Liugong India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 1482/DEL/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7292 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 04-01-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 13-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: MANOJ PARDASANI
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Earning of tax free income; Additional evidence; Working capital adjustments; Fair market value; Corroborative evidences; Avoidance of tax; Valuation report
• Section: 92C; 143(3); 92D; 92B; 14A; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH I - 1 NEW DELHI BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER & SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 1482/DEL./2015 ASSTT. YEAR : 2010 - 11 LIUGONG INDIA PVT. LTD., VS. A.C.I.T., CIRCLE 15(2), 82, GROUND FLOOR, NEW DELHI. OKHLA INDL. ESTATE, PH - III, NEW DELHI [PAN: AABCL3456H] (APPELLANT) (RESPONDENT) APPELLANT BY : SH. MANOJ PARDASANI, CA RESPONDENT BY : SH. AMRENDRA KUMAR, CIT/DR DATE OF HEARING : 04.01.16 & 01.04.20 16 DATE OF PRONOUNCEMENT : 28 .0 6 .2016 ORDER PER L.P. SAHU, ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED AGAINST THE ORDER OF THE ASSESSING OFFICER DATED 28.02.2014 U/S. 143(3) R.W.S. 144C OF THE INCOME - TAX ACT (HEREINAFTER REFERRED TO AS THE ACT ) AND SUBSEQUENT DIRECTIONS DATED 21.11.2014 OF DRP U/S. 144C(5) OF THE ACT AND FINAL ASSESSMENT ORDER DATED 30.01.2015 PASSED IN PURSUANCE TO DIRECTIONS OF DRP FOR THE ASSESSMENT YEAR 2010 - 11. ITA NO. 1482/DEL./2015 2 2. THE ASSESSEE COMPANY, LIUGONG INDIA PVT. LTD. (LIPL) IS PRI MARILY ENGAGED IN DISTRIBUTION OF HEAVY EARTH MOVING MACHINES AND SPARE PARTS THEREOF MANUFACTURED BY GUANGXI LUIGONG MARCHINERY PARTS LTD. (GLMCL), CHINA. IT IS ALSO ENGAGED IN THE BUSINESS OF MANUFACTURING OF MACHINERY STARTED BY THE END OF 2009 ITSELF. IT ALSO PROVIDED WARRANTEE AND AFTER SALE SERVICES TO ITS CUSTOMERS. IT PURCHASES THE PRODUCTS FROM GLMC AND SELL IT TO CUSTOMERS IN INDIA AND SOUTH ASIA EXCEPT PAKISTAN. THE COMPANY IS THE SOLE DISTRIBUTOR OF LIUGONG IN THIS AGREED AREA. IN ORDER TO CARR Y OUT THE ABOVE OPERATIONS, LIPL HAS TO PERFORM THE FOLLOWING FUNCTIONS: 1. MANUFACTURING OF GOODS LIPL IS ENGAGED IN THE MANUFACTURING OF CONSTRUCTION EQUIPMENTS AND SPARE PARTS. LIPL IMPORTED RAW MATERIAL FROM ITS ASSOCIATED ENTERPRISE FOR MANUFACTUR ING PURPOSE. IT HAS STARTED ITS MANUFACTURING PLANT AT PITHAMPUR, INDORE AND STARTED MANUFACTURING BY THE END OF 2009 ITSELF. 2. PURCHASE OF GOODS: LIPL PURCHASES FOLLOWING TYPES OF HEAVY EARTH MOVING MACHINES AND ALSO SPARE PARTS: WHEEL LOADER HYDRA ULIC EXCAVATOR MOTOR GRADER FORK LIFT ETC. LIPL PURCHASE A LL ITS PRODUCTS FROM GLMCL ONLY. THE COMPANY PROVIDES MONTHLY REGULAR PURCHASE ORDER AND ALSO SOME INTERIM ORDERS, COUNTER SIGNED BY THE COMPANY AS A MEASURE OF ACCEPTANCE OF SUCH ORDER. THE ORDE R IS MADE ON THE BASIS OF MONTHLY SALES FORECAST THE PRICES OF MACHINES ARE AS PER THE ITA NO. 1482/DEL./2015 3 AGREEMENT MADE BETWEEN GLMCL AND LIPL, UPDATED TIME TO TIME, ON GF BASIS. THE PAYMENTS IS MADE TO GLMCL WITH REGARDS TO MACHINES AND ITS PARTS UNDER AGREEMENT BY EXECUTI NG TELEGRAPH TRANSFER WITH DEFERRED MAXIMUM 180 DAYS FROM THE DATE OF INVOICE PAYMENT TERM AND LETTER OF CREDIT MAXIMUM OF 160 DAYS. AS PER THE AGREEMENT, THE COMPANY CANNOT DEAL IN OTHER BRANDS PRODUCTS. 3. CUSTOM CLEARANCE FUNCTIONS: LIPL PERFORM THE FUNCTION OF GETTING ITS IMPORT PURCHASES CLEARED FROM CUSTOM FORMALITIES AND TRANSPORTATIONS OF GOODS AT COMPANY PLACE, TT APPOINTS THE PERSONNEL FOR PERFORMING REASONABLE STEPS IN THIS REGARD. 4. EXAMINATION OF PRODUCTS: THE COMPANY PERFORMS THE EXAMINATION OF PRODUCTS WHEN THEY ARE RECEIVED AND NOTIFY THE LIUGONG IN WRITING WITHIN 30 DAYS OF SHIPMENT RECEIPT DATE, ABOUT ANY PROBLEMS CONCERNING SHORTAGES OR DAMAGES OF THE PRODUCTS AND GET THEM REPLACED FROM LIUGONG, CHINA. 5. SALES AND SUPPORT FUNCTIONS: THE COMPANY DIRECTLY QUOTES ITS CUSTOMERS, WITH PRICING OF PRODUCTS AT ITS DISCRETION BUT KEEPING IN MIND THE 'DEALERS RULES' MADE BY LIUGONG AND ITS DEALERS. THE COMPANY ESTABLISHES SALES AND SERVICE TEAM AND HAS SEVERAL SERVICE CENTER OUTLETS FROM THE PRODUCTS. THE COMPANY DEPUTES, ON REGULAR BASIS, SERVICE PERSONNEL TO COMPANY'S HEADQUARTERS FOR TRAINING FOR AROUND 1 MONTH. 6. PRICE NEGOTIATION: THE SALES TEAM OF THE LIPL IS RESPONSIBLE FOR THE PRICE NEGOTIATION AND ENTERING INTO CONTRACTS WITH CUSTOMERS. 7. MARKETING FUNCTION: LIPL DEVELOPS THE MARKETING STRATEGY FOR THE SALE OF ITS PRODUCTS, CARRY ON THE PROMOTIONAL AND ADVERTISING FUNCTIONS TO PROMOTE ITS PRODUCTS IN ITS TERRITORY DECIDED BY AGREEMENT . IT TRACE THE CUSTOMERS REQUIRING THE PRODUCTS AND DEALING WITH THEM. ITA NO. 1482/DEL./2015 4 8. INVENTORY CONTROL FUNCTION: LIPL PERFORMS ALL FUNCTIONS PERTAINING TO MANAGEMENT AND CONTROL OF GOODS PURCHASED INCLUDING MAINTENANCE AND STORAGE OF INVENTORY, TRANSPORTATION OF GOODS TO FACTORY/SALES POINTS, THE C OMPANY HAS SET UP OUTLETS WHEN NUMBER OF THE MACHINES INCREASED UP TO 10 UNITS . 9. WARRANTY SERVICES: AS PER THE AGREEMENT BETWEEN L I PL AND LIUGONG, LIPL HAS TO PROVIDE THE WARRANTY TO ITS DEALERS AND CUSTOMERS, IT PROVIDES THE TECHNICAL AND OTHER NECES SARY SUPPORT. THE COMPANY IS AUTHORISED BY LIUGONG TO SANCTION ALL WARRANTY CLAIMS, THE WARRANTY REPLACE PARTS WILL BROUGHT FROM LIUGONG ON MONTHLY BASIS. 