9911796707
TMI Blog2015 (9) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... record and the credit notes of 78 crore odd received by the assessee . Thus L.G. Electronic case [ 2013 (6) TMI 217 - ITAT DELHI] keeping in mind our finding that the assessee is a distributor whose remuneration model is not only supported by International Tax Jurisprudence as available in the OECD Guidelines and Australian Tax Guidelines but is also found supported by Questions 1,9 10 of the L.G. Electronics case as considered by the Special Bench. The assessee has made a reference to its Global Pricing Policy on which the TP study is based, the same may be produce before the TPO/AO. As such the arguments of the assessee to the above extent are upheld. On the issue of mark-up if still so warranted on facts the arguments of the Ld. AR have been that the same is excessive. It is seen that there is no discussion in the TPO s order as to why a mark-up of 15% is adequate. Similarly DRP also does not give any justification for reducing the same to 12.5%. We refrain from substituting the arbitrary mark-up by our own arbitrary estimate in the absence of any facts or material on record. Even estimates have to have some rationale and reasoning which is completely absence in the orders and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... f "Sony", and that the entire expenditure as had been incurred by it, on advertisement and marketing, had been incurred, solely for the purpose of its own business, in India, and any incidental benefit arising to its parent could not result in an adjustment in the hands of the Appellant. 9. That on the facts and the circumstances of the case and in law, the learned TPO/Hon'ble DRP has erred in ignoring that the advertisement and marketing expenses incurred by the Appellant represents only domestic transaction(s) undertaken with third parties, which under the amended law (Finance Act 2012) were also outside the purview of section 92BA of the Act and hence no adjustment could be made in respect of the same. 10. That on the facts and circumstances of the case and in law, the learned TPO has grossly erred in applying the 'Bright Line Method' for determining the arm's length advertisement and marketing expenditure incurred by the assessee as the same is not a prescribed method under the provisions of section 92C of the Act nor is the same notified by the Central Board of Direct Taxes under section 92C(1)(f) of the Act. 11. The learned DRP has failed to appreciate that once the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance of ₹ 11,57,21,515, being 10 percent of advertisement and selling expenses, on the ground that it resulted in enduring benefit to the appellant, and was, thus, capital in nature. 20. That the AO/DRP erred in making the above disallowance out of advertisement and selling expenses and in not following the decision of the ITAT in the case of Sony India Private Limited (315 ITR 150). 21. That the AO/DRP erred in law and in facts and circumstances of the case in making disallowance of the 10% of advertisement and selling expenses, as such expenditure has been adjusted by the TPO while making the transfer pricing adjustment, thereby resulting in double disallowance to the extent the same has been disallowed in view of the TPO's order. 22. That the AO/DRP erred in law and in facts and circumstances of the case in making arbitrary disallowance of 10% of advertisement and selling expenses holding the same as capital in nature which is not supplemented by proper examination of facts. PENALTY FOR CONCEALMENT OF INCOME 23. That on facts and in law, the AO/DRP erred in holding that the Appellant has furnished inaccurate particulars of income in respect of each item of disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO. However, qua the grounds of appeals raised by the assessee in the present appeal, it was his submission that they are more or less covered in the department's favour by the detailed findings given by the Special Bench in the case of LG Electronics India Ltd. 4.2. In the above factual background, Ld. AR inviting attention to the grounds raised submitted that the ground nos-1 & 2 are general in nature; ground no-3-16 are addressing the Transfer Pricing adjustment in regard to the AMP i.e the advertisement, marketing and promotional expenses considered at the length in the LG Electronics case. The grounds No-17-21, it was stated are Corporate issues agitated by the assessee and ground No-22 is premature. 5. Before referring to the arguments of the respective parties in detail, we think it appropriate to refer to the facts on record. 5.1. The relevant facts of the case in regard to the profile of the assessee and Sony Ericson group as appearing in the TPO's order u/s 92CA(3) are as under :- "2. Profile of the assessee and Sony Ericson Group:- 2.1 The Sony Ericson offers mobile multimedia devices, including feature-rich phones and accessories, PC cards and M2M solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the facts that the assessee had incurred a huge cost in advertising, marketing and sales promotions for promoting the brand name. The TPO required the assessee to explain the following points:- "1. Who owns the brand name? 2. Is there any agreement for use of brand name? 3. Whether any payment is being made to the AE for use of brand name? 4. Whether any payment is being received from the AE for promotion of brand name in India?" 