditure of Rs. 33,60,15,501/- cannot be expanded to the entire expenditure of AMP of Rs. 202.34 crores. The reason being, the amount of Rs. 202.34 crores have been incurred by the assessee on its own volition and business requirement to be in competition with other big players in the field of aerated and non-aerated beverages and food products. It is acclaimed fact that industry in which assessee company is operating has to face stiff competition not only from the Indian companies but also from many mult....
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....es. From the plain reading of the aforesaid Section, it is quite clear that: (i) the transaction has to be between two or more associated enterprises either or both of whom are non-resident; (ii) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of services or lending or borrowing money; (iii) or any other transaction having bearing on the profits, income, loss or assets of such enterprises; (iv) all such nature of transaction described in the section will also include mutual agreement and the arrangement between the parties for allocation or apportionment or any contribution to any cost or expenses incurred or to be incurred in connection with benefit, services and facility provided to any of such parties. Relevant Explanation to Section 92B as inserted by the Finance Act, 2012 reads as under: - "i. the expression "international transaction" shall include- .............................. (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketi....
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....ch an arrangement has to be between the two parties and not any unilateral action by one of the parties without any binding obligation on the other or without any mutual understanding or contract. If one of the party by its own volition is entering any expenditure for its own business purpose, then without there being any corresponding binding obligation on the other or any such kind of an arrangement actually existing in wring or oral or otherwise, it cannot be characterized as international transaction within the scope and definition of Section 92B (1). Here, in this case, it has been vehemently argued from the side of the assessee that assessee-company had incurred expenditure on AMP to cater to the needs of the customers in the local market and such an expenditure was neither incurred at the instance or behest of overseas AE nor there was any mutual understanding or arrangement or allocation or contribution by the AE towards reimbursement of any part of AMP expenditure incurred by it for the purpose of its business. If no such understanding or arrangement exists, then no transaction or international transaction could be said to be involved between the AE and the assessee whi....
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....and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC." Same proposition has been upheld by the Hon'ble Jurisdictional High Court in the case of Whirlpool of India Ltd. vs. DCIT, Bausch & Lomb Eyecare India Pvt. Ltd. vs. ACIT (supra) and Honda Siel Power Products Ltd. vs. DCIT (supra)" 43. In the present case we find that the Revenue has not been able to place any material to record to show or suggest that the Appellant's AMP activity was carried out at the behest of its AE, beyond what was approved and reimbursed under the MDF Agreement. No understanding or arrangement or "action in concert" can be inferred from the terms of the MDF agreement or the conduct of the assessee to show that "excessive" AMP expenditure has been incurred at the behest of the brand-owning AE. The appellant being one of the major players in the Indian market has carried out its AMP activity and function based on its own judgement and commercial realities. Revenue has not placed any material or evidence to show that there existed an u....
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....and do not accept the overbearing and orotund submission that the exercise to separate 'routine' and 'non-routine' AMP or brand building exercise by applying 'bright line test' of non-comparables and in all case, costs or compensation paid for AMP expenses would be 'NIL', or at best would mean the amount or compensation expressly paid for AMP expenses. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we would disagree with the majority decision in L.G. Electronics India (P) Ltd. (supra). 135. It is, therefore, incorrect to suggest or observe that international tax jurisprudence or commentaries recognise "bright line test" for bifurcation of routine and non-routine AMP expenditure, and non-routine AMP expenses is an independent international transaction which should be separately subjected to arm's length pricing." 45. In view of the above, we hold that the "bright line" approach is untenable in law either as a way to determine the existence of an international transaction or as a method to determine the ALP of an international tra....
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....e comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible." In the present facts, we find that the TPO has subjected various international transactions of the assessee to TNMM analyses under various segments and made transfer pricing adjustments on the basis of external comparables chosen by him. Several of these comparable companies included/excluded by him form subject matter of the present appeals. It implies that the TPO has applied his mind on the suitability of TNMM and made adjustments. Having adopted TNMM in a considered manner, it is not open for him to take up AMP as a separate transaction and subject to the same to a Cost Plus type of benchmarking because the e....
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....ich make the connection durable. The definition given by Lord MacNaghten in Commissioner of Inland Revenue v. Muller & Co' & Margarine Ltd. [1901] 217 AC 223 can also be applied with marginal changes to understand the concept of brand. In the context of 'goodwill' it was observed: "It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is bought and sold every day. It may be acquired. I think, in any of the different ways in which property is usually acquired. When a man has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will - of course, under the conditions attaching to property of that nature.....What is good-will? It is a thing very easy to describe very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However, widely extended or diffused its influen....
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.... psychologically, it is a "habit" and sociologically it is a "custom". Biologically, it has been described by Lord Macnaghten in Trego v. Hunt, 1896 AC 7 as the "sap and life" of the business. It has been horticulturally and botanically viewed as "a seed sprouting" or an "acorn growing into the mighty Oak of goodwill". It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the "attracting force". In terms of comparative dynamics, goodwill has been described as the "differential return of profit." Philosophically it has been held to be intangible, Though immaterial, it is materially valued. Physically and psychologically, it is a "habit" and sociologically it is a "custom". Biologically, it has been described by Lord Macnaghten in Trego v. Hunt, 1896 AC 7 as the "sap and life" of the business.' 105. There is a line of demarcation between development and exploitation. Development of a trademark or goodwill takes place over a passage of time and is a slow ongoing process. In cases of well recognised or known trademarks, the said trademark is al....
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.... are in the business of sale/transfer of brands. 107. Accounting Standard 26 exemplifies distinction between expenditure incurred to develop or acquire an intangible asset and internally generated goodwill. An intangible asset should be recognised as an asset, if and only if, it is probable that future economic benefits attributable to the said asset will flow to the enterprise and the cost of the asset can be measured reliably. The estimate would represent the set off of economic conditions that will exist over the useful life of the intangible asset. At the initial stage, intangible asset should be measured at cost. The above proposition would not apply to internally generated goodwill or brand. Paragraph 35 specifically elucidates that internally generated goodwill should not be recognised as an asset. In some cases expenditure is incurred to generate future economic benefits, but it may not result in creation of an intangible asset in form of goodwill or brand, which meets the recognition criteria under AS-26. Internally generated goodwill or brand is not treated as an asset in AS-26 because it is not an identifiable resource controlled by an enterprise, which can be reliabl....
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....isition. The aforesaid observations are relevant and are equally applicable to the present controversy. 110. It has been repeatedly held by Delhi High Court that advertisement expenditure generally is not and should not be treated as capital expenditure incurred or made for creating an intangible capital asset. Appropriate in this regard would be to reproduce the observations in CIT v. Monto Motors Ltd. [2012] 206 Taxman 43/19 taxmann.com 57 (Delhi), which read:- "4. ... Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisement are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The advertisements published/displayed may not be of relevance or significance after lapse of time in a highly competitive market, wherein the products of different companies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantag....
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....cribing the concept of the "brand" had made a clear cut demarcation between development and exploitation of brand which is either in the form of trademark or goodwill which takes place over a passage of time by which its value depends upon and is attributable to intangibles other than trademark like, infrastructure, knowhow, ability to compete in the established market, lease, etc. Brand value does not represent trademark as asset and it is quite difficult to determine and segregate its value. Brand value largely depends upon the nature of goods and services sold, after sales services, robust distributorship, quality control, customer satisfaction and catena of other factors. The advertisement is more telling about the brand story, penetrating the mind of the customers and constantly reminding about the brand, but it is not enough to create brand, because market value of a brand would depend upon how many customers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. It is also not the case here that fo....
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....e legal owner of intangibles, an intangible and any licence relating to that intangible are considered to be 87 different intangibles for transfer pricing purposes, each having a different owner. See paragraph 6.26. For example, Company A, the legal owner of a trademark, may provide an exclusive licence to Company B to manufacture, market, and sell goods using the trademark. One intangible, the trademark, is legally owned by Company A. Another intangible, the licence to use the trademark in connection with manufacturing, marketing and distribution of trademarked products, is legally owned by Company B. Depending on the facts and circumstances, marketing activities undertaken by Company B pursuant to its licence may potentially affect the value of the underlying intangible legally owned by Company A, the value of Company B's licence, or both. 6.42 While determining legal ownership and contractual arrangements is an important first step in the analysis, these determinations are separate and distinct from the question of remuneration under the arm's length principle. For transfer pricing purposes, legal ownership of intangibles, by itself, does not confer any right ultimately to....
