ASUS INDIA PVT LTD.,MUMBAI vs. ASST CIT CIRCLE- 9 (1)(2), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

This appeal in ITA No.7831/Mum/2019 for A.Y.2015-16 preferred by the order against the final assessment order passed by the Assessing Officer dated 25/10/2019 u/s.143(3) r.w.s. 144C(13) of the Income Tax Act, hereinafter referred to as Act, pursuant to the directions of the ld. Dispute Resolution Panel (DRP in short) u/s.144C(5) of the Act dated 12/09/2019 respectively for the A.Y.2015-16.

2 ITA No. 7831/Mum/2019 M/s. Asus India Pvt. Ltd.,

1.1. The ground No.1 raised by the assessee was stated to be not pressed at the time of hearing. The same is reckoned as statement made from the Bar. Accordingly, Ground No.1 is hereby dismissed as not pressed.

(i) Discount under the Conditional Discount Scheme – Rs.7,99,20,387/- (30% of Rs.26,64,01,291)

(ii) Volume Discount- Rs.6,07,15,612/- (30% of Rs.20,23,85,374/-)

(iii) Octroi and Insurance Expenses Rs.1,95,79,691 (30% of Rs.6,52,65,636/-)

(iv) Provisions for sales rebate – Rs. 55,33,096 (30% of Rs.1,84,43,654/-)

3.1. We have heard rival submissions and perused the materials available on record. We find that assessee company is engaged in the business of trading of note books, tablets, pad phones and accessories. The ld. AO observed that the assessee had reduced a sum of Rs.69,31,68,513/- on account of sales rebate from the total sales of Rs.1277,88,29,467/-. The break-up of the total sales rebate of Rs.69,31,68,513/- is as under:-

(i) Conditional Discount Scheme (ground Rs.26,71,93,971/- No.2 before us) (ii) Volume Discount on achievement of target Rs.20,66,53,421/- sales (Ground No.3 before us) iii) Reimbursement of octroi and insurance Rs.6,52,65,636/- on actual basis (Ground No.4 before us)

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iv) Provision for sales rebate relying on Rs.1,84,43,654/- percentage of sales rebate to sales of past years (Ground No.6 before us) v) Refurbish and rebate on defective Rs.13,56,11,831 products (Ground No.5 before us) Total Rs.69,31,68,513

3.2. We find the disallowance made by the ld. AO u/s.40(a)(ia) of the Act in respect of Ground No.2, Ground No.3, Ground No.4 and Ground No.6 as referred supra were subject matter of adjudication by this Tribunal in ITA No.943/Mum/2020 in assessee’s own case for A.Y.2016-17 dated 05/10/2020 wherein the facts relevant to the same and the decision rendered thereon are reproduced below:-

“7. In ground no.2, the assessee has challenged the disallowance made under section 40(a)(ia) of the Act out of the expenditure on account of discount given to the dealers/distributors under the conditional discount scheme. As discussed earlier, during the assessment proceedings, on being called upon by the Assessing Officer to justify the discount/rebate given amounting to ₹ 42,13,01,780. It was submitted by the assessee that period wise and product wise scheme are floated to push sales for already launched models/slow moving items. He submitted, such benefit/rebate is based on dealers/distributors who ultimately sell the products in the market to the end users. Further explaining, it was submitted by the assessee that as per the discount scheme, the dealers/distributors sell the products at a special price which is below the maximum retail price (MRP). Therefore, the assessee gets a lesser margin on such sale. It was submitted, such special sales under project/tender, etc., the price quoted by the dealers/distributors are guided by special price set-ups. Therefore, to compensate the dealers/distributors for low margin, the assessee raises credit notes towards rebate/discount in favour of dealers/distributors. The Assessing Officer observed, the payment made by the assessee is out of contractual obligation or in the nature of commission. Therefore, such rebate/discount given to the dealers/distributors would get covered under section 194C/194H of the Act. The assessee having not deducted tax at the prescribed rate in terms of the aforesaid provisions, the Assessing Officer disallowed 30% out of the expenditure. As discussed earlier, the disallowance made was also upheld by the learned Commissioner (Appeals) accepting the reasoning of the Assessing Officer. 8. The learned Authorised Representative submitted, the assessee imports electronic goods such as note books, tablets, pad-phones, mobile phones and

