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TMI Blog2018 (7) TMI 2083X X X X Extracts X X X X X X X X Extracts X X X X ..... hod for benchmarking the international transaction cannot be changed merely because of the fact that the taxpayer has suffered loss at the net level but has positive gross profit in trading segment as it depends on host of circumstances. TP adjustment on account of AMP expenses - HELD THAT:- When we examine letter dated December 29, 2015 written by the taxpayer to the ld. DRP, no opportunity of being heard has been given to the taxpayer before making ALP adjustment on account of AMP expenses Bare perusal of the letter dated 29.12.2015, undisputedly received by the ld. DRP, goes to prove that when letter (supra) issued by the taxpayer seeking opportunity to explain the query raised by the ld. DRP but the ld. DRP without affording any opportunity of being heard, ld. DRP has passed the impugned order on 30.12.2015. So, ld. DRP being a quasi-judicial authority is under legal obligation to afford an opportunity of being heard to the taxpayer before passing any order. In these circumstances, TP adjustment made by the ld. DRP/TPO/AO on account of AMP expenses is not sustainable, hence the issue is remitted back to the TPO to decide afresh after providing an opportunity of being he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of rejecting Resale Price Method CRPM') as the Most Appropriate method and substituting the same with Transactional Net Margin Method (TNMM) and correspondingly rejecting Gross profit/Sales (GP /Sales) as the relevant Profit Level Indicator ('PLI') and substituting the same with Operating Profit/ Sales (OP /Sales) to ascertain the arm's length price in the Appellant's case based on several subjective presumptions. 5. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/ Hon'ble DRP grossly erred in disregarding the principle of consistency and not following the similar benchmarking approach i.e. RPM as the most appropriate method which had been accepted in previous assessment years viz. for assessment year CAY') 2008-09 to AY 2010-11 without giving any cogent reasons of changing the benchmarking approach in the captioned assessment year as compared to previous years. 6. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/ Hon'ble DRP grossly erred in not appreciating the functional profile of the Appellant and incorrectly characterizing the Appellant to be akin to a super nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt before making the adjustment on account of non-receipt of the reimbursement for allegedly excessive AMP expenses incurred by the Appellant thereby violating the rule of natural justice. 12. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act without assigning cogent reasons for the same. 13. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in not giving TDS credit of INR 9,712,074 and proposing to withdraw interest paid under section 244A and ITA No.1982/Del./2017 (AY : 2012-13) 1. That on the facts and circumstances of the case and in law, the order passed by the Learned Assessing Officer ('Ld. AO') under section 143(3) read with section 144C of the Act, in pursuance of the directions issued by the Honorable Dispute Resolution Panel ('Hon. DRP'), is bad in law to the extent of adjustment of INR 14,99,41,509 made in the impugned assessment order. 3. That on the facts and circumstances of the case and in law, the Ld. AO/Transfer Pricing Officer ('TPO') following the directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw, the Ld. AO/TPO (on the directions of the DRP) erred in alleging that the AMP expenses incurred by the Appellant results in an international transaction and consequently benchmarked the same separately. 9. That on the facts and circumstances of the case and in law, the Ld. AO/TPO/ Hon'ble DRP grossly erred In enhancing the income of the Appellant by INR 3,96,82,107 on substantive basis (INR 8,28,54,784 on protective basis) on account of non-receipt of the reimbursement for alleged excessive AMP expenses incurred by the Appellant and in doing so have grossly erred in: 9.1 assuming jurisdiction in respect of the AMP expenditure when such expenditure did not satisfy the requisites of being an international transaction under Section 92B read with Section 92F(V) of the Act 9.2 disregarding the nature of AMP expenses incurred by the Appellant and incorrectly holding that such expenses results in developing marketing intangibles for the AEs; 9.3 disregarding the fact that the gross profit earned by the Appellant compensates the excessive AMP expenses as alleged by the TPO, if any, incurred by it; 9.4 considering the expenditure incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(C) of the Act without assigning cogent reasons for the same. 14. That on the facts and circumstances of the case and in law, the Ld. AO erred