TaxTMI 
TaxTMI 
2022 (11) TMI 1352
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....f technical and marketing support services to its AEs, reimbursement and recovery of expenses to/from its AEs. We shall discuss the functions performed under each of the segments while discussing the adjustment determined by the TPO. 3. In the TP study maintained for the year under consideration, the Assessee treated all the international transactions as being at arm's length. During the year, the Assessee also recovered certain advertisement expenses from Intel USA ("Intel") and Microsoft USA ("Microsoft"). Since the transactions were with unrelated parties, the assessee did not benchmark the same. During the course of assessment proceedings, reference was made to the Transfer Pricing Officer (TPO). The TPO passed an order dated 27.01.2016 u/s. 92CA of the Act determining a TP adjustment aggregating to Rs. 105,54,56,326/-, comprising of the following: A. Adjustment determined by bifurcating the marketing and business support services segment into ITES segment (adjustment of Rs. 4,51,94,904/-) and MSS segment (adjustment of Rs. 2,22,61,422/-); and B. Adjustment of Rs. 98,80,00,000/- determined in respect of the warranty expenses. 4. Pursuant to TP adjustment, a draft assessme....
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....eS. The Ld. CIT(A) erred in confirming the same. * The Ld. CIT(A) and the Ld. AO / Ld. TPO erred in rejecting the value of international transactions as recorded in the books of account, as the arm's length price. * The Ld. CIT(A) and the Ld. AO / Ld. TPO erred in determining a new arm's length price in substitution of the arm's length price determined by the Appellant. * The Ld. CIT(A) and the Ld. AO/ Ld. TPO erred in law in holding that the fresh comparability analysis using non contemporaneous data conducted by the Ld TPO and further substituting the Appellant's analysis with fresh benchmarking, analysis on his own conjectures and surmises. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the Ld. TPO is liable to be quashed. * The Ld. AO/ Ld. TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functions, assets and risk analysis of the Appellant. The Ld. CIT(A) erred in confirming the same. * The Ld. AO/ Ld. TPO grossly erred on facts in benchmarking the transactions of the marketing and business support services of the Appellant with companies operating as ....
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....red in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability, such as, (i) companies whose data for financial year (`FY') 2011-12 was not available, (ii) companies with ITeS revenue less than 75% of total operating revenue, (iii) companies with related party transactions greater than 25% of sales (iv) companies with export sales less than 75% of total sales (v) companies employee cost less than 25% of turnover were excluded and (vi) companies with different financial year ending (i.e. other than 31 March 2012). * Without prejudices to ground no. 2 above, the Ld. AO/ Ld. TPO, while applying the said turnover filter at the lower limit so as to reject companies having turnovers less than INR 1 crore in FY 2012-13, erred in not applying the said filter at the upper end so as to reject high turnover companies as well. The Ld. CIT(A) erred in not adjudicating the same. * Without prejudices to ground no. 2 above, the Ld. AO/ Ld. TPO erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. The Ld. CIT(A) erred in not a....
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....Ld. AO further erred in not restricting the TP adjustment in proportionate to the DGBV sales made in India. The Ld. CIT(A) erred in not adjudicating the same. 6. Erroneous data used by the TPO * The Ld. AO and Ld. TPO has erred in law and the Ld. CIT(A) further erred in confirming use of data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. * The Ld. CIT(A), the Ld. AO and Ld. TPO erred in law, and on facts in disregarding the application of multiple year data while computing the margins of comparable companies. 7. Non-allowance of appropriate adjustment to the comparable companies by the Ld. CIT(A) and Ld. AO/ Ld. TPO * The Ld. AO and Ld. TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (i) accounting practices, (ii) marketing expenditure adjustment, (iii) research and development expenditure adjustment, (iv) working capital and (iv) risk profile adjustment to account between the Appellant and the comparable companies. 8. Variation of 5% from the arithmetic mean * The Ld. AO and Ld. TPO....
