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TMI Blog2024 (8) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... tion - HELD THAT:- Deselection of companies functionally dissimilar with that of assessee. TP adjustments made to the arm s length price of the international transactions of the Networking segment - comparable selection - HELD THAT:- Deselection of companies functionally dissimilar with that of assessee. Trading, Networking and Manufacturing segments - determination of arm s length price of the international transactions of these segments - appellant has contended that the TPO has erred in not granting working capital adjustment - HELD THAT:- TPO has inadvertently failed to do so. Ld. CIT(DR) does not contest the same and submits that this matter can be remanded to the file of the TPO for computation. In view of the same, we direct the TPO to grant working capital adjustment while computing the mean/median margin of the comparables in accordance with the binding direction of the DRP. Similarly, as regards incorrect computation of profit margins of the comparables, Ld. CIT(DR) does not oppose the issue in principle and submits that the TPO may be directed to carry out a factual verification of the income and costs that are sought to be included or excluded. We order accordingly. All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and services, geographical markets, contract terms etc) is not available CUP should be eschewed and TNMM can be an appropriate method to determine the arm s length. In the instant case, we have held that the data chosen by the TPO for CUP is wholly inappropriate. Secondly, the TPO has already accepted TNMM for the Manufacturing segment as a whole. There are numerous international transactions in this segment - all these transactions like royalty, purchase of raw materials etc. have been aggregated under TNMM and benchmarked against independent third party comparables. In these circumstances, cherry-picking of one particular transaction like royalty and subjecting the same to a separate benchmarking and adjustment under CUP results in an impermissible double adjustment - once under TNMM and another CUP. This is contrary to the provisions which mandate adoption of only one method as the most appropriate method. A licensing arrangement where technical know-how is used for manufacturing is an inextricable part of the entire segment and we do not find any infirmity in bundling the same with the other transactions of this segment. At the end of the day, if the segment is generating arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Appellant : S/Shri Himanshu S. Sinha Bhuwan Dhoopar, Adv. For the Respondent : S/Shri Mahesh Shah, CIT(DR) Kanv Bali, Sr. DR ORDER PER YOGESH KUMAR U.S., JM The assessee has filed this appeal against the assessment order dated 20/11/2019 passed by Deputy Commissioner of Income Tax, Circle- 22(2), New Delhi (hereinafter referred as AO ) u/s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred as Act ), which was issued in pursuance to the directions dated 23.09.2019 issued by the Ld. Dispute Resolution Panel-1, New Delhi (hereinafter referred as DRP ), pertaining to assessment year 2015-16. 2. The assessee, an Indian company, is a wholly owned subsidiary of the Korean conglomerate Samsung Electronics Co. Ltd and engaged in the business of manufacturing and trading of consumer electronics, home appliances, mobile phones, and information technology products. It also carries out contract software development activities for its Korean parent and is also engaged in trading of telecommunication networking equipment whereby network equipment purchased from its Korean parent were sold to a 3rd party customer (Reliance) in India. 3. The assessee filed its return of income for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing Grounds of Appeal:- GROUNDS OF APPEAL 1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the total income of the Appellant at Rs. 8155,44,45,700/- as against the returned income of Rs. 2415,02,39,200/-. 2. That on the facts and circumstances of the case and in law, the Ld. Dispute Resolution Panel ( DRP )/AO/Transfer Pricing Officer ( TPO ) erred in making a transfer pricing adjustment of Rs. 5547,96,65,313/- on account of the following transactions: (i) advertising, marketing, promotion ( AMP ) expenses amounting to Rs. 2310,30,56,382/- (ii) trading segment amounting to Rs. 250,89,73,885/-(iii) networking segment amounting to Rs. 978,46,08,952/-(iv) manufacturing segment amounting to Rs. 1105,54,54,842/- and (v) payment of royalty amounting to Rs. 902,75,71,252/- alleging the same to be not at arm s length in terms of the provisions of section 92C of the Act read with Rule lOB of the Income Tax Rules, 1962 ( the Rules ). 