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2014 (11) TMI 101 - AT - Income TaxMethod of determination of ALP - Selection of the most appropriate method Transfer pricing adjustment under Nokia Mobile Phone Sales Division - Partial sustenance/reduction in the addition - Held that - The assessee purchased mobile phones and accessories from Nokia group companies situated outside India and resold the same as such without any further value addition, mainly, to HCL Infosystems in India - Since the goods imported from the foreign AEs representing the international transaction under this segment were neither processed further nor used as raw material for manufacturing any other product, RPM is the first choice as the most appropriate method for determination of ALP of the international transaction under this segment - the incurring of high advertisement and marketing expenses by the assessee vis-a-vis the other comparable companies does not in any manner affect the determination of ALP under the RPM - as the amount of advertisement and marketing expenses falls below the line and finds its place in the Profit and loss account, the higher or lower spend on it cannot affect the amount of gross profit and the resultant ALP under the RPM - since the TPO has not made any separate adjustment on account of AMP expenses and has given effect to the same under TNMM, the incurring of higher advertisement and marketing spend would not affect the calculation of ALP under the RPM - RPM prima facie appears to be the most appropriate method. Selection of comparables M/s Media Video Ltd. - Held that - If any company though functionally comparable, but, has more than a specific percentage of the RPTs, then, it should be ignored by treating it as a controlled transaction - the percentage of RPTs to make a company as ineligible for comparison, should be taken as more than 25% and not 15% as suggested on behalf of the assessee - The view adopting more than 25% RPTs making a company incomparable has been taken in Actis Advisers Pvt. Ltd. VS. DCIT (2012) 2012 (10) TMI 779 - ITAT, DELHI - a company can be considered as incomparable if its RPTs exceed 25% - transactions which do not impact the profitability, such as loan given or taken or other items finding place in the balance sheet, can have no place either in the numerator or the denominator of this formula - However, any income or expenditure resulting/relating from/to or likely to result/relate from/to such items of assets or liabilities, should not be confused with the per se international transactions finding place in the balance sheet of the company calling for exclusion. The assessee has computed the percentage of related party transactions of Media Video Ltd. by clubbing all the four types of international transactions in the numerator, viz., Purchase of goods and materials; Sale of goods and materials; Rent paid; and Service Income, all totaling ₹ 22,43,46,000 and the amount of net sales as denominator at ₹ 55,25,22,266 - the international transactions of rent paid by this company at ₹ 1,46,000 is quite insignificant and this transaction has no relation with its main source of the income producing activity, viz., Sales and Service charges it is directed to be excluded from consideration in the numerator thus, the matter is remitted back to the TPO to redo the exercise for M/s Media Video Ltd., for ascertaining whether this company should continue in or be excluded from the final list of comparables drawn by the ld. CIT(A). Transfer pricing adjustment in NET R&D segment and NIC R&D segment - ( )/(-) 5% adjustment - Held that - The TPO ventured to apply this filter and by applying the same, excluded some of the companies which were not suitable to him - as this filter has been applied and acted upon by the TPO partially - the companies having related party transactions of more than 25% cannot be considered as comparable as these fail the test of uncontrolled transactions - CIT(A) was justified in excluding these two companies, whose percentage of RPTs stood at 36.89% and 47.45% - assessee s turnover under this segment is to the tune of ₹ 9.72 crore - The TPO excluded the companies with the turnover of less than ₹ 5 crore without applying any upper limit of the turnover - the computation of arm s length price under the Indian transfer pricing provisions is embodied in section 92C of the Act - a company otherwise found to be functionally comparable cannot be excluded either on the ground of higher or lower profit rate or higher or lower turnover - in Maersk Global Centres (India) (P.) Ltd. VS. ACIT 2014 (3) TMI 891 - ITAT MUMBAI it has been held that potential comparables cannot be excluded merely on the ground that their profit is abnormally higher - There can be no justifiable reason to exclude such high or low profit companies unless it is shown that such high or low profit was due to abnormal factors - The mere fact that a company has a high or low turnover can be no reason to justify its exclusion if it is otherwise functionally comparable - The exclusion of companies on such a rationale runs contrary to the express provisions of the Act. The assessee s turnover under this segment amounted to less than ₹ 10 crore - The TPO has applied the turnover filter by setting a lower limit of turnover at ₹ 5 crore without setting any upper ceiling of turnover - law does not permit a person to both approbate and reprobate - as the TPO has himself applied the lower limit at half of the assessee s turnover, there is justification in applying some upper limit as well the order of the CIT(A) is upheld by fixing the upper limit of turnover filter at ₹ 50 crore - when the three sets of companies are held to be rightly excluded, the price charged by the assessee from its associated enterprises in this segment of international transactions comes within ( )/(-) 5% range as per proviso to section 92C(2) of the Act, warranting no addition on account of transfer pricing adjustment Decided partly in favour of Revenue.
