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Income Tax Appellate Tribunal, DELHI BENCHES: H : NEW DELHI
Before: SHRI ANUBHAV SHARMA & SHRI MANISH AGARWAL
ORDER PER ANUBHAV SHARMA, JM: These appeals are preferred by the Assessee against the final assessment orders dated 31.10.2019 and 30.06.2022 passed by the Asstt. Commissioner of Income Tax, Circle 24(1), Delhi and ACIT Circle-22(2), Delhi (hereinafter referred to as the Ld. AO) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) for the assessment years 2015-16 and 2017-18, respectively.
Heard the ld. representatives of both the sides who have argued these appeals on the basis of facts and referring to the orders of the ld. tax authorities below for AY 2015-16 which covers the grounds for the years before us in these appeals except ground No.6.5 for AY 2017-18. As for the convenience, and decision of appeals together, the facts and impugned orders for AY 2015-16 shall be referred to and the grounds for AY 2015-16 and ground No.6.5 for AY 2017-18 are reproduced below:- Grounds of appeal
for AY 2015-16 “1. That Ld. AO erred in assessing income of the Appellant at INR 717,75,46,290 as against returned income of INR 96,83,40,450/-.
2. That on the facts and in law, the Ld. AO has erred in computing the book profits of the appellant at INR 366,96,60,990 as against book profits of INR 306,38,29,828 as disclosed in return of income by the appellant.
3. Without prejudice, Ld. DRP erred in not giving directions on all the objections and further Ld. TPO/AO erred in not giving effect to all the directions of Ld. DRP resulting in unjust erroneous adjustments and demand contrary to law. Transfer Pricing Adjustment in respect of Import of finished goods In law and facts of present case:
4. Impugned order erred in re-writing transactions on imaginary basis.
5. Impugned order erred in assuming DEMPE functions were performed for AE and making ‘intensity adjustment’ to adjust net profit 2 margin of comparable companies purportedly to equalise functions. ‘Intensity adjustment’ is mirror image of Bright Line Test (‘BLT’) already invalidated by Hon’ble Courts.
6. Without prejudice to all other grounds, impugned order errs in quantifying AMP expense of appellant by including expenses like rates and taxes, carriage and freight, warranty, rebates and discounts and sales promotion expenses.
7. Without prejudice to all other grounds, impugned order erred in not adopting a consistent approach in considering expenses items while computing AMP expenses for Appellant vis-a-vis comparable companies.
8. Impugned order erred in making several adjustments for determining margins and excluding/ including companies in final set of comparable companies inconsistent with provisions of law resulting in unlawful adjustment to ALP.
9. Impugned order erred in making adjustment to costs reported in audited accounts. Without prejudice, adjustment is made only one sided/ incomplete adjustment like grossing up Appellant’s costs by amount of reimbursements received by Appellant from its AEs without making corresponding corrections to revenue.
10. Impugned order firstly errs in modifying profit and loss statement of the Appellant by grossing up costs by amount of credit notes received by Appellant from its AEs, as price adjustment against purchases made from AE and further perpetuated by not making corresponding adjustment to revenue considered for margin computation.
11. Without prejudice to all other grounds, impugned order errs in not providing benefit of proportionate adjustment to the Appellant while computing the impugned substantive adjustment.
12. Without prejudice to all other grounds, impugned order errs in inappropriate selection of Lava International Limited, Micromax Informatics Limited, Intex Technologies India Limited and United Telelinks (Bangalore) Limited, Sargam India Electronics Private Limited and OTSE Solutions as comparable to Appellant’s distribution activity for benchmarking transaction of import of goods.
13. Without prejudice to all other grounds, impugned order errs in inappropriate rejection of Beetel Teletech, Cerebra and Vivek Limited for benchmarking transaction of import of goods.
14. Without prejudice to all other grounds, impugned order errs in inappropriate selection of Fcbulka Advertising Pvt. Ltd. for benchmarking marketing function and also in not evaluating comparables proposed by Appellant.
15. Without prejudice impugned order errs by incorrectly applying the principles laid down in Rule 10TA while computing net margins of companies considered comparable.
16. Without prejudice to all other grounds, impugned order errs in considering erroneously computed working capital adjusted net margins of companies considered comparable to the distribution activity. Transfer Pricing Adjustment in respect of international transaction for Marketing and Development of Market Services (“MMDS”) based on BLT approach (Protective adjustment) In law and facts of present case: 17. Impugned order errs in retaining protective adjustment based on the BLT contrary to Hon’ble jurisdictional High Court decision. Further such adjustment is based on incorrect presumptions and ignores relevant factors laid down by Hon’ble Court. Transfer Pricing Adjustment in respect of transaction of payment of royalty 18. Impugned order erred in rejecting combined transaction approach and considering arm’s length price of international transaction of payment of royalty as NIL claiming same to be application of Comparable Uncontrolled Price (“CUP”) method. Without prejudice payment towards royalty was considered as cost for TNNM. Transfer Pricing Adjustment in respect of transaction of provision of advisory services 19. Impugned order errs in incorrectly rejecting Priya International Limited and incorrectly selecting Fcbulka Advertising Pvt. Ltd. as comparable.
20. Impugned order suffers from computational errors which computing operating profit margin of comparable companies and the Appellant. Disallowance of stock valuation loss 21. That on the facts and in law, Ld. DRP/ Ld. AO have grossly erred in treating difference of INR 2,19,08,287 between Net Realizable Value of closing stock and its cost, as a notional loss and as provision for diminution in value of asset thereby adding the same in computing taxable income under normal provisions of the Act and book profits under section 115JB of the Act respectively. Disallowance of expenditure on Corporate Social Responsibility (“CSR”) under section 115JB of the Act by treating it as apportion of profits.
