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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI AMARJIT SINGH & SHRI RAHUL CHAUDHARYShri Vishal Karla
Per Amarjit Singh (AM): The present appeal filed by the assesse is directed against the order passed by the DRP-III, Mumbai dated 18.12.2014 for A.Y. 2010-
The assesse has raised the following grounds before us:
“1. That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant for the relevant AY at INR 10,07,51,524 as against returned income of Nil after setting off brought forward losses based on the directions received from Hon'ble Dispute Resolution Panel ("DRP") upholding the adjustment to the transfer price made by the Transfer Pricing Officer ("TPO").
That on the facts and circumstances of the case and in law, the AO/DRP/TPO erred in making a transfer pricing adjustment of INR 15,46,56,351 in respect of the international transaction relating to import of components for the manufacturing segment, alleging the same to be P a g e | 2 Gigabyte Technology (India) Pvt. Ltd. Vs.The DCIT, Circle-1 not at arm's length in terms of the provisions of section 92C of the Act read with Rule 10D of the Income-tax Rules, 1962 ("the Rules").
That on the facts and circumstances of the case and in law, the AO/ DRP/TPO while rejecting Appellant's determination of arm's length price ("ALP") for import of components in relation to manufacturing segment erred in (a) not appreciating the business model functional, asset and risk analysis undertaken by the Appellant, (b) not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with Rules.
That on the facts and circumstances of the case and in law, the AO / DRP/ TPO has erred in rejecting the aggregation approach adopted by the Appellant for benchmarking its international transactions and further erred in segregating the audited financial statements of the Appellant into manufacturing and distribution segments in an arbitrary and subjective manner
That on the facts and circumstances of the case and in law, the AO/ DRP/ TPO has erred in determining the arm's length price in relation to advertising and sales promotion as Nil and further in not appreciating that it was merely a journal entry in the books of accounts, no actual payment was made by the Appellant.
That on the facts and circumstances of the case and in law, the AD / DRP/ TPO has erred in not allowing Appellant's claim for economic/ working capital/ risk adjustments.
That on facts and circumstances of the case and in law, the AO/ DRP/ TPO have erred in ignoring the provisions of Rule 108(4) of the Rules and judicial pronouncements, which advocate usage of multiple year data of comparable companies for the purpose of determination of the arm's length price.
That on facts and circumstances of the case and in law, the Learned DRP/AO/ TPO have erred in not providing the Appellant the benefit of (+/-) 5 percent range as provided by the proviso of section 92C(2) of the Act.
That on the facts and circumstances of the case and in law, the AO has erred in charging interest under sections 234B and 234C of the Act. The above grounds are independent and without prejudice to each other. The Appellant prays for leave to add, alter, amend and/or modify any of the grounds of appeal at or before the hearing of the appeal.”
The fact in brief is that assesse is engaged in the business of dealing in computer and peripherals. It has filed return of income on 4.10.2010 declaring total income of Rs. Nil after setting off of total income of Rs.5,34,24,514/- for the year under consideration against
P a g e | 3 Gigabyte Technology (India) Pvt. Ltd. Vs.The DCIT, Circle-1 brought forward losses of earlier years and paid taxes under MAT provisions. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 21.09.2011. The assessing officer has referred the case to the Transfer Pricing Officer to determine the arm’s length price of international transaction as appearing in 3CEB report filed by the tax payer. The TPO asked the assesse about the payment of excise duty and other manufactured related cost debited to the profit and loss account. The assesse explained that he engaged in trading in the computer peripheral and also imported certain raw material and parts from its associated enterprises and assembled motherboards from D-link India Pvt. Ltd. on job work basis. However, the TPO by virtue of payment of central excise duty on manufacturing which was debited to the profit and loss account treated the assesse both as manufacturer and distributer of the computer peripherals. Therefore, the TPO has redrawn financial into Manufacturing and Trading segment by allocating direct costs attributable and indirect cost based on the turnover as reproduced below: Item Manufacturing Trading Operating Revenues 80,30,12,985 76,23,22,361 Operating Expenses 97,03,97,508 77,40,63,841 Operating Loss 16,73,84,523 1,17,41,470 Operating Profit on -20.85% -1.54% Sales %
In respect of trading segment the assesse had made a margin (OP/OR) of 1.54%. The TPO has carried out independent analysis to determine the arm’s length margin for the comparable engaged in trading of computer peripheral and same was determined at 2.68%. Since, the margin was within +/- 5%, therefore, no adjustment was made in respect of trading segment.
However, in respect of manufacturing segment the assesse was issued a set of comparable which were engaged in the manufacturing of P a g e | 4 Gigabyte Technology (India) Pvt. Ltd. Vs.The DCIT, Circle-1 the computer peripheral and it was proposed that adjustment to the price paid to the associate enterprise will be adjusted based on the arithmetic mean of the comparables proposed by adopting TNMM as most appropriate method treating the assesse as manufacturer of computer peripherals. The list of comparables taken were as follows: Sr. Company Name Sales OP OC OP/OC OP/Sales No.
Euro Multivision 56.6 6.02 50.58 11.90% 10.64% Ltd.