Issues Involved:
1. Transfer Pricing Adjustment in the Nokia Mobile Phone Sales Division (Trading Segment) 2. Confirmation of Disallowance of Marketing Expenses 3. Deletion of Disallowance of Foreign Travelling Expenses 4. Deletion of Disallowance of Warranty Provision 5. Deletion of Addition on Account of Transfer Pricing Adjustment in NET R&D and NIC R&D Segments Detailed Analysis: 1. Transfer Pricing Adjustment in the Nokia Mobile Phone Sales Division (Trading Segment) The primary issue here was whether the Resale Price Method (RPM) or the Transactional Net Margin Method (TNMM) was the most appropriate method for determining the Arm's Length Price (ALP) of the international transactions under the Trading segment. The assessee, a wholly owned subsidiary of Nokia Corporation, Finland, acted as a trader of Nokia mobile phones in India, primarily selling to HCL Infosystems. The assessee used RPM, claiming an 11% gross profit margin, which was higher than the 9% average of 23 comparables. However, the Transfer Pricing Officer (TPO) rejected RPM due to the dissimilar nature of the comparables and adopted TNMM instead, resulting in a significant adjustment. The CIT(A) upheld the TPO's use of TNMM but emphasized the use of current year data and shortlisted five companies as comparables. The Tribunal, however, found RPM to be the most appropriate method due to the nature of the assessee's business as a pure trader without any value addition. The Tribunal directed the TPO to re-evaluate the comparables and the availability of gross profit data. If RPM could not be applied due to data unavailability, TNMM should be used. 2. Confirmation of Disallowance of Marketing Expenses The issue was the disallowance of Rs. 26,19,816 towards marketing expenses incurred by providing handsets to AMSC's, dealers, and employees. The Tribunal restored the issue to the Assessing Officer (AO) for reconsideration, following the precedent set in the assessee's appeals for previous assessment years. 3. Deletion of Disallowance of Foreign Travelling Expenses The CIT(A) deleted the disallowance of Rs. 58,72,028 out of foreign travelling expenses, following the Tribunal's decision in the assessee's own case for prior assessment years. The Tribunal upheld this deletion, respecting the precedent. 4. Deletion of Disallowance of Warranty Provision The CIT(A) also deleted the disallowance of Rs. 77,95,857 out of the warranty provision, again following the Tribunal's earlier decision in the assessee's favor. The Tribunal upheld this deletion as well. 5. Deletion of Addition on Account of Transfer Pricing Adjustment in NET R&D and NIC R&D Segments The assessee rendered contract R&D services to Nokia Internet Communication (NIC) and Nokia Network Technology, remunerated on a cost-plus basis. The TPO made an adjustment based on a different set of comparables, which the CIT(A) partially accepted but excluded certain companies based on specific filters like related party transactions and turnover. The Tribunal upheld the CIT(A)'s exclusion of companies with related party transactions over 25% and those with turnover significantly higher than the assessee. The Tribunal found no fault with the CIT(A)'s methodology and upheld the deletion of the addition of Rs. 85.20 lakh. Conclusion: The Tribunal's decision was detailed and issue-specific, focusing on the appropriateness of the methods used for transfer pricing adjustments, the validity of disallowances, and the comparability of selected companies. The Tribunal directed the TPO to re-evaluate certain aspects while upholding the CIT(A)'s decisions on others, ensuring a fair and comprehensive resolution of the disputes.
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