5.4. In response thereto, it was stated on behalf of the assessee that the trade name "Sony Ericson" is not a registered trademark and Sony Ericson Mobile Communication AB, Sweden is considered to be the economic owner of the brand/ that the trade name and trade mark were provided to the assessee without any charges/ that the assessee purchases the products at resale price minus transfer price/ that the price is adjusted according to the price level development in the marketing and operating cost changes in the sales subsidiary. Accordingly, the pricing of products between the assessee and the AE is regulated in a manner that ensures that the assessee earns an arms length return with respect to distribution activity. Therefore, based on the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture that the assessee has incurred on the AMP for which no compensation/reimbursement has been made by the AE." 5.9. Taking note of the Transfer Pricing Study Report of the assessee company, the TPO observed as under :- "SEIN (the assessee) has employed a team of employees for carrying out local marketing of mobile phones in India. The global recognition of brand name of Sony Ericson provides good brand equity in India as well as overseas. This also provides support to SEIN's marketing efforts. SEIN also undertakes various product promotion activities such as conducting road shows, participation in industry events, advertising in all forums of media channel, which includes magazines, newspaper, television, radio etc." 5.10. Further taking note of the Audited financials, he observed that the assessee company does not own any intangibles in the nature of brand name or marketing intangibles and the assessee had incurred the following expenses relating to AMP, the same are reproduced here under :- "Advertisement expenses ₹ 660,556,778/- Business Promotion & Selling Expenses ₹ 496,658,381/- Total Expenditure on AMP Rs.1,157,215,159/- 5.11. In the above backgroun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and commensurate to the efforts put in by the independent enterprises. It would also represent the likely interest foregone by the enterprise. Thus the proposed adjustment is computed as under :- Value of Gross Sales Rs.16,386,808,123/- Bright line 1.08% Amount that represent bright line Rs.176,977,527/- Expenditure on AMP incurred by assessee Rs.1,157,215,159/- Expenditure in excess of bright line Rs.980,237,631/- Mar-up @ 15% Rs.147,035,644/- Total Rs.1,127,273,275/- Amount Reimbursed . NIL Adjustment required to be made ₹ 1,127,273,275/- 5.13. The TPO required the assessee to make its submission thereon. The reply of the assessee is extracted in page 12 of the TPO's order. The same is reproduced hereunder:- "I. Assessee's pricing model compensates the Assessee for the alleged 'excess' AMP expenses, if any; II. AMP expenses incurred by the Assessee represent purely domestic transaction(s) undertaken by it towards third parties which are not covered under the purview of Section 92 of the Income Tax Act, 1961 ('Act'). III. Analysis of such domestic transactions undertaken with third parties, in respect of which no reference has been made by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6%. As such the AMP sales ratio of comparables at 3.35 % was accepted and the expenditure in excess of the bright line was computed at ₹ 60,82,57,087/- in the following manner :- "10.1. Thus, the amount which represents the bright line and the amount that should have been compensated to the assessee company are computed hereunder :- Value of Gross Sales Rs.16,386,808,123/- Bright line 3.35% Amount that represent bright line ₹ 548,958,072/- Expenditure on AMP incurred by assessee ₹ 1,157,215,159/- Expenditure in excess of bright line ₹ 608,257,087/-" 5.15. The TPO being of the view that an independent enterprise would also have been remunerated for its efforts after considering the reply of the assessee held that the markup of 15% to be a reasonable mark-up over and above the reimbursement of the expenditure incurred by the assessee. The said mark-up according to the TPO would take care of the interest cost that the assessee would have borne on the money invested by it in developing, marketing intangible. 5.16. Consequently, TP adjustment of ₹ 699,495,650/- was computed as under :- Computation of TP adjustment (In Rs.) Value of Gross Sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te during the period under consideration." 5.18. At the time of hearing, Ld. AR filed written submissions and argued on the basis of the same that the issue has to be necessarily restored. Since the submissions were filed in the Court, time was given to the Ld. CIT DR to address the same on the next date of hearing. Thereafter on the next date, the hearing was concluded after hearing the parties. However the appeal was listing for clarification on certain issues and the parties were heard at length again. 