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TMI Blog2022 (9) TMI 1233X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue : Shri. Praveen Karanth, CIT(DR)(ITAT), Bengaluru ORDER PER PADMAVATHY S, ACCOUNTANT MEMBER This appeal is against the final Assessment Order passed by the National Faceless Appeal Centre, under section 143(3) r.w.s. 144(13) of the Income Tax Act, 1961 (the Act ), dated 17.03.2022 for the Assessment Year 2017-18. 2. The assessee raised grounds pertaining to the following issues : i. TP adjustments of Rs.12,85,77,521/- towards AMP expenditure pertaining to trading segment (ground Nos.3 to 18). ii. TP adjustment of Rs.50,73,76,084/- in relation to reimbursement of warranty expenses to AE (Ground Nos.19 to 23) 2. Ground Nos.1, 2, 24 and 26 are general in nature and does not warrant separate adjudication. Ground No.27 is consequential. 3. The assessee is primarily engaged in the business of software development services and trading of mobile phones. The assessee filed the return of income for Assessment Year 2017-18 on 28.11.2017 declaring a total income of Rs.235,41,08,150/-. The case was selected for scrutiny under CASS and accordingly notice under section 143(2) was duly served on the assessee. Since the assessee had international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trading Segment Revenue Sale of Products: Mobile Phones 2443134478 Sale of Services: Income from research and Development services - Revenue from operations 24431344785 Liability written back to the extent no longer required 59462888 Total Revenue 24490807673 Less: Non-Operating Income Liability written back to the extent no longer required 59462888 Total Non-Operating Income 59462888 Operating Revenue (OR) 24431344785 Expenses Purchase of Stock-in-trade: Mobiles Phones 20817698303 Employee Benefit Expenses 84423045 Finance Costs 34737270 Depreciation and amor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtisement, marketing and sales promotion for which the assessee needs to be adequately compensated. The TPO proceeded to treat the AMP as a separate international transaction and made an adjustment of Rs.12,85,77,521/-. With regard to the warranty expenses, the TPO noticed that the assessee has made a provision of Rs.145,79,52,674/- and out of this provision, the assessee has reversed Rs.66,95,53,353/- which included the reimbursement of warranty expenses of Rs.50,73,76,084/- to its AE. The assessee submitted before the TPO that the said cost is incurred by the AE on behalf of the assessee and these expenses were charged back by the AE at cost. The assessee however submitted that these charges were pure cost to cost reimbursement of third party warranty expenses incurred by the AE on behalf of the assessee and is routed through the Profit and Loss A/c and considered as part of cost based of determining arm s length nature of the trading activities of the assessee. However, the TPO treated the payment made in the form of reimbursement of warranty expenses as a class of its own and stated that it requires a separate analysis. The TPO called for evidence supporting the transaction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te adjustment towards AMP expenses and warranty cost. In this regard, the learned AR relied on the decision of the Coordinate Bench of the Tribunal in the case of Epson India Pvt. Ltd., Vs. DCIT (2022) 140 taxmann.com 273 (Bangalore Tribunal). 12. The learned DR submitted that the assessee has spent considerable amount towards sales, promotion and advertisement expenses to the tune of 2.65% of the sales but has not carried out any exercise to determine the ALP of such expenses though the expenses bring an intangible benefit in the form of brand value for AE. The learned DR therefore supported the order of the DRP where the DRP has given a finding that the AMP expenses is a separate international transaction and has to be bench marked separately with regard to warranty expenses. The learned DR relied on the order of the DRP. 13. We heard the rival submissions and perused the material on record. We notice that in schedule 234 of the financial statements of the assessee, the AMP expenses and warranty expenses are part of the overall other expenses amounting to Rs.256,15,87,616/-. We also notice that in the segment financials considered for TP analysis, the said other expenses ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. 9. The coordinate bench of the Tribunal in the case of H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not furnished FAR analysis of AMP functions in its TP study. In our considered opinion, the matter requires remission to the TPO for undertaking fresh analysis to establish existence of international transaction in respect of AMP expenditure and true nature of transaction between the appellance and its AE. After due analysis of FAR of the AMPfunctions carried out by the appellant and having regard to the actual conduct of the appellant vis- -vis its AE and economic substance of the transactions between the appellant and its AE if the TPO is of the opinion that there existed an international transaction in the form of AMP function, then to undertake the exercise of determination of ALP by adopting a suitable method of compensation to the appellant for performing the AMP functions of its AE 11. For the year under consideration, the issue for consideration is treating the AMP expenses as a separate transaction from the distribution segment and making TP adjustment for the same. The Ld AR submitted that whether AMP expenses is a separate international transaction is not contended in the year under consideration and prayed that the decision rendered by the coordinate bench on t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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