9911796707
TMI Blog2019 (2) TMI 2062X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational transaction as per judicial discussion hereinabove and without prejudice to these findings, since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment is warranted. TP adjustment - Arm s Length rate for international transaction of payment of royalty at 3.5% as against royalty paid @ 5% by the assessee - HELD THAT:- As decided in assessee own case [ 2019 (1) TMI 1567 - ITAT DELHI ] we direct the TPO to determine the Arm s length royalty @ 4.05%. Ground No. 5 is partly allowed. International transaction of allocation of Asia Regional Head Quarters expenses allegedly holding that no specific services were received by the assessee in consideration for such payments - HELD THAT:- As decided own case [ 2019 (1) TMI 1567 - ITAT DELHI ] the adjustment computed by the TPO/DRP on account of allocation of RHQ expenses is uncalled for and deserves to be deleted. TP adjustment in respect of service warrantee charges received by the assessee by applying margin of 26% on such reimbursement - HELD THAT:- The assessee is not acting as an agent or a service provider for the associated enterprise but is seeking reimbursement of the actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e own case [ 2019 (1) TMI 1567 - ITAT DELHI ] we direct the Assessing Officer to treat royalty payment as revenue expenditure. Deduction claimed by the assessee u/s 80JJAA - HELD THAT:- An identical issue was considered and decided by the Tribunal in assessee s own case in [ 2019 (1) TMI 1567 - ITAT DELHI ] direct the Assessing Officer to allow claim of deduction u/s 80JJAA of the Act as claimed by the assessee. Charging of interest u/s 234B, 234C and 234D - HELD THAT:- Levy of interest is mandatory, though consequential to our decision. The Assessing Officer is directed to levy interest as per the provisions of the law. Interest u/s 234C to be charged on the returned income. Error in granting benefit of advance tax / self assessment tax/TDS credited - HELD THAT:- We find that there is some error in granting tax credit to the assessee in respect of advance tax, self assessment tax and TDS. We direct the Assessing Officer to give credit to the assessee after verifying the tax challan /TDS certificates. Grounds are allowed for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... ,37,05,303 AMP / Sales of the comparables 2.98% Amount that represents bright line 275,54,18,418 Expenditure on AMP by assessee 851,84,13,375 Expenditure in excess of bright line 576,29,94,957 Mark-up at 15.46% 89,09,59,020 Reimbursement that assessee should have received. 665,39,53,977 Reimbursement actually received 127,80,24,307 Adjustment to assessee's income 537,59,29,670 7. The ld. counsel for the assessee stated that the issue is decided by the Tribunal in assessee's own case for assessment year 2008-09 in ITA No. 6253/DEL/2012 vide Ground No. 3.3. of that appeal. 8. The ld. DR stated that the facts under consideration are different and, therefore, distinguishable from the earlier assessment year. It is the say of the ld. DR that a survey operation u/s 133A of the Act was conducted on 24.06.2010 and during the course of survey, statements of expatriate employees show that LG Korea is exercising control and consideration over LG India. Drawing support from the statements, the ld. DR strongly contended that during the year under consideration, the assessee has incurred AMP expenses and its Associated Enterprises [AEs] should have reimbursed the same and, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatute in Chapter X postulates. Rules also do not so stipulate." 11. Respectfully following the judgment of the Hon'ble High Court of Delhi [supra], we hold that BLT has no mandate under the Act and accordingly, the same cannot be resorted to for the purpose of ascertaining if there exists an international transaction of brand promotion services between the assessee and the AE. 12. In our considered opinion, while dealing with the issue of bench marking of AMP expenses, the Revenue needs to establish the existence of international transaction before undertaking bench marking of AMP expenses and such transaction cannot be inferred merely on the basis of BLT. For this proposition, we draw support from the judgment of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd 381 ITR 117. 13. In this case, the Hon'ble High Court held that existence of an international transaction needs to be established de hors the Bright Line Test. The relevant finding of the Hon'ble High Court reads as under: "43. Secondly, the cases which were disposed of by the judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand of SMC. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 61. The submission of the Revenue in this regard is: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. XXX 34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. 