M/S. XEROX INDIALTD.,GURGAON vs. DCIT, NEW DELHI

PER SAKTIJIT DEY, JM:

Captioned appeal has been filed by the assessee challenging

the final assessment order dated 21.10.2013 passed under

section 144C/143 of the Income-tax Act, 1961 (in short ‘the Act’)

ITA No.6151/Del/2013 AY: 2009-10

for the assessment year 2009-10, in pursuance to the directions

of learned Dispute Resolution Panel (DRP).

not press ground nos. 1 to 7 by stating that they are of general

nature. Accordingly, these grounds are dismissed as not pressed.

transfer pricing adjustment of Rs.28,81,09,571/- relating to

determination on arm’s length price of expenditure incurred by

the assessee for advertisement, marketing and promotion (AMP) of

the brand of Associated Enterprises (AEs)

3.1 Briefly the facts relating to this issue are, the assessee is a

resident corporate entity and is a part of Xerox group of

companies. As stated by the Assessing Officer, the assessee is

engaged in the business of providing a range of office equipments,

software solution and document management services. The

assessee sells xerographic equipments, printers, scanners,

multifunctional devices, high-end equipments etc. In course of

proceeding under section 92CA of the Act, the Transfer Pricing

Officer (TPO) noticed that the assessee had incurred expenditure

on AMP. After calling for and examining the necessary details, he

observed that by incurring such expenditure, the assessee is 2 | P a g e

ITA No.6151/Del/2013 AY: 2009-10

extending the reach of the brands owned by the AEs. Thus, the

final beneficiary of the expenditure incurred by the assessee on

AMP is the AE, as, the brand owned by it are gaining in value due

to marketing efforts of the assessee. In other words, by incurring

such expenditure, the assessee has created marketing intangibles

of the AE. Accordingly, he issued a show-cause notice to the

assessee to explain, why incurring of AMP expenditure, being an

international transaction, should not be benchmarked to find out

the arm’s length nature of such transaction. In response, the

assessee submitted that incurring of AMP expenditure is not an

international transaction. The TPO, however, was not convinced

with the submission of the assessee and held that incurring of

AMP expenses, since, created marketing intangibles of the AE, it

is an international transaction.

3.2 Having held so, he proceeded to benchmark the transaction

by applying Bright Line Test (BLT) method and proposed an

adjustment of Rs.28,81,09,571/-. While deciding assessee’s

objections on the issue, learned DRP followed the decision of

ITAT, Special Bench, in case of LG Electronics Pvt. Ltd. Vs. ACIT

(ITA No.5140/Del/2011) and upheld the adjustment proposed by

the TPO. 3 | P a g e

ITA No.6151/Del/2013 AY: 2009-10

3.3 Before us, learned counsel appearing for the assessee

submitted that the issue is squarely covered by a number of

decisions of the Tribunal in assessee’s own case in preceding

assessment years. In this context, he drew our attention to the

relevant observations of the Tribunal.

3.4 Per contra, learned Departmental Representative submitted

that the assessee is not a manufacturer but distributor of goods

imported from the AE. He submitted, the AE also effects direct

sales to Indian customers. He submitted, due to incurring of AMP

expenses by the assessee, there is direct benefit to the AE as AE’s

brand is getting promoted. In support of such contention, learned

Departmental Representative relied upon a decision of the

Coordinate Bench in case of M/s. Olympus Medical Systems India

Pvt. Ltd., ITA No.838/Del/2021, dated 20.04.2022.

3.5 We have considered rival submissions and perused the

materials on record. The issue arising for consideration is,

whether the AMP expenditure incurred by the assessee can be

regarded as an international transaction. Undisputedly, while

deciding the issue, learned DRP has relied upon a decision of the

ITAT, Special Bench in case of LG Electronics India Pvt. Ltd.