10. COMMISSION INCOME: IN CASE LIUGONG DIRECTLY SELL MACHINES OR PARTS TO CUSTOMERS OR ITS SUB - DISTR IBUTORS/DEALERS, LIPL IS ELIGIBLE TO GET THE COMMISSION WHICH AMOUNTS TO THE DIFFERENCE OF THE TRANSFER PRICE (AS PER AGREEMENT) AND DEALER'S PRICE. ASSETS EMPLOYED ANY BUSINESS REQUIRES ASSETS (TANGIBLE OR INTANGIBLE) WITHOUT WHICH IT CANNOT CARRY OUT ITS ACTIVITIES. AN UNDERSTANDING OF THE ASSETS EMPLOYED AND OWNED BY LIPL PROVIDES AN INSIGHT INTO THE RESOURCES DEPLOYED BY LIPL AND THEIR CONTRIBUTION TO THE BUSINESS PROCESS/ECONOMIC ACTIVITIES OF LIPL. LIPL HAS EMPLOYED ITS DISTRIBUTION INFRASTRUCTURE , OFFICE PREMISES, WAREHOUSING FACILITIES, COMMUNICATION FACILITIES, ETC. FOR THE PURPOSE OF ITS BUSINESS AND ALSO, PLANNING TO SET UP MANUFACTURING PLANT AT INDORE, INDIA. THE FIXED ASSET (NET OF DEPRECIATION) STRUCTURE WITH CAPITAL WORK - IN - PROGRESS OF UP L FOR THE FINANCIAL YEAR ENDED 31ST MARCH, 2010 IS AS FOLLOWS: S.NO. FIXED ASSETS AMOUNT (RS.) F.Y. 2009 - 10 1 LEASE HOLD LAND 51,428,902 ITA NO. 1482/DEL./2015 5 RISKS ASSUMED I N ANY BUSINESS, AN ORGANIZATION HAS TO BEAR MANY KINDS OF RISKS TO EARN A RETURN. FOLLOWING ARE RISKS ASSOCIATED WITH LI PL: 1. FINANCIAL RISK: FINANCIAL RISK IS THE RISK OF NON - PAYMENT OF DUES BY THE CUSTOMERS TO WHOM CREDIT HAVE BEEN EXTENDED. UPL IS FULLY EXPOSED TO THIS RISK IN RELATION TO ITS CUSTOMERS. 2. MARKET RISK: MARKET RISK ARISES FOR A BUSINESS DUE TO INCREASED COMPETITION AND RELATIVE PRICING PRESSURES, CHANGE IN DEMAND PATTERNS AND NEEDS OF CUSTOMERS, INABILITY TO DEVELOP/PENETRATE IN A MARKET, ETC. UPL HAS SIGNIFICANT EXPOSURE TO THIS RISK SO FAR AS SALES OF FINISHED PRODUCTS TO ITS CUSTOMERS ARE CONCERNED. IT IS CAUSED BY AN INCREASED COMPETITION IN THE MARKET RELATED PRICING PRESSURE, CHANGE IN DEMAND PATTERN AND NEEDS OF CUSTOMERS. 3. PRODUCT QUALITY LEVEL RISK RISKS ASSOCIATED WITH PRODUCT/SERVICE FAILURES INCLUDING NON - PERFORMANCE TO GENERALLY ACCEPTED OR REGULATORY STANDARDS. 2 BUILDING (OFFICE) 118,960,678 3 BUILDING (OFFICE) 263,757,004 4 PLANT & MACHINERY 159,559,104 5 MOTOR VEHICLES 2,250,684 6 COMPUTER 2,358,491 7 OFFICE EQUIPMENTS 1,228,519 8 FURNITURE & FIXTURES 7,602,787 9 ELECTRIC EQUIPMENTS 45,103,409 COMPUTER SOFTWARE 1,283,424 TOTAL 653,533,002 ITA NO. 1482/DEL./2015 6 THIS COULD RESULTS IN PRODUCT RECALLS AND POSSIBLE INJURIES TO END - USERS. AS LIPL PRODUCTS RANGE INVOLVES HEAVY MACHINES, IT HAS FULL EXPOSURE TO PRODUCT QUALITY LEVEL RISKS. IT HAS TO TAKE CARE OF WARRANTY GIVEN TO ITS CUSTOMERS FOR PRODUCT AND ITS PARTS REPLACEMENTS. 4. RESEARCH & DEVELOPMENT RISK RESEARCH & DEVELOPMENT RISK IS RISK ASSOCIATED WI TH R&D PERFORMED BY AN ENTERPRISE I.E., IT MAY OR MAY NOT BE SUCCESSFUL. LIPL DID NOT CARRY ON ANY R&D ACTIVITIES. SO IT IS NOT EXPOSED TO RESEARCH & DEVELOPMENT ACTIVITIES. 5. INVENTORY RISK INVENTORY RISK IS THE RISK ASSOCIATED WITH THE MANAGEMENT OF THE INVENTORY. IN CASE OF OVERSTOCKING OR SLOW/NON MOVING INVENTORY RESULTING FROM A RAPIDLY CHANGING AND TECHNOLOGY/PRICE SENSITIVE MARKET, THE ENTERPRISE MAY BE FORCED TO BEAR A LOSS OF MARGIN ON THE INVENTORY OR INCUR OTHER ADDITIONAL COSTS TO DISPOSE THE SAME. LIPL PURCHASE GOODS ON THE BASIS OF SALES FORECAST. SO, L I PL IS FULLY EXPOSED TO INVENTORY RISK AS IT PURCHASE IN ADVANCE FROM ITS ASSOCIATE, WHICH MAY BE RESULT IN OVERSTOCKING OR UNDER STOCKING. 6. FOREIGN EXCHANGE RISK THIS RISK RELATES TO THE POTENTIAL IMPACT ON PROFITS THAT MAY ARISE BECAUSE OF CHANGES IN FOREIGN EXCHANGE RATES. WITH MOVEMENTS IN THE FOREIGN EXCHANGE RATES, THE AMOUNTS RECEIVABLES PAYABLES CAN VARY FOR BOTH THE INDIAN AND FOREIGN ENTITY, DEPENDING ON THE CURRENCY OF INVOIC ING. LIPL IS FULLY EXPOSED TO THIS RISK WITH RESPECT TO ITS FOREIGN CURRENCY TRANSACTIONS. 7. HUMAN CAPITAL/MANPOWER RISK EVERY COMPANY HAS TO EMPLOY PEOPLE AND TRAIN THEM ADEQUATELY SO AS TO SUIT THE REQUIREMENTS OF THE COMPANY AND ITA NO. 1482/DEL./2015 7 THEREBY CONVERTING THEM INTO THE ASSETS OF THE COMPANY. THERE ALWAYS EXISTS A RISK OF THE TRAINED STAFF LEAVING THE COMPANY AND OTHER FACTORS AFFECTING QUALITY STANDARDS, PRODUCTIVITY AND EFFICIENCY, LIPL IS FULLY EXPOSED TO THIS RISK AS IN PROVIDING THE QUALITY STANDARDS S ERVICES TO ITS CUSTOMERS. THE COMPANY HAS TO TRAIN ITS PERSONNEL FOR SELLING ITS PRODUCTS BY DEMOS TO ITS PROSPECTIVE CUSTOMERS. 8. LEGA L AND STATUTORY RISK THIS RISK PRIMARILY ARISES ON NON - COMPLIANCE WITH ANY IEGAL/CONTRACTUAL/STATUTORY PROVISIONS. LI PL IS FULLY EXPOSED TO THIS RISK SO FAR AS COMPLIANCE WITH THE INDIAN RULES & REGULATIONS ARE CONCERNED. 9. POLITICAL RISK THIS RISK PRIMARILY ARISES ON ACCOUNT OF OPERATING IN GEOGRAPHICAL JURISDICTIONS WITH UNSTABLE POLITICAL REGIMES/UNFAVORABLE GOVERNMENT POLICIES. LIPL IS VERY L ITTLE EXPOSED TO THIS RISK SO FAR AS ITS INDIAN OPERATIONS ARE CONCERNED, BECAUSE INFRASTRUCTURE AND CONSTRUCTIONS COMPANIES IN INDIA ARE ENCOURAGED TO DEVELOP MORE AND MORE INFRASTRUCTURE. 