22. That on the facts and in law, Ld. DRP/ Ld. AO have grossly erred in treating the expenditure of INR 3,65,70,352 incurred on CSR as an appropriation of profits and adding it in the computation of book profits under section 115JB of the Act. Disallowance of Royalty expenses by holding that the Appellant had no liability to pay such royalties 23. That on facts and in law, Ld. DRP/Ld. AO have grossly erred in disallowing INR 2,29,72,438 being Royalty expenditure incurred by Appellant, by holding that the Appellant had no such liability. Disallowance of provision for warranty 24. That on the facts and in law, Ld. DRP/ Ld. AO have grossly erred in disallowing provision for warranty of INR 54,73,52,523 in computing taxable income under the normal provisions of the Act, by treating the computation methodology adopted by the appellant as being non-scientific.
25. Without prejudice to above grounds, Ld. DRP/ Ld. AO have grossly erred in not providing deduction of actual warranty expenditure incurred by appellant during the subject AY.
26. That on the facts and in law, Ld. DRP / Ld. AO have grossly erred in disallowing the provision for warranty of INR 54,73,52,523 by treating the same as contingent liability and adding the same in computing book profits under section 115JB of the Act. Non allowance of reversal of Marked to Market (MTM) Loss disallowed in immediately preceding previous year and credited to books of this year 27. That on the facts and in law, the Ld. AO has grossly erred in not following Ld. DRP directions by not reducing a sum of INR 90,51,149 in computing the taxable income and book profits under normal provisions of the Act and under section 115JB of the Act respectively, being the amount of addition made by Ld. AO in immediately preceding year for allegedly unrealized MTM loss which has been reversed in the subject year, thus leading to double taxation.
Miscellaneous contentions 28. Ld. AO has erred in initiating penalty proceedings under Section 271(1)(c). Additional Grounds: 29. That on the facts and circumstances of the case and in law, Ld. assessing officer/DRP ought to have restricted the levy of the dividend distribution tax, on the dividend distributed / paid to Sony Holding (Asia) B.V., Netherlands, being resident of the Netherlands, in terms of Article 10 of DTAA between India and Netherlands r.w., Protocol to the DTAA between the India and Slovenia or any other beneficial provision of any other tax treaty instead of section 115-O of the Act.
30. That on the facts and circumstances of the case and in law, Ld. Assessing officer/DRP ought to have restricted the levy of the dividend distribution tax, on the dividend distributed / paid to Sony Gulf FZE, Dubai UAE, in terms of Article 10 of the India- UAE, instead of section 115-O of the Act. The Appellant craves to leave to add, withdraw, alter, modify, amend or vary the above grounds of appeal before or at the time of hearing.
Ground No.6.5 for AY 2017-18: “6.5 Without prejudice to other grounds, impugned order errs in law and on facts and circumstances of the case by incorrectly computing interest beyond the assessed year.”
Based on the rival submissions and the material on record we feel it convenient to deal with the grounds as raised in the form of issues. The ground no. 1-3 are general in nature. The first issue thus relates to two aspects of substantive additions in AY 2015-16 made using Intensity approach and protective addition in all the three AY, on alleged international transaction of AMP expenses made on the basis of BLT.
The brief background to the issue are that Appellant/ assessee, was established in November 1994 and during the year FY 2014-15, it is held entirely by Sony Corporation, Japan (“Sony Corp”) through its subsidiaries Sony Overseas Holding B.V., Netherlands, Sony Mobile Communication AB, Sweden, Sony Mobile Communications International AB, Sweden and Sony Middle East & Africa FZE, Dubai. The assessee’s primary business is to distribute consumer electronics products in India mainly comprising of audio/visual entertainment products in the Indian markets. In addition to distribution of consumer electronics products, assessee (hereinafter also referred to as ‘SID’) also renders advisory to its Group companies.
4.1 In assessment proceedings for assessment year (“AY") 2015-16, the assesse filed its original return of income on 30 November 2015 declaring an income of Rs. 96,83,40,450/-. A notice under section 143(2) of the Act was issued to the assessee on 21 June 2016. The information/ details called upon by the TPO/AO were duly filed by the assessee. Further, a reference was made by the AO to the Additional Commissioner of Income Tax, Transfer Pricing officer- 3(1) (“TPO”) under section 92CA of the Act for determination of the arm’s length price. The Ld. TPO vide her order dated 29 October 2018 passed under section 92CA(3) of the Act made an adjustment to the income of the assessee amounting to Rs. 12,34,76,11,326/- on account of transfer pricing provisions. Based on the order of the Ld. TPO, the AO has issued a draft assessment order to the assessee in terms of provisions of section 144C of the Act proposing to make variations to the returned income of the assessee on account of transfer pricing and corporate tax issues. The assessee being an eligible assessee as per provisions of section 144C of the Act filed objections before the DRP against the transfer pricing variations proposed to be made by AO in the draft assessment order.