(supra). However, the ratio laid down in case of LG Electronics 4 | P a g e

ITA No.6151/Del/2013 AY: 2009-10

India Pvt. Ltd. (supra) has been disapproved by the Hon’ble

Jurisdictional High Court, hence, no more a good law.

3.6 Be that as it may, it is observed, identical issue came up for

consideration before us in assessee’s own case for the assessment

year 2008-09. While deciding the issue in ITA No.

5528/Del/2012, dated 16.12.2019, the Coordinate Bench has

held that the AMP expenses incurred by the assessee does not fall

within the definition of international transaction. The Bench

further disapproved the determination of ALP by applying BLT

method. Ultimately, the adjustment made on account of AMP

expenses was deleted. Identical view was expressed by the

Tribunal while deciding the issue in assessment year 2010-11 in

ITA No. 2060/Del/2015, dated 05.08.2020. In the latest order

passed for the assessment year 2011-12, the Bench has deleted

the adjustment holding as under:-

“6.5 As question of existence of international transaction of AMP and adjustment on account of the same in the case of assessee have been deleted in the assessment year 2008-09 and 2010-11, thus, respectfully following the finding of the Tribunal (supra), we hold that no international transaction of AMP exist in the case of assessee. Hence, we deleted the adjustment made on account of the AMP transaction. Corresponding grounds raised by the assessee are accordingly allowed. Accordingly, the appeal of the assessee is allowed.”

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ITA No.6151/Del/2013 AY: 2009-10

3.7 For the sake of completeness, we must observe, learned

Departmental Representative has cited before us a decision of the

Coordinate Bench in case of Ms. Olympus Medical Systems India

Pvt. Ltd. (supra). However, in our humble opinion, the decisions

rendered by the Coordinate Bench in assessee’s case will carry

greater precedentiary value. Therefore, facts being identical,

respectfully following the consistent view of the Coordinate

Benches in assessee’s own case, as discussed above, we delete

the addition made by the Assessing Officer. These grounds are

allowed.

challenged the addition of Rs.44,11,43,239/- on account of

transfer pricing adjustment made to the arm’s length price of

purchase of finished goods for distribution in India.

4.1 Briefly the facts are, while examining the transfer pricing

study report of the assessee, the TPO noticed that during the year

under consideration the assessee had purchased finished goods

from AE for resale in India. He observed that the payment made

towards purchase of finished goods have been aggregated with

various other transactions and benchmarked by applying

Transactional Net Margin Method (TNMM). Stating that the 6 | P a g e

ITA No.6151/Del/2013 AY: 2009-10

assessee, being a pure reseller of the imported goods without any

value addition, the TPO held that Resale Price Method (RPM) is

the most appropriate method to benchmark the transaction with

AEs. Thus, proceeded to benchmark the transaction by applying

RPM. While doing so, he recomputed the margin of the tested

party. In the process, he proposed an adjustment of

Rs.44,11,43,239/-. While doing so, he rejected assessee’s claim of

working capital adjustment. While considering assessee’s

objections in this regard, learned DRP concurred with the finding

of the TPO.

4.2 Before us, learned counsel appearing for the assessee

submitted that neither the TPO, nor DRP have properly

appreciated the facts placed before them to understand the

function carried on by the assessee in the distribution segment.

He submitted, the assessee not only resells the imported

equipments but also earns substantial rental and other services

income from deployment of equipments at customer’s premises.

He submitted, before the TPO and DRP, the assessee had

furnished the details of receipts from sale of equipments as well

as rental received from leasing of equipments. However, these

facts have been completely ignored by the departmental 7 | P a g e

ITA No.6151/Del/2013 AY: 2009-10

authorities. He submitted, though, an application for rectification

under section 154 of the Act was filed before the TPO, however, it

is still pending. Proceeding further, he submitted, assessee’s

business model is unique and not akin to routine distributors of

office automation products. He submitted, as far as the assessee

is concerned, there are two revenue streams, one is from sale of

equipment and other from lease rental of equipment. He

submitted, as far as sale of products is concerned, the pricing

could not be set in similar way as the pricing for equipments

given on lease to customers. In respect of leased of equipments,

the assessee will not be able to recover the cost of equipment

given on lease in one go. Rather, it would be recovered over a

period of years considering the useful life of such

equipments/components.