3. That on the facts and circumstances of the case and in law, the Ld. DRP/AO erred in making an addition of Rs. 192,45,41,190/- on account of disallowance of salary expenditure incurred in relation to expatriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AMP activities for the trading segment, manufacturing segment and networking segment are already included in the arm s length determination of the trading segment, manufacturing segment and networking segment. 11. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in not appreciating that after application of Transactional Net Margin Method ( TNMM ) as the Most Appropriate Method ( MAM ) for benchmarking the international transactions, no separate arm s length analysis was required in respect of the individual elements of cost (AMP expenditure) as it is inconsistent with the tenets of applications of TNMM as per Rule 10B(1)(e) of the Rules. 12. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making transfer pricing adjustment on account of AMP expenditure in networking segment ignoring the fact that under networking segment, the Appellant operates under a Business-to-Business ( B2B ) model wherein the it caters to a single customer and does not undertake any activity pertaining to AMP. 13. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in considering all v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant to its AEs. GROUNDS AGAINST SUBSTANTIVE ADJUSTMENT MADE UNDER TNMM IN THE TRADING SEGMENT, MANUFACTURING SEGMENT AND NETWORKING SEGMENT 21. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making an adjustment of Rs. 250,89,73,885/- in trading segment by rejecting Resale Price Method applied by the Assessee and instead applying TNMM as the MAM and by including companies that are not comparable to the Assessee in terms of functions performed, assets employed, risks assumed, and rejecting comparable companies selected by the Assessee. 22. That on the facts and circumstances of the case and in law, the Ld. AO/TPO have erred in making the adjustments in networking segment and manufacturing segment as substantive adjustments in the final assessment order and order giving effect to the DRP directions despite the fact that the said adjustments were made as protective adjustments in the TPO Order and there is no direction of the DRP to make the said adjustments as substantive adjustments. 23. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making an adjustment of Rs. 978,46,08,952/- in networki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of the transaction of payment of royalty without appreciating the fact that TPO during transfer pricing assessment proceedings had carried out benchmarking analysis of royalty and no adverse inference was drawn in the TP order. 32. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in modifying the comparable set, in contravention of section 92C(3) of the Act read with Rule 10B(2) of the Rules, by including/selecting companies that are not comparable to the Appellant in terms of functions performed, assets employed, risks assumed. GROUNDS AGAINST CORPORATE TAX ADJUSTMENT 33. That on the facts and circumstances of the case and in law, the Ld. DRP /AO erred in disallowing the salary expenditure of INR 192,45,41,190/- incurred in relation to expatriate employees under section 37(1) of the Act ignoring the fact that this Hon ble Tribunal has decided the issue in favour of the Appellant in the case of Samsung Electronics Co. Ltd v DCIT: [2018] 92 taxmann.com 171 (Delhi - Trib.). 34. That on the facts and circumstances of the case and in law the Ld. DRP /AO in holding that there was no employer-employee relationship between expatriate employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng leading to a substantive adjustment of Rs. 2013,99,22,624/- and a protective adjustment of Rs. 2083,75,34,081/-. This issue has been recurrent for the last several years and the TPO, DRP and the Tribunal have been consistent in their approaches. The TPO and the DRP have all along held that the assessee is incurring excessive AMP expenditure as compared to other independent and uncontrolled comparable Indian companies (referred to as the Bright Line). This excessive expenditure incurred by the assessee is primarily for the promotion of the brand Samsung and since the brand is owned by the assessee s Korean parent Samsung Electronics Co Ltd., the excess AMP expenditure above the Bright Line should be treated as a separate international transaction of brand-promotion service. Applying this Bright Line Test, the TPO and the DRP have held that the excess amount alongwith an arm s length mark-up (profit that comparable service companies would earn) should be treated as the arm s length price of this international transaction. However, since this Bright Line Test has been held to be illegal and untenable by the Hon ble Delhi High Court in Sony Ericsson Mobile Communications v. CIT (201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under an identical arrangement of pre-approval but without any MDF agreement. This reimbursement on cost-to-cost basis has been consistently disclosed as an international transaction by the appellant in its Form 3CEB and transfer pricing report under Rule 1OD. The TPO, however, has expanded the scope of the international transaction arbitrarily by referring to an unjustifiable allegation of excessive AMP expenditure. 