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TMI Blog2018 (9) TMI 140X X X X Extracts X X X X X X X X Extracts X X X X ..... owing grounds: A. Transfer Pricing Grounds 1. That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant under section 143(3) r.w.s Ita 144C(13) of the Act for the relevant assessment year at Rs. 147,41,69,894 as against the returned income of Rs. 47,55,95,410. 2. That on facts and circumstances of the case and in law the Learned AO/DRP /TPO erred in making an adjustment of Rs. 77,26,36,692 in respect of alleged international transaction pertaining to excess advertisement, marketing and promotion ('AMP') expenditure, alleging that the same to be not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules,1962 ("the Rules"). 3. That on the facts and circumstances of the case and in law, the DRP/AO have erred in not appreciating that suo moto adjustments proposed by the TPO in relation to Advertisement, Marketing and Promotion ("AMP") expenses incurred by the Appellant, without any reference from the AO, was beyond jurisdiction and bad in law. 4. That on the facts and in the circumstances of the case and in law, the Learned AO /DRP /TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the alleged excessive AMP expenditure. 11. That the AO / DRP/ TPO erred on the facts and circumstances of the case and in law in not appreciating that mark-up could not be levied on the AMP expenditures incurred by the Appellant. 11.1. Without prejudice to the above and not admitting, if at all a mark-up should have been charged by the Appellant, assuming it to be a brand building service provider, the said mark-up could have been charged only on the value addition expenses incurred by the Appellant for such alleged brand promotion service and not the entire amount incurred / paid to third party vendors. 12. That on facts and circumstances of the case and in law, the Learned AO/DRP/TPO have erred in not providing the Appellant the benefit of 5 percent range as provided by the proviso of section 92C(2) of the Act. 13. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by applying Comparable Uncontrolled Price Method in a manner that is not prescribed or justified under the law. 14. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO has erred by not carrying out the determinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Ld. A.O has erred in not allowing the entire credit of prepaid taxes (TDS, advance tax and self assessment taxes) amounting to Rs. 16,94,07,775/-. 2. On the facts and in the circumstances of the case, after having computed a taxable income in cases of Appellant, the Ld. A.O has erred in not allowing appropriate credit of foreign taxes amounting to Rs. 13,28,981/-. C. The Ld. A.O has erred, in law and on facts, in not allowing and granting the credit of set off of brought forward of losses of Rs. 19,32,08,420/- claimed by the appellant. D. The Ld. A.O has erred in law and on facts, in not allowing the deduction under Chapter VI-1 of the Act of Rs. 3,97,500/- claimed by the appellant. E. The Ld. A.O has erred, in law and on facts, in charging interest under section 234B of the Act. F. The Ld. A.O has erred, in law and on facts, in charging interest u/s 234D of the Act. G. The Ld. A.O had erred in making computational errors while determining the net amount payable by the appellant. H. On the facts and in the circumstances of the case, the Ld. A.O has erred in initiating penalty proceedings u/s 271 (1) (C) of the Act. I.T.A .No. 2275/DEL/2015 The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant. Further, the AO / Dispute Resolution Panel ("DRP") erred in not appreciating that such adjustment was beyond jurisdiction of the TPO, therefore, ultra-vires, bad in law and void ab-initio. 2.2. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in holding that the unilateral arrangement between the Appellant and Indian third parties for advertisement and promotion would be a "transaction" much less an "international transaction" within the meaning of Chapter X of the Act. Ita 3. That on the facts and circumstances of the case and in law the AO / DRP / TPO have erred in making an adjustment of Rs. 74,59,78,403 in respect of alleged international transaction pertaining to excess AMP expenditure, alleging that the same to be not at arm's length in terms of the provisions of sections 92C(1) and 92C(2) of the Act read with Rule 10B of the Income-tax Rules, 1962 ("the Rules"). 4. That on the facts and in the circumstances of the case and in law, the AO / DRP / TPO erred in alleging that AMP expenses paid to unrelated third parties in India are excessive and further erred in holding that the incurring of excessive AMP expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessive AMP expenses and holding that there are no appropriate comparable companies available to benchmark on an aggregate basis. 