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TMI Blog2020 (9) TMI 319X X X X Extracts X X X X X X X X Extracts X X X X ..... ing as a substantive adjustment. In AY 2012-13, similar adjustment was made by the ld. TPO by adopting the intensity approach which was held not to be sustainable by the coordinate Bench of the Tribunal for AY 2012-13 order [ 2020 (1) TMI 404 - ITAT DELHI] in taxpayer s own case by following the order passed by the coordinate Bench of the Tribunal in taxpayer s own case in earlier years. Scope and value of the international transactions cannot be extended to the so-called excessive expenditure incurred by the taxpayer on account of nonroutine AMP beyond the reimbursement already received by the taxpayer under MDF agreement and as such, adjustment made by the TPO on account of AMP expenses is not sustainable in the eyes of law, hence ordered to be deleted. Comparable selection - Functional dissimilarity - HELD THAT:- OTS E-Solutions Private Ltd. (OTSE) is a routine distributor/supply chain shows that the functions performed, risk assumed and expected reward is not comparable to the taxpayer. The taxpayer is also performing critical functions such as quality control and post sale/warranty support as a routine distributor whereas OTSE being an aggregator provides a platform for sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. The taxpayer has already given the detailed working capital calculation before the TPO as well as DRP, as is evident, during the TP as well as DRP proceedings. Working capital adjustment was also granted to the taxpayer consistently from AYs 2005-06 to 2011-12. So, in these circumstances, TPO is directed to grant the working capital adjustment to the taxpayer after due verification. Adjustment made to the proportion of international transactions with AE - HELD THAT:- Since this is a factual issue not controverted by the ld. DR for the Revenue the issue is remitted back to the TPO to make correct computation of proportionate adjustment of international transactions of the taxpayer with its AE after providing an opportunity of being heard to the taxpayer. Disallowance of salary expenditure paid to the expatriate employee of SEC, Korea u/s 37(1) - HELD THAT:- This issue is covered in case of taxpayer s parent company, SEC, Korea [ 2018 (3) TMI 1206 - ITAT DELHI] . In these circumstances, disallowance made by the AO and accepted by the ld. CIT (A) is ordered to be deleted. X X X X Extracts X X X X X X X X Extracts X X X X ..... RP/AO/TPO erred OM: a. not demonstrating the existence of an 'understanding' or an 'arrangement or 'action in concert' between the Appellant and its Associated Enterprises (AEs) w.r.t. the AMP spend; and b. not appreciating that the AMP expenses incurred by the Appellant are wholly and exclusively focused on generating domestic sales for its own business operations (and aligned with the risk profile of the Appellant) and the benefit arising from the incurrence of the AMP expenses by the Appellant has been received by the Appellant and the benefit, if any, resulting to its AEs is merely incidental. 7. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in holding that the AMP expenses incurred by Appellant has led to the creation of marketing intangibles and resulted in promotion of' Samsung Brand' for which the Appellant should be compensated by the legal owner of the brand. 8. That on the facts and circumstances of the case and in law, the Ld. DRP/ AO/ TPO have erred in adopting intensitybased approach which is not a prescribed method under the Income-tax Rules, 1962. 9. That on the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions performed, assets employed, risks assumed and rejecting companies selected by the Appellant. 16. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in incorrectly computing margin of the Appellant and the comparables. GROUNDS AGAINST PROTECTIVE ADJUSTMENT MADE IN RELATION TO AMP EXPENSES UNDER BRIGHT LINE TEST METHOD 17. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making protective adjustment of ₹ 18,29,02,10,040/- on account of AMP which comprised of ₹ 11,73,56,19,026/- for Manufacturing Segment and ₹ 6,55,45,91,014/- for Trading Segment which, is impermissible under law. 18. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making protective adjustment when substantive adjustment has already been done in the hands of the same Assessee for same assessment year which is impermissible under law. 19. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred applying the 'bright line' test as a tool to identify and benchmark the alleged AMP transaction which has no statutory mandate u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ronics Co. Ltd v DCIT: [2018] 92 taxmann.com 171 (Delhi - Trib.). 27. That on the facts and circumstances of the case and in law the Ld. DRP IAO in holding that there was no employeremployee relationship between expatriate employees and the Appellant and the expatriate employees were the employees of the parent company, i.e., Samsung Electronics Co. Limited. 28. That on the facts and circumstances of the case and in law the Ld. DRP /AO erred in holding that expatriate employees were not working wholly and exclusively for the business of the Assessee and accordingly, their salary expenditure is disallowable under section 37(1) of the Act. 29. That on the facts and circumstances of the case and in law, the AO has erred in charging interest under Sections 234B and 234C of the Act. 30. That on the facts and circumstances of the case and in law, the AO erred in initiating penalty proceedings under Section 271(1)(c) and Section 271BA and Section 271AA of the Act for furnishing of inaccurate particulars and concealment of income." 