Samsung India Electronics Pvt. Vs Addl. CIT (ITAT Delhi)
OTS E-Solutions Pvt. Ltd.: From the perusal of the records it can be seen that OTS E-Solutions Pvt. Ltd. was held as not comparable in subsequent assessment year i.e. A.Y. 2014-15 by the Tribunal. The functional dissimilarity is apparent on record and there are no changes in the present assessment year. Hence, we direct the TPO to exclude this comparable from the final list of comparables.
Celkon Impex Pvt. Ltd.: This company is in designing and manufacturing of mobile phones while the assessee company is in trading of consumer electronics, home appliances, computers and IT peripherals which is different portfolio all together. From the perusal of the records it can be seen that Celkon Impex Pvt. Ltd. was held as not comparable in subsequent assessment year i.e. A.Y. 201415 by the DRP. The functional dissimilarity is apparent on record and there are no change in the present assessment year. Hence, we direct the TPO to exclude this comparable from the final list of comparables.
Micromax Informatics Limited: It is pertinent to note that this company is also functionally dissimilar to the assessee company. The company undertakes all business activities and undertakes all associated business risks. The company outsources manufacturing activities to third party contractors and sells the products under its own brand name as an entrepreneur. The DRP in subsequent year i.e. 2014-15 has excluded Micromax Informatics Limited from the comparable list. The functional dissimilarity is apparent on record and there are no change in the present assessment year. Hence, we direct the TPO to exclude this comparable from the final list of comparables.
United Telelinks (Bangalore) Pvt. Ltd.: It is pertinent to note that this company is also functionally dissimilar to the assessee company. It has brand owning and outsources manufacturing activities to third party contractors. The DRP in subsequent year i.e. 2014-15 has excluded United Telelinks (Bangalore) Pvt. Ltd. from the comparable list. The functional dissimilarity is apparent on record and there are no change in the present assessment year. Hence, we direct the TPO to exclude this comparable from the final list of comparables.
As relates to inclusion of the three comparables, the discussion is as under:
Redington India Limited: We have heard both the parties and perused all the relevant material available on record. From the perusal of records it can be seen that this company is engaged in distribution of IT products such as computers, printers, software storage systems and also a leading supply chain solutions provider for global brands of IT hardware and software product which appears to be similar to that of assessee’s functions. Therefore, we direct the TPO to look into the portfolio of this company and applying the filters, this comparable i.e. Redington India Limited may be included in the final comparable list.
Tech Pacific (India) Limited (later name changed to ‘Ingram Micro’): We have heard both the parties and perused all the relevant material available on record. From the perusal of records it can be seen that this company is engaged it is trading in IT hardware and software products which appears to be similar to that of assessee’s functions. Therefore, we direct the TPO to look into the portfolio of this company and applying the filters, this comparable i.e. Tech Pacific (India) Limited (later name changed to ‘Ingram Micro’) may be included in the final comparable list.
HCL Infosystems Limited: We have heard both the parties and perused all the relevant material available on record. From the perusal of records, it can be seen that this company is engaged in distribution of telecommunication and digital lifestyle products such as cellular phones, computers, printers, scanners etc. and hence functionally similar to the assessee company. Besides this fact, this company is allowed as comparable in A.Y. 2005-06 to 2011-12 by the Tribunal and there are no different facts emerging as relates to function conducted by the present assessment year to that of previous assessment years. Therefore, we direct the TPO to look into the portfolio of this company and applying the filters, this comparable i.e. HCL Infosystems Limited may be included in the final comparable list.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal is filed by the assessee against the order dated 31/10/2018 passed under Section 254/143(3) read with Section 144 C of the Income Tax Act, 1961 passed by Addl. CIT(A), New Delhi, for Assessment Year 2013-14.
2. The grounds of appeal are as under:-
GROUNDS OF APPEAL
“1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the total income of the Appellant at Rs.27,96,96,74,360/- as against the returned income of Rs. 24,95,09,04,510/-.