7. The AO / DRP / TPO have erred in holding that Distribution & Marketing (incurrence of AMP) should be benchmarked separately applying PSM method and further erred in not appreciating that the same would result in over taxation and is contrary to the computation machinery provided in Chapter X. 7.1. That on the facts and circumstances of the case and in law, the AO / DRP/ TPO have erred in not allowing the setoff excess margin earned by the Appellant from distribution function against the adjustment made on account of AMP expenditure even if the same was to be segregated and benchmarked separately. 8. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in including subsidy from the scope of AMP expenditure while benchmarking the same on segregated basis. 8.1. That on facts and circumstances of the case and in law, the AO / TPO have erred in not excluding selling / business promotion expenses from the scope of AMP expenditure and further erred in not following the directions of the DRP to exclude the selling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m has been utilized for the specified purpose and included in income for AY 2012-13. B.2 Without prejudice to the above, the Learned AO has erred, in law and on facts, in not granting the claim of prepaid taxes. 1. That on the facts and in the circumstances of the case and in law, after having computed a taxable income in case of Appellant, the learned AO has erred in not allowing the credit of TDS amounting to Rs. 385,168/-. B.3 That on the facts and in the circumstances of the case and in law, in not allowing the deduction under Chapter Vl-A of the Act of Rs. 500,000/- claimed by the Appellant. B.4. That on the facts and in the circumstances of the case and in law, in charging interest under section 234B of the Act. I.T.A .No. 1052/DEL/2016 1. On the facts and in the circumstances of the case and in law, Hon'ble DRP has erred in restricting the ALP from Rs. 74,59,78,408/- to Rs. 53,21,45,194/- u/s 92CA(3) of the Income Tax Act 1961. 2. On the facts and in the circumstances of the case and in law, the Hon'ble DRP-1 has ignored the facts that such expense i.e. selling expenses are included in the AMP expense of the AE, which is taken as a base for the profit spl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence in the Arms Length Price determined by the TPO was added back to the total income of the assessee. In this regard a draft of the proposed order of assessment was passed and sent to the assessee. The assessee filed objections before the Dispute Resolution Panel challenging the variation proposed to be made in the draft order. The DRP vide order dated 24.12.2014 has restored the matter to the file of the transfer pricing officer for verification. The TPO vide report dated 21.01.2015 revised the value of Ita compound adjustment to Rs.77,26,36,692/-instead of Rs. 86,24,79,282/-as proposed in the draft assessment order. In compliance to the directions of the DRP and the order of TPO, the addition amounting to Rs.77,26,36,692/-was made on account of ALP. The Assessing Officer also made an addition of Rs. 3,23,31,873 being subsidy received from Canon Singapore Pte. Ltd. but not utilised within the previous year. During the year assessee claimed set-off of brought forward losses and unabsorbed depreciation to the extent of Rs. 19,32,08,420/-. On going through the Assessment Order for the A.Y. 2009-10 it is seen that there is no losses/unabsorbed depreciation carried forward for set o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed by Assessing Officer making TPO reference prospective. The Hon'ble High Court has held that the instruction clarifies the correct legal position and cannot be construed as not applying to the facts on hand. Being procedural it requires to be applied even the case where a reference was made by the Assessing Officer to the TPO prior to the issue is of the circular. The Ld. AR relied on the decision of Hon'ble Punjab and Haryana High Court in the case of Shri Vishnu Etables (India) Ltd. vs. DCIT (2016) 387 ITR 385 and Hon'ble Gujarat High Court in the case of Alpha Nipon Innovatives Ltd. vs. DCIT (2016) 291 CTR 309. In the present case, the TPO had first constructed/determine that the inference of AMP expenditure as a deemed international transaction based upon conjecture and surmises though none existed on facts and law and then arbitrarily determined the ALP of the said international transaction. The Ld. AR submitted that the provisions of the Act provides that the TPO can only determine ALP of an international transaction however jurisdiction of the TPO includes adjudication of characterization of transaction to be an international transaction. The Ld. AR further submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm's length price in relation to the international transaction [or specified domestic transaction] referred to in sub-section (1) of the Act. Thus, Ground No. 3 is dismissed. 