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TMI Blog2022 (7) TMI 1377X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned AO has erred in: a) Making a reference for the determination of the Arm's Length Price of the international transactions to the TPO without demonstrating as to why it was necessary and expedient to do so. b) Passing the order without demonstrating that the Appellant had any motive of tax evasion. c) Not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law. GROUNDS RELATING TO TP ADJUSTMENT WITH RESPECT TO ADVERTISEMENT, MARKETING, PROMOTION (`AMP') EXPENSES 3. The lower authorities have erred in making transfer pricing adjustment of Rs. 33,95,60,000/- towards AMP expenses. 4. The lower authorities have erred in: (i) Not appreciating that the Appellant had incurred AMP expenses with third parties and there was no transaction with the Associated Enterprise ("AE") (ii) Concluding that there exists international transaction between the Appellant and its AE. In the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... munications Ltd as a comparable. 8. Without prejudice to above, the learned TPO has erred in incorrectly computing the operating profit margins in case of the comparables selected by him. 9. The Hon'ble DRP has erred in upholding the action of the TPO/ AO of segregating the AMP expenses incurred by the Appellant into routine and non-routine and observing that non-routine AMP expenditure is towards Development, Enhancement, Maintenance, Protection and Exploitation ("DEMPE") functions requiring compensation from AE without placing any evidence on record to demonstrate that there is a transaction as envisaged in section 92F(v) of the Act. GROUNDS RELATING TO TP ADJUSTMENT WITH RESPECT TO BUSINESS SUPPORT SERVICES SEGMENT 10. The lower authorities have erred in making transfer pricing adjustment of Rs. 20,54,912/- for the business support services segment. 11. The lower authorities have erred in: (i) Rejecting comparables selected and the TP analysis undertaken by the Appellant on unjustifiable grounds. The lower income tax authorities have erred in rejecting following companies selected as comparables by the Appellant: * Priya International Ltd * ICRA Manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.1 Assessee is engaged in the business of distribution of Epson products like printers, cartridges, scanners, projectors, spares and other consumables. It filed its return of income for year under consideration on 29/11/2016 declaring total income of Rs.56,33,01,500/-. The case was selected for scrutiny and notice u/s. 143(2) and 142(1) of the Act was issued to assessee. In response, assessee filed relevant details as called for. 2.2 The Ld.AO noted that, the assessee had international transaction with its wholly owned company being Epson Singapore Pte Ltd. The Ld.AO noted that the assessee is engaged in the distribution of the products of its AE in India. As the value of international transaction exceed Rs. 15 Crores, reference was made to the Ld.TPO under 92CA of the Act. On receipt of the 92CA reference, the Ld.TPO called upon assessee to furnish economic details of the international transaction between assessee and the AE. The Ld.TPO noted that following were the international transaction reported in Form 3CEB. S. No. Transaction Total Amount 1. Purchase of traded goods 844,23,34,121 2. Sale of products 151,59,147 3 Commission received 1,34,80,501 4. Technical c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. in ITA No. 110/2014 and ITA 710/2015, * CIT Vs Whirlpool of India Ltd. (129DTR169), * Baush & Lomb Eyecare (India) (P) Ltd. Vs. Addl.CIT (129DTR201) * Yum Restaurants (India) Pvt. Ltd., Vs ITO (ITA No. 349/2015 dtd. 13/01/2016) and Honda Seil Products. 2.6 The Ld.TPO after considering the submissions of the assessee, proposed adjustment as under: Particulars Amount Excess AMP incurred for the benefit of the AE 2967.41 lakh Arm's length Margin (refer para no. 4.7.4. 14.43% Arm's Length Price (2967.41 lakh *114.43%) 3395.60 lakhs Price received - Adjustments 3395.60 lakhs Business Support Service segment 2.7 The Ld.TPO observed that, under Business support service segment, the assessee selected following 9 comparables with a weighted average of 7.44% as against assessee's margin at 6.43%. S. No. Name of the company Year wise adjusted operating profits/operating revenue (%) Weighted average of adjusted operating profits/ operating revenue (%) FY 2015-16 FY 2014-15 FY 2013-14 1 Adhaan Solutions Pvt Ltd 0.94% 1.32% NA 1.05% 2 Priya International Ltd (Segmental) -0.22% -6.33% 19.65% 3.47% 3 MCI Management (India) Limited 1.10% 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount AMP Expenditure Rs. 33,95,60,000/- Business Support Services Rs. 20,54,912/- Total Adjustment u/s 92CA Rs. 34,16,14,912/- 2.10 On receipt of the order under 92CA, the Ld.AO passed the draft assessment order incorporating the proposed adjustment on 10/12/2019. On receipt of the draft assessment order by the assessee, objections were filed before the DRP. The DRP rejected the objections raised by the assessee. 2.11 On receipt of the DRP directions, the Ld.AO passed the impugned assessment order by making addition in the hands of the assessee at Rs.34,16,14,912/-. 2.12 Aggrieved by the impugned order, assessee is in appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that, Ground no. 1 is general in nature and therefore do not require adjudication. 