2. Briefly stated the facts necessary for adjudication of the issue at hand are : Samsung India Electronics Pvt. Ltd. (SIEL), the taxpayer is a wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... salary expenditure of ₹ 167,75,31,950/- paid to the expatriate employee of SEC, Korea u/s 37(1) of the Act. 6. Assessee carried the matter before the ld. Disputes Resolution Panel (DRP) by way of filing objections which were partly allowed. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 7. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1, 2 & 3 8. Grounds No.1, 2 & 3 are general in nature hence need no specific adjudication. GROUNDS NO.4 TO 20 9. The aforesaid grounds raised by the taxpayer pertained to adjustment made by the ld. TPO/DRP/AO on account of AMP expenditure incurred by the taxpayer in a trading segment as well as network segment. Ld. TPO used the "intensity approach" by comparing the VAE (Value Added Expenditure)/Sales ratio of each comparable with that of the taxpayer. Ld. TPO has also made protective adjustment by applying BLT in licensed manufacturing segment and trading segment. 10. At the very outset, ld. AR f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der to the taxpayer by the AE cannot lead to the conclusion that there was an arrangement/understanding/action in concert between the taxpayer and AE for any excess amount incurred by the taxpayer. Moreover, BLT approach adopted by the ld. TPO is not tenable in law. 14. Hon'ble Delhi High Court in Sony Ericsson India Pvt. Ltd. v. CIT (2015) 374 ITR 118 (Del.) and subsequently in Maruti Suzuki India Ltd. v. CIT (2016) 328 ITR 210 (Del.) has categorically held that BLT is not a valid basis for determining the existence of international transaction or for that matter for computing the ALP of such international transaction involving AMP expenses. So, in these circumstances, the order of TPO passed by making BLT as basis of the ALP adjustment is not sustainable in the eyes of law. 15. Furthermore, Hon'ble Delhi High Court in subsequent decisions viz. Bausch & Lomb Eye Care (India) Pvt. Ltd. v. Additional CIT (2016) 381 ITR 227 (Del.) and Honda Siel Power Products Ltd. v. Dy. CIT (2016) 237 Taxman 304 held that it is for the Revenue to firstly discharge the onus to prove the existence of an international transaction between the taxpayer and its AE and only thereafter ALP of internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose." 40. Therefore, the argument advanced by the Ld. CIT (DR) that the MDF Agreement should be viewed as an evidence to demonstrate the existence of an understanding and arrangement to carry out AMP in India at the behest of the AE needs to be examined in light of the above principles laid down by the Delhi High Court. In the present facts, we find that this transaction of having received assistance /reimbursement has already been shown by the assessee in its Form 3CEB as an international transaction. It has been contended by the Revenue that by virtue of this agreement, the entire AMP expenditure incurred by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The amount of reimbursement shall be the actual Marketing Fund related expenses DISTRIBUTOR incurs to carry out the pertinent activities as specified in Article 3 and 4.3 for the term of this Agreement and the yearly total amount of such reimbursement shall be limited to USD 30,000,000 assigned by SEC. 4.2 DISTRIBUTOR shall submit to SEC a detailed implementation plan pursuant to the annual Marketing fund schedule in writing at least two weeks in advance of the proposed implementation date for approval of said activities. DISTRIBUTOR shall be entitled to claim a reimbursement for the expenses hereof only when execution of such activities are pre-approved by SEC in a manner stated herein. 4.3 The extent of the Marketing Fund related activities to be reimbursed shall be limited to the following: Category ACTIVITIES Advertising Broadcast media, print media, outdoor ad. Sponsor, intent and PR Marketing infrastructure Market research, consulting, market data subscription database Other marketing infrastructure activities Promotion Sales promotion activities Dealer support activities (dealer convention, product training, incentive tour) Exhibition, trade, roadshow S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom many multinational companies; and to remain in the competition as a lead brand it has to aggressively promote its product under the brand to remain in the competition and to augment its sale. All the necessary functions of strategizing, advertising and marketing activities, its implementation for market penetration in India is solely carried out by the assessee and there is no material on record to infer that there is any arrangement or agreement with the AE at any point of time that assessee is required to spent on AMP or it has been done at the behest of the AE. The reason adopted by the Revenue to conclude that the incurrence of AMP expenditure by the assessee for promoting the brands which is owned by its AE constituting a separate international transaction for the purpose of Section 92B which requires separate bench marking, does not has any legs to stand, because the Revenue has failed to show the existence of any agreement, understanding or arrangement between the