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accessories for re-selling in India. He submitted, technology relating to these products gets upgraded/developed very fast and within a short period of launch of a particular product, it becomes obsolete. Therefore, the company conceives various rebate/discount schemes to push sales of such obsolete/slow moving products. Drawing our attention to Note-17 of the Profit & Loss Account, a copy of which is at Page-3 of the paper book, the learned Authorised Representative submitted, major revenue during the year was generated from sale of notebooks, tablets, pad-phones, mobile phones and accessories, which have a fiercely competitive market. Due to quick technological advance, these products become out dated/obsolete within a very short span, therefore, have to be sold at a discounted price. The learned Authorised Representative submitted, the assessee does not have any principal-agent relationship with any of the dealers/distributors and once the assessee sells/delivers the goods to the dealers/distributors, sale is complete. The assessee does not enter into any sales with the end users. Therefore, the sale contract between the assessee and the dealers/distributors ends on delivery of goods to them. That being the case, there is no principal- agent relationship. In this context, he drew our attention to the agreement entered with Flipkart India Private Ltd. (in short "Flipkart"). Drawing our attention to various clauses of such agreement, the learned Authorised Representative submitted, the agreement makes it clear that once the assessee sells goods to Flipkart, sale is complete. Therefore, there is no principal-agent relationship, but it is a principal- to-principal sale. That being the case, the provisions of section 194H of the Act would not be applicable. Drawing our attention to the tax invoice and credit note, the learned Authorised Representative submitted, these are simple sale transactions between two principals without involvement of any agency. Further, drawing our attention to the items sold, he submitted, these are slow moving goods and have to be sold with discount, otherwise, they cannot be sold at all. Thus, he submitted, the provisions of section 194H of the Act is not applicable. As regards applicability of section 194C of the Act, the learned Authorised Representative submitted, the transaction between the assessee being sale transaction of specific goods/items, it cannot be brought within the purview of section 194C of the Act, which is applicable only in respect of carrying out any work. Finally he submitted, though, similar rebate/discount was given in earlier years, no disallowances were made under section 40(a)(ia) of the Act. Thus, he submitted, disallowance made under section 40(a)(ia) of the Act for alleged violation of section 194C / 194H of the Act is legally unsustainable. In support of such contention, the learned Authorised Representative relied upon the following decisions:- i) Ahmedabad Stamp Vendor Association v/s Union of India, [2002] 257 ITR 202; ii) CIT v/s Ahmedabad Stamp Vendor Association, [2012] 348 ITR 378; iii) CIT v/s United Breweries Ltd., [2017] 387 ITR 150; and iv) CIT v/s Intervate India Pvt. Ltd., [2014] 364 ITR 238.

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outdated within a very short span of time and it becomes difficult to sell them in the market. Therefore, it is understandable that for pushing sale of such slow moving/outdated products, all the manufacturers dealing in such products provide rebate/discount schemes to sell their products at a rate below the MRP. Likewise, the assessee from time-to-time has formulated rebate/discount schemes for dealers/distributors towards sale of such products. Undisputedly, the rebate/discount given by the assessee to the dealers/distributors have been treated as payment coming within the ambit of section 194C/194H of the Act while making disallowance under section 40(a)(ia) of the Act. 12. Before we deal with the correctness of the aforesaid disallowance, it is necessary to briefly deal with certain crucial facts. It is evident from the material on record that during the year under consideration, the assessee had provided conditional rebate/discount of ₹ 42,13,01,780 to 29 distributors/dealers to whom various products, such as, notebooks, zenphones, tablets, zenpads, eeebooks, accessories, etc., were sold for a total amount of ₹ 1768,78,77,006. It is further relevant to observe, out of the 29 dealers/distributors to whom products were sold, the assessee had entered into a written contract only with Flipkart. On a perusal of the agreement with Flipkart, a copy of which is at Page-5 of the paper book, it is seen that as per the terms of the contract, the assessee is required to sell goods/products as per the purchase order to be placed by Flipkart. As per Para-(iii) of the agreement, the assessee is required to deliver the product to Flipkart in accordance with the specifications and prices as specified in the purchase order. Further, the terms of the agreement makes it clear that the total ownership to the products shall pass on to Flipkart at the time of delivery of such products to Flipkart. Para-(iv) of the agreement provides that Flipkart has to provide the assessee relevant information in order to supply products as sought by Flipkart from time-to-time. It further says that Flipkart shall make payment to the supplier in a timely manner as provided in the agreement. Para-(v) of the agreement sets out the obligation of the assessee towards Flipkart. Para-(vi) of the agreement provides for pricing and discount. Whereas, Para-(vii) provides for invoicing and payment. As per the aforesaid clause, the assessee is required to issue invoice to Flipkart from time-to-time with regard to supply of products. It further stipulates that invoice shall contain various details including the reference to relevant purchase order and item number, price, VAT details, etc. Para-(ix) provides that the assessee shall deliver the products to Flipkart in due time and in accordance with the delivery dates as mentioned in the purchase order. 13. So, from the aforesaid broad terms of the agreement, it is very much clear that it is a principal-to-principal sale contract and the contract of sale concludes once the goods/products are delivered to Flipkart at which point the ownership to the product passes on to Flipkart. Though, learned Departmental Representative drawing our attention to certain clauses of the contract, such as, requirement of the assessee to do the packaging of the goods products as well as the indemnity clause tried to impress upon the fact

