TaxTMI 
TaxTMI 
2026 (8) TMI 957
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.... the lead year for recording the facts, where ever relevant and issues specific to AY 2017-18 shall be separately dealt with by us. 3. The Assessee, M/s Samsung India Electronics Pvt. Ltd. ("SIEL" / "Assessee"), is a company incorporated under the Companies Act, 1956 is a part of the Samsung group of companies and is a wholly owned subsidiary of Samsung Electronics Co. Ltd. Korea ("SEC"). It is primarily engaged in the business of manufacturing and trading of consumer electronics, home appliances, mobile phones and IT products. The Assessee undertook contract software development activities for SEC and was also engaged in buy-sell operation of Telecommunication Equipment from SEC to third party customers in India. The Assessee filed its return of income on 29.11.2016 declaring income of Rs. 4864,43,19,590/-. Thereafter, a revised return was filed on 28.03.2018, declaring total income of INR 4763,89,58,528/-. However, vide letter dated 20.06.2018 submitted by the Assessee, the income was again restored to the income reported in Original Tax Return i.e. Rs. 4864,43,19,590/-. The Assessee's operations were segregated by it into the following business segments: a) Manuf....
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....lowance of salary expenditure, Ld. DRP direct the TPO to delete the proposed adjustment. In compliance, the AO in its final order passed u/s. 143(3) r.w.s. 144C (13) r.w.s. 143(3A) and 143(3B) of the Act dated 31.03.2021 observed that since the appeals were filed in respect to the orders of immediately preceding years therefore, the AO had made the additions to the total income of the assessee as proposed in the draft assessment order including transfer price adjustments though regarding the issue of disallowance of salary paid to expatriate employees, ld. DRP directed the AO to delete the adjustment as proposed by TPO and the total income of the assessee was, finally assessed at INR 9723,34,28,470/-. 6. Thus assessee is in appeal and has raised following grounds of appeal for AY 2016-17; Grounds of appeal "1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the total income of the Appellant at Rs. 9723,34,28,470/- as against the returned income of Rs. 4864,43,19,590/-. 2. That on the facts and circumstances of the case and in law, the Ld. Dispute Resolution Panel ("DRP")/ AO/ Transfer Pricing Officer ("TPO") erre....
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....wholly and exclusively focused on generating domestic sales for its own business operations (and aligned with the risk profile of the Appellant) and the benefit arising from the incurrence of the AMP expenses by the Appellant has been received by the Appellant and the benefit, if any, resulting to its AEs is merely incidental. 9. That on the facts and circumstances of the case and in law, the Ld. DRP/ AO/ TPO have erred in adopting intensity-based approach which is not a prescribed method under the Income-tax Rules, 1962. 10. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in holding that the AMP expenses incurred by Appellant has led to the creation of marketing intangibles and resulted in promotion of 'Samsung Brand' for which the Appellant should be compensated by the legal owner of the brand. 11. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in applying mark-up on the alleged incurred excessive AMP expenditure by selecting companies providing market support functions in order to determine the mark-up to be imputed on AMP adjustment. 12. That on the facts and c....
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.... the Appellant. 18. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in incorrectly computing margin of the Appellant and the comparables. GROUNDS AGAINST SUBSTANTIVE AND PROTECTIVE ADJUSTMENT MADE IN RELATION TO AMP EXPENSES UNDER BRIGHT LINE TEST METHOD 19. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making substantive adjustment of Rs. 339,23,89,070/- on account of AMP for Trading segment and protective adjustment of Rs. 1783,92,66,237/- for Manufacturing segment by applying Bright Line Test method which is impermissible under law. 20. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making protective adjustment for Manufacturing segment when substantive adjustment has already been done in the hands of the Appellant for same assessment year, which is impermissible under law, thereby also not appreciating that this issue of making an adjustment on a 'protective' basis along with substantive adjustment is squarely covered in favour of the Appellant by the order of this Hon'ble Tribunal in Appellant's ow....
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.... the fact that working capital adjustment was allowed by this Hon'ble Tribunal in Appellant's own case for AY 2007-08, AY 2008-09, AY 2009-10 & AY 2014-15. 28. That on the facts and circumstances of the case and in law, the Ld. DRP/ TPO/AO erred in wrongfully computing proportionate adjustment. GROUNDS AGAINST ROYALTY ADJUSTMENT 29. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making an adjustment of Rs. 1732,93,94,316/- on account of royalty payment by rejecting TNMM applied by the Appellant and instead applying CUP as the MAM. 30. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in not appreciating the fact that payment of royalty is intrinsically linked with the manufacturing activity, thus segregating and benchmarking the transaction of royalty is in violation of transfer pricing provisions. 31. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in including/selecting companies that are not comparable to the Appellant in terms of functions performed, assets employed, risks assumed, in contravention of section ....