Fatpipe Networks 58.96 4.24 54.74 7.75% 7.19% India Ltd.
Lipi Data Systems 166.13 13.14 152.99 8.59% 7.91% ltd
PCS Techynology 197.81 9.06 188.75 4.80% 4.58% ltd.
Smartlink Network 175.33 22.68 152.65 14.86% 12.94% Systems ltd.
T V S Electronics 194.55 2.16 192.39 1.12% 1.11% Ltd.
Zenith Computers 277.29 4.87 272.42 1.79% 1.76% Ltd. Average 7.26% 6.59%
However, after taking into consideration the objections filed by the assesse, the TPO has applied the following comparables as under:
Sr. No. Name of the Company OP/OR%
Euro Multivision Limited 11.74
Fatpipe Networks India Ltd. 5.24
Lipi Data Systems Ltd 7.38
Smartlink Networks Ltd 10.57
TVS Electronics Ltd. 1.03
Zenith Computers Ltd
67 Arithmetic Mean
27
Based on the aforesaid analysis the TPO has made adjustment to the amount of Rs.21,77,33,437/- on account of adjustment made in respect of the manufacturing segment:
P a g e | 5 Gigabyte Technology (India) Pvt. Ltd. Vs.The DCIT, Circle-1 Arm’s Length Mean Margin on Sales 6.27% Operating Revenue 80,30,12,985 Arms Length Price (ALP) @ 93.73% of operating 75,26,64,071 Revenue Operating Cost 97,03,97,508 Excess Payment made for raw materials 21,77,33,437 purchased being adjustment u/s 92CA
The TPO has also observed that assesse had not reported an international transaction in respect of advertisement and Sales Promotion Expenses of Rs.1,51,15,398/- paid to the holding company Gigabyte Technology Co. Ltd. These transactions were not reported by the assesse in Form 3CEB. The TPO further stated that assesse had also not done any separate bench marking analysis for the same and had not justified why the payment made was at arm’s length. Therefore, the TPO held that this payment made by the assessee was not justified, therefore, arm’s length price was treated as Rs.nil in the case of advertisement expenses claimed by the assesse. Finally, the TPO has made adjustment on account of advertisement and manufacturing segment to the amount of Rs.23,28,48,835/- and total summary of adjustments made are as under: Sr. No. Particulars Amount (Rs.)
Advertising & Sales Promotion paid 1,51,15,398
Manufacturing segment 21,77,33,437 Total adjustments u/s 92CA 23,28,48,835
On the basis of order of the TPO passed u/s 92CA of the Act dated 30.01.2014, the A.O has passed draft assessment order on 05.03.2014 by incorporating the aforesaid adjustment made by the TPO.
Against the draft assessment order issued by the assessing officer u/s 143(3) r.w.s 144C of the Act dated 05.03.2014 the assesse has filed its objection along with Form 35A before the Dispute Resolution Panel –III, Mumbai on 11.04.2014. The DRP held that out of the total sale of P a g e | 6 Gigabyte Technology (India) Pvt. Ltd. Vs.The DCIT, Circle-1 Rs.171.88 crores the composition of manufacturing segment was 54% and the trading segment was 46% and after applying the revenue after discount in the above proportion determined the operating revenue from manufacturing segment to Rs.88,64,36,098/- and the trading segment to Rs.75,51,12,232/-. On the basis of revised working the operating profit was worked out as under: Item Manufacturing Operating Revenues 88,64,36,098 Operating expenses 97,03,97,508 Operating loss 16,73,84,523 Operating Profit on sales % -9.47%
In accordance with the directions of the DRP, the assessing officer passed assessment order u/s 143(3) r.w.s 92CA r.w.s 144C(5) of the Act on 03.02.2015 and made total adjustment u/s 92CA to the amount of Rs.15,46,56,351/- comprising advertisement and sale promotion expenses of Rs.1,51,15,398/- and manufacturing segment Rs.13,95,40,953/-.
During the course of appellate proceedings before us the ld. Counsel contended that assesse was primarily engaged in the distribution of computer component viz. motherboard, graphic cards and optical disk drives in India. The assesse also deals in laptops, LCD, monitors keyboard, mouse and other computer components. The assesse imports these components from its associate enterprises and resale the same in India through distribution network. The ld. Counsel also contended that during the year the assessee has also imported certain raw materials and parts from its associate enterprise pertaining to motherboard and got it assembled from D-link India Pvt. Ltd. into finished products in the form of motherboards. The ld. Counsel submitted that the TPO has incorrectly treated the assesse from being a distributor to a distributer cum manufacturer merely on the ground
P a g e | 7 Gigabyte Technology (India) Pvt. Ltd. Vs.The DCIT, Circle-1 that it had paid excise duty and incurred manufacturing related cost during the years. The ld. Counsel has placed reliance on the following judicial pronouncements: (i) Margin Method (TNMM) and the same has been accepted by the department in prior assessment years i.e 2008-09 to 2009-10 and also in the succeeding assessment year 2011-12. 7. On the other hand, the ld. D.R has supported the order of TPO, DRP and assessing officer.