4.2 Now we find that that the details of international transactions undertaken during financial year (“FY”) 2014-15 are as under:- S. No Type of international transaction Amount in INR
1 Import of finished goods for resale 74,53,27,26,476 Export of finished goods 5,77,90,937 2 3 Receipt of Information Technology 2,97,71,350 (“IT") services 4 Receipt of Infrastructure services 14,22,51,145 5 Receipt towards use of Intel logo 3,15,67,625 6 Payment of Royalty 2,29,72,438 7 Use of FIFA logo 2,31,06,943 8 Provision of warranty services 3,63,70,082 9 Purchase of Promotional Material 1,82,51,095 10 Purchase of Samples 20,98,093 11 Purchase of airtime slots 19,61,394 12 Reimbursement paid by SID to its AEs 3,43,10,234 13 Receipt of Cali Centre Services 4,70,69,542 14 Receipt of Application services 1,61,97,008 15 Purchase of Spare and repair parts 20,94,72,430
16 Purchase of Solid-State Storage 1,14,02,12,373 Media Products 17 Provision of advisory services 72,90,433 18 Reimbursement received by SID 27,73,23,584 from its AEs 4.3 The assessee has at the time of preparing its Transfer Pricing documentation benchmarked the international transactions from point 1-16 using a combined transaction approach considering Transactional Net Margin Method (“TNMM”) as the most appropriate method for computing the arm’s length price of the international transaction. The case of assessee is that since the transactions are closely linked to the activity of distribution of consumer electronics, thus they have been analyzed together using TNMM. Therefore, companies, whose economically significant activities consist of distribution and marketing of consumer electronic products, and that are similar to SID in respect of responsibilities undertaken, were considered as comparable to SID. Based on the economic analysis so conducted by the assessee, it was concluded that the pricing in respect of the above transactions is at arm’s length as per section 92(1) of the Act.
4.4 The transaction pertaining to reimbursement received by SID from its AEs was benchmarked using “Other method’’ and provision of advisory services was benchmarked separately, since, price/profit level details for the transactions were available with reasonable accuracy. Based on the economic analysis so conducted by the assessee, it was concluded that the pricing in respect of the above transactions is at arm’s length as per section 92(1) of the Act.
4.5 Transfer Pricing Officer’s by order u/s 92CA (3) dated 29 October 2018 made an adjustment on transaction pertaining to import of finished goods by contending that there is a mutual agreement/ arrangement between assessee and the AE for discharge of function of marketing and market development in addition to the arrangement/ agreement for sale and distribution of the goods purchased from the AE for which the costs have been borne by the AE. Thus based on the same, the Ld. TPO has concluded that the assessee is not a plain vanilla distributor carrying out only purchase and sale function but has been rendering Development, Enhancement, Maintenance, Protection and Exploitation (“DEMPE”) services which include market development, value addition, creation of marketing intangible etc as well. The Ld. TPO has contended that there is no bifurcation provided on the promotional expenditure and the expenditure on market development function incurred by the assessee for which the assessee is eligible for compensation under a situation where no such bifurcation is available. Thus the ld. TPO concluded that contribution of the assessee in developing the marketing intangibles which requires to be compensated by AE is primarily to be benchmarked using Profit Split Method (“PSM") but then observed that PSM cannot be applied as the assessee has failed to provide requisite information. Further ld. TPO observed that the Hon’ble Delhi High Court has emphasized that while benchmarking the first endeavor of the TPO should be to benchmark the entire distribution function by use of suitable comparables. Failing such effort, segregate approach should be used. Ld. TPO observes that the Hon’ble High Court has not laid down any methodology for segregated benchmarking. It was further observed that the assessee has not provided monitory value of marketing function discharged by the assessee and identification of costs using brightline test is no longer permissible pursuant to Hon’ble High Court decision. Hence, ld. TPO found it to be handicapped to benchmark the entire distribution function including purchase, marketing and market development. According to the ld. TPO, the comparables chosen by the assessee do not discharge both the functions (i.e. distribution and marketing) in the manner carried out by the assessee. The recourse left to the ld. TPO was to use broad category comparables, which although engaged in purchase and sale of goods of the broad category dealt by the assessee but are not carrying out significant marketing functions.
4.6 Based on reasons mentioned above, the comparables were subject to comparability adjustment under Rule 10B(1)(e)(iii). This comparability adjustment was carried out in the margin of the comparables by identifying the excess intensity of expenditure incurred by the assessee on indirect expenses, excluding personnel expenses, (SGA) as a ratio of sales vis-a-vis the comparables. The expenditure incurred by the comparable companies is then increased in order to equalize the intensities. According to ld. TPO, since the marketing function provides a return in the market, the average profit margins returned by entities providing market support functions were identified.
S. No Name of the company OP/OC (%) 1. NDTV Worldwide Ltd. 34.49% 2. Killick Agencies & Marketing Ltd 26.47% 3 Fcbulka Advertising Pvt. Ltd. 28.62% Average 29.86% 4.7 Considering the above return, the sales in the comparables was increased by 1.2986 times the increase made in the cost. The ld. TPO further computed working capital adjustment on such margins.
4.8 In carrying out the above TNMM analysis, Ld. TPO has rejected ten companies out of twelve companies selected by the assessee (while submitting updated data for FY 14- 15) and proposed ten additional companies. The list of twelve companies finally selected as comparables by Ld. TPO along with their intensity and working capital adjusted operating profit/ operating revenue (OP/OR) is tabulated as under:
S. No. Name of the company Intensity and working capital adjusted OP/OR Companies selected by the assesse 1 Optiemus Infracom Limited 5.34% Salora International Ltd. 2.65% 2 Additional companies selected by LD. TPO 3 Intex Technologies (India) Limited 5.60% 4 Micromax Informatics Limited 7.96% 5 United Telelinks (Bangalore) Private 12.21% Limited 6 Lava International 8.30% 7 Ample Technologies 5.90% 8 Novel Appliances Private Limited 6.27% 9 Aditya Infotech 7.10% 10 Virtual Netcom Private Limited 2.85% OTS E-Solutions Private Limited 4.62% 11 Sargam India Electronics Private 4.78% 12 Limited Median 5.75% 35th Percentile 5.34% 65th Percentile 6.27% 4.9 The case of assessee before the DRP was that the Ld. TPO has not provided assessee the back-up computation for the adjustment being proposed. The Ld. TPO has incorrectly computed the operating expenses of the assessee. Further Ld. TPO increased the above computed operating cost of the assessee by 5% without giving any valid rationale for such stepping up of operating cost. The credit notes received by the assessee which were set-off against its purchases were grossed up twice in operating expenses. Assessee also alleged that 13 advertising, travelling, warranty reimbursement and other reimbursements received were erroneously included in operating cost by the ld. TPO while determining assessee’s operating margins. As per assessee pursuant to these errors, the assessee’s margins were determined at (-) 8.21 percent of operating revenue. Thus based on the above approach, the Ld. TPO proposed an adjustment of INR 12,32,35,19,000/- to the assessee’s taxable income.