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....nts made towards AMP expenditure incurred by the assessee where the AO has made adjustments by following BLT ("Bright Line approach") and IBA ("Intensity based approach") on protective and substantive basis. The TPO based on the fact assessee has received 2,00,22,148/- as reimbursement of marketing expenses from its parent Samsung Electronics Co. Ltd., Korea held the same as an international transaction. Accordingly, the TPO held the entire amount of AMP expenditure incurred by the assessee in manufacturing, trading and networking segments as international transactions of intra-group service rendered by the assessee to its parent for the promotion of the brand 'Samsung' and proposed following adjustments on substantive basis and protective basis by applying Intensity Approach and Bright line approach for different segments. 8. The ld. DRP in para 3.1.1. of its order has observed that this issue was considered and decided in assessee's own case for AY 2014-15 and 2-15-16 and since the objections raised are identical, ld. DRP directed the AO/TPO to follow its directions given in these years. In preceding years i.e. in AY 2014-15 and 2015-16, the DRP held that AMP expenditure as ex....
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....hat in AY 2011-12 to 2014-15, the orders passed by the Tribunal stood affirmed by the Hon'ble Jurisdictional High Court and submits that appeal against the order of Tribunal in AY 2015-16 has not yet been filed. Ld. AR thus, submits that the issue in hand is squarely covered in assessee's favour and requested for the deletion of the adjustments made on this score. 11. Ld. CIT DR for the Revenue vehemently supported the orders of the lower authorities. As per ld. CIT DR principle of res-judicata does not apply to income tax proceedings and each assessment year is to be judged on its own basis thus the orders of Tribunal in preceding years cannot be followed without looking into the merits of the case in each individual year. He submits that assessee itself has reported transaction of recovery of marketing expenses of Rs. 2,00,22,148/- is an international transaction. He further submits that in trading segments, AMP expenses are to be benchmarked separately which was not done in preceding years and thus, the issue is totally distinguishable in the year under appeal. He further submits that in the case of Sony Ericson Mobile Communications Pvt. Ltd. 55 taxmann.com 240 wherein Hon'b....
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....ny amount beyond such agreed reimbursements do not warrant inclusion within the ambit of the international transaction as these expenses have not been necessitated by any understanding, arrangement, or agreement with the AEs. In the absence of any evidence of this common understanding or action in concert, any such conclusion would be a mere surmise. 14. During the instant year, we find that not only there was no MDF agreement in effect between the assessee and the AE, the amount of reimbursement of marketing expenses received by the assessee has diminished to a meagre sum of Rs. 5,51,13,066/. However, the TPO and the DRP have proceeded on an assumption that there was an understanding between the assessee and its AE that "excessive" AMP expenditure would be incurred in India to promote the 'Samsung' brand in a manner that was not justified by the scale and nature of Indian business but at the behest and requirement of the foreign parent that owned the brand. We do not find any merit in the approach taken by the TPO and the DRP as well the contention raised by the Ld. CIT(DR) that consistency of approach by the Tribunal should be disregarded. The Transfer Pricing Report of ....
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....ts manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson Mobile Communications India (P.) Ltd. (supra) having disapproved of BLT as a legitimate means of determining the ALP of an international transaction inv....
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....AMP expenditure. The arrangement and understanding were limited to the amounts agreed to be paid as assistance under the MDF Agreement. The amounts incurred as AMP expenditure by the appellant under the MDF Agreement have already been received as reimbursement/assistance and have indisputably been disclosed as an international transaction in Form 3CEB and form part of the transfer pricing study conducted under Rule 10D. The AMP expenditure which is outside the ambit of reimbursement received under the MDF Agreement, has been incurred by the appellant on its own volition as per its own requirements and without any interference of the AE and have been paid to third parties. 44. In view of the above, we hold that the scope and value of international transaction cannot be expanded beyond the reimbursements received under MDF agreement to cover the entire gamut of AMP expenditure incurred by the Appellant during the year. 45. In view of the above, we hold that the "bright line" approach is untenable in law either as a way to determine the existence of an international transaction or as a method to determine the ALP of an international transaction pertaining to AMP. No ....
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....he Id. TPO by adopting the intensity approach which w>as held not to be sustainable by the coordinate Bench of the Tribunal in ITA No.6813/Del/2017 for AY 2012-13 order dated 07.01.2020 in taxpayer's own case by following the order passed by the coordinate Bench of the Tribunal in taxpayer's own case in earlier years. 25. So, in view of what has been discussed above and by following the aforesaid order passed by the coordinate Bench of the Tribunal, we are of the considered view that scope and value of the international transactions cannot be extended to the so called excessive expenditure incurred by the taxpayer on account of non-routine AMP beyond the reimbursement already received by the tax payer under MDF agreement and as such, adjustment made by the TPO on account of AMP expenses is not sustainable in the eyes of law, hence, ordered to be deleted." 17.1 Following the aforesaid decisions rendered by various Coordinate Benches in ten prior assessment years on this issue, we hold that the transfer pricing adjustments to the arm's length price of the alleged international transaction of AMP expenditure of the appellant is bad in law and liable to be deleted....
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....g AYs. 17. Aggrieved by the said order, the assessee is in appeal wherein assessee requested for the inclusion of Six (06) comparables excluded by TPO and further requested for the exclusion of one comparable which was included by TPO in final set of comparables. 18. Taking up issue of inclusion of comparables, relying the quarterly results of Value Industries available at 1740-1741 of the paperbook and Videocon Industries at 1749-1750 of the paperbook ld. Counsel has submitted that same would allow the Ld. TPO to rebuild the annual financials and therefore, the company should be included in the final set of comparables. This Tribunal's in Assessee's own case for AY 2015-16 has accepted in principle that companies with different financial year ending can be taken as comparable if the quarterly results of the company are available in public domain and further reliance is further placed on the following judgements for the proposition that if the quarterly data in respect of a company is available, it cannot be excluded on the ground of different financial year ending: - DCIT v. McKinsey Knowledge Centre India (P.) Ltd. [IT Appeal No. 2195 (Delhi) of 2011, dated 13-09-2....
