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TMI Blog2023 (1) TMI 1242X X X X Extracts X X X X X X X X Extracts X X X X ..... was selected for scrutiny assessment proceedings under CASS and the statutory notices were duly served on the assessee. During the course of the assessment proceedings, the AO made a reference of international transactions entered into by the assessee to the Transfer Pricing Officer ("the Ld. TPO") for determining the Arm's Length Price ("ALP") of such transactions under Section 92CA of the Act. The TPO made a total adjustment of Rs.168,5,82,798 the break up of which is as follows - (i) Adjustment to the manufacturing segment - Rs. 57,52,661 (ii) Adjustment on account of excess AMP expenditure - Rs. 157,19,22,677 (iii) Administrative and Business Support Services - Rs. 8,44,80,389 (iv) Sales facilitation services - Rs. 2,34,27,071 3. The AO passed the draft assessment order against which the assessee raised objections before the DRP. The DRP upheld the action of the TPO and confirmed the above adjustment. According the AO passed the final assessment order and the assessee is in appeal against the same before the Tribunal. 4. The assessee raised the following grounds of appeal - (i) Ground No.1 to 3 and Ground No.47 to 49 - General (ii) Ground No. 4 to 13 - TP adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2016-17. This list provides for the weighted average of the prices paid during the year for the products imported from AEs. Each of these parts is identified based on a distinctive product code. * With respect to the imports from AEs, the Company conducted a search (based on product code) to identify similar products, imported from unrelated vendors for the FY 2016-17. This process resulted in the identification of potential internal comparables for 140 of the products imported. Against each product code, the average price per unit from unrelated vendor is compared to the price paid to its AEs. Products imported from AEs only (262 products) 8. With respect to the imports from AEs only, the prices paid by AEs to its third-party vendors were considered as CUP. In this regard: * Out of the 262 products, 126 products were sold by the AEs on a cost-to-cost basis. Accordingly, the same has been considered to be at ALP. * On the balance 136 products, the AEs have sold the products to Lenovo India at a price at cost plus 0.5 percent margin. The Company believes that the difference from the ALP is not material and has therefore not undertaken any further analysis for such reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of TNMM as MAM and methodology adopted to determine ALP under the TNMM by the Ld. TPO. 12. The ld AR submitted that as far as the issue of MAM in the case of the assessee, the objections to each of the reasons put forth by Ld. TPO / DRP for the rejection of CUP as the MAM are as under: Sl. No. The Ld. TPO's reasons for rejection of CUP Appellant's contention against each of these reasons 1. Non-availability of reliable data in order to compare the degree of comparability between the international transaction and uncontrolled transactions. * Appellant imported components from both AEs as well as unrelated vendors. * These components have a unique identity and bear serial numbers or codes by which they are identified. * Appellant has documented the comparability analysis in respect of the comparison of the prices for all the components that have been imported from its AEs. 2. Weighted average rate is not an uncontrolled transaction that can be compared with the purchases made from AEs / Non-AEs since the level of obsolesce in the computer hardware industry is very high * Appellant has procured components throughout the year which indicates that the components are no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's own case for 2014-15 by order date 13.06.22 has considered the same issue and held that - We refer to the order passed by this Tribunal for A.Y. 2015-16 which is the recent most order wherein this Tribunal decided this issue on identical facts in assessee's own case by observing as under. "9. Aggrieved by the order of the DRP, the Assessee has raised Grd. No. II before the Tribunal. We shall first take up Gr. No. II subgrounds 2 to 6 which grounds relate to the contention of the Assessee that CUP should have been accepted as the MAM. We have heard the rival submissions. As far as the issue of MAM in the case of the Assessee in the transaction of import of components is concerned, we have already extracted the reasons assigned by the TPO for rejecting CUP as MAM and the reasons given by the Assessee as to why the reasons assigned by the TPO are unsustainable. 10. In AY 2006-07, the Tribunal has in its order dated 30-5-2016 in IT (TP) A.No.582/Bang/2015 upheld the DRP's direction that CUP is the MAM to be applied in the case of the Assessee. In AY 2007- 08, the DRP upheld CUP as the MAM and the department did not file any appeal against that order of DRP b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation to the public about details of product, its specification etc. The aforesaid advertisement and business promotion activities undertaken by the Assessee are specific to the products sold in India. Given that the selling of the products in India is the function of the Assessee, there are no approvals sought by the Assessee in connection with the incurrence of said expenses which influences the volume of sales of the Assessee. The advertisement contents are decided by the Assessee and the said expenses do not require any approval from its AEs. The aforesaid activities are primarily to promote the business of Assessee and the same is done to influence the volume of sales of the Assessee. 