TaxTMI 
TaxTMI 
2023 (1) TMI 1242
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....laring a total income of NIL. The case was selected for scrutiny assessment proceedings under CASS and the statutory notices were duly served on the assessee. During the course of the assessment proceedings, the AO made a reference of international transactions entered into by the assessee to the Transfer Pricing Officer ("the Ld. TPO") for determining the Arm's Length Price ("ALP") of such transactions under Section 92CA of the Act. The TPO made a total adjustment of Rs.168,5,82,798 the break up of which is as follows - (i) Adjustment to the manufacturing segment - Rs. 57,52,661 (ii) Adjustment on account of excess AMP expenditure - Rs. 157,19,22,677 (iii) Administrative and Business Support Services - Rs. 8,44,80,389 (iv) Sales facilitation services - Rs. 2,34,27,071 3. The AO passed the draft assessment order against which the assessee raised objections before the DRP. The DRP upheld the action of the TPO and confirmed the above adjustment. According the AO passed the final assessment order and the assessee is in appeal against the same before the Tribunal. 4. The assessee raised the following grounds of appeal - (i) Ground No.1....
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....s as well as from unrelated third-party vendors. * To identify internal CUPs, Lenovo India has prepared a list of the products imported from its AEs for the FY 2016-17. This list provides for the weighted average of the prices paid during the year for the products imported from AEs. Each of these parts is identified based on a distinctive product code. * With respect to the imports from AEs, the Company conducted a search (based on product code) to identify similar products, imported from unrelated vendors for the FY 2016-17. This process resulted in the identification of potential internal comparables for 140 of the products imported. Against each product code, the average price per unit from unrelated vendor is compared to the price paid to its AEs. Products imported from AEs only (262 products) 8. With respect to the imports from AEs only, the prices paid by AEs to its third-party vendors were considered as CUP. In this regard: * Out of the 262 products, 126 products were sold by the AEs on a cost-to-cost basis. Accordingly, the same has been considered to be at ALP. * On the balance 136 products, the AEs have sold the products to Lenovo....
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....e returned income. 11. The assessee filed objection to the proposed addition before the Dispute Resolution Panel (DRP) but the DRP upheld the order of the Ld. TPO by accepting the reasons given by the TPO. The DRP also upheld application of TNMM as MAM and methodology adopted to determine ALP under the TNMM by the Ld. TPO. 12. The ld AR submitted that as far as the issue of MAM in the case of the assessee, the objections to each of the reasons put forth by Ld. TPO / DRP for the rejection of CUP as the MAM are as under: Sl. No. The Ld. TPO's reasons for rejection of CUP Appellant's contention against each of these reasons 1. Non-availability of reliable data in order to compare the degree of comparability between the international transaction and uncontrolled transactions. * Appellant imported components from both AEs as well as unrelated vendors. * These components have a unique identity and bear serial numbers or codes by which they are identified. * Appellant has documented the comparability analysis in respect of the comparison of the prices for all the components that have been imported from its AEs. 2. Weighted average rate is not an u....
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....sistently holding that the application of CUP Method adopted by the assessee to be the MAM benchmarking the manufacturing segment for AY 2006-07, 2009-10 to 2010-11, and 2012-13 to 2015-16. 14. The ld DR relied on the orders of the lower authorities. 15. We notice that the coordinate bench in assessee's own case for 2014-15 by order date 13.06.22 has considered the same issue and held that - We refer to the order passed by this Tribunal for A.Y. 2015-16 which is the recent most order wherein this Tribunal decided this issue on identical facts in assessee's own case by observing as under. "9. Aggrieved by the order of the DRP, the Assessee has raised Grd. No. II before the Tribunal. We shall first take up Gr. No. II subgrounds 2 to 6 which grounds relate to the contention of the Assessee that CUP should have been accepted as the MAM. We have heard the rival submissions. As far as the issue of MAM in the case of the Assessee in the transaction of import of components is concerned, we have already extracted the reasons assigned by the TPO for rejecting CUP as MAM and the reasons given by the Assessee as to why the reasons assigned by the TPO are unsustainab....