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.... of INR 1,91,583 Lakhs which include sales and services both and after excluding Receipts from services from the gross-operating revenue, the net sales coms to INR 1,50,094 lacs i.e. revenue from operations as against which the total manufacturing sales was of 134700 and thus, percentage of manufacturing sales viz a viz total revenue from operation comes to 80.74%. It is evident from the figures, the actual revenue from manufacturing function as a % of total revenue from all operations is 89.74% (page 13 of the AR compilation/1752 of the paperbook). Therefore it has to be considered to have pass the filter of manufacturing turnover of more than 75%. Further, we find that IFB Industries is engaged in the manufacture of products such as washing machine, microwave, air conditioner, etc., which is similar to the products being manufactured by the Assessee in its Licensed Manufacturing segment (page 14 of AR compilation/ pages 1753 of the paperbook) and therefore, it is a valid comparable to be included in the final set of comparables. 22. In case of Penguin Electronics Ltd. ld. TPO has rejected the company as it is allegedly having diversified businesses and therefore, are not valid....
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....sumer electronics or home appliances. The goods manufactured by the appellant are TVs, refrigerators, mobiles, microwave ovens, air conditioners etc.. These products form part of rapidly growing section of the Indian market. Whereas products meant for industrial and technical use face very different economic dynamic and the risks involved are wholly dissimilar. Another factor which differentiates them is the R&D function. While the assessee is wholly dependent on its AE for the R&D, Frog Cellsat has its own R&D function. This further vitiates functional similarity. In view of the aforesaid there is little justification in including this comparable. It is, accordingly, directed that Frog Cellsat Ltd. be excluded from the list of comparables." - The company's functional profile has not changed in the relevant AY, i.e, AY 2016-17. (refer to extracts of annual report on page 20 of AR compilation/pages 1761-1763 of the paper book). - The company has a miniscule revenue of INR 84.92 cr whereas the Appellant has revenue of INR 32,084 cr in Licensed Manufacturing segment. (refer to page 21 of AR compilation/pages 1763-1764 of the paper book) - R & D function:....
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....rder of TPO and stated that AO has rightly included these companies in the final set of comparables and he prayed accordingly. 32. After considering the facts, we find that the Co-ordinate Bench under the identical circumstances, has included these companies in the final set of comparable by observing in para 39 as under:- 39. "We have perused the annual reports and financials of these companies that have been taken as comparables to the Networking segment of the assessee. We find merit in the contention that all these seven companies are service companies and are not engaged in trading of any goods. The services provided by these companies range from IT services, telecom services, content based services, digital media distribution services, to mobile and internet services. The assessee, in contrast, derives 95% of its revenues in this segment from sale of telecom equipment to Reliance. The design, installation, and commissioning fee is a small part of the composite sale agreement and this fee is a meagre 5% of the total revenues. In these circumstances, there is no justification in permitting these companies as comparables. These service companies are, therefore, order....
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....nt, with nearly 92% of the total revenue from this segment being derived from its trading activities, whereas the companies introduced by the TPO are service providers and therefore not comparable. It is submitted that 8 comparables, being PCS Technology, Hughes Communication India Ltd., Planetcast Media Services Ltd., Bharti Airtel Ltd., AT&T Global Network, Altruist Technologies Pvt. Ltd., Avantel Limited, and Verizon Communications Pvt. Ltd. are liable to be excluded from the final list of comparables. It is submitted that except Verizon Communications, the other 7 companies have been excluded by this Hon'ble Tribunal in Assessee's own case for AY 2015-16 on the ground of functional dissimilarity, and following the said order, these companies are liable to be excluded from the final set of comparables. It is also submitted that the functional profile of these companies has not changed in the subject AY and therefore, the decision of this Hon'ble Tribunal in AY 2015-16 is squarely applicable. 37. As far as Verizon Communications Pvt. Ltd is concerned, we find from the submission of ld. Assessee, that it is principally engaged in the provision of dedicated internet lease line s....
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....he same direction as has been made in AY 2014-15 & 2015-16. Accordingly, Ground of appeal No.25 raised by the assessee is allowed for statistical purposes. 39. Ground No. 26 relates to the alleged error committed by ld. TPO to consider foreign exchange gain as non-operating in nature for the purpose of computation of the margins of the Assessee as well as the comparables and this issue now stands covered in the Assessee's favour by this Tribunal's order for AY 2011-12 [ITA No. 2105/Del/2016] which has also been upheld by the jurisdictional High Court in ITA No. 453/2024. Rather issue itself is settled and reliance is also placed on the following judgements: - PCIT vs. Ameriprise India Pvt. Ltd. [2017] 78 taxmann.com 373 (Delhi) [23-03-2016] - PCIT v. Global Logic India Ltd. [2023] 155 taxmann.com 483 (Delhi) [11-09-2023] - PCIT v. Fiserv India P. Ltd. [2018] 92 taxmann.com 471 (Delhi) [06-01-2016] 40. We thus find that this issue was decided in assessee's own case for AY 2011-12 where in ITA No. 2105/Del/2016 the Co-ordinate Bench of Tribunal has confirmed the directions of Ld. DRP of including the forex gain as operating income. It is further seen ....