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that it is not a principal-to-principal sale but is essentially a principal-agent relationship, however, we are unable to accept such contention. It is well settled legal principal that to ascertain the true intention of the parties, the contract has to be read as a whole and cannot be referred to in piecemeal manner. Therefore, simply relying upon certain clauses of the contract on a standalone basis, it cannot be said that it is a contract having principal-agent relationship. Insofar as the transaction with other dealers / distributors are concerned, the Revenue has not brought on record any material to negate assessee's contention that it is a concluded sale transaction between two principals and there is no element of agency involved. The sample invoices, credit notes, etc., placed in the paper book clearly demonstrate the aforesaid factual position. 14. Having dealt with the facts involving in the issue, now we will deal with the legal aspect. Undisputedly, the Assessing Officer has disallowed the rebate/discount given under section 40(a)(ia) of the Act on the reasoning that such payments come within the purview of section 194C/194H of the Act. A reading of section 194C of the Act would suggest that in respect of any payment made to a contractor/sub-contractor for carrying out any work, including supply of labour, would be subject to deduction of tax at source at the appropriate rate. In the facts of the present case, the assessee has entered into a sale contract, simpliciter, for sale of its products to dealers/distributors. Certainly, the transaction between the assessee and the dealers/distributors cannot be termed as a contract for work. The assessee simply sells its products to dealers/distributors who, in turn, sell them to the end users. Therefore, there is no element of work as defined under clause (iv) of Explanation to section 194C of the Act. Therefore, under no circumstances, section 194C of the Act would be applicable to the discount/rebate. 15. Insofar as applicability of section 194H is concerned, a reading of the said section would make it clear that while making any payment which is in the nature of commission/brokerage other than insurance commission, would be subject to deduction of tax at the appropriate rate. Explanation to the aforesaid provision defines commission or brokerage to include any payment received or receivable directly or indirectly by a person acting on behalf of another person for services rendered or for any service in the course of buying or selling of goods. Thus, the primary conditions for qualifying as commission or brokerage are, the person receiving such payment must be acting on behalf of the payer and must be rendering some services in the course of buying or selling of goods. Undisputedly, in the facts of the present case, the dealers/distributors are not providing any service to the assessee in the course of buying or selling of goods. The assessee is simply selling its products to dealers/distributors who in turn sell them to end users. There is no contract of sale between the assessee and end users so as to conclude that the dealers/distributors act as intermediary between the assessee and the end users to facilitate sale of products. At least, the Department has not brought on record any material to establish the fact that the dealers/distributors are

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simply acting as intermediaries to facilitate sale of products to end users so as to infer a principal-agent relationship. In view of the aforesaid factual position, we have no hesitation in holding that the rebate/discount given to the dealers/distributors would not attract the provisions of section 194H of the Act. Our aforesaid view is well supported by the decisions cited by the learned Authorised Representative. In case of Ahmedabad Stamp Association (supra) affirmed by the Hon'ble Supreme Court, the Hon'ble Gujarat High Court after examining the true import of the term 'commission' and 'discount' and their basic difference and further, referring to the provisions of section 194H of the Act, has held that for attracting the aforesaid provision, the element of agency has to be there. The Hon'ble High Court while providing by way of illustration, the nature of transaction between a dealer in car and its manufacturer has observed that a service in the course of buying or selling of goods has to be something more than the act of simply buying or selling of goods. Therefore, the discount/rebate given cannot be termed as commission. The Hon'ble Andhra Pradesh High Court in United Beveries Ltd. (supra) while dealing with identical nature of dispute has held that when the sale transaction between two parties is on principal-to-principal basis, there is no element of service being rendered by one party to another and discount given to retailers is only for promoting sales, therefore, cannot be termed as commission. The Hon'ble Jurisdictional High Court in Intervate India Pvt. Ltd. (supra) has expressed similar view that when the relationship between the seller and buyer is that of a principal-to-principal, the discount given cannot be termed as commission. On the contrary, the decision in case of PMS Diesels & Ors. (supra) cited by the learned Departmental Representative is contextually different, hence, would not be applicable to the facts of the present case. 16. It is relevant to observe, in course of hearing the learned Departmental Representative drawing our attention to Page-27 of the paper book had submitted that the assessee has not directly sold its products to Flipkart but has sold to end users as the invoice is raised in the name of end user. However, on a perusal of the facts on record, we find the aforesaid submission of the learned Departmental Representative factually incorrect. A reference to Page-27 of the paper book would reveal that it has nothing to do with any sale effected to Flipkart but is in respect of a sale made to another distributor/dealer, Rashi Peripherals Pvt. Ltd. and such sale is co-related with the credit note issued in the name of the said party. In view of the aforesaid, we hold that the rebate/discount given by the assessee to the dealers will not coming either within the purview of section 194C or section 194H of the Act, therefore, would not require deduction of tax at source. At this point, it is relevant to observe, the Assessing Officer while invoking the provisions of section 40(a)(ia) of the Act has stated that it attracts section 194C / 194H of the Act. The aforesaid statement of the Assessing Officer makes it clear that he himself is not sure whether it is a payment for carrying out any work or is in the nature of commission / brokerage for any service rendered by another party in the course of buying and selling a product. That