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.... place for a fairly long period of time (as in the present situation where the assessee is the distributor of "Samsung" products in India), expenses on advertising cannot be subjected to a stand-alone analysis as a "service" to its AE on a year to year basis. This question of compensating an Indian distributor would arise only if the parties prematurely terminate the distributorarrangement. In such an event, if the Indian distributor has been deprived of the opportunity of recovering its investment in AMP, it could be a valid reason for a transfer pricing adjustment because third parties would not agree to a premature termination of this kind without demanding compensation. Therefore, the question of compensating the taxpayer for any loss suffered due to excess AMP spend would arise only at the time of such premature termination and not during the pendency of the distributorship arrangement. Thus, in case of a routine distributor, disallowance/adjustment on account of AMP spend on the mere assumption that the supplier may terminate the agreement in the future is not sustainable. A taxpayer cannot be penalized on the presumption of a future event (which may not even occur) while ign....
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....Price Method (RPM) and had chosen 5 comparables in its transfer pricing documentation with a mean margin of 6.45%. The Ld. TPO rejected RPM and chose TNMM as the most appropriate method. Further, the TPO also altered the set of comparables and adopted a set 13 comparables with a mean net profit margin of (-) 0.447%. The TPO also computed the net profit margin of the Appellant after giving effect to the MDF expenditure treatment to -3.50%. On appeal, the Ld. CIT (A) rejected 2 of TPOs comparables namely Control Print Ltd. and Gemini Communication Ltd. and applied current year data on the remaining comparables. The mean margin of the remaining comparables came to 0.38% as against 0.21% of the Appellant (after treating reimbursement for advertisement expenses as operating expense). The Ld. CIT (A) accordingly concluded that an adjustment of Rs. 3.3 crores is required to be done because the difference between ALP and the transfer price exceeds 5% of the ALP. The Ld. Counsel for the appellant submitted that the Ld. CIT (A) erred in making an incorrect calculation in this regard. The difference between the ALP and transfer price is within the permissible 5% range as shown in the computat....
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....company was included by the Ld. TPO in the final list of comparables by merely relying on its predecessor's order for AY 2004-05. On appeal by the Assessee, the Ld. CIT(A) excluded this comparable by relying on its predecessor's order for AY 2004-05 wherein it was held that the company is engaged in backward integration and indigenous manufacturing of components, hence it cannot be treated as an appropriate comparable. 59. Being aggrieved by the CIT (A)'s order, the Department is in appeal asking for inclusion of this comparable. The Ld. CIT (DR) argued that under TNMM broad level of function and product similarity is mandated and this company is engaged in manufacturing which is also the function of the tested party. He vehemently argued that product similarity may not be exact and as long as there is a broad level of similarity, comparables should be accepted. In this case, he submitted that components of colour TVs are being manufactured by this comparable, which falls under the broad category of consumer goods. He also argued that prior years precedents should not be applied to questions of fact. 60. The Ld. counsel for the Assessee while supporting the order of the CIT (A)....
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....omparable in Sony India (supra) and held it to be inappropriate. In view of the above, we dismiss this ground of appeal and hold that Videocon has been rightly excluded by the CIT (A) from the list of comparables. 62. Samtel Colour Limited (Class I- Manufacturing): Samtel was introduced by the Ld. TPO in the final list of comparables by merely relying on its predecessor's order for AY 2004-05. The company operates in only one segment i.e. manufacture of colour picture tubes and electron gun. It has a Related Party Transaction (RPT) as a percentage of sales of 23.85%. 63. On appeal by the Assessee, the Ld. CIT (A) relied on the decisions of Sony India (supra) and Avaya India Pvt. Ltd (ITA No. 5150/Del/2010) wherein it was held that companies having more than 15% RPT should not be taken as comparable. Even for AY 2004-05, in Assessee's own case, Khaitan Electricals Ltd was excluded as it had RPT in excess of 15%. Based on above, Ld. CIT (A) excluded Samtel as a comparable. 64. Being aggrieved by the CIT (A)'s order, the Department is in appeal before this Tribunal for inclusion of this comparable. It is the Department's contention that RPT filter should be 25% instead of 15% as....
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....f finished goods, import of spare parts, export of spare parts, purchase of samples, export of samples, payment for packing & R&D expenses, purchase of sales promotion material. In the TP Study, the Assessee selected 5 comparables. The TPO proceeded to undertake a fresh analysis and arrived at a fresh set of comparables. He accepted some of the comparables of the Assessee but also introduced 8 new comparables. Some of the comparables which were introduced by the TPO were thereafter rejected by the CIT (A) and the same are under challenge by the Department in its appeal as under. Ld. CIT (DR) submitted that the Revenue is aggrieved in respect of two comparables, namely Control Print (India) Ltd. and Gemini Communications Ltd. 68. Control Print (India) Limited (Class II- Distribution): This comparable was introduced by the Ld. TPO in the final list of comparables by merely relying on his predecessor's order for AY 2004-05. The company operates in only one segment and is engaged in coding, marking systems and development of digital printing systems for various markets & applications including packaging applications, specialty industrial applications, textile printing and security pr....
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....ng on his predecessor's order for AY 2004-05 wherein it was held that the functional/business profile of the company vis-à-vis the Assessee is dissimilar. It is a full-fledged and end-to-end IT solutions and service provider unlike the Assessee which is engaged in distribution operations only. 74. Before us, the CIT (DR) submits that the company has been taken as a comparable after conducting a detailed functional analysis and is similar to the appellant in several material respects. 75. The Ld. Counsel for the Assessee while supporting the order of the CIT (A) submitted that the company should not be taken as a comparable due to following reasons: (a) ________________________________ Gemini is engaged in the business of providing solutions on networking and communications with products of companies like Cisco, Nortel, Avaya, etc. (b) ________________________________ The same was excluded by the CIT (A) for AY 2004-05 but the Department did not file an appeal on this issue. Since, Department has accepted it as a comparable in one year, it cannot change its stand and challenge it in the subsequent year, if there is no change in the facts and circumstances of the cas....
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....owable in full in the year in which it is incurred. Orders dated 9.06.2013 and 15.05.2017 in the appeals for A.Yrs. 1999- 2000 and 2003-04 respectively of the Delhi High Court have been placed before us. Respectfully following the decision of the Delhi High Court we dismiss this ground of appeal. AY 2006-07 (ITA No. 5856/DEL/10) 79. The facts and business model in the present Assessment Year i.e. 2006-07 are similar to the facts already stated for AY 2005-06. The appellant had filed its return of income on November 29, 2006, declaring an income of Rs. 36,26,44,434. A summary of the international transactions and the appellant's approach in determining their ALP is given in the table below: Particulars Most Appropriate Method as per TP study Profit Level Indicat or (PLI) as per TP Study Margin earned by the Appellant as per TP study No. of comparables considered as per TP study Arm's Length Marginas per TP study Class I - Manufacturing (Consumer Electronics, and Home Appliances) Import of raw materials, Import of stores and service parts, export of finished goods, payment of royalty, import of fixed assets Transactional Net Margin Method ("TNMM") OP/OR 2.22% 6 ....
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....analysis carried out in the TP Study for Class-II and Class-IV segments resulted in identification of 12 and 9 uncontrolled independent comparable companies respectively. Since the appellant had earned gross profit margin of 24.78% and 10.15% in the Class-II and Class-IV segments respectively which was higher than the profit margin earned by the comparables, it was concluded that the international transactions were at arm's length. 83. The TPO rejected the most appropriate method adopted by the assessee. He discarded the Resale Price Method for Class-II (trading) and Class-IV (trading) segment. As per the TPO, for both the segments Transactional Net Margin Method (TNMM) was the most suitable method for determining of arm's length price. Under TNMM he selected operating profit margin on revenues (OP/OR; OP = operating profit/ OR = operating revenue) as the profit level indicator for both the segments. Further, the TPO while computing the profit level indicator of the appellant for manufacturing and trading segments increased the quantum of operating expenditure taken into account to increase the operating profit by Rs. 86.22crores. The aforesaid amount of Rs. 86.22 crores had been....
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....s-IV trading segments were carried out at 2.45% and 1.61% respectively. To compute profit level indicators of the comparable companies, the TPO used multiple years' data (current and two previous years to the extent of availability of data). The margins computed by the TPO are after making adjustments on account of working capital differences 85. Based on the above approach, the TPO worked out an adjustment to the arm's length price of the international transactions pertaining to Class-I manufacturing segment at Rs. 439,163,419/-. In respect of Class-II and Class-IV trading segments, the adjustment to the arm's length was worked out to be at Rs. 509,049,110 and Rs. 300,466,885 respectively. There was no adjustment made to the Class III and Class V segments. 86. The AO incorporated the adjustment to the ALP made by the TPO and also made the following additions to total income: (a) ________________________________ Recruitment and training expense of Rs. 1,03,07,792 was treated as capital expenditure and not allowable as a revenue expenditure u/s 37 of the Act; (b) ________________________________ Depreciation on UPS, printers and servers was restricted to 15% as against 60%....