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....sideration. Ld. CIT(DR) did not object to the issue being remanded back to the TPO. We, accordingly, direct the TPO to determine the proportionate adjustment, if any, in an appropriate manner which considers the transactions with the AEs and excludes the unrelated party transactions after taking into account the computations submitted by the assessee." 44. As there is no change in the facts and this issue has already been settled by the Co-ordinate Bench in assessee's own case accordingly, we direct TPO to determine the proportionate adjustment, if any, in appropriate manner by consider the transactions with AEs and excluded the unrelated party transactions, after taking into account, the computation submitted by the assessee. With these directions, we direct the AO to correctly compute the proportionate adjustment in the year under appeal. Accordingly, Ground of appeal No.28 raised by the assessee is allowed for statistical purposes. 45. Ground of appeal Nos. 29 to 31 raised by the assessee are with respect to the transfer pricing adjustment made of INR 1732,93,94,316/- on account of Royalty payment by rejecting TNMM applied by the assessee and by applying CUP method as the ....
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.... the same to a separate benchmarking as it results in an impermissible double adjustment. Reliance was also placed on Magnetti Marelli Powertrain India Pvt Ltd vs DCIT: 389 ITR 469(Del), affirmed by Hon'ble Supreme Court vide order dated November 3, 2017 in SLP(C) no. 15244 of 2017). 48. We find that the Royalty agreements introduced by the Ld. TPO under CUP method belong to a completely different industry, i.e, Agricultural Industry. The Appellant (in its licensed manufacturing segment) is engaged in manufacturing of consumer electronics & home appliances such as mobile phones, televisions, washing machines, refrigerator etc. and the products are sold under a B2C model to the general public. The technology and other economic parameters in the electronics and communication industry is highly unique, fast evolving and affected by global factors. The three comparable royalty agreements introduced by the Ld. TPO involve agricultural companies, engaged in developing products and tools in relation to seeds development which help farmers/ crop-growers make more efficient use of resources such as energy/ water/land etc. It is settled law that among other factors such as geographical ma....
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....picked up in an arbitrary manner. Such an approach is inimical to the accuracy demanded under CUP We have perused the royalty transactions chosen by the TPO and we note the following glaring dissimilarities that render the entire process untenable: (a) ROSETTA INPHARMATICS INC (LICENSOR) AND MONSANTO CO (LICENSEE) This agreement pertains to payment of royalty in lieu of the right to use technical knowledge (algorithms and methods) for developing and selling species of animals, plants, plant or animal products, animal progeny, seeds containing a gene lead. It not valid for the relevant year since this agreement started in November 2000 for a period of 3 years and there is no material on record to show that it was in currency for the current year. The Licensor is a laboratory based in Washington which is engaged in provision of genomics services such as genotyping, gene sequencing, and gene expression profiling. The licensee is an agricultural company engaged in developing products and tools to including seeds to help farmers grow crops while using energy, water, and land more efficiently. The licensee uses biotechnology and other advanced methodologies including gene editin....
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....g the same to a separate benchmarking and adjustment under CUP results in an impermissible double adjustment - once under TNMM and another CUP. This is contrary to the provisions which mandate adoption of only one method as the most appropriate method. A licensing arrangement where technical know-how is used for manufacturing is an inextricable part of the entire segment and we do not find any infirmity in bundling the same with the other transactions of this segment. At the end of the day, if the segment is generating arm's length level of operating profits which is equivalent to or more than profit margin of the comparables, there can be no cause for the Revenue to carry out an exercise of the present kind. Grounds 29-32 are disposed of in terms of the aforesaid observations. 52. Admittedly there was no change in the circumstances and the observations made by the TPO and also the submissions of the assessee remained the same. The ld. DRP also admitted this fact and directed the AO / TPO to follow its direction given in AY 2015-16 for computation of ALP with respect to the Royalty. Under these circumstances, by respectfully following the observations made by the Co-ordinate Ben....
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.... as under: "6.2 Having considered the submission of the assessee, we are of the view that the Hon'ble ITAT Delhi decision dated 22.03.2018 in case of SEC Korea, reported in (2018) 93 taxmann.com 171 was on the limited issue of whether the expatriated employees seconded in India constituted any fixed place PE in India, in the absence of any business being conducted by the assessee foreign company in India, and where no income was derived through activities of these employees. We have noted that SEC Korea has earned royalty income of Rs. 543.38 crores from the assessee, besides technical services income of Rs. 50.97 crores during the year, therefore it could not be said that SEC Korea had no income from any source in India. It could also not be said that the seconded employees did not assist the assessee through their technical and managerial services for exploiting the technical know-how and trademark licensed by SEC Korea, for which incomes chargeable under the DAA has been earned by the AE of assessee. It is also not the case of the assessee that the seconded employees, by performing the functions in India did not help the parent company. 6.3 Having said that....