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being the case, no disallowance under section 40(a)(ia) of the Act can be made. Accordingly, we delete the disallowance. 17. In ground no.3, the assessee has challenged the disallowance under section 40(a)(ia) of the Act amounting to ₹ 3,99,46,787, being 30% of the volume discount given of ₹ 13,31,55,945. 18. In the course of assessment proceedings, the assessee had submitted that the volume discount is given to dealers/distributors once the quarterly targets allotted to distributors are fulfilled. However, the Assessing Officer held that volume discount is nothing but in the nature of commission as it is essentially a reward given by the principal to its agent for achieving the target set for sales. Thus, he held that the payment has to be treated as commission as per section 194H of the Act and proceeded to compute disallowance under section 40(a)(ia) of the Act. 19. The leaned Counsel for the assessee submitted, volume discount is nothing but additional price support system provided to the dealers/distributors in respect of sale of certain specific products. The leaned Counsel submitted, in respect of such sale transactions, no third party is involved. Therefore, the provision of section 194H of the Act is not attracted. Further, he reiterated his submissions made in respect of ground no.2. 20. The learned Departmental Representative relied upon the observations of the Assessing Officer and learned Commissioner (Appeals). 21. Having considered rival submissions and perused the material on record, we are of the view that our reasoning while deleting the disallowance under section 40(a)(ia) of the Act in respect of ground no.2 would equally apply to this issue as well, since, the Revenue has failed to establish any principle-agent relationship between the assessee and the dealers/distributors to whom volume discount was given. Therefore, following our detailed reasoning given in respect of ground no.2, we delete the disallowance made by the Assessing Officer. 22. In ground no.4, the assessee has challenged the disallowance under section 40(a)(ia) of the Act made by the Assessing Officer in respect of reimbursement of octroi and insurance to dealers/distributors. 23. As could be seen from the facts on record, the assessee had reimbursed octroi paid on the products sold by the dealers/distributors as well as insurance claimed against ASUS products to the dealers/distributors on actual basis. The Assessing Officer was of the view that such reimbursement amounting to ₹ 4,13,94,071, is in the nature of commission as the liability to pay octroi and insurance claimed is solely on the dealers/distributors. Therefore, any reimbursement of octroi and insurance is in the nature of commission and will be covered under section 194C/194H of the Act.

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Accordingly, he disallowed an amount of ₹ 1,24,18,434, out of the expenditure claimed by invoking the provisions of section 40(a)(ia) of the Act. 24. The learned Commissioner (Appeals) also sustained the disallowance. 25. The leaned Counsel for the assessee reiterating the submissions made in respect of other disallowances made by the Assessing Officer, as contested in the earlier grounds, submitted that though the payment of octroi and insurance claimed are the liabilities of the dealers/distributors, however, the reimbursement of such payments on actual basis cannot be termed as commission or contract for work as provided under section 194C and 194H of the Act. He submitted, such payments were made purely keeping in view the business expediency. Thus, he submitted, no disallowance should be made. 26. The learned Departmental Representative submitted, the liability to pay octroi and insurance claimed is completely the burden of the dealers/distributors. Therefore, the reimbursement of such expenditure even on actual basis would be in the nature of commission. 27. We have considered rival submissions and perused the material on record. There cannot be any dispute that the payment of octroi and insurance claimed is the liability of the dealers/distributors. Just to incentivize the dealers/distributors, the assessee has reimbursed the payment made towards octroi / insurance claimed to the dealers / distributors on actual basis. However, in the facts of the present case, we are not called upon to decide the allowability of such expenditure at the hands of the assessee as business expenditure. The Assessing Officer himself has not disputed that the expenditure is allowable. The part disallowance made by him is only on account of alleged non- deduction of tax at source while making such payment. According to the Assessing Officer, the reimbursement of octroi and insurance claimed is covered under the provision of section 194C and 194H of the Act. As discussed in detail while dealing with ground no.2 (supra), we have held that neither there is any contract for work between the assessee and the dealers/distributors as provided under section 194C of the Act, nor there is any principal-agent relationship between the assessee and the dealers/distributors to treat the payment made as commission in terms of section 194H r/w its Explanation. Therefore, we are of the view that since the payment made by the assessee are not covered under section 194C/194H of the Act, no disallowance under section 40(a)(ia) of the Act could have been made. At the cost of repetition, we must observe that considering the limited issue arising in the present appeal as to whether the reimbursement of octroi/insurance claimed is covered under section 194C/194H of the Act, thereby, requiring deduction of tax at source, we refrain from expressing any opinion whether the expenditure is allowable as a business expenditure at the hands of the assessee. This ground is allowed.