5.19. On behalf of the assessee, it was argued that the advertising, marketing activity is a function performed by the assessee as a distributor and the profits are earned on the sale of goods and not merely on the activity of purchase of goods. Accordingly for the purpose of facilitating sales the distributor needs to undertake the entire gamut of functions likes sales budgeting, inventory scheduling, packaging and logistics, marketing, distribution channel, sales and warranty etc. As such it was argued these are part and parcel of its activities as a distributor. It was submitted that the FAR analysis of the assessee at pages 19 to 25 of the first paper book has not been distu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the facts appearing in pages 17 & 18 of the written submissions, the same are reproduced hereunder :- Distributor 1-Distributor who takes the responsibility of advertising and marketing function Distributor2-Distributor who does not takes the responsibility of advertising and marketing function Sales of 100 units of goods 150 Sales of 100 units of goods 150 Less: Cost of purchase of 100 units of goods at the rate of 1.25 per unit 125 Less: Cost of purchase of 100 units of goods at the rate of 1.25 per unit 125 Gross margin 25 Gross margin 25 Less: Advertising and marketing cost 25 Less: Advertising and marketing Cost NIL Less: Other overhead costs 15 Less: Other overhead costs 15 Net margin (-) 15 Net margin 10 Add: Subsidy from manufacturer by way of credit note adjusted against COGS 25 Add: Subsidy from manufacturer by way of credit note adjusted against COGS NIL Adjusted gross margin 50 Adjusted gross margin 25 Adjusted net margin 10 Adjusted net margin 10 * The above table clearly demonstrates our argument that as compared to a distributor who has limited role and responsibilities, a distributor who undertakes greater functions and resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... While consensus has been sought as far as possible, it was considered most in accord with a practical manual to include some elements where consensus could not be reached, and it follows that specific views expressed in this Manual should not be ascribed to any particular persons involved in its drafting. Chapter 10 is different from other chapters in its conception, however. It represent an outline of particular country administrative practices as described in some detail by representatives of those countries, and it was not considered feasible or appropriate to seek a consensus on how such country practices were described. Chapter 10 should be read with that difference in mind." 5.19.6. Based on the above, it is sought to be canvassed that the views expressed in Chapter 10 of the UN TP Manual are the views of the Country's Tax Administration. For the said purpose, reliance is further placed upon the following extract from the practical Manual on Transfer Pricing Manual on Transfer Pricing of Developing Countries (from page 24 vol.-3 of the paper book) :- "10.3.8.15. The important issue in the determination of ALP in these cases is to examine who benefits from the extraordinary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s beyond what an independent distributor with similar rights might incur for the benefit of its own distribution activities. An independent distributor in such a case might obtain an additional return from the owner of the trademark, perhaps through a decrease in the purchase price of the product or a reduction in royalty rate." 5.19.9. Similarly, it is stated that identical example has been illustrated by the Australian Tax Office (ATO) in its guidance for Marketing Intangibles wherein the market/distributor bears the costs and risks of its marketing activities and has a royalty-free contractual arrangement (with exclusive right) with the owner of the brand. Attention is invited to example 3 at page 11 of Vol.-3 of the paper book which as simplified and explained in page 27 of the written submissions and extracted hereunder :- "Facts : Distributor (B) receives no reimbursement from brand owner (A) in respect of any expenditure it incurs or any other indirect or implied compensation from A and expects to earn its reward solely from the sales of branded watches to third party customers in the Australian market. ATO's guidance : If A was compensating B for its marketing activiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s placed on the order of the Mumbai Bench in the case of Fine Jewellery India Ltd vs ACIT 19 ITR (Trib) 746. It was submitted that benefit if any has accrued to the AE as a result of AMP expenses cannot be considered a separate transaction and benefit if any has accrued incidentally and does not require any compensation. 5.19.14. Without prejudice to the other arguments, it was also argued that the mark-up of 12.5% was high excessive and unwarranted. 