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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
(PAN : AABCM8634R) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Tarandeep Singh, Advocate REVENUE BY : Shri Sanjay I. Bara, CIT DR Date of Hearing : 07.11.2019 Date of Order : 16.12.2019
O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER
The Appellant, M/s. Xerox India Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 24.09.2012 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Act qua the assessment year 2008-09 on the grounds inter alia that :-
“Order being bad in law
1. That on the facts and in the circumstances of the case and in law, the order passed by the Learned Assessing Officer ("AO") under section 143(3) read with section 144(C) of the Act is erroneous and bad in law.
2. That on the facts and in circumstances of the case and in law, the Learned AO erred in assessing the returned income of Rs.15,50,03,450 at Rs. 52,89,44,734.
Transfer Pricing Grounds
3. That on the facts and in the circumstances of the case and in law, the Learned AO erred in upholding the adjustment made by the Learned Transfer Pricing Officer (''TPO'') of INR 364,127,428 to the income of the Appellant.
4. That on the facts and in the circumstances of the case and in law, the Learned TPO erred by taking suo moto cognizance of an alleged international transaction on account of Advertisement, Marketing and Promotion (‘AMP') expenses of Appellant.
5. That on the facts and in the circumstances of the case and in law, the Learned TPO/AO/Dispute Resolution Panel erred in adopting an incorrect and unjustified interpretation of section 92C of the Act by assuming the AMP expense would satisfy the jurisdictional pre-requisite of being an "international transaction".
6. That on the facts and in the circumstances of the case and in law, the Learned AO/Dispute Resolution Panel ("DRP")/TPO erred in holding that AMP expenses paid to unrelated third parties in India by Appellant for itself is an "international transaction" within the meaning of section 92B of the Act in absence of any agreement, arrangement or understanding with its Associated Enterprise ('AE') in this regard.
7. That on the facts and in the circumstances of the case and in law, the Learned TPO lacked jurisdiction under sub-sections 2A and 2B of section 92CA of the Act in picking up the transaction of AMP in absence of any specific reference by AO.
8. That on the facts and in the circumstances of the case and in law, the Learned AO /DRP / TPO erred in applying the "Bright line theory" as articulated in Transfer Pricing regulations of foreign jurisdictions and decisions rendered by foreign courts (based on specific Transfer Pricing regulations of those countries).
That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO without any material on record erred in assuming that beyond engaging in the business of distributing products in India, Appellant rendered a service (i.e. brand promotion) to a foreign associated enterprise of Appellant.
10. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred in assuming the mere fact that upon forfeiture of distribution activities / termination of business arrangement, the brand (and related trademark) shall vest with the owner and hence, requires a pre-emptive Transfer Pricing adjustment on an annual basis.
11. That on the facts and in the circumstances of the case and in law, and assuming arguendo that the Appellant's AMP expenditures constituted an international transaction potentially subject to adjustment by the Learned TPO/AO, the Learned AO / DRP / TPO erred by including expenses incurred for trade/cash discounts, sales promotion schemes and commissions as part of Appellant's AMP expenditure, particularly for purposes of benchmarking Appellant's AMP expenditure against AMP expenditure incurred by comparable companies.
12. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred in concluding that the Appellant's AMP is excessive and has resulted in creation of marketing intangible in favour of AE, for which it should be compensated along with a mark-up by the AE.
13. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by not taking cognizance of the business model, functional and risk profile of the Appellant and in concluding AMP expenditure to be excessive.
14. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by identifying incorrect set of comparables.
15. That on the facts and in the circumstances of the case and in law, the learned AO / DRP / TPO erred by excluding few companies from the set of comparables while benchmarking the percentage of AMP expenditure incurred by the Appellant against the percentage of AMP expenditure incurred by comparable companies in an ad-hoc manner. Further, learned AO erred by stating that no arguments were providing against Rathi Graphics Limited and excluding the same from the set of com parables while benchmarking the percentage of A&P expenditure.
16. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by making a mechanical comparison between the AMP expenditure of the Appellant and other comparable companies and concluding it to be excessive.
17. That on the facts and in the circumstances of the case and in law, the Learned AO erred by not following the directions received from Learned DRP.
18. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by not appreciating the fact that the Appellant undertakes AMP expense to increase its own business / sales in India and therefore its benefit lies with Appellant.
19. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by benchmarking the AMP spend on a standalone basis without giving cognizance to the fact that the Appellant has applied the Transactional Net Margin Method and the same was accepted by Learned AO / TPO / DRP.
20. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by applying Comparable Uncontrolled Price Method in a manner that is not prescribed or justified under the law.
21. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred in evaluating the reasonableness of Appellant's AMP expenses solely on a subjective basis and ignoring the point of view of commercial expediency.
22. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by adding a mark-up and even if the mark-up was justified, then the approach adopted by TPO to determine the markup is not appropriate.
23. That the Learned AO / DRP / TPO have not placed correct reliance on OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators, July 2010 and other international commentaries and jurisprudence.
24. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by not providing the Appellant the benefit of 5 percent range as provided by the proviso of section 92C(2) of the Act.
25. The Learned AO / DRP / TPO has erred by not carrying out the determination of arm's length price as required under section 92C of the Act read with rule 10D of Income Tax Rules, 1962.
Corporate Tax Grounds Disallowance of Depreciation on account of capital assets converted into stock in trade
26. That on the facts and circumstances of the case and in law, the AO/DRP has erred in making an adjustment of depreciation of Rs. 24,94,155 on account of capital assets getting converted into stock-in-trade.
27. That on the facts and circumstances of the case, the AO/DRP erred in not following the decision of Hon'ble ITAT and Hon'ble Delhi High Court in Appellant's own case deleting a similar disallowance in earlier year.
Disallowance of depreciation on computer peripherals
28. That on the facts and circumstances of the case, the Learned AO has erred in law and facts in disallowing depreciation amounting to Rs. 8,89,960 on the assets written off.
29. That on the facts and circumstances of the case, Learned AO/DRP erred in law and facts by disallowing a sum of Rs.8,26,071, by not allowing the depreciation at 60% on printers, routers, UPS SMF battery etc. as they fall under the definition of computer and computer system, and instead allowing 15% depreciation by treating them as 'Plant and Machinery'.
Disallowance of Bad debts and advances written off
30. That on the facts and circumstances of the case, Learned AO/DRP erred in law and facts by disallowing a sum of Rs.56,03,670 of bad debts and advances written off.
Levy and withdrawal of interest u/s 234 Band 244 A respectively
31. That the Learned AO erred on facts and in law, in withdrawing interest under section 244A and levying interest under sections 234B and 234 D of the Act.
Penalty proceedings wrongly initiated
32. That the Learned AO erred on facts and in law, in initiating penalty proceedings u/s 271 (1)(C) of the Act.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Xerox India Limited, the taxpayer is a Member of the Xerox group of companies and is 100% subsidiary of Xerox USA. The taxpayer operates in document management industry providing a range of office equipment, software solutions and document management services with primary function of distribution of goods imported from its Associated Enterprises (AEs).
During the year under assessment, the taxpayer entered into international transactions with its AEs as under :-
Nature of transaction Method Total value of selected transaction (in Rs.) Import of raw materials and TNMM 15,736,421 components Purchase of finished goods for resale TNMM 2,037,731,760 Sale of finished goods TNMM 46,002,398 Provision of software development, TNMM 53,206,736 accounting and marketing services Receipt of support services TNMM 626,516
During transfer pricing analysis, Transfer Pricing Officer (TPO) noticed that the taxpayer has incurred substantial expenses on Advertisement, Marketing & Promotion (AMP) aimed at creating/enhancing the value of Xerox brand in India and the final beneficiary of this function of taxpayer was its AEs. TPO considered the same as international transaction and proceeded to benchmark the same.