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.... assessee's own case, therefore, the action of AO to include the same solely for sole reasons to keep this issue live is patently incorrect and contrary to the facts as narrated above. Accordingly, we direct the AO to delete the disallowance made. Ground of appeal Nos. 32 to 35 raised by the assessee are hence, allowed. 60. Finally, in AY 2016-17, left out grounds Nos. 1-4 are general in nature while Ground No. 36, dealing with interest and Ground No. 37, dealing with levy of penalty, are merely consequential in nature, thus no specific discussion is needed. ITA No. 1955/Del/2021 for AY 2017-18 61. Based on aforesaid determination of issues in AY 2016-17 as we consider ITA No. 1955/Del/2021 for AY 2017-18, we find that that barring ground nos. 12 to 14, the grounds raised in both years are identical, thus except to that limited extent, the findings returned by us in respect of the corresponding grounds for AY 2016-17 would apply mutatis mutandis to AY 2017-18 as well. 62. Also Ld. Counsel has drawn our attention to the grounds of appeal raised in AY 2017-18 to demonstrate how the grounds in two years are similar, the same is described as follows. 62.1 Ground No. 1 is....
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....ief facts leading to this issue are that in this year the Appellant has separately benchmarked the transactions in networking segment for determining the ALP. In case of international transaction of import of telecommunication equipment from the parent company i.e. SEC Korea, assessee benchmarked this transaction by selecting itself as tested party and applied TNMM as MAM, and used Berry Ratio as the PLI. Like earlier years, Appellant adopted distributor companies as comparables to this transaction. Regarding other set of international transaction of availing network support services of network design, installation and commissioning and network maintenance services from its AE, i.e. SEC Korea [through its Project Office in India ('SEC PO')]. The assessee has separately benchmarked this transaction by selecting SEC PO as tested party, since it was the least complex entity. The assessee adopted TNMM as MAM and OP/OC as PLI and took service comparables to determine the ALP. The assessee claimed that "Import of Network Equipment segment" and "availing of services for networking business" are different transactions and not even interlinked with each other, therefore, the same we....
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....to end-customers. The value of services availed was INR 60,17,75,201/-. (refer para 5.6 of TP report, page 83 of PB). Given the distinct FAR profile of this transaction vis-à-vis the equipment import transaction, the Assessee benchmarked it separately, selecting SEC PO as the tested party (being the least complex entity), applying TNMM as MAM and OP/OC as PLI, with service companies as comparables. SEC PO earned an NCP of 10.06%, which fell below the 35th percentile arm's length margin of 10.36%. (refer paras 6.5.1-6.5.12 of TP report, pages 159-191 of PB Vol. 1). 65. Ld. TPO aggregated the 'Import of Network Equipment' and 'availing of services for networking business' transactions, selected the Appellant as tested party, and applied TNMM with OP/OR as PLI, using service-sector comparables. The final list of comparables is at pages 30-32 of the appeal set / internal pages 13-15 of the DRP effect order. The Ld. DRP upheld the rejection of Berry Ratio on the ground that the Appellant was carrying out warehousing activities a finding that is wholly contrary to the record. 66. In the instant year, profit of INR 6437,59,25,441/- earned from distribution business of....
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....annot be discarded. Accordingly, we approved the segregate approach adopted by the assessee for benchmarking both the transactions separately. 70. As with regard to justification for adopting Berry Ration, Ld. Counsel has submitted that the Assessee performs limited trading functions in the import of telecommunication equipment without bearing any risks, and is appropriately categorized as a limited-risk distributor. It neither performs any function nor assumes any risk in relation to the value of goods reflected in its P&L account. Since COGS is a mere pass-through and a non-value-added expense, Berry Ratio (GP/VAE) is the most appropriate PLI it is specifically suited to situations where the value of goods is irrelevant to profit generation and profits are directly linked to operating expenditure. Attention was drawn to pages 80-81 of PB Vol. 1 / internal pages 57-58 of TP report. 71. The following documents were placed before this Bench, in support of the Assessee's position that equipment sales occurred on a high sea basis and that the services transaction is distinct from the equipment transaction: i) High sea sales agreement along with the bills of lading -....
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....diture incurred by the Assessee should effectively captures the functions performed and risk undertaken by the Assessee. The relevant paragraphs are extracted below for reference: 45. Traditionally, the denominator of the ratio only comprised of selling, general and administration expenses. However; the Treasury Legislation of USA also included depreciation as a part of the Operating Expenses used as a denominator in the berry ratio. As is apparent, Berry ratio has limited applicability; it can be used effectively only in cases where the value of goods have no role to play in the profits earned by an Assessee and the profits earned are directly linked with the operating expenditure incurred by the Assessee. In other words, the operating expenditure incurred by the Assessee effectively captures all functions performed and risks undertaken by the Assessee. Thus, in cases where an Assessee uses intangibles as a part of its business, Berry ratio would not be an apposite PLI as the value of such tangibles would not be captured in the operating cost and, therefore, it would not be appropriate to compute the ALP based on net profit margin having regard to the operating cost as a ....
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....#39;s length compensation that a Swiss subsidiary of DuPont-USA, engaged as a distributor of the DuPont-USA, should earn on the distribution services it performed in Switzerland on behalf of the AE. In his analysis, Charles Berry determined that the best method for determining an arm's length result was to compare the Swiss distributor's mark-up on operating expenses to the same mark-up earned by uncontrolled (ie., third-party distributors performing substantially similar functions. Berry's key insight in the case was that distributors should eurn a return commensurate to the distribution services performed and that the value of the products being distributed, in other words, was irrelevant. The implicit emphasis was thus on the service element even in trading activity, and in the costs incurred on rendering this service rather than in the value of goods traded. That was a case in which the assessee was simply involved in distributorship function without much risks, though certainly much more risks than in a back to back trading, associated with inventories or with uncertainties of normal trading. The key contribution to the economic activity was recognized as performin....
