TaxTMI 
TaxTMI 
2023 (4) TMI 617
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....and notice u/s 143(2) of the I.T.Act was issued on 20.08.2018. During the course of assessment proceedings, it was noticed that the assessee-company had entered into international transaction with its Associated Enterprises (AEs) and the case was referred to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of the international transaction entered by the assessee with its AEs. The TPO passed order dated 27.01.2021 u/s 92CA of the I.T.Act, wherein he proposed an adjustment of Rs.27,39,63,366 under Advertisement, Marketing and Publicity (AMP) segment and Business Support Services (BSS) segment. Later, the TPO passed order u/s 92CA r.w.s. 154 of the I.T.Act (order dated 06.10.2021), wherein the TP adjustment proposed under the above two segments was enhanced to Rs.27,59,29,649 instead of Rs.27,39,63,366 proposed in the initial order. The draft assessment order was passed incorporating the above TP adjustment proposed by the TPO and also making certain corporate tax disallowances / additions. 3. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP confirmed the adjustment proposed by the ....
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....ties and there was no transaction with the Associated Enterprise ("AE") Concluding* that there exists international transaction between the Appellant and its AE. In the facts and circumstances of the case, there exist no international transaction of AMP in the case of the Appellant. (ii) Selecting inappropriate comparables for computing nonroutine AMP even though they are not comparable in terms of functions performed, assets utilized, risks assumed etc. (iii) Not appreciating that the alleged transaction of enhancement of marketing intangibles is closely linked to other international transactions in the distribution segment and when done so, it is discernible that an appropriate quantum of profits is offered to tax in India. (v) Not appreciating that the premium profits in the distribution segment compensates more than for any excess AMP expenses incurred by the Appellant. (vi) Not appreciating once the net profit margin is tested on the touchstone of arm's length price under TNMM, it presupposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm's length ....
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....g comparables. (ii) Selecting inappropriate comparables and selecting companies as comparables even though they are not comparable in terms of functions performed, assets utilized, risks assumed, size, have unusual business circumstances, high margin, etc. The lower income tax authorities have erred in adopting the following companies as comparables: * Majestic Research Services & Solutions Ltd.. * Scarecrow Communications Ltd. * Pressman Advertising Ltd 11. Without prejudice to above, the learned TPO has erred in incorrectly computing the operating profit margins in case of the following comparables selected by him: * ICRA Management Consulting Services Ltd 12. The lower authorities have erred in: (i) Not making proper adjustment for enterprise level and transactional level differences between the Appellant and the comparable companies; (ii) Not providing working capital adjustment while computing the Arm's length price; and (iii) Not recognizing that the Appellant was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk prem....
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....follows:- "8. We have heard the rival submissions and perused the materials on record. The assessee has chosen RPM as the most appropriate method (MAM) for arriving at ALP. The assessee has chosen 7 comparables based on various filters applied and the median of weighted average of adjusted gross profit on sales % of these comparables was 4.44% (page 189 to 190 of paper book). The gross profit margin of the assessee from undertaking distribution activities during the year under consideration resulted in gross profit of 17.87% on sales (Page 254 of the paper book). Since the assessee's margin is more than the arm's length range, the margin of the assessee from its distribution activities is considered to be at arm's length from TP perspective. In a corroborative analysis done under Transaction Net Margin Method (TNMM) the assessee's margin is taken to be at arm's length as the median of the comparables was 1.08% whereas the operating profit of the assessee from undertaking the distribution activities was 3.12% (Page 255 of the paper book). We notice that the while arriving at the operating profit of the assessee the 'Selling and Marketing expenses' to the tune of Rs.68,16,40....
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....at the co-ordinate bench has, following various decisions, held that the revenue has to first show that the AMP expenses would fall under the category of "international transactions". For that purpose, the revenue has to show that there existed an agreement between the assessee and its AE in the matter of incurring of AMP expenses. Admittedly, it is not shown in the instant case that there existed any agreement relating to incurring of AMP expenses. Thus, we notice that there is no change in facts relating to this issue between the current year and the AY 2010- 11/2011-12. It was also held that when TNMM method is applied to benchmark the entire international transactions, then there is no requirement of making separate TP adjustment on account of AMP expenditure. In the earlier paragraphs, we have also held that TNMM as most appropriate method and has also held that the international transaction of Exports to AEs is at arms length. Hence, no separate adjustment is required to be made in respect of AMP expenses on this account also. 10. We have considered the Ld DR's submission that the coordinate bench of the Tribunal in assessee's own case (supra) has remanded the case b....
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....he Tribunal for assessment year 2015- 2016, we hold that when the TPO has not rejected the gross margin and the net margin of the assessee in the trading segment, separate TP adjustment on AMP expenses is not called for. Therefore, we delete the TP adjustment proposed by the TPO under the AMP segment. It is ordered accordingly. 11. In the result, grounds 4(v) and 4(vi) are allowed. Ground 10(ii) (TP adjustment on BSS Segment) 12. The final list of comparables for computation of ALP in BSS segment after the DRP's directions and the median of the comparables vis-à-vis tax payers margin are detailed below:- Sl. No. Company name Average OP / OC 1. MCI Management (India) Pvt. Ltd. 2.54% 2. ICC International Agencies Ltd. (segment) 2.70% 3. Goldmine Advertising Ltd. 4.92% 4. Ugam Solutions Pvt. Ltd. 7.74% 5. Icra Management Consulting Services Ltd. 13.41% 6. Keystone Integrated Marketing Services Ltd. (Seg.) 14.31% 7. Pressman Advertising Ltd. 15.98% 8. Scarecrow Communication Ltd. 17.53% 9. Majestic Research Services & Solutions Ltd. 33.23% Particular OP / OC (....
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....is engaged in the business of providing marketing research services and offers wide range of qualitative and quantitative research services. The TPO has taken the data for the assessment years 2015-2016, 2016- 2017 and 2017-2018 for computing the ALP. This is on the basis that all the three years are comparable. The ITAT in assessee's own case for A.Y. 2016-2017 (supra) had excluded this company as comparable. The relevant finding of the ITAT for excluding Majestic Research Services & Solutions Limited, as a comparable reads as follows:- "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 the services provided by Epson India to its associated enterprises. The Ld.AR submitted that this is functionally different and not be considered a comparable to business support services segment of the assessee. The ....
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....ompany is rendering service pertaining to advertisement in radio and television and public shows which are different from the business support service rendered by the assessee. Pages 315- 316 of Paper Book Vol. I gives the details of revenue generated by this comparable. Further, this comparable is rendering services not on the similar profile as that of assessee. Therefore we do not hold this comparable to be included in the final list. Accordingly this comparable is directed to be excluded from the final list." 25. The TPO has taken data for assessment years 2015- 2016, 2016-2017 and 2017-2018 for computing the ALP. On this basis all the three years has been taken as a comparable. Since the Tribunal has excluded this company as comparable for assessment year 2016-2017 and the profile is same for the relevant assessment year, namely, A.Y. 2017-2018, which has been even accepted by the TPO, the above company needs to be excluded from the comparable list. It is ordered accordingly. Pressman Advertising Limited 26. The TPO accepted the above company as a comparable on the ground that it is engaged in the business of promoting brands through various medium, which is similar t....