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TMI Blog2023 (9) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances of the case the learned CIT(A) has erred in accepting the assessee's contention that the comparables engaged in 'the distribution function can be used with FAR analysis of assessee's in Marketing Support Services, also? 3. When as per the agreement the assessee is entitled to retain only 3.5% of its sales to third party, whether the CIT(A) was correct in holding that the revenue transaction is not a tainted transaction and allowing the assessee to consider PLI at OP/OR level instead of OP/OC? 4. Whether on the facts and circumstances of the case the learned CIT(A) has erred in concluding that Dynacons Technologies, Integra Telecommunications and JMD Telefilms are functionally comparable to MSC India?" 2. The assessee in Cross Objection Appeal No. 53/PUN/2022 has raised the following grounds of appeal : "1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in dismissing the following grounds of appeal (Ground 2.2, 2.3, 2.4, 2.7, 2.8, 2.9 and 2.11) of the respondent raised before the Ld. CIT(A) considering them academic: 2.2. Disregarding the benchmarking analysis adopted as part of TP Study Report 2.3 Selection/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the transfer pricing order, TPO held that the main activity of the assessee is marketing activity and assessee is getting remunerated for marketing functions with a fixed mark-up. Accordingly, the TPO carried out the search and arrived at following comparables : "9.1.8. Considering the above, the final set of comparables engaged in MSS activity are as follows : Sr. No Company Name Combined weighted average OP/OC 1 D D B Mudra Pvt. Ltd. -1.35% 2 Publicis Communications Pvt. Ltd. 2.08% 3 I C R A Management Consulting Services Ltd. 3.73% 4 Pressman Avertising Ltd 10.94% 5 Concept Public Relations India Ltd 11.45% 6 Kestone Integrated Mktg. Services Pvt. Ltd. 11.92% 7 Paradigmplus Marketing Communications Pvt. Ltd. 12.72% 8 Majestic Research Services & Solutions Ltd. 18.83% 9 Fcbulka Advertising Pvt. Ltd. 37.41% 10 Platinum Advertising Pvt. Ltd. 46.51% 11 Cheil India Pvt. Ltd. 61.88% Date place Range Adjusted Weighted OP/OC 4 35th percentile 10.94% Median 11.92% 8 65th percentile 18.83% 4. The TPO observed that OP/OC of the assessee was 3.63%. However average OP/OC of the comparable selected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled to retain only 3.5% of its sales to third party, whether the CIT(A) was correct in holding that the revenue transaction is not a tainted transaction and allowing the assessee to consider PLI at OP/OR level instead of OP/OC? 4. Whether on the facts and circumstances of the case the learned CIT(A) has erred in concluding that Dynacons Technologies, Integra Telecommunications and JMD Telefilms are functionally comparable to MSC India? 5. It is observed that this appeal is time barred by 68 days and the ld. AR raised no objection regarding condonation of delay. Having heard the submissions of the parties, the delay is condoned and the case is heard on merits. 6. The issue for adjudication in this appeal is broadly whether the assessee is in distribution support services or is doing marketing support services as held by the TPO. The ld. TPO has given his finding at para 6.1 of his order analysing the relevant clauses of the agreement between the assessee and the Associated Enterprise (AE) and has held as follows: "6.1 Purchase Price: Reseller shall pay to Company monthly an aggregate amount such that Reseller earns cumulative year-to-date Operating Income of three an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed on to company i.e. AE. * The copy of agreement with customer is done in a format approved by Company. Further Company has right to call for periodic report regarding activities of assessee and verify its books which assessee has to comply, (Clause 3.8 and 3.9 of the agreement) Thus as can be seen from the above discussion, the main activity of the assessee is marketing activity. Otherwise ownership of the product is with AE, the power to determine whether to accept/ reject order and pricing is with AE. So assessee is getting remunerated for marketing function only with a fixed mark up." 7. Thus, the TPO held that the main activity of the assessee is the marketing activity. Otherwise ownership of the product is with the AE, the power to determine whether to accept / reject the order and pricing is with the AE. Therefore, the assessee is getting remunerated for marketing function only with a fixed mark-up. Once the functions of the assessee were understood, FAR analysis of comparables was undertaken to verify whether the functions performed by the assessee and the comparables selected were similar or not. In this regard, ld. TPO observed and held as follows: "6.4. .. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketing of products and support services. Thus the comparables selected by assessee cannot be considered as comparables due to different functional profile. Thus herewith it is held that activity of assessee is marketing support activity." 8. The ld. CIT(A) on the other hand, allowed the appeal of the assessee holding the activities of the assessee to be distribution support services while relying on the assessee's own case for A.Y. 2013-14 where the predecessor CIT(A) has accepted the software distribution functions of the assessee. It was held that since there is no change in the facts for the year under consideration as compared with the facts of A.Y. 2013-14 relief was provided to the assessee by holding that the assessee is into distribution support services. 9. We have perused the case records, heard the rival contentions and analyzed the facts and circumstances in this case. We have also perused the Reseller agreement between the assessee and its AE and in this agreement the very term the assessee is referred to as "Reseller". In the recital part clause (B), it states "Company wishes to appoint reseller to market and sell the products in the territory (as defined her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d other related localized materials effective upon the date of creation thereof by Reseller. 