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....s company should be excluded, data of at least three years (current plus two prior years) have to be seen. 90. The Ld. Counsel argued that Voltas cannot be said to be categorized as a persistently loss-making entity because persistent loss-making entities imply that losses are suffered year after year leading to erosion of net worth. In the present case, a company suffering losses only in two years cannot be said to be persistent loss-making company. Further, it has been pointed out that turnover of the company has increased over the years, and it had no intention to close down its business and is in the market for the long run. The Ld. Counsel contended that the courts have consistently held that if a company is functionally comparable, then it cannot be rejected merely on the basis that it is making losses. In this regard, the Ld. Counsel places reliance on the case laws below: (a) ________________________________ In the cases of DCIT vs. Exxon Mobil Company India Pvt. Ltd. (ITA No. 4389/Mum/2010)(Para 7) and Bobst India (P.) Ltd. v. DCIT (ITA No. 1380 (PN) of 2010), it has been observed that exclusion of a comparable merely on the ground that the comparable is incurring abn....
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....ics etc. which are very competitive industries as is evident from the low margins of the comparable companies. 93. The Ld. CIT (DR) relied vehemently on the orders of the Ld. TPO and DRP and submitted that two years of continuous losses demonstrated that the company was in a downward trend and was experiencing a situation that was different from that of the appellant. On account of the extraordinary situation, this company cannot be taken as a comparable. The Ld. CIT (DR) further submitted that the Tribunal in various decisions has upheld the application of persistent loss making as a filter. 94. We have perused the orders of the lower authorities and examined the Annual Report of this company and seen the profitability trend as well. This company is indisputably a functionally comparable company and therefore the question that requires our consideration is whether it has shown persistent losses and whether persistent losses can be a ground for excluding a comparable. It is now settled that a mere loss-making or abnormally high loss/profit making company cannot be excluded unless it can be shown that extraordinary economic factors are present. It is also now settled that if a c....
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....39; includes Lamps, Tubes and Luminaries; * 'Consumer Durables' includes Appliances & Fans; * 'Engineering & Projects' includes Transmission Line Towers, Telecommunications Towers, Highmast, Poles and Special Projects; * 'Others' includes Die-casting and Wind Energy. 96. The Ld. Counsel pointed out that the gross-profit margin of Appliance products were computed from the product schedule and used for Resale Price Method (RPM) computation in the TP report. However, when RPM was discarded in favour of TNMM by the TPO, the net profit margin of the entire consumer durables segment was selected for computation of net profit margin. It was also pointed out by the Ld. Counsel that the assessee applied RPM for this segment and computed the gross profit margin of the products appearing under the head 'Appliances' in the product schedule of the Annual Report. In the product schedule, there were two categories, appliances and fans in this segment of consumer durable. The Ld. TPO has rejected RPM and has adopted TNMM and used the net margin of the consumer durable segment which includes fans. 97. The Ld. Counsel contended that the Ld. TPO has committed a gr....
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....o consumer products like Colour TVs, Air conditioners, Washing Machines, Microwave ovens and refrigerators. We therefore order the exclusion of this comparable for determination of ALP of the international transactions of the segment pertaining to trading of consumer products of the assessee. This ground is accordingly allowed. GROUND NO. 4.4: That on facts and in law, the TPO/AO has erred in additionally identifying Control Print Limited and Gemini Communications Limited as a comparable company for benchmarking the international transactions under Class IV (trading of colour monitors and other IT products) 100. The Ld. Counsel pointed out that this issue has already been decided in favour of the assessee by CIT (A) in prior years i.e. AY 2004-05 and 2005-06. He pointed out that no appeal has been filed by the Department before the ITAT on this issue in AY 2004- 05. However, in AY 2005-06, the Department has filed an appeal on the same issues and the same has been covered in the submissions for AY 2005-06. The Ld. CIT (DR) relied on the orders of the Ld. TPO and DRP. 101. While adjudicating the appeal filed by the Dept. for A.Y. 2005-06, we have held that the Ld. CIT (A) was....
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....prove that the expenses directly correspond to actual expenses incurred. The Ld. Counsel contends that the issue stands squarely covered in favour of the Appellant in its own case for three prior years by this Hon'ble ITAT. 104. Ld. DR argued that the Marketing Development Fund entered into by the appellant with its AE was for promotion of brand of the AE in India. Thus, action of the Ld. TPO of making an addition by treating AMP recovery as non-operating income and including the same as part of the operating expenses was correct. He also placed reliance on the DRP order wherein the DRP has upheld the action taken by the Ld. TPO on the same reasoning. 105. We have perused the orders of the TPO and the DRP as well as the appellate orders passed by this Tribunal on this issue in the prior years. We observe that a coordinate Bench of this Tribunal while deciding the appeals of the Appellant-assessee in A.Yrs. 2002-03, 2003-04, 2004-05 has examined this issue in detail and has concluded that the approach of the TPO to treat the reimbursement received under the MDF agreement as nonoperating income while treating the same as operating expenditure for computing the net profit margin i....
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....ransactions with AEs. Accordingly, the TPO is directed to restrict the amount of adjustment, if any, made under Chapter X of the Act limited and proportionate to the value of the international transactions with AEs. GROUND NO. 7: As this Ground has not been pressed by the assessee, it is dismissed. GROUND NO. 7.1:That on facts and in law, the AO has erred in holding that the benefit of expenditure on recruitment and training of employees is not restricted to one year and accordingly has to be apportioned over 6 years, accordingly, the AO has erred in disallowing expenditure of Rs. 1,03,07,792. GROUND 7.2: That on facts and in law, the AO has erred in not allowing in the year under assessment, 1/6th of the expenditure on recruitment and training that was similarly disallowed in the preceding five assessment years 109. The Ld. Counsel submitted that the said issue is covered by decision of Hon'ble Delhi High Court in Assessee's own case for AY 1999-2000, 2002-03 and AY 2003-04 wherein the Delhi High Court affirmed the decision of this Hon'ble Tribunal allowing the deduction of expenditure incurred on recruitment and training of employees. The Ld. Counsel submitted that the....
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.... on the order of the AO and the DRP. 112. We are in agreement with the Ld. Counsel of the Appellant that this issue is no longer res integra as this Tribunal has already taken a view that for depreciation purposes, UPS falls under the category of Computers being a computer peripheral. The law in this regard has been settled by various decisions, particularly the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. BSES Rajdhani ITA No. 1266/2010. This ground is therefore allowed. AY 2007-08 (ITA No. 5315/DEL/11) 113. The facts and business model in the present Assessment Year i.e. 2007-08 are similar to the facts already stated for AY 2005-06 and 2006-07. For the relevant assessment year, the appellant had filed its return of income on 31 October 2005 declaring an income of Rs. 104,57,52,771/- A summary of the international transactions in dispute and the appellant's approach in determining their ALP for these disputed transactions is given in the table below: Particulars Most Appropriate Method as per TP study Profit Level Indicator (PLI) as per TP study Margin earned by the Appellant as per TP study No. of comparables considered as per TP study Arm's....
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....with operating profit/ operating revenue as the profit level indicator. The economic analysis carried out in the TP study resulted in identification of 6 uncontrolled independent comparable companies. Since the appellant had earned profit margin of 0.17% which was within the +/- 5% range of the profit margin earned by the comparables, it was concluded that the international transaction was at arm's length. 117. The transfer pricing officer rejected the most appropriate method adopted by the assessee. He discarded the Resale Price Method for Class-II (Trading of consumer electronic goods and home appliances) segment and adopted Transactional Net Margin Method (TNMM) as the most suitable method for determining of arm's length price. Under TNMM, he selected operating profit margin on revenues (OP/OR; OP = operating profit/ OR = operating revenue) as the profit level indicator. The TPO further proceeded to undertake a fresh benchmarking analysis of the uncontrolled comparable companies and arrived at a set of 3 comparable companies for the Class-II (Trading of consumer electronic goods and home appliances) segment and 2 comparables for the Class-III (Manufacturing of colour monitors)....
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....the Act; (b) Loss arising on account of fluctuation of foreign exchange currency amounting to Rs. 206,77,205/- was disallowed as being notional and contingent in nature; (c) Depreciation on UPS, printers and servers was restricted to 15% as against 60% claimed by the appellant leading to a disallowance of Rs. 7,12,027/-. 119. The assessee being aggrieved by the orders of the TPO and AO filed objections before the DRP, New Delhi contesting the aforesaid additions made to the total income of the assessee on various grounds. The Ld. DRP disposed of the objections filed by the assessee vide its directions under section 144C of the Income Tax Act, 1961 30th August 2011 and upheld the order of the TPO/AO. In pursuance to the DRP Directions, the AO passed the final assessment order dated 19th September 2011. Aggrieved by the order of the AO (impugned order), the assessee has preferred the present appeal and has prayed for adjudication of the following grounds of appeal. GROUNDS IN APPELLANT'S APPEAL (ITA NO. 5315/DEL/11) FOR AY 2007-08 GROUND NOs. 1 and 2: These grounds are general in nature. GROUND NOs. 1.1 to 1.3: These grounds pertain to the AMP issue and are identical to t....
