Smt. Diva Singh, Judicial Member - This is an appeal filed by the assessee against the assessment order dated 24/10/2011 passed u/s 143(3) read with Section 144C of the Income-tax Act pursuant to the directions of the DRP dated 16th September 2011 u/s 144C(5) of the Income-tax Act on the following grounds:—
| "1. |
That the appellant denies its liability to be assessed at gross total income of Rs.8,15,51,320/- and accordingly denies its liability to pay tax, interest, cess and surcharge demanded thereon. |
2(a) |
That having regard to the facts and circumstances of the case, Ld. Asstt. CIT, Circle-12(l) has erred in law and on facts in making addition of Rs.2,32,05,277/- on the notional markup on the reimbursement on the basis of order of Ld. TPO as affirmed by Ld. DRP and the order impugned are contrary to law and facts on various legal and factual grounds. |
2(b) |
That having regard to the facts and circumstances of the case, Ld. Asstt. CIT, Circle-12(l) has erred in law and on facts in making addition on the basis of order of TPO u/s 92CA(3) as affirmed by Ld. DRP on account of alleged difference in arms length price aggregating to Rs. 2,32,05,277/-. |
2(c) |
That in any case and in any view of the matter, action of Ld. Asstt. CIT in making the aggregate addition of Rs. 2,32,05,277/- is contrary to law and facts and the same has been made in violation of principles of natural justice and without giving adequate opportunity of hearing. |
3. |
That having regard to the facts and circumstances of the case, Ld. Asstt. CIT, Circle-12(1) has erred in law and on facts in making addition of Rs.21,777/- u/s 14A of the Income Tax Act, 1961. |
4. |
That having regard to the facts and circumstances of the case, Ld. Asstt. CIT, Circle-12(1) has erred in law and on facts in not allowing the depreciation @ 60% on the amount of compute peripherals and has further erred in restricting it to 15% and accordingly made the disallowance of Rs.45,224/- under this head. |
5. |
That the transfer pricing order dated 30/7/2010 passed u/s 92CA(3) by the Addl. CIT, TPO-1(2), New Delhi is bad in law, contrary to facts, illegal and is not sustainable on various legal and factual grounds. |
6. |
That the draft order dated 21/12/2010 passed by DCIT (OSD), CIT-IV, New Delhi is also illegal and is not sustainable on various legal and factual grounds. |
7. |
That the order passed by Hon'ble Dispute Resolution System u/s 144C(5) dated 16/9/2011 is also illegal and the same is not sustainable on various legal and factual grounds and the directions issued therein are also contrary to law and facts. |
8. |
That the order passed u/s 144C/143(3) dated 24/10/2011 by Asstt. CIT, Circle-12(l), New Delhi is illegal, contrary to law and facts, barred by limitation and the same is not sustainable on various legal and factual grounds and the additions made therein are also bad in law and against the facts and circumstances of the case. |
9. |
That having regard to the facts and circumstances of the case, Ld. Asstt. CIT, Circle-12(1) has erred in law and on facts in charging interest u/s 234B and 234D of the Income Tax Act, 1961. |
10. |
That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other." |
2. At the outset, the Ld. AR inviting attention to the grounds raised stated that he would not be pressing Ground No. 3 and apart from the transfer pricing issues addressed in Ground Nos. 1, 2, 5, 6, 7 & 8 the only corporate issue requiring adjudication is Ground No. 4. Ground No. 9 it was admitted is consequential and Ground No. 10 requires no adjudication. Addressing the transfer pricing issues attention was invited to the Statement of the facts filed before the DRP on which heavily reliance was being placed by the assessee assailing the action of upholding the addition made by applying the mark of 16.56%. It was his stand that unlike the case of L. G. Electronics India (P.) Ltd. v. Asstt. CIT [2013] 29 taxmann.com 300 (Delhi) (SB) decided by the Special Bench in the facts of the present case, the assessee has been reimbursed for Advertisement & Promotion expenses for Brand Promotion expenses and also for after sales services. In the circumstances it was his submission that a mark was not warranted. It was stated that as a result of the efforts in the highly competitive market the assessee in its very first year has a turn over of approximately three hundred crores. It was stated that this could be achieved only by the direct efforts of the assessee and by having an excellent after sale services so as to win customer confidence and the need and necessity of such an exercise cannot be over emphasized. It was his submission that the comparables of the assessee have been wrongly rejected and the objections of the assessee to the TPO's comparables have not been considered by the DRP. It was argued that 2% net profit earned by the assessee company is sufficient to address the issue of profit which is much more then the arithmetic mean of -10.97% shown by comparables. It was his submission that the arguments on facts has been ignored by the DRP. It was further submitted that referring to the Statement of facts filed before the DRP specific Para 3 that entire working capital needs of the assessee were taken care of by the AE and there was no borrowing cost in terms of interest etc. and the entire reimbursements on advertisement, brand promotion, after sale service was received well in advance by the assessee from its AE and further the entire purchase was made from AE on credit bases which also facilitated the working capital needs. These submissions it was stated have not been controverted by the Revenue made in letter dated 15/4/2010.