TPO declined the contentions raised by the taxpayer qua expenditure incurred under the head AMP expenses that trade discounts and commissions are not part of the AMP expenses and the trade discount and commissions are not used to undertake AMP activities. TPO found AMP expenditure to sales in case of taxpayer at 6.93% vis-à-vis AMP/sales ratio of comparables at 1.20%. AMP/sales ratio of the comparables used by the taxpayer is tabulated as under :-
Sl.No. Name AMP/Sales (%) 1 Dhoot Industrial Finance Ltd. 0.06% 2 Intex Technologies Ltd. 5.53% 3 HCL Infosystems Ltd. 0.58% 4 Iris Computers Ltd. 0.48% 5 Kilburn Office Automation Ltd. 1.04% 6 Priya Ltd. 0.06% 7 Rathi Graphic Technologies Ltd. 12.96% 8 Ricoh Ltd. 3.32% 9 Savex Computers Ltd. 0.31% 10 SPS International Ltd. 0.38% 11 Spice Mobiles Ltd. 13.71% 12 Tyche Peripherals Ltd. 2.19% 13 Universal Print Systems Ltd. 1.20%
Declining the contentions raised by the taxpayer that no direct benefit accrues to any other Xerox enterprise or the holding company Xerox USA from the marketing activities carried out by the taxpayer, the TPO proceeded to hold that by incurring these expenses, taxpayer enhanced the value of intangibles that is owned by the parent company and determined the Arm’s Length Price (ALP) qua AMP expenses resulting into creation of marketing intangibles in favour of AEs at Rs.36,41,27,428/-
The taxpayer carried the matter before the ld. DRP by way of filing objections, who has confirmed the proposed adjustment incurred on account of AMP expenses by the taxpayer. Ld. DRP also confirmed the mark-up of 12.5% of AMP expenses charged by the TPO for the entrepreneurial effort including use of its infrastructure etc. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUNDS NO.1 & 2 9. Grounds No.1 & 2 need no findings being general in nature and having not been pressed by the ld. AR for the taxpayer.
TRANSFER PRICING GROUNDS GROUNDS NO.3 to 25
Undisputedly, taxpayer carried AMP activities to identify customers in India and bears cost of marketing/advertising activities. Major functions performed qua sale of products include development of marketing strategy, control/coordination of marketing activities, development of promotional activities, planning of advertisements, development of goods catalogues, recruitment and maintenance of sales personnel, identification of distribution channels and contracting with clients, negotiation price, terms etc.
After examining the functions performed by the taxpayer, ld. TPO proceeded to observe that the taxpayer is making serious efforts to market the products of its AEs for which it has developed marketing strategy, identified customers and finally & most importantly borne the cost of marketing activities. It is also observed that the taxpayer is making an extremely high level of advertising and marketing expenditure promotion under the head ‘advertisement expenses’, ‘discounts’ and ‘commissions’ which are 6.93% of the sales. Details of discounts are as under :-
Account Description Amount in Nature code Rs. 30050111 Discount on 8,82,06,873 Rebate or discount given to Equipment partners/distributors on sale of Sales ORS Equipments(photocopy machines) based on schemes announced by the company 31100111 Discount on 1,45,58,446 Rebate or discount given to Paper Sales partners on sale of paper based on approved schemes 31200111 Discount on 6,98,23,493 Rebate or discount given to Toner Sales partners/distributors on sale of supplies (Consumables business) based on rebate or discounts schemes announced by the company 31620211 Discount on 28,712 Rebate or discount given to Parts Sales partners/distributors on sales of part of machines. These rebates/ discounts are based on schemes announced by the company from time to time 61800301 Cash 61,86,170 Cash discount offered to Discount to Channel Customers Customers Partners/distributors for early/prompt payments (Upfront payments) Total 17,88,03,695 Similarly, you have provided details of commission paid which are tabulated below.
