ITO, NEW DELHI vs. M/S. BOSE CORPORATION INDIA P. LTD., NEW DELHI

PER KULDIP SINGH, JUDICIAL MEMBER :

(hereinafter referred to as ‘the assessee’) in by filing the present appeal sought to set aside the impugned order dated 24.02.2014, passed by the AO under section 143(3)/144C of the Income-tax Act, 1961 (for short ‘the Act’) in consonance with the orders passed by the ld. DRP/TPO qua the assessment year 2009-10 on the grounds inter alia that :-

“1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("Ld. AO") under section 143(3) read with section 144C of the Act is bad in law to the extent of additions/adjustments of Rs.14,52,78,812 made in the impugned assessment order.

3.1 disregarding the correct characterisation of the appellant's business i.e. being a normal risk bearing distributor undertaking all the risks relating to its business of distribution and instead,

3.2 disregarding the nature of AMP expenses incurred by the appellant and incorrectly holding that such expenses results in developing marketing intangibles for the AEs;

3.3 misinterpreting/ placing incorrect reliance on the international guidance from OECD, US TP Regulations and Australian Tax Office ("ATO") and making several erroneous/ factually incorrect and contradictory statements/ observations in the TP order, which are not relevant to the instant case, only in order to justify an otherwise inappropriate and unwarranted TP adjustment;

3.4 incorrectly holding the AMP expenses incurred by the Appellant to be "excessive" on the basis of a "bright line limit" arrived at by, erroneously rejecting companies similar in functional profile to the Appellant on basis of inappropriate reasoning;

3.5 disregarding the fact that the premium gross profit earned by the Appellant more than compensate the allegedly excessive AMP spends, if any, incurred by it;

3.6 alleging that the AMP expenses incurred by the Appellant need to be reimbursed by the Associated Enterprises C'AEs') along with a mark-up on the same by implicating the same as an intra-group marketing service;

3.6.1 applying the concept of 'intra-group services' without a due understanding thereof and without demonstrating that services has been rendered for the benefit of the AEs or any tangible benefits have been received by the AEs for which a return needs to earned by the Appellant; ./2014 ITA No.2523/Del./2014 3.6.2 in applying a mark-up of IS.27% in respect of the Appellant's "alleged excessive" AMP expenses, without any basis for the same whatsoever and without giving the Appellant adequate opportunity to analyze, present its contentions on the same;

3.7 disregarding the Directions issued by the Ld. DRP and not including Intex Technologies India Private Limited as a comparable company for the purpose of determining the Bright-line;

3.8 disregarding the Directions issued by the Ld. DRP and considering Prime Lending Rate instead of Base Rate of SBI as directed by the Hon'ble DRP for the purpose of applying mark- up on the alleged excessive AMP expenses incurred by the appellant;

3.8.1 even while applying the Base Rate instead of Prime Lending Rate, the Ld. TPO committed a mistake by considering a mark-up of 300 basis points on the SBI Prime Lending Rate instead of ISO basis points as directed by the Ld. DRP;

4. That the Ld. AO (following the directions of the Ld. DRP) erred in disallowing an amount of 4/5th Rs.6,10,91,813 (being of the total expenditure) paid towards advertisement charges by treating the same as deferred revenue expenditure.

4.1 That the Ld. AO has made the addition in an arbitrary manner by merely stating that whole of the expenditure incurred for advertising products through media in India cannot be allowed as revenue expenditure in one year itself;

4.2 That the Ld. AO relying on the Apex Court's decision which was rendered in a different context erred in alleging that the benefit of incurring such expenditure is stretched over a ./2014 ITA No.2523/Del./2014 number of years and accordingly the expenditure needs to be amortized over a number of years; 4.3 That the action of the Ld. AO shall result in double whammy on the appellant as an addition has already been made on AMP expenditure by the Ld. TPO;

5. Without prejudice to the appellant's contention in ground No.4 above , the Ld. AO erred in not providing a deduction of 1/5th of the advertisement expenses pertaining to the preceding years in assessing the income for the year under consideration.

6. That the Ld. AO (following the directions of the Ld. DRP) erred in disallowing an amount of Rs.45,61,318 being write-off of demonstration equipment inventory by holding that such inventory should have been valued at cost disregarding the fact that the Net Realizable; Value ( or 'NRV') of demonstration equipment inventory is lower than the cost.