4. Ground no. 2 has not been argued by the Ld.AR, however it is submitted that, the issue may be kept open to be argued in appropriate situation. Accordingly, we dismiss Ground no. 2 by keeping the issue open providing the right to argue the issue to the assessee in an appropriate assessment year. 5. Ground Nos. 3-9 are in respect of adjustment with respect to AMP expenses. 6. Ground no. 10 is general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d arrived at the average mean of gross profits margin(GPM) of 7 comparables which is at 4.44% whereas the GPM of the assessee is at 17.87%. Hence the assessee claimed that the transactions of the trading (Distribution) segment to be at arm's length as per the TP Study. The assessee incurs AMP expenses in order to carry out its distribution business. The TPO held that the assessee in trading/distribution segment has not confined itself just to distribution of trading goods but has performed additional functions in the form of AMP expenses. The TPO concluded that the assessee needs to be adequately compensated for such additional function undertaken and proceeded to compute the ALP following the 'Other Method". The TPO segregated the AMP expenses as routine and non-routine and made a TP adjustment by adding a margin @ 11.20% on the non-routine AMP expenses. The DRP confirmed the TP adjustment and accordingly the AO passed the final order. 6. The Ld AR submitted that (i) The functional profile of the assessee (pages 173-182 of paper book) identifies marketing activities as a key function performed by the assessee for distribution of products and the functional profile of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No 293 & 2479/Bang/2017] has remanded the matter back to the TPO/AO and prayed for a similar adjudication. 8. We have heard the rival submissions and perused the materials on record. The assessee has chosen RPM as the most appropriate method (MAM) for arriving at ALP. The assessee has chosen 7 comparables based on various filters applied and the median of weighted average of adjusted gross profit on sales % of these comparables was 4.44% (page 189 to 190 of paper book). The gross profit margin of the assessee from undertaking distribution activities during the year under consideration resulted in gross profit of 17.87% on sales (Page 254 of the paper book). Since the assessee's margin is more than the arm's length range, the margin of the assessee from its distribution activities is considered to be at arm's length from TP perspective. In a corroborative analysis done under Transaction Net Margin Method (TNMM) the assessee's margin is taken to be at arm's length as the median of the comparables was 1.08% whereas the operating profit of the assessee from undertaking the distribution activities was 3.12% (Page 255 of the paper book). We notice that the while arriving at the operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AMP expenses. The Hon'ble Tribunal has held that - 34. We notice that the co-ordinate bench has, following various decisions, held that the revenue has to first show that the AMP expenses would fall under the category of "international transactions". For that purpose, the revenue has to show that there existed an agreement between the assessee and its AE in the matter of incurring of AMP expenses. Admittedly, it is not shown in the instant case that there existed any agreement relating to incurring of AMP expenses. Thus, we notice that there is no change in facts relating to this issue between the current year and the AY 201011/2011-12. It was also held that when TNMM method is applied to benchmark the entire international transactions, then there is no requirement of making separate TP adjustment on account of AMP expenditure. In the earlier paragraphs, we have also held that TNMM as most appropriate method and has also held that the international transaction of Exports to AEs is at arms length. Hence, no separate adjustment is required to be made in respect of AMP expenses on this account also. 10. We have considered the Ld DR's submission that the coordinate bench of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised in the present appeal is identical with that of the A.Y. 2015-16. Nothing has been placed on record by the Ld.DR contrary to the above observations by Coordinate Bench of this Tribunal in order to take different view. Respectfully following the same, we are directing the Ld.AO to delete the adjustment made on account of AMP expenses by treating it as separate international transaction. Accordingly, ground nos. 3-9 raised by assessee stands allowed. 15. Before dealing with the comparability analysis, it is necessary sine qua non to understand the functions performed, assets owned and risks assumed by the assessee under the business support service segment. Functions Epson India is engaged in providing business support services to its parent entities Seiko Japan and Epson Singapore. These services are in the nature of business support and other customer support services. Strategic Management Functions Epson India operates under the broad strategy framework set out by its AEs. Epson India primarily performs the tactical managerial functions regarding day to day management of business. Corporate Services With respect to human resources, financial management, routine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of following two comparables: 18. ICRA Management Consulting Services Ltd. 18.1 The Ld.AR submitted that, this comparable was rejected by the Ld.TPO on the ground of functional dissimilarity as it was engaged in providing management services and professional consulting services. 