5. Further ld. TPO also made a protective adjustment of INR 2,06,652.54 lakhs following Brightline Test (“BLT") approach which has been rejected by Hon’ble Delhi High court in case of Sony Ericsson Mobile Communications India Private Limited (ITA 16/2014).
Ld. Counsel has submitted that in the absence of clear machinery provisions in the Act for benchmarking Advertisement, Marketing and promotion (AMP) expenditure, multiple attempts were made by Revenue to use ad hoc and arbitrary methods. One such method euphemistically called intensity adjustment is just a mirror image of Bright Line Test (BLT) which is disapproved by Hon’ble Delhi High Court and several decisions of Coordinate benches of Hon’ble Tribunal across the country. Department’s SLP is pending consideration. In present case Sony is the tested party i.e., whose BLT is compared to BLT of companies chosen as comparable OR tested party margin of Sony is compared with notional intensity (BLT substituted) margins of comparable companies. This is termed as protective adjustment by TP order. As 14 BLT is invalidated by Hon’ble Courts this arithmetic jugglery is performed on comparable companies and labelled as intensity adjustment. Steps involved were explained as below:
“Bright Line Test Median of Expenditure towards AMP as a % of sales (AMP/ Sales - 0.96% internal page 44 of TP order relating to AY 15-16) for companies selected as comparable( internal page 29 and 30 of TP order) for benchmarking core business segment in Sony (in present case import and sale of finished goods) is taken as bright line ( see page 44 of TP order. BLT of 0.96 % translates to INR 10570. 39 lacs). Excess of AMP expenditure ( AMP / sales % of which is 16.45% please see internal page 44 of TP order) incurred by Tested party (Sony - see working on internal page 44 of TP order for AY 15 -16 for excess expenditure over BLT INR 170547.61 lacs) above Bright line is determined Tax department refers to such excess expenditure to justify its claim that AMP is a separate and distinct international transaction As tax department imagines that such excess expenditure is incurred by Indian entity for rendering marketing and advertisement services to overseas AE. Such excess is further marked up by margin earned by companies engaged in advertising and marketing business ( please see internal page 30 - average of such margins as per TPO is 21.17%). As per tax department such marked up amount (excess AMP further marked up= 206652.54 lacs) is Transfer pricing adjustment applying BLT. This amount is required to be received by Indian entity from the overseas AE. Adjustment if any on bench marking of core segment goes separately as AMP is bench marked as separate transaction In regard to the Intensity adjustment it was submitted that (i)To (viii) STEPS adopted by TPO for intensity are described at internal page46 of TP order (just above para 22). Reference to page 2641 of Transfer pricing paper book III - copy of letter from TPO to Commissioner explains key factors used in working of intensity. This clarification by TPO, when viewed in context of BLT based adjustment on internal page 44 of TP order would show jugglery of same numbers and acrobatics. Expenditure towards AMP as % of sales (AMP/Sales - 16.45 % please see internal page 44 of TP order) incurred by tested party (SONY) is considered as the basis (without labelling this as ‘bright line’). For convenience of reference this amp / sales % ( 16.45 %) of tested party is referred hence forth in this note as BLT 2. This is just mirror of AMP/Sales% of same set of comparable companies used as basis in BLT approach. For purpose of recasting margin of comparable companies selected for benchmarking core business transaction (in present case import and sale of finished goods) BLT 2 percentage ( 16.45 %) is used as notional AMP cost in place of actual AMP expenditure incurred by each of such companies. Each company’s revenue/income/ sales is also correspondingly increased/substituted by amount of notional AMP + mark-up (21.17 % used in BLT - please see internal page 30 - average of such margins as per TPO is 21.17%) as described below in next steps. Average margin earned by companies engaged in advertising and marketing business is worked out for determining mark up % - just as in BLT. This mark- up % is used to gross up the notional AMP worked out (amount of AMP worked out using same percentage 16.45% as tested party) in earlier step. This new amount i.e., notional AMP expenditure determined above grossed up further for mark up(21.17%) is increased to sale/revenue/ income. Margin of each comparable company is worked out using the notional sale (-) cost including substituted AMP as described above. Margin earned by tested party is compared with average of new margins worked out for comparable companies to determine necessity and quantum of adjustment (please see internal page 64 of TPO order for working of adjustment based on intensity -.
Thus, same steps as in BLT are carried out in reverse direction i.e., on comparable companies and this method is euphemistically termed as intensity adjustment Appreciating above process though called intensity is a mirror image of BLT, coordinate bench of Tribunal in Widex has invalidated the same as mental acrobatics.”
Thus in summary for applying BLT, Sony’s AMP/ Sales is determined and excess over similar AMP / sales of comparable companies ( Bright line) is considered as adjustment after further marking up with margin of advertisement companies and in intensity approach the actual AMP of comparable companies is substituted by Sony’s % AMP/ Sales and by a notional exercise income is increased by excess of Sony AMP over comparables AMP expenditure after further mark up. The average of fresh notional margin of comparables is used to work out TP adjustment.