2.1 Attention in this background was invited to the order of the ITAT in Haier Appliances India (P.) Ltd. v. Dy. CIT [2013] 35 taxmann.com 203 (Delhi). Tribunal with the request that since the facts on record have not been considered by the TPO and the objections have not been dealt with by the DRP the issue may be restored to the TPO. The Ld. AR was required to address whether in the facts of the said case also the amounts have been reimbursed by the AE and whether facts and circumstances of the case were identical. In response to the said query it was submitted that his limited prayer was that the issue may be restored and he was not aware of the facts of that case.
3. The Ld. CIT DR on the other hand inviting attention to page 18 & 19 of the TPO's order contended that the assessee has not benchmarked the transactions as would be evident from para 6. The same is reproduced for ready reference:—
"6. The transfer pricing approach, in this order may be summarized as below:
| (i) |
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In respect of the following transactions no benchmarking was done by the assessee. |
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S.No. |
Description |
Amount (INR) |
|
1. |
Reimbursement of expenses. Advertisement and Promotion |
71,374,339 |
|
2. |
Reimbursement of expenses Brand promotion |
42,231,239 |
|
3. |
Reimbursement of expenses After sales service |
26,522,910 |
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|
Total |
140,128,488 |
(ii) |
the JV agreement was perused and it was noticed that in connection with the activities referred to above, the level of effort of the assessee was high enough to merit a mark up on cost and a mere reimbursement would not be in keeping with the arms length principle. |
(iii) |
Accordingly, a show-cause notice was issued to the assessee. The same is reproduced of this order. The assessee's reply has been discussed at Para 4 onwards. Based on the discussion an adjustment of Rs.23,205,277 has been made to the returned income of the assessee. |
(iv) |
The assessee was allowed reasonable opportunity of being heard which include personal hearing on various dates mentioned in Col. 7 of Page 1 of this order. " |
3.1 Addressing the functions performed by the assessee it was his submission that the assessee is performing vital function and promoting the brand names trade mark of AE which is owned by the AE. Inviting attention to the MOU entered into between the assessee and its associated enterprise which has been reproduced in the TPO's order it was his submission that it was mutually agreed that the associate enterprise shall bear only part of the following expenses:—
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"Advertising and sales promotion which includes operator business, open market business and brand promotion. |
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After sales service |
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Testing and Certification costs including fees relevant labour/employee costs, vehicle maintenance, travel cost, special testing cost, communication costs, computer maintenance costs, etc. |
? |
Other expenses such as salary costs, establishment expenses, travelling costs of employees engaged in providing after sales service, testing services. " |
3.2 Addressing the obligations of the assessee it was submitted that the assessee was required to use its best efforts to make the sales and expand the business. It was his submission that the assessee was responsible for the sale of the product within the territory through the use of an active and effective sales organization as is evident from a reading of the relevant clauses of the Agreement reproduced in the TPO's order. Specific attention was invited to Clause f, (i) & J so as to emphasize that significant services promoting resulting in brand building for the benefit of the A.E has been done by the assessee at its cost. For ready reference we reproduce from the TPO's order:—
"Obligations of the Company. The Company shall be responsible for the following.
