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TMI Blog2014 (11) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... no delay in preferring the appeal before the Tribunal. The record was perused, to find the appeal in time. The satisfaction of the condition of stay was also found to have been met; the assessee having made payment of Rs. 50 lacs each on 27.03.2014 and 26.04.2014 (copy of the challans on record). The hearing in the matter was accordingly proceeded with. 3. The assessee-company, incorporated in January, 2005, is a wholly owned subsidiary of Nobel Biocare Asia-Africa Holding AG ('NBH'), Sweden. The Nobel Biocare Group, it is stated, is a medical devices group and world leader in innovative esthetic dental solutions. The assessee undertakes wholesale trading of NBH's dental products/solutions in India, also providing the requisite marketing, pre-sale/after-sale support and training to customers in India. The customers of Nobel India are Dental Surgeons, Prosthodontists, Periodontists, Dental Laboratories and General Dentists practicing by themselves or in hospitals. It filed its return of income for the relevant year on 31.03.2010 at a total income of Rs. 29,584/-, as income from other sources, claiming carry forward business loss at Rs. 1,50,42,916/-, including unabsorbed depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin of comparable uncontrolled distributors and the excess (over 4%) or shortfall (i.e., below 2%) is to be paid to or, as the case may be, compensated by the supplier. Per the second agreement, the parties agreed to again adjust the prices so as to allow the assessee-distributor margin (reckoned as earnings before interest and tax (EBIT)) (i.e., according to mutually agreed calculations) within a target range (Article 10.1). The said range is not defined/specified therein, though is stated to have been agreed at 4% for the current year. The parties before us, i.e., the assessee and the Revenue, have proceeded on the basis of the said margin, which is to be paid or received, as the case may be, through credit/debit note to be issued by the supplier subsequent to the crystallization of the figures after the conclusion of the relevant year (also refer para 11.3 and 11.4 of the Transfer Pricing Officer (TPO)'s order u/s.92CA(3) dated 30.11.2012). We choose to dwell on this aspect of the matter in some detail as the subsisting argument of the ld. AR during hearing was that in-as-much as the assessee has been allowed all the expenses incurred by it, by its supplier (AE), ensuring a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, where and to the extent so, as where the amount is debited directly to the account of the principal (for being received), i.e., treated as on capital account, the same shall stand to be added both as an expense and as a receipt. Also, some adjustments, as for example for Rs. 31,25,248/-, being registration fee, which stands reduced while computing the ALP of participation fee (incurred at Rs. 1,50,29,094/-), forming part of the business development expenditure, would require being factored in computing the ALP of the purchase or assistance, whichever way one may choose to see it. Similarly, the TP adjustment of Rs. 85.99 lacs (in respect of honorarium paid to doctors, comprising of three amounts, i.e., Rs. 26.46 lacs, Rs. 31.185 lacs and Rs. 28.35 lacs), which we observe stands made (and confirmed) in the absence of the assessee being able to show of the same being a part of the recovery of professional expenses at Rs. 89,88,819/-, itself forming part of recovery of WT expenses (for Rs. 409.15 lacs), since recovered from the AE, would obtain if (and to the extent) not shown to be so, i.e., by the assessee before the Assessing Officer (A.O.), while giving appeal effect to this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at which any IT is transacted, which is what any adjustment seeks or purports to do, bringing it at par with an arm's length value (ALP), would get reflected in the shortfall in the assistance that the AE is obliged to provide to the assessee under the DA. How would then, one may ask, it matter as to at what value their individual ALP is fixed? The payments to, and the assistance from the AE having crystallized, it is the operating margin as obtaining that is to be determined, and on the adequacy of which, i.e., with reference to that of the comparables, reckoned on an average, that the TP adjustment, if any, shall arise. As such, the reason/s for effecting the adjustment notwithstanding, in our view the TNMM at the entity level, as aforestated, shall substitute as the most appropriate method for all the impugned international transactions in the facts and circumstances of the case. 5.3 We next consider the validity of the comparables, the mean of which works to 8.88%, as against the stated 4% in the assessee's case. In this regard, the assessee has taken the following objections: a) The assistance from AE, instead of an item of income, as considered by the TPO, should be as a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables; the assessee objecting to the last two: Sr. No. Name of Comparable Companies PLI (%) 1 Hicks Thermometers (India) Ltd. 4.56 2 Sataytej Commercial Company Ltd. 0.55 3 ADS Diagnostics Ltd. 21.80 4 Advanced Micronic Devices Ltd. 8.60 5 Arithmetic Mean 8.88 The assessee's objections, along with reason/s for its non-acceptance, appear at para 4 (pgs.10-11) of the order u/s.144C(5) dated 19.12.2003 of the DRP. We discuss each of them as under: i. ADS Diagnostics Ltd. The company has two segments, namely medical diagnostics services and trading activities. The trading, which