Now in regard to use of appropriate method for benchmarking AMP transactions while finding BLT to not be a method recognized under the Act and Rules. Hon’ble Delhi High Court in Casio India Company Private Limited vs. DCIT in ITA 814/2017, order dated 10th February, 2025, has considered the decision of in Maruti Suzuki (2015) 381 ITR 117 (Delhi), and relevant para of Maruti Suzuki decision (supra) are reproduced below; “70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed price cannot form the reason for making an ALP adjustment.
Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case.
As rightly pointed out by the Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit such an adjustment.” 8.1 Then Hon’ble Delhi High Court in PCIT-1 vs. Beam Global Spirits & Wine (India) Pvt. Ltd., ITA 155/2022 & 156/2022, order dated 7.3.2025 in para 22 has categorically discarded benchmarking of AMP expenses which was commenced solely on the basis of a perceived excessive expenditure incurred by an assessee. Similar is the case before us.
8.2 Then in Addl. CIT vs. Bacardi India Pvt. Ltd., & 4070/Del/2019, order dated 20.05.2022, the Co-ordinate bench at Delhi in para 15 has held as follows:-
“15. Having said so, the ld. CIT(A) held that there is a rationale to factor in AMP intensity adjustment while equating the functional profit into the comparables in TNMM benchmarking. The “bright line test” which is the mirror image of intensity approach has no statutory mandate. Hence, cannot be upheld.” 8.3 Similarly in Samsung India Electronics (P) Ltd. Versus DCIT Circle 2(2) reported in (2020) 120 taxmann.com 283 (Delhi Trib) has relied the decision of Chandigarh Bench in Widex India (P) Ltd. Versus ACIT (2019) 108 taxmann.com 125 (Chandigarh) to approve that what applies to BLT also applies to ‘intensity approach’ as a method for making ALP adjustment.
On the basis of aforesaid discussion we have no hesitation to uphold the contention of ld. Counsel that either applying BLT or by way of intensity approach alone the adjustments to AMP were not in accordance with law. Thus this issue and corresponding grounds are decided in favour of the assessee. Both substantive and protective adjustments to AMP shall stand deleted.
Second Issue. The issue is common to three AYs before us. Ld. TPO made an adjustment on royalty transaction by rejecting the combined transaction benchmarking under TNMM and has instead used the Comparable Uncontrolled Price method (‘CUP’) as the most appropriate method. The case of assessee before the DRP was that while using CUP, the TPO's office has not used any 19 benchmarking analysis or comparable transaction but instead concluded that Moser Baer India Ltd. (MBIL) being manufacturer is the ultimate beneficiary of the patent owned by Sony Corp. Thus MBIL should have paid the royalty to Sony Corp and not SID. Based on this, Ld. TPO in its order determined the ALP of royalty amounting to INR 2,29,72,438/- equal to NIL.
As with regard to this second issue arising out of transfer pricing adjustment in respect of transaction of payment of royalty, we find that the coordinate Bench had decided the issue in favour of the assessee while adjudicating the appeal for AY 2016-17. The ld. counsel has submitted that the law is now settled that such determination is arbitrary and unsustainable since, for application of CUP Method also TPO is duty bound to record comparable data. Although the ld. DR has made submission that the matter can be restored to AO/TPO, however, we are of the view that when such data/submissions were available and were part of the record, at the first instance, the Revenue cannot be given second opportunity. In this context, we would like to reproduce the findings of the coordinate Bench in assessee’s own case for AY 2016-17 in order dated 18.10.2022 as upheld by Hon’ble Delhi High Court in ITA 551/2023 order dated 30.09.24. The relevant paragraphs 23 to 30 of the order of tribunal read as under:-
“23. We have given thoughtful consideration to the orders of the authorities below. The manufacturing license agreement made on 29.09.2015 is exhibited at pages 1114 to 1125 of the Paper Book. The most relevant part of this agreement is worth mentioning here: "WHEREAS, SONY designs, develops and manufactures LCD TV products and related components; and WHEREAS, SID desires to manufacture and sell in the TERRITORY (as hereinafter defined) by itself and/or through SONY's authorized third party, certain LCD TV products; and WHEREAS, SONY is willing to permit and assist SID in the manufacture and sale of such products in the TERRITORY, upon the terms and conditions hereinafter set forth, all of which are acceptable to SID. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth. XXXXX (1) SONY hereby grants to SID a non-exclusive, indivisible, non- assignable and non-transferable and non-sublicensable license under the LICENSED PATENTS and/or the LICENSED KNOW-HOW (i) to manufacture or have the SUBCONTRACTOR manufacture the LICENSED PRODUCTS in the TERRITORY by using the COMPONENTS, and (ii) to sell, use, lease or otherwise dispose of such LICENSED PRODUCTS in the TERRH ORY. (2) SONY hereby grants to SID, a non-exclusive, indivisible, non- assignable, non-transferable and non-subliceasable license to use the LICENSED TRADEMARKS in the TERRITORY (i) to manufacture or have the SUBCONTRACTOR manufacture the LICENSED PRODUCT'S which shall meet the quality requirements to w'hich reference is made in Paragraph (1) of ARTICLE V of this Agreement, and (ii) to sell, use, lease, otherwise dispose of the (3) No alteration or modification of the LICENSED PRODUCTS, once approved by SONY pursuant to ARTICLE V hereof, shall be made by SID or the SUBCONTRACTOR without the prior written approval of SONY of such alteration or modification. SID shall cause the SUBCONTRACTOR to, strictly comply with the restriction set forth above in this Paragraph (3). (4) SONY acknowledges and agrees that SID may have SONY SUBSIDIARIES manufacture and may, by itself or through the SUBCONTRACTOR, purchase from SONY SUBSIDIARIES, the COMPONENTS necessary for the manufacture of the LICENSED PRODUCTS provided that (i) SID shall, jointly and severally, guarantee that SONY SUBSIDIARIES strictly complies with the terms and conditions of this Agreement and any other agreement entered into between SONY and SID regarding the subject matter, (ii) SID shall indemnify and hold SONY harmless