3. THE ASSESSEE E - FILED ITS RETURN OF INCOME ON 25.09.2010 DECLARING A LOSS OF RS.1,54,06,882/ - . SINCE THE ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES, A REFERENCE WAS MADE BY THE ASSESSING OFFICER TO THE TRANSFER PRICIN G OFFICER (TPO), NEW DELHI U/S. 92CA(1). VIDE ORDER DATED 13.01.2014, THE TPO PROPOSED ADDITION OF RS.26,25,36,577/ - AND THE AO VIDE HIS DRAFT ASSESSMENT ORDER, AFTER CONSIDERING THE ABOVE INTERNATIONAL TRANSACTIONS, PROPOSED TO ASSESS THE ITA NO. 1482/DEL./2015 8 ASSESSEE AT AN I NCOME OF RS.25,96,09,506/ - BY MAKING FOLLOWING ADDITIONS/DISALLOWANCES : I. A DDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS 26,65,36,577/ - II. D ISALLOWANCE U/S. 40(A)(IA) 84,88,503/ - III. DISALLOWANCE U/S. 14A 1,308/ - 4. DURING THE ASSESSMENT YEAR, THE ASSESSEE HAS UNDERTAKEN INTERNATIONAL TRANSACTIONS AS UNDER : SR. NO. NATURE OF INTERNATIONAL TRANSACTION ALP DETERMINED BY THE ASSESSEE ALP DETERMINED BY THE TPO DIFFERENCE (I) PURCHASE OF MACHINERY, HEAVY EARTHMOVING MACHINES 40,55,59,818 73,80,62,265 RS.12,71,34,142 PURCHASE OF MACHINE (CKD/SKD) 9,45,18,989 PURCHASE OF SPARE PARTS 7,85,15,567 TOTAL 57,85,94,374 (II) PURCHASE OF PLANT & MACHINERY 3,23,33,749 3,52,73,181 RS.29,39,432 (III) INTEREST ON RECEIVABLES NIL 7,35,63,856 RS.7,35,63,856 (IV) SELLING AND DISTRIBUTION EXPENSES 5,23,82,317 NIL RS.5,23,82,317 (V) COMMISSION INCOME 2,04,40,169 3,05,83,501 RS. 1,01,43,332 ITA NO. 1482/DEL./2015 9 (VI) MISCELLANEOUS EXPENSES 3,73,498 NIL RS.3,73,498 TOTAL ADJUSTMENT UNDER SECTION 92CA RS.26,65,36,577 5. IN RESPECT OF THE ABOVE INTERNATIONAL TRANSACTIONS, THE ASSESSEE FURNISHED THE TP STUDY AND SELECTED TNMM AS MOST APPROPRIATE METHOD. THE ASSESSEE SELECTED TWO COMPARABLES WHOSE AVERAGE MARGIN WAS 1.64% AS AGA INST ASSESSEE S MARGIN OF ( - ) 2.12%. ACCORDI NGLY, THE ASSESSEE STATED THAT THEY MEET THE ARM S LENGTH STANDARD AS REQUIRED UNDER INDIAN REGULATIONS. HOWEVER, TPO ON APPLYING CERTAIN FILTERS AND ON THE BASIS OF FAR ANALYSIS, IN ADDITION TO ONE OF THE COMPARABLE SELECTED BY THE ASSESSEE INTRODUCED 12 MORE COMPARABLES. THE TPO ALSO CHANGED THE PLI BY ADOPTING 'NET PROFIT ON COST' INSTEAD OF 'NET PROFIT ON SALES' ADOPTED BY THE ASSESSEE. THE TPO AFTER CONSIDERING 13 COMPARABLES, FOUND THAT THE AVERAGE MARGIN OF THE COMPARABLE WAS 20.81% AND THUS HE PROPO SED AN ADJUSTMENT OF RS,12,71,34,142 IN RESPECT OF INTERNATIONAL TRANSACTION RELATING TO PURCHASE OF MACHINERY, CKD/SKD AND SPARE PARTS. 6. MOREOVER TPO MADE AN ADJUSTMENT ON PLANT AND MACHINERY PURCHASED BY THE ASSESSEE AND CAPITALIZED AS FIXED ASSETS OF RS. 3,23,33,749 / - HE BENCHMARKED THE SAID TRANSACTION BY ADOPTING A MARKUP OF 10% AND MADE AN ADJUSTMENT OF RS.29,39,432 / - TO THE VALUE OF INTERNATIONAL TRANSACTION ITA NO. 1482/DEL./2015 10 PERTAINING TO PLANT AND MACHINERY. THE TPO ALSO MADE AN ADJUSTMENT OF RS. 7,35,63,85 6 / - ON ACCOUNT OF INTERESTS ON OVERDUE RECEIVABLES CONSIDERING RS. 45,67,22,388/ - AS RECEIVABLE DUE FROM THE AE, AS REPORTED IN THE RELATED PARTY DISCLOSURE IN THE FINANCIAL STATEMENTS OF THE ASSESSEE AND APPLYING INTEREST RATE OF 14.88% FOR COMPUTING INTEREST O N OVERDUE RECEIVABLES. 7. IN ADDITION TO ABOVE THE TPO ALSO COMPARED THE SELLING AND DISTRIBUTION EXPENSES INCURRED BY THE ASSESSEE VIS - A - VIS THE SAME EXPENSES INCURRED BY 2 COMPARABLES CHOSEN BY THE ASSESSEE IN ITS TP STUDY FOR BENCHMARKING THE INTERNATI ONAL TRANSACTION AND DETERMINED THE BRIGHT LINE AND BY ADDING 15% OF MARKUP ON T H E BRIGHT LINE, MADE AN ADDITION OF RS. 5,23,82,3 17/ - TOWARDS THE CREATION OF MARKETING INTANGIBLES FOR THE AE. 8. FURTHER, BY COMPARING THE COMMISSION RECEIVED BY THE ASSESSE E ON THE SALES MADE BY THE ASSESSEE TO THE CUSTOMER IN INDIA AND THE COMMISSION RECEIVED ON SALES MADE BY THE AE DIRECTLY TO THE CUSTOMER IN INDIA, THE TPO CAME TO THE CONCLUSION THAT THE ASSESSEE HAS RECEIVED LESS COMMISSION ON THE SALES MADE BY THE AE TO THE CUSTOMERS DIRECTLY IN INDIA AND THUS TPO FURTHER ADDED A SUM OF RS. 1,01,43,332/ - TO THE ASSESSEE'S INCOME. ITA NO. 1482/DEL./2015 11 9. LASTLY, THE TPO MADE AN ADJUSTMENT OF MISCELLANEOUS EXPENSES OF RS.3,73,498/ - CLAIMED BY THE ASSESSEE IN THE INSTANT YEAR. 10. REASON FOR SELECTION FOR MOST APPROPRIATE METHOD BY ASSESSEE ARE THAT SECTION 92C(1) OF THE ACT PROVIDES THAT ALP IN RELATION TO INTERNATIONAL TRANSACTIONS SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS : (I). COMPARABLE UNCONTROLLED PRICE METHOD (CUP) (II). RE - SALE PRICE METHOD (RPM) (III). COST PLUS METHOD (CPM) (IV). PRO FIT SPLIT METHOD (PSM) (V). TRANSACTIONAL NET MARGIN METHOD (TNMM) 11. OUT OF THE ABOVE FIVE METHODS, THE ASSESSEE SELECTED TRANSACTION NET MARGIN METHOD (TNMM). UNDER THIS METHOD, FIRST THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN 'ASSOCIATED ENTERPRISE' IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES AFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED OR ANY OTHER RELEVANT BASE. THEN THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION IS COMPUTED WITH REGARD TO THE SAME BASE. SUCH NET PROFIT MARGIN ARISING IN COMPARABLE UNCONTROLLED TRANSAC TIONS IS TO BE ADJUSTED ON ACCOUNT OF DIFFERENCES IF ANY, WHICH COULD MATERIALLY AFFECT THE NET PROFIT MARGIN IN THE OPEN MARKET, BETWEEN THE TRANSACTIONS BEING COMPARED OR BETWEEN THE ENTERPRISES ITA NO. 1482/DEL./2015 12 ENTERING INTO SUCH TRANSACTION. THEN THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS ESTABLISHED WITH THE NET PROFIT MARGIN COMPUTED OUT OF COMPARABLE UNCONTROLLED TRANSACTION AND THE NET PROFIT MARGIN THUS ESTABLISHED, SHALL BE TAKEN INTO ACCOUNT TO ARRIVE AT THE ARM'S LENGTH PRICE.THIS METHOD COMPARES THE NORMAL NET PROFIT MARGIN COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR HAVING REGARD TO ANY OTHER RELEVANT BASE REALIZED BY ASSOCIATED ENTERPRISE TO THE NET PROFIT MARGIN REALIZED BY UNRELATED ENTERPRISES FROM COMPARABLE UNCONTROLLED TRANSACTIONS. UNDER THE TNMM, COMPARABLE TRANSACTIONS NEED TO BE ONLY BROADLY SIMILAR. SIGNIFICANT PRODUCT DIVERSITY AND SOME FUNCTIONAL DIVERSITY BETWEEN THE CONTROLLED AND UNCONTROLLED PARTIES ARE ACCEPTABLE . ASSESSEE TOOK THIS METHOD AS MOST APPROPRIATE METHOD. 