TaxTMI 
TaxTMI 
2022 (7) TMI 1377
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.... GROUNDS RELATING TO TRANSFER PRICING - LEGAL ISSUES 2. The learned AO has erred in: a) Making a reference for the determination of the Arm's Length Price of the international transactions to the TPO without demonstrating as to why it was necessary and expedient to do so. b) Passing the order without demonstrating that the Appellant had any motive of tax evasion. c) Not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law. GROUNDS RELATING TO TP ADJUSTMENT WITH RESPECT TO ADVERTISEMENT, MARKETING, PROMOTION (`AMP') EXPENSES 3. The lower authorities have erred in making transfer pricing adjustment of Rs. 33,95,60,000/- towards AMP expenses. 4. The lower authorities have erred in: (i) Not appreciating that the Appellant had incurred AMP expenses with third parties and there was no transaction with the Associated Enterprise ("AE") (ii) Conclud....
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....Ltd. (vi) Charging mark-up on excess AMP expenses, which is not supported by any provision under the Act or Rules. 7. Without prejudice to above, the learned TPO has erred in rejecting Quadrant Communications Ltd as a comparable. 8. Without prejudice to above, the learned TPO has erred in incorrectly computing the operating profit margins in case of the comparables selected by him. 9. The Hon'ble DRP has erred in upholding the action of the TPO/ AO of segregating the AMP expenses incurred by the Appellant into routine and non-routine and observing that non-routine AMP expenditure is towards Development, Enhancement, Maintenance, Protection and Exploitation ("DEMPE") functions requiring compensation from AE without placing any evidence on record to demonstrate that there is a transaction as envisaged in section 92F(v) of the Act. GROUNDS RELATING TO TP ADJUSTMENT WITH RESPECT TO BUSINESS SUPPORT SERVICES SEGMENT 10. The lower authorities have erred in making transfer pricing adjustment of Rs. 20,54,912/- for the business support services segment. 11. The lower authorities have erred in: (i) Rejecting compara....
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....ice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law. The Appellant prays accordingly." 2. Brief facts of the case are as under: 2.1 Assessee is engaged in the business of distribution of Epson products like printers, cartridges, scanners, projectors, spares and other consumables. It filed its return of income for year under consideration on 29/11/2016 declaring total income of Rs.56,33,01,500/-. The case was selected for scrutiny and notice u/s. 143(2) and 142(1) of the Act was issued to assessee. In response, assessee filed relevant details as called for. 2.2 The Ld.AO noted that, the assessee had international transaction with its wholly owned company being Epson Singapore Pte Ltd. The Ld.AO noted that the assessee is engaged in the distribution of the products of its AE in India. As the value of international transaction exceed Rs. 15 Crores, reference was made to the Ld.TPO under 92CA of the Act. On receipt of the 92CA reference, the ....
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....row Communications Ltd. Business services & consultancy Business services & consultancy 23.12% 9 Irunway India Pvt. Ltd. Business services & consultancy Other consultancy 25.09% Particular Data OP/OC 35th percentile 3.15 12.99 Median 5.00 17.75 65th percentile 5.85 20.94 2.5 Assessee in reply relied on the following decisions * Decision of Hon'ble Delhi High Court in case of M/s. Sony Ericsson Mobile Communication India Pvt. Ltd. reported in 276 CTR 97 (2015) * M/s. Maruthi Suzuki India Pvt. Ltd. in ITA No. 110/2014 and ITA 710/2015, * CIT Vs Whirlpool of India Ltd. (129DTR169), * Baush & Lomb Eyecare (India) (P) Ltd. Vs. Addl.CIT (129DTR201) * Yum Restaurants (India) Pvt. Ltd., Vs ITO (ITA No. 349/2015 dtd. 13/01/2016) and Honda Seil Products. 2.6 The Ld.TPO after considering the submissions of the assessee, proposed adjustment as under: Particulars Amount Excess AMP incurred for the benefit of the AE 2967.41 lakh Arm's length Margin (refer para no. 4.7.4. 14.43% Arm's Length Price (2967.41 lakh *114.43%) 3395.60 lakhs Price received - Adjustments ....