11. It was further submitted that based on the decisions of the Hon ble Delhi High Court in Maruti Suzuki (2015) 381 ITR 117 (Delhi); and Bausch Lomb (2016) 381 ITR 227 (Delhi), the Tribunal in prior years has given a categorical finding that there is no basis to expand the ambit of international transaction pertaining to cost to cost reimbursement of marketing expenses to a much larger excessive AMP expenditure. It was further submitted that once the existence of an international transaction is itself negated, there would be no question of determination of its arm s length price. As regards TNMM intensity approach, the Ld. AR submitted that the steps adopted to adjust for the higher intensity of marketing function are nothing but a disguised form of Bright Line Test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed reimbursements do not warrant inclusion within the ambit of the international transaction as these expenses have not been necessitated by any understanding, arrangement, or agreement with the AEs. In the absence of any evidence of this common understanding or action in concert, any such conclusion would be a mere surmise. 14. During the instant year, we find that not only there was no MDF agreement in effect between the assessee and the AE, the amount of reimbursement of marketing expenses received by the assessee has diminished to a meagre sum of Rs. 5,51,13,066/. However, the TPO and the DRP have proceeded on an assumption that there was an understanding between the assessee and its AE that excessive AMP expenditure would be incurred in India to promote the Samsung brand in a manner that was not justified by the scale and nature of Indian business but at the behest and requirement of the foreign parent that owned the brand. We do not find any merit in the approach taken by the TPO and the DRP as well the contention raised by the Ld. CIT(DR) that consistency of approach by the Tribunal should be disregarded. The Transfer Pricing Report of the assessee states very clearly i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Eric.sson Mobile Communications India (P.) Ltd. (supra) having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement. The amounts incurred as AMP expenditure by the appellant under the MDF Agreement have already been received as reimbursement/assistance and have indisputably been disclosed as an international transaction in Form 3CEB and form part of the transfer pricing study conducted under Rule 10D. The AMP expenditure which is outside the ambit of reimbursement received under the MDF Agreement, has been incurred by the appellant on its own volition as per its own requirements and without any interference of the AE and have been paid to third parties. 44. In view of the above, we hold that the scope and value of international transaction cannot be expanded beyond the reimbursements received under MDF agreement to cover the entire gamut of AMP expenditure incurred by the Appellant during the year. 45. In view of the above, we hold that the bright line approach is untenable in law either as a way to determine the existence of an international transaction or as a method to determine the ALP of an international transaction pertaining to AMP. No international transaction can be presumed to exist merely on the basis of bright line of expenditure incurred by comparable companies. ITA No. 6813/D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed by the coordinate Bench of the Tribunal in taxpayer's own case in earlier years. 25. So, in view of what has been discussed above and by following the aforesaid order passed by the coordinate Bench of the Tribunal, we are of the considered view that scope and value of the international transactions cannot be extended to the so called excessive expenditure incurred by the taxpayer on account of non-routine AMP beyond the reimbursement already received by the tax payer under MDF agreement and as such, adjustment made by the TPO on account of AMP expenses is not sustainable in the eyes of law, hence, ordered to be deleted. 17.1 Following the aforesaid decisions rendered by various Coordinate Benches in ten prior assessment years on this issue, we hold that the transfer pricing adjustments to the arm s length price of the alleged international transaction of AMP expenditure of the appellant is bad in law and liable to be deleted. Grounds 4 to 20 are accordingly allowed. 18. The next issue is in respect of the adjustment of Rs. 250,89,73,885/- made by the TPO to the arm s length price of the international transactions in the Trading segment under TNMM by altering the set of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Virtual Netcom Pvt. Limited, and Sataytej Commercial Co. Limited. 