2024 (8) TMI 43 - AT - Income Tax

TP adjustment made to the international transaction of AMP Expenditure incurred by the assessee - HELD THAT - In the instant case where the assessee does not accept the existence of any such transaction the onus is on the TPO to bring evidence and material on record to rebut the assessee s position. From the facts on record it is manifest that the Revenue s position is not backed by any evidence that the assessee had agreed either explicitly or implicitly to incur any AMP expenditure on behalf of the parent company. There is no material that would show that the assessee s advertising and marketing budget was finalised or determined at the behest of the parent entity. TP 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. Arm s length price of the international transactions in the Trading segment under TNMM by altering the set of comparable companies - comparable selection - HELD THAT - Deselection of companies functionally dissimilar with that of assessee. TP adjustments made to the arm s length price of the international transactions of the Networking segment - comparable selection - HELD THAT - Deselection of companies functionally dissimilar with that of assessee. Trading Networking and Manufacturing segments - determination of arm s length price of the international transactions of these segments - appellant has contended that the TPO has erred in not granting working capital adjustment - HELD THAT - TPO has inadvertently failed to do so. Ld. CIT(DR) does not contest the same and submits that this matter can be remanded to the file of the TPO for computation. In view of the same we direct the TPO to grant working capital adjustment while computing the mean/median margin of the comparables in accordance with the binding direction of the DRP. Similarly as regards incorrect computation of profit margins of the comparables Ld. CIT(DR) does not oppose the issue in principle and submits that the TPO may be directed to carry out a factual verification of the income and costs that are sought to be included or excluded. We order accordingly. All items of income and expenditure which have a nexus with the business operations of the appellant are to be considered whereas any financing or non-recurring/non-operational item is to be excluded. Trading Networking and Manufacturing segments adjustment - as contended that the manner of computation of proportionate adjustment is erroneous - HELD THAT - We 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. Adjustment/disallowance made in respect of royalty paid by the assessee to its parent for the know-how licensed for manufacturing of various products - selection of MAM - TPO has concluded that the rate of royalty is higher than the arm s length rate and has made adjustment in this regard which has been contested in this appeal - HELD THAT - We find considerable merit in the contention of the assessee that the comparable transactions chosen under CUP are devoid of any meaningful comparability. Of all the methods prescribed CUP is the most rigorous as it compares prices at transactional level. It requires highest level of similarity in terms of subject matter of agreements and transactions in respect of products/services salient contractual terms tenure and several other economically relevant characteristics. We find that the TPO s selection of comparable transactions is vitiated as wholly incomparable technologies products and contracts have been picked up in an arbitrary manner. Such an approach is inimical to the accuracy demanded under CUP. These transactions are ex-facie disparate and do not have even a modicum of similarity at transactional level. We have no hesitation in holding that the approach adopted by the TPO is unsustainable and should be deleted. The adjustment made to the royalty transaction is therefore held to be invalid and unsustainable in law. Since we have held that on merits this adjustment is sustainable we need not get into the issue of jurisdiction and other ancillary aspects raised by the assessee. These are academic in view of our aforesaid conclusion. As regards the issue of adoption of TNMM versus CUP it is fair to conclude that if relevant data of comparable transactions (in terms of material aspects like nature of goods and services geographical markets contract terms etc) is not available CUP should be eschewed and TNMM can be an appropriate method to determine the arm s length. In the instant case we have held that the data chosen by the TPO for CUP is wholly inappropriate. Secondly the TPO has already accepted TNMM for the Manufacturing segment as a whole. There are numerous international transactions in this segment - all these transactions like royalty purchase of raw materials etc. have been aggregated under TNMM and benchmarked against independent third party comparables. In these circumstances cherry-picking of one particular transaction like royalty and subjecting 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 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. Disallowance of salary paid to expatriate employees on secondment made u/s 37 - AO has held that the employees on secondment from Korea are primarily working for the Korean parent and therefore their salaries being paid by the appellant are not allowable as deductible expenses - HELD THAT - The secondees from Samsung Korea are taken on the payroll of the appellant by way of local employment contracts and during the period of secondment they work under the sole control of the appellant. Their salary is borne solely by the appellant and the Korean parent is not liable for any of their actions and omissions. Their functions are wholly towards the business of the appellant and though they may be required to interact closely and regularly with the personnel of the parent entity their functions and responsibilities are solely towards the appellant. He has cited numerous decisions to support the view that secondees were the employees of the assessee and no permanent establishment can be created for such activities. Ld. CIT(DR) while accepting that the prior year s Tribunal order on this issue squarely covers the issue submits that res-judicata does not apply to income tax proceedings and every year needs to be seen separately. He would submit that the seconded employees are furthering the objectives of the Korean company and are in effect the employees of the Korean company. We do not find any merit in his contention. The AO has not brought any evidence on record to show that the seconded employees were furthering the business objectives of the foreign parent. He has merely relied on the assessment order passed in the Korean company s case where it was held by the AO of the Korean company that it had a permanent establishment in India on account of the functions of the secondees. The entire approach is based on surmises and conjectures. Coordinate Bench in the case of the Korean company has already deleted the additions and negated the existence of permanent establishment. Based on these orders in A.Yr. 2014-15 another Coordinate Bench has deleted the disallowance of salary made on this account.