5.20. The Ld. CIT DR on the other hand argued that the credit notes do not state that they relate to the AMP expenditure and have already been rejected by the TPO so no purpose would be served by restoring the same for verification. It was his vehement stand that with hindsight after the decision of the Special Bench the arguments of the taxpayers have been that subsidy has been received for AMP it was his vehement argument that do the records show that it was sent for this specific purpose. It was his argument that the record would show that the assessee has been contesting till date that it is not an international transaction and the assessee has not even documented it as an international transaction accordingly how can the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- 2. AMP Expenditure towards Brand Building (that should have been received from AE), (a Transaction reported by assessee) Nil 20,000 The Assessee has not received ₹ 20,000/- from the AE, though it should have received the same. 3. Subsidy received. 30,000 It has not been specified, as to the purpose for which subsidy has been received. According to the assessee, the subsidy is to be applied to AMP expenditure. If such is the situation then ALP or AMP expenditure, according to the assessee, would be Rs. (-) 10,000/-, (Rs. 20,000 being ALP of AMP expenditure less ₹ 30,000 being subsidy). This is an absurd result. Revenue's contention is that since the AMP expenditure towards Brand Building (or creation or feeding of Intangibles etc.) has not been reported as an international transaction, at all, how can subsidy be attributed to AMP (or Brand Building or creation of Intangibles etc). This is too far-fetched a proposition and an afterthought. Subsidy could not have been given for a transaction which the assessee claims is not an international transaction. Even the Hon'ble ITAT, in the case of M/s. LG Electronics (as referred above), has held, on pages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the AE. I therefore propose to determine the arm's length price of the international transaction of promoting the trade name/trade mark which is beneficially owned by the AE however promoted by the assessee for which the assessee has not been compensated." (Refer 3.4 to 3.6 on page 7 of main appeal set). The above approach of the TPO is not only contrary to the view held by all international literature on the fundamentals of transfer pricing but also contrary to the principle upheld by the Special Bench in the case of LG Electronics India Private limited (ITA No. 5140/Del/2011). Relevant extract of order are as follows: "Para 19......... If there is no subsidy in a comparable case but the assessee has received some amount of subsidy from its foreign AE on imports or in any other manner, which fact otherwise needs to be specifically established by the assessee, then the initial amount so computed would require reduction to the extent of such subsidy or vice versa" In the present case, it was respectfully submitted that during the course of the transfer pricing assessment it was specifically stated by the assessee that it has received subsidy from its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses in connection with the sales do not lead to brand promotions and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction. In view thereof, we direct the Assessing Officer to exclude the expenses incurred by the assessee in connection with the sales totaling ₹ 5500.86 lacs as the4 same do not fall within the ambit of AMP expenses and hence not to be considered for computing the const/value international transaction. The assessee vide ground no.4 had raised the issue against the disallowance of consumer market research expenses of ₹ 567. 49 lacs. In view of our decision in allowing the claim of the assessee being relatable to sales promotion expenses, this ground of appeal is thus allowed. The ground nos. 2.14 to 2.16 and ground no 4 are thus allowed". Similar approach has been followed by Delhi ITAT in the case of Canon India Pvt. Ltd Vs. DCIT Cir 3(1) (ITA No. 4602/Del/2010, 5593/Del/2011 and 6086/Del/2012) in para 7.7 (Copy of order is attached herewith) Therefore, it is humbly submitted that following Special Bench and coordinate bench order the expenses in conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions and perused the material available on record including the decisions and judgements relied upon for our consideration. We propose to consider and discuss the judgements and decisions separately as Transfer Pricing issues are very fact driven as such, we first propose to refer to the Transfer Pricing Study made available to the TPO by the assessee. The same is placed on paper book pages 1-53. 