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2020 (9) TMI 319
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....n the facts and circumstances of the case and in law, the Ld. Dispute Resolution Panel ("DRP")/AO/Transfer Pricing Officer ("TPO") erred in making a transfer pricing adjustment of Rs. 1409,51,89,261/- on account of (i) advertising, marketing, promotion ("AMP") expenses of Rs. 802,61,48,069/- and (ii) international transactions pertaining to trading segment of Rs. 606,90,41,192/- alleging the same to be not at arm's length in terms of the provisions of section 92C of the Act read with Rule 10B of the Income Tax Rules, 1962 ("the Rules"). 3. That on the facts and circumstances of the case and in law, the Ld. DRP/AO erred in making an addition of Rs. 167,75,31,950 on account of disallowance of salary expenditure incurred in relation to expatriate employees under section 37(1) of the Income-tax Act, 1961. GROUNDS AGAINST SUBSTANTIVE ADJUSTMENT MADE IN RELATION TO AMP EXPENSES 4. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making substantive adjustment of Rs. 802,61,48,069 on account of AMP which comprised of Rs. 680,19,00,772 for the Trading Segment (Non- IT) and Rs. 122,42,47,297 for Networking Segment (No....
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....analysis was required in respect of the individual elements of cost (AMP expenditure) as it is inconsistent with the tenets of applications of TNMM as per Rule 10B(l)(e) of the Rules. 12. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making transfer pricing adjustment on account of AMP expenditure in networking segment ignoring the fact that under networking segment, the Appellant operates under a Business-to-Business ('B2B') model wherein the it caters to a single customer and does not undertake any activity pertaining to AMP. 13. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in considering all 'value added expenses' (excluding employee costs) as part of the AMP expenditure on the premise that all value-added expenses lead to promotion of the brand 'Samsung' disregarding the fact that many of such expenses are purely operational in nature. 14. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in not allowing the exclusion of sales related expenses from the ambit of AMP disregarding the fact that exclus....
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....nd by including companies that are not comparable to the Assessee in terms of functions performed, assets employed, risks assumed, and rejecting comparable companies selected by the Assessee. 22. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in incorrectly computing the margin of the Assessee and the comparables. 23. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in considering the foreign exchange gain as non-operating in nature for the purpose of computation of margins of the Appellant as well as of the comparables. 24. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in denying working capital adjustment under Rule10B(1)(e) for the purpose of determination of ALP to account for the difference in working capital employed by the Assessee vis-a-vis the comparable companies by ignoring the fact that working capital adjustment was allowed by the Ld. TPO in AY 2005-06, 2006-07, A Y 2010- 11 and 2011-12 and by Hon'ble DRP in AY 2013-14. 25. That on the facts and circumstances of the case and in law, the Ld. DRP/TPO/AO erred i....
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....istribution Segment) (iii) Provision of contract software development services (Contract Software Development Segments) and (iv) Operations involving Buy-Sell of Telecommunication Equipment from Samsung Korea to third party customers in India (Network Segment) 4. Out of the aforesaid segments, ld. TPO made adjustment in trading and distribution segment only. Ld. TPO made transfer pricing adjustment on account of Advertisement, Marketing and Promotion (AMP) expenditure incurred by the taxpayer during assessment year by applying "intensity approach" for trading segment as well as network segment. Ld. TPO also proceeded to make protective adjustment by applying a Brightline Test (BLT) in case of licencing manufacturer segment as well as trading segment. 5. In case of trading segment, the taxpayer in its TP study chosen 19 comparables by applying Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) and computed the margin of comparables at 10.61% as against margin of the taxpayer at 14.98% and found its international transactions qua trading segment at arm's length. However, ld. TPO in its TP analysis ....
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.... 12. Undisputedly, there is a Marketing Development Fund (MDF) Agreement between the taxpayer and its Associated Enterprises (AE) vide which part reimbursement qua ALP expenses incurred by the taxpayer has been reimbursed by the AE. It is also not in dispute that the taxpayer has itself treated the transaction qua AMP expenses as international transactions in Form 3CEB. So, the ld. TPO noticed that the taxpayer has incurred significant amount of AMP expenses during the year under assessment to promote the brand not owned by it. Consequently, ld. TPO reached the conclusion that "significant non-routine AMP expenditure incurred by the taxpayer is an international transaction" which led to creating marketing intangibles and as such, AE has to compensate the taxpayer for significant functions performed, assets utilized and for creating economic value for the AEs brand by enhancing, maintaining and promoting the brand. Ld. TPO by using BLT approach proposed protective adjustment of Rs. 16,83,57,78,332/- and thereafter proceeded to make alternative benchmarking of international transactions under TNMM by applying intensity approach. TPO by adopting the intensity approach made adjustmen....