in charging interest u/ss. 234A, 234B 234C of the Act without assigning cogent reasons for the same. Corporate Tax Ground 15. On the facts, in law and in circumstances of the case, the Ld. AO erred in rejecting the claim of brought forward losses made by the assessee, while computing the assessed income. ITA No.7088/Del./2017 (AY : 2013-14) 1. Than on the facts and circumstances of the case and in law, the order passed by the Asst. Commissioner of Income Tax, Circle 9(2), New Delhi ('Ld. AO') under section 143(3) read with section 144C of the Act, in pursuance of the directions issued by the Honorable Dispute Resolution Panel ('Hon. DRP'), is bad in law to the extent of adjustment of INR 889,841,699 (INR 417,429,552 on account of transactions relating to distribution of goods, INR 423,363,864 on count of Advertisement, Marketing Promotion CAMP') expenses on substantive basis an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of being international transaction under Section 92B read with Section 92F(V) of the Act; 6.2 not considering that there are no machinery provisions in Chapter X of the Act which are applicable to determine the quantum of transfer pricing adjustment made on account of AMP expenses. 6.3 alleging that the Appellant is rendering a service to its AEs for creation of marketing intangibles in India. 7. That on the facts and circumstances of the case and in law, the Ld. AO/TPO/ Hon'ble DRP grossly erred in enhancing the income of the Appellant by INR 423,363,864 on substantive basis on account of non-receipt of the reimbursement for alleged excessive AMP expenses incurred by the Appellant and in doing so have grossly erred in: 8.1 disregarding the nature of AMP expenses incurred by the Appellant and incorrectly holding that such expenses results in developing marketing intangibles for the AEs; 8.2 disregarding the fact that the gross profit earned by the Appellant compensates the excessive AMP expenses as alleged by the Ld. TPO, if any, incurred by it; 8.3 considering the expenditure incurred in the nature of normal business functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tural justice. 12. That on the facts and circumstances of the case and in law, the Ld. Ld. AO/TPO has grossly erred in computing adjustment both on account of change in method from RPM to TNMM to the distribution segment of the Appellant and AMP adjustment on substantive basis, which has led to comparability adjustments being made twice to the income of the Appellant leading to double taxation in the hands of the Appellant; 13. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(C) of the Act without assigning cogent reasons for the same. 14. That on the facts and circumstances of the case and in law, the Ld. AO erred in charging interest u/ss. 234A, 234B 234C of the Act without assigning cogent reasons for the same. BRIEF FACTS OF ITA No.1674/Del./2016 (AY : 2011-12) 3. Briefly stated the facts necessary to adjudicate the issues in controversy are : M/s. Fujitsu India Private Limited, the taxpayer is a wholly owned subsidiary of Fujitsu Technology Solutions, Holding, B.V., Netherlands, incorporated in 1997, engaged in trading of IT solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchase of fixed assets TNMM 29,684,974 5. Reimbursement of Expenses CUP 28,853,246 6. Recovery of Expenses CUP 15,297,246 BRIEF FACTS OF ITA No.7088/Del./2017 (AY : 2013-14) 4.1 International transactions entered into by the taxpayer with its AE during AY 2013-14 are extracted as under :- S. No. International Transaction Amount 1. Purchase of finished goods 645,655,926 2. Purchase of spare parts 73,570,891 3. Availing of IT Services 8,226,076 4. Availing of maintenance support services 7,050,209 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 017 (AY : 2013-14) 9. Grounds No.1 2 in ITA No.1674/Del./2016 (AY : 2011- 12), ITA No.1982/Del./2017 (AY : 2012-13) and ITA No.7088/Del./2017 (AY : 2013-14) are general in nature, hence do not require any specific adjudication. GROUND NO.3 IN ITA No.1674/Del./2016 (AY : 2011-12) ITA No.1982/Del./2017 (AY : 2012-13) 10. Ground No.3 in 1674/Del./2016 (AY : 2011-12) and ITA No.1982/Del./2017 (AY : 2012-13) is dismissed having not been pressed during the course of arguments. GROUNDS NO.4, 5 6 IN ITA No.1674/Del./2016 (AY : 2011-12) ITA No.1982/Del./2017 (AY : 2012-13) GROUNDS NO.3, 4 5 IN ITA No.7088/Del./2017 (AY : 2013-14) 11. It is also not in dispute that the taxpayer is trading in servers, laptops, notepads, etc. which are hardware equipments of IT segments. It is the case of the TPO that during TP proceedings, the taxpayer accepted that purchase of trading goods includes goods for components of IT support services. So, these two types of goods being intrinsically inter-connected, it is not correct to benchmark trading at gross level and other parts at net leve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxpayer has made proper warehousing arrangement or has proper inventory control, its goods will not move to the point of sale which can be said of the marketing efforts of the taxpayer. 