| (a) |
The Company shall use its best efforts to sell and expand the sale of Products within the Territory through the use of an active and effective sales organization and Service network. |
(b) |
The Company shall be kept informed about purchase sale and inventory of each customer and make order forecast accordingly and maintain an inventory of the Products sufficient to meet the demand of customers throughout the Territory in a timely manner. |
(c) |
The Company shall obtain and maintain all necessary government approval, licenses, permits registration certificates and other forms of approval which are necessary or advisable for the sale of the Products and the implementation of this Agreement within the Territory. |
(d) |
The Company shall properly inform the Parties of any facts or opinions likely to be relevant in relation to the manufacture, sale, use for development of the products within the Territory including (but not limited to) those concerning safety and labelling requirements and the activities of the Company's competitors. |
(e) |
The Company shall not, directly or through any third person or entity establish a sales office a warehouse or a distribution center outside the Territory or solicit orders for the Products from customers outside the Territory. Unless otherwise agreed by party A in writing any such order obtained by the Company shall be forwarded promptly to party A. |
(f) |
The Company is responsible for Uniform planning and promotion of Haier Brand in the Territory and formulating and implementing advertising and promotion plan and pay all advertising and promotional expenses incurred in marketing the Products pursuant to this Agreement. The Company shall provide the parties with a courtesy copy of all advertising for its records. |
(g) |
The Company is not authorized to make, and shall not make any representations or warranties with respect to the Products expect those representations and warranties authorized in writing by party A. Party A shall not be liable for and the Company shall hold Party A harmless from, all claims, demands, administrative or governmental penalties or fines, actions cause of action, fees, costs attorneys fees and expenses arising from any all promotional sales or marketing activities, representations warranties and statements (written or verbal) made by the Company or any of its agents employees representatives and or assigns in relation to the Products this Agreements or the Parties. |
(h) |
The Company shall at all times conduct itself in an appropriate manner so as not to injure the business goodwill reputation or good standing of the parties. |
(i) |
The Company shall formulate and implement Haier's development strategy for the Territory; the Company shall furnish operation and development plan for next year in October of each year. The goal of the operation and development plan shall not be lower than the market target as defined in detail in Appendix I hereto. |
(j) |
The Company shall provide the Parties with a quarterly report and business plan which outlines (1) the sales of the Products during the preceding quarter. (2) the promotional activities of the Company during the preceding quarter including the names and addresses of actual and potential customers: (3) the business environment in the Territory including a discussion of the activities of the Company's compactors, the laws and governmental policies affecting the sale of the Products, and the economic conditions in the Territory affecting the sale of the Products; and (4) anticipated sales for the current quarter. This report shall be provided to the Parties by the end of each quarterly month of the calendar year (i.e March, June, September and December). |
(k) |
The Company shall investigate new business opportunities and maximize market development for the products within the territory. |
(l) |
The Company shall investigate, select and monitor distributors, agents and representatives of the products within the Territory. |
(m) |
The Company shall collect and analyze market data to further increase demands of Haier products within the Territory; and |
(n) |
The Company shall promote advertise and market the products in a highly professional manner and endeavour to achieve maximum market share." |
3.3 Regarding the prayer of the assessee that the objections have not been dealt with by the DRP reliance was placed on the same. However, the request that after sales services being crucial for the business needs of the assessee and they should be excluded from the AMP expense for the purposes of mark up was vehemently opposed by the department. Considering the prayer that the issue may be restored to the TPO it was fairly stated that the law on the aspect has developed and evolved as such he would have no objection if the issue is restored to the TPO to correctly apply the law on facts.
4. We have heard the rival submission and perused the material available on record. Considering the same it is worth mentioning that the parties in the course of the hearing were required to address as to how benchmarking had been done by the assessee on which aspect Ld. CIT Departmental Representative made his point as noted in the earlier part of this order. Ld. AR to elaborate had invited attention to Form 3CEB. It is also seen from a perusal of the same that in Column No.-13 the following information has been given by the assessee.
13. |
Particulars in respect of any other transaction; |
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Has the assessee entered into any other international transaction not specifically referred to above, with associated enterprise? |
Yes, the Assessee Company has received financial support from its associated enterprises. Besides, the Assessee Company has also received commissions from associated enterprises. |
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If 'yes' provide the following details in respect of each associated enterprise and each transaction: |
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|
(a) |
Name and address of the associated enterprise with whom the international transaction has been entered into. |
Please refer Annexure "C" |
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(b) |
Description of the transaction |
Financial support in respect of Advertisement expenses-US$ 1,583,078 equivalent to Rs.71374339 Financial support in respect of Brand Promotion expenses-US$ 954,604 equivalent to Rs.42,231,239
Financial support in respect of After sales services-US$ 588541 equivalent to Rs.26522910.00
Other reimbursements US$ 80,924 equivalent to Rs.3,547,317/-
The assessee Company has received commission amounting to US$ 337.417 equivalent to Rs. 1,60,18,512/-. |
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|
(c) |
Amount paid/received or payable/receivable in the transaction- |
As per Annexure-C |
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|
(i) |
As per books of account |
Financial support in respect of Advertisement expenses-US$ 1,583,078 equivalent to Rs. 71374339
Financial support in respect of Brand Promotion expenses-US $ 954,604 equivalent to Rs.26,522,910/-. Other reimbursement US$ 80,924 equivalent to Rs.3,547,317/-
The Assessee Company has received commission amounting to US$ 337,417 equivalent to Rs. 1,60,18,512/-. |
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As computed by the assessee having regard to the arm's length price. |
Financial support in respect of Advertisement expenses-US$ 1,583,078 equivalent to Rs.71,374,339/-
Financial support in respect of Brand Promotion expenses-US$ 954,604 equivalent to Rs.42,231,239/-
Financial support in respect of After sales services-US$ 588541 equivalent to Rs.26,522,910/-
Other reimbursements US$ 80,924 equivalent to Rs.3,547,317/-
The Assessee Company has received commission amounting to US$ 337,417 equivalent to Rs. 1,60,18,512/-. |
(d) |
Method used for determining the arm's length price [see Section 92C(1)] |
Reimbursement of expenses and financial support received from associated enterprises.