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commission under section 194H of the Act. The learned Commissioner (Appeals) has also confirmed the aforesaid decision of the Assessing Officer. Therefore, the precise issue arising before us is the validity of disallowance made under section 40(a)(ia) of the Act by treating the expenditure claimed as payment towards commission. As discussed earlier, while dealing with the issue raised in other grounds which are more or less identical to the issue raised in this ground, we have held that as per the facts on record, a principal- agent relationship between the assessee and the dealers/distributors is not discernible. Therefore, the rebate/discount given cannot be treated as commission under section 194H of the Act. Our aforesaid reasoning rendered in context of ground no.2, would equally apply to this ground as well. Therefore, the disallowance made under section 40(a)(ia) deserves to be deleted. As regards the contention of the learned Departmental Representative that the provision is not allowable as expenditure, we are afraid, we cannot entertain such claim at this stage. As could be seen from the facts on record, the Assessing Officer has not raised any doubt with regard to the genuineness or allowability of expenditure. He has disallowed part of such expenditure simply for the reason that tax has not been deducted at source in terms of section 194H of the Act. Learned Commissioner (Appeals) has also approved the aforesaid decision of the Assessing Officer. Therefore, the limited issue before us is the validity of disallowance under section 40(a)(ia) of the Act. In view of the aforesaid, we decline to entertain the fresh plea of learned Departmental Representative. The decisions cited by the learned Departmental Representative being factually distinguishable would not apply to the facts of the present case. The ground raised by the assessee is allowed.” 3.3. We find that the facts prevailing in A.Y. 2016-17 with regard to the aforesaid four items are exactly identical with the facts prevailing in the year under consideration. Hence, the decision rendered by this Tribunal for A.Y.2016-17 shall apply mutatis mutandis to this assessment year also except with variance in figures. Accordingly, Ground Nos. 2,3,4 & 6 raised by the assessee are allowed.

4.1. We have heard rival submissions and perused the materials available on record. We find that assessee had incurred a sum of Rs.13,56,11,831/- on account of refurbish and rebate on defective products by debiting the

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same under total sales rebate of Rs.69,31,68,513/-. We find that the assessee had incurred expenditure of Rs.13,56,11,831/- towards additional discount given to dealers/distributors to get the defective product repaired at their end. According to the assessee, to avoid getting the products back from the dealers/distributors getting them repaired and again re- selling them, the assessee asks the dealers/distributors to repair the products at their end and makes good the cost of such repair by reimbursing at fixed rate of 30%. The ld. AO was of the view that had the dealers/distributors would not have repaired the products, the assessee would have hired the services of a professional to undertake repairs. Therefore, the assessee would have been liable to deduct tax at source while making payment for such repairs to the professional as it would be covered under section 194C/194J of the Act. The assessee having failed to deduct tax at source, the ld. AO disallowed 30% amounting to Rs.4,06,83,549, under section 40(a)(ia) of the Act. The disallowance was also sustained by ld. CIT(A). 4.2. At the outset, the ld. AR before us stated that this issue had been decided against the assessee by this Tribunal for A.Y. 2016-17 in ITA No.943/Mum/2020 dated 05/10/2020. But he stated that terms agreed upon by the assessee with dealers is that the dealers have to completely undertake the repair works at their end if there occur any repairs and assessee would compensate the dealers by giving 30% flat discount on the price of the product sold to them, to take care of the same on their regular sales. The ld. AR pointed out that this fact was not argued before the Tribunal in A.Y.2016-17. Accordingly, he pleaded that the decision rendered by this Tribunal in A.Y.2016-17 becomes factually distinguishable. He also drew our attention to the sample invoice and credit note raised by the assessee which apparently revealed that the assessee merely compensates dealers/distributors @30% of original price

