TaxTMI 
TaxTMI 
2020 (12) TMI 583
X X X X Extracts X X X X
X X X X Extracts X X X X
....djustment of Rs. 3,01,87,69,854/-- on account of (i) advertising, marketing, promotion ("AMP"-1T) expenses of - Rs. 46,38,28,605/- and (ii) international transactions pertaining to trading segment of Rs. 2,55,49,41,249/-- 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"). GROUNDS AGAINST ADJUSTMENT MADE IN RELATION TO AMP EXPENSES 3. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in holding that the AMP expenditure incurred by the Appellant in India is an 'international transaction' as per the provisions of the Act. 4. That on the facts and circumstances of the case and in law, the DRP/ AO/ TPO have erred in adopting intensity based approach which is not a prescribed comparability condition under the Income-tax Rules, 1962. 5. That on the facts abd circumstances of the case and in law, the Ld. DRP/AO/TPO, while making adjustment of Rs. 46,38,28,605/- on account of AMP expenditure, erred in: a. not demonstrating the existence of an 'understanding' or !an 'arrangement or 'action in concert....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pellant and the chosen comparables and the resulting quantum of AMP expenditure of both the Appellant and the comparables. 10. That on the facts and circumstances of the case and in law, the Ld DRP/AO/TPO erred in making AMP adjustment under IT segment without appreciating the fact that the appellant is a captive service provider, hence AMP adjustment is not warranted. 11. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in applying mark-up on the alleged incurred excessive AMP expenditure by selecting companies providing market support functions in order to determine the mark-up to be imputed on AMP adjustment. 12. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred including sales related expenses (not being brand promotion) as part of AMP expenditure while computing the adjustment. Doing so, the DRP erred in not appreciating the fact that sales promotion expenses were allowed by DRP in AY 2011-12 and AY 2012-13. PROTECTIVE ADJUSTMENT 13. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making protective adjustment of R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stances of the case and in law, the AO erred in initiating penalty proceedings under section 271(1)(c) of the Act for furnishing of inaccurate particulars and concealment of income. 3. The assessee company is engaged in the business of manufacturing and distributing various Samsung Products of Consumer Electronics & Home Appliances category. The assessee is also engaged in the business of computer software development on behalf of its AEs. The assessee filed e-return of income declaring an income of Rs. 2495,09,04,510/- on 30/11/2013. The TPO vide order dated 31/10/2017 proposed an adjustment of Rs. 770,97,36,203/- on substantive basis and Rs. 1279,94,22,725/- on protective basis. The Draft assessment order was passed on 27/11/2017 at an income of Rs. 3287,49,89,360/- against return income of Rs. 2495,09,4,510/-. The assessee filed objections before the DRP. The DRP passed direction on 30/08/2018 thereby deleting the disallowance of Rs. 21,43,48,648/- on account of Forex loss in relation to forward exchange contracts made in the draft assessment order. In view of the directions of the DRP, the TPO vide order dated 30/10/2018 recomputed the adjustment at Rs. 3,01,87,69,854/- inst....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng the TPO for the inclusion of three comparables forming part of the TP Report in the Non-IT Segment namely Priya Ltd., Optiemus Infracom Ltd. and Iris Computers Ltd. and the exclusion of four comparables in the Marketing Support Services Segment namely BVG India Ltd., Just Dial Ltd., HSCC (India) Ltd. and ICRA Management Consulting Services Ltd. used for adding the mark-up on the alleged excess Selling, General and Administrative (SG&A) expenditure incurred. The DRP upheld the TPO's action of rejection of 20 comparables out of 25 comparables selected in the TP Report. The Ld. AR submitted that this issue of AMP is fully covered in favour of the assessee in the assessee's own case for nine Assessment Years i.e. A.Y 2005-06 to A.Y. 2012-13 and A.Y. 2014-15 (Being ITA Nos. 3248 & 3410/Del/2012, 5856/Del/2010, 5315/Del/2011, 1567/Del/2014, 6741/Del/2014, 868/Del/2016 & 2511/Del/2018 order dated 04.10.2019) (ITA No. 6813/Del/2017 order dated 07.01.2020 for A.Y. 2012-13) (ITA No. 9481/Del/2019 order dated 31.08.2020 for A.Y. 2014-15). The Revenue's approach is based on the existence of an international transaction covering the entire AMP expenditure of the assessee on the basis of a Ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 understanding to incur "excessive" AMP expenditure. The arrangement and understanding were limited to the amounts agreed to be paid as assistance under the MDF Agreement. The amounts incurred as AMP expenditure by the appellant under the MDF Agreement have already been received as reimbursement/assistance and have indisputably been disclosed as an international transaction in Form 3CEB and form part of the transfer pricing study conducted under Rule 10D. The AMP expenditure which is outside the ambit of reimbursement received under the MDF Agreement, has been incurred by the appellant on its own volition as per its own requirements and without any interference of the AE and have been paid to third parties. 