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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI N V VASUDEVAN & MS. PADMAVATHY S
IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI N V VASUDEVAN, VICE PRESIDENT AND MS. PADMAVATHY S, ACCOUNTANT MEMBER
IT(TT)A No.205/Bang/2021
Assessment year : 2015-16
Epson India Private Limited, Vs. The Dy. Commissioner of Income- 12th Floor, The Millenia Tower A tax , International Taxation No.1, Murphy Road, Circle-1(2), Ulsoor, Bengaluru. Bengaluru - 560008
APPELLANT RESPONDENT
Assessee by : Shri. Padam Chand Khincha, CA Revenue by : Dr. Manjunath Karkihalli, CIT DR
Date of hearing : 04.04.2022 Date of Pronouncement : 18.04.2022
O R D E R Per Padmavathy S, Accountant Member
This appeal is against the order of the Deputy Commissioner of Income Tax International Taxation, Bangalore dated 30/03/2021 passed under section 143 (3) r.w.s 144C of the income tax act 1961 (the Act) for the assessment year 2015-16
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The assessee is a wholly owned subsidiary of Epson Singapore PTE Ltd. The assessee is primarily engaged in distribution of Epson group products like printers, cartridges, scanners, projectors, spares and other consumables. In terms of the provisions of Sec.92-A of the Act, the assessee and its wholly owned holding company were Associated Enterprises ("AEs"). In terms of Sec.92B(1) of the Act, the transaction of providing distribution services was an "international transaction" and in terms of Sec.92(1) of the Act, any income arising from an international transaction shall be computed having regard to the arm's length price.
The assessee filed its return of income AY 2015-16 on 24.11.2015 by declaring a total income of Rs.50,94,90,730. The assessing officer (AO) initiated reassessment proceedings u/s. 147 by issue of notice u/s. 148 on 15.09.2017. The matter was referred to TPO to determine the ALP of international transaction. The TPO wide order dated 28.10.2019 treated the Advertising, Marketing and Promotional (AMP) expenditure incurred by the assessee as a separate international transaction and calculated average AMP expenses on sales of comparables at 1.53%. The TPO concluded that the assessee has incurred AMP expenses in excess of what the comparables had incurred and that the assessee needs to be compensated with a mark up for the excess expenditure incurred by the assessee as the same benefits the AE. The excess amount of non-routine AMP expenses was determined at Rs.1525.33 lakhs on which the TPO applied a markup of
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11.20% and accordingly proposed a TP adjustment of Rs.16,96,17,000. The AO passed the draft assessment order on 14/12/2017 post incorporating the TP adjustments made by the TPO. Against the draft assessment order the assessee filed objections before the dispute resolution panel (DRP). The DRP wide direction dated 15.02.2021 upheld the action of the TPO. Pursuant to the directions of the DRP the AO passed final assessment order. Aggrieved by the final assessment order the assessee filed the appeal before the Tribunal.
The assessee has raised grounds with respect to legal issues and grounds on merits against the TP adjustment. The assessee has also raised additional ground on the legality of reference made to the TPO when the assessee has raised objection to the reopening u/s.147 before the AO. During the course of hearing the Ld AR pressed only for grounds on merits with respect to AMP expenses. Therefore the issue for our consideration is whether the assessing officer is correct in treating the AMP expenses as a separate international transaction from the distribution segment, and making a TP adjustment for the same. 5. The assessee is involved in two segments viz., (i) Trading (Distribution) segment & (ii) Business Support Services. The Business Support Services Segment was accepted as at Arm’s lengyh by the TPO. The assessee has chosen Resale Price Method (RPM) as the most appropriate method for the Trading (Distribution) segment and arrived at the average mean of gross profits margin(GPM) of 7 comparables which is at 4.44% whereas the GPM of the assessee is at 17.87%. Hence the
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assessee claimed that the transactions of the trading (Distribution) segment to be at arm’s length as per the TP Study. The assessee incurs AMP expenses in order to carry out its distribution business. The TPO held that the assessee in trading / distribution segment has not confined itself just to distribution of trading goods but has performed additional functions in the form of AMP expenses. The TPO concluded that the assessee needs to be adequately compensated for such additional function undertaken and proceeded to compute the ALP following the ‘Other Method”. The TPO segregated the AMP expenses as routine and non-routine and made a TP adjustment by adding a margin @ 11.20% on the non-routine AMP expenses. The DRP confirmed the TP adjustment and accordingly the AO passed the final order.