4.3 Drawing our attention to the computation of margin by the

TPO, he submitted that the gross margin computed is by taking

total cost of purchases from the AE but including only the

revenue from the resale of equipments/components, which gives

a distorted result under RPM. He submitted, such a comparable

analysis cannot be done even when compared to a routine

distributor of office automation products, as, it is not only the 8 | P a g e

ITA No.6151/Del/2013 AY: 2009-10

product similarity that determines the use of RPM but also the

way different businesses are conducted. In this context, he drew

our attention to para 2.33 of OECD Guidelines, 2022. He

submitted, in assessee’s case, since, the business is conducted in

a way that affects pricing at the gross level, when compared to the

companies selected by the assessee in TP documentation, gross

level testing is not appropriate. Further, he submitted, RPM

cannot be applied as, though, based on available data in public

domain gross margin of comparables can be computed, however,

reliable data to indicate suitable comparability adjustment in

order to align business model of comparables companies with

that of the assessee are not available. He submitted, in assessee’s

own case, the TPO has applied TNMM as most appropriate

method consistently prior to year 2009-10. He submitted, even

from assessment year 2011-12 onwards, TNMM has been applied

as most appropriate method. Thus, he submitted, applying the

rule of consistency, in this year also assessee’s benchmark under

TNMM should have been accepted.

4.4 Without prejudice, he submitted, even if RPM is applied, the

transaction for purchase of equipment for resale and lease can be

benchmarked only when both streams of Revenue are considered. 9 | P a g e

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He submitted, this approach has been accepted by DRP in

assessee’s own case in assessment year 2010-11, wherein, the

DRP directed the TPO to include the income received from rental

while computing RPM. He submitted, if this approach is adopted

in the impugned assessment year, there would be no adjustment.

4.5 Learned Departmental Representative submitted, there is no

disclosure in the TP study report that the assessee is doing any

other activity, except resale. Thus, he submitted, there was no

scope either to the AO or DRP to consider assessee’s claim. He

submitted, if the assessee is earning two streams of revenue from

resale and leasing, they cannot be considered as closely linked

transaction for adopting aggregate approach. He submitted,

however, the departmental authorities are prevented from taking

any decision in this regard, as the assessee did not furnish the

necessary details regarding resale and leasing. He submitted, in

case, the assessee furnishes the necessary details, the matter can

be examined by the TPO.

4.6 We have considered rival submissions and perused the

materials on record. Undisputedly, the assessee has

benchmarked the transaction relating to purchase of goods from

AE for resale by applying TNMM. Whereas, the TPO as well as 10 | P a g e

ITA No.6151/Del/2013 AY: 2009-10

learned DRP have held that RPM is the most appropriate method

to benchmark the transaction. On perusal of Rule 10(1)(b), it is

observed that RPM can be applied in a case where the goods are

purchased from the AE simply for the purpose of resale. However,

in the facts of the present appeal, it is the say of the assessee that

the imported goods are not only utilized for resale but were also

leased out to customers to be installed at their premises on rental

basis. Therefore, in case, there are two streams of revenue being

generated by the assessee in respect of imported goods, one resale

and second leasing, the issue which requires to be considered is,

whether in such a scenario RPM can be applied as the most

appropriate method to determine the ALP. In case, RPM is

applied, what adjustments are required to be made. On a careful

perusal of the order passed by the TPO and learned DRP, it is

observed that assessee’s claim regarding two streams of revenue

earned in relation to goods imported from the AE for resale have

not been considered. We have further observed from the materials

placed before us, though, the assessee is following the same

business model as regards the purchase of office equipments from

the AE in other assessment years. However, the TPO has

benchmarked the transaction by applying TNMM. This is the 11 | P a g e

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factual position we noted on going through the assessment orders

passed by the TPO in assessment years 2008-09, 2010-11 and

2011-12. In case, the facts are identical in the impugned

assessment year, the departmental authorities must justify their

action of taking a different approach in the impugned assessment

year. However, no proper reasoning has been recorded by the

departmental authorities while making a departure from the view

taken in the other assessment years.