35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent company which is the entrepreneur. The brands are owned by the parent company. The Indian subsidiary only acts on behalf of the parent company. The Revenue alleges that eventual beneficiary of the acts of the Indian subsidiary is the parent company. Any benefit that may accrue to the Indian subsidiary is at best incidental to the entire exercise. This action of the Indian subsidiary amounts to rendering of a service to its foreign AE for which arm's length compensation was payable by foreign AE to its Indian subsidiary. 17. It is the say of the ld. DR that the functions carried out by the assessee are in the nature of development, enhancement, maintenance, protection and exploitation of the relevant intangibles and thus, the assessee deserves compensation. 18. The case of the ld. DR is that the act of incurring of AMP expenses by the assessee is not a unilateral act and is an international transaction for following reasons:- i) Though, the AMP expenditure may be for the purpose of business of the assessee but it is in performance of function of market development for the brands and products of the AE that enhances the value of the marketing intangibles owned by the for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erstanding of the facts and law, mere agreement or arrangement for allowing use of their brand name by the AE on products does not lead to an inference that there is an "action in concert" or the parties were acting together to incur higher expenditure on AMP in order to render a service of brand building. Such inference would be in the realm of assumption/surmise. In our considered opinion, for assumption of jurisdiction u/s 92 of the Act, the condition precedent is an international transaction has to exist in the first place. The TPO is not permitted to embark upon the bench marking analysis of allocating AMP expenses as attributed to the AE without there being an 'agreement' or 'arrangement' for incurring such AMP expenses. 22. The aforesaid view that existence of an international transaction is a sine qua non for invoking the transfer pricing provisions contained in Chapter X of the Act, can be further supported by analysis of section 92(1) of the Act, which seeks to benchmark income / expenditure arising from an international transaction, having regard to the arm's length price. The income / expenditure must arise qua an international transaction, meaning thereby that the ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not have any bearing on the existence of 'international transaction' just because it is engaged in manufacture has not merit. 25. Considering the aforesaid contention of the Revenue, we are of the considered view that the Hon'ble High Court in the case of Maruti Suzuki India Ltd [supra] held that the findings of the Hon'ble High Court with regard to existence of international transaction was only with respect to the case of three limited risk distributors namely, Sony Ericsson, Canon and Reebok etc., wherein the existence of international transaction was admitted and not in dispute. The Court accordingly held that such findings in the case of Sony Ericsson cannot be applied to the case of the manufacturers. 26. The Hon'ble High Court held as under: "43. Secondly, the cases which were disposed of by the Sony Ericsson judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee (Indian entity) has economic ownership of the brand/logo/trademark in question, in the case of long term right of use of the same. This principle also squarely covers the present case. The assessee has a long term agreement for the use of the trademark 'LG' in India. This clearly evidences the fact that the economic benefit arising out of the alleged promotion of the AE's logo is being enjoyed by the assessee. There is a clear opportunity and reasonable anticipation for the assessee to benefit from the marketing activities undertaken by it. This is clearly evidenced by the significantly higher profits made by assessee compared to its industry peers and also the very sizeable year on year increase in its turnover. In view of the aforesaid, it is respectfully submitted that the economic ownership of the trademark 'LG' rests with the assessee. The Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd (supra) disagreed with the finding of the Special Bench that the concept of economic ownership is not recognized under the Act. The relevant observations in paras 151 to 154 of the judgement are reproduced hereunder: "151. Economic ownership of a tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Indian entity. It wa submitted that the economic ownership of the brand rests with the assessee and accordingly, the assessee cannot be expected to seek compensation for the expenditure incurred on the asset economically owned by it. No Transfer Pricing adjustment on account of AMP expenses would be warranted. The aforesaid test is fully satisfied in the case of the assessee and the Transfer Pricing adjustment on account of AMP expenses made by the TPO is liable to be deleted. 