is also in the health care segment, is of high-end medical equipments, viz. bone denstimeters, digitizers, mammographic equipments. The other ground on which the assessee seeks to distinguish its case is that the said company has also commission income. As such, without prejudice, even if the said company is considered as a comparable, the said income ought to be excluded while drawing the comparison, doing which would reduce its income to 1.36%. The same did not find favour with the Revenue as the said company was also engaged in distribution of medical devices and equipments. The commission inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties in computing the assistance from the AE. The argument is invalid. The purview of the Revenue is not to settle the account between the assessee and its' AE. The operating margin has to be computed on the basis of actuals, and which is to be compared with that of the comparables, i.e., under TNMM. The argument accordingly is of no moment. 5.4 Finally, we may address another pertinent aspect of the matter, arising in the course of hearing. With reference to the decision by the larger bench of the tribunal in the case of L. G. Electronics India (P.) Ltd. vs. Asst. CIT [2013] 140 ITD 41 (Del) (SB), it was submitted on behalf of the Revenue that the said decision would esstop the assessee from taking the argument being advanced before us, as also preclude its acceptance by us. The tribunal in that case had clearly held that AMP (advertisement, marketing and promotion) expenses constitute a separate, independent international transaction, and that the Revenue was correct both in taking cognizance of the same, i.e., despite the assessee not reporting it u/s.92E, as well as determining its cost employing the bright line test. We have perused the said decision. In the facts of that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision. 5.5 The foregoing decides the assessee's grounds 2 through 5. 6.1 Vide its' Grounds 1 and 6, the assessee agitates the adjustment of business development expenses at Rs. 1,63,31,366/- u/s.92 r/w s.92C, as well as its' disallowance u/s.37(1) of the Act, and which also explains both, the assessee's assuming two grounds, without prejudice to each other, in its respect, as also our considering the same separately. The said expenditure, not reported as an international transaction in the prescribed form (3CEB), stands incurred on the cost of materials required in the conduct of the world tour event organized by the assessee during the relevant year in Mumbai (from April 4, 2008 to April 6, 2008). The details of the expenses appears at para 6.3 of the TPO's order. The said material is in the form of training material and kits, welcome packages, etc. provided to the participants of the world tour event, besides other relevant material, costing a total of $3.67 lacs - the impugned sum representing the conversion thereof in Indian currency. The basis of the Revenue's adjustment, which also forms the reason for the disallowance u/s. 37(1) (refer para 6 (6.1 through 6.7) and para 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason is without basis in law. What though is relevant is the economic justification. The assessee, as a part of its business profile, is to market, sale and distribute the principal's products, as well as provide technical services related thereto. The participants are all doctors from India. How, we wonder, then, is the organization of an event, which is a part of the global training program, in India, designed in a scientific manner to provide education, including live demonstrations, presentations, interactive sessions with experts, etc. of solutions and application of the assessee's products, etc., could be doubted as to its economic justification, i.e., even if no tangible benefit/s could be exhibited by the assessee? In fact, the assessee claims a quantum increase (of nearly 55%) in both its' sale as well as customer base, i.e., for the relevant year, vis-à-vis the immediately preceding year, with the most of the new customers being participants of the said event. The assertions have not been rebutted by the Revenue in any manner. 'Business purpose', it is even otherwise well-settled, is a term of wide import (refer: CIT vs. Malayalm Plantations Ltd. [1964] 53 ITR 140 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ascertained and verified. This would also meet the Revenue's objection, which, in essence, states of the provision being contingent and not based on facts. In this view of the matter, we only consider it fit and proper to restore this matter back to the file of the A.O. for an examination and decision on merits; the legal aspect of the matter being well-settled, and toward which the assessee has relied on some case law and, further, on which we observe no dispute in principle. We decide accordingly. 8. Ground No. 8 by the assessee disputes, similarly, the provision for sales return, made at Rs. 185.36 lacs. The same is stated to be on the basis of the empirical data for the last three years, so that it is fact, as well as, evidence based; further relying on the decision in the case of Chainrup Sampatram vs. CIT [1953] 24 ITR 481 (SC); Bharat Earth Movers vs. CIT [2000] 245 ITR 428 (SC); and Rotork Controls India (P) Ltd. vs. CIT [2009] 314 ITR 62 (SC). As it would appear to us, the sale returns arise only on the exercise of the option there-for extended to the customers through and in the form of product warranty against manufacturing defect/s. The same would therefore be backed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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