12. ON OBJECTION BEFORE THE LD. DRP REGARDING MOST APPROPRIATE METHOD FOR DETERMINING A LP WHEREIN THE ASSESSEE REQUESTED FOR ADOPTING CUP METHOD WHEREAS THE ASSESSEE IN ITS TP STUDY REPORT AS WELL AS THE LD. TPO HAS TAKEN TNMM. THE DRP REJECTED THIS CONTENTION FOR THE REASON THAT SINCE THE AO AND THE TPO HAS MENTIONED THE SAME METHOD AS THE MOST APPROPRIATE METHOD IN THEIR BENCHMARKING ANALYSIS, HENCE, THE CONTENTION WAS REJECTED. ITA NO. 1482/DEL./2015 13 13. THE LEARNED DRP FURTHER REJECTED THE OBJECTION OF THE ASSESSEE AGAINST THE FILTERS ADOPTED BY THE TPO. FURTHER REGARDING 12 COMPARABLES, THE OBJECTION OF THE ASSESSEE WAS ALSO REJECTED. THE OBJECTION OF THE ASSESSEE AGAINST THE PLI WAS ALSO NOT ACCEPTED BY THE LD. DRP AND IT WAS HELD THAT OP/OC IS NOT THE CORRECT PROFIT LEVEL INDICATOR BUT OP BY SALES IS THE CORRECT INDICATOR. THE OBJECTION OF THE ASSESSEE ON I NCORRECTNESS OF ADJUSTMENTS PROPOSED WAS ALSO REJECTED. FURTHER ON WORKING CAPITAL ADJUSTMENT, THE LD. DRP HELD THAT THERE IS NO CASE FOR ALLOWING WORKING CAPITAL ADJUSTMENTS. ON THE ISSUE OF SALES COMMISSION, SERVICE COMMISSION ETC., WHETHER CAN BE TAKEN AS AN AMP INSTANCE, THE LD. DRP HELD THAT THE RATIO DECIDED BY ITAT IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. IS APPLICABLE AND THEREFORE, THE CONTENTION OF THE ASSESSEE WAS REJECTED. ON THE ISSUE OF WORKING OF THE COMMISSION INCOME ON THE SALES DIRECT LY MADE BY THE AR TO CUSTOMERS OF INDIA, THE LD. DRP HAS HELD THAT DEALER PRICE NEEDS TO BE REDUCED AND FURTHER 50% OF THE DEALER PRICE MAY BE CONSIDERED. THEREFORE, COMMISSION INCOME IS DIRECTED TO BE RECOMPUTED. THE GROUND REGARDING ADJUSTMENT ON ACCOUNT OF INTEREST AND OVERDUE RECEIVABLES WAS HELD TO BE INFRUCTUOUS AND FURTHER UPHELD THE ADJUSTMENT MADE BY THE LD. TPO ON ACCOUNT OF ADJUSTMENT PERTAINING TO PLANT AND MACHINERY. THE LD. DRP FURTHER HELD THAT ADJUSTMENT MADE BY THE TPO ON ACCOUNT OF MISCELL ANEOUS EXPENSES IS ALSO CORRECT. ON THE CORPORATE TAX ITA NO. 1482/DEL./2015 14 GROUND REGARDING DISALLOWANCE U/S. 40(A)(IA), WAS ACCEPTED AND DISALLOWANCE U/S. 14A WAS ALSO UPHELD. AGAINST THE DIRECTIONS PASSED BY THE DRP, THE LD. ASSESSING OFFICER PASSED THE FINAL ASSESSMENT ORDE R ON 30.01.2015 WHEREIN BASED ON THE DIRECTIONS OF THE DRP, THE TOTAL ADJUSTMENT PROPOSED ON ALP WAS REDUCED TO 13,69,92,899/ - INSTEAD OF RS.19,29,72,721/ - COMPUTED EARLIER AND THEREAFTER FINAL ASSESSMENT WAS PASSED ASSESSING THE TOTAL INCOME OF THE ASSESS EE AT RS.19,51,51,180/ - . 14. AGAINST THIS, THE ASSESSEE IS IN APPEAL ON THE FOLLOWING GROUNDS : TRANSFER PRICING - PURCHASE OF MACHINERY, HEAVY EARTHMOVING MACHINES AND SPARE PARTS RS.9,56,91,501 1. ON THE FACTS AND IN LAW, THE HONOURABLE DISPU TE RESOLUTION PANEL ('HON'BLE DRP')/ LEARNED ASSESSING OFFICER ('LD. AO)/ LEARNED TRANSFER PRICING OFFICER (LD. TPO) ERRED IN VIOLATING PROVISIONS OF SECTION 92C OF THE INCOME TAX ACT, 1961 ('THE ACT') READ WITH RULE 10C OF THE INCOME TAX RULES, 1962 ('T HE RULES'), IN DISREGARDING AND IGNORING THE COMPARABLE UNCONTROLLED PRICE('CUP ) SUBMITTED FOR INTERNATIONAL TRANSACTIONS PERTAINING TO PURCHASE OF MACHINERY OF RS. 40,55,59,818. 2. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN VIOLATING PROVISIONS OF SECTION 92C OF THE ACT READ WITH RULE 10C OF THE RULES, IN ENHANCING THE VALUE OF THE INTERNATIONAL TRANSACTIONS OF PURCHASE OF FINISHED GOODS. CKD/SKDS AND SPARE PARTS BY RS. 9,56,91,501. 3. ON THE FACTS AND IN LA W, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN CONTRAVENING THE PROVISIONS OF THE RULE 10B(1)(E), IN INCORRECTLY COMPUTING THE NET PROFIT MARGIN REALIZED BY THE APPELLANT AT (8.45)% FROM THE INTERNATIONAL TRANSACTIONS WITH ITS AES INSTEAD OF 4.49%. ITA NO. 1482/DEL./2015 15 4. THE LD. AO/ LD. TPO ERRED ON FACTS AND IN LAW CONTRAVENING PROVISIONS OF SECTION 92C(3), IN REJECTING THE TRANSFER PRICING ('TP') DOCUMENTATION MAINTAINED BY THE APPELLANT UNDER SECTION 92D OF THE ACT READ WITH RULE 10D AND IN CARRYING OUT A FRESH SEARCH FOR COMPARABLE COMPANIES BY USING INAPPROPRIATE AND ARBITRARY CRITERIA. 5. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN VIOLATING PROVISIONS OF RULE 10B(2) BY SELECTING COMPANIES ENGAGED IN MANUFACTURING OPERATIONS WITHOUT CONSID ERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED BY SUCH COMPANIES VIS - A - VIS THE TRADING OPERATIONS OF THE APPELLANT, THEREBY RESORTING TO CHERRY PICKING OF COMPARABLES. TRANSFER PRICING - SELLING AND DISTRIBUTION EXPENSES - RS. 1,25,33,385 6. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN MAKING AN ADDITION OF RS.1,25,33,385 TO THE TOTAL INCOME OF THE APPELLANT BY ALLEGING THAT THE SELLING AND DISTRIBUTION EXPENSES INCURRED BY THE APPELLANT FOR ITS OWN BUSINESS IN INDIA HAS RESULTED IN CREATION OF MARKETING INTANGIBLE IN FAVOUR OF THE AE. 7. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN CONSIDERING AMOUNT OF RS. 1,11,88,562 INCURRED TOWARDS WARRANTY EXPENSE BY THE APPELL ANT AS EXPENSE INCURRED TOWARDS CREATION OF MARKETING INTANGIBLE. 8. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN CONSIDERING AMOUNT OF RS. 33,04,351 INCURRED TOWARDS FREIGHT OUTWARDS BY THE APPELLANT AS EXPENSE INCURRED TOWARDS CREATION OF MARKETING INTANGIBLE. 9. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN CONSIDERING THE AMOUNT OF RS. 49,03,989 INCURRED ON EXHIBITION OF PRODUCTS OF THE APPELLANT AS AN EXPENSE TOWARDS CREATION OF MARKETING INTANGIBLE. ITA NO. 1482/DEL./2015 16 10. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN CONSIDERING THE AMOUNT OF RS. 12,16,400 INCURRED ON PRODUCT ADVERTISEMENT AS EXPENSE INCURRED TOWARDS CREATION OF MARKETING INTANGIBLE. 11. ON THE FACTS AND IN LAW, THE HON'BLE D RP/ LD. AO/ LD. TPO ERRED IN CONSIDERING THE AMOUNT OF RS. 6,33,155 INCURRED TOWARDS BUSINESS PROMOTION EXPENSE BY THE APPELLANT AS EXPENSE TOWARDS CREATION OF MARKETING INTANGIBLE. 12. ON THE FACTS AND IN LAW. THE HON'BLE DRP/ LD, AO/ LD. TPO ERRED IN CONSIDERING AMOUNT OF RS. 30,33.392 INCURRED TOWARDS PROMOTIONAL EXPENSE BY THE APPELLANT IN INDIA AS EXPENSE TOWARDS CREATION OF MARKETING INTANGIBLE. 13. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN APPLYING THE ALLEGED 'BRIGHT L INE TEST' FOR MEASURING THE SELLING AND DISTRIBUTION EXPENSES OF APPELLANT VIS - A - VIS A ROUTINE DISTRIBUTOR, BASED ON HIS CONJECTURES AND SURMISES. 14. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO./ LD. TPO ERRED IN ADDING A MARK - UP OF 13.25 THE AFOR ESAID ALLEGED SELLING AND DISTRIBUTION EXPENSES INCURRED BY THE APPELLANT. TRANSFER PRICING - RECEIPT OF COMMISSION INCOME - RS. 1,01,43,332 15. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN ERRONEOUSLY COMPUTING THE COMMISSION INCO ME AT RS. 3,05.83,501 AS AGAINST THE CORRECT COMMISSION OF RS. 2,04,40,169 COMPUTED BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION. 16. WITHOUT PREJUDICE, ON THE FACTS AND IN LAW. LD. AO/ LD. TPO ERRED IN ERRONEOUSLY COMPUTING THE COMMISSION INC OME AT RS. 3,05.83,501, CONTRAVENING THE DIRECTIONS OF THE HON BLE DRP. ADJUSTMENT ON ACCOUNT OF PURCHASE OF PLANT AND MACHINERY AS FIXED ASSETS - RS. 29,39,432 17. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN MAKING AN ADJUSTMENT OF RS. 29,39,432 TO THE VALUE OF ITA NO. 1482/DEL./2015 17 INTERNATIONAL TRANSACTION PERTAINING TO PLANT AND MACHINERY WITHOUT APPRECIATING THE FACTS OF THE CASE. ADJUSTMENT ON ACCOUNT OF MISCELLANEOUS EXPENSES - RS. 3,73,498 PLUS PENALTY 18. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN MAKING AN ADJUSTMENT OF RS. 3,73.498 BY CONSIDERING THE ARM'S LENGTH PRICE OF MISCELLANEOUS EXPENSES AS NIL WITHOUT PROVIDING ANY OPPORTUNITY OF BEING HEARD TO THE APPELLANT TO DEMONSTRATE THE ARM'S LENGTH NATURE OF THE TRANS ACTION. 19. ON THE FACTS AND IN LAW, THE LD. TPO ERRED IN PROPOSING TO LEVY A PENALTY OF 2% TOWARDS NONDISCLOSURE OF INTERNATIONAL TRANSACTION OF PAYMENT OF MISCELLANEOUS EXPENDITURE IN THE FORM NO. 3CEB. PENALTY ON INTERNATIONAL TRANSACTION PERTAINING TO ISSUE OF SHARES 20. ON THE FACTS AND IN LAW, THE LD. TPO ERRED IN PROPOSING TO LEVY OF PENALTY OF 2% OF THE ISSUED SHARE CAPITAL FOR NON - DISCLOSURE OF TRANSACTION PERTAINING TO ISSUE OF EQUITY SHARES BY THE APPELLANT IN THE FORM 3CEB. CORPORATE TAX - SECTION 14A - RS. 1,308 21. ON THE FACTS AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN DISALLOWING AN AMOUNT OF RS. 1,308 UNDER SECTION I4A. 15. NOW, WE FIRST TAKE UP THE TRANSFER PRICING ISSUE. THE FIRST GROUND OF APPEAL IS AGAINST ACTION OF THE LOWER AUTHORITIES DISREGARDING AND IGNORING COMPARABLE UNCONTROLLED PRICE SUBMITTED FOR INTERNATIONAL TRANSACTIONS PERTAINING TO PURCHASE OF MACHINERY OF RS.40,55,59,818/ - . ITA NO. 1482/DEL./2015 18 16. THE BRIEF FACTS OF THIS ISSUE ARE THAT FOR THE PURPOSE OF BENCHMARKING ANALYSIS, THE ASSESSEE IN ITS TP STUDY REPORT HAS ACCEPTED THE MOST APPROPRIATE METHOD AS TNMM AFTER ELIMINATING ALL OTHER METHODS OF BENCHMARKING ON THE FOLLOWING REASONS : REASON FOR ACCEPTING THIS METHOD: ON THE BASIS OF ANALYSIS OF FUNCTIONS PREFORMED , RISKS ANALYSIS AND ASSETS UTILIZATION ANALYSIS OF THE LIPL WITH UNCONTROLLED TRANSACTIONS, THE TNMM METHOD IS THE MOST SUITABLE METHOD SINCE: A) TNMM INVOLVES A COMPARISON AT NET PROFIT LEVEL AS AGAINST AT GROSS PROFIT LEVEL (AS PRESCRIBED IN CUP AND R PM). THE PROFIT MARGIN MAY ALSO BE TOLERANT TO SOME FUNCTIONAL DIFFERENCE BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGINS. B) UNDER TNMM COMPARABLE TRANSACTIONS NEED TO BE ONLY BROADLY SIMILAR, SIGNIFICANT PRODUCT DIVERSITY AND SOME FUNCTIONAL DIVERSITY BETWEEN CONTROLLED AND UNCONTROLLED TRANSACTIONS ARE ACCEPTABLE. DIFFERENCES IN FUNCTIONS PERFORMED BETWEEN ENTERPRISES ARE GENERALLY REFLECTED IN VARIATIONS IN OPERATING EXPENSES. SUCH THAT ENTERPRISES WITH SIGNIFICANTLY DIF FERENT GROSS PROFIT MARGINS MAY EARN SIMILAR LEVELS OF NET PROFITS. C) THE NET MARGINS LIKE RETURN ON ASSETS, OPERATING INCOME TO SAFES AND OTHER MEASURES OF NET PROFITS ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES THAN IS THE CASE WITH PRICE IN CUP M ETHOD. D) MOREOVER, IT IS A SIMPLE METHOD TO APPLY RATHER ANY OTHER METHOD PROVIDED IN THIS CASE. 5.6. SELECTION OF APPROPRIATE PROFIT LEVEL INDICATOR (PLI) ITA NO. 1482/DEL./2015 19 5.6.1. THE APPLICATION OF TNMM REQUIRES THE SELECTION OF AN APPROPRIATE PROFIT LEVEL INDI CATOR (PLI). THE PLI MEASURES THE RELATIONSHIP BETWEEN (I) PROFITS AND (II) EITHER COSTS INCURRED, REVENUES EARNED, OR ASSETS EMPLOYED. A VARIETY OF PROFIT LEVEL INDICATORS MAY BE USED. 5.6.2. TNMM AIMS AT ARRIVING AT THE ARM'S LENGTH OPERATING PROFIT ( I.E. PROFIT BEFORE FINANCIAL AND NON - OPERATING EXPENSES). FACTORS RELEVANT TO THE SELECTION OF THE APPROPRIATE PLI INCLUDE THE RELIABILITY OF THE AVAILABLE DATA AND THE EXTENT TO WHICH THE PLI TAKES INTO ACCOUNT COSTS THAT WOULD BE CONSIDERED BY INDEPENDEN T PARTIES. 