6.1. A perusal of the same shows that as per the Transfer Pricing study available on record, it is claimed that Sony Ericson is a company incorporated in India on 23.04.2007 and is a subsidiary of Sony Ericson Mobile Communication AB, a company incorporated under the laws of Sweden. The Swedish entity is a 50:50 joint venture between Telefonaktiebolaget LM Ericson (Sweden) and Sony Corporation (Japan). The ownership pattern depicted in the Transfer Pricing study is as under:- "1.2.2. SEIN is a company incorporated in India on April 23, 2007 and is a subsidiary of Sony Ericsson Mobile Communications AB , a company incorporated under the laws of Sweden. The Sweden entities a 50:50 joint venture between Telefonaktiebolaget LM Ericsson (Sweden) and Sony Corporation (Japan)." 6.1.1. As pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions of SEIN were in accordance with "Arm's Length' standard required under the Indian Regulations. 1.4.2. It is important to note that the results of the transfer pricing analysis and the recommendations are based on facts and financial data for FY 2007- 08 and are pertinent to financial year ended on March 31,2008. On a going forward basis, the results would need to be altered so as to incorporate latest financial results and any changes in the functions performed, risks assumed and the level of tangible and intangible assets owned and employed by SEIN and its AEs. Also, we recommend that SEIN reviews and update its transfer pricing arrangements to reflect changes in the market or changes in the nature of its intra-group transactions." (Bold-texted by the Bench) 6.1.3. The Group Companies Overview unique strength, background, role performance are addressed in the TP study as under:- "2.2.1. Sony Ericson Mobile Communications AB, a company incorporated in Sweden, is a 50:50 Joint Venture (JV) between the world renowned Sony Corporation and Ericson group. The JV entity was launched as an operational business on October 1, 2001. Its activities are focused on product deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity, the company undertakes the promotion, sales, marketing and distribution of mobile handsets. The company also provides related post sales support/warranty services." (Bold-texted by the Bench) 6.1.5. A perusal of Industry Overview at pages 11 to 18 of the TP study shows that the background has been discussed presumably to address the competition in the market. A perusal of the same shows that from a situation where there was regulated monopoly enjoyed by the Department of Telecommunications (DoT) the Indian telecommunication industry entered a deregulated market competition where there are stated to be multiple players like Reliance, Bharti, Tatas, HFCL etc offering parallel networks to those of Dot/Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL). The growth in the industry is attributed to favourable telecom regulations, reduction in call rates and rise in FDI limit and increasing competition among the service providers. The study points out the performance of earlier entrants using GSM and Code Division Multiple Access (CDMA), the competition amongst the entrenched and new entrants specially the Chinese companies resulting in the price wars amon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retail outlets, until last year there were 79,000 mobile outlets, out of which 72,000 were of Nokia, other vendors realizing importance of these outlets helped in increasing total mobile outlets to 1,30,000 out of which 75,000 belonged to Nokia. Hence, implying that while Nokia had registered an increase of 4% in number of retail outlets over last year, the other players registered a staggering growth of 684% in number of retail outlets over last year. 3.4.1. Mobile phones have moved to the masses in urban areas, but the challenge is how to address semi-urban and rural areas. Mobile operators already cover most of the urban market and the 40% of new subscribers are coming from rural market. By the end of FY 2007-08, rural subscribers accounted for close to 25% of the total mobile user base in the country. The rural population is likely to reach 800 million by 2010, which is indicates that there is a huge potential market waiting to be tapped by the telecom companies. According to Voice and Data estimates, of the next 250 million users as many as 100 million will be from the rural parts of the country". Turning these estimates into reality will indeed be a herculean task and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s towards mid to premium level segment, whose value added phones provide some degree of protection against margin erosion, but economic slowdown can affect telecom sector as luxury end of handset market is particularly prone to economic slowdown. Besides that, there is significant pressure on telecom companies to reduce cost that will require efficient distribution of resources. In short, Telecom handset companies might have to fight on all fronts to stay in the race or even survive. (Bold-texting provided for emphasize) 6.2. The functions of the assessee are stated to be local marketing of mobile phones distributor of mobile phones/products; provision for repair and maintenance services which involve, determining long-term and short term policies in relation to the market in India; framing and implementing market penetration and future growth strategies. Based on the broad guidelines provided by the AEs who is