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....racted for ready perusal as under :- "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 received as reimbursement under the MDF agreement? ...... 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 transacti....
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....y disclosed and explained in the Form 3CEB and in the TP study. The question that requires our adjudication is whether by virtue of this agreement, the so-called "excessive" AMP expenditure of the assessee (which is much higher than the assistance received under the MDF agreement) can be treated as an international transaction u/s 92B. For this we need to advert to the terms of the MDF agreement. Relevant clauses of the MDF agreement applicable for A.Y. 2005-06 (the agreements pertaining to other 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 thi....
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....solely on its own volition that the AE determines the activity it wants to finance/reimburse/assist. Therefore, it is not possible to infer the existence of an international transaction beyond what has been reimbursed. 42. In a similar situation, coordinate Bench of this Tribunal has examined the issue of existence of an "international transaction" in the case of PepsiCo India Holdings Pvt. Ltd. v. Addl. CIT (I.T.As. No. 1334/CHANDI/2010, 1203/ CHANDI /2011, 2511/DEL/2013, 1044/DEL/2014 & 4516/DEL/2016) where the assessee, an Indian company had reimbursed a portion of the sponsorship 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 cos....
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....es, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. 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 p....
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....This definition of transaction has to be read in conjunction with the definition given in section 92B, which means that the transaction has to be first in the nature given in Section 92B (1); and then when such transaction includes any kind of arrangement, understanding or action in concert amongst the parties, whether in writing or formal, then too it is treated as international transaction. Here the conjoint reading of both the sections lead to an inference that in order to characterized as international transaction, it has to be demonstrated that transaction arose in pursuant to an arrangement, understanding or action in concert. Such 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 ....
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.... purposes of the 'means' part of clause (b) and the 'includes' part of clause (c,) the revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand SMC...... 61......Even if the word 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it still incumbent on the revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part 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....
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....fit of AE and found it not applicable in case of licensed manufacturer such as the taxpayer by returning following findings :- "50. In view of the above, we hold that in case of licensed manufacturers like the appellant who bear the full risks and rewards of manufacturing and selling their goods in the Indian market, the concept of brand promotion being for the benefit of the AE has no application at all. As regards brand building expenses incurred by a distributor who does not own the brand, the same needs to be examined from a long-term perspective whereby the ability of the distributor to recover the advertising costs by way of increased sales for a reasonable period of time is to be judged. Once a distributor arrangement in 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 distributor arrangement. In such an event, if the Indian distributor has been depriv....
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....nfructuous and academic. 53. Thus, in view of our finding given above we hold that, no adjustment can be made in the case of the appellant on account of AMP expenses and same is directed to be deleted." 21. Ld. AR for the taxpayer challenging the intensity approach adopted by the ld. TPO relied upon the order passed by the coordinate Bench of the Tribunal in case of Casio India Co. Pvt. Ltd. vs. DCIT (2019) 107 taxmann.com 307 (Delhi-Trib) and Widex India (P.) Ltd. vs. ACIT (2019) 108 taxmann.com 125 (Chandigarh - Trib.). 22. Coordinate Bench of the Tribunal in case of Casio India Co. Pvt. Ltd. vs. DCIT (supra) also discarded the intensity approach in making adjustment on account of AMP expenditure by determining following findings :- "28. Otherwise also, it would be very difficult to determine the impact of increase intensity of advertisement function on profit margin, the impact of advertisement on sale cannot be determined or quantified in a particular year, and therefore, even if AMP expenditure is to be compared with other comparables by applying any method, it would be very difficult to make reasonably accurate adjustment to the profit margins of the c....