16. TPO also proceeded to change the method on the premises that the taxpayer has incurred AMP expenses of ₹ 15,425,168/-against the trading revenue of ₹ 81,738,810 which is 18.87% which is definitely much higher than the expenses of a routine distributor. TPO also not entertained the arguments of the taxpayer that the net level loss the taxpayer has suffered is due to failure of the business/ project plans for the financial years on the ground that AE ought to have been supported the taxpayer either by reimbursement of cost or some price support in the international transaction of purchase of finished goods by the taxpayer. So, the TPO proceeded to believe that the net loss of the taxpayer is linked to the transfer price that the taxpayer has agreed with its AE and in these circumstances, TNMM is the most appropriate method. 17. However, when we examine the arguments addressed by both the ld. Representative for the parties to the appeal in the light of the undisputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market research, sales and marketing, ware-housing, inventory control, quality control etc. and also risk like market risk, inventory risk, credit risk etc all are undertaken by any distributor for sale of products. No comparable instances have been brought either by the TPO or by the Ld. DRP that the other distributors are not performing such functions. What is important is to see is, whether there is any value addition or not on the goods purchased for resale? If there is no value addition and if the finished goods which are purchased from AE are resold in the market as it is, then gross profit margin earned on such transaction becomes the determinative factor to analyse the gross compensation after the cost of sales. Thus, we hold that under the facts of the present case, RPM should be held as MAM. 21. Co-ordinate Bench of the Tribunal in Asstt. CIT v. Kobelco Construction Equipment India Ltd. 186 TTJ 790 also decided the identical issue by relying upon Mattel Toys (I.)(P.) Ltd. (supra) and ITO v. L'oreal India (P.) Ltd. [2012] 24 taxmann.com 192 in favour of the assessee by returning following findings :- 13. The aforesaid decision clearly clinches the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son that in a comparable uncontrolled transaction, normally distributor requires to carry out all the functions necessary to enhance the sales like market research, inventory risk, credit risk etc.. In such circumstances, no comparable instances have been brought on record by the TPO/DRP. So, when finished goods purchased by the taxpayer are resold in the market without any value addition, then gross margin earned on such transaction is the only determinative factor to analyse gross compensation after the cost of sale. So, we are of the considered view that RPM in this case is the MAM to bench mark the international transactions. In these circumstances, addition made by the TPO/AO merely by disputing the method applied by the taxpayer is not sustainable in the eyes of law. Method for benchmarking the international transaction cannot be changed merely because of the fact that the taxpayer has suffered loss at the net level but has positive gross profit in trading segment as it depends on host of circumstances. So, Grounds No.4, 5 6 in ITA No.1674/Del./2016 (AY : 2011-12) ITA No.1982/Del./2017 (AY : 2012-13) and Grounds No.3, 4 5 in ITA No.7088/Del./2017 (AY : 2013-14) are dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g bright-line should not be taken as part of AMP expenses. In this regard, at the outset, the Assessee would like to submit that the Learned Transfer Pricing Officer ('Ld. TPO) in its Order dated January 07, 2015 passed u/s. 92CA of the Income-tax Act, 1961 ( the Act ), has not made any adjustment on account of excessive spend by the Assessee on AMP. Further, this issue was also not discussed eluting the hearing held before the Hon'ble Panel on December 14, 2015. However, in case the Hon'ble Panel wishes to analyse the marketing intangible/AMP issue at this stage, the Assessee seeks a reasonable opportunity to present its case in line with the principle of natural justice. In case your honour's require any other information/clarifications, the Assessee would appropriately respond at the earliest. 28. Bare perusal of the aforesaid letter dated 29.12.2015, undisputedly received by the ld. DRP, goes to prove that when letter (supra) issued by the taxpayer seeking opportunity to explain the query raised by the ld. DRP but the ld. DRP without affording any opportunity of being heard, ld. DRP has passed the impugned order on 30.12.2015 ..... 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