44. In view of the above, we hold that the scope and value of i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unt of AMP expenses is not sustainable in the eyes of law, hence ordered to be deleted." As regards to BLT approach used for protective assessment, the Tribunal held as under: o For AY 2005-06 to AY 2011-12 (Page 49 - Para 45) "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 transaction pertaining to AMP. No international transaction can be presumed to exist merely on the basis of "bright line" of expenditure incurred by comparable companies." o For AY 2012-13 (Page 18 - Para 7) "7. Regarding the applicability of the Bright Line Text [(BLT) (specific grounds at 11, 12 & 13)] to determine the adjustment in the AMP expenditure has been rejected by the Hon'ble Jurisdictional High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. in Tax Appeal No. 16 of 2014. In view of the judgment of the Hon'ble High Court, we hereby hold that no International Transaction can be presumed to be in existence and hence no addition is called for." o For AY 2014-15 (Pag....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n Impex Pvt. Ltd., Micromax Informatics Ltd., United Telelinks (Bangalore) Pvt. Ltd. are functionally dissimilar. The Ld. AR submitted that OTS E-Solutions Pvt. Ltd. was held as not comparable in A.Y. 2014-15 by the Tribunal and Celkon Impex Pvt. Ltd., Micromax Informatics Ltd., United Telelinks (Bangalore) Pvt. Ltd. these comparables held as not comparable by the DRP for A.Y. 2014-15. As regards 3 comparables which has to be included that of Redington India Pvt. Ltd., Tech Pacific (India) Ltd. (Later name changed to Ingram Micro) & HCL Infosystems Ltd., these comparables are functionally similar. For Redington India Pvt. Ltd. and Tech Pacific (India) Ltd. (Later name changed to Ingram Micro), the Ld. AR submitted that these comparable companies were included by the DRP in A.Y. 2014-15 and for HCL Infosystems Ltd., the Tribunal in Assessment Year 2005-06 to 2011-12 held that if the quarterly results are available and margins can be extrapolated, this comparable can be included. The detail discussion for these comparables are as follows: 11.1 OTS E-Solutions Pvt. Ltd.: The Ld. AR submitted that this company is engaged in providing an Online Marketing platform by the name 'GadgetG....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee company is in trading of consumer electronics, home appliances, computers and IT peripherals which is different portfolio all together. From the perusal of the records it can be seen that Celkon Impex Pvt. Ltd. was held as not comparable in subsequent assessment year i.e. A.Y. 2014- 15 by the DRP. The functional dissimilarity is apparent on record and there are no change in the present assessment year. Hence, we direct the TPO to exclude this comparable from the final list of comparables. 11.7 Micromax Informatics Limited: The Ld. AR submitted that this company is a full-fledged entrepreneur dealing in business of mobile handsets and owns the brand "MICROMAX". The company undertakes all business activities and undertakes all associated business risks. The company outsources manufacturing activities to third party contractors and sells the products under its own brand name as an entrepreneur. The Ld. AR submitted that the DRP in subsequent year i.e. 2014-15 has excluded this comparable company. 11.8 The Ld. DR submitted that this company is engaged in trading of mobile phones and there is no manufacturing cost, therefore it is a trading company. Further, on ana....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of IT products such as computers, printers, software storage systems. This company is a leading supply chain solutions provider for global brands of IT hardware and software product. 12.2 The Ld. DR submitted that this company is a leading supply chain solution provider for global brands in IT and non-IT (consumer and digital lifestyle products) verticals, it's nature of business activities, products traded and business model itself is entirely different. Thus, the Ld. DR relied upon the order of the TPO. 12.3 We have heard both the parties and perused all the relevant material available on record. From the perusal of records it can be seen that this company is engaged in distribution of IT products such as computers, printers, software storage systems and also a leading supply chain solutions provider for global brands of IT hardware and software product which appears to be similar to that of assessee's functions. Therefore, we direct the TPO to look into the portfolio of this company and applying the filters, this comparable i.e. Redington India Limited may be included in the final comparable list. 12.4 Tech Pacific (India) Limited (later name changed to 'Ingram Mic....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... No. 17 and 18 are allowed. 14. As regards Ground No. 19 relating to incorrect margin adjusted for working capital of computation of comparables. The Ld. AR submitted that the same differs from the computation given by the TPO on few counts. The TPO has not provided detailed computation in respect of the same. Thus, the Ld. AR submitted that this issue may be remanded back to the TPO with a direction to compute the same after affording the assessee an opportunity to examine the figures used by the TPO. 15. The Ld. DR relied upon the order of the TPO. 16. We have heard both the parties and perused all the relevant material available on record. From the perusal of records, it appears that the margin adjusted for working capital of computation of comparables is incorrect and the same fact was not denied by the Ld. DR during the course of hearing. Therefore, we remand back this issue to the file of the TPO with the direction to compute the margin adjusted for working capital of computation of comparables correctly. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 19 is partly allowed for statistical purpose....