responsible for all Research, Core, strategic and complex decisions, it may be relevant to extract para 4.4.5, 4.4.6, 4.4.8 & 4.4.9 of the TP study as under :- "4.4.5. The overall marketing strategy is developed by the AEs as they have the requisite experience for undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emises, warehousing facility, furniture & fixtures, computers & office equipments, vehicles etc. For ready-reference, we extract para 4.5.4 of the TP study as under :- "4.5.4. The trade name "Sony Ericson" is owned by overseas Group Companies. Accordingly, the Indian entity is a distributor of branded products, the brand being owned by the overseas supplier. The sale of a branded product to a distributor carries with it the stated or implied right to use the supplier's trademark or trade name only for the purpose of reselling the supplier's products. SEIN does not have nay other additional rights to use or exploit the marketing intangibles (trademarks or trade names) owned by Group Companies." 6.4. As per the risk profile the assessee is characterized as a normal risk distributor carrying out sales marketing and distribution activities. Before we proceed to consider how and to what extent the decision of the Special Bench in the case of L.G. Electronic's case is applicable to the facts of the present case, it is necessary to emphasize a relevant fact that the principal appellant in the case of L.G.Electronic's case was a licensed manufacturer. On the other hand in the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r answering the specific question posed to the Judges. The Judges while deciding the same may dwell on various possibilities without the benefit of the facts in those cases and consequently arguments thereon which they may deliberate and at times without the benefit of specific arguments on those facts. The observations which may have been made in passing in these deliberations do not form the ratio decidendi of the decision. It would be too much to ascribe and read precise meaning to words in a decision which the judges who wrote them may not have had in mind. In support of the above legal position, we may make specific reference to CWT vs Dr. Karan Singh and Others. (1993) 200 ITR 614 (SC); CIT vs K. Ramakrishnan (1993) 202 ITR 997 (Kerala) and KTMTM Adbul Kayoom & another vs. CIT (1962) 44 ITR 689. The observations of the Hon'ble Apex Court in the case of CIT vs. Sun Engineering Works Pvt. Ltd. (1992) 198 ITR 297 (SC) specifically observed that it is neither desirable nor permissible to pick out a word or a sentence from the judgement of the Hon'ble Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared. 6.6. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s model. After charactering the taxpayer on the basis of FAR analysis, a selection of comparable Companies has to made where functional similarity qua the transaction on the basis of the FAR analysis of the comparable companies is necessarily required to be done. In order to decide the applicability of any section, rule or principle underlying the decision or judgement which would be binding as a precedent in a case, an appraisal of facts of the case in which the decision has been rendered is necessary since "the scope and authority of a precedent should never be expanded unnecessarily beyond the needs of a given situation' as held by the Hon'ble Supreme Court in P.A.Shah vs. State of Gujarat AIR 1986 SC 468. More so in the case of transfer pricing the detailed analysis cannot be over looked as only thereafter the applicability of the decision to the facts of a case to which it is sought to be applied can be considered. 6.8. The need in the facts of the present case is more so, as transfer pricing legislation and the Rules thereunder specifically Rule 10B(2) framed u/s 92C of the Income Tax Act mandate that the comparability of an international transaction with an uncontrolled tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficant terms of the contract may be diametrically different. As such the conclusions qua the functions performed vis-a-vis the functions assumed would be entirely different. 6.10. In the facts of the present case on behalf of the assessee, the stand has been that keeping its legal claim alive the issue may be restored considering the "without prejudice" arguments, in terms of the decision of the Special Bench in L.G. Electronic's case. The claim of the department on the contrary has been that the legal issues having been decided against the assessee, the order may be confirmed as the issue is "covered". Accordingly, considering the above legal principles addressing the precedent value of decision, we hold that in order to decide the issue reference has to be made to the specific facts of the case and then apply the legal principle which can be said to constitute a precedent for deciding the issues. It would be a grave error of judgement to blindly rely upon a decision as a precedent for all future cases simply because the decision is by a larger Bench or an earlier Co-ordinate Bench since the facts of each and every case will determine the extent to which the said decision is bind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stributor would have no relevance. 