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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’, NEW DELHI
Before: SH. SAKTIJIT DEY & SH. N. K. BILLAIYA
This appeal by the assessee is preferred against the order dated 30.10.2018 framed u/s. 143 (3) r.w.s. 144 C of the Act.
The substantive grounds are moved before us read as under :- 2.1. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO/Ld. TPO erred in assuming that the AMP expenditure incurred by the Appellant is an. "international transaction" within the meaning of the term as contained in section 92B of the Act (including the explanation to section 92B) without appreciating that the AMP expenses incurred by the Appellant is a function performed by the Appellant for the purpose of sale of its goods in India and not for the purpose of creation of marketing intangible in favour of its AE, a factual position which has been accepted by Hon'ble ITAT in Appellant's own case for AY 2012-13.
3.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. AO/ Ld. TPO have erred in using Transactional Net Margin Method ("TNMM") to determine the arm's length nature of the alleged international transaction by comparing the net margin earned by the Appellant with adjusted net margins of comparable companies ("intensity adjustment"), without giving any reasons for rejecting the Resale Price Method ("RPM") used by the Appellant which has been upheld as the most appropriate method for determination of arm's length price of import of finished goods by the order of Hon'ble High Court in Appellant's own case for AY 2009-10.
3.2 That on the facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. AO/Ld. TR0Thqvti erred in not considering that even if intensity adjustment is to be performed to metefmine the ALP of the alleged AMP transaction, the same should be performed on the gross profit margins of comparable companies while applying the RPM as the most appropriate method as selected by the Appellant.
3.7 That on the facts of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble DRP has erred in selection of functionally non-comparable companies and rejection of comparable companies, for the purpose of determination of ALP of the alleged international transaction on account of AMP on an adhoc basis, without resorting to any reasonable search methodology, thereby resorting to cherry picking of comparable companies. 3.7.1. The Ld. AO/ Ld. TPO, in particular, erred in selecting Titan Company Limited, KDDL Limited, Opal Luxury Time Products and VBL Innovations Limited as comparable companies without appreciating that such companies are manufactures vis-a-vis the Appellant who is a distributor and therefore are not functionally comparable to the Appellant.
3.7.2. The Ld. AO/ Ld. TPO, in particular, erred in rejecting MD Overseas Limited, MIRC Electronics Limited, Month Industries Limited, Beetel Teletech Limited and Optiemus Infracom Limited without giving any reason for their rejection. In doing so he has failed to appreciate that these companies, akin to the Appellant are engaged in distribution function and hence are comparable to the Appellant.
4.1.That on the facts and circumstances of the case and in law, Hon'ble DRP/ Ld. AO/Ld. TPO have grossly erred in applying the "BLT" to propose transfer pricing adjustment of INR 37,93,50,708 on a protective basis, in complete disregard of the findings of the Hon'ble Jurisdictional Delhi High Court in the case of Sony Ericsson Mobile Telecommunications India Private Limited (supra) and Maruti Suzuki India Ltd (supra). In this regard, the Hon'ble DRP/ Ld. AO/ Ld. TPO also erred in facts and law by disregarding the binding nature of a judicial precedent as it remains unaffected by even if it has been challenged before a higher forum.
At the outset the counsel stated that the issues raised in the substantive grounds are intermingled and interlinked and stated that the issues have been decided by this Tribunal in assessee’s own case in A.Y.2012-13. The counsel drew our attention to the relevant findings of this Tribunal in order 26.05.2017.
The DR fairly conceded saying that he has no reservations if the order of the Tribunal is followed.
On such concession we have carefully perused the orders of the authorities below and the decision of this Tribunal (supra).
Briefly stated the facts of the case are that the appellant was incorporated in India on 15.11.2007 and commenced actual operations from February, 2008. It has been established primarily for the purpose of carrying on the business of trading of sunglasses and spectacles frames in India. The appellant being a closely held company 99.99 percent of its equity shares are held by Luxottica Holland.
The details of the international transaction entered by the assessee with its AE during the year under consideration are follows :-
S. Description of the Method Amount (In No. transactions Applied INR) i. Import of finished goods RPM 1,555,583,988 ii. Payment of software TNMM 46,476,832 licensing fee iii. Payment of IT support TNMM 4,553,118 charges and rental iv. Reimbursement of Other method 26,940,900 expenses to AEs as per Rule 10AB v. Reimbursement of Other method 58,23,768 expenses of AEs as per Rule 10AB
During the course of the transfer pricing assessment proceedings the TPO was of the opinion that the AMP expenses leads to the creation of marketing intangibles. The TPO found the details of AMP/ sales, GP /sales, NP/sales for last three years as under :-
The comparables identified and finally selected are as under :-
To the show cause notice in reference to the above the assessee replied as under :-
After considering the reply of the assessee the TPO concluded that the AMP expenses incurred by the assessee is an international transaction u/s.92B of the Act and within the scope of chapter 10 provision. There are statutory and machinery provision in the Act and in the rule to make the adjustment in relation to the AMP expenses.
The TPO further observed that from the TP document it is seen that the assessee has used resale price method (RPM) as the most appropriate method for benchmarking its international transaction of purchase of goods from the AE for distribution in India.
The TPO was not convinced with the most appropriate method adopted by the assessee and was of the firm belief that TNMM is the most appropriate method providing for intensity as comparability adjustment.
In this background the comparables identified by the assessee were examined and TPO found that the comparables were carrying out activities which can be considered to be at the most in the nature of buy and sell. The TPO was of the firm belief that the intensity of functions carried out by assessee is very different from the comparables.
15. After considering the objections raised by the assessee against the show cause notice the list of comparables alongwith calculation of AMP/Sales ratio was taken as under :-
16. Finally the computation arm’s length price was computed as under :-
17. In the background the above factual matrix let us now consider the findings of this Tribunal for A.Y. 2012-13 :- by the assessee over and above arm’s length cost. Coming back, the TPO carried out the AMP intensity adjustment in the profit rates of the comparable as under :-
14. Respectfully following the findings of the coordinate bench (supra) we direct accordingly.
In assessment year 2013-14 this Tribunal in led the occasion to consider the quarrel relating to the use of BLT approach for computing transfer pricing adjustment on a protective basis. The relevant findings of this Tribunal read as under :-
Respectfully following the findings of the coordinate Bench (supra) we hold accordingly.
It would not be out of place to refer to the order giving appeal effect to the decision of the Tribunal in A.Y. 2012-13. After discussing the various findings of the Tribunal the AO concluded as under :-
The counsel has also argued that the TPO has erroneously taken certain comparables which are manufacturer and the appellant is only a distributor, therefore, such comparables are functionally different.
We direct the AO/ TPO to consider the comparables which are akin to the business profile of the assessee and decide the issue afresh after affording a reasonable and fair opportunity of being heard to the assessee.
In the result, the appeal filed by the assessee is allowed with the above directions.
Decision announced in the open court in the presence of both the parties on 27.01.2022.