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....cy 11.52% 4 Kestone Integrated Marketing Services Pvt. Ltd., (Seg.) Business services & consultancy 12.85% 5 ICC International Agencies Ltd. (Seg.) Business services & consultancy 13.50% 6 Ugam Solutions Pvt. Ltd. Business services & consultancy 14.43% 7 Killick Agencies & Mktg. Ltd. Other miscellaneous services 18.24% 8 Majestic Research Services & Solutions Ltd. Business services & consultancy 20.94% 9 Scarecrow Communications Ltd. Business services & consultancy 23.12% 2.9 The Ld.TPO thus computed proposed adjustment under the business support service segment being the shortfall at Rs.20,54,912/-. The Assessing Officer also rejected the Working Capital Adjustment to the assessee. Thus the total adjustment proposed by the Ld.TPO under 92CA are as under: Particulars Amount AMP Expenditure Rs. 33,95,60,000/- Business Support Services Rs. 20,54,912/- Total Adjustment u/s 92CA Rs. 34,16,14,912/- 2.10 On receipt of the order under 92CA, the Ld.AO passed the draft assessment order incorporating the proposed adjustment on 10/12/2019. On receipt of the draft assessment order by ....
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.... "4. The assessee has raised grounds with respect to legal issues and grounds on merits against the TP adjustment. The assessee has also raised additional ground on the legality of reference made to the TPO when the assessee has raised objection to the reopening u/s.147 before the AO. During the course of hearing the Ld AR pressed only for grounds on merits with respect to AMP expenses. Therefore the issue for our consideration is whether the assessing officer is correct in treating the AMP expenses as a separate international transaction from the distribution segment, and making a TP adjustment for the same. 5. The assessee is involved in two segments viz., (i) Trading (Distribution) segment & (ii) Business Support Services. The Business Support Services Segment was accepted as at Arm's lengyh by the TPO. The assessee has chosen Resale Price Method (RPM) as the most appropriate method for the Trading (Distribution) segment and arrived at the average mean of gross profits margin(GPM) of 7 comparables which is at 4.44% whereas the GPM of the assessee is at 17.87%. Hence the assessee claimed that the transactions of the trading (Distribution) segment to be at arm's len....
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....the assessee for the distribution segment is higher than that of the comparables. (v) The assessee also places reliance on the judgment of jurisdictional Bangalore Tribunal in the following cases wherein it is held that once the net margin are at arm's length no separate adjustment is required for a AMP expenses (a) M/s. Essilor India Pvt Ltd - 68 Taxmann.com 311 (b) M/s. Lenovo India (P) Ltd - [TS-148-ITAT-2022 Bang-TP] (c) Himalaya Drug Company vs ACIT [2020] 119 taxmann.com 421 (Bang Trib) (vi) By segregating the AMP expenses and treating it as a separate International transaction the TPO in substance made an attempt to re- characterize the transaction from manner in which the assessee and its AE had originally structured which is not permissible. 7. Ld DR supported the views taken by the lower authorities. The Ld DR also submitted that the coordinate bench of the Tribunal in assessee's own case for the assessement year 2012-13 and 2013-14 [IT(TP)A No 293 & 2479/Bang/2017] has remanded the matter back to the TPO/AO and prayed for a similar adjudication. 8. We have heard the rival submissions and perused the materials on r....
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....and 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. 9. The coordinate bench of the Tribunal in the case of Himalaya Drug Company (supra) has held that for the AMP expenses to fall under the category of 'international transaction' the revenue should show that there existed an agreement between the assessee and its AE in the matter of incurring AMP expenses. We notice that in assessee's case the revenue has not shown that there is any agreement in place between the assessee and the AE with regard to incurring AMP expenses. The Hon'ble Tribunal has also held that when the MAM for the entire international transaction is accepted by the TPO, no separate adjustment is required to be done for AMP expenses. The Hon'ble Tribunal has held that - 34. We notice that the co-ordinate bench has, following various decisions, held that the revenue has to fir....
