TaxTMI 
TaxTMI 
2018 (7) TMI 2083
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....nds inter alia that :- "ITA No.1674/Del./2016 (AY : 2011-12) 1. That on the facts and circumstances of the case and in law, the order passed by the Learned Assessing Officer (Ld. AO') under section 143(3) read with section 144C of the Act, in pursuance of the directions issued by the Honorable Dispute Resolution Panel (Hon. DRP'), is bad in law to the extent of adjustment of INR 59,552,876 made in the impugned assessment order. 2. That on the facts and circumstances of the case and in law, the Ld. AO/Transfer Pricing Officer (TPO') following the directions of Hon'ble DRP, erred in assessing the total income of the Appellant of INR 7,96,25,548 at INR 13,91,78,424. 3. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/ Hon'ble DRP erred in disregarding multiple year/ prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2010-11) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its Transfer Pricing ("TP") documentation. 4. That on the facts and....
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.... excessive" AMP expenses incurred by the Appellant and in doing so have grossly erred in: 10.1 disregarding the nature of AMP expenses incurred by the Appellant and incorrectly holding that such expenses results in developing marketing intangibles for the AEs; 10.2 disregarding the fact that the gross profit earned by the Appellant more than compensate the allegedly excessive AMP spends, if any, incurred by it; 10.3 alleging that the AMP expenses incurred by the Appellant need to be reimbursed by the AEs along with a mark-up on the same by implicating the same as a service rendered by the Appellant to its AE for which it has not been compensated and in doing so grossly erred in; 10.3.1 applying the concept of 'intra-group services' without a due understanding thereof and without demonstrating that services has been rendered for the benefit of the AEs or any tangible benefits have been received by the AEs for which a return needs to earned by the Appellant; 10.3.2 applying a mark-up of 6.55% in respect of the Appellant's "alleged excessive" AMP expenses, which is completely untenable and based on mere surmises and conjectures;....
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....rossly erred in enhancing the income of the Appellant by INR 8,20,07,004 by rejecting Resale Price Method ('RPM') as the Most Appropriate method and substituting the same with Transactional Net Margin Method ('TNMM') and correspondingly rejecting Gross Profit/ Sales (GP /Sales) as the relevant Profit Level Indicator (,PLI') and substituting the same with Operating Profit/ Sales (OP /Sales) to ascertain the arm's length price in the Appellant's case based on several subjective presumptions. 6. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO erred in enhancing the income of the appellant from INR 7,92,43,871 to INR 8,20,07,004 with respect to the distribution segment of the Appellant on account of working capital adjustment without providing back up calculations for the same. Transfer Pricing Adjustment amounting to INR 3,96,82,107 on account of Advertisement, Marketing & Promotion ('AMP') expenses incurred by the Appellant 7. That on the facts and circumstances of the case and in law, the Ld. AO/TPO/ Hon'ble DRP erred in alleging that the Appellant is rendering a service to its Associated ....
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....he AEs for which a return needs to earned by the Appellant; 9.6.2 applying a mark-up of 9% to the Appellant's alleged excessive AMP expenses, based on mere surmises and conjectures; and 9.7 making an adjustment on AMP expenses which has led to double taxation in the hands of the Assessee. 10. That on the facts and circumstances of the case and in law, the Ld. AO/TPO/Hon'ble DRP erred in computing the AMP adjustment by considering the AMP expenditure in total, irrespective of the fact that the Appellant has multiple segments including the AE & Non-AE Segments. Therefore, considering the entire AMP expenditure for the computation of adjustment is erroneous. 11. The Hon'ble DRP erred in law and fact by making a suo moto transfer pricing adjustment amounting to INR 3,96,82,107 on account of AMP expenses incurred by the Appellant and in doing so, completely overlooked the fact that such addition did not arise out of the draft order/TP Order and was not a ground of objection raised before the Hon'ble DRP. 12. The Hon'ble DRP erred in law and fact by not giving an opportunity of being heard to the appellant on the issue of A....
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....the Appellant and incorrectly characterizing the Appellant to be akin to a super normal/ high risk distributor. 5. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/ Hon'ble DRP grossly erred in enhancing the income of the Appellant by INR 417,429,552 by rejecting Resale Price Method 'RPM') as the Most Appropriate method and substituting the same with Transactional Net Margin Method ('TNMM') and correspondingly rejecting Gross Profit/ Sales (GP /Sales) as the relevant Profit Level Indicator CPLI') and substituting the same with Operating Profit/ Sales (OP /Sales) to ascertain the arm's length price in the Appellant's case based on several subjective presumptions. Transfer Pricing Adjustment amounting to INR 472,412,147 on account of AMP expenses incurred by the Appellant 6. The Ld. AO/TPO/Hon'ble DRP erred in treating a portion of the Appellant's AMP expenses as being excessive. Furthermore, Ld. AO/TPO/Hon'ble DRP erred in treating the alleged excessive AMP expenses as an international transaction under section 92B of the Act. In doing so, the Ld. AO/TPO/Hon'ble DRP have grossly err....
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.... the Appellant; 8.5.2 undertaking comparability adjustment by applying TNMM and including the alleged excessive AMP expenses in operating cost and operating revenue along with a mark-up; and 8.5.3 arbitrarily determining the mark-up to be earned for performing AMP services; 9. That on the facts and circumstances of the case and in law, Ld. AO/TPO/ Hon'ble DRP erred in enhancing the income of the Appellant by INR 49,048,283 on a protective basis and in doing so, have grossly erred in: 9.1 holding the AMP expenses incurred by the Appellant to be "excessive" on the basis of a "bright line test"; 9.2 applying a mark-up of 12.18% in respect of the Appellant's "alleged excessive" AMP expenses; 9.3 disregarding the fact that bright line test has no statutory mandate and it is not obligatory to subject AMP expenses to a bright line test 10. That on the facts and circumstances of the case and in law, the Ld. Ld. AO/TPO/ Hon'ble DRP has grossly erred in making both substantive and protective adjustment. 11. The Hon'ble DRP erred in law and fact by suo mota directing AMP adjustment based on the addition of....
