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TMI Blog2020 (9) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... ises during the year. Therefore, a reference was made to the Transfer Pricing Officer (TPO) for determination of the ALP. The TPO passed an order under section 92CA(3) on 30.01.2016 proposing an adjustment of Rs. 1,73,05,026/-. The assessee filed its objections before the DRP who directed the AO to retain the comparables selected by the TPO and to compute the adjustment accordingly. DRP also directed the AO to allow working capital adjustment and risk adjustment. Accordingly, final assessment order was passed against which assessee is in appeal before the Tribunal. 2.1. This appeal is taken up for hearing on 01.09.2020 through Video Conferencing and both the parties were heard. 3. The Ld.Counsel for the assessee submitted that the assessee had entered into three international transactions i.e. Software Development Services, Software Support Services and Distribution of products. The assessee treated the first two activities as falling under the definition of 'international transactions' and accordingly bench marked the same. As far as distribution activity is concerned, the assessee had stated that its Associate Enterprise (AE) has supplied the products to the assessee free of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, it has incurred loss in this year. It was also submitted that as per the agreement, the AE will not charge any amount to the assessee if the operating cost is more than the revenue earned. The TPO, however, was not convinced with the assessee's explanation. He held that even though the cost price to the assessee is 'nil', the product has a price and that the sales are made on behalf of the AE and that the assessee company should be compensated by way of a suitable mark-up. Thus, he was of the opinion that the arrangement is nothing but in the nature of service agreement requiring a markup. The TPO, therefore, issued a show-cause notice to the assessee. 7. In reply to the show-cause notice, the assessee furnished its reply on 24.12.2014 stating that the assessee is only acting as a captive distributor and is not distributing on behalf of its AE. In addition thereto, the assessee also furnished a fresh search for comparables which resulted in 11 companies with an average margin of 0.40%. The TPO however, did not accept the assessee's TP analysis on the ground that the TP analysis has to be reported in Form 3CEB and filed before the due date of filing of the return of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was providing services of selling the products of AE in India and therefore, it should be considered as a service agreement and should be compensated with a mark-up. 10. Having regard to the rival contentions and the material on record, we find that admittedly, the assessee has received the goods from its AE free of cost and the assessee has not made any payment whatsoever to the AE during the relevant A.Y or in the subsequent A.Ys till the A.Y 2013-14. We have also gone through the copy of the agreement between the assessee and its AE wherein it was clearly spelt out that the assessee is a distributor and is not required to make the payments to the AE for the goods supplied to it till the assessee makes profit from the transactions. The relevant clause is reproduced hereunder for ready reference: "11. Transfer Pricing and Remuneration: a) In consideration for the rights provided to Distributor hereunder, Distributor shall pay to Comm Vault US an amount (the "Payment Amount") equal to a specified percentage (the "Specified Percentage") of Distributor's sales revenue less operating costs/expenses of Distributor ("Operating Costs/Expense"), The parties agree to negotiate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the case may be, contributed under sub-section (2) [or sub-section (2A)], has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction [or specified domestic transaction] was entered into. 13. Thus, from the recitals in the agreement, it can be seen that the intention of the parties is clear that the assessee shall be a distributor of AE's products in India. The Hon'ble Delhi High Court in the case of Sony Ericson Mobile Communications India (P) Ltd. v. CIT reported in (2015) , 374 ITR 118 (Del.) discussed the context and ruling in EKL Appliances Ltd, reported in 345 ITR 241 (Del.) to hold as follows: "CIT versus EKL Appliances Ltd - Disregarding actual transaction 147. Tax authorities examine a related and associated parties' transaction as actually undertaken and structured by the parties. Normally, tax authorities cannot disregard the actual transaction or substitute the same for another transaction as per their perception. Restructuring of legitimate business transaction would be an arbitrary ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the entries in the books of account, then the income chargeable to tax or loss shall not be decreased or increased by reason of Transfer Pricing computation. Thus, transfer pricing adjustments do not enure to the benefit or advantage the assessed, thereby reducing the income declared or enhancing the declared loss. Pertinently, the Sub-Section makes reference to the income chargeable to tax or increase in the loss on the basis of the entries in the books of account. The concept of set off or adjustments was/is well recognized and accepted internationally and by the tax experts/commentators. In case the legislative intent behind sub-section (3) to Section 92 was to deny set off, the same would have been spoken about and asserted in different and categorical words. Legislative intent to the contrary should not be assumed." 16. Thus, section 92 provides for the computation of income from international transaction having regard to the Arm's Length Price. While sub-section (1) provides the necessary jurisdiction, sub-section (2) requires that the ALP should be understood to mean that the expenses or interest incurred by the non-resident should not be overlooked, i.e. the pric ..... X X X X Extracts X X X X X X X X Extracts X X X X
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