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....ervices rendered are considered to be ITES, the services that are being classified as ITES are rendered by the Assessee to third party customers of the AE on behalf of the AE. Since the so called ITES are being rendered to third parties, it cannot be subject matter of TP assessment. The ld AR also submitted that the major post-sales support in relation to the warranty support and co-ordination, i.e., call centre support is not being provided by the Assessee directly to its AEs. The Assessee has outsourced these services to another Group Entity in India which is compensated at an arm's length mark-up of cost plus 15%. The ld AR drew our attention to the decision of this Tribunal in the Assessee's own case for the assessment year 2009-10 (Order dated 18.03.2022 passed in IT(TP)A Nos. 269 and 217/Bang/2014) and submitted that the above issue is squarely covered by this decision. 11. The ld DR supported the orders of lower authorities 12. We heard the rival submissions and perused the material on record. We will look at the definition of ITES as defined in Rule 10TA(e) of the Income-tax Rules, 1962, which reads as under: "information technology enabled services" means the following....
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.... provide logistics support to ensure delivery of products and services to the customers and also provide marketing support and Sales promotion services. The technical services are provided to the customers of products, and as such cannot be compared to the function of provision of ITES service. Therefore. we are no in agreement with the TPO's view in comparing such services to call entre activity, and there is no information for the TPO to take such a view. Besides, we note that all these functions is provision of logistics support, marketing support and technical support have interrelation in the facts & circumstances of the case. Therefore, it would not be appropriate to segregate them into Technical Services & Marketing Supports services. Accordingly, the TPO's action in such segregated analysis is disapproved. The TPO is directed to consider the Marketing support and Technical Support as an integrated function and such integrated revenue of these two activities may be benchmarked as Marketing Support Service. Accordingly, the TPO's benchmarking analysis with regard to Marketing Support Service would be considered applicable for this integrated Market Support & Busines....
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....olly on the AEs and the Assessee only provides co-ordination and support services as regards the same, for which it is compensated on cost plus 5%. The co-ordination and support services includes call centre support, cost for third party services for assistance to customers of the AEs, etc. The cost of spares and parts to be replaced under the warranty are borne by the AEs. 17. The TPO made an adjustment on the basis that the Assessee had not made any recovery towards the warranty services and the out of pocket warranty charges paid to third parties and the same was upheld by the DRP. 18. The ld AR submitted that the Assessee has in fact recovered the expenses incurred in respect of the warranty services, with a mark up of 5%. Therefore, no further adjustment is warranted. The ld AR also submitted that the above issue is squarely covered by the decision of this Hon'ble Tribunal in the Assessee's own case for the assessment year 2009-10 (supra). 19. We heard the DR. We notice that the coordinate bench of the Tribunal in assessee's own case (supra) for has considered the issue of adjustment towards warranty cost and held as under - "8.7. We have heard rival submissions and perus....
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....he disallowed the said amount. 22. The CIT(Appeals) relying on the DRP directions for AY 2011-12 confirmed the disallowance. 23. Before us, the ld. AR submitted that the sum of Rs. 40,72,04,283 represents rebate payment to distributors on which the provisions of TDS are not applicable. It was further submitted that the Assessee is in the business of manufacture and trading of computers along with related accessories that are sold goods through its distributors by adopting two models for distribution as described under: A. Bill to Order Under this model, the distributor undertakes to collate orders from the prospective customers on behalf of the Assessee and acts as an agent between the customer and Assessee for which the distributor earns commission at a prescribed rate on every successful order. The Assessee is ultimately responsible for all the risks and reward arising from such orders after the same is accepted. The entire obligation pertaining to fulfilment of orders is on the Assessee and not the distributor. The Assessee deducts applicable taxes at source on such commission paid to the distributors under bill to order model. B. Stock and Sell (SNS) In this model t....
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....ors who act as agents and gets compensated on a commission basis. The second model is where the products are sold to the distributor and the distributer get a rebate in the products purchased based on the business volume. When the relationship between the assessee and the distributor is on a principal to principal basis, the rebate /volume discount given by the assessee on the price of products sold to distributer cannot be characterized as commission in order to attract section 194H of the Act thereby there is no liability to deduct tax at source. We notice that the Hon'ble jurisdictional High Court has expressed a similar view in the case of Bharti Airtel Ltd (supra) where it is held that - 51. From the aforesaid clauses, it is clear that there is no relationship of principal and agency. On the contrary, it is expressly stated that the relationship is that of principal to principal. Secondly the Distributor/Channel Partner has to pay consideration for the Product supplied and it is treated as sale consideration. There is a Clause, which specifically states that after such sale of Products, the Distributor/Channel Partner cannot return the goods to the assessee for whatever reas....