9. Ground no. 4 is relating to non-existence of international transaction. Ground no. 5 is relating to no creation of marketing intangible in favour of AE. Ground no. 6 is relating to non rendition of any brand building services. For these three grounds, the Ld. AR submitted that existence of an international transaction is sine qua non to invoke the provisions of transfer pricing. The AMP expenditure incurred does not fall within the definition of international transaction and therefore the same was not reported in form 3CEB as the same expenditure was incurred in relation to third-party vendors in India. The AMP expenditure by assessee is unilateral action. The TP regulation would be applicable to transaction began arrangement understanding reaction in consort in relation to purchase sale or l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction has not been discharged by the revenue. It is settled law that the onus to prove the existence of arrangement regarding incurrence of unilateral AMP expenditure by the taxpayer is solely for the brand promotion of its foreign AE is on the revenue. Existence of an international transaction cannot be a matter for inference or surmise and the burden to prove the existence of an agreement/arrangement prior to incurring of the AMP expenses is on the revenue. Unless revenue definitely shows that the Assessee was obliged to incur AMP expenses of certain level for promoting its AE's Brand, an international transaction cannot be inferred. The Ld. AR relied on the following decisions: * Maruti Suzuki India Ltd. vs. CIT (2016) 381 ITR 154 (Del) * CIT vs. Whirlpool of India Ltd. (2016) 381 ITR 154 (Del) * Honda Siel Power Products (2016) 283 CTR 322 (Del) * Bausch & Lomb Eyecare (India) (P) Ltd. vs. ACIT (2016) 381 ITR 227 (Del) * Widex India Pvt. Ltd. vs ACIT: [2017] 78 taxmann.com 348 (Chandigarh - Trib.) * Nippon Paint India Pvt vs ACIT: [2017] 79 taxmann.com 8 (Chennai - Trib.) * Essilor India Private Limited Vs DCIT: [2016] 178 TTJ 69 (Bangalore - T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's contentions in relation to benchmarking of the alleged international transaction are as under: * Ground No. 7 is relating to wrong application of Bright Line Test by the AO/DRP/TPO. * Ground No. 13 is relating to wrong application of CUP method in a manner not prescribed under law by the AO/DRP/TPO. * Ground No. 14 is relating to wrong determination of ALP of the alleged international transaction as per Section 92C of the Act, read with, Income Tax Rules, 1962. 13. The Ld. AR submitted that the AO/TPO/DRP determined transfer pricing adjustments relating to the AMP expenditure by applying the Bright Line Test which is not recognized under the Indian transfer pricing regulations, as a prescribed method under Section 92C of the Act for benchmarking of the Assessee's AMP expenditure. The Ld. AR relied upon the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd. vs. CIT (Supra), Maruti Suzuki (supra) and several other cases, whereby, the High Court has held that Bright Line Test is ultra-vires the provisions of the Act and cannot be applied for computing the ALP or benchmarking the AMP expenditure. The Ld. AR also r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et and accordingly should be excluded for the purpose of AMP analysis of Assessee. The Ld. AR pointed out that TPO itself in its order dated 01.01.2016, for subsequent A.Y. 2011-12 has not included trade discount, commission and other selling and administrative expenditure in the ambit of AMP expenditure for benchmarking purposes. The Ld. AR further pointed out that the Tribunal vide order dated 03.05.2013 for A.Y. 2006-07 to 2008-09 held that all selling expenditure including trade discount and commission along with subsidy should be excluded from the ambit of AMP expenditure. Thus, the same read with the subsequent directions of the Hon'ble Delhi High Court in Assessee's own case i.e. judgment in batch of cases of Sony Ericsson (supra) case, the TPO should be directed to exclude Trade discount, commission and special purpose subsidy from the ambit of the AMP expenditure. Thus, following the order of the Tribunal for A.Y. 2006-07 to 2008-09 read with the subsequent directions of the Hon'ble Delhi High Court in Assessee's own case, the TPO should be directed to exclude Trade discount, commission, selling and administrative expenses and special purpose subsidy from the ambit of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 read with the subsequent directions of the Hon'ble Delhi High Court in Assessee's own case, it will be appropriate to direct the TPO to exclude Trade discount, commission, selling and administrative expenses and special purpose subsidy from the ambit of the AMP expenditure, as given in the tabulated form hereinabove after verifying the same in accordance with the records available with the TPO/AO. Thus, this issue is remanded back to the file of the TPO/AO. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 8 of the assessee's appeal is partly allowed for statistical purpose. Ita 19. Ground No. 9 is relating to final comparables selected by AO/TPO/DRP for benchmarking AMP expenditure. Ground No. 10 is relating to quantitative adjustments. Ground No. 11 and 11.1 are relating to mark-up. Ground No. 12 is relating to benefit to proviso of section 92C(2) of the Act. Ground No. 16 is relating to multiple year data. The Ld. AR submitted that since AO/TPO/DRP has applied Bright Line Test which is not a statutory method for benchmarking AMP expenditure, the aforesaid grounds become academic as at the outset the main issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annexed to the synopsis by the Ld. AR. The Ld. AR submitted that from the perusal of the adjusted gross margins would show that the assessee's margins were better than that of the comparable companies and therefore, no adjustment on account of AMP expenditure was required to be made. The adjustment made by the AO/TPO, is therefore, prima facie untenable and deserves to be deleted. The Ld. AR alternatively, submitted that comparability adjustment can be carried out in line with provisions of Rule 10B(3) of the Rules in respect of the intensities of the AMP expenditure incurred by comparables vis-à-vis assessee. The Ld. AR further pointed out that TPO for A.Y. 2014-15 has proposed and done the benchmarking of alleged international transaction following the intensity approach, vide order dated 17.10.2017. 23. The Ld. DR relied upon the orders of the AO, TPO and directions of the DRP. 24. We have heard both the parties and perused all the relevant records. It is pertinent to note that the issue of AMP has been remanded back to the file Ita of the TPO/AO. Therefore, these grounds become infructuous. Hence Ground No. 15 is dismissed. 25. As relates to Corporate tax issues speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue's contention that the unutilized subsidy is required to be recognized as income of the Assessee in the year of its receipt. This would be contrary to the matching concept, which is the substratal principle for computing income during a relevant period. It is necessary that income be recognized along with the corresponding expenditure incurred for earning the income. Thus, where an Assessee follows the Accrual/Mercantile system of Accounting - as in this case - income can be recognized only when the matching expenditure is also accounted for irrespective of the cash outflows/inflows during the year. It would thus, not be correct to recognize the subsidies received for incurring specific expenditure Canon India Pvt. Ltd. as income without accounting for the corresponding expenditure." Thus, the issue is squarely covered in favour of the assessee. Therefore, Ground Nos. B.1, 1, 1.1, 1.2 are allowed. 29. As relates to Ground No. B.2, 1, 2 regarding not granting the claim of prepaid taxes and foreign tax credit claimed by the assessee, the Ld. AR submitted that the Assessing Officer has not allowed the entire credit of prepaid taxes (TDS, advance tax and self assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available before us. Ground No. i) of the Revenue's appeal is already decided in favour of the assessee as per Ground Nos. B, B.1, 1, 1.1, 1.2. Therefore, Ground No. i) of the Revenue's appeal is dismissed. As relates to Ground No. ii) is regarding deletion of the addition made by the Assessing Officer on account of low GP by the DRP by ignoring the fact that the assessee had not offered any explanation/ justification whatsoever regarding fall in GP. From the records, the Assessee has given the explanation regarding the fall in GP rates and the same was totally ignored by the Assessing Officer. Therefore, DRP rightly deleted this addition. Ground No. ii) of the Revenue's appeal is dismissed. Ground No. iii) is general in nature, hence dismissed. 37. In result, Revenue's appeal being ITA No. 2275/Del/2015 for A.Y. 2010-11 is dismissed. Now we are taking up the appeal for A.Y. 2011-12 38. The Ld. AR submitted that Grounds of appeal Nos. 1 and 3 are general. Therefore, Ground No. 1 and 2 are dismissed. 