3.3 End-User Agreements. Reseller shall cause each customer to which any of the Products are delivered to agree to an End-User Agreement in a form which has been approved by Company which is attached hereto as Exhibit A. Reseller shall provide Company with copies of each End-User Agreement in accordance with those policies communicated by Company to Reseller from time to time. 3.4 Sub-reseller Agreements. Reseller shall have the right to appoint Sub-reseller(s). Reseller shall cause each Sub-reseller (if any) to execute a Sub-reseller Agreement which contains substantially similar terms as those contained herein. Upon request, Reseller shall provide Company with copies of each Sub-reseller Agreement in accordance with those policies communicated by Company to Reseller from time to time. 3.5 Personnel and Facilities. Reseller shall occupy and maintain facilities adequate to market and sell the Products in the Territory. Reseller shall retain and have at its disposal at all times an adequate staff of trained and qualified personnel to perform its obligations under this Agreement. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. 4.3 Performance of Maintenance Contracts. The Parties acknowledge and agree that Company shall be responsible for providing Enhancements, as that term is defined in the Company's standard end-user agreement, and unless otherwise agreed, that Reseller shall be responsible for the performance of technical support services under the maintenance contracts sold by Reseller hereunder; provided that Reseller may, from time to time, request Company to assist with the performance of such services, on such terms as agreed between the Parties. Section 5 - Purchase Orders and Delivery 5.1 Orders. All orders for the Products submitted by Reseller to Company (the "Purchase") shall be placed as instructed by Company. On receipt of orders for the Products by Reseller from a customer. Reseller shall submit to Company a corresponding order for the Products. All orders for the Products submitted by Reseller to Company shall specify the type and quantity of the Products, the name and email address of the customer requesting the Products and the requested delivery date. Each order submitted by Reseller shall be governed by and deemed to incorporate ail the terms and conditions of this A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Operating income under this Agreement, "Costs" shall mean all direct and indirect costs incurred by Reseller in connection with marketing and selling the Products, maintenance contracts and support services to third parties in the Territory (excluding the Purchase Price specified in Section 6.1), computed under US GAAP. For the avoidance of doubt, "Costs" relate only to the marketing and support activities performed by Reseller hereunder, and exclude stock based compensation, foreign exchange gains/losses, interest income/expense, and other extraordinary or non-recurring items (e.g., restructuring costs). 6.2 End of Month Adjustment and Payment. Within thirty (30) calendar days after the end of each month, the Parties shall determine Reseller's Operating Income for the month. Within ninety (90) days after the end of each month, to the extent necessary, Company shall pay to Reseller (or Reseller shall refund to Company) an amount such that Reseller recognizes an Operating income of three and one-half percent (3.5), based on Net Revenue, for the cumulative year-to-date period ending with such month." 10. From the analysis of these provisions, it is absolutely clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.2. Disregarding the benchmarking analysis adopted as part of TP Study Report 2.3 Selection/ rejection of filters and failing to provide the accept reject matrix and search process 2.4 Correct profitability if the Respondent is to be compared to marketing support service providers 2.7 Not giving due consideration to the pricing arrangement for the selection of comparables 2.8 Selection of functionally non comparable companies for the purpose of determining the ALP 2.10 Allowing economic adjustments for differences between Respondent and comparables 2. On the facts and in circumstances of the case and in law, the learned Deputy Commissioner of Income-Tax Circle-7, Pune ('Ld. AO') has erred in making transfer pricing addition to the Appellant's income and the learned Commissioner of Income- tax (Appeals)-13, Pune ['Ld, CIT(A)'] has erred in partially upholding/ confirming the actions of the Ld. AO in this regard. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not adjudicating certain grounds of appeal raised before the CIT(A) by the respondent considering them pre-mature [i.e.. Ground 3 raised before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions performed by the assessee. Accordingly, Ground No's.1 to 3 raised by the Revenue are Allowed. Rebuttal of AR's submission: 10. In this case Ld.AR vehemently argued that the ITAT's order in assessee's own case for A.Y. 2015-16 have failed to appreciate the functions of the assessee properly and hence the said ITAT order shall not be followed. We specifically asked the Ld.AR whether the activities under taken by the assessee for AY 2015-16 and current year are same or not? The Ld.AR admitted that activities under taken by the assessee in AY 2015-16 and current year are same. The Agreement between the assessee and the AEs for AY 2015-16 and current year is same. The Ld.AR could not brought on record any document to demonstrate that the functions of the assessee in AY 2015-16 and current year are not same. In these facts and circumstances of the case, we are of the opinion that it is our duty to follow the ITAT order in AY 2015-16 (supra) specially when the Hon'ble JM was party to that order. Ground No.4 : 11. The Ground No. 4 is regarding ld.CIT(A)'s decision that Dynacons Technologies, Integra Telecommunications and JMD Telefilms are comparables to assessee. It is ob ..... X X X X Extracts X X X X X X X X Extracts X X X X
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