The Ld AR submitted that
(i) The functional profile of the assessee (pages 173-182 of paper book) identifies marketing activities as a key function performed by the assessee for distribution of products and the functional profile of the assessee has not been disputed by the TPO in his order.
(ii) The assessee is procuring finished products from its AE and distributing them in India under the brand name of the AE. The Hon’ble Delhi High Court in the case Sony Ericsson mobile communication India Private Limited 55 Taxmann.com 240 (Delhi) has held that the workings of section 92F and that Rule 10A explicitly states that the term transaction includes a number of closely linked to transaction thus making it clear that it was never the intent of the Legislature to abandon the general principles of
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plurality. Therefore the contention of the TPO of adopting ‘transaction by transaction approach’ is not liable to be rejected.
(iii) Under the net operating margins the assessee has earned an Operating margin of 3.12 % as against the operating margin of 1.08% (Page 7 Para 4.6 of TPO’s order) In the process of arriving at this margin the advertising and sales promotion expenses were considered as part of operating cost. Once the assessee has established that it has earned adequate margins at the net level (i.e. after considering AMP expenses and other indirect operating expenses) the TPO cannot segregate a particular line of item of expense and make adjustments to it.
(iv) The fact the TPO has made adjustments only towards AMP expenses would substantiate the fact that the TPO has accepted that the gross margin and the net margin of the assessee for the distribution segment is higher than that of the comparables.
(v) The assessee also places reliance on the judgment of jurisdictional Bangalore Tribunal in the following cases wherein it is held that once the net margin are at arm's length no separate adjustment is required for a AMP expenses
(a) M/s. Essilor India Pvt Ltd – 68 Taxmann.com 311 (b) M/s. Lenovo India (P) Ltd – [TS-148-ITAT-2022 Bang- TP] (c) Himalaya Drug Company vs ACIT [2020] 119 taxmann.com 421 (Bang Trib)
(vi) By segregating the AMP expenses and treating it as a separate International transaction the TPO in substance made an attempt to
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re- characterize the transaction from manner in which the assessee and its AE had originally structured which is not permissible.
Ld DR supported the views taken by the lower authorities. The Ld DR also submitted that the coordinate bench of the Tribunal in assessee’s own case for the assessement year 2012-13 and 2013-14 [IT(TP)A No 293 & 2479/Bang/2017] has remanded the matter back to the TPO/AO and prayed for a similar adjudication.
We have heard the rival submissions and perused the materials on record. The assessee has chosen RPM as the most appropriate method (MAM) for arriving at ALP. The assessee has chosen 7 comparables based on various filters applied and the median of weighted average of adjusted gross profit on sales % of these comparables was 4.44% (page 189 to 190 of paper book). The gross profit margin of the assessee from undertaking distribution activities during the year under consideration resulted in gross profit of 17.87% on sales (Page 254 of the paper book). Since the assessee’s margin is more than the arm’s length range, the margin of the assessee from its distribution activities is considered to be at arm’s length from TP perspective. In a corroborative analysis done under Transaction Net Margin Method (TNMM) the assessee’s margin is taken to be at arm’s length as the median of the comparables was 1.08% whereas the operating profit of the assessee from undertaking the distribution activities was 3.12% (Page 255 of the paper book). We notice that
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the while arriving at the operating profit of the assessee the ‘Selling and Marketing expenses’ to the tune of Rs.68,16,40,898 has been included. The TPO in the order (Page 13 of TPO order para 4.7.5) has mentioned that TP analysis with respect to AMP and the mark up the methods as used by the assessee like RPM with GPM as the PLI and TNMM with OP/OC as the PLI are not suitable, however he had not rejected the TP analysis of the distribution segment. This issue is particularly dealt with by the Hon’ble Delhi High Court in the case of Sony Ericsson mobile communication India Private Limited (supra) where it is held that –
However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible.