22. OTS E-Solutions Pvt. Ltd: The TPO has observed that this comparable has been included since it is engaged in trading activities and does not own any intangible related to online portal. On objections being filed by the assessee, Ld. DRP did not give any finding on the inclusion/exclusion of this comparable. The Ld. AR submitted that this comparable company has been rejected by this Tribunal in assessee s appeals for AYrs. 2013-14 and 2014-15 on the ground of functional dissimilarity. This company is engaged in providing an online marketing platform by the name 'GadgetGuru' for sale of electronic products. It acts as an aggregator in the online marketing space. Taking us through the relevant pages of the Paper Book, the Ld. AR submitted that the company sells electronic products of various brands on its online platform, hence, it is not a 'Sole-Selling Agent' of any brand, whereas the assessee is the sole seller of Samsung goods in India. The Ld. AR further submitted that OTS E-Solutions is a routine distributor and does not perform critical functions such as quality control and post-sale/ warran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that OTSE is a routine distributor/supply chain shows that the functions performed, risks assumed and expected reward is not comparable to the taxpayer. The taxpayer is also performing critical functions such as quality control and post sale warranty support as a routine distributor whereas OTSE being an aggregator provides a platform for sale of electronic products of multiple brands and as such having a different business model vis-a-vis taxpayer having routine buysell model. So, in these circumstances, we are of the considered view that OTSE is not a suitable comparable vis-a-vis the taxpayer hence ordered to be excluded. 24.1 In view of the aforesaid factual matrix and the coordinate bench, this company is directed to be excluded from the list of comparables. 25. Virtual Netcom Pvt Ltd: The TPO as well as the Ld. DRP have not provided any reasoning or finding for this company's inclusion. The Ld. AR submitted that the company offers comprehensive information management solutions including information security, networking network management etc. to customers in India and SAARC through its alliance with technology partners like Barracuda Networks, Blue Coat, Extreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that it is settled law that there is no estoppel in the statute and once the assessee can substantiate its claim that it had wrongly taken a particular comparable in the TP study, then the comparable ought to be rejected. For this reliance was placed on Deputy Commissioner of Income-tax v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 (CHO.) (SB) (Para 38) affirmed by the Punjab Haryana High Court [2011] 11 taxmann.com 427 and Navisite India Pvt. Ltd vs. ITO (ITA No. 5329/Del/2012). 28. The Ld. CIT(DR) submitted that this company was selected as a comparable by the assessee itself in its TP study report which in turn was accepted by the TPO and the Ld. DRP. At this stage, the assessee cannot be allowed to change its stand and argue for its exclusion. It was also submitted that the grounds of appeal do not have any specific reference to this comparable and in the absence of such ground, it is not open for the Tribunal to examine the same. We do not agree with this contention. The rules do not require a specific ground to be taken in respect of each comparable. A general ground in respect of arm s length price of the international transactions of the Trading segment is wide and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit margin on revenues (OP/OR) as the profit level indicator. The assessee s profit margin being 5.31% being higher than the mean margin of the uncontrolled party comparables (4.08%) it was concluded that the transactions were at arm s length. Four comparables were selected in the TP study. 31. The TPO recomputed and adjusted the arm s length price by Rs. 978,46,08,952, by rejecting 3 out of 4 comparables taken by assessee, introducing 8 new comparables and arriving at a final set of 9 comparables with OP/OR of 23.87%. The TPO also recomputed the operating margin of the appellant at 5.30%. While arriving at the operating margin, the TPO denied working capital and risk adjustments. The Ld. DRP did not give any finding on the objections raised by the assessee on inclusion/exclusion of comparable companies and accordingly, the adjustments made in the original TP order were incorporated in the impugned order. The Ld. AR submitted that the assessee is aggrieved by the inclusion of seven (7) comparable companies, and wrongful exclusion of 2 comparable companies. 