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....Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) and computed the margin of comparables at 10.61% as against margin of the taxpayer at 14.98% and found its international transactions qua trading segment at arm's length. However, ld. TPO in its TP analysis rejected 14 comparables out of the 19 comparables and introduced 3 new comparables with OP/OR as the PLI and computed the margin at 5.10% of the comparables. Ld. TPO also recomputed the comparables margin of taxpayer at (-) 5.57% as against margin given by the taxpayer during assessment proceedings of (-) 2.66%. Ld. TPO also denied the working capital and risk adjustment to the taxpayer and thereby made Upward adjustment of Rs. 775,43,37,415/- in the trading segment. 28. Ld. TPO granted proportionate adjustment of 74.14%, however denied the working capital and risk adjustment under Rule 10B(1)(e) for the purpose of determining the ALP to account for difference in working capital employed and risk undertaken by the applicant vis-à-vis comparable company. 29. Ld. DRP however partly allowed the objections raised by the taxpayer by including two comparables chosen b....
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....d to in the discussion made at page 73 and has retained this comparable by merely referring to profit & loss statement, no purpose would be served by remitting the issue back to the TPO. Moreover, ld. DRP was also having an opportunity to examine the factual position as to the functional dissimilarity between the OTSE vis-à-vis the taxpayer. 34. So, keeping in view the fact that OTSE is a routine distributor/supply chain shows that the functions performed, risk assumed and expected reward is not comparable to the taxpayer. The taxpayer is also performing critical functions such as quality control and post sale/warranty support as a routine distributor whereas OTSE being an aggregator provides a platform for sale of electronic products of multiple brands and as such having a different business model vis-à-vis taxpayer having routine buy-sell model. So, in these circumstances, we are of the considered view that OTSE is not a suitable comparable vis-à-vis the taxpayer hence ordered to be excluded. SATAYTEJ COMMERCIAL CO. LTD. ( SATAYTEJ ) 35. This is taxpayer's comparable. The taxpayer sought exclusion of Sataytej as a comparable on ground of different bu....
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....E TAXPAYER OF THE COMPARBALES 39. The taxpayer challenged the margin computed by the ld. TPO of the taxpayer as well as comparables being incorrect. It is the case of the taxpayer that OP/OR of the taxpayer is (-) 2.66% whereas ld. TPO computed at (-) 5.57% by treating other income as non-operating and also used in operating cost without any basis. 40. The ld. TPO has allocated the direct cost to compute the margin which cannot be. The taxpayer has given comparative analysis as per taxpayer and ld. TPO which is extracted for ready perusal as under :- Margin computation of Appellant (Trading Segment) Particulars As per Assessee As per TP Order Income Net Sales 98,054,150,814 98,054,150,814 Other Income 388,895,918 Non-Operating Operating Income (A) 98,443,046,732 98,05,41,50,814 Expenditure Detailed Computation not shared Raw Materials, Spares Consumed and Cost of Goods Sold 86,906,341,287 Personnel Expenses 1,952,658,059 Logistic Expenses 578,603,705 Advertising, Marketing & Promotion Expenses (Net) 5,717,454,983 After Sales Service Expenses (Net) 2,452,913,942 IT Co....
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.... D=B+C 199,502,432,115 Total value of International Transaction as a percentage of sum of Total Operating Income & Total Operating Expenditure E=A/D % 36.55% Corresponding proportion considered by TPO 74.13% 45. Since this is a factual issue not controverted by the ld. DR for the Revenue the issue is remitted back to the TPO to make correct computation of proportionate adjustment of international transactions of the taxpayer with its AE after providing an opportunity of being heard to the taxpayer. GROUNDS NO. 26 TO 28 46. AO disallowed salary expenditure of Rs. 167,75,31,950/- paid to the expatriate employee of SEC, Korea u/s 37(1) of the Act. This issue has already been decided in favour of the taxpayer by the coordinate Bench of the Tribunal in case of taxpayer's parent company, SEC, Korea, in ITA No.65 to 70/Del/2013 for AYs 2004-05 to 2009-10, ITA No.315/Del/2016 for AY 2011-12 and ITA Nos.4705 & 4706/Del/2017 for AYs 2012-13 & 2014-15, copy of order is available at pages 226 to 2465 of the case Law Compilation. 47. However, ld. DRP passed a conditional order that in case appeal against the order passed by the Tribunal has not been fil....