assessee company and AE regarding the quantum of AMP spent or it was spent on behest of AE. The TPO has not recorded or identified any such separate arrangement or agreement that AMP expenses incurred by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; Clause (ii) of the said explanation reads as follows ii. The expression "intangible property" shall include- (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos;……………….." Thus, under the expanded definition of the term 'international transaction' intangible property has been defined to include marketing related intangible assets such as trademark, trade name, brand name and logos, etc. This inter alia means that where two AEs engaged in the transaction which involved, purchase, sale, transfer, lease or use of intangibles rights then the same shall be classified as international transaction. From the above, definition, apart from transaction relating to purchase, sale or lease of tangible or intangible property, services lending or borrowing money, etc. functions having bearing on the profits, income, losses or assets is recko ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t exists, then no transaction or international transaction could be said to be involved between the AE and the assessee which can be reckoned to be covered within the provision of Transfer Pricing Regulation. The incurring of expenditure by the assessee is in fact purely a domestic transaction by a domestic enterprise with a third party in India for its own business purpose. Even the reimbursement, as discussed above, by the assessee to its AE was in lieu of sponsorship fee paid to ICC which again was wholly and exclusively for the assessee's own business and was not at the behest or mandate of AE. This contention of the learned counsel on the face of record is liable to be accepted and in absence of any material or any kind of arrangement discovered or brought on record by the Revenue, remains unrebutted. The onus is on the Revenue to show that the twin requirement of Section 92B exists, that is, firstly, the transaction involved was between the AE, one of which is resident and other a non-resident was involved; and secondly, the transaction of AMP expenses has taken place between the two AEs (except for reimbursement of ₹ 33.60 crore). Now it has been well settled by the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AMP activity and function based on its own judgement and commercial realities. Revenue has not placed any material or evidence to show that there existed an understanding to incur "excessive" AMP expenditure. The arrangement and understanding were limited to the amounts agreed to be paid as assistance under the MDF Agreement. The amounts incurred as AMP expenditure by the appellant under the MDF Agreement have already been received as reimbursement/assistance and have indisputably been disclosed as an international transaction in Form 3CEB and form part of the transfer pricing study conducted under Rule 10D. The AMP expenditure which is outside the ambit of reimbursement received under the MDF Agreement, has been incurred by the appellant on its own volition as per its own requirements and without any interference of the AE and have been paid to third parties. 44. In view of the above, we hold that the scope and value of international transaction cannot be expanded beyond the reimbursements received under MDF agreement to cover the entire gamut of AMP expenditure incurred by the assessee during the year." 18. So, in view of what has been discussed above, we are of the consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of AMP spend on the mere assumption that the supplier may terminate the agreement in the future is not sustainable. A taxpayer cannot be penalized on the presumption of a future event (which may not even occur) while ignoring the present facts and circumstances. It is also worthwhile to note that in the present case, the assessee has not paid any trade-mark or brand royalty to its AE for having used its brand." 20. Coordinate Bench of the Tribunal also held that the concept of protective adjustment has no place in the law and as such cannot be applied by returning following findings :- "It is settled law that protective addition along with substantive addition of an item of income can be made only when the identity of the real owner of the income is unclear. The following observations made by the coordinate bench in MSD Pharmaceuticals Pvt. Ltd. (supra) make this amply clear: "The very concept of protective addition is relevant only when an income is to be added in the hands of more than one taxpayer, in a situation in which there is an element of ambiguity as to in whose hands the said income can be rightly brought to tax. That's not the case before us. In our humble u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve referred to in the earlier part of this order while adverting to the objections posed by the taxpayer, we find ourselves in agreement to the objections posed and we have no hesitation in holding that what applies to bright line test fully applies to the Intensity approach as worked out in the facts of the present case as it is a reverse of bright line test as its mirror image. The said mental acrobatics and athletics do not have any judicial sanction and cannot be approved." 