In respect of commission-Comparable Uncontrolled Price method. |
4.1 Accordingly it is seen that the assessee discloses that financial support has been received from its associated enterprise. Apart from that the assessee has also received commission income from A.E of specific amounts for brand promotion expenses, after sales services plus some other imbursements have been given. Specific amounts for financial support in respect of Advertisement Expenses, brand promotion expenses, after sales services and other reimbursements are also mentioned. Thus is seen that there is no dispute on the fact that the financial support has been received in respect of advertisement expenses; brand promotion expenses and after sales service etc. It is also seen that unlike the decision in L. G. Electronics India (P.) Ltd. case (supra) where the expenditure was claimed as an expenditure of the assessee and disclosed as a domestic transaction and the Revenue's stand was upheld by the Special Bench holding that non-routine AMP expense applying the brightline test is to be imbursed for brand building by advertising the brand owned by the A. E which was held as an international transaction. In the facts of the present case, it is seen that the assessee itself has shown it to be an international transaction however, in the TP Study the assessee has not benchmarked the same to show that it is at Arm's Length Price. It is seen that in the course of the arguments the assessee has contended that these are reimbursement of expenses and similarly the TPO has also considered the same to be re-imbursement of expenses holding that mere reimbursement of expenses on cost to cost basis shall not be sufficient and a mark up is to be applied. This principle is upheld by us as no unrelated party would provide such a service without expecting a remuneration for its effort deployed in terms of time and energy. In the facts of the present case even if financial support by way of providing working capital etc. are provided and credit facilities are made available, it has to be demonstrated by the assessee that the same were adequate keeping in mind the services rendered and the expenses incurred. The fact that they were at arm's length has not been demonstrated by the assessee and for considering the issue of mark up this exercise has to be done. Accordingly it is seen that the whole exercise has to be done again as the comparables have to be selected based on functional similarity. Similarly the basis of working of the amounts stated to be financial support provided for each of the activities as whether it includes merely reimbursement orders or does it include profit for services rendered also. As the arguments and orders are based on the reasoning that these are re-imbursements despite the specific narration given by the assessee that it is "financial support," accordingly we deem it appropriate to restore the issue in the interest of justice back to the TPO's setting aside the orders. The assessee shall make available to the TPO the complete break-up of the calculations of the financial support received vis-a-vis the bills raised. It is seen that not only the TPO but even the assessee has proceeded on the footing that these are reimbursement which appears to be factually incorrect as per Column 13 of Form 3CEB report filed by the assessee. In the circumstances we deem it a proper to restore the issue back to the file of the TPO with the direction to decide the same in accordance with law by way of a speaking order after giving the assessee a reasonable opportunity of being heard. The assessee shall place relevant facts and evidences before the TPO benchmarking the international transactions and it is only after characterizing the assessee that the comparables can be selected on the basis of functional similarly. For deciding the applicability of mark up the necessary facts need to be available thus upholding in principle the applicability of mark up as cost to cost re-imbursement of expenses is not enough as no unrelated party would provide services without expecting a remuneration, however on facts the issue is restored to the TPO. It may also necessarily be kept in mind that this is the first year of business for the assessee in the competitive market and as per para 17.4 of L.G. Electronics (India) (P.) Ltd. case (supra) decision this fact needs to be kept in mind while deciding the issue. Accordingly, the issue is restored to the file of the TPO/A.O.
5. Considering the only Corporate issue which survives adjudication is the rate of depreciation allowable to computer peripherals the AO is directed to examine the claim and allow in terms of the judgment of the Jurisdiction High Court in the case of BSES Rajdhani. In the result the appeal of the assessee is allowed for statistical purposes. |