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....ue of Rs. 105,43,36,985/- by holding that the Income-tax Act, 1961 ("the Act") does not provide for the concept of deferred revenue. 30. By placing reliance on the directions issued by the DRP in the Assessee's case for the assessment years 2009-10 and 2010-11, the DRP rejected the claim of the Assessee that only the proportionate revenue pertaining to the current year is to be brought to tax. Accordingly, the DRP rejected the objections of the Assessee and upheld the order of the AO 31. Ld AR submitted that - * At the outset, it is submitted that the AO erred in proceeding on an erroneous footing that there is no concept of deferment of income as per the Act and contending that the income of Rs. 105,43,36,985/- has accrued to the Appellant during the financial year 2011-12. * It is submitted that the AO ought to have relied on the cancellation policy provided under the terms of warranty wherein the customer has the right to cancel the contract with a prior notice and upon cancellation of the contract, the Assessee has to refund the entire consideration less cost of services already rendered. Sample warranty terms are available at pages 284-290 Annexure 2 to submission dated ....
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....e outflow of cost/resources for the Assessee. Further, in case the contract is cancelled, the Assessee is liable to refund the consideration received originally, less cost of services already rendered. * It is submitted that as and when the services are rendered in a particular year, the revenue deferred to such year is recognized as revenue during such year (amortised) and offered to tax. The movement of deferred revenue is as under: Assessment Year Opening Balance (under Other Liabilities) Closing Balance (under Other Liabilities) Net debit to Revenue (P&L) 2010-11 (216,92,03,935) (341,83,99,970) 124,91,96,035 2011-12 (341,83,99,970) (481,01,21,184) 139,17,21,213 2012-13 (481,01,21,184) (586,44,58,169) 105,43,36,985 * Clearly, the Assessee has been recognizing the revenue periodically on the basis of accrual and offered them to tax. 32. The ld AR also submitted that the issue is squarely covered by the order of this Hon'ble Tribunal in Assessee's own case for assessment year 2010-11 [order dated 18.08.2022 passed in IT(TP)A Nos. 562 & 400/Bang/2015] at paras 31-35, where the assessee's ground of appeal was allowed, accepting the above contentions and the addi....
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....tion. However, if that period has transpired since Customer's receipt of the Supported Product, Customer may not cancel this Service except as provided by an applicable state/country/province law which may not be varied by agreement. Dell may cancel this Service at any time during the Service term for any of the following reasons: Customer fails to pay the total price for this Service in accordance with the invoice terms; Customer refuses to cooperate with the assisting analyst or on-site technician; or Customer fails to abide by all of the terms and conditions set forth in this Service Description. If Dell cancels this Service, Dell will send Customer written notice of cancellation at the address indicated on Customer's invoice. The notice will include the reason for cancellation and the effective date of cancellation, which will be not less than me 0-01 days from the date Dell sends notice of cancellation to Customer, unless state law requires other cancellation provisions that may not by varied by agreement. IF DELL CANCELS THIS SERVICE PURSUANT TO THIS PARAGRAPH, CUSTOMER SHALL NOT BE ENTITLED TO ANY REFUND OF FEES PAID OR DUE TO DELL." 33. The assessee reco....
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....ed on AS-9 of ICAI. The second aspect which has to be clarified is that the deferment of revenue as not pertaining to the relevant AY 2009-10 is also substantiated by the Assessee and the basis of deferral of revenue is clearly given in paper book no.7 pages 1620 to 1897. Therefore there can be no dispute that the income deferred did not pertain to AY 2009-10, if one were to accept that deferral of income, though it has accrued to an Assessee, is possible. The principal question therefore that needs to be addressed is regarding whether deferring revenue is permissible under the mercantile system of accounting followed by the Assessee where income that accrues or arises to an Assessee has to be regarded as income. 92. The learned counsel for the Assessee in his rejoinder submitted that the decision of the Tribunal rendered in the case of Optum Health & Technology (India) (P.) Ltd. (supra) is clearly distinguishable because in that case not only was the revenue received but also services were rendered and still the Assessee chose to defer revenue recognition and it was in those circumstances, the Tribunal held that deferring revenue was not proper and had to be regarded as income o....