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....t for performing the AMP functions of its AE" 11. For the year under consideration, the issue for consideration is treating the AMP expenses as a separate transaction from the distribution segment and making TP adjustment for the same. The Ld AR submitted that whether AMP expenses is a separate international transaction is not contended in the year under consideration and prayed that the decision rendered by the coordinate bench on this specific count need not be applied in the year under consideration. 12. Considering the ratio laid down by the Hon'ble Delhi High Court in the case of Sony Ericsson mobile communication India Private Limited (supra) and the other decisions of the coordinate bench of the Tribunal, with respect to treating AMP expenses as a separate transaction when the TPO has not otherwise rejected the gross margin and the net margin of the assessee, we hold that there is no separate adjustment to be made in respect of AMP expenses. The appeal is allowed in favour of the assessee." 14.1 It is submitted that the issues raised in the present appeal is identical with that of the A.Y. 2015-16. Nothing has been placed on record by the Ld.DR contrary ....
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....fluctuations. Epson India provides business support services only to its AEs and therefore bears limited credit and collection risks since it provides services to the group itself. Epson India provides support services exclusively to Epson Group based on the directions and instructions received from Epson Group. While Epson India is responsible for the quality of the work assigned to it, the risk is transferred to the group due to the transfer pricing policy. Assets owned Epson India does not own goodwill related intangibles. Characterisation In relation to the support service activities undertaken by Epson India it does not bear any significant risk. Hence it can be characterized as a captive service provider in respect of provision of business support services. 16. Based on the above comparability of the comparables sought for inclusion/exclusion which are considered as under: Assessee has been characterised to be a limited risk distributor and the captive service provider in respect of Business support service segment. Ground No. 11(i)- Assessee is seeking inclusion of following two comparables: 18. ICRA Management Consulting Services Ltd. 18.1 T....
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....ed to be operating in one primary segment being managed analytics. He submitted that this company even otherwise going by the website information is functionally not similar with that of the assessee, as the clientele of this company services and provides solutions to global market research firms which include research operations, technology infrastructure transition, data warehousing aggregation and visualisation, sample management optimisation, global program management, custom panel solution, reporting solution and mobile solutions etc. He thus submitted that this comparable is functionally not similar with that of the assessee, who is a captive service provider and provides limited functions required by the associated enterprise. 20.1.2 Ld.CIT DR relied upon authorities below. 20.1.3 We have perused submissions advanced by both sides on the basis of records placed before us. Admittedly this company is into managed analytical services and provides solutions to global market research firms, retailers, leading brands as has been observed by DRP in para 8.2.1. On comparing the functions rendered by the assessee to the associated enterprise, this company cannot be a fit compar....
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....itioning of a firm's product in a market and that establish marketing techniques that bring the products to the customers' attention. The AEs are responsible for branding activities to ensure that a consistent message is conveyed across the globe. Further, the business unit leaders of the AEs develop market strategies and relay this information to QIPL so that QIPL may undertake market research and business development activities on behalf of the AEs in India, and augment the AE's efforts in raising awareness of Qualcomm's technology to manufacturers in India. 20.2.4 Thus, on going through the functions, we find that the comparable "Killick" is functionally different from the assessee, hence, we direct the same may be excluded from the list of final comparables. 20.3 Majestic Research Services & Solutions Ltd. It is submitted that this comparable is a market research agency relying exhaustively on usage of technology for data acquisition, it offers a wide range of quantitative and qualitative research both nationally and internationally. The company focuses on market research, advertising research, and brand research, thus making it entirely different from ....
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....should be allowed on actual. It has been submitted that all relevant details for computation of working capital was provided to AO/DRP which has been disregarded. He placed reliance upon the decision of coordinate bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt. CIT reported in (2019) 101 taxmann.com 313, wherein it has been held that the working capital has to be granted in actual. 22.3 On the contrary, Ld.CIT DR placed reliance upon orders passed by authorities below. 22.4 We have perused submissions advanced by both sides in light of records placed before us including the decision relied upon by Ld.AR in case of Huawei Technologies India Pvt. Ltd. (supra). 22.5 A reading of Rule 10B(l)(e)(iii) of the Rules read with sec. 92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. Chapters I and III of OECD Transfer Pricing Guidelines contain guidelines on compar....
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....er the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) * This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts in suppliers" 22.6 The reverse applies to huge accounts payable. By having high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in p....