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of the defective product. The ld. AR also placed reliance on an affidavit of Shri Suhas Joshi, Sr. Manager-Accounts working with the assessee company wherein the said Senior Manager-Accounts had affirmed that the assessee does not ask or insist upon the dealers / distributors to actually repair the damaged products and that the repairs done by the distributors is absolutely an independent task undertaken by them. The ld. AR also pointed out that the outcome of the repair work whether the same was successful or not, was not the look out of the company and accordingly, it could not be stated that the amount paid by the assessee by way of 30% flat discount of the original price was towards the cost of the repairs for the product. The ld. AR also drew our attention to the agreement with Flipkart enclosed in page 53 of the paper book wherein it has been agreed that in case of defective products, the assessee is required to either remove the defect or replace the product and that neither of these two tasks were performed by the assessee. Instead, the assessee and the distributors had agreed for a compensation at 30% of the price of the product. The ld. AR argued that issuing credit note to the dealers / distributors amount to novation of the contract requiring assessee to perform either of the aforesaid tasks. He also drew our attention to Section 62 of the Indian Contract Act 1872 wherein it is stated that if the party has agreed to substitute a new contract in place of the original contract or alter the same, the original contract need not be performed. The ld. AR alternatively argued on without prejudice basis that even assuming that the dealers / distributors are getting the defective products repaired at the instance of the assessee, then the 30% discount on the original cost price of the product would be nothing but reimbursement of the repair work done by the dealer on which no TDS could be made applicable as the reimbursement portion does not represent the income of the recipient.

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4.3. We find that at the outset, this decision has been decided against the assessee by this Tribunal in A.Y.2016-17 as referred supra. But the ld. AR before us had brought several fresh facts which was apparently either not argued before this Tribunal or stated before the lower authorities while adjudicating the issue under consideration. Hence, we deem it fit and appropriate in the interest of justice and fair play, to set aside this issue to the file of the ld. AO for denovo adjudication in accordance with law. In the said set aside assessment proceedings, the ld. AO shall factually examine all the contentions of the assessee and take a reasoned view uninfluenced by either his views taken in the assessment order or by the order of the ld. DRP or by this Tribunal in A.Yrs. 2016-17 and 2017- 18. This direction is given in view of the fact that this issue being a repetitive issue as pointed out by the ld. AR, would have the recurring effect in all the years for the assessee. So, it would be relevant to bring all the facts pertaining to this issue on record. Accordingly, the ground No.5 raised by the assessee is allowed for statistical purposes subject to above mentioned directions. 5. The Ground Nos. 7-10 raised by the assessee are challenging the Transfer Pricing (TP) adjustment made in respect of provision of Marketing Support Services (MSS).

5.1. We have heard rival submissions and perused the materials available on record. The assessee is a private limited company incorporated on 5/07/2011 and began its operation from mid-February 2012. The assessee is a subsidiary of ASUS Technology Pte. Limited. ('ASUS Technology'), Singapore. The assessee is engaged in the business of distribution of ASUS Group's products in India. The assessee purchases Notebooks, Eeepcs, Tablets, Padphones and Accessories from ASUS Technology and sells the products locally in India with no additional

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manufacturing. ASUS TeK Computer Inc. ('ASUS’) is a multinational computer hardware and electronic company headquartered in Taiwan. ASUS is one of the largest PC vendor in the world. The company's products include motherboards, desktops, laptops, monitors, tablets, PCs, servers and mobile phones. ASUS Technology, a subsidiary of ASUS, is engaged in the distribution of computer and computer peripherals.

5.2. We find that during the year under consideration, the assessee provided marketing support services ('MSS’) to its AE for which it gets fee from its AEs. During the course of transfer pricing proceedings vide order sheet entry 05/10/2018, the assessee was asked why different set of comparable companies engaged in marketing support services (selected by Transfer Pricing Officer in A.Y.2013-14) should not be applied to benchmark the transactions of marketing support services. It is pertinent to note that the ld. TPO had indeed agreed to the fact that assessee had received fee from AE’s for providing marketing support services. The assessee responded vide letter dated 22/10/2018 before the ld. TPO by giving various submissions on inclusion / exclusion of comparables. The ld. TPO after going through the submissions of the assessee arrived at the final list of comparables as under:-

Sr. No Comparable Companies OP/TC(Weighted Average) 1 Axis Integrated System 37.58% 2 Inmacs Management Services 53.52% 3 Asian Business Exhibiters & conferences Ltd. 4.04% Mean 31.71%

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5.3. The ld. TPO arrived at the arm’s length price (ALP) adjustment on account of provision of marketing support services to the tune of Rs.56,33,036/- as under:-

Particulars Amount (INR) Marketing and Advertising cost 3,18,08,173 Mean of comparable margins 31,71% Margin to be earned 1,00,86,372 Total marketing support fees receivable 4,18,94,545 Total marketing support fees actually received 3,62,61,509 Adjustment Amount 56,33,036