from any and all losses or damages suffered or incurred by SONY as a result of breach by SONY SUBSIDIARIES of the above mentioned terms and conditions, (iii) SID shall in no way be relieved of any of its obligations under this Agreement and (iv) nothing contained herein shall be construed as a transfer or assignment of this Agreement by SID to SONY SUBSIDIARIES. SID shall sell the COMPONENTS manufactured by and purchased from SONY SUBSIDIARIES only to the SUBCONTACTOR if not used in the manufacture of the LICENSED PRODUCTS by SID. XXXX (1) SID agrees that it will pay to SONY a running royalty equal to two percent (2%) of the Net Sales determined pursuant to Paragraph (2) of this ARTICLE X for each LICENSED PRODUCT. (2) The "Net Sales" of the LICENSED PRODUCTS shall, for purposes of this ARTICLE X, be the aggregate of the selling prices in the usual course of business for such LICENSED PRODUCTS by SID, without any deductions other than: (i) sales taxes (and similar taxes pertaining to sale, if any, including but not limited to turnover tax, value added tax and any other corresponding tax imposed cm the LICENSED PRODUCT'S presently or in the future); (ii) usual trade and cash discounts actually allowed; and (iii) if invoiced separately, the selling price of packing material and boxes, cartons and crates in which such LICENSED PRODUCTS are packed, as well as freight and insurance charges. (3) By no later than the first business day of each calendar quarter (i.e., January 1, April 1, July 1 and October 1) during the TERM, SID shall furnish to SONY a statement, certified by an officer of SID, showing the quantities of the LICENSED PRODUCTS sold in the immediately preceding calendar quarter and the amounts of royalty payable with respect to such LICENSED PRODUCTS pursuant to this ARTICLE X; and SID shall pay SONY the royalties payable for each immediately preceding calendar quarter by the end of the month following two (2) months after such calendar quarter. (4) In order that the royalties and statements provided for in this ARTICLE X may be verified, SID shall keep lull, complete and accurate books and records showing the assembly, manufacture, sale, and/or other disposition of the LICENSED PRODUCTS. SID agrees to permit such books and records to be audited from time to time, but no more than once in each calendar year, at the expense of SONY, by a representative or representatives of SONY acceptable to SID or by an independent certified public accountant appointed by SONY to the extent necessary' to verify the accuracy of the aforementioned royalties, payments and statements.
(5) All sums of money payable by SID to SONY under this AR ITCLE X shall be paid in United States Dollars and remitted to a bank account designated by SONY, without any deduction of taxes or charges of any kind, which taxes or charges, if any, are assumed by SID as a part of the royalty. Conversion from the local currency to United States Dollars shall be made at the exchange rate applied by the remittance bank on the dale of the remittance. If, at any time during the TERM any competent government of any country shall require that any income tax be withheld by SID and remitted directly to such government on behalf of SONY, SID shall be and is hereby authorized to do so. SID shall promptly transmit to SONY tax receipts issued by the competent tax authorities of such country in respect of income taxes so withheld so as to enable SONY to support a claim for credit against income tax payable by SONY in Japan."
24. A perusal of the above relevant clauses of the agreement shows that MBIL and CTTL are manufacturing sub-contractors and license has been given to the assessee by Sony Corp. It is not a case of the Revenue that MBIL and CTTL have also paid royalty to Sony Corp. Therefore, we fail to understand how MBIL and CTTL can be considered as manufacturer by TPO/DRP for the purposes of royalty payment because by no stretch of imagination Sony Corp would allow an unrelated party to manufacture its products on which it has sole copyright/trade mark right/manufacturing/distribution rights.
25. Further, we are of the considered view that the TPO has grossly erred in supporting his finding on the premise that the assessee has failed to prove that such intangibles were actually received by it and further failed to prove that such received intangibles have benefitted it.
26. The TPO further erred in justifying his findings by stating that the assessee has not derived any benefit on account of usage of intangible property for which royalty was paid.
The Hon'ble High Court of Delhi in the case of Cushman and Wakefield [supra] has categorically held as under: "The Court first notes that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine ITA 475/2012 Page 25 whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO. This distinction was made clear by the ITAT in Dresser-Rand India Pvt. Ltd. v. Additional Commissioner of Income Tax, 2012 (13) ITR (Trib) 422: "8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; It is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in ITA 475/2012 Page 26 terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an Assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no services were rendered by the AE at all, and that since there is No. evidence of services having been rendered at all, the arm's length price of these services is 'nil'."
It is also not in dispute that Sony Corp has invested significant amount and efforts in developing, manufacturing intangibles and for which it should be suitably remunerated and since the assessee has received license to use these value intangibles during the course of its operations in India, the assessee was duty bound to pay royalty for the simple reason that Sony Corp would not allow any third party to use its intangible properties created through large amount of investment without receiving any sort of consideration.
It is also not in dispute that the assessee has licensed technology and trade mark from Sony Corp and further licensed them to OEMs and the OEMs manufacture these goods based on technology sub licensed by the assessee and sells them back to the assessee for which the assessee pays royalty at an agreed percentage of net selling price and this payment of royalty by the assessee instead of OEMs is due to commercial necessity and payment of royalty transaction is already bench marked under TNMM.