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....f spare parts RPM 31,242,767 3. Receipt of IT Services TNMM 20,639,907 2. Provision of IT Services TNMM 28,499,837 3. Business support services TNMM 62,781,183 4. Purchase of fixed assets TNMM 29,684,974 5. Reimbursement of Expenses CUP 28,853,246 6. Recovery of Expenses CUP 15,297,246 BRIEF FACTS OF ITA No.7088/Del./2017 (AY : 2013-14) 4.1 International transactions entered into by the taxpayer with its AE during AY 2013-14 are extracted as under :- S. No. International Transaction Amount 1. Purchase of finished goods 645,655,926 2. Purchase of spare parts 73,570,891 3. Availing of IT Services 8,226,076 4. Availing of maintenance support services 7,050,209 4. Provision of IT Services 29,180,273 5. Provision of Business support services 281,034,456 6. Provision of fixed assets 10,426,407 7. Reimbursement of Expenses 63,758,725 8. Recovery of Expenses 13,570,867 Total 1,132,473,830 5. Common/identical issue involved in all the aforesaid appeals is that the taxpayer in its TP analysis has se....
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.... of IT segments. It is the case of the TPO that during TP proceedings, the taxpayer accepted that purchase of trading goods includes goods for components of IT support services. So, these two types of goods being intrinsically inter-connected, it is not correct to benchmark trading at gross level and other parts at net level because at the gross level there is a positive income and at the net level, there is a loss of 75%. It is also not in dispute that the TPO has not proposed TP adjustment on account of Advertisement, Marketing and Promotion (AMP) expenses. However, the AMP adjustments have been made by ld. DRP. 12. In the backdrop of the aforesaid facts and circumstances of the case, the sole question arises for determination in this case is :- "as to whether TPO/DRP have erred in substituting RPM as the MAM with TNMM by rejecting the Gross Profit/Sales (GP/Sales) as the Profit Level Indicator (PLI) by substituting the same with OP/Sales to determine the Arm's Length Price (ALP) of the international transactions entered into between the taxpayer and its Associated Enterprises (AE) during the years under assessment?" 13. Ld. AR for the taxpayer contended inter ....
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....inked to the transfer price that the taxpayer has agreed with its AE and in these circumstances, TNMM is the most appropriate method. 17. However, when we examine the arguments addressed by both the ld. Representative for the parties to the appeal in the light of the undisputed facts, it goes to prove that the taxpayer has purchased finished goods ready for sale in the market from its AE without making any value addition to the same. The function performed by the taxpayer for issuance of the purchase order, budget control, quality checks, etc. would not change the role of the taxpayer other than a normal distributor. 18. Now, the question arises for determination in this case is as to whether functions performed by the taxpayer with regard to quality control, warehousing, sales and marketing etc. are required to be captured in the resale price margin. 19. Undisputedly, these costs are qua unrelated parties and to our mind, these activities are not linked to the international transactions entered into between the taxpayer and the AEs as the AEs do not have any control on such activities and the answer to the question is to be found in case law relied upon by the taxpayer as....
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....d the identical issue by relying upon Mattel Toys (I.)(P.) Ltd. (supra) and ITO v. L'oreal India (P.) Ltd. [2012] 24 taxmann.com 192 in favour of the assessee by returning following findings :- "13. The aforesaid decision clearly clinches the issue that under the RPM, the focus is more on same or similar nature of properties or services rather than similarity of products and functional attribute is a primary factor while undertaking the comparability analysis under RPM. Further, RPM is mostly applied in the case of a distributor where reseller purchases tangible property and obtains services from the AE and without making any value addition, resells the same to third parties. Under these circumstances and looking to the fact that functions performed by the assessee is of distributor only, therefore, RPM should be reckoned as the most appropriate method and accordingly, we agree with the learned CIT(A) that on the facts of the present case, RPM should be the adopted as the most appropriate method for benchmarking assessee's international transactions. So far as the two comparables chosen by the TPO apart from assessee's comparables are concerned, we find that, T....
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....oss profit in trading segment as it depends on host of circumstances. So, Grounds No.4, 5 & 6 in ITA No.1674/Del./2016 (AY : 2011-12) & ITA No.1982/Del./2017 (AY : 2012-13) and Grounds No.3, 4 & 5 in ITA No.7088/Del./2017 (AY : 2013-14) are determined in favour of the taxpayer. GROUND NO.7 IN ITA No.1674/Del./2016 (AY : 2011-12) 24. Ground No.7 in ITA No.1674/Del/2016 for AY 2011-12 is dismissed having not been pressed during the course of arguments. GROUNDS NO.8, 9, 10 & 11 IN ITA No.1674/Del./2016 (AY : 2011-12) GROUNDS NO.7, 8, 9, 10, 11 & 12 IN ITA No.1982/Del./2017 (AY : 2012-13) GROUNDS NO.7, 8, 9, 10, 11 & 12 IN ITA No.7088/Del./2017 (AY : 2013-14) 25. Undisputedly, the TPO has not made any adjustment on account of Advertisement, Marketing & Promotion (AMP) expenses. The ld. DRP directed the TPO to make adjustment on account of AMP expenses by treating the same as separate international transactions. It is the case of the taxpayer that since the AMP expenses incurred by the taxpayer is not international transactions and bright line test cannot be accepted to benchmark the international transactions of AMP, the addition is not sustainable and rel....