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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’, NEW DELHI
Toshiba India Pvt. Ltd. Vs DCIT E-20, 1st & 2nd Floor, Circle-25(1), Hauz Khas C.R.Building New Delhi New Delhi (APPELLANT) (RESPONDENT) PAN No. AABCT4829N Appellant by : Sh. Himanshu S. Shekhar, Adv. Respondent by : Sh. Amrendra Kumar, CIT(DR) Date of Hearing :10.03.2016 Date of pronouncement: 08 .04.2015 ORDER PER N.K. SAINI, A.M.
The appeal of the assessee is directed against the order dated 28.01.2016 passed by the AO u/s 143(3) read with section 144(c) (4) of the Income Tax Act, 1961 (hereinafter referred to as the Act) and the stay application has been filed to grant the stay of outstanding demand of Rs. 11,18,04,310/-. In the appeal, the assessee has raised following grounds : “
General Grounds 1. That the Ld. Assessing Officer (AO) / Hon’ble Dispute Resolution Panel (DRP) erred in computing the total income of the Appellant at Rs. 343,103,020/- as against the returned income of Rs. 129,003,431/-.
2. That the DRP/Ld. Transfer Pricing Officer (TPO) erred in making an adjustment of Rs. 217,399,859/- under section 92CA(3) of the Income Tax S.A. No.121/Del/2016 2 (In Act, 1961 (“the Act”) in respect of the “advertising and marketing expenses”(AMP expenses) incurred by the Appellant for its own business purposes. Transfer pricing grounds 3. That the Ld. TPO/AO/DRP erred in segregating “AMP transaction” after having accepted the arm’s length price of all other transactions under TNMM and having accepted that the profit margin of the Appellant was within the +/- percent range of comparable companies.
4. That on the facts and circumstances of present case and in law, Ld. TPO/AO/DRP have erred in holding that AMP expenditure incurred by the Appellant, is an ‘international transaction’u/s 92B justifying separate benchmarking under chapter X of the Act.
5. That the Ld. TPO/AO/DRP erred in determining the value of international transaction pertaining to AMP expenditure by applying the bright light test using AMP to Gross Profit as the bright line benchmark.
6. That the Ld. TPO/AO/DRP erred in not allowing a set off of surplus revenue/ profit exceeding the ALP margin earned from the distribution business against the total AMP expenditure to determine the value of international transaction relating to AMP expenditure.
7. That the Ld. TPO/AO/DRP erred in taking certain routine AMP expenses as brand promotion expenses for creation of intangibles.
8. That the Ld. TPO/AO/DRP erred in benchmarking the AMP function by using comparable selected by the Ld. TPO for application of bright line and also applying a further mark-up of Gross Profit to COGS without any basis whatsoever.
9. That the Ld. TPO/ AO/ DRP grossly erred in adopting methodology (stated as CPM) for determining arm’s length price of AMP that is contrary to the Rules and economic logic and without any basis whatsoever. Corporate tax ground 10. The Ld. AO has erred on facts and in law in not following the directions of DRP to correct the amount of claim of warranty expense made by the appellant with respect to the warranty provision while computing the taxable profits during the financial year. Common ground 11. Ld. AO has erred, in charging interest under sections 234B and 234C of the Act.
12. That on facts and in laws, the Ld. AO erred in holding that the Appellant has furnished inaccurate particulars of income in respect of each item of disallowance/ additions and in initiating penalty proceedings under section 274 read with section 271(1)(c) of the Act.”
2. Ground no. 1 and 2 are general in nature and ground no. 12 is raised prematurely so these grounds do not require any comments on our part.
3. Ground nos. 3 to 9 relate to the addition on account of AMP adjustment. Facts related to this issue in brief are that the assessee e-filed the return of income declaring total income at Rs. 12,90,03,431/-. The case was selected for scrutiny. The assessee was engaged in the business of trading of consumers durables etc. and also providing representative and marketing Sports Services to Toshiba Groups Company Worldwide. Since the assessee had entered into international transactions with associated enterprises (AE), the AO referred the case to the Transfer Pricing Officer (TPO) to determine the arm’s length price of the international transaction. The TPO vide order dated 30.01.2015 u/s 92CA(3) of the Act recommended an enhancement of the assessee’s return income by amount of Rs. 71,23,76,838/- being the difference between the arm’s length price of reimbursement of AMP expenses and the reimbursement of AMP receipt by the assessee from its AE’s as under :-
Value of gross sales 4,08,82,37,238/- AMP/sales of the comparables 2.75% Amount that represent bright line 11,24,26,524/- Expenditure on AMP by assessee 79,59,43,275/- Makeup @12.50% 8,54,39,594/- Reimbursement that assessee should have 76,89,56,345/- received Less:- Re-imbursement received 5,65,79,507/- Adjustment 71,23,76,838/-
The A.O. made the addition of Rs. 71,23,76,838/- on T.P.Adjustment in draft assessment order. During the course of assessment proceedings, the AO also S.A. No.121/Del/2016 4 (In Rs. 82,399/- on account of SAD written off. When confronted to explain the claim, the assessee submitted that the similar disallowance was made in the assessment year 2010-11 which was confirmed by the DRP. The AO therefore, made the similar disallowance for this year also. The AO proposed the draft assessment order and recomputed the income at Rs. 105,03,22,510/- as under :- Total Income as per return filed 33,78,63,271/- Add:- Transfer Pricing Adjustment 71,23,76,838/- Disallowance of SAD written off 82,399/- Total Income 1,05,03,22,508/- Total Income (rounded off u/s 288A) 1,05,03,22,510/-
The assessee filed objection dated 17.02.2015 to the draft assessment order before the DRP-II, New Delhi who vide order dated 15.12.2015 directed the TPO to exclude certain comparables from the final list of comparables. The AO gave the effect to the directions of the DRP and worked out the AMP adjustment at Rs. 21,73,99,859/- as against Rs. 71,23,76,838/- proposed in the order passed u/s 92CA(3) of the Act. Now the assessee is in appeal.