32. The Ld. AR submitted that all the companies introduced by the TPO are service providers and are not engaged in any sort ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trader of networking equipment earning around 7% of its revenue from sale of products. Another distinguishing factor pointed out by the Ld. AR was that the company owns a significant intangibles which accounts for 55% of its total fixed assets whereas the appellant does not own any intangible in this segment. 36. Planetcast Media Services Limited: It was submitted that the finding of the TPO that this company is engaged in trading of networking equipment is incorrect. Taking us through the financial statements, the Ld. AR submitted that the company provides technology-led managed services to the broadcasting industry comprising of digital media distribution services, digital media technology services, content production and acquisition services, content management and postproduction, cloud based content management services, outdoor media acquisition and media/live event coverage. It was also submitted that this company earns 99% of its revenue from sale of services. 37. Avantel Ltd, Hughes Communication Ltd and PCS Technology Ltd: Ld. AR submitted that the TPO committed the same error in these 3 comparable companies by treating these as trader of networking equipment, whereas on p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO is incorrect. The Ld. CIT(DR) submitted that a company with a diminishing net worth cannot be taken as a valid comparable. The argument that there is an increase in sales on a year-on-year basis does not hold ground if the overall net worth of the company is declining. 41. We have considered the rival contentions and perused the financials, and the facts recorded by the TPO in her order on page 22 it is seen that the net worth of this company as on 31.3.2015 (last day of the financial year) was Rs. 488.38 crore. This figure remained unchanged since 31.03.2014 as the net worth recorded on that date was the same figure of Rs. 488.38 crore. Though, this figure on 31.03.2014 and 31.03.2014 was 15% less than the net worth as on 31.03.2013, it is not correct to state that there is downward trend in net worth. Moreover, the decline that was witnessed two years earlier of 15% cannot be treated as extraordinary in nature. Increase or decrease of net worth of businesses are normal incidents and there is nothing unusual regarding its change unless the going concern status is threatened. Similarly, we note that the TPO s observation that the company has seen a declining trend in sales is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenues (OP/OR). The assessee has earned a profit margin of 6.17% which is higher than the margin earned by the comparable companies (2.58%) chosen in the TP study. 44. The TPO made a transfer pricing adjustment of Rs. 11,05,54,54,842/- to the arm s length price of the international transactions in the Manufacturing segment by rejecting 3 out of 5 comparables taken by assessee and introducing 2 new comparables and arriving at a final set of 4 comparables with operating profit margin on revenues (OP/OR) of 14.95%. The Ld. DRP did not give any finding on the objections raised by the assessee on inclusion/exclusion of comparable companies and accordingly, the adjustments made in the original TP order were incorporated in the impugned order. Under Ground no. 24, the assessee is aggrieved by the inclusion of two (2) comparable companies, namely Frog Cellsat Ltd. and Glen appliances, and wrongful exclusion of 3 comparable companies namely Value Industries Limited, Trend Electronics Limited and Penguin Electronics Limited. 45. Frog Cellsat Ltd: The TPO included this comparable on the ground that the company is engaged in the business of manufacturing equipment. DRP did not give any findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry different economic dynamic and the risks involved are wholly dissimilar. Another factor which differentiates them is the R D function. While the assessee is wholly dependent on its AE for the R D, Frog Cellsat has its own R D function. This further vitiates functional similarity. In view of the aforesaid there is little justification in including this comparable. It is, accordingly, directed that Frog Cellsat Ltd. be excluded from the list of comparables. 47. Glen Appliances Limited: Both the TPO and Ld. DRP did not give any specific reason for its inclusion. The Ld. AR submitted that this company is admittedly a distributor company and is not engaged in manufacturing function. On account of this fundamental difference, Glen Appliances has no basis to be included. It was submitted that this company was held to be a non-routine distributor of goods by the TPO himself while he examined the suitability of this company for the TNMM based intensity approach for AMP expenditure. Accordingly, it is an admitted position that Glen is a distributor and therefore cannot be included in the manufacturing set. The Ld. AR further submitted that Glen deals with products like gas stove, burners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n manufacturing of consumer electronics goods including washing machines, air conditioners, refrigerators, and other home appliances which is similar to the functional profile of the Appellant. The Ld. CIT(DR) submitted that data of different accounting period cannot be taken under the rules. While we agree that a comparable with a different financial year can be taken if the annual financials can be rebuilt using accurate quarterly audited data, if such data is not available in the public domain, there would be no justification in including the same. In the present case, the appellant has not filed the quarterly data of these two companies. Accordingly, we cannot accede to their demand and these companies cannot be included in the list of comparables. 