18.2 It was submitted that Ld.TPO for A.Y. 2014-15 had accepted this comparable. The Ld.AR referred to page 832 of the paper book wherein the order dated 30/10/2017 passed by the Ld.TPO for A.Y. 2014-15 is placed. 18.3 The Ld.AR thus submitted that this company is functionally similar with that of the assessee and passed all filters applied by the Ld.TPO. 19. Concept Public Relations India Ltd. 19.1 The Ld.AR submitted that, this company is engaged in building relations and imaging for its clients. It is submitted that it also passes all the filters applied by the Ld.TPO. The Ld.AR submitted that, the Ld.TPO rejected this comparable, as it did not fall in the search matrix carried out by him. 19.2 On the contrary, the Ld.DR relied on orders passed by authorities below. 19.3 We note that, the DRP has not adjudicated the submissions of the assessee in respect of both the comparables. We find force i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company cannot be a fit comparable, due to functional dissimilarities and risk assumed by this company. Accordingly we direct this comparable to be excluded from the final list. 20.2 Killick Agencies & Mktg. Ltd. 20.2.1 With regard to the inclusion of comparable namely, "Killick Agencies and Marketing Ltd. (Killick)", it was argued before us that the comparable was functionally different, whereas the DRP held that, the business model and type of income does not matter with reference to functional comparability. The DRP also held that, the comparable provides lot of services which help the companies to sustain the market. We find that, "Killick" is engaged in acting as agent for various foreign principals for sale of dredgers, dredging equipment, steerable rudder propellers, maritime and aviation lighting, acoustic communication equipment etc. and sales services. Apart from this, the company is involved in exports of micro switches, engineering items, acoustics items & headsets. It is engaged in the business of marine equipment like specialized propulsion systems, marine engines, industrial & marine gear boxes, ballast water treatment system, special purpose sea going vessels, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y different from the services provided by Epson India to its associated enterprises. The Ld.AR submitted that this is functionally different and not be considered a comparable to business support services segment of the assessee. The Ld.AR also submitted that this company fails RPT filter of 25% of sales adopted by the Ld.TPO. In support he referred to page 309 of Paper Book-I. We are of the view that this company is rendering advertisement functions which are not akin to Business Support Services rendered by the assessee. Therefore we do not hold this comparable to be included in the final list. Accordingly this comparable is directed to be excluded from the final list. 20.4 Scarecrow Communications Ltd. 20.4.1 We have considered the submissions advanced by both sides in the light of records placed before us. This company is rendering service pertaining to advertisement in radio and television and public shows which are different from the business support service rendered by the assessee. Pages 315316 of Paper Book Vol. I gives the details of revenue generated by this comparable. Further, this comparable is rendering services not on the similar profile as that of assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alyses for transfer pricing purposes. Guidlines on adjustments to be provided is found in paragraphs 3.47-3.54 and in the Annex to Chapter III. The guidelines must be followed for computing arm's length principle, and for comparing comparable uncontrolled transactions. Reasonably accurate adjustments should be made to eliminate effect of any such differences Paragraphs 13 to 16 of OECD guidelines, emphasizes need for working capital adjustment in terms of receivables and payables as under: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment is given in Paragraphs 13 to 16 of the aforesaid OECD Guidelines (supra). These guideline also indicate factors that needs to considered like; 22.7 The point in time at which the Receivables, Inventory and Payables should be compared between tested party and comparables, and whether it should be the figures of receivables, inventory payable at the yearend or beginning of the year or average of these figures that should be considered;, 22.8 In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the assessee or the Department to show what is the Arm's Length Price. The data available with the assessee and Department should be the starting point and depending on the facts and circumstances of a case, further details can be called for. As far as the assessee is concerned, the facts and figures with regard to its business must be furnished. In so far as applying inventory, receivables and payables for computing working capital adjustment alleged by DRP/TPO in case of certain comparables, ITAT Delhi Bench in case of ITO v. E Value Servc.com reported in (2016) 75 taxmann.com 195 held that, insisting on daily balances of working capi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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