Account Description Amount in Nature code Rs. 53300101 Dealer 5,46,34,581 Normal commission paid to the Commission dealers depending upon approved on commission percentage Equipment Sales ORS 53300121 Dealer 1,14,40,125 Normal commission paid to the Commission dealers depending upon approved on Paper commission percentage Sales Total 660,74,706
Ld. TPO chosen 10 comparables with average of 1.18% to benchmark the AMP expenditure of the taxpayer which are as under :-
Sl.No. Name AMP/Sales (%) 1 Dhoot Industrial Finance Ltd. 0.06% 2 Intex Technologies Ltd. 5.53% 3 HCL Infosystems Ltd. 0.58% 4 Iris Computers Ltd. 0.48% 5 Kilburn Office Automation Ltd. 1.04% 6 Priya Ltd. 0.06%
7 Savex Computers Ltd. 0.31% 8 SPS International Ltd. 0.38% 9 Spice Mobiles Ltd. 13.71% 10 Tyche Peripherals Ltd. 2.19% 11 Universal Print Systems Ltd. 1.20% Average 1.18%
In order to determine the mark-up, the TPO chosen 17 comparables with average of 22.24% which are as under :-
Sl.No. Name PBIT/Cost (%) 1 Tamil Nadu Ex-Servicemen's Corpn. 9.29% Ltd. 2 Apitco Ltd. 49.35% 3 Best Mulyankayan Consultants Ltd 12.84% 4 Choksi Laboratories Ltd 29.18% 5 Genins India T P A Ltd. 9.11% 6 I C R A Management Consulting 4.18% Services Ltd. 7 I D C (India) Ltd. 15.31% 8 India Cements Capital Ltd 42.46% 9 Indus Technical & Financial 14.05% Consultants Ltd. 10 Mecan Ltd. 11.8% 11 NIS Sparta Ltd. 1.84% 12 ORG Informatics Ltd.(Seg.) 6.54% 13 Rites Ltd. 31.52% 14 Sanco Trans Ltd. 20.62% 15 Technicom-Chemie (India) Ltd. 13.43% 16 Vapi Waste & Effluent Mgmt. Co. 47.53% Ltd. 17 WAPCOS Ltd. (Seg.) 58.98% Average 22.24%
Consequently, TPO proceeded to determine ALP of international transaction qua incurring of AMP expenditure of the taxpayer as under :-
Total revenue of the assessee Rs.5,626,964,000 Arm’s length price of AMP expenses 1.18% Arm length AMP expenses Rs.66,398,175 (A) AMP exp incurred by assessee Rs.390,067,000 (B) Expenses incurred on creation of intangibles Rs.323,668,825 (C) = (B – A) Mark up @ 12.5% (D) Rs.40,458,603 Adjustment u/s 92CA (C + D) Rs.364,127,428 The arm’s length price of the international transaction is determined at Rs.364,127,428 as against ‘nil’ determined by the assessee. The assessing officer shall enhance the income of the assessee by Rs.362,127,428.”
Hon’ble Delhi High Court in subsequent decisions viz.
Bausch & Lomb Eye Care (India) Pvt. Ltd. v. Additional CIT (2016) 381 ITR 227 (Del.) and Honda Siel Power Products Ltd. v.
Dy. CIT (2016) 237 Taxman 304 held that it is for the Revenue to firstly discharge the onus to prove the existence of an international transaction between the taxpayer and its AE and only thereafter ALP of international transactions involving AMP can be computed.
16. Ld. AR for the taxpayer vehemently contended that AMP expenditure is not an international transaction nor any objective findings have been returned by the ld. TPO. When we peruse the findings of ld. TPO in paras 3.5 & 3.6, the TPO in order to find out whether AMP is an international transaction relied upon section 92F(v) which defines transaction as under :-
“(v) “transaction” includes an arrangement, understanding or action in concert,- (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding.”
Ld. TPO by relying upon section 92F (v) of the Act returned the findings declaring AMP expenditure as an international transaction as under :-
“The issue of AMP expenditure falls squarely within the definition of ‘transaction’ as per sec. 92F(v). Hence, there is no infirmity with the action of this office.”
The ld. AR for the taxpayer further contended that continuous growing sales pattern of the taxpayer substantiates the fact that the benefit of AMP activities accrues to the taxpayer only and not to any other entity. However, the ld. TPO dismissed this argument of taxpayer by observing that growth in sales is actually incidental benefit and it is only the enhancement of brand value i.e. actual objective of this exercise.
Ld. TPO also observed that AMP expenditure of the taxpayer are more than the normal range of expenditure incurred by the routine distributor and such high level of AMP expenses is not incurred only for increasing its sales but to promote the brand which is evident from the fact that AMP/ sales ratio of taxpayer is 6.93% vis-à-vis 1.18% the AMP/sales ratio of routine distributors.
We are of the considered view that all these findings are general in nature and are not factual objective findings based upon any evidence. Merely because of the fact that AMP expenses of the taxpayer are on higher side, the same cannot be treated to promote the brand and create intangibles for its AE.