5.6.3. NET PROFIT MARGIN IS SELECTED TO RELIABLY MEASURE THE INCOME OF THE TESTED PARTY THAT IT WOULD HAVE EARNED, HAD IT DEALT WITH UNCONTROLLED PARTIES AT ARM'S LENGTH. NET PROFIT MARGIN (NPM), THE RATIO OF OPERATING PROFIT TO SALES, IS NOR MALLY A GOOD INDICATOR OF TOTAL RETURN TO THE BUSINESS ACTIVITY. THIS MEASURE ACCOUNTS FOR OPERATING EXPENSES AS WELL AS COST OF GOODS SOLD AND THUS IS LESS LIKELY, THAN THE GROSS MARGIN, TO BE DISTORTED BY DIFFERENCES IN FUNCTIONS OR ACCOUNTING CONVENTION S. THUS, IT IS GENERALLY CONSIDERED AS AN ACCEPTABLE PLI WHEN SALES ARE MADE TO THIRD PARTIES. 5.6.4. THE ARM'S LENGTH RESULT OF PROFITABILITY CAN BE ESTABLISHED BY ONE OF SEVERAL FINANCIAL INDICATORS. A VARIETY OF INDICATORS MAY BE USED IN A GIVEN ANA LYSIS; THE CHOICE BETWEEN MEASURES DEPENDS UPON THE ACTIVITIES OF THE TESTED PARTY, THE RELIABILITY OF THE DATA FOR COMPARABLE UNCONTROLLED COMPANIES AND THE EXTENT TO WHICH THE INDICATOR WILL PRODUCE A RELIABLE MEASURE OF AN ARM'S LENGTH RESULT. 17. THE TPO IN HIS ORDER HAS SUBMITTED THAT SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE REJECTING THE TP STUDY REPORT. IT WAS MENTIONED AT PAGE NO. 27 THAT AT THE TIME OF SELECTION OF MOST APPROPRIATE METHOD , THE ASSESSEE HAS REJECTED THE METHODS BY APPLYING FOL LOWING APPROACH : ITA NO. 1482/DEL./2015 20 CUP THE TAXPAYER HAS REJECTED THIS METHOD BY STATING THAT A) IT ACTS AS A SOLE DISTRIBUTOR OF ITS AE IN INDIA, B) LACK OF AVAILABILITY OF DATA OF COMPARABLE COMPANIES. THE TPO REMARKS IF THE TAXPAYER IS ACTING AS SOLE DISTRIBUTOR THE N IN THAT CASE, IT HOLDS MONOPOLY IN INDIA MARKET FOR LIUGONG PRODUCTS AND CAN CHARGE ANY PRICE FROM ITS CUSTOMERS, BUT STILL IT IS OPERATING IN LOSSES. FURTHER, IT IS ALWAYS TRUE THAT IN CASE OF SOLE DISTRIBUTOR, COMPARABLE DATA MAY NOT BE AVAILABLE, HOWE VER, IN CASE IT S AE IS SELLING SIMILAR PRODUCTS TO OTHER COUNTRIES, THEN AFTER CLAIMING ADJUSTMENT FOR GEOGRAPHICAL DIFFERENCES, CUP METHOD CAN EASILY BE APPLIED FOR WHICH NO EXTRA EFFORTS HAVE BEEN PUT ON RECORD. R PM TAXPAYER HAS REJECTED THIS METHOD BY STATING THAT TECHNICALLY THIS METHOD IS APPLICABLE, BUT REJECTED DUE TO LACK OF AVAILABILITY OF DATA FOR COMPUTATION OF GROSS MARGINS. TPO S REMARKS HERE, TAXPAYER ITSELF ACKNOWLEDGE THAT BEING A TRADING ORGANIZATION, RPM IS THE BEST METHOD IN ITS CASE, HOWEVER, NO EFFORTS HAVE BEEN PUT ON RECORD TO JUSTIFY ITS APPLICABILITY, WHICH CLEARLY SHOWS THAT METHODS ARE BEING REJECTED ON BASELESS PARAMETERS BY SIMPLY REFERRING TO LACK OF AVAILABILITY OF DATA. CPM TAXPAYER REJECTED THIS METHOD BY STATING TH AT A) ABSENCE OF RELIABLE DATA ON FUNCTIONAL COMPARABILITY BETWEEN INTERNATIONAL TRANSACTIONS AND UNCONTROLLED TRANSACTIONS, B) INFORMATION REGARDING DIRECT AND INDIRECT COST OF PRODUCTION IS NOT AVAILABLE IN EXTERNAL DATABASE, C) BY REFERRING TO JUDGMENT OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. TPO S REMARKS SURPRISINGLY, IT IS STATED THAT INFORMATION REGARDING COST BIFURCATION IS NOT AVAILABLE IN EXTERNAL DATABASE. THE IMPORTANT QUESTION ARISES HERE THAT WHY AND FOR WHAT REASONS, TO KNOW ITS OWN DI RECT AND INDIRECT COST, A COMPANY IS REQUIRED TO REFER EXTERNAL DATABASE, WHEREAS THE SAME MUST BE ITA NO. 1482/DEL./2015 21 AVAILABLE WITH THE TAXPAYER HIMSELF. IT IS IMPORTANT TO STATE HERE THAT BY SIMPLY WRITING THAT DATA IS NOT AVAILABLE, ONUS CANNOT BE SAID TO BE DISCHARGED BY THE TAXPAYER. HERE, AGAIN, NOTHING HAS BEEN PUT ON RECORD IN TP STUDY THAT EFFORTS WERE MADE TO CULL - OUT THE DETAILS FOR APPLYING CPM BUT THE SAME IS NOT AVAILABLE WITH DIFFERENT REASONS ALONG WITH SUPPORTING THEREOF. PSM TAXPAYER REJECTED THIS METHOD BY STATING THAT A) THIS METHOD IS COMPLEX AND B) ABSENCE OF RELIABLE MARKET DATA. TPO S REMARKS IT IS VERY MUCH CLEAR THAT TAXPAYER HAS NOT EVEN TRIED TO APPLY THIS METHOD AND SIMPLY REJECTED THIS METHOD BASED ON ITS COMPLEXITY AND NOT ON ACTUAL FACTS AND CIRCUMSTANCES. FURTHER, IT IS HARD TO IGEST THAT FOR APPLICATION OF PSM WHAT KIND OF MARKET DATA IS REQUIRD. TNMM TAXPAYER SELECTED THIS METHOD BY STATING THAT IT IS SIMPLE METHOD TO APPLY RATHER ANY OTHER METHOD. TPO S REMARKS IT IS ITSELF CLEARED T HAT FOR THE PURPOSE OF EASE AND CONVENIENCE ONLY, TAXPAYER HAS SELECTED THIS RESIDUAL METHOD. 18. BEFORE THE DRP, IT WAS SUBMITTED BY THE ASSESSEE THAT VIDE SUBMISSIONS DATED 10.07.2013, THE ASSESSEE SUBMITTED COMPARABLES UN CONTROLLED PRICE PERTAINING T O PURCHASE OF MACHINERY. HOWEVER, THE LD. TPO HAS REJECTED THOSE COMPARABLES AND STATED THAT THE ASSESSEE DID NOT MAKE ANY EFFORT IN APPLYING AND FURNISHING THE CUP DATA FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. THE ASSESSEE SUBMITTED THAT IT HAS PR OVIDED THE DETAILS OF SALE PRICE OF PRODUCT SOLD BY AE TO THE ASSESSEE AND TO THE INDEPENDENT THIRD PARTY DISTRIBUTOR IN ITA NO. 1482/DEL./2015 22 DIFFERENT GEOGRAPHICAL LOCATIONS. BY WAY OF WRITTEN SYNOPSIS, THE ASSESSEE FURTHER SUBMITTED AS UNDER : DURING THE YEAR, THE ASSESSEE I MPORTED MACHINERY FROM ITS AE, GUANGXI LIUGONG MACHINERY CO. LTD. FOR SALE IN INDIA. AS MENTIONED IN THE FORM NO. 3CEB OF THE ASSESSEE, IT HAD IMPORTED 192 PIECES OF MACHINES FOR RS. 40,55,59,818 FROM ITS AE. THE ASSESSEE, IN ITS TP REPORT, REJECTED CUP A S THE MOST APPROPRIATE METHOD DUE TO NON - AVAILABILITY OF COMPARABLE DATA IN THE PUBLIC DOMAIN. HOWEVER, DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD SUBMITTED BEFORE THE LD. TPO, THE DETAILS OF SALES MADE BY THE AE TO THE INDEPENDENT THIRD PARTIES AND TO THE ASSESSEE AS ANNEXURE 3 TO SUBMISSION DATED 10 JULY 2013. (REFER PAGES 579 TO 607 OF THE PAPER BOOK) IT WAS DEMONSTRATED THAT THE MODEL - WISE AVERAGE SALE PRICE (AT FOB VALUES) PER UNIT AT WHICH