6.12. On facts the bright-line from 3.35% will be needed to be calculated again as considering the partial relief granted by the DRP as a result of excluding Rediton India Ltd. and Compuage Infocom will result in 4.02% as the bright line. Applying this bright line there is still a difference in 7.06% and 4.02% as there is still expenditure in excess to the extent of 3.04% (7.06-4.02=3.04). Thus applying the precedent, the expenditure to that extent shall constitute non-routine functions as a result of which the brand owned by the AE has benefited resulting in service to the AE which has been done at the cost of the profits of the assessee earned in India. Accordingly upholding the application of the bright line test and upholding the finding that assessee has entered into an international transaction, the legal issues to that extent are decided against the assessee following the precedent in the decision of the Special Bench in L.G. Electronics case. Consequently, the grounds assailing the action of the DRP in upholding the TPO's order, holding the transaction as an international transaction; and holding that compensation for nonroutine incurring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the Global Pricing Policy, assessee is assured of 2% profit. Reliance in the course of the arguments has been placed on the Practical Manual on Transfer Pricing Manual on Transfer Pricing for Developing countries where India has been represented through the Representative of the Revenue. Para 10.3.8.15 (extracted in the earlier part of this order) addresses the concern of the Revenue on which it has been argued that the concern expressed is in the context of distributors who are stated to be no risk/low risk entities showing negative incomes/huge losses. From a perusal of page 23-26 paged written submission numbering 60 pages, it is seen that in the recently released Practical Manual on Transfer Pricing Manual for developing countries which includes the working of various authors including Representatives of Revenue, Govt. of India as is evident from the Forward to the Manual the concerns address loss making distributors who are stated to be no risk//low risk distributor. The participation of the Representative of India evidenced from the Forward to the Manual is reproduced for ready-reference :- "While consensus has been sought as far as possible, it was considered most ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the services rendered. The remuneration model of a distributor as per OECD TP Guidelines Manual and Australian Tax Office Guidelines also supports the argument that a distributor can be rewarded by pricing adjustment; direct payment of fees for services rendered and also by subsidies and credit notes etc. In the facts of the present case, it needs to be kept in mind that the assessee is characterized as a distributor and considering its FAR analysis it has performed a higher intensity of services when compared to its comparables. The distinguishing feature that whereas the assessee has received Credit notes worth 78 crore odd is a fact, the position whether the comparables have also received any such benefit or subsidy as observed in para 19 in the case of the L.G. Electronics needs to be considered as submitted on behalf of the assessee who requests similar enquiry qua the comparables may also be done. As seen the Special Bench in the case of L.G. Electronics was considering the facts of a licensed manufacturer who was the principal appellant and though the Special bench did attempt to consider the situation of all possible diverse business models and various possible permutat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No-1,9,10 & 12 of para 17.4 of L.G. Electronic case keeping in mind our finding that the assessee is a distributor whose remuneration model is not only supported by International Tax Jurisprudence as available in the OECD Guidelines and Australian Tax Guidelines but is also found supported by Questions 1,9 & 10 of the L.G. Electronics case as considered by the Special Bench. The assessee has made a reference to its Global Pricing Policy on which the TP study is based, the same may be produce before the TPO/AO. As such the arguments of the assessee to the above extent are upheld. 6.15. On the issue of mark-up if still so warranted on facts the arguments of the Ld. AR have been that the same is excessive. It is seen that there is no discussion in the TPO's order as to why a mark-up of 15% is adequate. Similarly DRP also does not give any justification for reducing the same to 12.5%. We refrain from substituting the arbitrary mark-up by our own arbitrary estimate in the absence of any facts or material on record. Even estimates have to have some rationale and reasoning which is completely absence in the orders and arguments advanced before us. Accordingly, we deem it appropriate to ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