Considering the facts of the case in totality, we do not find any merit in the TP adjustment in respect of transaction of payment of royalty and accordingly direct the Assessing Officer to delete the adjustment of Rs. 14,69,89,634/-. This ground with all its sub-grounds is allowed and accordingly, grievances raised vide Ground Nos. 1 to 40.6 become otiose.”
11.1 In the light of the aforesaid, this issue with corresponding grounds are decided in favour of the assessee.
Third issue. The issue is relevant to AY 2015-16. Ld. TPO made an adjustment on transaction pertaining to provision of business support services or advisory services. In order to benchmark impugned international transaction pertaining to provision of advisory services, the ld. TPO rejected some of the comparables selected by the assessee in its Transfer Pricing Study and included additional comparables in the Transfer Pricing order, which assessee claims were functionally dissimilar. Ld. TPO’s office while computing the adjustment on transaction pertaining to provision of advisory services, has considered the following comparable companies:-
Companies considered for mark-up Sl. No. Margin (OP/OC) Avanti Media Ltd. 15.88% 1. Majestic Research Services & Solutions Ltd. 15.22% 2. 3. Mig Media Neurons Ltd 15.00%
4. NDTV Worldwide Ltd 34.49%
Fcbulka Advertising Pvt. Ltd. 28.62%
6. Just Dial Limited 33.82%
7. Info edge (India) Limited 41.88%
8. Median 28.62%
The ld. Counsel has submitted that on exclusion of only one comparable, i.e Fcbulka Advertising Pvt. Ltd., transfer pricing adjustment would be superfluous. We find force in the contention of the ld. counsel that complete financial statements are not available in public domain and it is a functionally different company. We find that admittedly, the assessee has provided advisory services to its AE on which it was earning a mark up of 15% and for benchmarking the said transaction the assessee chose TNMM as the most appropriate method. The average margin of comparables was calculated in a range of 16.37% and 20.24% and, thus, the transaction was claimed to be at arm’s length.
In assessee’s own case for AY 2016-17 (supra), the issue was restored to the DRP to give a detailed and speaking order after affording reasonable and adequate opportunity of being heard to the assessee. Thus, we allow this issue with the direction to the TPO to exclude, Fcbulka Advertising Pvt. Ltd as a comparable and make a fresh adjustment in accordance with the law. The relevant grounds in AY 2015-16 accordingly stands allowed for statistical purposes.
Fourth issue; The issue is relevant for AY 2017-18 and 2018-19. This issue arises out of transfer pricing adjustment in respect of outstanding receivables. In regard to this issue, it was submitted that in AY 2017-18, the TPO while computing the interest income for delayed receivables, has not restricted the computation to assessment year under consideration. The TPO has computed the adjustment by considering interest up to the TPO’s order, i.e., 31st January, 2021. On behalf of the assessee, invoice-wise details filed before the DRP are available in PB. In the light of the same, the issue for AYs 2017-18 and 2018-19 is restored to the files of TPO to verify discrepancy and make adjustment accordingly. The corresponding ground are allowed for statistical purposes.
Fifth Issue; The fifth issue is relevant to all the three years in hand. Ld. AO then held that from the examination of the account of the assessee it was seen that the assessee company has valued some of its closing stock on price lower than the cost. The assessee has stated that they are following lower of cost or market price/net realizable value for valuing the closing stock. In respect of the following items, net realizable value was taken which was lower than the cost. The assessee was asked to provide details of inventory items which were valued at Net Realizable Value ('NRV') as on 31 March 2015, alongwith the basis for calculating NRV and cost of items valued at NRV. Also, to explain why the difference between NRV and Cost should not be disallowed in income computation as per the normal provisions of the Act and in MAT computation. In response, the assessee furnished its reply vide dated 21.12.2018. In its reply the assessee stated that it follows Accounting Standard-2 for inventory, as per Generally Accepted Accounting Standard. As per the accounting standards, inventories should be valued at the lower of cost and NRV. The assessee also relied upon some case laws but the ld. AO rejected this claim.
The ld. counsel has pointed out that this issue has been decided in favour of the assessee in AY 2016-17 (supra). We find that in paras 56 to 58, the coordinate Bench in AY 2016-17 (supra) has discussed the issue and the relevant findings in para 56 needs to be reproduced here below:-
“56. We have given thoughtful consideration to the orders of the authorities below. At the very outset, we have to state that the observations/comments by the Assessing Officer on application of Accounting Standard - 2 is without any merits and, in fact, uncalled for. Secondly, it is an undisputed fact that the assessee has been consistently following the same method of valuation of closing stock which was cost or net realizable value, whichever is lower.”
17.1 After taking into consideration the findings of the ld. AO in para 7 and sub-paras, we find that for the similar reasons the additions in the total income as well as book profits of the company was proposed. Thus, following the coordinate bench decision in AY 2016-17 (supra), the issue with corresponding grounds is decided in favour of the assessee.
Sixth Issue; The issue is common to all the years in hand. As regard to issue of Corporate Social responsibilities (CSR), disallowance, it can be seen that during the year 2015-16 under consideration the assessee had incurred a sum of Rs. 3,65,70,352/- towards CSR, and this entire sum was disallowed by the assessee company in computation of its taxable Income under the normal provision of the Income Tax Act, 1961. The assessee company has charged the entire CSR expenditure incurred by it, to its statement of Profit and Loss for the year and no addition was made in computing 'Book Profit' under section 115JB of the Act. The DRP observed that as per explanation (2) to section 37(1), the CSR expenditure is not allowable under normal provision of the Act. Therefore, it is added to total income under normal provision of Act.