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....that a similar situation exists in this year as Bajaj Electricals had manufactured 379,000 fans out of total of 21,78,000 fans sold by them. A bifurcation of profit margin of fans manufactured fans and traded fans are not provided. We accordingly allow this ground by following the earlier year's position in this respect. GROUND NO. 4: That, on facts and in law, the ld. TPO/AO has erred in rejecting PCS Technology Limited, Spice Limited and VXL Instruments as comparable companies for benchmarking the international transactions under Class III segment (manufacturing of color monitors) VXL Instruments 122. The Ld. Counsel contends that the TPO committed an error by rejecting VXL Instruments on the sole ground that it is a persistent loss-making company with declining net margins. The Ld. DRP upheld the order and reasoning of the TPO. The Ld. Counsel submits that it is factually incorrect that the said comparable is incurring persistent losses. As per the second proviso to Rule 10B (4), we should be checking losses in the current year and two prior years. 123. The Ld. Counsel pointed out that in subsequent years, turnover of VXL Instruments has increased and it continues to ha....
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....vided to account for profit as well as loss making companies. He submitted the Turnover and Net margin trend for different years: Assessment Year Segmental Turnover (INR in crores) NPM AY 2004-05 49.48 0.96% AY 2005-06 52.38 0.24% AY 2006-07 40.26 -11.09% AY 2007-08 72.81 -1.92% AY 2008-09 93.43 -7.53% AY 2009-10 80.38 2.14% AY 2010-11 76.60 1.26% 125. Thus, he submitted that it can be seen from the trend analysis that there is no trend of persistent losses on a long-term basis. Further, the trend of sales on year-on-year basis shows that the company clearly has an upward trend. Therefore, it cannot be branded as a persistent loss maker. 126. The Ld. CIT (DR) vehemently argued that since VXL Instruments was persistently making losses, it was rightly rejected as a comparable by the Ld. TPO and the said rejection was rightly upheld by the DRP. He pointed out that this company has experienced losses in the current year, prior year and the subsequent year and on account of this trend it is evident that this company is a persistently loss-making company. He further submitted that this Hon'ble Tribunal has held in various judgments that a persiste....
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....e have perused the reasoning given by the TPO and the Annual Report of this company (PCS Technology Ltd.). As per Rule 10B (4) current year data is to be primarily used for comparison under any of the specified methods. If the time period of comparison does not converge, the accuracy of comparison gets compromised. We do not agree with the contention of the Ld. Counsel that financial year ending is an irrelevant factor for the purpose of comparison under TNMM. In our view the law clearly stipulates the time period for which the data can be used for determination of ALP. It is only in certain situations where the company maintains and publishes quarterly results, the results for April-March period can be accurately extrapolated. In other situations where quarterly results are not available, any effort to derive at April-March results by extrapolating the figures on a proportionate basis would be fraught with the risk of inducing inaccuracy in the comparability process. The Hon'ble High Court's decision in Mckinsey Knowledge Centre (supra) was also rendered in the context of availability of quarterly results. In the present case, the extrapolated results submitted by the Ld. Counsel ....
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....t if accurate segmental results are not available, the same cannot be used for TNMM benchmarking. We accordingly dismiss this ground pertaining to inclusion of Spice Mobiles Ltd. GROUND NO. 5: That, on facts and in law, the Ld. TPO/AO has failed to make appropriate adjustments to account for the differences in working capital employed by the appellant vis-à-vis the comparables, thereby disregarding the provisions of the Indian transfer pricing regulations and several judicial pronouncements on this subject 134. The Ld. Counsel contends that appropriate adjustment to account for differences in working capital employed by the appellant vis-à-vis comparables ought to be allowed. He submitted that the TPO erred in not granting the working capital adjustment to the appellant to account for differences in working capital employed by the appellant vis-à-vis comparables. He argued that the TPO himself has allowed the working capital adjustments in two preceding years, i.e., AY 2005-06 & 2006-07. He further submitted that working capital adjustments usually include adjustments for accounts payable, accounts receivable and inventory. These adjustments ensure that th....
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....f this discussion, we allow this ground and hold that TPO should, while determining the net profit margins of the comparables should compute and allow suitable adjustments for differences in working capital. We also note that this is justified from the angle of consistency as well because the TPO himself had made working capital adjustments to the margins of the comparables in the two prior assessment years. GROUND NO. 6: That, on facts and in law, the Ld. TPO / Ld. DRP has erred in not restricting the transfer pricing adjustment in proportion to the value of impugned international transactions with the associated enterprise vis-à-vis the total cost base of the various business segments which included the cost of uncontrolled transactions with independent third parties also GROUND NO. 6.1: Without prejudice, the ld. AO / Ld. DRP has erred in holding that the value of international transactions is approximately 50% of the total cost and therefore the international transactions have significant effect on the total profitability which is not true for Class II transactions for which adjustment may be restricted in proportion to the value of international transactions 137. T....
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....unexpired on March 31st are marked to the market as per generally accepted accounting principles. If there is loss on the open contract the same is debited to the P&L account and claimed as a deduction u/s 37 of the Act. The AO in his assessment order has held that the provisions of Act do not allow deduction of any such notional loss for which the liability has not crystallized. Therefore, Marked to Market (MTM) losses on account of revaluation of forex forward contracts are only notional and are deductible as business losses under income tax provisions. For the purpose of taxation, MTM Losses should be considered as just notional losses which do not involve any actual outgo as the assessee is not liable to pay such losses. This view of the AO has been upheld by the Ld. DRP. 141. The Ld. Counsel for the appellant-assessee submits that the Ld. AO has erred in holding that loss on exchange fluctuation debited to P&L account on account of revaluation of open forward forex contracts is a notional loss for which liability is not crystallized or is contingent upon the actual settlement of forward contracts and is not allowable as a deduction under the provisions of the Act. The foreig....
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....ed at a future date but what should be definite is incurring of liability. The Ld. Counsel for the appellant has placed before us a copy of an order passed u/s 154 of the Act where similar forex losses in A.Yr.2005-06 has been allowed by relying on the Hon'ble SC judgement of Woodward Governor (supra). Further, this Tribunal has examined and adjudicated this issue in favour of the assessee in ITA No. 6508/Del/2012 in the case of Samsung Technology India Pvt. Ltd which had subsequently merged with the assessee. In view of the above discussion and respectfully following the authority laid down by the Hon'ble Supreme Court, this ground is allowed. AY 2008-09 (ITA No. 52/DEL/13) 143. The facts and business model in the present Assessment Year i.e. 2008-09 are similar to the facts already stated for AY 2005-06, 2006-07 & 2007-08. The appellant had filed its return of income on November 30, 2008, declaring an income of Rs. 173,84,64,490/-. A summary of the international transactions of the appellant and the appellant's approach in determining their ALP is given in the table below: Particulars Most Appropriate Method as per TP study Profit Level Indicator (PLI) as per TP study Ma....
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....manufacturing of colour monitors. Transactional Net Margin Method was chosen as the most appropriate method in its transfer pricing study for both these segments. The profit level indicator taken was operating profit/operating revenue. For the benchmarking exercise in Class-II and Class-III segments, an economic analysis was carried out in the TP study leading to identification of 7 and 5 uncontrolled comparable companies respectively. Since the appellant had earned profit margin of 2.22% and -1.55% in the Class-II and Class-III segments respectively which was higher than the profit margin earned by the comparables, it was concluded that the international transactions were at arm's length. 146. The TPO rejected the economic analysis undertaken by the appellant and proceeded to undertake a fresh benchmarking analysis by accepting certain comparables of the appellant and introducing certain new comparables. The TPO arrived at a set of 7 comparable companies for the Class-II trading segment and 2 comparables for the Class-III manufacturing segment. The arithmetic mean of the operating profit margin (OP/OR) of these comparables for the Class-II trading segment was computed at 5.21%. ....
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....irected to include other discounts and commission payments reflected in P&L account of comparables in the AMP expenditure to fix the Bright Line. A final set of 7 comparables was directed to be used for determining the bright line. The computation of AMP adjustment was revised as under: Particulars Amount (Rs.) Value of Gross Sales 55,784,998,000 AMP/ Sales of the Comparables 2.95% Amount that represents Bright Line 1,645,657,441 Amount actually spend on AMP Expenditure 5,54,27,68,817 Amount spent in excess of 'bright line' and on creation of marketing intangibles 3,89,71,11,376 Mark-up @15% 58,45,66,706 The amount by which Samsung India should have been reimbursed 4,48,16,78,082 Amount reimbursed 49,67,86,817 Adjustment (Rs.) 3,98,48,91,265 148. Based on the above directions, the TPO vide his rectified order dated 31 October 2012 made a final adjustment of Rs. 4,65,88,50,797 which comprised of (i) adjustment on account of AMP expenditure at Rs. 398,48,91,265/-, (ii) adjustment in respect of Class-II (trading segment) at Rs. 48,40,26,768/- and (iii) adjustment in respect of Class-III (manufacturing segments) at Rs. 18,99,32,764/-. 149. The AO incorporat....