Ld. AR for the taxpayer further contended that no direct benefit accrues to any other Xerox enterprise or holding company (Xerox US) as a result of marketing activities undertaken by it.
However, dismissing the contentions raised by the taxpayer, ld. TPO made out the case that, “by incurring these expenses, the taxpayer has enhanced the value of intangibles owned by the parent company”.
Ld. AR for the taxpayer further contended that to improve its business market, it is the sole responsibility of the taxpayer and as such, the AMP expenditure has direct nexus with its earning of the income. The taxpayer also relied upon para 7.13 of the OECD Guidelines which state inter alia that, “an AE should not be considered to receive an intra-group service when it obtains incidental benefits attributable solely to its being part of a larger concern and not to a specific activity being performed”.
Ld. AR for the taxpayer further contended that use of any logo across the globe is not considered equivalent to enhancing a brand. However, ld. TPO proceeded to observe on the basis of general observation that the mandatory use of brand name or logo of the overseas parent company will lead to the creation of a marketing intangibles in favour of the taxpayer. However, when we examine the facts of this case in entirety, no doubt taxpayer uses “Xerox” logo but all the information in relation to contract address, brand ambassador, product, market and other similar details in the advertisement is confined to India only. So, it cannot be said to promote the Xerox brand world-wide. Moreover, when it is undisputed fact that the taxpayer has not paid any royalty for use of Xerox brand name, incidental benefits, if any, to overseas entity does not call for any compensation for the taxpayer.
In case of Valvoline Cummins (P.) Ltd. vs. DCIT (2017) 84 taxmann.com 191 (Delhi), Hon’ble Delhi High Court held that mere use of brand name or logo owned by the AEs by the taxpayer will not automatically lead to influence that any expenses that the taxpayer incurred towards AMP was only to enhance the brand by returning following findings :-
“17. Once the BLT has been declared by this Court in Sony Ericsson India Pvt. Ltd.(supra) to no longer be a valid basis for determining the existence of or the ALP of an international transaction involving AMP expenses, the order of the TPO was unsustainable in law. The mere fact that the Assessee was permitted to use the brand name ‘Valvoline’ will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand ‘Valvoline’. The onus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose.”
When all these objections were raised by the taxpayer before the ld. DRP, same has been dismissed by using same ratio applied by the TPO firstly to declare the AMP expenditure as an international transaction and then to treat the AMP expenditure incurred by the taxpayer in excess of routine expenditure to promote the brand and creating intangibles for its AE by using the BLT, as is evident form para 5.3 of the ld. DRP order. In para 5.8, ld. DRP again applied the BLT to benchmark the international transaction qua AMP expenditure by returning following findings:-
“5.8 We have also considered the assessee's objection about rejection of certain comparables by the TPO. Two of them, namely, MIs Ricoh India Ltd. and MIs Spice Mobile Ltd. are engaged in the distribution of branded goods. We have already mentioned that the TPO has considered the distributors of only the similar unbranded goods to determine the routine marketing and distribution expenditure by them. The AMP expenditure incurred by the distributors of the branded goods would include certain amount of brand promotion expenses. That is why such distributors have not been considered as comparables because o~ aim is to determine the routine marketing and distribution expenses to fix the 'brightline' and ascertain the expenditure incurred by the assessee which is attributable to brand promotion. Only routine distributors are to be taken who are nor engaged in any brand building exercise. The purpose of bright line is to ascertain as to how much AMP expenses would normally be incurred by a manufacturer distributor for carrying on its routine distribution activity. For this it is necessary to select comparables which are not engaged in creation of brand name. In respect of the third company, M/s. Rathi Graphics Ltd., the TPO has observed in the order that it was carrying out AMP activities on behalf of its subsidiaries also. The assessee has not given any arguments to rebut the contention of the AO. Therefore, the assessee's objection regarding rejection of all the three comparables is turned down by the Panel. The assessee has also given a list of its own comparables for determining the "brightline". However, all the comparables proposed by the assessee are distributors of branded goods and, therefore, for the reasons mentioned above, such comparables cannot be accepted. However, the Panel, on its own, has carefully examined the functional profile as well as the financials of all the comparables used by the TPO. It has been noted that more than 50% of turnover of M/s Dhoot Industrial Finance Ltd. is from sale of shares. The Panel is, therefore, of the view that it should have not been considered as a comparable.”