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....s. TP adjustment on account of excess AMP expenditure 17. The Assessee is engaged in the business of manufacturing and distribution of desktop, laptop, servers, and smartphones. During the relevant previous year, the Assessee incurred expenditure in connection with campaigning, depicting features of new products, providing information to the public about details of product, its specification etc. The aforesaid advertisement and business promotion activities undertaken by the Assessee are specific to the products sold in India. Given that the selling of the products in India is the function of the Assessee, there are no approvals sought by the Assessee in connection with the incurrence of said expenses which influences the volume of sales of the Assessee. The advertisement contents are decided by the Assessee and the said expenses do not require any approval from its AEs. The aforesaid activities are primarily to promote the business of Assessee and the same is done to influence the volume of sales of the Assessee. 18. The TPO held as under in respect of the above AMP adjustment:- * Assessee has not confined itself to distribution of trading goods but has performed....
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....d that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. Relevant observations from the above decision in this context are as under:- "101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/ segregation, it would as noticed above lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(J)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the compara....
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....ts in rejecting the following companies selected by the Assessee in its TP Documentation which are comparable to the Assessee: a) MCI Management (India) Limited b) Concept Public Relations India Limited c) Kestone Integrated Marketing Services Private Limited (Segmental) d) Adhaan Solutions Pvt Ltd e) I C R A Management Consulting Services Ltd. 40. Further, the Honourable DRP and the learned AO / TPO has erred in law and on facts in not accepting the below company which is comparable and thereby not considering the detailed submissions of the Assessee: a) Crayon Advertising Limited 41. The Honourable DRP and the learned AO / TPO has erred in law by not granting appropriate favourable economic adjustments (including the working capital adjustment) while calculating the arm's length margin for final set of comparable companies for these segments. 25. Brief note on the nature of services rendered by the assessee to the AEs in these segments is given below - Provision of Administrative and other business support services The Assessee has entered into a Support Service arrangement with its AE, with respect ....
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.... 55.67 11 Cheil India Pvt. Ltd. 64.59 69.85 65.21 64.86 35th Percentile 17.11 Median 19.53 65th Percentile 29.89 27. Accordingly the TPO computed the TP adjustment as below - Administrative and Business Support Services Taxpayers operating revenue OR 975114664 Taxpayers operating cost OC 886467877 Taxpayers operating profit OP 88,646,787 Taxpayers PLI PLI=OP/OC 10.00% 35th Percentile Margin of comparable set 17.1.1% Adjustment Required (if PLI< 35^th Percentile) Yes Median Margin of comparable set M 19.53% Arm's Length Price ALP=(1+M)*OC 1059595053 Price Received OR 975114664 Shortfall being adjustment ALP-OR 84480389 Sales facilitation services Taxpayers operating revenue OR 270406914 Taxpayers operating cost OC 245824467 Taxpayers operating profit OP 24,582,447 Taxpayers PLI PLI=OP/OC 10.00% 35th Percentile Margin of comparable set 17.11% Adjustment Required (if PLI< 35^th Percentile) Yes Median Margin of comparable se....
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....ich also include pre-product development, its study and feasibility, optimization for market resources and final advertising. Majestic Research also uses the latest technology tools/ resources to gather the required data which includes digital tracking, facial recognition, eye tracker, perception analyzer among other tools. Further, it is observed that the company had acquired new business and also divested its stake in an existing company in order to leverage further on its existing strengths and credentials. Majestic Research had acquired 100% stake in Emtee Research and Consultants Private Limited, which was also an independent market research agency. Based on the information available in the annual report of Majestic Research, it can be observed that the acquisition had resulted in synergy of benefits which boosted the operating margins of Majestic Research significantly. A comparison of the margin progression over the past 3 years is provided below: Particulars FY 2016-17 FY 2015-16 FY 2014-15 Operating Revenue - A 2,293.04 1112.96 550.77 Total Operating expenditure - B 1,570.97 831.92 463.76 Operating profit (A-B) 72....
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....ence, it is evident that Lintas is an agency company undertaking to provide services to unrelated third parties on a commission basis unlike the Appellant who undertakes to provide sales facilitation and business support services on a fixed fee model. Further, the Appellant is not an agency to its group company but in turn acts as a representative in India. 30. We heard the rival submissions and perused the material on record. We notice that the DRP while considering the inclusions / exclusions did not examine the submissions of the assessee based on facts and has rejected the contention by making a cryptic observation that - "7.1 Panel: The taxpayer has not used appropriate filters and therefore the panel is of the opinion that the TPO has rightly rejected the TP documentation given by the taxpayer. In view of the reason cited by the TPO, we have come to the conclusion that the data used in computation of ALP is neither reliable nor correct. After careful analysis of the facts, it is seen that the filters & measure applied by the TPO has lcd to selecting the proper comparables. Further, the objections of the taxpayer to the comparables selected by the TPO has been disp....