Heard both the sides and perused the material on record. The assesse is primarily engaged in the distributions of computer components viz. motherboard, graphic cards, optical disk drives etc. In addition to this the assesse also got assembled motherboard from D- link (India) Ltd. on job work bases after importing the computer components from its associate enterprise. The assesse has submitted that there is no difference in product profile in trading and contract manufacturing segments. The assessee was engaged in sale of computers and peripherals in India and finished products purchased from associated enterprises or assembled finished products sourced from D-link (India) Ltd. These assembled products were therefore, sold in India by the assesse through a distribution network. In the profit and loss account assesse has booked the job work charges paid to the D- link India and same was excluded in the Net Margin calculation while benchmarking the import transaction. The relevant detail in respect of trading and manufacturing segment are as under:
P a g e | 8 Gigabyte Technology (India) Pvt. Ltd. Vs.The DCIT, Circle-1 “17 direct Cost Raw Materials and components consumed 834,348,627 Purchase of traded goods 723,545,771 Packing materials and consumables consumed 2,416,282 Jobwork charges 66,671,802 Total 1,626,982,482
The assesse undertake import and resale of computer components along with the assembled component on job work basis from D-link (India) Ltd. into finished product and these were closely linked transaction. Therefore, assesse submitted that it has benchmarked these transactions on an aggregate basis using Transactional Net Margin Method (TNMM). It is also undisputed fact that assesse had adopted the same aggregation in the earlier assessment year 2008-09 and 2009-10 and succeeding assessment year 2011-12 which has been accepted by the revenue. The assesse has also referred notification of the central excise No. 214/86-C.E. dated 25.03.1986 that simply if it had paid excise duty only on that basis assesse cannot be treated as manufacturer. We have perused the copies of invoices raised by D-link (India) Ltd. for assembling of finished goods placed in the paper book. It is noticed that assesse has assembled motherboard from D-link (India) Ltd. normally @ Rs.138/- per unit i.e vide invoice dated 27.06.2009 assesse had paid Rs.2,07,000/- to D-link (India) Ltd. for assembling of 1500 motherboard. Similarly, on 29.06.2009 vide invoice placed in the paper book it had paid charges for job work to D-link (India) Ltd. for assembling of Rs.19,04,405/- for assembling of 1380 motherboard which established that assesse has only paid nominal amount on assembling charges in the form of job work which was not a complete manufacturing. Similarly it is demonstrated from the other invoices that the assesse had paid nominal amount for assembling work which was not full-fledged manufacturing. We have also perused the copies of invoices raised by D-link (India) on the assessee for assembling of finished goods, copies of invoices for sale of finished goods by the P a g e | 9 Gigabyte Technology (India) Pvt. Ltd. Vs.The DCIT, Circle-1 assessee assembled by D-link in India placed in the paper book. We have also perused the copies of sale of goods by the assessee imported from AEs and sold in India. It is demonstrated from the copies of invoices that assesse has not undertaken any full-fledged manufacturer of motherboard and paid nominal amount per motherboard as job work charges for assembling the different components imported by the assesse from its associated enterprises as discussed supra in this order. The AO, TPO could not controvert these material facts brought on record by the assesse in support of aggregating these transactions as composite transactions. Therefore TPO/DRP were not justified in applying the comparable of the companies which were fully engaged in the manufacturing as discussed supra in this order. In the light of the above facts and after considering the approach adopted in the earlier assessment year and succeeding assessment year as referred supra the TPO, AO is not justified in bifurcating the transaction separately into manufacturing and trading segment. In respect of Advertisement expenses:
The assesse explained that advertisement and sale promotion expenses were merely an accounting entry in the books of the assesse towards reversing excess reimbursement booked by the assesse previously. No actual payments were made during the year and the assessee had merely passed a balancing entry in its books of accounts. We have also perused the break-up of advertisement and sale expenditure alongwith journal ledger placed at page no. 351 to 353 of the paper book. The assessee explained that upon reconciliation it was noticed that excess reimbursement was claimed from the AE, therefore the same was reversed during the year under consideration. The A.O and TPO has not brought any material on record to controvert the facts reported by the assessee alongwith the relevant material as discussed supra. Therefore, computation of adjustment made by the A.O, TPO is P a g e | 10 Gigabyte Technology (India) Pvt. Ltd. Vs.The DCIT, Circle-1 not justified and same was deleted. Therefore, ground of appeal of the assesse 2 to 6 are allowed.
Ground No. 7 to 9 are consequential in nature, since we have allowed ground of appeal, therefore these grounds become academic the same stand dismissed.
In the result, the appeal of the assesse is partly allowed. Order pronounced in the open court on 10.03.2023 (Rahul Chaudhary) (Amarjit Singh) Judicial Member Accountant Member Place: Mumbai Date 10.03.2023 Rohit: PS
आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. आयकर आयुक्त(अपील) / The CIT(A)- 4. आयकर आयुक्त / CIT 5. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file.
सत्यावपि प्रवि //// आदेशानुसार/ BY ORDER,
उि/सहायक िंजीकार (Dy./Asstt.