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....The berry ratio should, therefore, be equally useful in the present case as well. In the case of the traders like assessee, who neither assume any major inventory risk nor commit any significant assets for the same and particularly as there is no value addition or involvement of unique intangibles, the berry ratio should also be equally relevant as in the case of a limited risk distributor. ' 51. In view of the above, it is submitted that all the conditions for applicability of the Berry Ratio are met in the case of the Applicant as it does not have intangibles/substantial assets for this particular segment and is not exposed to any significant risk in respect of its distribution business in the networking segment. Further, all the expenses relating to depreciation, rent and insurance, after sales service expenses and other miscellaneous operating expenses have been included in the cost base while computing GP/VAE of the Applicant, thereby, effectively capturing the functions performed and risk undertaken by the Applicant in relation to its business. 52. Considering the above, it is humbly submitted that GP/ VAE (Berry Ratio) is the most appropriate PLI to reh....
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....r Transaction Net Margin Method (TNMM) during A.Y. 2016-17 with OP/total Sales as PLI. (Kindly refer to Page 38, 157-160 of Paper Book, which are part of T.P. Study Report, filed by the Assessee for A.Y. 2016-17) During A.Y. 2017-18, the assessee has bifurcated above mentioned three international transaction pertaining to 'Networking Division' segment into two different segments and then, used two different methods i.e. Berry Ration (GP/VAE) and TNMM to benchmark and for determination of ALP as shown in the table reproduced from TPSR below. Instead of using aggregated transaction approach for all three International Transactions, the assessee aggregated only two transactions namely, Purchase of Finished Goods and Purchase of Software and determined ALP of the same combinedly using 'Other Method' with Berry Ration as PLI. Third transactions namely, 'Availing of Services for networking business' was benchmarked separately using TNMM as MAM and OP/OC as PLI. S. N. Nature of Transaction Segment Most Appropriate Method Profit Level Indicator ('PLI") Tested Party's PLI( %) Comparable companies Range/Mean MAM used for A.Y.201 6-17 ....
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....idered suitable only for the cases of limited risk distributors. Both above aspects are discussed here in below: 2. With regard to networking business, the assessee is not only supplying telecommunication equipment to its customer, but also undertaking all activities right from the sage of designing of network to final commissioning of the network equipments. Such activities include network designing, supply of equipments, installation and commissioning of such equipment. Even after sales, Annual Maintenance Services, services relating to warranty provision are also being provided by the assessee only. Thus, as a matter of fact, the assessee is providing one stop solution to its customer in this segment. The A.E. of the assessee do not enter into any kind of transaction or contract with the customer at all for above work. The assessee has claimed that, during A.Y. 2017-18, it has undertaken following International transactions under the networking division: • Import of telecommunication equipment from its AEs for the purpose of sale to end customers. • Purchase of software. So far as benchmarking of above international t....
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.... (i) the value of the functions performed in the controlled transaction (taking account of assets used and risks assumed) is proportional to the operating expenses; (ii) the value of the functions performed in the controlled transaction (taking account of assets used and risks assumed) is not materially affected by the value of the products distributed, l.e., It is not proportional to sales; and (iii) the taxpayer does not perform, in the controlled transactions, any other significant function (e.g., manufacturing function) that should be reimbursed using another method or financial indicator. The first criterion is relevant, as the denominator is operating expenses in the Berry ratio. Thus, the value created in the controlled transaction must be reflected only in the operating expenses Accordingly, it is gathered that the Berry ratio would not be an appropriate PLI: • when there are significant non-routine Intangibles Involved in controlled transactions, as the contribution of Intangibles is not reflected merely in the operating expenses; • in the case of an integrated distributor that performs different function....
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....in having regard to the operating cost as a relevant base. Similarly, Berry ratio would not be an appropriate PLI for determining ALP in cases of Assessees who have substantial fixed assets since the value added by such assets would not be captured in Berry ratio. 46. It can be seen from the above that the Berry ratio can be used only in very limited circumstances and the limitations that we have listed above are by no means exhaustive. There is also a view expressed that use of Berry ratio as a PLI results in indicating less than fair ALPs in tax jurisdiction where the Assessees have a lower bargaining power. In the aforesaid context, in our view, the TPO had correctly reasoned that Berry ratio could not be used as a PLI In cases of Assessees which were using intangibles. However, we find that there was no cogent material for the TPO to hold that the Assessee had developed supply chain and human resources intangibles. In any event, there was no material to conclude that costs of such intangibles were not captured in the operating expenses. 47. In our prima facie view, the third reason stated by the TPO, that is, the rate of commission paid to the Assessee is base....
