TaxTMI 
TaxTMI 
2025 (8) TMI 1177
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....or the convenience, and decision of appeals together, the facts and impugned orders for AY 2015-16 shall be referred to and the grounds for AY 2015-16 and ground No.6.5 for AY 2017-18 are reproduced below:- Grounds of appeal for AY 2015-16 "1. That Ld. AO erred in assessing income of the Appellant at INR 717,75,46,290 as against returned income of INR 96,83,40,450/-. 2. That on the facts and in law, the Ld. AO has erred in computing the book profits of the appellant at INR 366,96,60,990 as against book profits of INR 306,38,29,828 as disclosed in return of income by the appellant. 3. Without prejudice, Ld. DRP erred in not giving directions on all the objections and further Ld. TPO/AO erred in not giving effect to all the directions of Ld. DRP resulting in unjust erroneous adjustments and demand contrary to law. Transfer Pricing Adjustment in respect of Import of finished goods In law and facts of present case: 4. Impugned order erred in re-writing transactions on imaginary basis. 5. Impugned order erred in assuming DEMPE functions were performed for AE and making 'intensity adjustment' to adjust net profit mar....
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....lection of Fcbulka Advertising Pvt. Ltd. for benchmarking marketing function and also in not evaluating comparables proposed by Appellant. 15. Without prejudice impugned order errs by incorrectly applying the principles laid down in Rule 10TA while computing net margins of companies considered comparable. 16. Without prejudice to all other grounds, impugned order errs in considering erroneously computed working capital adjusted net margins of companies considered comparable to the distribution activity. Transfer Pricing Adjustment in respect of international transaction for Marketing and Development of Market Services ("MMDS") based on BLT approach (Protective adjustment) In law and facts of present case: 17. Impugned order errs in retaining protective adjustment based on the BLT contrary to Hon'ble jurisdictional High Court decision. Further such adjustment is based on incorrect presumptions and ignores relevant factors laid down by Hon'ble Court. Transfer Pricing Adjustment in respect of transaction of payment of royalty 18. Impugned order erred in rejecting combined transaction approach and considering arm's length p....
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....owing the provision for warranty of INR 54,73,52,523 by treating the same as contingent liability and adding the same in computing book profits under section 115JB of the Act. Non allowance of reversal of Marked to Market (MTM) Loss disallowed in immediately preceding previous year and credited to books of this year 27. That on the facts and in law, the Ld. AO has grossly erred in not following Ld. DRP directions by not reducing a sum of INR 90,51,149 in computing the taxable income and book profits under normal provisions of the Act and under section 115JB of the Act respectively, being the amount of addition made by Ld. AO in immediately preceding year for allegedly unrealized MTM loss which has been reversed in the subject year, thus leading to double taxation. Miscellaneous contentions 28. Ld. AO has erred in initiating penalty proceedings under Section 271(1)(c). Additional Grounds: 29. That on the facts and circumstances of the case and in law, Ld. assessing officer/DRP ought to have restricted the levy of the dividend distribution tax, on the dividend distributed / paid to Sony Holding (Asia) B.V., Netherlands, being resi....
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....e. Further, a reference was made by the AO to the Additional Commissioner of Income Tax, Transfer Pricing officer- 3(1) ("TPO") under section 92CA of the Act for determination of the arm's length price. The Ld. TPO vide her order dated 29 October 2018 passed under section 92CA(3) of the Act made an adjustment to the income of the assessee amounting to Rs. 12,34,76,11,326/- on account of transfer pricing provisions. Based on the order of the Ld. TPO, the AO has issued a draft assessment order to the assessee in terms of provisions of section 144C of the Act proposing to make variations to the returned income of the assessee on account of transfer pricing and corporate tax issues. The assessee being an eligible assessee as per provisions of section 144C of the Act filed objections before the DRP against the transfer pricing variations proposed to be made by AO in the draft assessment order. 4.2 Now we find that that the details of international transactions undertaken during financial year ("FY") 2014-15 are as under:- S. No Type of international transaction Amount in INR 1 Import of finished goods for resale 74,53,27,26,476 2 Export of finished goods 5,....
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....justment on transaction pertaining to import of finished goods by contending that there is a mutual agreement/ arrangement between assessee and the AE for discharge of function of marketing and market development in addition to the arrangement/ agreement for sale and distribution of the goods purchased from the AE for which the costs have been borne by the AE. Thus based on the same, the Ld. TPO has concluded that the assessee is not a plain vanilla distributor carrying out only purchase and sale function but has been rendering Development, Enhancement, Maintenance, Protection and Exploitation ("DEMPE") services which include market development, value addition, creation of marketing intangible etc as well. The Ld. TPO has contended that there is no bifurcation provided on the promotional expenditure and the expenditure on market development function incurred by the assessee for which the assessee is eligible for compensation under a situation where no such bifurcation is available. Thus the ld. TPO concluded that contribution of the assessee in developing the marketing intangibles which requires to be compensated by AE is primarily to be benchmarked using Profit Split Method ("PSM"....
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....ut the above TNMM analysis, Ld. TPO has rejected ten companies out of twelve companies selected by the assessee (while submitting updated data for FY 14- 15) and proposed ten additional companies. The list of twelve companies finally selected as comparables by Ld. TPO along with their intensity and working capital adjusted operating profit/ operating revenue (OP/OR) is tabulated as under: S. No. Name of the company Intensity and working capital adjusted OP/OR Companies selected by the assessee 1 Optiemus Infracom Limited 5.34% 2 Salora International Ltd. 2.65% Additional companies selected by LD. TPO 3 Intex Technologies (India) Limited 5.60% 4 Micromax Informatics Limited 7.96% 5 United Telelinks (Bangalore) Private Limited 12.21% 6 Lava International 8.30% 7 Ample Technologies 5.90% 8 Novel Appliances Private Limited 6.27% 9 Aditya Infotech 7.10% 10 Virtual Netcom Private Limited 2.85% 11 OTS E-Solutions Private Limited 4.62% 12 Sargam India Electronics Private Limited 4.78% Median 5.75% 35th Percentile 5.34% 65th ....
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....-16) for companies selected as comparable( internal page 29 and 30 of TP order) for benchmarking core business segment in Sony (in present case import and sale of finished goods) is taken as bright line ( see page 44 of TP order. BLT of 0.96 % translates to INR 10570. 39 lacs). Excess of AMP expenditure ( AMP / sales % of which is 16.45% please see internal page 44 of TP order) incurred by Tested party (Sony - see working on internal page 44 of TP order for AY 15 -16 for excess expenditure over BLT INR 170547.61 lacs) above Bright line is determined Tax department refers to such excess expenditure to justify its claim that AMP is a separate and distinct international transaction As tax department imagines that such excess expenditure is incurred by Indian entity for rendering marketing and advertisement services to overseas AE. Such excess is further marked up by margin earned by companies engaged in advertising and marketing business ( please see internal page 30 - average of such margins as per TPO is 21.17%). As per tax department such marked up amount (excess AMP further marked up= 206652.54 lacs) is Transfer pricing adjustment applying BLT. ....
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....adjustment (please see internal page 64 of TPO order for working of adjustment based on intensity -. Thus, same steps as in BLT are carried out in reverse direction i.e., on comparable companies and this method is euphemistically termed as intensity adjustment Appreciating above process though called intensity is a mirror image of BLT, coordinate bench of Tribunal in Widex has invalidated the same as mental acrobatics." 7. Thus in summary for applying BLT, Sony's AMP/ Sales is determined and excess over similar AMP / sales of comparable companies ( Bright line) is considered as adjustment after further marking up with margin of advertisement companies and in intensity approach the actual AMP of comparable companies is substituted by Sony's % AMP/ Sales and by a notional exercise income is increased by excess of Sony AMP over comparables AMP expenditure after further mark up. The average of fresh notional margin of comparables is used to work out TP adjustment. 8. Now in regard to use of appropriate method for benchmarking AMP transactions while finding BLT to not be a method recognized under the Act and Rules. Hon'ble Delhi High Court in Casio India Company ....
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....eam Global Spirits & Wine (India) Pvt. Ltd., ITA 155/2022 & 156/2022, order dated 7.3.2025 in para 22 has categorically discarded benchmarking of AMP expenses which was commenced solely on the basis of a perceived excessive expenditure incurred by an assessee. Similar is the case before us. 8.2 Then in Addl. CIT vs. Bacardi India Pvt. Ltd., ITA Nos.4069 & 4070/Del/2019, order dated 20.05.2022, the Co-ordinate bench at Delhi in para 15 has held as follows:- "15. Having said so, the ld. CIT(A) held that there is a rationale to factor in AMP intensity adjustment while equating the functional profit into the comparables in TNMM benchmarking. The "bright line test" which is the mirror image of intensity approach has no statutory mandate. Hence, cannot be upheld." 8.3 Similarly in Samsung India Electronics (P) Ltd. Versus DCIT Circle 2(2) reported in (2020) 120 taxmann.com 283 (Delhi Trib) has relied the decision of Chandigarh Bench in Widex India (P) Ltd. Versus ACIT (2019) 108 taxmann.com 125 (Chandigarh) to approve that what applies to BLT also applies to 'intensity approach' as a method for making ALP adjustment. 9. On the basis of aforesaid discussion we have no he....
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....develops and manufactures LCD TV products and related components; and WHEREAS, SID desires to manufacture and sell in the TERRITORY (as hereinafter defined) by itself and/or through SONY's authorized third party, certain LCD TV products; and WHEREAS, SONY is willing to permit and assist SID in the manufacture and sale of such products in the TERRITORY, upon the terms and conditions hereinafter set forth, all of which are acceptable to SID. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth. XXXXX (1) SONY hereby grants to SID a non-exclusive, indivisible, non- assignable and non-transferable and non-sublicensable license under the LICENSED PATENTS and/or the LICENSED KNOW-HOW (i) to manufacture or have the SUBCONTRACTOR manufacture the LICENSED PRODUCTS in the TERRITORY by using the COMPONENTS, and (ii) to sell, use, lease or otherwise dispose of such LICENSED PRODUCTS in the TERRH ORY. (2) SONY hereby grants to SID, a non-exclusive, indivisible, non- assignable, non-transferable and non-subliceasable license to use the LICENSED TRADEMARKS in the TERRITORY (i) to manufacture or have the SUBCONTRACTOR manuf....
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....parately, the selling price of packing material and boxes, cartons and crates in which such LICENSED PRODUCTS are packed, as well as freight and insurance charges. (3) By no later than the first business day of each calendar quarter (i.e., January 1, April 1, July 1 and October 1) during the TERM, SID shall furnish to SONY a statement, certified by an officer of SID, showing the quantities of the LICENSED PRODUCTS sold in the immediately preceding calendar quarter and the amounts of royalty payable with respect to such LICENSED PRODUCTS pursuant to this ARTICLE X; and SID shall pay SONY the royalties payable for each immediately preceding calendar quarter by the end of the month following two (2) months after such calendar quarter. (4) In order that the royalties and statements provided for in this ARTICLE X may be verified, SID shall keep lull, complete and accurate books and records showing the assembly, manufacture, sale, and/or other disposition of the LICENSED PRODUCTS. SID agrees to permit such books and records to be audited from time to time, but no more than once in each calendar year, at the expense of SONY, by a representative or representatives of SONY....
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....duct a transfer pricing analysis to determine the ALP and not to determine ITA 475/2012 Page 25 whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO. This distinction was made clear by the ITAT in Dresser-Rand India Pvt. Ltd. v. Additional Commissioner of Income Tax, 2012 (13) ITR (Trib) 422: "8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an....
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....h price of these services is 'nil'." 28. It is also not in dispute that Sony Corp has invested significant amount and efforts in developing, manufacturing intangibles and for which it should be suitably remunerated and since the assessee has received license to use these value intangibles during the course of its operations in India, the assessee was duty bound to pay royalty for the simple reason that Sony Corp would not allow any third party to use its intangible properties created through large amount of investment without receiving any sort of consideration. 29. It is also not in dispute that the assessee has licensed technology and trade mark from Sony Corp and further licensed them to OEMs and the OEMs manufacture these goods based on technology sub licensed by the assessee and sells them back to the assessee for which the assessee pays royalty at an agreed percentage of net selling price and this payment of royalty by the assessee instead of OEMs is due to commercial necessity and payment of royalty transaction is already bench marked under TNMM. 30. Considering the facts of the case in totality, we do not find any merit in the TP adjustmen....
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....o exclude, Fcbulka Advertising Pvt. Ltd as a comparable and make a fresh adjustment in accordance with the law. The relevant grounds in AY 2015-16 accordingly stands allowed for statistical purposes. 15. Fourth issue; The issue is relevant for AY 2017-18 and 2018-19. This issue arises out of transfer pricing adjustment in respect of outstanding receivables. In regard to this issue, it was submitted that in AY 2017-18, the TPO while computing the interest income for delayed receivables, has not restricted the computation to assessment year under consideration. The TPO has computed the adjustment by considering interest up to the TPO's order, i.e., 31st January, 2021. On behalf of the assessee, invoice-wise details filed before the DRP are available in PB. In the light of the same, the issue for AYs 2017-18 and 2018-19 is restored to the files of TPO to verify discrepancy and make adjustment accordingly. The corresponding ground are allowed for statistical purposes. 16. Fifth Issue; The fifth issue is relevant to all the three years in hand. Ld. AO then held that from the examination of the account of the assessee it was seen that the assessee company has valued some of its clo....
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....,352/- towards CSR, and this entire sum was disallowed by the assessee company in computation of its taxable Income under the normal provision of the Income Tax Act, 1961. The assessee company has charged the entire CSR expenditure incurred by it, to its statement of Profit and Loss for the year and no addition was made in computing 'Book Profit' under section 115JB of the Act. The DRP observed that as per explanation (2) to section 37(1), the CSR expenditure is not allowable under normal provision of the Act. Therefore, it is added to total income under normal provision of Act. 19. The ld. counsel has pointed out that the issue is covered in favour of the assessee in the decision for AY 2016-17 (supra). We find in para 60 to 61 that the coordinate Bench has dealt with the issue wherein this issue has been decided in favour of the assessee by relying the decision of the coordinate Bench decision in the case GE Power System India Pvt. Ltd. in ITA No.9120/Del/2019, order dated 10.08.2022 for AY 2016-17. We find there is no distinguishing feature. According the issue and corresponding grounds are decided in favour of the assessee. 20. Seventh Issue; The seventh issue rel....
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.... 211,019,753 318,165,585 43,42,21,569 144,21,67,488 134,79,39,537 23. Thus, considering that every year the assessee has a net surplus in the provision for warranty account the ld. AO concluded that the amount of balance in the provision account means that while it has been claimed as expenditure, but remains un-utilised. The amount of Rs. 134.79 Crores has not been taxed till date. The assessee was asked to explained as to why excess provision account should not be added to the total Income. In response, the assessee has stated that it has scientific method to compute the liability and that it was also based on past experiences. However, the ld. AO was not satisfied and made the disallowance. 24. Ld. Counsel has submitted that this issue is also covered in favour of assessee by decision in AY 2016-17 (supra). We find that in AY 2016-17 the issue was examined by the coordinate bench and considering same to be a legacy issue since AY 2001-02 and being determined by Hon'ble Delhi High Court in 160 Taxmann 397, where in Hon'ble High Court has held that revenue has failed to allege and establish that amounts set apart were unreasonably disproportionate. It can be seen....