6.1 That the Ld. AO erred in equating the NRV of normal / new inventory with the demonstration equipment inventory disregarding the fact that the latter undergoes excessive wear and tear in the course of display;

6.2 That the Ld. AO erred in holding that the provision for demo inventory was created purely on estimation basis and cannot be treated as real expense without appreciating that the same is in the nature of an actual write-off;

6.3 That the Ld. AO erred in not appreciating that the write-off of demonstration equipment also needs to be allowed on account of 'Rule of Consistency' as the appellant has been consistently creating such charge each year and no addition has been made in any of the preceding years;

8. That on the facts and in the circumstances of the case and in law, the Ld. AO has grossly erred in giving only a part credit of tax deducted at source amounting to Rs.12,78,043 instead of Rs.15,25,403 as claimed in the return of income.

9. On the facts and in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(c), 271BA and 271AA of the Act.” 3. The Objector, Income-tax Officer, Ward 3 (1), New Delhi, (hereinafter referred to as ‘the Revenue’) in by filing the present appeal sought to set aside the impugned order dated 24.02.2014, passed by the AO under section 143(3)/144C of the Income-tax Act, 1961 (for short ‘the Act’) in consonance with the orders passed by the ld. DRP/TPO qua the assessment year 2009-10 on the grounds inter alia that :-

“1. Whether on the facts and circumstances of the case, the Ld DRP erred in deleting the addition of Arm's length Price by ignoring the facts that:-

(i) Application of base rate of SBI as on 30-6- 2008 cannot be accepted as the concept of base rate come into effect on 1-7-2010.

(ii) Intex Technology (I)' P Ltd. cannot be taken as a comparable for benchmarking

S.No. Description of the transaction Amount (in Rupees) 1 Purchase of finished goods and 309,415,090 spares 2 Support Service Income 33,720,836 3 Purchase of Capital Goods 5,967,973 4 Reimbursement of expenses paid 2,724,717 assessment at Rs.4,09,24,720/- and as per P&L account, the total revenue of the assessee amounting to Rs.1,06,60,46,669/- from following segments :-

Nature of income Amount (in INR) Sales (Traded) 99,22,28,546/- Support Services Income 3,37,20,836/- Installation charges 2,36,62,296/- Service income 1,31,88,910/- Other income 32,46,081/-

Feeling aggrieved, the assessee as well as Revenue has come up before the Tribunal by way of filing the present cross appeals.

Bose has divided its Indian operation in two segments – one : retail sales; and two : professional sales. passed by the Revenue authorities, the first question arises for determination in this case is :-

“as to whether AMP expenses is not an international transaction and as such, the question of determining arms length price of this transaction or making addition thereof does not arise as contended by the assessee.”

Particulars FY 2006-07 FY 2007-08 FY 2008-09 Sales (Rs.) 569,837,043 893,853,149 1,062,800,588 AMP expenditure 58,780,494 78,299,410 76,364,766 Percent AMP to total sales 10.32% 8.76% 7.18%

Expenditure on AMP 76,364,766 Value of Gross Sales 992,228,546 AMP / Sales of the assessee 7.70%

S.No. Company Name AMP/ Sales% 1 Adtech Systems Ltd. 3.97 2 Compuage Infocom Ltd. 0 3 Computer Point Ltd. 0.04 4 Dynacons Systems & Solutions Ltd. 0.1 5 Priya Ltd. 0.47 6 Sparc Systems Ltd. 0 7 Uniport Computer Ltd. NA MEAN 0.7633

Value of Gross Sales Rs.1,062,800,588 AMP / Sales of the comparables 0.7633% Amount that represent bright line 7,854,965 Expenditure on AMP by 76,156,646 assessee Expenditure in excess of bright 68,301,680 line No relief has been granted by the ld. DRP to the AE.

Pvt. Ltd. vs. CIT – (2015) 374 ITR 118 (Del.) in which AMP expenses have been held to be international transaction and the matter of determination of ALP has been restored to the TPO.

In these circumstances, we are of the considered view that it would be in the interest of justice if the impugned order is set aside and the matter is restored to the file of TPO/AO for fresh determination of the question to determine, “as to whether AMP expenditure is international transaction”, in the light of the judgments rendered the existence of such an international transaction is not proved, there shall not be any transfer pricing addition. However, in case the international transaction is proved to be existed, then the TPO will determine such international transaction in the light of the judgment rendered by Hon’ble jurisdictional High Court after providing an opportunity of being heard to the assessee.

“as to whether AO/DRP have erred in disallowing an amount of Rs.45,61,318/- being write off of demonstration equipment inventory by holding that such inventory should have been valued at cost disregarding the fact that Net Realizable Value (NRV) or demonstration inventory is lower than the cost.”