4.7 Further, in assessment year 2010-11, though, learned DRP

has held that RPM is the most appropriate method to benchmark

the transaction, however, they directed the TPO to take into the

account the total expenses as well as the total revenue in the

distribution segment while determining the ALP of the

international transaction. The observations of learned DRP in this

regard is reproduced hereunder:

“5.5. DRP has carefully considered the above submission of the assessee. It is clear that the assessee is not only re-selling the finished goods but also giving the imported finished goods on lease. It is but natural to recognize the two streams of revenue - one from sale of goods and the other from the rentals. In the same way, assessee has to maintain the equipments supplied on lease with replacement of spares or damaged parts. The purchase of equipments and spare parts can be benchmarked only when the two streams of revenue is recognized. It is obvious that the assessee will 12 | P a g e

ITA No.6151/Del/2013 AY: 2009-10

not be able to recover the cost of equipment given on lease at one go. Therefore, DRP directs the TPO to take into account the total expenses as well as total revenue involved in this segment while determining the ALP of the international transaction. The above submission of the assessee should be examined by the TPO in the light of the above direction of the DRP and calculate the margin of the assessee afresh.

4.8 Learned counsel appearing for the assessee has submitted

before us that if DRP’s direction in assessment year 2010-11 is

followed in the impugned assessment year, there would be no

adjustment. Since, the aforesaid aspects have not been

considered by the departmental authorities and needs to be

considered qua the facts available on record, in our view, it has to

be examined at the level of AO/TPO. Accordingly, we are inclined

to restore this issue to the Assessing Officer for fresh

adjudication, keeping in view the discussions made hereinabove.

4.9 Needless to mention, the assessee must be provided

reasonable opportunity of being heard before deciding the issue.

These grounds are allowed for statistical purposes.

challenged disallowance of depreciation on capital assets

converted into stock in trade.

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5.1 We have heard learned Representatives appearing for the

parties. It is a common point before us that the issue is squarely

covered in favour of the assessee by the decisions of the Tribunal

in assessee’s own case in assessment years 2007-08 and 2008-

assessment year 2007-08 has been upheld by the Hon’ble Delhi

High Court.

5.2 Having considered rival submissions and perused the

materials on record, we are convinced that the issue is squarely

covered by the decisions of the Coordinate Bench in assessee’s

own case in assessment year 2007-08 as rendered in ITA No.

5389/Del/2011, which has been confirmed by the Hon’ble

Jurisdictional High Court in judgment dated 18.01.2016 delivered

in ITA No. 771/2015. The same view has been reiterated by the

Coordinate Bench while deciding the issue in assessment year

2008-09 in ITA No. 5528/Del/2012. Again while deciding the

issue in assessment year 2010-11, the Tribunal followed its

earlier decisions.

5.3 Therefore, respectfully following the decisions of the

Coordinate Bench and Hon’ble Jurisdictional High Court, we hold

that assessee’s claim of depreciation is allowable. Accordingly, we 14 | P a g e

ITA No.6151/Del/2013 AY: 2009-10

delete the disallowance of Rs.37,54,845/-. Thus, these grounds

are allowed.

grant of TDS credit.

6.1 Having heard the parties, we direct the Assessing Officer to

verify the relevant facts and allow TDS credit in accordance with

law.

at this stage, are dismissed.

Order pronounced in the open court on 19th October, 2022

Sd/- Sd/- (DR. B.R.R. KUMAR) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 19th October, 2022. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

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