By now, it is settled principle of law that BLT is not a valid method for determining the existence of international transaction or for determination of ALP of such transactions.
22. Hon’ble Delhi High Court in case of CIT vs. Whirlpool of India Ltd. (2016) 381 ITR 154 (Delhi) decided the identical issue by returning following findings :-
“34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE.
35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have “acted in concern”. …..
37. The provisions under Chapter X do envisage a ‘separate entity concept’. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses. …..
For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP.”
Hon’ble Delhi High Court in case of Maruti Suzuki India Ltd. vs. CIT (2015) 64 taxmann.com 150 (Delhi) also decided as to how the international transaction qua AMP expenditure is to be determined and as to how the price of international transaction qua AMP expenditure is to be determined by returning following findings :-
“68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to ‘price’ and to ‘uncontrolled conditions’ it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negative by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ……..
What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. …….
The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92Bof the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue)or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for?”
In case of Honda Siel Power Products Ltd. vs. DCIT (2015)
64 taxmann.com 328 (Delhi), Hon’ble Delhi High Court held that:-
“25. If the BLT is kept aside as a valid means of determining the existence of an international transaction concerning AMP expenses, the Revenue would have to make out its case on the basis of the other tangible material which might show the existence of any ‘arrangement’ or 'understanding' or any conduct of either party to show that they were ‘acting in concert’ as far as the Assessee having to promote the brand of the foreign AE is concerned.
In case of LE Passage to India Tour & Travels (P.) Ltd. (2017) 391 ITR 207 (Delhi), Hon’ble Delhi High Court again held that all transactions reporting AMP cannot be treated as international transaction and the fact of each case would have to be examined independently by returning following findings :-
“4. This Court is of the view that whilst L.G. Electronics India Pvt. Ltd.(supra) indicated that AMPs were or did constitute the basis for an inquiry into the international transaction and indicated a “bright line” test for it, Sony Ericsson Mobile Communications India Pvt. Ltd.(supra) overruled that decision. This per se does not mean that every endeavour will be to conclude that all transactions reporting AMPs are to be treated as international transactions, the facts of each case would have to be examined for some deliberations. Whilst the TPO and the DRP undoubtedly held that the international transactions existed - that understanding apparently was passed upon the pre-existing regime, propounded in L.G. Electronics India Pvt. Ltd.(supra) with greater clarity on account of this Court’s decision in Sony Ericsson Mobile Communications India Pvt. Ltd.(supra). The I.T.A.T. in our opinion, should have first decided whether in the circumstances of this case, the nature of the AMP reported, could lead to the conclusion that there was an international transaction. When doing so, it should have remitted the matter back for examination to the A.O. in this case. Accordingly, following the decision of Sony Ericsson Mobile Communications India Pvt. Ltd.(supra) and a subsequent decision in Daikin Airconditioning India Pvt. Limited v. Assistant Commissioner of Income Tax in ITA 269/2016, decided on 27.07.2016, this Court hereby remits the matter for a comprehensive decision by the I.T.A.T. In other words, the I.T.A.T. will decide whether the reporting of the AMP in regard to the outbound business constitutes an international transaction for which ALP determination was necessary and if so, the effect thereof. The parties are directed to appear before the I.T.A.T. on 01.02.2017. The appeal is partly allowed in the above terms.”
Hon’ble Delhi High Court in Valvoline Cummins (P.) Ltd. vs. DCIT (supra) further decided the issue in favour of the taxpayer that merely because of the fact that AMP expenditure incurred by the taxpayer was in excess, existence of international transaction cannot be inferred. Operative part of the findings is extracted as under :-
“15. The decision in Le Passage to India Tour & Travels (P) Ltd.(supra) turned on the fact that there was no determination by the TPO in the first place whether there was an international transaction. In the present case, however, the TPO did apply his mind to the existence of an international transaction involving AMP expense. The only ground on which the conclusion was reached by the TPO was that the AMP expenditure incurred by the Assessee was in excess of that incurred by the comparables. His conclusion was not based on any other factor. In other words, it was not as if the conclusion arrived by the TPO was based on two or three grounds, one of which was the BLT.