“10.4 The Panel has examined the issue. It is seen that the taxpayer has valued the demo equipment at a benchmark fixed by it, depending upon the no. of years of use. Para 3 of the AS-2 issued by the Institute of Chartered Accountant of India (ICAI) defines net realizable value as under: net realizable value = 'estimated selling price' in the ordinary course of the business (-) estimated cost of completion (-) the estimated cost necessary to make the sale. Thus, the net realizable value is the estimated value of good which it can fetch on its sale. It is further noted by the Panel that the Ahmedabad ITAT in its decision dated 4.1.2008 in the case of D Subashchandra & Co. vis ACIT in has held that the onus is upon the assesses to prove that the NRV shown by him is the correct net realizable value. Thus, ./2014 ITA No.2523/Del./2014 it is to be seen if the taxpayer has duly discharged its onus or not? The Panel finds that the taxpayer has failed on this account for the following reasons:

(i) The AO in its draft order has clearly established that the NRV adopted by the taxpayer is drastically lower than the sale price of the equipment. It is also much lower the cost price of the equipment For better understanding, the said portion of the draft order is reproduced hereunder;

"In the taxpayer's case, the selling price of any normal equipment (other than demo equipment), is priced above 90% above the cost price on an average as is evident from the following workings;

Total Sales made during the relevant previous year : Rs.99.22 Crores Cost of goods as declared in P&L A/c : Rs.52.21 Crores Difference : Rs.47.01 Crores

Percentage of difference of the cost price (47.01/52.21) x 100: 90%

Going with statement of the taxpayer, it can be seen that there will be a difference of 110% in the sale price of the equipment other than demo equipment and estimated NRV of the demo equipment after one year as is illustrated below:

Suppose, the cost of normal equipment : Rs. 100 Selling price of normal equipment : Rs. 190 (90% above the cost price)

The estimated NRV of demo equipment (80% of cost): Rs.80/-

Difference in normal selling price and the NRV of demo equipment :Rs. 110/-

This means that the taxpayer company is claiming the NRV of the demo equipments at below the half the selling price (42% to be precise) of the normal equipment. The above position is illustrated for the demo equipment after the one year only. The gap is even wider for the second year and for each increasing year. Such a heavy discount is It appears that the provision of demo equipments is based on pure estimation and hence the same cannot be treated as real expense .

(ii) Before the AO, the taxpayer company could not produce any documentary evidence like sale bill etc to show that any of the demo equipments were sold at 42% (or lower for the older equipment) of its normal sale price.

(iii) The demo equipments are not generally used for more than one year for display. These are mostly sold within that period. To keep pace with the competition, the models are changed frequently and the old inventories are sold to give space to the new range of equipments. The AO has noted clearly that the details of the demo equipment filed by the taxpayer reveals that the major portion of the demo equipments was less than one year old.

(iv) The taxpayer was requested by the Panel to submit the particulars of the scrap sale for the last 5 years. However, the taxpayer did not submit the relevant particulars for the reasons best known to it.

The Panel would like to refer to the decision of Supreme Court in the case of CIT vs. British Paints India Limited 188 ITR 44 (SC), which lays down important principles for the valuation of closing stock of goods. The ratio of this decision has been that each year being self contained unit and the tax liability arising with reference to the income of a specific assessment year the argument that the closing stock of one year is only opening stock of the next year, is not valid.

The Panel therefore, holds that the taxpayer has failed to discharge the onus cast upon it to disprove that the NRV actually remains sufficiently above the cost price, of the equipment and licence and hence as per the accounting policy of the company and the AS-2 of ICAI prescribed for the valuation of the closing stock, the taxpayer should have adopted the cost value of for valuation of closing stock of the demo equipments. The addition proposed to be made by the AO is therefore, upheld.” taxpayer has failed to discharge the onus cast upon it to disprove that NRV actually remains sufficiently above the cost price of the equipment and hence as per the accounting policy of the company and the AS-2 of ICAI prescribing valuation of the closing stock, the taxpayer should have adopted cost value of the valuation of the closing stock of the demo equipment. DRP also held that it appears that the provision of demo equipment is based upon pure assumption, hence the same cannot be treated as real expenses and before the AO, taxpayer could not produce any documentary evidence like sale bill to prove that any of the demo equipments was sold at 42% of its normal sale price. The assessee company has also not submitted the particulars of scrap sale for last five years before DRP.