Summary

Issues Involved:
1. Adjustment to the arm's length price of AMP expenditure.
2. Adjustment to the arm's length price of international transactions in the Trading segment.
3. Adjustment to the arm's length price of international transactions in the Networking segment.
4. Adjustment to the arm's length price of international transactions in the Manufacturing segment.
5. Disallowance of part of the royalty payment.
6. Disallowance of salary paid to expatriate employees on secondment.

Issue-wise Detailed Analysis:

1. Adjustment to the Arm's Length Price of AMP Expenditure:
The assessee argued that the AMP expenditure should not be treated as an international transaction, as it was incurred to promote domestic sales, and any benefit to the parent company was incidental. The Tribunal noted that this issue had been decided in favor of the assessee in prior years, and there was no evidence of an understanding or arrangement between the assessee and its AE to incur excessive AMP expenditure. The Tribunal reiterated that the Bright Line Test (BLT) is not a valid method for determining the arm's length price of AMP expenditure, as held by the Delhi High Court in Sony Ericsson Mobile Communications v. CIT. The Tribunal concluded that the adjustments made by the TPO and DRP were not tenable in law and deleted the adjustments.

2. Adjustment to the Arm's Length Price of International Transactions in the Trading Segment:
The TPO rejected the Resale Price Method (RPM) applied by the assessee and adopted TNMM, including certain companies as comparables. The Tribunal excluded OTS E-Solutions Pvt. Ltd., Virtual Netcom Pvt. Ltd., and Satytej Commercial Co. Ltd. as comparables due to functional dissimilarities. The Tribunal directed the inclusion of Nu Tech India Limited and excluded HCL Comnet due to the unavailability of audited quarterly reports. The Tribunal also remanded the matter to the TPO for the computation of working capital adjustment and correct computation of profit margins.

3. Adjustment to the Arm's Length Price of International Transactions in the Networking Segment:
The TPO included service companies as comparables, which the Tribunal found inappropriate as the assessee was primarily engaged in trading of telecom equipment. The Tribunal excluded seven service companies and included Nu Tech India Limited. The Tribunal also remanded the matter to the TPO for the computation of working capital adjustment and correct computation of profit margins.

4. Adjustment to the Arm's Length Price of International Transactions in the Manufacturing Segment:
The TPO included Frog Cellsat Ltd. and Glen Appliances Ltd. as comparables, which the Tribunal excluded due to functional dissimilarities. The Tribunal also excluded Value Industries Limited and Trend Electronics due to the unavailability of quarterly data. The Tribunal included Penguin Electronics Limited as a comparable. The Tribunal remanded the matter to the TPO for the computation of working capital adjustment and correct computation of profit margins.

5. Disallowance of Part of the Royalty Payment:
The TPO rejected TNMM and applied CUP, using royalty agreements from the agricultural sector as comparables. The Tribunal found these comparables inappropriate due to significant dissimilarities and held that the adjustment was unsustainable. The Tribunal emphasized that the payment of royalty was closely linked to the manufacturing segment and should be benchmarked under TNMM. The Tribunal deleted the adjustment made to the royalty transaction.

6. Disallowance of Salary Paid to Expatriate Employees on Secondment:
The AO disallowed the salary paid to expatriate employees, arguing that they were working for the Korean parent. The Tribunal noted that this issue had been decided in favor of the assessee in prior years, where it was held that the presence of expatriate employees did not create a permanent establishment for the Korean parent. The Tribunal directed the deletion of the disallowance.

Conclusion:
The Tribunal allowed the appeal of the assessee partly, deleting the adjustments and disallowances made by the TPO and AO, and remanding certain issues for recomputation by the TPO.