49. Penguin Electronics Limited: TPO rejected this comparable on the ground of functional dissimilarity stating that it is engaged in manufacturing of different products and hence the same cannot be taken as a comparable company. The Ld. AR submitted that this comparable company was selected as a suitable comparable by the TPO himself in the TP Order for AY 2013-14 and the product profile of this company as well as that of the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have a nexus with the business operations of the appellant are to be considered whereas any financing or non-recurring/non-operational item is to be excluded. Grounds no. 25 and 27 are disposed of in terms of the aforesaid directions. 51. The last common ground pertaining to the Trading, Networking and Manufacturing segments adjustment is Ground no. 28 wherein the appellant has contended that the manner of computation of proportionate adjustment is erroneous. It was submitted that in prior years (A.Yrs. 2013-14 and 2014-15) similar errors were committed while determining the proportion of AE transactions and the Tribunal had remanded the matter back to the TPO for reconsideration. Ld. CIT(DR) did not object to the issue being remanded back to the TPO. We, accordingly, direct the TPO to determine the proportionate adjustment, if any, in an appropriate manner which considers the transactions with the AEs and excludes the unrelated party transactions after taking into account the computations submitted by the assessee. 52. The penultimate issue to be decided here is the adjustment/disallowance made in respect of royalty paid by the assessee to its parent for the know-how licensed for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of royalty has been disaggregated and benchmarked separately. The actions of the DRP, TPO and AO in this regard suffer from various infirmities and are completely perverse in nature. 55. The Ld. AR drew our attention to the peculiar facts leading to this adjustment. During the course of the transfer pricing proceedings, the TPO had vide a show-cause notice (SCN) dated 17 September 2018 rejected the TNMM analysis (aggregated approach) adopted by the assessee. Instead, the TPO chose to apply the CUP method and thereby proposed three third party royalty agreements (with an ALP of 1.50%). This SCN was responded to vide submission dated 9 October 2018, wherein the assessee raised its objections against 1) application of the CUP method while rejecting TNMM (Aggregated approach) and 2) the stark dissimilarities in the three third party royalty agreements v/s the assessee s license agreement. The TPO, after taking note of the appellant's arguments, did not make any adverse inference/ adjustment against the payment of royalty. Rather, the TPO in the TP order dated 31 October 2018 chose to adopt TNMM for the licensed manufacturing segment and carried out an aggregated analysis, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (5) for further enquiry and passing of the assessment order . The Ld. DRP is required to adjudicate all questions before it based on the draft order, material submitted by the assessee, any remand report called for from the authorities and any inquiries that it may itself conduct. It was submitted that by issuing such directions the DRP has exceeded its jurisdiction. Reliance was placed on Capstone Securities Analysis Pvt Ltd v DCIT ITA no. 251/Pun/2017 in support of the above proposition. It has been contended that the assessee has been deprived of his right to object regarding any variation of his income before the DRP since the AO has passed the final assessment order based on the adjustment made by the TPO on the directions of the DRP. Placing reliance on PCIT v. Woco Motherson Advanced Rubber Technologies Ltd. 406 ITR 375, it was submitted that the machinery u/s 144C was a complete and exhaustive one and it does not give any room for the DRP to remand or set aside any matter to the TPO or the AO. Numerous decisions were cited in support of the proposition that a final assessment order passed in violation of the mandatory requirements of section 144C would vitiate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Karnataka); M/s. Luwa India Pvt. Ltd. Vs. ACIT, [2016] 75 