This Court in Sony Ericsson India Pvt. Ltd.(supra) categorically found that the BLT was not an appropriate yardstick for determining the existence of an international transaction or for that matter for calculating the ALP of such transaction. The decision of the Full Bench of the ITAT in L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1which sought to make BLT the basis was set aside by this Court.”
In the instant case, there is not an iota of material on the file apart from relying upon the fact that by incurring huge AMP expenses to the tune of 6.93%, taxpayer has enhanced brand value and created intangibles in favour of its AE, no cogent material is there to treat the incurring of AMP expenses as international transactions. TPO has also not returned the finding that how the benefit of AMP expenditure incurred by the taxpayer have benefited AE, no calculation has come on record, so in these circumstances when we discarded the BLT the entire case of ld. TPO/DRP fell flat.
In view of what has been discussed above and following the decisions rendered by Hon’ble High Court discussed in the preceding paras, we are of the considered view that firstly, there is not an iota of material with ld. TPO to prove the existence of an international transactions involving AMP expenses by the taxpayer. TPO rather proceeded on the premise that the AMP expenditure incurred by the taxpayer were far excess of AMP expenses incurred by the comparables.
TPO has also applied the BLT which has been discarded by the Hon’ble High Court in a number of judgments. Even otherwise, in the absence of any agreement, arrangement or understanding between the taxpayer and its AE, expressed or implied, that AMP spent of the taxpayer would also be beneficial to the AE or it would enhance the brand value of the AE in any manner, no international transaction can be inferred.
Moreover, on the other hand, the taxpayer has come up with specific pleading that it has analysed a principal to principal relationship with its AE and at no point, it has acted as agent of the AE. If this is so, AMP expenses which the taxpayer has incurred to boost up its sales cannot be treated to enhance the brand value and to create intangibles in favour of the AE. All these facts stand proved from the growing sale pattern of the taxpayer which shows that benefit of AMP activities accrued in favour of the taxpayer. Moreover when TPO has failed to prove that there is an existence of international transaction between taxpayer and AE, the addition on account of AMP expenses cannot be made on the basis of the fact that AMP expenses of the taxpayer are far excess than the AMP expenses of comparables.
Even otherwise, the mere use of logo of AE is per se not international transaction. Consequently, we are of the considered view that AO/DRP/TPO have erred in making addition of Rs.36,41,27,428/- which is not sustainable in the eyes of law, hence ordered to be deleted. Hence, grounds no.3 to 25 are determined in favour of the taxpayer.
Before parting with this order, we would like to bring on record the fact that ld. DR for the Revenue, although admitted the legal position enunciated in the preceding paragraphs, but he contended that since all the aforesaid decisions are lying challenged before the Hon'ble Apex Court, the matter may be kept pending till the decision by Hon'ble Apex Court. However, we are of the considered view that since it is a stay granted matter and the proceedings before the second appellate authority have not been stayed by any higher forum, the same cannot be kept pending.
After considering the legal position as discussed in the preceding paragraphs, we are of the considered opinion that the ALP of an international transaction involving AMP expenses, the adjustment made by the TPO/DRP/AO is not sustainable in the eyes of law. At the same time, we cannot ignore the submission of the learned DR that the matter is pending before Hon'ble Apex Court and the decision of Hon'ble Apex Court would be binding upon all the authorities. In view of the above, we set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We hold that as per the facts of the case and the legal position as of now and discussed above in this order, the adjustment made by the TPO/DRP/AO in respect of AMP expenses is not sustainable. However, if the above decisions of Hon'ble Jurisdictional High Court which is under consideration before the Hon'ble Apex Court is modified or reversed by the Hon'ble Apex Court, then the Assessing Officer would pass the order afresh considering the decision of Hon'ble Apex Court. In those circumstances, he will also allow opportunity of being heard to the assessee.
