9911796707
TMI Blog2023 (4) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... 19 on 29.11.2018 declaring a total income of Rs. NIL. The case was processed u/s. 143(1)(a) on 13.11.2019 by prima facie adjustment of Rs.24,83,81,027. Subsequently the case was selected for complete scrutiny under CASS and notices were duly served on the assessee. The case was referred to TPO to determine the arm's length price (ALP) of the international transactions the assessee has entered into with its AE. The TPO made the following adjustments :- (1) On account of excess AMP expenses - Rs.101,11,98,209 (2) Administrative & Business Support services - Rs.1,54,04,913 (3) Sales facilitation services - Rs.1,14,54,439 4. The AO passed the draft assessment order incorporating the above TP adjustments. Aggrieved, the assessee filed its objections before the DRP. 5. The DRP gave marginal relief to the assessee whereby the TP adjustment was recomputed at Rs.103,06,26,654. The DRP also gave a direction with regard to the prima facie adjustment made u/s. 143(1)(a) and accordingly the said addition was deleted. The AO passed the final assessment order against which the assessee is in appeal before the Tribunal. 6. The issues contended through various grounds of appeal raised b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO stating that the cost of AMP incurred by the assessee has benefitted AEs and accordingly AMP is an international transaction. 10. The ld DR submitted that the AMP expenses need to be treated as separate international transaction and supported the orders of the lower authorities. Without prejudice the ld DR submitted that the bench marking the trading segment should be considered afresh and accordingly requested for this issue to be remitted back to the TPO. 11. The ld. AR submitted that the issue is covered by the order of coordinate Bench in assessee's own case for AY 2017-18 in IT(TP)A No.195/Bang/2022 dated 31.1.2023. 12. We heard the parties and perused the material on record. We notice that the coordinate Bench in assessee's own case has considered the issue of adjustment made towards excess AMP expenses and held that - "21. We heard the rival submissions and perused the material on record. For the year under consideration the net profit margin of the assessee in Trading Segment is 1.19% and the net profit margin of the comparable companies in 35th percentile to 65th percentile range is 0.13% to 1.48% (page 2084 of paper book Vol III). Since the margin of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price, then no separate addition needs to be made. Considering the fact that no adverse inference is drawn by the TPO in respect of the Trading segment which means that the TPO has accepted the overall margins of the said segment and respectfully following decision of the Hon'ble Delhi Court in the case of Sony Ericsson (supra) and the ratio laid down by the coordinate bench in assessee's own case, we direct the TPO to delete the adjustment made towards the trading segment. 23. Since we have adjudicated the issue of adjustment made towards AMP expenses as above, the other contentions raised in this regard by the assessee with respect to the issue through various grounds have become academic and accordingly left open." 13. For the year under consideration, we notice that the TPO has not made any adjustment in the trading segment and also in the manufacturing segment in which the AMP expenses are included as part of operating cost. In our view, this would mean that there is no adverse inference drawn by the TPO in respect of the arm's length price in the trading segment in the order passed u/s. 92CA and has accepted the entity level margins earned by the assessee with respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19. With regard to the TPO considering incorrect margins, The ld. AR submitted that - (i) PR Pundit Public Relations Private Limited The Ld. TPO has erred in computing the margin of the comparable. The correct margin of the said comparable is 15.47%. The rectified OP/OC computation is 15.47% from the records available, i.e., Annual report. Below is the computation for the rectified margin from the Annual Report: Particulars FY 2017-18 FY 2016-17 FY 2015-16 Operating Revenue - A 170,565,374 146,880,529 119,765,052 Total Operating expenditure - B 151,516,268 128,868,675 99,219,070 Operating profit (A-B) 19,220,565 18,495,608 20,859,519 Margin on cost 12.70% 14.41% 21.09% Weighted Average Margin -Unadjusted on cost 15.47% (ii) Marketing Communication & Advertising Limited The Ld. TPO has erred in computing the margin of the comparable. The correct margin of the said comparable is 9.53%. Below is the computation for the rectified margin from the Annual Report: Particulars FY 2017-18 FY 2016-17 FY 2015-16 Operating Revenue - A 3,685,279,465 2,105,446,528 1,719,562,718 Total Operating expenditure -B 3,372,771,849 1,910,568,479 1,573,375,365 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C . 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :--- (a) to (d)............. (e)transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by 'the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable. uncontrolled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 2. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: * No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he investment (i.e. collects money from customers) * This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195(Del-Trib) has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Anal is there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is Also no merit in the objection of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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