THESE MACHINES WERE SOLD BY THE AE TO THE ASSESSEE WERE MUCH LESS THAN THE AVERAGE SALE PRICE (AT FOB VALUES) PER UNIT AT WHICH THE SAME MODELS WERE SOLD BY THE AE TO INDEPENDENT THIRD PARTIES. THE SUMMARY OF THE SAME IS REPRODUCED BELOW FOR YOUR HONOUR'S EASE OF REFERENCE; S. NO. MODEL NAME DETAILS OF PRODUCTS SOLD TO LIPL BY THE AE DURING FY 2009 - 10 DETAILS OF PRODUCTS SOLD TO INDEPENDENT DISTRIBUTORS IN OTHER COUNTRIES 1 BY THE AE DURING FY 2009 - 10 NO. OF UNITS AVERAGE SALE PRICE FOR SALE TO LIPL (IN USD) (FOB) NO. OF UNITS AVERAGE SALE PRICE FOR SALE TO INDEPENDENT DISTRIBUTORS (IN USD) (FOB) 1 CLG 856 83 54,033 19 75,437 ITA NO. 1482/DEL./2015 23 2 CLG 835 36 25,301 116 36,308 'I ZL30E 26 19,934 101 20,273 S. NO. MODEL NAME DETAILS OF PRODUCTS SOLD TO LIPL BY THE AE DURING FY 2009 - 10 DETAILS OF PRODUCTS SOLD TO INDEPENDENT DISTRIBUTORS IN OTHER COUNTRIES BY THE AE DURING FY 2009 - 10 NO. OF UNITS AVERAGE SALE PRICE FOR SALE TO LIPL (IN USD) (FOB) NO. OF UNITS AVERAGE SALE PRICE FOR SALE TO INDEPENDENT DISTRIBUTORS (IN USD) (FOB) 4 CLG418 3 63,283 9 72,401 5 CLG614 14 21,243 9 30,395 6 CLG 205C 24 56,308 8 76,643 7 B230 2 1,11,750 6 1,12,739 8 CPCD 30 2 8,838 48 10,090 9 CPCD 20 2 7,838 3 15,118 THE DETAILS OF SALES MADE BY THE AE TO THE INDEPENDENT THIRD PARTIES AND TO THE ASSESSEE AS ANNEXURE 3 TO SUBMISSION DATED 10 JULY 2013. (PAGE 579 TO 607 OF THE PAPER BOOK) IN ADDITION TO THE ABOVE, THE ASSESSEE ALSO SHALL SUBMIT THE COPIES OF THE INVOICES FOR THE MACHINERY SOLD BY THE AE TO I NDEPENDENT THIRD PARTY DISTRIBUTORS AND TO THE ASSESSEE ITA NO. 1482/DEL./2015 24 DURING FY 2009 - 10 IN SUPPORT OF ABOVE CLAIM AS ADDITIONAL EVIDENCE DURING THE COURSE OF THE PROCEEDINGS BEFORE YOUR HONOUR. 10.1.2 APPROPRIATE ADJUSTMENTS TO ENHANCE COMPARABILITY FOR APPLICATION OF CUP METHOD, AS HIGHLIGHTED IN PARAGRAPHS ABOVE, THE ASSESSEE MADE SUITABLE ADJUSTMENTS FOR DIFFERENCES IN FREIGHT OWING TO DIFFERENCE IN GEOGRAPHICAL LOCATIONS, TO ENHANCE THE PRICE LEVEL COMPARABILITY BETWEEN THE ASSESSEE AND INDEPENDENT THIRD PARTY DIST RIBUTORS. FACTUAL EXPLANATION TO EXPLAIN, THE SIGNIFICANT DIFFERENCE ARISING ON ACCOUNT OF DIFFERENCE IN GEOGRAPHICAL LOCATIONS IS REFLECTED IN 'OCEAN FREIGHT' AND OTHER GIF EXPENSES. IN ORDER TO TAKE CARE OF SUCH DIFFERENCE, THE ASSESSEE SUBMITS TH AT THE DATA PROVIDED BY THE AE CONTAINS THE COMPARISON OF PRICES ADJUSTED AS FOLLOWS: - > SALE PRICE OF THE AE TO THE ASSESSEE AS WELL AS TO INDEPENDENT CUSTOMERS - > LESS: FREIGHT INCURRED BY THE AE - > = FOB SALE PRICE THE SAME ADJUSTMENT WAS MADE ON THE SALE TO THE ASSESSEE AS WELL AS TO THE INDEPENDENT CUSTOMERS BY THE AE FOR COMPARISON PURPOSES. LEGAL PROVISIONS RELIED UPON BY THE ASSESSEE HERE, THE ASSESSEE WOULD LIKE TO EMPHASIZE THE INTENT OF THE LEGISLATURE, THAT EVEN IF THERE ARE DIFFERENCES IN 'E CONOMIC CIRCUMSTANCES ' INCLUDING DIFFERENCE IN GEOGRAPHICAL LOCATION OF THE TESTED PARTY AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, THEN REASONABLE AND ACCURATE ADJUSTMENTS SHOULD BE MADE TO ELIMINATE SUCH DIFFERENCES. REFERENCE IS DRAWN TO THE FOLLOWI NG EXTRACT OF RULE 10B OF THE INCOME - TAX RULES. 1962 ('THE RULES''): ITA NO. 1482/DEL./2015 25 RULE 10B(1) OF THE RULES 'DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 92C. 10B. (1) FOR THE PURPOSES OF SUB - SECTION (2) OF SECTION 92C, THE ARM 'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY: (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH, (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED: (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB - CLAUSE (II) IS TAKEN TO BE AN ARM 'S LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION; RULE 10B(3) OF THE RULES ' (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARI SING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES.' ITA NO. 1482/DEL./2015 26 SUPPORT IN OECD GUIDELINES IN SUPPORT OF ABOVE CONTENTIONS, THE ASSESSEE WOULD ALSO LIKE TO DRAW Y OUR HONOUR'S KIND ATTENTION TO THE FOLLOWING EXTRACT FROM THE GUIDELINES ISSUED BY THE ORGANISATION FOR ECONOMIC CO - OPERATION AND DEVELOPMENT FOR MULTINATIONAL ENTERPRISES ('OECD GUIDELINES') JULY 2010 WHICH STATES THE FOLLOWING: 'D. 1.2.4 ECONOMIC CIRCUM STANCES 1.55 ARM'S LENGTH PRICES MAY VARY ACROSS DIFFERENT MARKETS EVEN FOR TRANSACTIONS INVOLVING THE SAME PROPERTY OR SERVICES; THEREFORE, TO ACHIEVE COMPARABILITY REQUIRES THAT THE MARKETS IN WHICH THE INDEPENDENT AND ASSOCIATED ENTERPRISES OPERATE DO N OT HAVE DIFFERENCES THAT HAVE A MATERIAL EFFECT ON PRICE OR THAT APPROPRIATE ADJUSTMENTS CAN BE MADE. AS A FIRST STEP, IT IS ESSENTIAL TO IDENTIFY THE RELEVANT MARKET OR MARKETS TAKING ACCOUNT OF AVAILABLE SUBSTITUTE GOODS OR SERVICES. ECONOMIC CIRCUMSTANC ES THAT MAY BE RELEVANT TO DETERMINING MARKET COMPARABILITY INCLUDE THE GEOGRAPHIC LOCATION; THE SIZE OF THE MARKETS; THE EXTENT OF COMPETITION IN THE MARKETS AND THE RELATIVE COMPETITIVE POSITIONS OF THE BUYERS AND SELLERS; THE AVAILABILITY (RISK THEREOF) OF SUBSTITUTE GOODS AND SERVICES; THE LEVELS OF SUPPLY AND DEMAND IN THE MARKET AS A WHOLE AND IN PARTICULAR REGIONS, IF RELEVANT; CONSUMER PURCHASING POWER; THE NATURE AND EXTENT OF GOVERNMENT REGULATION OF THE MARKET; COSTS OF PRODUCTION, INCLUDING THE COSTS OF LAND, LABOUR, AND CAPITAL; TRANSPORT COSTS; THE LEVEL OF THE MARKET (E.G. RETAIL OR WHOLESALE); THE DATE AND LIME OF TRANSACTIONS; AND SO FORTH. THE FACTS AND CIRCUMSTANCES OF THE PARTICULAR CASE WILL DETERMINE WHETHER DIFFERENCES IN ECONOMIC CIRC