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....d. v. DCIT (ITA 1296/PN/2010). The Ld. Counsel submitted that Shyam Telecom operates under three business segments as stated in the table below: Segment Name Segment Description Telecom Products & Services The Telecom products & Services segment comprise of manufacturing and services in the related area. Turnkey Projects and Trading Turnkey Projects and trading services segment includes the turnkey projects and trading in telecom products. Investments (including Dividend) Investments are primarily in the subsidiaries which are dealing in telecommunication sectors. He pointed out that over 99% income under Turnkey Projects and Trading Segment are attributable to trading income from sale of GSM handsets, accessories, communication systems and components. Revenue from GSM handsets & accessories is Rs. 157.08 crores which is 99% of total revenue from the Turnkey Projects and trading segment as is evident from the table below: Particulars Amount (In INR) (In Lakhs) Total revenue from Turnkey projects and trading segment 15,893 Total revenue from traded goods 15,708 Ratio of traded goods to segmental revenue 99% 154. Ld. Counsel argued that in this case, no extraor....
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.... no. 5315/Del/2011 for A.Y. 2007-08. As the material facts and circumstances and the arguments taken by both sides remain the same, this ground is decided on the findings and observations made in these two years. As in prior years, the material fact that needs to be seen is whether the segment of consumer products taken by the TPO includes manufacturing of fans. The Annual Report of Bajaj Electricals for the F.Y. 2007-08 reveals that in this year as well the company had manufactured 2,87,000 fans out of a consolidated sales quantity of 27,07,000 fans and the net profit margins of the manufactured and traded fans are not provided. In the absence of these details Bajaj Electricals Ltd cannot be taken as a comparable. 158. Ground no. 5 pertains to two companies which have been sought to be included as comparables - these are PCS Technology Ltd. and VXL Instruments Ltd. The suitability of these two companies as comparables for the Manufacturing Segment has already been examined by us in the appeal for A.Y. 2007-08, where identical questions and arguments had been raised by the two sides. In the said appeal (ITA No. 5315/Del/2011) while adjudicating Ground no.4 pertaining to these com....
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....during benefit to the appellant and in allowing only 1/6th of the total expenditure in the current year and deferring the balance to be allowed in next five years and in doing so disallowing expense of Rs. 2,07,83,696 GROUND 9.1: Without prejudice to above, the Ld. AO has erred in not allowing in the year under assessment, 1/6th of the expenditure on this account that was similarly disallowed in the preceding five assessment years 161. We have already adjudicated this issue in the appeals for prior years (A.Y. 2005-06, 2006-07 and 2007-08) and allowed the same. We have held that training and recruitment expenditure is fully allowable as revenue expenditure in the year in which it is incurred. There being no enduring benefit it cannot be treated as capital expenditure or deferred revenue expenditure. Ground no. 9 is therefore allowed and Ground no. 9.1 is dismissed as being infructuous. GROUND NO. 10: That, on facts and in law, the Ld. AO has erred in not treating UPS connected to computers as 'computer' and instead regarding it as an item of general 'plant and machinery' for the purpose of allowing depreciation and in doing so disallowed depreciation of Rs. 7,24,741 162. ....
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....rvice spares, Export of finished goods, Payment of royalty, Import of fixed Assets, Import of spares for repair and maintenance, Availing of services, Reimbursement of marketing expenses by AEs Transactional Net Margin Method ("TNMM") OP/OR 4.13% 6 1.91% Class II - Trading (Consumer Electronics, Home Appliances and Mobile phones) Import of finished goods, Import of stores and service parts, Export of finished goods, Services income, Reimbursement of marketing expenses by AEs TNMM OP/ OR 1.38% 8 2.14% Class III - Trading (Colour Monitors and other IT products) Import of finished goods, Import of stores and services spares, Reimbursement of marketing expenditure by AE TNMM OP/OR 1.42% 9 -0.41% Class IV - Contract Software Development Services Provision of contract software development services TNMM OP/ OC 15% 21 14.33% 165. The dispute in the present appeal filed by the appellant pertains to the international transactions grouped under Class-IV (Contract software development) segment. The other international transactions pertain to Classes I (Manufacturing of Consumer Electronics, Home Appliances and Mobile Phones), Class II (Trading of Consumer Electr....
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....419,164 39,419,164 Total Expenditure on AMP F =A +B +C +D+E 7,850,539,796 7,850,539,796 Less: Cash Discounts* G (489,586,765) (620,056,638) AMP for this analysis H =F -G 7,360,935,031 7,230,438,158 *While computing the total amount of AMP spent, cash discounts were accepted to be excluded from the computation Particulars TP adjustment as per original TP Order TP Adjustment as per original rectified TP Order Value of Gross Sales A 80,092,644,000 80,092,644,000 AMP/ Sales of the Assessee (%) B 9.19% 9.03% Arm's length level of AMP (3.66% of sale) C 2,931,390,770 2,931,390,770 Amount actually spent on AMP D 7,850,539,796 7,230,438,158 Amount spent in excess of the 'bright line' E = D - C 4,919,149,026 4,299,092,388 Mark up @ 15.46% F 760,500,439 664,639,683 Amount to be reimbursed by the AE G = E + F 5,679,649,465 4,963,732,071 Amount already reimbursed by the AE H 408,392,970 408,392,970 Amount of TP adjustment I = G - H 5,271,256,495 4,555,339,101 169. Subsequently, the Appellant filed a rectification application under section 154 dated 19 February 2013 with the TPO. This application was for c....
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.... Software & Exports Ltd. 2.7% 7. Goldstone Technologies Ltd. (Seg) 10.28% 8. Infosys Technologies Ltd. 40.74% 9. Larsen & Toubro Infotech Ltd. 21.56% 10. LGS Global Ltd. 17.55% 11. Mindtree Ltd. 27.36% 12. Persistent Systems Ltd. 37.77% 13. R S Software (I) Ltd. 10.15% 14. Sasken Communication Technologies Ltd. 22.67% 15. Tata Consultancy Services Ltd. 31.44% 16. Tata Elxsi Ltd. 16.89% 17. Thinksoft Global Ltd. 16.56% 18. Thirdware Solutions Ltd. 37.37% Arithmetic Mean 25.00% Based on the above set of comparables, the TPO computed the adjustment as under: Particulars Amount (Rs.) Operating Cost A 1,071,382,122 Arm's Length Margin @ 25% B = A*25% 267,845,531 Arm's Length Price C = A + B 1,339,227,653 Price charged by the Assessee D 1,232,080,000 Adjustment proposed E = C - D 1 07,147,653 172. The Ld. DRP passed its directions under section 144C of the Act dated 30 December 2013. Vide its directions, the Ld. DRP upheld the action of TPO with respect to the adjustment made on account of AMP expenses. However, for the adjustment made on account of software development segment, the Ld.....
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.... comparable companies identified by the appellant using 'turnover less than INR 5 crores' as a comparability criterion GROUND NO. 15: The Ld. TPO/AO/DRP have erred, in rejecting certain comparable companies identified by the appellant on account of showing diminishing revenues trend GROUND NO. 16: The Ld. TPO/AO/DRP have erred in rejecting certain comparable companies identified by the appellant for having different accounting year (i.e. having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) GROUND NO. 17: The Ld. TPO/AO/DRP have erred in rejecting certain comparable companies identified by the appellant using 'employee cost greater than 25 percent of total cost' as a comparability section GROUND NO. 18:The Ld. TPO/AO/DRP have erred in rejecting certain comparable companies identified by the appellant using 'export earnings less than 75 percent of operating revenues' as a comparability criterion GROUND NO. 19:The Ld. TPO/AO/DRP have erred in wrongly rejecting certain companies from and adding certain companies to the final set of comparables for the said transaction on an ad-hoc basis, thereby resort....
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.... these two comparables and the claim of working capital adjustment. The Ld. Counsel made the following submissions and pleaded for exclusion of Infosys Technology Ltd and Tata Consultancy Services Ltd. i) Infosys Technologies Limited (a) The Ld. Counsel pointed out that there is a huge disparity in turnover between Infosys and the Appellant's software segment- INR 20,000 Cr approx. for Infosys vis-à-vis INR 125 Cr (approx.) for the Appellant. The Ld. Counsel also submitted the company was engaged in diversified and non-comparable services i.e. design development, re-engineering, infrastructure management services and it commands a huge brand value of approximately Rs. 31,900 Cr and, hence, could not be compared to the Appellant who is a captive service provider. He further submitted that the company has significant onsite revenue i.e. 51% of revenue is from on-site jobs whereas the comparables 'Maars Software International Ltd.' and 'Zylog Systems Ltd.' have been excluded by the TPO on the ground that they had onsite revenue of approximately 42%. (b) The Ld. Counsel argued that since the company has significant R & D activities (i.e. 1.3% of revenue earned), has sig....