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The coordinate bench of the Tribunal in the case of Himalaya Drug Company (supra) has held that for the AMP expenses to fall under the category of ‘international transaction’ the revenue should show that there existed an agreement between the assessee and its AE in the matter of incurring AMP expenses. We notice that in assessee’s case the revenue has not shown that there is any agreement in place between the assessee and the AE with regard to incurring AMP expenses. The Hon’ble Tribunal has also held that when the MAM for the entire international transaction is accepted by the TPO, no separate adjustment is required to be done for AMP expenses. The Hon’ble Tribunal has held that –
We notice that the co-ordinate bench has, following various decisions, held that the revenue has to first show that the AMP expenses would fall under the category of "international transactions". For that purpose, the revenue has to show that there existed an agreement between the assessee and its AE in the matter of incurring of AMP expenses. Admittedly, it is not shown in the instant case that there existed any agreement relating to incurring of AMP expenses. Thus, we notice that there is no change in facts relating to this issue between the current year and the AY 2010- 11/2011-12. It was also held that when TNMM method is applied to benchmark the entire international transactions, then there is no requirement of making separate TP adjustment on account of AMP expenditure. In the earlier paragraphs, we have also held that TNMM as most appropriate method and has also held that the international transaction of Exports to AEs is at arms length.
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Hence, no separate adjustment is required to be made in respect of AMP expenses on this account also.
We have considered the Ld DR’s submission that the coordinate bench of the Tribunal in assessee’s own case (supra) has remanded the case back to the TPO. In the said assessment years, the case was remanded back mainly for the purpose of determining whether the AMP expenses in an international transaction or now. The relevant para from the judgment is reproduced here for reference
“ In the present case also TPO had not brought anything on record to show existence of international transaction whereby the assessee was obliged to incur AMP expenditure for the purpose of promoting brand, intangible to its AE. Similarly the assessee- company also has not furnished FAR analysis of AMP functions in its TP study. In our considered opinion, the matter requires remission to the TPO for undertaking fresh analysis to establish existence of international transaction in respect of AMP expenditure and true nature of transaction between the appellance and its AE. After due analysis of FAR of the AMPfunctions carried out by the appellant and having regard to the actual conduct of the appellant vis-à-vis its AE and economic substance of the transactions between the appellant and its AE if the TPO is of the opinion that there existed an international transaction in the form of AMP function, then to undertake the exercise of determination of ALP by adopting a suitable method of compensation to the appellant for performing the AMP functions of its AE”
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For the year under consideration, the issue for consideration is treating the AMP expenses as a separate transaction from the distribution segment and making TP adjustment for the same. The Ld AR submitted that whether AMP expenses is a separate international transaction is not contended in the year under consideration and prayed that the decision rendered by the coordinate bench on this specific count need not be applied in the year under consideration.
Considering the ratio laid down by the Hon’ble Delhi High Court in the case of Sony Ericsson mobile communication India Private Limited (supra) and the other decisions of the coordinate bench of the Tribunal, with respect to treating AMP expenses as a separate transaction when the TPO has not otherwise rejected the gross margin and the net margin of the assessee, we hold that there is no separate adjustment to be made in respect of AMP expenses. The appeal is allowed in favour of the assessee.
In the result, the appeal of the assessee is allowed.
Order pronounced in court on 18th April, 2022
(N.V.VASUDEVAN) ( PADMAVATHY S) Vice President Accountant Member
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Bangalore, Dated, 18th April, 2022 / vms /
Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.
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Date of Dictation …………………………………… 2. Date on which the typed draft is placed before the dictating Member ……………………. 3. Date on which the approved draft comes to Sr.P.S .……………………………. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ………………….. 9. Date on which order goes for Xerox & endorsement…………………………………… 10. Date on which the file goes to the Head Clerk ……………………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ………………………………. 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order …………………………. 13. Date of Despatch of Order. ……………………………………………..