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....al specifications of the equipment and procures it against confirmed orders from the customer. Sales and marketing Marketing strategy functions are those activities that determine the positioning of a firm's product in a market and that establish marketing techniques that bring the products to the customers' attention. The sales and marketing team at SIEL and SEC Korea is continuously engaged with the customer for securing contracts for additional supply of equipment and services. SIEL has a team of 7 persons who are engaged in marketing and selling networking equipment and services to customers. They also assist in providing product demonstrations to potential customers. SIEL also takes need based support from SEC Korea for performing such activities e.g. marketing, technical demonstration etc. Based on the PO Issued by the customer, SIEL places a PO with SEC Korea for purchase of networking equipment and related software. The PO contains detalls regarding quantity of the equipment required. SIEL places a PO for purchase of finished goods on its AEs only after it has received a corresponding PO from the customer. Page 81 of TPSR....
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....decline in orders from SIEL in case of any adverse circumstances. Also, given the sufficient resale margin allowed by the AE to SIEL on equipment sales, the risk ultimately shifts to the AE." "Inventory risk Since the ownership in goods Imported is transferred to end customer on high sea sales basis and SIEL does not maintain any Inventory, SIEL does not bear any Inventory risk in this regard. However, it bears inventory risk in respect of Inventory of stores and service spares maintained by it for providing AMC services." Page 82 TPSR "Product/service liability risk Since SIEL has entered into the contract with the customer, the liability for any product or service failure shall be borne by SIEL. In this respect, SIEL also provides a performance Stand by Letter of Credit ('SBLC') amounting to 10 percent of each invoice of material supply to the customer valid for 18 months from shipment date. ........ ........ SIEL bears the cost of any fault in the equipment supplied to the customer covered under the free warranty period of 27 months." "Credit and collection risk To ensure guarantee ....
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....rvices relating to annual maintenance contract with regard to solution provided by it. These are entire gamut of activities, which any entity handling projects relating to networking segments would be required to perform. All above activities and price associated with the same form part of the single composite contract of the assessee with the customer. Thus, assessee provided full-fledged solution for establishing the network for its customer. From business point of view, the assessee is bearing full risk as any other network solution provider bears. Thus, the assessee can not be considered merely as a limited risk distributor. II. The customer does not deal or enter into any contract with the A.E. of the assessee at all. Thus, A.E. of the assessee is not accountable towards the customers. It is the assessee, which for the purpose of execution of contract entered into with its customer, procures equipments from its AE and supplies the same to its customer. Further, for commissioning and installation of such equipments, it is the assessee which take assistance from its AE. Customer is not concerned with any of such dealings between assessee and its AE. I. Customer....
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....ator in 'Berry Ratio' would not capture entire range of functions performed by the assessee because all these functions are highly technical in nature adding value to the goods/equipments supplied. As sated earlier, the assessee has multifarious activities undertaken as a part of a single contract with its customers and therefore, it can not be said that overall solution provided by the assessee by aggregating all such activities together do not add value to the good/equipments supplied and will not command better margins than what a limited risk pure distributor of goods will command. VII. It needs to be noted that in a business, price of goods or services supplied are decided by the range and nature of activities provided to the customer. When an enterprise is providing multiple technical services besides supply of goods by way of a composite contract to its customer, it can not be ruled out that enterprise may adjust margin of goods into services or vice-versa to make deal look more attractive to its customer. The customer is mainly concerned with overall price to be paid vis- a-vis overall services received by it. Whereas in a case of a pure limited risk distri....
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....€¢ Payment of other service charges; and • Payment of other technical services In order to assess, whether the international transactions and specified domestic transactions entered into by SIEL are at arm's length, a transfer pricing method may be applied to each of the said transactions separately or to all such transactions as a single group of transactions. In the instant case, given the range of transactions involved, the arm's length method cannot be adequately applied on a transaction-by-transaction basis. Accordingly, based on above, for the purposes of determining the ALP, the aforesaid International and specified domestic transactions have been aggregated for benchmarking. ...................... 6.4.3.5 TNMM Given the fact and circumstances, the TNMM provides the most reliable measure of an arm's length result for the International transactions aggregated under the networking segment. Further, in the instant case, since the multiple transactions listed in the preceding paragraphs under this segment are closely interlinked, the same have been aggregated under the TNMM. In view of the above, we have c....
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....communication equipment to its customers under a contractual arrangement with the customers. The equipenent for the customer contract entered into by the Appellant is procured from SEC Korea. This equipment is purchased from SEC on CIF basis and thereafter, are sold on high sea sales basis to customer wherein the equipment is invoiced/billed to the Appellant and transferred to customer through endorsement of Bill of Lading, Further, customs clearance is also done by customer and shipment directly moves to customer warehouse. The Appellant does not have any infrastructure and warehouse to maintain the inventory and operates on a bill to ship to model. Therefore, the Appellant gets only flash title to the goods which are sold to the customer. The Appellant does not hold any inventory in its books, except for the period when the goods are in transit. For installation kits purchased from unrelated parties, the suppliers directly ship the goods to the customer and bills the Appellant for the same. Accordingly, the Appellant is not engaged in providing any logistics support. 78. In the submission filed for the assessee the risks assumed by the Appellant are highlighted below in a tabu....