The ld. counsel has pointed out that the issue is covered in favour of the assessee in the decision for AY 2016-17 (supra). We find in para 60 to 61 that the coordinate Bench has dealt with the issue wherein this issue has been decided in favour of the assessee by relying the decision of the coordinate Bench decision in the case GE Power System India Pvt. Ltd. in order dated 10.08.2022 for AY 2016-17. We find there is no distinguishing feature. According the issue and corresponding grounds are decided in favour of the assessee.
Seventh Issue; The seventh issue relates to the disallowance of royalty expenses by AO as examined u/s 37(1) of the Act and is relevant to all the three years in hand. The ld. Counsel has pointed out that the issue is covered in favour of the assessee in the decision for AY 2016-17 (supra). We find in paras 63-65 that the coordinate Bench has dealt with this issue wherein this issue has been considered in favour of the assessee as follows:-
“63. The underlying facts in this issue are from the account of the assessee. The Assessing Officer noticed that the assessee has claimed royalty expenses of Rs. 14,69,89,634/-. The Assessing Officer proceeded to examine the claim u/s 37(1) of the Act.
The TPO disallowed the expenditure of royalty incurred during the year.
This issue has been considered by us in detail while adjudicating first issue [supra]. For our detailed discussion therein, these grounds become otiose. Ground No. 53 and 54 have become infructuous.”
The coordinate Bench has held that the issue is otiose consequent to adjudication of issue of royalty adjustment. Similar is the consequence here.
Accordingly, the assessee is benefitted of the findings in favour of the assessee while deciding the issue No.2 and corresponding grounds are decided in favour of assessee.
Eighth Issue. This issue arises out of disallowance of provision of warranty by the ld. AO in AY 2015-16 and 2017-18. It can be observed from the assessment order that from the account of the assessee, Ld. AO observed that the assessee has created provision for warranty amounting to Rs. 247,41,55,169/- and utilized a provision of Rs. 256,83,83,121/-. The provision account for the last five years is as under:
Particular/ FY 2009-10 FY 2010-11 FY 2011-12 FY 2012-13 FY 2013-14 FY 2014-15 Years Sales Sales 38,563,259,962 56,955,820,877 67,555,446,980 82,586,519,196 100,164,225,151 110,103,008,33 Opening 200,823,000 186,253,791 211,019,753 318,165,585 43,42,21,569 144,21,67,488 Provision Created 256,801,929 381,109,522 718,687,000 940,769,817 3,059,984,007 2,474,155,169 during the year Utilised 271,371,000 356,344,000 611,541,000 824,713,833 2,052038,088 256,83,83,121 during the year Reversed - - - - - - during the year Closing 186,253,791 211,019,753 318,165,585 43,42,21,569 144,21,67,488 134,79,39,537 Provision (A)
Thus, considering that every year the assessee has a net surplus in the provision for warranty account the ld. AO concluded that the amount of balance in the provision account means that while it has been claimed as expenditure, but remains un-utilised. The amount of Rs. 134.79 Crores has not been taxed till date. The assessee was asked to explained as to why excess provision account should not be added to the total Income. In response, the assessee has stated that it has scientific method to compute the liability and that it was also based on past experiences. However, the ld. AO was not satisfied and made the disallowance.
Ld. Counsel has submitted that this issue is also covered in favour of assessee by decision in AY 2016-17 (supra). We find that in AY 2016-17 the issue was examined by the coordinate bench and considering same to be a legacy issue since AY 2001-02 and being determined by Hon’ble Delhi High Court in 160 Taxmann 397, where in Hon’ble High Court has held that revenue has failed to allege and establish that amounts set apart were unreasonably disproportionate. It can be seen that in AY 2016-17 the coordinate bench has also relied decision in favour of assessee reported in 114 ITD 448, wherein it was held that provision for warranties is an ascertained liability. Thus we are inclined to follow the said decision and decide the issue along with corresponding grounds in favour assessee.
Ninth Issue. The next issue relates to the disallowance of reversal of unrealized Market to market loss, (MTM loss). The issue is relevant to grounds raised
in AY 2015-16 and AY 2018-19. The case canvased by the ld. Counsel is that in FY 2016-17, unrealised MTM loss on account of firm commitment of 32. INR 98,91,549 was disallowed while computing taxable income for FY 2016-17. In FY 2017-18, the same was reversed in the books of accounts and therefore, was not taxable. In FY 2017- 18, unrealised MTM loss of INR 7,70,171 was accounted and disallowed. Therefore, profits were decreased by INR 91,21,378 being net unrealised MTM loss on account of firm commitment (INR 98,91,549 less INR 7,70,171). It is submitted that disallowance of unrealised MTM loss which has already been offered to tax earlier, on an incorrect understanding of the ICDS provisions, will lead to double disallowance considering the same amount has been subjected to tax in the hands of the Assessee in the preceding year. In the light of aforesaid we are inclined to restore this issue to the files of ld. AO. Assessee shall file a computation establishing double taxation and upon verification the same shall be deleted. Corresponding grounds are allowed for statistical purposes.
Tenth issue. The issue is relevant to AY 2015-16. The next issue relates to the Dividend Distribution Tax. Additional ground was raised seeking application of lower rate of DDT. Such claim though not made in original return or assessment proceedings raises only legal issues and facts of DDT are part of record. The issue stands settled against the assessee by decision of special bench in DCIT Versus Total Oil (2023) 104 ITR (Mumbai Tribunal). Thus issue and corresponding grounds are settled against the assessee.
27. Remaining grounds are consequential. As a consequence of aforesaid determination of grounds the appeals are allowed partly with consequence to follow as per the determination of grounds as above.