5.4. This ALP adjustment was upheld by the ld. DRP and hence, the ld. AO added the same in the final assessment order.

5.5. We find that the total international transactions carried out by the assessee with its AE are as under:-

S. No Nature of Transaction Amount (in Rs.) Method adopted 1 Import of finished goods 1231,86,01,503 TNMM 2 Purchase of marketing 1,09,02,602 TNMM samples 3 Purchase allowance 2,44,79,179 TNMM 4 Import of fixed assets 18,98,605 Other method . 5 Provision of marketing 3,62,61,509 TNMM support service fees

5.6. As could be seen from the business of the assessee, as stated supra, while undertaking distribution activity, the assessee also provides

18 ITA No. 7831/Mum/2019 M/s. Asus India Pvt. Ltd.,

Marketing Support Services to its AE for which the assessee is compensated at cost plus mark-up. For the purpose of benchmarking, the assessee aggregated Marketing Support Services transactions with the transactions of distribution business. The ld. TPO benchmarked Marketing Support Services transactions separately and made the addition after selecting 3 comparable companies.

5.7. The ld. AR argued that marketing support services and distribution functions are to be aggregated as provision of marketing support services is an integral part of the main transaction of distribution business. He argued that none of these functions could be performed in isolation. He specifically drew our attention to the fact that the assessee also undertakes selling and distribution activity and in the process, purchases finished products and accessories from AE and distributes it for the purpose of marketing. Thus, both the parties incur cost on marketing which shows that transactions are intended towards ultimate goal of marketing and distribution and, hence, to be benchmarked together. Once marketing support services transactions are clubbed with distribution services transactions, there would not be any transfer pricing adjustment as the assessee's margin in respect of distribution services is within the permissible range.

5.8. The ld. DR argued that aggregation of transactions for benchmarking is resorted to when the prices and functions are so inextricably linked that one cannot survive without the other. He argued that this is not the case with the assessee. We are unable to persuade ourselves to accept to this argument of the ld. DR. In fact we find that from the functions performed by the assessee, both distribution and marketing functions are performed by assessee for promoting sale of products in India. Hence,

19 ITA No. 7831/Mum/2019 M/s. Asus India Pvt. Ltd.,

marketing services becomes an integral part of distribution business as they are interlinked and interdependent. None can function in isolation. Hence, we hold that all these transactions are to be aggregated.

5.9. With regard to yet another argument advanced by the ld. AR that profit margin should not be calculated with reference to pass through cost, we find that the ld. AR stated Marketing expenses (details are enclosed in page 341 of the Paper Book filed before us) mainly comprise of services availed from third parties such as cost of marketing materials, advertising, courier charges, insurance etc. The assessee neither performs any additional functions with respect to such costs nor such activities involve any service element of the assessee.

5.10. Per contra, the ld. DR stated that argument regarding marketing expenses referred in page 341 of the paper book are being raised by the assessee for the first time. He argued that whether costs can be treated as pass-through costs is a fact specific exercise and the onus is on the assessee to demonstrate why the costs should be allowed as pass- through costs. The intercompany agreements and actual conduct should clearly document that it does not perform any functions or assume any risks in relation to such costs. Hence, factual analysis and the conduct of the assessee needs to be carefully ascertained, before allowing any cost to be considered as pass-through cost. In the instant case, the assessee has not claimed any costs as pass-through costs either before the ld. AO/TPO or the DRP. This issue is being raised for the first time before this tribunal. Therefore, the ld. DR argued that this request of the assessee should not be accepted. He further stated that however, if this tribunal is of the opinion that pass-through costs are to be allowed, then the issue may be set-aside to the file of the ld. AO/TPO to analyse this issue afresh

20 ITA No. 7831/Mum/2019 M/s. Asus India Pvt. Ltd.,

after calling for all the relevant documents/information from the assessee and also after studying the actual conduct of the parties involved. He stated that here again, the onus is on the assessee to satisfy the ld. AO/TPO as to the exclusion of pass-through costs for determining profit margin.

5.10.1. Since, we have already held that all the transactions are to be aggregated as stated supra, this aspect of the argument of the ld. AR becomes academic and is hereby left open. No opinion is given by us in this regard.