2. That on the facts and circumstances of the case and in law, the Ld. Dispute Resolution Panel (‘DRP’)/A.O/ Transfer Pricing Officer (“TPO”) erred in making a transfer pricing adjustment of Rs.3,01,87,69,854/– on account of (i) advertising, marketing, promotion (“AMP”-1T) expenses of – 46,38,28,605/- and (ii) international transactions pertaining to trading segment of Rs. 2,55,49,41,249/-– alleging the same to be not at arm’s length in terms of the provisions of section 92C of the Act read with Rule 10B of the Income Tax Rules, 1962 (“the Rules”).
GROUNDS AGAINST ADJUSTMENT MADE IN RELATION TO AMP EXPENSES
3. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in holding that the AMP expenditure incurred by the Appellant in India is an ‘international transaction’ as per the provisions of the Act.
4. That on the facts and circumstances of the case and in law, the DRP/ AO/ TPO have erred in adopting intensity based approach which is not a prescribed comparability condition under the Income-tax Rules, 1962.
5. That on the facts abd circumstances of the case and in law, the Ld. DRP/AO/TPO, while making adjustment of Rs. 46,38,28,605/- on account of AMP expenditure, erred in:
a. not demonstrating the existence of an ‘understanding’ or !an ‘arrangement or ‘action in concert’ between the Appellant and its Associated Enterprises (AEs) w.r.t. the AMP spend; and
b. not appreciating that the AMP expenses incurred by the Appellant are wholly and exclusively focused on generating domestic sales for its own business operations (and aligned with the risk profile of the Appellant) and the benefit arising from the incurrence of the AMP expenses by the Appellant has been received by the Appellant and the benefit, if any, resulting to its AEs is merely incidental.
6. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in bolding that the AMP expenses incurred by Appellant has led to the creation of marketing intangibles and resulted in promotion of ‘Samsung Brand’ for which the Appellant should be compensated by the legal owner of the brand.
7. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in not appreciating that the Appellant has used Transactional Net Margin Method (“TNMM”) to benchmark its international transactions for the trading business (including alleged AMP activity, if any) and manufacturing business (including alleged AMP activity, if any), and thus, no separate aim’s length analysis was required in respect of the individual elements of cost as it is inconsistent with the tenets of applications of TNMM as per Rule 10B(l)(e) of the Rules.
8. Without prejudice to the above, the Ld. DRP/AO/TPO have erred in classifying product-wise profitability of the Appellant between Information Technology (“IT”) and Non-IT products ignoring the functional differentiation between manufacturing and trading business segments and compared the same with that of other companies which is in gross contravention of Rule 10B(2) of the Rules. In doing so, the Ld. DRP/AO/TPO erred in:
a. Rejecting 20 comparables in AMP-IT that are functionally comparable to the Appellant in terms of functions performed, assets employed and risk assumed without providing any cogent reasons.
b. Not adjudicating on the 20 comparables rejected by the TPO. The DRP has assigned TPO to record “rejection reasons” against these 20 comparable companies which is in contravention of section 144C(8) of the Act.
9. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in wrongly computing the margin of the Appellant and the chosen comparables and the resulting quantum of AMP expenditure of both the Appellant and the comparables.
10. That on the facts and circumstances of the case and in law, the Ld DRP/AO/TPO erred in making AMP adjustment under IT segment without appreciating the fact that the appellant is a captive service provider, hence AMP adjustment is not warranted.
11. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in applying mark-up on the alleged incurred excessive AMP expenditure by selecting companies providing market support functions in order to determine the mark-up to be imputed on AMP adjustment.
12. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred including sales related expenses (not being brand promotion) as part of AMP expenditure while computing the adjustment. Doing so, the DRP erred in not appreciating the fact that sales promotion expenses were allowed by DRP in AY 2011-12 and AY 2012-13.
PROTECTIVE ADJUSTMENT
13. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making protective adjustment of Rs. 13,503,642/- under AMP-IT and Rs 13,05,04,16,597/- under AMP-Non IT which is impermissible under law.
14. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred applying the ‘bright line’ test as a tool to identify and benchmark the alleged AMP transaction which has no statutory mandate under the Act as laid down by the Hon’ble Delhi HC in the case of Sony Ericson Mobile Communications India Pvt. Ltd. [2015] 374 ITR 118 (Delhi).
15. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in levying a further mark up on the alleged AMP expenses incurred over and above the so-called “bright-line’ limit, stating that it tantamount to services being provided by Appellant to its AEs.
GROUNDS PERTAINING TO ADJUSTMENT IN TRADING SEGMENT
16. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in determining the arm’s length price for international transactions pertaining to trading segment thereby making an upward adjustment of Rs 2,55,49,41,249/- to the taxable income of the Appellant.
17. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in rejecting 18 comparable companies selected by the Appellant in the economic analysis carried out in the TP documentation without providing any cogent reasons.
18. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in introducing 4 new comparable companies without providing any cogent reasons.
19. That on the facts and circumstances of the case and in law, the Ld. TPO/AO have erred in wrongly calculating the working capital adjusted margins of the comparable companies.
20. That on the facts and circumstances of the case and in law, the Ld. DRP/ TPO/AO erred in computing proportionate adjustment.
21. That on the facts and circumstances of the case and in law, the Ld. DRP/ TPO/AO have erred in not providing the benefit of arm’s length range of 3 percent as provided under proviso to section 92C of the Act for the purpose of computation of arm’s length price.
22. That on the facts and circumstances of the case and in law, the AO erred in levying consequential surest of Rs 72,37,98,550 under section 234B of the Act.
23. That on the facts and circumstances of the case and in law, the AO erred in initiating penalty proceedings under section 271(1)(c) of the Act for furnishing of inaccurate particulars and concealment of income.
3. The assessee company is engaged in the business of manufacturing and distributing various Samsung Products of Consumer Electronics & Home Appliances category. The assessee is also engaged in the business of computer software development on behalf of its AEs. The assessee filed e-return of income declaring an income of Rs. 2495,09,04,510/- on 30/11/2013. The TPO vide order dated 31/10/2017 proposed an adjustment of Rs. 770,97,36,203/- on substantive basis and Rs. 1279,94,22,725/- on protective basis. The Draft assessment order was passed on 27/11/2017 at an income of Rs. 3287,49,89,360/- against return income of Rs. 2495,09,4,510/-. The assessee filed objections before the DRP. The DRP passed direction on 30/08/2018 thereby deleting the disallowance of Rs. 21,43,48,648/- on account of Forex loss in relation to forward exchange contracts made in the draft assessment order. In view of the directions of the DRP, the TPO vide order dated 30/10/2018 recomputed the adjustment at Rs. 3,01,87,69,854/-instead of the proposed adjustment of Rs.7,70,97,36,203/- as per its earlier order dated 31/10/2017. Therefore, as per TPO order, the Assessing Officer added a sum of Rs. 3,01,87,69,854/- to the total income of the assessee on substantive basis and addition of Rs. 13,06,39,20,239/- (Non IT Segment 13,05,04,16,597/- plus IT Segment 13,50,36,42) is made on account of TP adjustment on protective basis. Thus, the Assessing Officer assessed the total income at Rs. 2796,96,74,360/- on substantive basis and addition of Rs.1306,39,20,239/- on protective basis.
4. Being aggrieved by the assessment order, the assessee has filed present appeal before us.
5. The Ld. AR submitted that Ground No. 1 & 2 are general in nature. Hence Ground No. 1 and 2 are not adjudicated upon at this juncture.