taxmann.com 145 (Bangalore - Trib.); Daksh Business Process Services (P) Ltd v DCIT, [2016] 72 taxmann.com 44 (Delhi - Trib.); DCIT v SNF (India) Pvt Ltd, 2019 SCC On Line ITAT 15119; Knorr Bremse India Pvt Ltd v ACIT, [2015] 63 taxmann.com 186 (Punjab Haryana)/ [2016] 380 ITR 307 (Punjab Haryana); and GBT India Pvt Ltd v ACIT, [2020] 117 taxmann.com 357 (Delhi - Trib.) 61. On the rejection of TNMM in favour of Comparable Uncontrolled Price (CUP) method based on certain royalty transactions taken as comparables by the TPO, the Ld. AR submitted that royalty agreements introduced by the TPO under CUP method belong to a completely different sector, i.e. agriculture. The appellant (in its licensed manufacturing segment) is engaged in manufacturing of consumer electronics like TVs, home appliances like washing machines and mobile phones. The technology and other economic parameters in the electronics and communication industry is unique, fast evolving and affected by numerous global and local factors. The three comparable royalty agreements introduced by the TPO are entirely disparate and involve agricultural companies, engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Such an approach is inimical to the accuracy demanded under CUP. We have perused the royalty transactions chosen by the TPO and we note the following glaring dissimilarities that render the entire process untenable: (a) ROSETTA INPHARMATICS INC (LICENSOR) AND MONSANTO CO (LICENSEE) - This agreement pertains to payment of royalty in lieu of the right to use technical knowledge (algorithms and methods) for developing and selling species of animals, plants, plant or animal products, animal progeny, seeds containing a gene lead. It not valid for the relevant year since this agreement started in November 2000 for a period of 3 years and there is no material on record to show that it was in currency for the current year. The Licensor is a laboratory based in Washington which is engaged in provision of genomics services such as genotyping, gene sequencing, and gene expression profiling. The licensee is an agricultural company engaged in developing products and tools to including seeds to help farmers grow crops while using energy, water, and land more efficiently. The licensee uses biotechnology and other advanced methodologies including gene editing to make improvements in the plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in an impermissible double adjustment - once under TNMM and another CUP. This is contrary to the provisions which mandate adoption of only one method as the most appropriate method. A licensing arrangement where technical know-how is used for manufacturing is an inextricable part of the entire segment and we do not find any infirmity in bundling the same with the other transactions of this segment. At the end of the day, if the segment is generating arm s length level of operating profits which is equivalent or more than profit margin of the comparables, there can be no cause for the Revenue to carry out an exercise of the present kind. Grounds 29-32 are disposed of in terms of the aforesaid observations. DISALLOWANCE OF SALARY PAID TO EXPATRIATE EMPLOYEES 66. The last issue in this appeal pertain to Grounds 33, 34 and 35 - these are in respect of disallowance of salary amounting to Rs. 192,45,41,190/- paid to expatriate employees on secondment made u/s 37 of the Act by the AO. The AO has held that the employees on secondment from Korea are primarily working for the Korean parent and therefore, their salaries being paid by the appellant are not allowable as deductible expenses. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and the Korean parent is not liable for any of their actions and omissions. Their functions are wholly towards the business of the appellant and though they may be required to interact closely and regularly with the personnel of the parent entity, their functions and responsibilities are solely towards the appellant. He has cited numerous decisions to support the view that secondees were the employees of the assessee and no permanent establishment can be created for such activities. Ld. CIT(DR), while accepting, that the prior year s Tribunal order on this issue squarely covers the issue, submits that res-judicata does not apply to income tax proceedings and every year needs to be seen separately. He would submit that the seconded employees are furthering the objectives of the Korean company and are in effect the employees of the Korean company. We do not find any merit in his contention. The AO has not brought any evidence on record to show that the seconded employees were furthering the business objectives of the foreign parent. He has merely relied on the assessment order passed in the Korean company s case where it was held by the AO of the Korean company that it had a perman ..... X X X X Extracts X X X X X X X X Extracts X X X X
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