CORPORATE GROUNDS GROUNDS NO.26 & 27
AO/DRP have made adjustment of depreciation of Rs.24,94,155/- on account of capital assets getting converted into stock-in-trade by following AY 2007-08. However, ld. AR for the taxpayer contended that this issue has been decided in favour of the taxpayer in AY 2007-08 by the Tribunal in order dated 12.12.2014 which has been confirmed by the Hon’ble Delhi High Court. Undisputedly, there is no change in the facts of the present case from the facts of AY 2007-08 and issue is also identical. Coordinate Bench of the Tribunal decided the identical issue in favour of the assessee by returning following findings :-
“8. We have heard both the sides on the issue. The assessee is engaged in the business of trading of Xerographic Equipments, Printers, Scanners, Faxes, Multi Functional Devices and consumables parts thereof. The assessee leased out the equipments to the customers on an operating lease basis and these equipments are capitalised and depreciation is claimed for tax purposes in accordance with the provisions of the Act. These operating leased assets were returned to the assessee either on the termination of the lease or otherwise after a period of six months, then the assessee is following a practice to convert these assets into stock-in-trade at a nominal value of Rs.1/- as these used assets are not having any readymade market for further leasing. This nominal value is reduced from the block of assets. In some of the cases, these assets are again leased out then they are recapitalized in the block of assets at the nominal value at which these were decapitalised. However, certain used assets remained in stock-in-trade and whenever these are sold, the profit is offered for taxation. This method of accounting is being followed consistently by the assessee. When the assets are recapitalized at the nominal value at which it is decapitalised then there is no effect on the taxability of the assessee. Similarly, whenever these used assets are converted into stock-in-trade and sold subsequently and the surplus on the sale is offered for taxation then there is no harm to the revenue. Considering all these facts, we allow this ground of assessee’s appeal.”
So, following the aforesaid decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that conversion of used asset into stock-in-trade and sold subsequently and surplus on the sale is brought to tax then there is no loss to the Revenue. Consequently, the addition of Rs.24,94,155/- made by the AO/DRP is ordered to be deleted.
Hence, ground nos.26 & 27 are determined in favour of the taxpayer.
GROUND NO.28
Ground No.28 is dismissed having not been pressed during the course of arguments.
GROUND NO.29
The taxpayer challenged the disallowance of Rs.8,26,071/- by AO/DRP on the ground that the depreciation @ 60% on printers, routers, UPS SMF battery etc. is allowable as against 15% depreciation by AO/DRP by treating the same as plant and machinery.
Hon’ble Delhi High Court in case of CIT vs. BSES Yamuna Power Ltd. in ITA 1267/2010 order dated 31.08.2010 affirmed the findings returned by the Tribunal that computer accessories and peripherals, such as, printers, scanners and server etc. are integral part of the computer system, hence entitled for depreciation @ 60% instead of 15% allowed by the DRP/AO. Consequently, following the decision rendered by the Hon’ble Delhi High Court in case of CIT vs. BSES Yamuna Power Ltd. (supra), we are of the considered view that the taxpayer is entitled for depreciation @ 60% on computer accessories and peripherals. So, the AO is directed to calculate the same accordingly. Ground No.29 is determined in favour of the taxpayer.
GROUND NO.30 42. The taxpayer has challenged the disallowance of Rs.56,03,670/- on account of bad debts and advances written off on the ground that the entire evidence was there before the ld. DRP by way of additional evidence which was also given to AO during remand proceedings.
Ld. AR for the taxpayer drew our attention towards the submissions made by the taxpayer before AO during remand proceedings, available at page 623 to 627 of the paper book duly enclosed with details of advances/security deposits written off. But ld. DRP/AO have not considered the said evidence but disallowed the same on the basis of surmises.
In these circumstances, we are of the considered view that the issue is required to be remanded back to the ld. DRP to decide afresh after perusing the additional evidence brought on record by the taxpayer after providing opportunity of being heard to the taxpayer, consequently ground no.30 is determined in favour of the taxpayer for statistical purposes.
GROUND NO.31 45. Ground No.31 being consequential in nature needs no specific findings.
GROUND NO.32 46. Ground No.32 being premature needs no specific findings. 41. Resultantly, the appeal filed by the taxpayer is partly allowed for statistical purposes. Order pronounced in open court on this 16th day of December, 2019.