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....terprise Application Servico5es Pvt. Ltd. vs. ACIT [TS-293-ITAT-2013(HYD)-TP] (AY 2005- 06) * 3DPLM Software Solutions Ltd. (TS-359-ITAT- 2013(Bang)-TP) (AY 2008-09) * Hyundai Motors India Engineering Pvt. Ltd. [ITA.No.1850/Hyd/2012] * App Labs Technologies Pvt. Vs DCIT [TS-316-ITAT- 2013(HYD)-TP] (c) The Ld. CIT (DR) submitted that the Ld. TPO retained this comparable for the reason that major revenue of this company was from software development and the revenue from software product was extremely low and that R&D of 1.3% of revenue was not significant. The Ld. DRP upheld action of the TPO for the reason that FAR profile of this company was akin to the Appellant. ii) Tata Consultancy Services Ltd (a) This company was introduced by the Ld. TPO and his action was upheld by the Ld. DRP for the reason that this company is functionally similar to the Appellant. (b) The Ld. Counsel contended that this company fails the Related Party Transaction (RPT) filter applied by the TPO. He pointed out that the value of RPT (only revenues derived from related parties) is Rs. 12619.79 crore and the total revenue is Rs. 22,404 crores. Accordingly, the Ld. Counsel contended that ....
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....of the tested party. A company which is much bigger in size and has greater number of employees requires much different level of assets and undertakes much higher levels of risk as compared to a company which is smaller in size and lesser number of employees. i) A company with a significant brand and other valuable trade intangibles has a distinct advantage in the market place over unbranded companies. It is also important to emphasize that branded and unbranded companies operate at different levels of the market and compete in different market segments. This is a relevant factor under Rule 10B(2). j) In the real world, there can never be a positive correlation between two economic factors / indicators, specially while measuring the impact on profit margins it is not possible to judge the exact quantum of impact of any one factor on the profit margin because profit margin is impacted by numerous factors and reasons all of which cannot be documented and quantified. It is for this reason that Rule 10B(1)(e)(iii) contains the words "could materially affect the amount of net profit margin in the open market". Therefore, the statute does not mandate that an economic factor is rele....
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....s on the facts and circumstances of each particular case and the above list is neither limitative nor prescriptive." "B.2.3.4.40. Criteria commonly used for initial screening may include the following list. The relevance of the screening criteria below depends on the facts and circumstances of each particular case and the list here is purely indicative: * Geographic restrictions with respect to a country or region; * A specific industry classification; * Certain keywords; * Elimination of those enterprises which may have substantial transfer pricing issues themselves and fail an independence screening; * Inclusion or expulsion of specific functions such as research and development, production, distribution or holding of shares; * Exclusion of companies which were only recently set up; * Consideration of diagnostic ratios such as turnover per employee, ratio of net value of intangibles/total net assets value or ratio of research and development/sales etc.; and * A focus on sales volume, fixed assets or numbers of employees." A perusal of the above principles along with the factors stipulated in Rule 10B(2) makes it amply clear that functions, assets and ....
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....td. should be excluded from the list of comparables. 179. The factual matrix pertaining to Tata Consultancy Services is quite similar. We have perused the Annual Report of this company and we find that its turnover is in excess of Rs. 20,000 crores. Furthermore, on Page 58 of the Annual Report it has been stated that the company has 42 registered patents and another 150 are pending registration. The head-count given on Page 23 of the Report indicates that it has more than 100,000 employees. Its asset base is in excess of Rs. 2500 crore (as against Rs. 45 crores of the Appellant). In these circumstances, it is vastly dissimilar and different that the software segment of the appellant, which is operating at a much smaller level and sans any ownership of IPRs. Furthermore, the details given on Page 144 of the Annual Report demonstrate that more than 50% of its revenues are derived from related parties. It, accordingly, fails the RPT filter of 25% applied by the TPO. The reasons for excluding Infosys Technology are equally applicable to Tata Consultancy Services as well. We, therefore, hold that Tata Consultancy Services Ltd. is a wholly inappropriate comparable for the software deve....
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....__________________________ DCIT v Whirlpool of India Ltd: ITA No. 1609/Del/2013 (j) ___________________________________ United Health Group Information Services Pvt Ltd v DCIT: ITA No. 419/Del/2014 (k) __________________________________ ITO v M/s H&S Software Development & Knowledge Management Centre Pvt Ltd: ITA No. 6662/Del/2014 152 (l) ___________________________________ Transcend MT Services Pvt Ltd (m) __________________________________ Accenture Services (P) Ltd v ACIT: ITA No. 7686/Mum/2012 183. The Ld. CIT (DR) relied on the orders of the lower authorities and reiterated that the appellant had failed to show the differences between the working capital levels. 184. We have perused the orders of the lower authorities and the material on record. We find that the WC adjustment figures were furnished by the appellant which were disregarded by the TPO. On the issue of allowability of this adjustment we find that this issued has been settled by this Tribunal in numerous decisions (some of which have been cited by the Appellant) in favour of the assessees. The desirability of making the WC adjustment has also been endorsed by the OECD and UN Guidelines. The relevant....
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....receding five assessment years 187. We have already adjudicated this issue in the appeals for prior years (A.Yrs. 2005-06, 2006-07, 2007-08 and 2008-09) and allowed the same. We have held that training and recruitment expenditure is fully allowable as revenue expenditure in the year in which it is incurred. There being no enduring benefit it cannot be treated as capital expenditure or deferred revenue expenditure. Ground no. 24 is therefore allowed and Ground no. 25 is dismissed as being infructuous. GROUND NO. 26: The Learned AO/DRP has erred in reducing the claim of depreciation on UPS without mentioning anything in the final assessment order and without assigning any reasons which is against the principle of natural justice GROUND NO. 27: Without prejudice to the above ground, the Learned AO/DRP has erred in not treating UPS connected to computers as 'computer' and instead regarding it as an item of general 'plant and machinery' for the purpose of allowing depreciation. 188. We have already adjudicated this issue in the appeals for prior years (A.Yrs. 2006-07, 2007-08 and 2008-09) and allowed the same. We have held that it is now settled that depreciati....
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....covered in its favour by the order of this Tribunal in ITA No. 6508/Del/2012 in the case of Samsung Telecommunications India Pvt. Ltd. for AY 2008-09, which merged with the Appellant w.e.f. 1 April 2008. A copy of the order of this Tribunal in ITA No. 6508/Del/2012 dated 23/05/2017 has been placed before us. Our attention has been drawn towards Paragraphs 19-30 of this order where the Tribunal has examined this issue in detail and has concluded that relocation of an unit from one place to another in order to meet shortage of space and to effect expansion of business does not amount to splitting or reconstruction of an existing business and would not disentitle the assessee from claiming the benefit of Section 10A of the Act. This order of the Tribunal was subsequently confirmed by the Hon'ble Delhi High Court on this issue. Respectfully following the decision of the Tribunal and the Hon'ble Delhi High Court we allow this ground of appeal. AY 2010-11 (ITA No. 6741/DEL/14) 191. The facts and business model in the present Assessment Year i.e. 2010-11 are similar to the facts already stated for AY 2005-06 to 2009-10. The appellant had filed its return of income on September 30, 2010....
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....in the TP study leading to identification 4 uncontrolled comparable companies. Since the appellant had earned profit margin of 14.84% which was within +/-5% of the profit margin earned by the comparables, it was concluded that the international transactions were at arm's length. 194. The dispute in the present appeal filed by the appellant pertains to the adjustments made by the TPO vide order dated 30 January 2014 on account of: (a) alleged international transaction of Advertising, Marketing and Promotion (AMP) expenses and (b) software development segment. 195. Adjustments made on account of AMP expenses: The Ld. TPO proposed an adjustment of Rs. 7,401,552,834 (Rs. 1,021,561,275 under the IT business and Rs. 6,379,991,559 under the Non-IT business) with respect to AMP expenses incurred by the Appellant. He was of the view that the Appellant has provided certain services in respect of creation of marketing intangibles to its AE. 196. ALP determination for Provision of Contract software development services (Class III): In Class III (Contract software development services segment), the Ld. TPO proceeded to undertake a fresh benchmarking analysis of the uncontrolled comparable....