18. The TPO held as under in respect of the above AMP adjustment:- * Assessee has not confined itself to distribution of trading goods but has performed additional functions in the form of AMP. Therefore, the Company needs to be adequately compensated for such additional functions. (Page 216 of Appeal Set) * RPM analysis carried out by the Assessee in the TP Doc is flawed as AMP is not captured while calculating gross margin. (Page 217 of Appeal Set) * Ratio of AMP to sales incurred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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(J)(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 com parables 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" 22. We also see merit in the submission of the ld AR that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in law and on facts in not accepting the below company which is comparable and thereby not considering the detailed submissions of the Assessee: a) Crayon Advertising Limited 41. The Honourable DRP and the learned AO / TPO has erred in law by not granting appropriate favourable economic adjustments (including the working capital adjustment) while calculating the arm's length margin for final set of comparable companies for these segments. 25. Brief note on the nature of services rendered by the assessee to the AEs in these segments is given below - Provision of Administrative and other business support services The Assessee has entered into a Support Service arrangement with its AE, with respect to the provision of Administrative support services pursuant to which the Assessee provides administrative support services to Lenovo Group companies such as budgeting, planning and MIS support services and other support services in the nature of coordination, technical support etc. These services are in the nature of low-end support services and the Assessee is compensated on a cost plus mark-up of 10 percent for the same. Provision of Sales facilitation services The Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived OR 975114664 Shortfall being adjustment ALP-OR 84480389 Sales facilitation services Taxpayers operating revenue OR 270406914 Taxpayers operating cost OC 245824467 Taxpayers operating profit OP 24,582,447 Taxpayers PLI PLI=OP/OC 10.00% 35th Percentile Margin of comparable set 17.11% Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 19.53% Arm's Length Price ALP=(1+M)*OC 293833985 Price Received OR 20406914 Shortfall being adjustment ALP-OR 23427071 28. The DRP confirmed the adjustment. Aggrieved the assessee is in appeal before the Tribunal. 29. The ld AR made a detailed written submission with regard to each of the comparables for which inclusion / exclusion is sought. The extract of the submissions are as given under - Exclusions 1. Red Baron Integrated Services Private Limited ('Red Baron') It is submitted that Red Baron was engaged in the activity of specialized design services. The same is evident from the Annual Report given in page 182 of the Appeal set. It is observed that Red Baron is engaged in the business of branding and design activities for independent par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Majestic Research significantly. A comparison of the margin progression over the past 3 years is provided below: Particulars FY 2016-17 FY 2015-16 FY 2014-15 Operating Revenue - A 2,293.04 1112.96 550.77 Total Operating expenditure - B 1,570.97 831.92 463.76 Operating profit (A-B) 722.07 281.04 87.01 Margin on cost 45.96% 33.78% 18.76% As seen from the above, there is a significant increase in the operating margins of FY 2015-16 and FY 2016-17 as compared with FY 2014-15. Hence, it is clear that the increase in the operating margins of the company is attributable to the extraordinary events that took place and therefore, Majestic Research is not functionally comparable to the Appellant and ought to be rejected. Further, in the case of Epson India Private Limited [ITA No. 206/Bang/2021], AY 2016-2017 at Page 23 of the Order, the Hon'ble Bangalore Tribunal has directed the Ld. TPO to exclude Majestic Research Services & Solution Limited from the final list of comparable under the said segment. 4. Cheil India Private Limited ("Cheil India") It is submitted that as per the annual report of the company, it was observed that Cheil India was engaged in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter careful analysis of the facts, it is seen that the filters & measure applied by the TPO has lcd to selecting the proper comparables. Further, the objections of the taxpayer to the comparables selected by the TPO has been disposed of by the TPO with proper reasoning and functional analysis. Therefore, we find no reason to interfere in the adjustments so proposed by the TPO." 31. Therefore we are of the considered view that this issue should be remitted back to the DRP with a direction to do consider the submissions of the assessee and examine the facts based on evidences before deciding the inclusion/exclusion in accordance with law. Needless to say that the assessee should be given a reasonable opportunity of being heard. It is ordered accordingly. 32. The TPO is directed to re-compute the arm's length price in accordance with the directions given in this order. 33. The issues contented in ground no 42 to 45 are with respect to error in considering the assessed income in final assessment order, AO not granting brought forward loss, error in considering the Book Profits in final assessment order and the AO not granting appropriate TDS credit. In this regard, we direct the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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