During the course of hearing the ld. Counsel for the assessee at the very outset submitted that the issue under consideration deserves to be set aside to the TPO/AO as the issue now has been settled by the Hon’ble Jurisdictional High Court in the case of Sony Ericsson Mobile Communications Pvt. Ltd. vs. CIT reported at 374 ITR 118 and in the case of Maruti Suzuki India Ltd. vs. CIT in and 710/2015 order dated 11 December, 2015. It was further submitted that the aforesaid orders were not available to the T.P.O. / D.R.P. at the time of passing of their respective orders. It was also submitted the TPO/AO/DRP
S.A. No.121/Del/2016 5 (In ) have not brought any evidence on record to demonstrate the existence of any mutual agreement or arrangement between the assessee and the A.E. It was stated that the DRP declined to apply the decisions of M/s Maruti Suzuki India Ltd. vs. C.I.T. (Supra) on the ground that it was given in the context of a manufacturer and not a distributor, however, subsequent to the said decision the Hon’ble Jurisdictional H.C. in the case of Whirlpool of India vs. DCOT in I.T.A. 228/2015 & C.M.No. 5751/2015 order dated 22.12.2015 and in the case of Bausch & Lomb Eyecare (India) Pvt. Ltd. vs. A.C.I.T. in & 675/14 order dated 23.12.2015 examined this aspect and applied the same principle to distribution business as well. It was further submitted that DRP and the TPO failed to give any cogent reason for de-bundling the AMP function of the assessee as a separate transaction which is in violation of the principles laid down in the case of Sony Ericsson Mobile Communications India Pvt. Ltd reported at (2015) 55 Taxman.com.240(Del.) (Supra).
In his rival submissions, the ld. DR although supported the order of the AO could not controvert the aforesaid contention of the Ld. Counsel for the assessee.
We have considered the submissions of both the parties and perused the material available on the record. In the present case it is an admitted fact that the T.P.O. proposed the adjustment by applying the “Bright Line Test”, on account of excessive AMP incurred by the assessee on behalf of the A.E. But subsequently the D.R.P. held that the application of “Bright Line Test” has been over ruled in the case of M/s. Sony Ericsson Mobile Communication India Pvt. Ltd. (Supra). However, the D.R.P. declined to apply the decision of Maruti Suzuki India Ltd. (Supra) on the ground that it was rendered in the context of a manufacturer and not a distributor. Recently, the Hon’ble Delhi High Court, subsequent to the said
S.A. No.121/Del/2016 6 (In Maruti Suzuki India Ltd. (Supra), examined this aspect and applied the same principle to the distribution business also in the cases of Bausch & Lomb Eyecare (India) Pvt. Ltd. vs. A.C.I.T. (Supra) and C.I.T. & Ors vs. Whirlpool of India Ltd. (supra) vide order dated 23.12.2015 and 22.12.2015 respectively. These decisions of the Hon’ble Jurisidctional Court which are applicable to the facts of the present case were not considered by the T.P.O. and the D.R.P. since these were not available to them. We, therefore, by considering the totality of the facts and the ratio laid down by the Hon’ble Delhi High Court in the aforesaid judicial pronouncements, deem it appreciate to set aside the issue relating to the adjustment on account of AMP to the file of the TPO/AO to be decided afresh in accordance with the law after providing due and reasonable opportunity of being heard to the assessee.
The next issue vide ground no. 10 relates to the claim of warranty expenses. The only grievance of the assessee relating to this issue is that the AO has not followed the directions given by the DRP while deciding this issue. It is noticed that the objection of the assessee before the DRP was that the AO had not corrected the claim of warranty expenses made by the assessee with respect to the warranty provisions while computing the taxable process. The DRP directed the AO to verify and correct, if any errors were detected. It appears that the AO did not follow the said directions given by the D.R.P. relating to warranty claim, therefore, this issue is set aside to the file of the AO to be decided afresh as directed by the DRP.
As regards to ground no. 11 it was the common contention of both the parties that it is consequential in nature, we, order accordingly.
Since the appeal of the assessee has been decided, therefore the stay application no. 121/Del/2016 for the assessment year 2011-12 becomes infructuous. Accoridngly, the same is dismissed.