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.... of the Act. 199. Aggrieved by the order of the AO, the assessee has preferred the present appeal and has prayed for adjudication of the following grounds of appeal. GROUNDS IN APPELLANT'S APPEAL(ITA NO. 6741/DEL/14) FOR AY 2010-11 200. GROUND NO. 1 to 11: These grounds pertain to the issue of AMP expenditure being treated as an international transaction and adjustment being made on the basis of the "bright line" test. We have already decided this issue in ITA no. 3248/Del/2012 for A.Y. 2005-06 by examining the same in detail. These grounds for this year are allowed and disposed-off on the lines of our findings and observations made while deciding Grounds no. 3.1 to 3.6 of ITA no. 3248/Del/2012. ADJUSTMENT ON ACCOUNT OF SOFTWARE DEVELOPMENT GROUND NO. 12: The Learned TPO/AO/DRP have erred in not accepting the economic analysis undertaken by the appellant in respect of international transaction pertaining to provision of contract software development services by the appellant to its AEs and computing adjustment of INR 10,93,95,995 to the total income of the appellant GROUND NO. 13: The Learned TPO/AO/DRP have erred, in rejecting certain comparable companies identified by....
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....will be rendered academic in nature. We therefore proceed to examine the validity of this claim. 202. The Ld. Counsel made following submissions with respect to rejection of the three comparable companies: E-Infochips Bangalore Limited ("E-Infochips") (a) The Ld. Counsel argued that E-Infochips is functionally dissimilar as the company is engaged in both software development and IT enabled services. He pointed out that in the Annual Report, segmental information is not available and he drew the attention of the Bench to Page No. 63 of the Annual Report where this fact has been clearly stated and the segmental information in respect of software development and ITES has not been given. (b) The Ld. Counsel submitted that the Ld. TPO included the said comparable by merely stating that this company cannot be said to be providing IT enabled services since its communication costs are very low and that merely having supernormal profits is not a criterion for rejection. The Ld. Counsel argued that that the Ld. TPO's conclusions are based on surmises and are contrary to the facts on record as evident from the Annual Report of the company. He further submitted that the exclusion of ....
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....taken for comparison with the software segment of the assessee. It is now well settled that in the absence of segmental margins, combined entity level results cannot be used for a TNMM analysis. In Headstrong Services (supra), this Tribunal while examining the comparability of E-Infochips Bangalore to a software company held as under: 12.2. After considering the rival submission and perused the relevant material on record, we find from the Annual Report of this company available on page 352 of the paper book that its P & L Account shows `Income from software services' as one unit at Rs. 43,04,66,481/-. Schedules 7 gives break up of this income with "Income from Software Services" at Rs. 37.13 crore and "Consultancy Charges" at Rs. 5.90 crore. Segmental information of this company is available on page 66 of its Annual Report which states that: "The Company is primarily engaged in Software Development and I.T. enabled services which is considered the only reportable business segment". This indicates that the revenue from Software Development and ITES has been clubbed by this company which also includes consultancy charges. No doubt Consultancy charges in relation to Software Devel....
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....chnologies, which inter alia includes: * Next generation of software engineering * Convergence of services, network and applications * Text analysis, machinelearning, symbolic and quantitative approaches to Reasoning and Decision Making, and Task Oriented Knowledge Management Systems * Virtualization, grid models for computing efficiencies and cloud computing. * Application security requirements, etc. The efforts of the SET Labs have led to creation of R&D and filing of patents (d) The Ld. Counsel pointed out that Infosys has an established brand presence which is one of the most important intangible assets. The company itself accepts this in its Annual Report. He further pointed out that from a perusal of Infosys' Annual Report, it has claimed that it is the most reputed and admired company in India. (e) The Ld. Counsel argued that Infosys was engaged in diversified services apart from software services income. Revenues is also derived from sale of software products & onsite services. As per the Annual Report, the Company provides end-to-end business solutions that leverage cutting-edge technology, thereby enabling clients to enhance business performance. T....
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....ear increase (%) - 708.23% 37.67% Employee remuneration NIL 18,725,836 109,151,595 143,902,273 Year-on-year increase (%) - 482.29% 31.83% Profit before tax (49,999) 9,851,316 157,310,476 337,737,471 Year-on-year increase (%) - 1496.85% 114.495% Debtors NIL 50,097,205 131,326,992 225,170,269 Year-on-year increase (%) - 162.14% 71.46% The Ld. Counsel submitted that the fact that this company has witnessed widely fluctuating growth rates (as depicted above) is indicative of the fact that the company was facing exceptional or peculiar circumstances and risks and cannot be said to be representative of the Indian software industry. In this regard, the Ld. Counsel placed reliance on the jurisdictional ITAT ruling in the case of M/s. Stryker Global Technology Center Private Limited vs. DCIT, (ITA No.6866/Del./2014) wherein the ITAT has examined the functional profile of Infinite Data Systems for AY 2011-12 and excluded it as a comparable. He also placed reliance on the jurisdictional ITAT ruling in the case of M/s Freescale Semiconductor India Pvt Ltd (ITA No1263 /Del/2015). 211. The Ld. CIT (DR) vehemently....
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....lementation, testing and infrastructure management services. So, in view of the matter, we are of the considered view that Infinite is not a suitable comparable vis-à-vis assessee company, hence ordered to be excluded." In light of the aforesaid we order the exclusion of this company from the list of comparables. 213. The other grounds of the software segment are not being adjudicated as being academic in nature in view of the submission made by the Ld. Counsel regarding the international transaction of software segment being at arm's length on the basis of deletion of the three aforesaid comparables, viz., Infosys Technologies, EInfochips Bangalore and Infinite Data Systems. GROUND NO. 25: The Learned AO/DRP has erred in holding that expenditure on recruitment and training of employees leads to enduring benefit to the appellant and in holding to allow only 1/6th of the total expenditure in the current year and deferring the balance to be allowed in next five years GROUND NO. 26: Without prejudice to the above, Learned AO/DRP has erred in not allowing in the year under assessment, 1/6th of the expenditure on this account that was similarly disallowed in the precedi....
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....ein we have allowed the ground. Following the same, this Ground is allowed. AY 2011-12 (ITA No. 868/DEL/2016 and ITA No. 2511/DEL/2018 arising out of order passed u/s 154) 217. The facts and business model in the present Assessment Year i.e., 2011-12 are similar to the facts already stated for AY 2005-06 to 2010-11. The appellant had filed its return of income on November 29, 2011, declaring an income of Rs. 1,73,33,95,170/-. A summary of international transactions entered into by the appellant and the appellant's approach in determining their ALP is given in the table below: Particulars Most Appropriate Method as per TP study Profit Level Indicat or(PLI) as per TP study Margin earned by the Appellant as per TP study No. of comparables consider ed as per TP study Arm's Length Margin as per TP study Class I - Manufacturing (Consumer Electronics, Home Appliances, Mobile Phones and Colour monitors) Import of raw material, Import of stores and service spares, Export of raw material, Export of stores, spares and semi-finished goods, Payment of royalty, Import of fixed assets, Import of spares for repair and maintenance, Provision of intra-group services, Availing of services, ....
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....lied the bright line test ("BLT") to compare the AMP/sales ratio of the appellant with that of the comparable companies and application of a mark-up equivalent to SBI's PLR. 221. ALP determination for Provision of contract software development services (Class III): In Class III (software development services) segment, the Ld. TPO proceeded to undertake a fresh benchmarking analysis of the uncontrolled comparable companies by modifying the filters and arrived at a fresh set of comparables. He selected 11 out of the 26 comparables provided by the appellant (i.e. 22 comparables identified as per TP Study and 4 comparables identified by the assessee during the course of TP assessment proceedings) and introduced 8 additional comparables. The final sets of comparables for benchmarking international transaction are reproduced in the table below: S.No. Name of Comparable Working capital adjusted NCP for AY 2011-12 (%) 1 Akshay Software Technologies Ltd. 3.63% 2 E-Infochips Limited 56.42% 3 Evoke Technologies Pvt Ltd 10.23% 4 E-Zest Solutions 38.19% 5 Infosys Technologies Ltd. 45.11% 6 Larsen & Toubro Infotech Ltd. 21.22% 7 LGS Global Limited 13.58% 8....
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....sessment order dated 28 January 2015. The AO while incorporating the transfer pricing adjustments made by the TPO, made further additions of: i) Rs. 143,127,352 on account of disallowance in respect of foreign exchange contracts classified under forex loss ii) Rs. 889,984,961 on account of disallowance of deduction claimed under section 40(a)(i) of the Act. 223. The Ld. TPO initiated rectification proceedings suo-moto vide notices dated 6 April 2016 and 12 March 2018. In response to these notices, the Appellant filed submissions contesting the rectifications so proposed by the Ld. TPO dated 28 April 2016, 19 May 2016 and 22 March 2018. A rectification order dated 27 March 2018 was passed by the Ld. TPO ignoring the Appellant's contentions and enhanced the total adjustment amount as below: 224. Adjustments made on account of AMP expenses: The Ld. TPO enhanced the AMP adjustment from Rs. 394,368,561 (i.e. Rs. 313,105,771 under the non-IT segment and Rs. 81,262,790 under the IT segment) to Rs. 1,936,311,967 (i.e. Rs. 1,936,311,967 under the non-IT segment and 'nil' under the IT segment) on account of: * Revision in the AMP/ Gross Profit ('GP') ratio of comparable companie....