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.... right to receive must come into existence before the actual receipt takes place. Receipt, by itself, is not sufficient to attract tax. It is only receipt as 'income' which would attract tax. Every receipt by the assessee is, therefore, not necessarily income in his hands. It bears the character of income at the time when it accrues in the hands of the assessee and then it becomes eligible to tax. What is relevant to determine whether money received is income or simply an advance, is the initial character of the receipt and not the head under which the amount is credited in the books of account. If no income has resulted, it cannot be said that income accrued merely on the ground that the assessee has been following the mercantile system of accounting." The Hon'ble Court accordingly upheld the stand of the Assessee. Holding that the Assessee did not become owner of the money received unless the services are rendered and was not entitled to appropriate the same till service was rendered in lieu of which the same was received in advance. 94. The Hon'ble Madras High Court in the case of Coral Electronics (P.) Ltd. (supra) also dealt with similar case. The assessee ....
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.... amount due to customers as shown by assessee was nothing but receipt of advance before accrual of income and, therefore, same could not be treated as income of assessee at point of receipt. The Tribunal held in favour of the Assessee. 96. As far as the decision of the Tribunal in the case of Optum Health & Technology (India) (P.) Ltd., is concerned, as rightly contended by the learned counsel for the Assessee the facts were that the sums were received in advance and in respect of the sums received services were also performed but still the Assessee did not recognize revenue but postponed recognition based on the bills raised on the clients for services performed. Though there are observations in the order of the Tribunal that postponement of recognition of income is not possible on the basis of AS-9 of ICAI when income accrues or arises under the mercantile system of accounting, those observations have to be confined as decision on the facts of that case. In the light of the decision of the Hon'ble High Courts of Punjab & Haryana and the Hon'ble Madras High Court, we are of the view that the claim made by the Assessee deserves to be accepted. Accordingly the addition mad....
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.... bringing into existence any asset or advantage to the Assessee but only facilitates the business operations of the Assessee efficiently by maintaining uniform standards across all Franchisee stores. Hence, the expenditure is revenue in nature and deductible under Section 37(1) of the Act as the same is laid out wholly and exclusively for the business of the Assessee. Reliance was placed on the following case laws:- i. Empire Jute Co. Ltd. v. CIT [Reported in [1980] 3 Taxman 69 (SC)] at para 11; ii. CIT v. Geoffrey Manners & Co. Ltd. [Reported in [20090] 180 Taxman 87 (Bombay) at paras 3-5; iii. CIT v. Asian Paints (India) Ltd. [Reported in [2016] 75 taxmann.com 152 (Bombay)] at para 5(e); iv. CIT v. IBM India Ltd. [Reported in [2014] 43 taxmann.com 470 (Karnataka)] at para 10; v. DCIT v. Jubilant Foodworks Ltd. [Reported in [2022] 137 taxmann.com 345 (Delhi-Trib.) at para 11. 41. The ld. DR relied on the orders of lower authorities. 42. We have considered the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in the case of M/s. NIKE India Pvt. Ltd vs DCIT (IT(TP) A No.202/Bang/2021 dated 26.07.2022) has considered....
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....ra), it has been held that when any expenditure is incurred by an assessee on leasehold premises, even though it may give an enduring benefit, it would not amount to capital expenditure as no capital asset is being created in favour of the assessee. In some of the cases, the expenditure is on civil and electrical works also. In the case before us, we find that the AO has erroneously held that there was no termination clause in the agreement of lease and that the lease is permanent. We find that the lease is for a period of 4 years only and the assessee was to pay for lease rental as well interest-free security deposit for the lease and also that the assessee is required to incur the expenditure for interior and exterior works for carrying on the business as per 'brand' specifications. In such a situation, it cannot be said that the assessee is deriving an enduring benefit nor can it be said that any capital asset has been created in favour of the assessee. The quantum of expenditure cannot determine the nature of the expenditure. Therefore, respectfully following the decisions relied upon by the learned counsel for the assessee we hold that this expenditure is revenue in na....