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....es, the COGS can be considered as non-value-added expense. The non-value-added expenses do not form part of any value-added function and as such are not material to calculation of the profitability of Appellant. Therefore, a PLI of gross profit to only operating expenses (excluding the COGS) is appropriate in the given circumstances. 80. Thus dealing with the Ld. DR DR's contention that Berry Ratio is inapplicable because the Assessee performs ancillary services in addition to importing and selling telecom equipment we find same is not sustainable as the decisive test for Berry Ratio's applicability is not the mere performance of ancillary services, but whether the taxpayer bears any significant risks in relation to the principal transaction of purchasing and selling goods. In the Assessee's business model, it functions as a merchanting trader obtaining only a "flash title" holding ownership for a very short period while goods transit directly from the supplier to the buyer. Orders are placed only against confirmed client orders; title passes via endorsement of a bill of lading and the Assessee never takes physical possession of the goods. The title is transferred th....
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....ion that continue only for one month and did the trading of the products that mobile for the remaining periods for the previous year. The assessee cannot treated as a normal trader who is doing trading activity of various goods of number of customers rather the assessee is working in special environment and it had purchased goods from a single supplier and sole to only one customer that too on order to order basis wherein when the assessee gets the order from customers, the corresponding order is placed to the supplier for the supply of goods. In other words, assessee enters into a purchase contract with only one supplier i.e. Elentec and sells the goods to only one customer. Though, technically, the assessee had entered into purchase and sale contracts for buying and selling goods, however, in reality, the assessee merely acts as a facilitator of buying and selling of goods between the supplier and customer. As per the business model, the goods purchased from Elentec are sold to SEIL. Thus, the goods never come to assessee's inventory and nor stored in any warehouse of the assessee. It is also a fact on record that both the seller and buyer are pre-determined and prices of the....
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....ry ratio. "46. It can be seen from the above that the Berry ratio can be used only in very limited circumstances and the limitations that we have listed above are by no means exhaustive. There is also a view expressed that use of Berry ratio as a PLI results in indicating less than fair ALPs in tax jurisdiction where the Assessees have a lower bargaining power. In the aforesaid context, in our view, the TPO had correctly reasoned that Berry ratio could not be used as a PLI in cases of Assessees which were using intangibles. However, we find that there was no cogent material for the TPO to hold that the Assessee had developed supply chain and human resources intangibles. In any event, there was no material to conclude that costs of such intangibles were not captured in the operating expenses. 47. In our prima facie view, the third reason stated by the TPO, that is, the rate of commission paid to the Assessee is based on the value of the goods, would be a valid reason to reject the use of Berry ratio because Berry ratio can only be applied where the value of the goods are not directly linked to the quantum of profits and the profits are mainly dependent on expenses ....
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....r assets employed, but, having regard to any other relevant base also. The expression "any other relevant base" is wide enough to align the computation of margin of the assessee and the comparables. 23. Thus, if we go by the provision of rule 10B(1)(e), the return on value added cost, otherwise known as berry ratio, is not completely excluded from its purview. It can be a relevant base for computing the margin. The berry ratio in simple terms means a ratio of gross profit to operating expenses. Therefore, where operating expense is considered as a relevant base, there would be no difficulty in using berry ratio as PLI in terms of Rule 10(B)(1)(e). In case of Sumitomo Corporation India Pvt. Ltd. (supra), Hon'ble jurisdictional High Court, while considering applicability of berry ratio, has observed that it can be used effectively only in cases where the value of goods have no role to play in the profit earned by a assessee and the profits earned are directly linked with the operating expenditure incurred by the assessee. The operating expenditure incurred by the assessee effectively captures the functions performed and risk undertaken by the assessee. Thus, in a case wh....
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.... the cost of goods. Grounds are allowed. 17. This view is further supported by the judgement of Mitsubishi Corporation India (P.) Ltd. vs CIT (supra) and various other judgments which are relied upon by the assessee. 18. In view of the above-mentioned facts, we are of the view that the Berry ratio is applicable in the present case as PLI and the assessee in para 36 of its written submissions as reproduced above has stated that if the same is applied to the final set of comparables, the assessee is working of ALP is at bar and no adjustment is required to be made which in our opinion, is correct and therefore, we hold the assessee approach of computing the Alp on the distribution operations based on Berry ratio as PLI is correct and directed to delete the adjustment made by AO/TPO on this count. Thus, Ground Nos. 4 to 7 raised by the assessee are allowed. 82. We find substance in the contention of ld. Counsel that the Ld. TPO/DRP's rejection of Berry Ratio is fundamentally flawed as the Ld. TPO has misconstrued the FAR profile of the Assessee and has recorded that the Assessee has performed functions of a full-fledged risk bearing distributor. These findings of ....
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....nchmarking undertaken by the Ld. TPO, who benchmarked the Assessee's distribution dominated networking segment by adopting service companies as comparables. The Assessee's selection of TNMM with distribution companies as comparables was, at that time, found to be the most appropriate alternative available to benchmark the Assessee's functional profile as a distributor by this Tribunal as well. 84. We thus find substance in the contention that at the relevant time, jurisprudence on the appropriateness of Berry Ratio as a PLI was under consideration. However, with the subsequent development of law, including judgements by the Hon'ble High Courts and this Tribunal, Berry Ratio has now been recognised as an appropriate PLI and guidance has been provided by this Tribunal as well on the application of Berry Ratio. Thus for the year under consideration, i.e., AY 2017-18, if the Assessee adopted a more refined and scientifically accurate segregated approach, same cannot be pitched out on assertion to maintain consistency. Thus we find no error in approach that the distribution transactions were benchmarked under the "Other Method" with Berry Ratio as the PLI, using distribution companie....