30. The assessee being a full-fledged manufacturer, entire AMP expenditure is incurred at its own discretion and for its own benefit for sale of LG products in India. In the case of the appellant, the advertisements are aimed at promoting the sales of the product sold under trademark 'LG' manufactured by the assessee and not towards promoting the brand name of the AE. In such circumstances, the alleged excess AMP expenditure does not result in an international transaction and the assessee cannot be expected to seek compensation for such expenses unilaterally incurred by it from the AE. 31. The Revenue has strongly objected for the aggregated bench marking analysis for the AMP. According to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .01% in the manufacturing segment and 4.52% in the distribution segment and the same is higher than that of the comparable companies at 4.04% in the manufacturing segment and 4.46% in the distribution segment. TNMM has undisputedly been satisfied. Since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment on account of AMP expenses is warranted. 34. Considering the facts of the case in hand in totality, we are of the view that the Revenue has failed to demonstrate by bringing tangible material evidence on record to show that an international transaction does exist so far as AMP expenditure is concerned. Therefore, we hold that the incurring of expenditure in question does not give rise to any international transaction as per judicial discussion hereinabove and without prejudice to these findings, since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment is warranted. Ground Nos. 3 to 3.34 of the assessee are allowed." 10. Respectfully following the aforementioned findings of the coordinate bench, Ground No. 4 is allowed. 11. Ground No. 5 relates to TP adjustment of Rs. 41,87 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm license may charge. It can be seen that the TPO downgraded 2% on this score and reduced the unadjusted comparable rate of 3.5% to the adjusted 1.5%. To put it differently, the TPO treated the premium charged by the comparable licensors on account of fixed term licenses at 57% (2/ 3.5*100), or in other words, the discount at such rate to the prevalent market rate on account of perpetual license. However, the DRP treated such discount for perpetual license at 22% (1/4.5*100). Considering the entirety of the facts and circumstances of the instant case, we find that the rate of premium on the license with fixed term at 22% is on a higher side. In our considered opinion, the rate of such premium should be restricted to 10% of the average rate of royalty of the comparable cases. 10.9. It has been held above that the DRP rightly considered three companies as comparable, whose average rate of unadjusted royalty comes at 4.5% within the meaning of sub- clause (i) of rule 10B(1)(a). When rate is discounted with 10% under sub-clause (ii), resulting into a deduction of 0.45% (10% of 4.5), the arm's length rate of royalty as per subclause (iii) of rule 10B(1)(a) comes to 4.05% (4.5-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from the RHQ visit the assessee company. 50. In so far as the allegation that these are share holder services, we do not find any merit in this argument of the Revenue. Services are provided by LG Electronics Singapore Pte Ltd, which is not a shareholder of the assessee company and was created to provide managerial support services to various entities in the region, in the form of undertaking market research, market performance analysis, conducting consumer interviews engaging the services of third party consultants for undertaking market/industry analysis, provision of supply chain management services, provision of after sale services etc. and such activities cannot be termed as share holder activity. 51. We find that the assessee engaged a third party consultant to determine the arm's length price of the services provided by the RHQ. The consultant determined ALP at Rs. 6,521/- per hour as against the comparable uncontrolled price of Rs. 11,670/- per hour. Since the hourly rate charged by RHQ is lower than comparable hourly rate of third parties transaction of regional head quarter charges meets the arm's length test. 52. The Revenue has made the adjustment holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit of the assessed has to be compared with profit margins of related enterprise. The formula prescribed under the Rules does not accept the ratiocination adopted and applied by the TPO. 54. The Hon'ble Delhi High Court in the case of CIT vs Lumax Industries Limited ITA No 102/2014 held that the Transfer Pricing provisions do not authorize disallowance of any expenditure on the basis that it was not necessary for the assessee to incur the expenditure. The Hon'ble Court