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.... GROUND NO. 13: The Learned TPO/AO/DRP have erred in computing adjustment of INR 18,97,97,464 to the total income of the appellant on account of adjustment in ALP of the international transaction pertaining to provision of software development services entered into by the appellant with its AE GROUND NO. 14: The Learned TPO/AO/DRP have erred in rejecting certain comparable companies identified by the appellant using 'export earnings less than 75 percent of operating revenues' as a comparability criterion GROUND NO. 15: The Learned TPO/AO/DRP have erred, in law and on facts and circumstances of the case, by rejecting certain comparable companies identified by the appellant on account of showing diminishing revenues trend GROUND NO. 16: The Learned TPO/AO/DRP have erred in rejecting certain comparable companies identified by the appellant using 'related party filter less than 25 percent of total cost' as a comparability criterion even though they satisfy the same on a consolidated basis GROUND NO. 17: The Learned TPO/AO/DRP have erred, in rejecting certain comparable companies identified by the appellant for having different accounting year (i.e. having ac....
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....for AY 2011-12 Income from operations (B) 260,384,251 Page no. 33 of annual report for AY 2011-12 Revenue from comparable segment (A/B) 62.77% (c) The Ld. Counsel argued that E-Infochips incurred significant R & D expenses of 4.15% of the total cost during the year whereas the Appellant has not incurred any amount towards R&D in this segment. He further contended that the company is functionally dissimilar to the Appellant on account of undertaking diversified business operations since it has derived income from hardware and such income accounts for 15% of the total revenue. It is evident from the table below: Particulars Amounts (In INR) Reference Income from computer hardware(A) 39,248,562 Page no. 62 of annual report for AY 2011-12 Income from operations (B) 260,384,251 Page no. 33 of annual report for AY 2011-12 Revenue from comparable segment (A/B) 15% (d) He further pointed out that the company has reported only one segment despite undertaking diversified operations. He placed reliance on various judgments wherein it has been held that E-Infochips ought to be excluded as it is involved in products and no segmental data is available. The ....
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.... (supra) and Intoto India Pvt. Ltd. (supra). In view of the above factual aspects and the numerous decisions of this Tribunal, we hold that E-Infochips is not a suitable comparable and is directed to be excluded from the list of comparables. Wipro Technologies Limited ("Wipro Technology") 233. The Ld. Counsel pointed out that, as per the Annual Report (Page No. 38) of Wipro Technology for AY 2011-12, Wipro Technology is engaged in providing IT software solutions / maintenance and technology infrastructure support services to Citi Group entities globally. He contended that Wipro Technology is functionally dissimilar on account of undertaking diversified business operations comprising software related support services, primarily information technology software solutions / maintenance and technology infrastructure support services unlike the Appellant who is engaged in software development support services only. Reliance was placed by the Ld. Counsel on the following judgments that hold that in absence of segmental details, a company cannot be taken into account for comparability analysis: * LG Soft India (P.) Ltd. Vs. DCIT (2014) 48 taxmann.com 237 (Bangalore-Trib.) * M/s Bri....
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....nal wherein exclusion of this comparable has been upheld in the case of a software development company: * Intoto Software India Private Ltd. [2013] 35 taxmann.com 421 (Hyderabad - Trib.) * M/s. FCG Software Services (India) Pvt. Ltd. Vs. ITO, I.T(T.P) A.No. l242/Bang/2012 * Vodafone India Services Vs. DCIT, ITA No.7140 /Mum/2012 * Xander Advisors India Pvt. Ltd., Vs. ACIT, ITA No.5840/Del/2012 * NEC Technologies India P Ltd. (ITA No. 6283/Del/2015) 234. Ld. CIT (DR) has contended that the TPO included Wipro Technology as a comparable for the reason that it is providing specialized services within software development and is not selling products and thus, it is comparable to the Appellant. The Ld. CIT (DR) contended that the order of Ld. TPO was correct, and Wipro Technology was rightly included for the reasons mentioned in his order. 235. We have examined the facts relating to Wipro Technology Services and the contention raised by the two sides. We find that this company has been consistently held to be incomparable on account of the peculiar facts surrounding its history. This company was earlier a subsidiary of Wipro Ltd. and had a long term service contract wi....
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.... criterion to reject a comparable company. He pointed out that no adverse inference was made by the TPO in AY 2012-13 wherein Caliber was accepted as a comparable by the Appellant in its TP Study even though in that year too, the financial year of the company was December as in this year. The Ld. Counsel argued that a functionally comparable company cannot be rejected merely on the grounds of having different financial year if the data can be reasonably extrapolated. Reliance was placed by him on: * DCIT vs. McKinsey knowledge Centre India private limited (ITA No. 195/DEL/2011), affirmed by the Hon'ble High Court of Delhi [TS-672-HC-2015(DEL)-TP] * Mercer Consulting (India) Pvt Ltd [TS-664-HC-2016(P & H) * Exevo India Pvt. Ltd. vs. ITO (I.T.A. No.907/Del/2016) * SSL TTK (TS-887-ITAT-2016) * Aegis Limited (ITA No. 7694/Mum/2014) 238. The Ld. Counsel submitted that extrapolated annual profitability of the comparable segment depicting March ending results for AY 2011-12 have been computed at 4.25% from annual reports for period December 2010 and December 2011. He placed reliance on the judgment delivered in the case of Maersk Global Services Centre (I) Pvt Ltd (I.T.A.....
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....ailable, the comparable cannot be included merely on the basis of extrapolated figures derived from weighted average basis. This ground is disposed off in terms of our above directions. GROUND NO. 23: The Ld. AO/DRP has erred in law and in fact, in holding that loss on exchange fluctuation amounting to Rs. 143,127,352 debited to P&L account is a notional loss and is not allowable as a deduction under the provisions of the Act GROUND NO. 24: Without prejudice to the above ground, the Ld. AO/DRP erred in not excluding Rs. 48,659,085 from the taxable income on the current year being marked to market losses incurred in respect of foreign exchange contracts which were outstanding as on 31st March 2010 and written back during the year as same was also not allowed as deduction in the assessment proceedings for AY 2010-11 241. This ground pertains to allowability of loss recognized under accounting standards under marked to market (MTM) guidelines in respect of forward forex contract which are open and unexpired on the last date of the balance sheet on account of restatement of amounts payable and receivable in foreign exchange. This issue has already been decided by us in ITA No. ....
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....e issue of disallowance made by the AO u/s 40(a)(i)/(ia). The relevant facts in this respect are that, the assessee had created a year end provision of INR 3,396,650,580 for the year ending 31 March 2010. Out of this provision, INR 889,984,971 was in respect of vendors who could not be identified, and no TDS could be made. Accordingly, the assessee in its computation of income and in income tax return for A.Y. 2010-11 disallowed this amount of INR 889,984,971. During this year i.e. FY 2010-11 (AY 2011-12), the assessee reversed such provision in the books of accounts and credited the same in respect heads of expenses thereby reducing the expenses. This led to an increase of the total income to the extent of INR 889,984,971.The Ld. AO held that the assessee company has not deducted and deposited the tax deduction at source (TDS) and on a failure to deposit withholding taxes on this amount disallowed the same under section 40(a)(i)/(ia) of the Act. He further held that creation of provision is nothing but a strategy / tool for decreasing the income and taxes. The AO was of the view that the submission of the assessee that the expense was reversed in the current year establishes that ....
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....of income for the prior year shows that the appellant on its own volition had added back an amount of Rs. 889,984,971to its income on account of a provision being created without any TDS being made. We find that during the relevant financial year, this provision was reversed and the corresponding heads of expenses to which the provision pertained were reduced correspondingly. This led to increase of income in the books of account. Since this amount had already been voluntarily disallowed in A.Y. 2010-11 and offered to tax, the impact of writeback in the books for the current year had to be reversed. The assessee claimed this as a deduction in its computation of income. We are in agreement with the submission of the assessee that this approach is consistent with the generally acceptable accounting practices. 246. In our view, Section 40(a)(i)(ia) of the Act comes into play only when an assessee claims any expense as a deduction without deducting TDS on the same. However, in the present case, as the assessee has reversed the provision created in the previous year, the same has accordingly be reduced from the total income as it was already added back while computing the income of pr....