5.11. We find that the ld. AR further argued that exclusion of the following two comparables from the final list of comparables chosen by the ld. TPO:-

(i) Axis Integrated Systems Ltd., (ii) Inmacs Management Services Ltd.,

5.12. We find that assessee had sought for exclusion of these two comparables before the ld. DRP also who while dismissing the claim of the assessee, had observed as under:-

“A) AXIS Integrated Systems Limited It was claimed by the Assessee that the company is engaged in diverse activities such as provision of consultancy services in relation to indirect taxation and foreign trade policies, trading of digital signatures, etc. which are not at all in the nature of marketing support services provided by the Assessee to its AE. Thus, the Assessee prayed that this company is not functionally comparable and should be excluded. We have considered the facts of the case in the submissions made. As per annual report, the company is providing services in the Held of digital certificate and export licensing services and EX1M consultation Services. These are all Business Support Services. Hence, the company is functionally comparable to the assessee.

21 ITA No. 7831/Mum/2019 M/s. Asus India Pvt. Ltd.,

Hence, it has been rightly selected by the TPO as comparable. The objeptiontof the assessee in this case is therefore rejected. B) INMACS Management Services Limited (‘INMACS’) The Assessee contended that INMACS is majorly engaged in provision of services in the nature of management consultancy, corporate finance, audit, tax and legal advisory services and it employs professionals who are highly educated and have a vast experience in the field of taxation, costing, finance and accounts to provide high quality services. Thus, the Assessee prayed that this company is not functionally comparable and should be excluded. We have considered the facts of the case in the submissions made. As per annual report, the company is providing services in the field of Risk Management and Business process reengineering which are in the nature of Business Support Services. Hence, the company is functionally comparable to the assessee. Hence, it has been rightly selected by the TPO as comparable. The objection of the assessee in this case is therefore rejected. “

5.13. We find lot of force in the argument of the ld. AR that activities of Axis are not comparable to marketing support services, since Axis is engaged in liasoning with Government and regulatory authorities and further Axis outsources substantial activities to third parties. Similarly, the ld. AR also argued that Inmacs is engaged in providing consultancy, audit, taxation and legal advisory services which is not functionally comparable with marketing support services rendered by the assessee. We find that Axis Integrated Systems Ltd., was sought to be excluded in the Co- ordinate bench decision of this Tribunal in the case of DSM Nutritional Products India Pvt. Ltd., vs. DCIT reported in 118 Taxmann.com 363 for A.Y.2014-15 wherein it was held that though the Revenue stand is that the consultancy and liasoning service segment is comparable to the assessee, however, on deeper scrutiny, we find that said consultancy and liasoning services provided by this company is in relation to foreign trade, customs, excise and GST related matters. Further, the company provided such services to independent clients / agencies, unlike the assessee which is purely a captive service provider. This Tribunal also observed that similar view was expressed by Delhi Tribunal in the case of Li & Fung

22 ITA No. 7831/Mum/2019 M/s. Asus India Pvt. Ltd.,

(India) P. Ltd., vs. ACIT reported in 96 Taxmann.com 151 which was challenged by the Revenue before the Hon’ble Delhi High Court. While dealing with the issue, the Hon’ble Delhi High Court had categorically observed that no comparison can be drawn between the captive service provider and an entity like Axis Integrated Systems Ltd., In view of the above, we hold that Axis Integrated Systems Ltd., is functionally not comparable with the marketing support services rendered by the assessee.

5.14. With regard to exclusion of Inmacs Management Services Ltd., we find that the Delhi Tribunal in the case of Brown Forman Worldwide LLC vs. DDIT (Int. Taxn) in ITA Nos. 433 and 6139/Del/2012 dated 11/05/2018 had excluded this comparable for benchmarking marketing support services. In view of the same, we direct the ld. TPO to exclude Inmacs Management Services Ltd., from the final list of comparables chosen by him for benchmarking the marketing support service transaction of the assessee.

5.15. Once these two comparables are excluded, we find that the margin of the comparable companies would be 4.04% and whereas the assessee’s margin 14% and accordingly, assessee’s revenue would be at arm’s length in respect of provision of marketing support services.

5.16. Yet another argument advanced by the ld. AR was that the ld. DRP while accepting the above two comparables had observed that these companies are engaged in business support services and hence comparable with the assessee. However, the ld. DRP had rejected the comparables chosen by the assessee by observing that market research is not a comparable of business of the assessee and event management is

23 ITA No. 7831/Mum/2019 M/s. Asus India Pvt. Ltd.,

not comparable to business of the assessee. This depicts the contradictory stand by the ld. DRP. We are in agreement with this argument advanced by the ld. AR. In view of the aforesaid observations, we direct the ld. TPO / AO to delete the TP adjustment made in the sum of Rs.56,33,036/-. Accordingly, the Ground Nos. 7-12 raised by the assessee are allowed.

Order pronounced on 22/02/2022 by way of proper mentioning in the notice board.

Sd/- Sd/- (VIKAS AWASTHY) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 22/02/2022 KARUNA, sr.ps Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy// BY ORDER, (Asstt. Registrar) ITAT, Mumbai