held as under: "16. On the question of addition made by the AO on account of ALP for the payment of royalty, learned counsel for the Assessee has rightly referred to the decision in Commissioner of Income Tax v. Sony Ericsson Mobile Communication (2015) 374 ITR 118 where the determination of the ALP of the royalty paid as Nil was not approved. The Court's attention has also been drawn to the decision in Commissioner of Income Tax v. EKL Appliances Limited (2012) 345 ITR 241 wherein it was held that Rule 10B (1) (a) did not authorize disallowance of any expenditure on the ground that it was not necessary for the Assessee to have incurred such expense. It was observed that though the quantum of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r: "17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of 38,58,80,000 only for which Comparable Uncontrolled Price ("CUP") method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 11 are allowed for statistical purposes. 21. Ground No. 8 relates to TP adjustment of Rs. 20,01,35,879/- in respect of service warrantee charges received by the assessee by applying margin of 26% on such reimbursement. 22. Warranty service charges received from AE, comprise of the following: - Provision of warranty services Rs. 6,07,16,151 - Reimbursement of in-warranty expenses Rs.43.54.24.268 - Service warranty charges Rs.27,36,12,964 Total Rs.76,97,53,383 23. The nature of these expenses are explained as follows: (I) Provision of warranty services: 24. With respect to the mobile phones supplied by LGEK in India, independent authorized service centers in India provide warranty and repair services. The assessee being in Indi incurred certain expenditure towards employee and other administrative costs while rendering after sales service during in-warranty period because the mobile [hnes are supplied by LGEK and hence in warrantee period services cannot be provided from Korea. For such services, LGEK compensates the assessee for provision of such services. (II) Reimbursement of in-warranty (spare parts) expenses: 25. As mentioned above, the products are supplied f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d mutual benefit. The ld. counsel for the assessee prayed for deletion of mark up. 30. The ld. DR strongly supported the findings of the TPO/Assessing Officer. 31. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below qua the issue. In our considered opinion, the TPO has misconstrued the entire transaction wherein the assessee sells the product imported from the associated enterprise, to the customer in India on a principal to principal basis. Such sale of product to customer entails an obligation on the assessee to provide service warranty for one year of the sale. Such warranty is out-sourced to third party service provider in India whose charges are incurred by the assessee as and when such claims are received from the customers. In terms of the arrangement with the associated enterprise, the assessee recovers the entire actual cost of providing service warranty to the customer. In our considered opinion, the assessee is not acting as an agent or a service provider for the associated enterprise but is seeking reimbursement of the actual cost incurred by it. 32. While making payment for third-party costs for services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng benchmarking analysis, it would not be appropriate to consider costs incurred by third party or unrelated enterprise to compute assessee's net profit margin. The relevant findings of the High Court read as under: "39. The TPO's determination enhanced LFIL's cost base for applying the operating profit over total cost margin. LFIL's compensation model is based on functions performed by it and the operating costs incurred by it and not on the cost of goods sourced from third party vendors in India. Allotting a margin of the value of goods sourced by third party customers from Indian exporters/vendors to compute the appellant's profit is unjustified. This Court is of opinion that to apply the TNMM, the assessee's net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Textually, and within the bounds of the text must the AO/TPO operate, Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee's net profit margin for application of the TNMM. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too." 37. The SLP filed by the Revenue against the aforesaid decision of the Hon'ble High Court was dismissed by the Hon'ble Supreme Court in SLP (Civil) No 15244/2017. 38. Further, we find that the aforesaid arrangement of receiving reimbursement for warranty transaction on actual cost basis was accepted to be at arm's length by the DRP in assessment year 2007-08 and by the TPO in assessment year 2008-09. 39. Considering the facts of the case in totality in the light of judicial decisions discussed hereinabove, we do not find any merit in the impugned TP adjustment. We direct the Assessing Officer/TPO to delete the same. Ground No. 8 is allowed. 40. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x months from the date of production, whichever is earlier. The said notification also provided that the eligibility certificate to the assessee will be issued by the joint/additional director of concerned Development Authority and the same will be produced before the concerned assessing officer. The Addl. Director Industries, Greater Noida Industrial Development Authority, vide letter No. 1344 dated 23/06/1999 issued eligibility certificate to the assessee. As per this certificate fixed capital investment is of Rs.51,57,95,446/-. The date of commencement of production is 9/03/1998 and the first sale was affected on 27th March, 1998. The assessee applied for exemption from trade tax [sales tax] vide application dated 10/09/1998. The exemption from trade tax [sales tax] was provided from 27th March, 1998 to 26th March, 2013 for a period of 15 years or till the time the exemption of sales tax was availed of to the extent of 200 per cent of fixed capital investment i.e. Rs.1,02,75,90,892/- whichever was earlier. This certificate also provided the items i.e. Colour TV, Washing machine and Air-conditioners on which exemption from sales tax was provided. Another certificate was issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court of All. However, upon careful consideration, we find that there is no proper justification to deviate from the decision of the ITAT in assessee's own case. The appeal against the Tribunal order is still pending in Hon'ble High Court. Under the circumstances, the judicial propriety mandates that we adhere to the decision of the Tribunal in assessee's own case. Accordingly, respectfully following the precedent as above, we uphold the order of the Ld. Commissioner of Income 80. We find that the assessee's appeal against the order of the Tribunal for A.Y 2002-03 is pending before the Hon'ble High Court. Judicial propriety mandates that we adhere to the decision of the coordinate bench in assessee's own case. Respectfully following the precedents [supra] we decline to interfere with the findings of the CIT(A). Ground No. 8 is accordingly dismissed. 42. Respectfully following the precedent, we decline to interfere with the findings of the DRP. Ground No. 9 is accordingly dismissed. 43. Ground No. 10 relates to disallowance of Rs. 97,71,71,875/- out of aggregate royalty amounting to Rs. 1,39,59,59,821/- paid to LG Electronics, Korea holding the same to be in the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly;". 97. The claim of the assessee is that the workmen who joined in the preceding year in which such workmen worked for less than 300 days should be considered provided that the period of employment of such workmen is equal to or more than 300 days in the relevant previous year. What the assessee contends is that new workmen, who did not fall in the category of "regular workmen", on account of employment being for less than 300 days in the year of appointment, should be considered as "regular workmen" in the subsequent year, provided such workmen continue to be employed with the company and the total period of their employment is equal to or more than 300 days in the subsequent year. Thought this contention of the assessee has been take care of by the second proviso, but the same has been given effect from 1.4.2019. 98. If the effect of the second proviso is given retrospectively, then the assessee's claim of deduction is allowable. Memorandum explaining provisions of Finance Bill 2018 states that the amendment is intended to rationalize the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that the statutory liability for sales-tax actually discharge after the expiry of accounting year in compliance with the relevant stature is entitled to deduction under Section 43B. The High Court has held the amendment to be clarificatory and, therefore, retrospective. The Gujarat High Court in the above case held the amendment to be curative and explanatory and hence retrospective. The Patna High Court has also held the amendment inserting the first proviso to be explanatory in the case of Jamshedpur Motor Accessories Stores v. union of India and Ors. ([1991] 189 ITR 70.), It was held that amendment inserting first proviso to be retrospective. The special leave petition from this decision of the Patna High Court was dismissed. The view of the Delhi High Court, therefore, that the first proviso to section 43B will be available only prospectively does not appear to be correct. As observed by G.P. Singh in his Principles of statutory Interpretation, 4th Edn. Page 291, "It is well settled that if a statute curative or merely declaratory of the previous law retrospective operation is generally intended." In fact the amendment would not serve its object in such a situation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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