24. Ld. TPO by adopting the intensity approach qua trading segment and network segment proceeded to make alternative benchmarking as a substantive adjustment. In AY 2012-13, similar adjustment was made by the ld. TPO by adopting the intensity approach which was held not to be sustainable by the coordinate Bench of the Tribunal in ITA No.6813/Del/2017 for AY 2012-13 order dated 07.01.2020 in taxpayer's own case by following the order passed by the coordinate Bench of the Tribunal in taxpayer's own case in earlier years. 25. So, in view of what has been discussed above and by following the aforesaid order passed by the coordinate Bench of the Tribunal, we are of the considered view that scope and value of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ytej Commercial Co. Ltd. 6.28% Optiemus Infracom Ltd. 3.73% Redington India 3.66% OTS E-Solutions Pvt. Ltd. 4.52% Average 3.79% 31. At this stage, since there is no dispute in the method applied by the ld. TPO/ DRP, the ld. AR for the taxpayer compressed the controversy by seeking exclusion of two comparables, namely, OTS E-Solutions Private Ltd. & Sataytej Commercial Co. Ltd. and inclusion of Spice Mobility Limited. We would discuss suitability of aforesaid comparables for the purpose of benchmarking the international transactions qua trading segment one by one. EXCLUSION OF COMPARABLES SOUGHT FOR BY THE TAXPAYER OTS E-SOLUTIONS PRIVATE LTD. (OTSE) 32. The taxpayer sought exclusion of OTS E-Solutions Private Ltd. (OTSE) on ground of functional dissimilarity vis-à-vis the taxpayer and relied upon the financial statement of OTSE for AY 2014-15, available at pages 426 to 495 of the paper book. Perusal of the disclosure of change in accounting policies and changes in estimates explanatory (Test Block) Note 22-Significant Accounting Policies show under the head 'Corporation Information/ Overview' that "OTSE is engaged in online marketing of goods". OTSE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s comparable is not sustainable. 36. Perusal of pages 66 & 67 of the annual report for FY 2013-14 goes to prove that Sataytej is into the sale of surgical and medical equipment which is not comparable to taxpayer. Even otherwise, when the taxpayer has himself rejected other 3 comparables on the ground that those comparables are engaged in sale of medical equipments which is not comparable to the business of the taxpayer, he is required to adopt the principle of consistency. However, since it is a factual issue the same must be reexamined by the TPO. So, this comparable is remitted back to the TPO to examine afresh after providing an opportunity of being heard to the taxpayer. INCLUSION OF COMPARBALE SOUGHT FOR BY THE TAXPAYER SPICE MOBILITY LTD. (SPICE) 37. The taxpayer sought inclusion of Spice to benchmark the international transactions qua trading segment on the ground that the coordinate Bench of the Tribunal vide its order dated 04.10.2019 for AYs 2005-06 to 2011-12 directed to include this comparable in the final set of comparables if quarterly results are available and information can be extrapolated. 38. Ld. TPO / DRP have rejected this comparable on the ground that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er providing an opportunity of being heard to the taxpayer. TAXPAYER SOUGHT WORKING CAPITAL ADJUSTMENT 42. Ld. TPO denied the working capital adjustment sought by the taxpayer on the ground that, "since the working capital indices such as 'Debtors', 'Creditors' and 'Inventory' cannot be obtained for each of the Appellant's segment, working capital adjustment cannot be computed." 43. However, ld. DRP allowed the working capital adjustment to the taxpayer but TPO at the time of giving effect to the ld. DRP order has failed to grant the working capital adjustment. The taxpayer has already given the detailed working capital calculation before the TPO as well as DRP, as is evident form pages 840 to 858 of the paper book, during the TP as well as DRP proceedings. Working capital adjustment was also granted to the taxpayer consistently from AYs 2005-06 to 2011-12. So, in these circumstances, TPO is directed to grant the working capital adjustment to the taxpayer after due verification. INCORRECT COMPUTATION OF PROPORTIONATE ADJUSTMENT BY THE TPO FOR TRADING SEGMENT 44. The taxpayer challenged the adjustment made to the proportion of international transactions with AE made by the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to a condition that Tribunal's order is not challenged before the Hon'ble High Court, the contentions raised by the ld. DR for the Revenue is not sustainable. 49. Ld. AR for the taxpayer contended that expatriate employee was engaged on the basis of local employment contract and placed on record their employment letters, available at pages 865 to 872 of the paper book. Perusal of the employment letters show that the taxpayer is the employer of expatriate employees engaged for carrying out the day-to-day business efficiently and that they were governed by the conditions of the employment. Moreover, salary to the expatriate employees have been paid in India after deducting tax u/s 192 of the Act. Moreover, when SEC, Korea /AE is having no Permanent Establishment in India the expatriate employees were working under the control of taxpayer to carry out its business. 50. However, this issue is covered in case of taxpayer's parent company, SEC, Korea, vide order dated 22.03.2018 reported in (2018) 64 ITR (T) 99 (Delhi-Trib). In these circumstances, disallowance made by the AO and accepted by the ld. CIT (A) is ordered to be deleted. GROUNDS NO.29 & 30 51. Grounds No.29 & 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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