6. As regards Ground No. 3 to 15 relating to adjustment on account of AMP, the Ld. AR submitted that this issue is squarely covered in favour of the assessee in asessee’s own case from Assessment Years 2005-06 to 2012-13 and 2014-15. The Ld. AR further submitted that the TPO made adjustment on account of AMP to the IT Segment (Contract Software Segment) using the intensity based a project wherein the Selling, General and Administrative (SG&A)/sales ratio of each comparable was compared with that of the assessee. The shortfall as computed is added to the operating cost of the comparable, thereby arriving at the adjusted operating cost. At the next step, the revenues of the comparables are adjusted upwards by a mark-up based on the mean profit margin of marketing supporting companies. The quantum of operating cost is accordingly added on account of differences in intensity of Selling, General and Administrative (SG&A) spend with further corresponding upwards adjustment as mark-up to operating cost to arrive at an adjusted operating revenue. The ALP of international transaction is determined based on adjusted operating revenue and adjusted operating cost, to be compared with the assessee. The TPO also made protective adjustment based on the Bright Line Test (BLT) approached, firstly on Non-IT Segment comprising of Licensed Manufacturing Segment, Trading Segment and Network Segment as well as secondly, to IT Segment comprising of Contracts Software Development Segment. The DRP upheld the approach adopted by the TPO and directed a modification of comparables by further directing the TPO for the inclusion of three comparables forming part of the TP Report in the Non-IT Segment namely Priya Ltd., Optiemus Infracom Ltd. and Iris Computers Ltd. and the exclusion of four comparables in the Marketing Support Services Segment namely BVG India Ltd., Just Dial Ltd., HSCC (India) Ltd. and ICRA Management Consulting Services Ltd. used for adding the mark-up on the alleged excess Selling, General and Administrative (SG&A) expenditure incurred. The DRP upheld the TPO’s action of rejection of 20 comparables out of 25 comparables selected in the TP Report. The Ld. AR submitted that this issue of AMP is fully covered in favour of the assessee in the assessee’s own case for nine Assessment Years i.e. A.Y 2005-06 to A.Y. 2012-13 and A.Y. 2014-15 (Being ITA Nos. 3248 & 3410/Del/2012, 5856/Del/2010, 5315/Del/2011, 1567/Del/2014, 6741/Del/2014, 868/Del/2016 & 2511/Del/2018 order dated 04.10.2019) (ITA No. 6813/Del/2017 order dated 07.01.2020 for A.Y. 2012-13) (ITA No. 9481/Del/2019 order dated 31.08.2020 for A.Y. 2014-15). The Revenue’s approach is based on the existence of an international transaction covering the entire AMP expenditure of the assessee on the basis of a Marketing Development Fund (MDF) Agreement between the assessee and its parent company. This approach has remained same as in the prior years and subsequent year. The Ld. AR submitted that BLT approach used for protective assessment is untenable in law. The same is reiterated in Assessment Year 2005-06 to 2012-13 as well as 2014-15 in assessee’s own case.
7. The Ld. DR relied upon the orders of TPO and the DRP. The ld. AR further submitted that the Revenue is in appeal before the Hon’ble Supreme Court and in many cases SLP have been admitted on the issue of whether AMP is an International Transaction or not. The Ld. DR relied upon the following decisions:
(i) Addl. CIT vs. Bausch & Lomb Eyecare India (P.) Ltd. (C). [2017] 77 taxmann.com 54 (SC)
(ii) CIT vs. Haier Appliances India (P.) Ltd. [2016] 73 taxmann.com 300 (SC) (Arising out of Sony Ericsson Mobile Communications India (P.) Ltd. vs. ACIT [2015] 347 ITR 118 (Delhi). )
(iii)DCIT vs. Honda Siel Power Products Ltd. [2016] 71 taxmann.com 181 (SC)
(iv) Pri. CIT vs. Gillette India Ltd. [2019] 106 taxmann.com 113 (SC)
The Ld. DR further submitted that the DRP has discussed order of Tribunals in the cases of BMW India P Ltd. AY 10-11 (TS-88-ITAT-2017 (Del), and Toshiba India Pvt. Ltd. AY 2012-13 (TS-686-ITAT-Del-TP) wherein, under similar circumstances this transaction of AMP has been held to be an International Transaction. Further, as a settled law, each assessment year is different, therefore, the Ld. DR submitted that the order of the TPO and DRP be upheld.
8. We have heard both the parties and perused all the relevant material available on record. In the present assessment year, the Revenue while making addition has relied upon the Marketing Development Fund Agreement which was similar to the earlier years and subsequent years wherein the Tribunal had decided this issue in favour of the assessee. The relevant extracts of the Tribunal’s orders are as under:
