TaxTMI 
TaxTMI 
TaxTMI 
2025 (8) TMI 1177
X X X X Extracts X X X X
X X X X Extracts X X X X
....ogether, 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 margin of comparable companies purportedly to equalise functions. 'Intensity adjustment' is mirror image....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpugned 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 price of international transaction of payment of royalty as NIL claiming same to be application of Comparable Uncontrolled Price ("CUP") method. Without prejudice payment towards royalty was considered as cost for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ks 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 resident of the Netherlands, in terms of Article 10 of DTAA between India and Netherlands r.w., Protocol to the DTAA between the India and Slovenia or any other beneficial provision of any other tax treaty instead of section 115-O of the Act. 30. That on the facts and circumstances of the case and in law, Ld. Assessing officer/DRP ought to have r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 5,77,90,937 3 Receipt of Information Technology ("IT") services 2,97,71,350 4 Receipt of Infrastructure services 14,22,51,145 5 Receipt towards use of Intel logo 3,15,67,625 6 Payment of Royalty 2,29,72,438 7 Use of FIFA logo 2,31,06,943 8 Provision of warranty services 3,63,70,082 9 Purchase of Promotional Material 1,82,51,095 10 Purchase of Samples 20,98,093 11 Purch....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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") but then observed that PSM cannot be applied as the assessee has failed to provide requisite information. Further ld. TPO observed that the Hon'ble Delhi High Court has emphasized that while benchmarking the first endeavor of the TPO should be to benchmark the entire distribution function by use of suitable comparables. Failing such effort, segregate approach should be used. Ld. TPO observes that the Hon'ble High Court has not laid down any methodology for segregated benchmarking. It was fu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Percentile 6.27% 4.9 The case of assessee before the DRP was that the Ld. TPO has not provided assessee the back-up computation for the adjustment being proposed. The Ld. TPO has incorrectly computed the operating expenses of the assessee. Further Ld. TPO increased the above computed operating cost of the assessee by 5% without giving any valid rationale for such stepping up of operating cost. The credit notes received by the assessee which were set-off against its purchases were grossed up twice in operating expenses. Assessee also alleged that advertising, travelling, warranty reimbursement and other reimbursements rece....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. This amount is required to be received by Indian entity from the overseas AE. Adjustment if any on bench marking of core segment goes separately as AMP is bench marked as separate transaction In regard to the Intensity adjustment it was submitted that (i) To (viii) STEPS adopted by TPO for intensity are described at internal page46 of TP order (just above para 22). Reference to page 2641 of Transfer pricing paper book III - copy of letter from TPO to Commissioner explains key factors used in working of intensity. This clarification by TPO, when viewed in context of BLT based adjustment on internal page 44 of TP order would show jugglery of same numbers and acrobatics. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....panies 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 Private Limited vs. DCIT in ITA 814/2017, order dated 10th February, 2025, has considered the decision of in Maruti Suzuki (2015) 381 ITR 117 (Delhi), and relevant para of Maruti Suzuki decision (supra) are reproduced below; "70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pheld." 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 hesitation to uphold the contention of ld. Counsel that either applying BLT or by way of intensity approach alone the adjustments to AMP were not in accordance with law. Thus this issue and corresponding grounds are decided in favour of the assessee. Both substantive and protective adjustments to AMP shall stand deleted. 10. Second Issue. The issue is common to three AYs before us. Ld. TPO made an adjustment on royalty transaction by rejecting the combined transaction benchmarking under TNMM and has instead used the Comparable Uncontrolled Price method ('CUP') as the most appropriate method. The case of assessee before the DRP was that while using CUP, the TPO's office has not used any benchmarking analysis or comparable transaction but instead concluded that Mose....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 manufacture the LICENSED PRODUCT'S which shall meet the quality requirements to w'hich reference is made in Paragraph (1) of ARTICLE V of this Agreement, and (ii) to sell, use, lease, otherwise dispose of the (3) No alteration or modification of the LICENSED PRODUCTS, once approved by SONY pursuant to ARTICLE V hereof, shall be made by SID or the SUBCONTRACTOR without the prior written approval of SONY of such alteration or modification. SID shall cause the SUBCONTRACTOR to, strictly comply with the restriction set forth above in this Paragraph (3). (4) SONY acknowledges and agrees that SID may have SONY SUBSIDIARIES manufacture and may, by itself or through the SUBCONTRACTOR, purchase from SONY SUBSIDIARIES, the COMPONENTS necessary for the manufacture of the LICENSED PRODUCTS provided that (i) SID shall, joint....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oks 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 acceptable to SID or by an independent certified public accountant appointed by SONY to the extent necessary' to verify the accuracy of the aforementioned royalties, payments and statements. (5) All sums of money payable by SID to SONY under this AR ITCLE X shall be paid in United States Dollars and remitted to a bank account designated by SONY, without any deduction of taxes or charges of any kind, which taxes or charges, if any, are assumed by SID as a part of the royalty. Conversion from the local currency to United States Dollars shall be made at the exchange rate applied by the remittance bank on the dale of the remittance. If, at any time during the TERM any competent government of any country shall require that any income tax be withheld by SID and remitted directly to such government on behalf of SONY, SID shall be and is hereby authorized to do so. SID shall promptly tran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icer 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 Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; It is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in ITA 475/2012 Page ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee 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 adjustment in respect of transaction of payment of royalty and accordingly direct the Assessing Officer to delete the adjustment of Rs. 14,69,89,634/-. This ground with all its sub-grounds is allowed and accordingly, grievances raised vide Ground Nos. 1 to 40.6 become otiose." 11.1 In the light of the aforesaid, this issue with corresponding grounds are decided in favour of the assessee. 12. Third issue. The issue is relevant to AY 2015-16. Ld. TPO made an adjustment on transaction pertaining to provision of business support services or advisory services. In order to benchmark impugned international transaction pertaining to provision of advisory services, the ld. TPO rejected some of the comparables selected by the assessee in its Transfer Pricing Study and included additional comparables in the Transfer Pricing order, which assessee claims were functionally dissimilar. Ld. TPO's office while computing the adjustment on transaction pertaining to provision of advisory s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ree 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 closing stock on price lower than the cost. The assessee has stated that they are following lower of cost or market price/net realizable value for valuing the closing stock. In respect of the following items, net realizable value was taken which was lower than the cost. The assessee was asked to provide details of inventory items which were valued at Net Realizable Value ('NRV') as on 31 March 2015, alongwith the basis for calculating NRV and cost of items valued at NRV. Also, to explain why the difference between NRV and Cost should not be disallowed in income computation as per the normal provisions of the Act and in MAT computation. In response, the assessee furnished its reply vide dated 21.12.2018. In its reply the assessee stated that it follows Accounting Standard-2 for inventory, as per Generally Accepted Accounting Standard. As per the accounting standards, inventories should be valued at the lower of cost and NRV. The assessee also relied upon some case laws but the ld. AO rejected this claim. 17. The ld. counse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hing feature. According the issue and corresponding grounds are decided in favour of the assessee. 20. Seventh Issue; The seventh issue relates to the disallowance of royalty expenses by AO as examined u/s 37(1) of the Act and is relevant to all the three years in hand. 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 paras 63-65 that the coordinate Bench has dealt with this issue wherein this issue has been considered in favour of the assessee as follows:- "63. The underlying facts in this issue are from the account of the assessee. The Assessing Officer noticed that the assessee has claimed royalty expenses of Rs. 14,69,89,634/-. The Assessing Officer proceeded to examine the claim u/s 37(1) of the Act. 64. The TPO disallowed the expenditure of royalty incurred during the year. 65. This issue has been considered by us in detail while adjudicating first issue [supra]. For our detailed discussion therein, these grounds become otiose. Ground No. 53 and 54 have become infructuous." 21. The coordinate Bench has held that the issue is otiose consequent to adjudication of issue of royalty adjus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t can be seen that in AY 2016-17 the coordinate bench has also relied decision in favour of assessee reported in 114 ITD 448, wherein it was held that provision for warranties is an ascertained liability. Thus we are inclined to follow the said decision and decide the issue along with corresponding grounds in favour assessee. 25. Ninth Issue. The next issue relates to the disallowance of reversal of unrealized Market to market loss, (MTM loss). The issue is relevant to grounds raised in AY 2015-16 and AY 2018-19. The case canvased by the ld. Counsel is that in FY 2016-17, unrealised MTM loss on account of firm commitment of INR 98,91,549 was disallowed while computing taxable income for FY 2016-17. In FY 2017-18, the same was reversed in the books of accounts and therefore, was not taxable. In FY 2017- 18, unrealised MTM loss of INR 7,70,171 was accounted and disallowed. Therefore, profits were decreased by INR 91,21,378 being net unrealised MTM loss on account of firm commitment (INR 98,91,549 less INR 7,70,171). It is submitted that disallowance of unrealised MTM loss which has already been offered to tax earlier, on an incorrect understanding of the ICDS provisions, will lead t....