39. As regards to Ground No. 2.1 relating to jurisdiction of TPO limited to determination of ALP of an international transaction and not to recharacterize transaction as an 'interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO is comparing two controlled transactions, which is against the very premise of transfer pricing, as the intend of the legislature under transfer pricing is, that controlled transaction is to be compared with uncontrolled transaction. The Ld. AR submitted that the TPO placed reliance on the decision of the Rolls Royce Plc [2011] 339 ITR 147 (Delhi) for the purpose of attributing global profit to the various functions undertaken by Canon Inc. The TPO, accordingly attributed the global profits in the following ratio: > Manufacturing - 50 percent > Research and development - 15 percent > AMP - 35 percent 42. In view of the above, the Ld. AR submitted that the TPO incorrectly applied the PSM method and computed the adjustment as under: - i. As Canon Inc. follows calendar year, TPO estimated global operating profit of Canon group from the consolidated financial statements of Canon Japan at of 385,181 million yen, arrived at by adopting a weighted average approach. (75 percent from financials ended December, 2010 and 25 percent from financials ended 2011). ii. Allocated 35 percent of aforesaid operating profit to AMP function. The same resulted in 134,813 Million Yen (equiva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length price of any one transaction, by which- As per sub-clause (d) of Rule 10B(1) PSM is applicable where the transaction involves transfer of unique intangible or multiple inter related international transactions from which arm's length price cannot be separately determined. In the instant case, the alleged transaction sought to be benchmarked by the lower authorities is rendition of brand building services to the AEs. In other words, it is to be appreciated that (a) there is no allegation of transfer of unique intangibles and (b) there are no inter related transactions between the AE and the Assessee, from which arm's length price cannot be determined separately, because the allegation is that the Assessee is rendering brand building services and not that the Assessee and the AE are jointly rendering brand building services to a third party. 2. (i) the combined net profit of the associated enterprises arising from the international transaction [or the specified domestic transaction] in which they are engaged, is determined; the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the High Court ruling. Also, in Assessee's own case the TPO has not disputed / questioned RPM for benchmarking the distribution function. In view of the same, RPM should be considered as the most appropriate method for benchmarking distribution and marketing function on an aggregate basis. 47. The Ld. AR further submitted that Canon Inc. is following a different accounting year. The TPO have simply considered 75% of profits for the calendar year 2010 and 25% of profits for the calendar year 2011 to arrive at the profit of Canon Inc. for the period corresponding to April 01, 2010 - March 31, 2011. Thus TPO have made an attempt to reconstruct the profit and loss account of Canon Inc on an arbitrary basis. Such an approach would result in unreliable / arbitrary financial results for the period under consideration. The Ld. AR further submitted that no Function, Asset and Risk ("FAR") analysis carried out by TPO. As per Rule 10B(1)(d) of the Rules, while applying PSM the relative contribution made by each of the AEs to the earning of such combined net profit he evaluated on the basis of the FAR. However no FAR analysis has been undertaken by TPO. 48. The Ld. DR relied upon the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the records available with the TPO/AO. Thus, this issue is remanded back to the file of the TPO/AO. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 8 of the assessee's appeal is partly allowed for statistical purpose. 54. As relates to Ground No. 9 regarding not granting quantitative /economic adjustments, the Ld. AR submitted that the same is academic. Hence Ground No. 9 is dismissed. 55. As relates to Ground No. 10 regarding 5% range benefit, the same is consequential. Hence Ground No. 10 is dismissed. 56. As relates to Corporate Grounds i.e. Ground Nos. B.1, 1, 1.1, 1.2, 1.3 and 2 regarding addition of subsidy received from Canon Singapore Pte. Ltd. but not utilized within the previous year, the same are identical to that of the earlier A.Y. 2010-11's ground Nos. B, B.1, 1, 1.1, and 1.2. The said issue is squarely covered by the ITAT's decision in assessee's own case for A.Ys. 2006- 07, 2007-08 and 2008-09 (ITA Nos. 4602/Del/2010, 5593/Del/2011 & 6086/Del/2012 order dated 03.05.2013) wherein the unutilized subsidy is allowed by the Tribunal. The said view is affirmed by the Hon'ble High Court vide order dat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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