UMSTANCES HAVE A MATERIAL EFFECT ON PRICE AND WHETHER REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE EFFECTS OF SUCH DIFFERENCES. ' AS PROVIDED IN THE INDIAN LEGISLATURE AND RECOMMENDED BY THE OECD GUIDELINES, UNCONTROLLED TRANSACTIONS CAN B E COMPARED WITH THE CONTROLLED TRANSACTIONS, PROVIDED REASONABLE & ACCURATE ADJUSTMENTS ARE PERFORMED LO ITA NO. 1482/DEL./2015 27 ELIMINATE THE DIFFERENCES THAT MAY HAVE MATERIAL EFFECT ON THE COMPARABILITY OF CONTROLLED AND UNCONTROLLED TRANSACTIONS. AS EXPLAINED ABOVE AND ALSO PROVIDED IN THE LEGISLATURE, REASONABLE AND APPROXIMATE (CLOSE TO ACCURATE) ADJUSTMENT HAS ALREADY BEEN MADE BY THE AE, ON ACCOUNT OF DIFFERENCE IN GEOGRAPHICAL LOCATIONS CAPTURED BY THE DIFFERENCE IN FREIGHT AND OTHER CIF EXPENSES) OF THE ASSESSEE AND THE INDEPENDENT CUSTOMERS, IN COMPILING THE ABOVE MENTIONED COMPARATIVE DATA. JUDICIAL PRECEDENTS RELIED UPON BY THE ASSESSEE WHERE GEOGRAPHICAL ADJUSTMENTS IN CUP METHOD HAVE BEEN UPHELD IN THIS REGARD, THE ASSESSEE WOULD LIKE TO RELY ON FOLLOWING JUD ICIAL PRECEDENTS, DISCUSSED AS UNDER: BHARTI AIRTEL LIMITED (ITA NO. 5 63 6/DEL/2011 AY 2007 - 08 '49 XX..XX...THE TPO HAS REJECTED ALL BUT ONE OF THESE COMPARABLES ON THE GROUND THAT THE REMAINING COMPARABLES ARE WITH RESPECT TO GEOGRAPHICALLY DIFFERENT MARKETS BUT, AS WE HAVE SEEN ABOVE, A DIFFERENCE IN GEOGRAPHICAL LOCATION OF THE MARKET, UNLESS RESULTING IN DIFFERENT MARKET CONDITIONS, IS NOT A REASON GOOD ENOUGH TO REJECT A COMPARABLE UNDER THE CUP METHOD. THERE IS NO MENTION WHATSOEVER OF ANY COMMERC IAL DIFFERENCES, I.E. DIFFERENCES IN MARKET CONDITIONS, IN THE MARKET OF THE UNCONTROLLED TRANSACTION AND THE INTRA AE TRANSACTION. SINCE THE TPO HAS REJECTED THESE COMPARABLES, THE ONUS IS ON HIM TO DEMONSTRATE THAT THE MARKET CONDITIONS ARE SO DIFFERENT THAT THE UNCONTROLLED TRANSACTIONS CEASE TO BE COMPARABLE WITH THE INTRA AE TRANSACTIONS. NOT ONLY THAT THIS ONUS IS NOT DISCHARGED, THERE IS NOT EVEN A SUGGESTION THAT THE MARKET CONDITIONS OF THE UNCONTROLLED TRANSACTIONS ARE MATERIALLY DIFFERENT. IN VIE W OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THIS CASE, THE VERY BASIS OF EXCLUSION OF OTHER COMPARABLES IS DEVOID OF LEGALLY SUSTAINABLE REASONS. ' ITA NO. 1482/DEL./2015 28 M/S. ISAGRO (ASIA) AGROCHEMICALS PVT. LTD: V. THE DCIT, CIR. 8(2), MUMBAI. (ITA NO.2044/MUM/2010] 'THE CONTENTION OF THE ID. DR THAT THE DIFFERENCE IN GEOGRAPHICAL LOCATIONS MAKES ITS IMPACT ON BENCHMARKING, IN OUR CONSIDERED OPINION IS WELL FOUNDED. HOWEVER, WHEN WE CONSIDER THE FACTS OF THE INSTANT CASE IN WHICH THE EFFECT OF SUCH GEOGRAPHICAL DIFFERENCES HAS BEEN REMOVED BY COMPARING FOB VALUE OF TRANSACTIONS WITH AES AND NON - AES, THE RELEVANCE OF SUCH FACTOR GETS MITIGATED. M/S CLEAR PLUS INDIA PVT. LTD V. DY. C.I.T., CIRCLE - 3(L),(I.T.A. NO.3944/D/2010] RECENTLY, THE SUPREME ADM INISTRATIVE COURT OF CZECH REPUBLIC, IN THE CASE OF RODUSEK JMSNMEREPUBIJKY, IN RE JU DR. LENKA KANIOVA, PRESIDENTAND JUDR. MARIE, J. JUDGMENT NO. 1 AFS 101/2012 - 31 JANUARY 23, 2013 ([2013] 35 TAXMANN.COM 197 (CRSAC)), ADJUDICATED AS UNDER: (I) THE SUPREM E ADMINISTRATIVE COURT HELD THAT TARGET MARKET CONDITIONS WERE IRRELEVANT FOR THE APPLICATION OF THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD; (II) THE DIFFERENCE IN PRICE LEVELS IN THE VARIOUS MARKETS AND COUNTRIES WERE NOT RELEVANT FOR DETERMINATION OF THE ARM'S LENGTH PRICE; (III)THE CONSIDERATION HAD NOT TO BE GIVEN TO THE TARGET MARKET IN SETTING THE PRICES AND THE DIFFERENCE IN MARGINS GENERALLY HAD TO BE ATTRIBUTED TO THE DISTRIBUTOR AND NOT TO THE PRODUCER. FURTHER, IN THE FOLLOWING CASES ALSO, T HE GEOGRAPHICAL DIFFERENCES WERE CONSIDERED TO BE IRRELEVANT IN THE ASSESSEE'S CASE: M/S. WRIGLEY INDIA PRIVATE LIMITED V. ADDL. CIT, RANGE IS, NEW DELHI [ITA 5224/DEL./2010] ITA NO. 1482/DEL./2015 29 M/S AGILITY LOGISTICS PRIVATE LIMITED V. DEPUTY COMMISSIONER OF INCOME TA X - 8(L), ITA NO. 8648/MUM/2011] FROM THE ABOVE SUBMISSION AND SUPPORTING EVIDENCES, IT IS EVIDENT THAT AFTER MAKING SUITABLE ADJUSTMENTS ABOVE, THE ASSESSEE HAS BEEN CHARGED AT A LOWER RATE THAN THE MARKET DETERMINED PRICES FOR THE INDEPENDENT CUSTOMERS. I N OTHER WORDS, IT CAN BE REASONABLY INFERRED THAT THERE IS NO INSTANCE OF OVERPRICING IN THE INSTANT CASE; AND THE INTERNATIONAL TRANSACTIONS OF IMPORT OF MACHINES CAN BE CONSIDERED TO MEET THE ARM'S LENGTH STANDARD. HENCE, THERE IS NO REASON TO DRAW AN AD VERSE INFERENCE IN THE INSTANT CASE. HOWEVER, THE LD. TPO IGNORED THE DATA/ SUBMISSION FURNISHED BY THE ASSESSEE PERTAINING TO CUP DATA AND STATED THAT THE ASSESSEE HAS NOT PUT ANY EXTRA EFFORTS ON RECORD TO BENCHMARK ITS INTERNATIONAL TRANSACTION PERTAIN ING TO PURCHASE OF MACHINES, WHICH IS FACTUALLY INCORRECT. JUDICIAL PRECEDENTS ON APPLICATION OF CUP METHOD BEING USED IN CASE OF DATA AVAILABILITY. IN THIS REGARD, THE ASSESSEE WOULD LIKE TO RELY UPON THE HON'BLE MADRAS TRIBUNAL'S RULING IN CASE OF ALDEN PREPRESS SERVICES (ITA NO. 927/ MDS/ 2008 AY 2004 - 05), WHEREIN THE HON'BLE TRIBUNAL HELD AS UNDER: 6.9. IT IS VERY DIFFICULT TO FIND AN EXACTLY IDENTICAL COMPARABLE UNCONTROLLED TRANSACTION. THE ABOVE FACT IS ALSO RECOGNIZED BY THE BANGALORE SPECIAL BENCH OF IT A T IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. V AC1T (2007) 109 TTJ 893 (BANG) (SB). IN APPLYING CUP, SIMILARITY OF THE PRODUCTS AND SIZE/ TYPE OF MARKETS ARE VITAL FACTORS. PURCHASES BY THE ALDEN GROUP LTD., U.K. FROM THE ASSES SEE COMPANY AS WELL AS FROM UNRELATED SUPPLIERS ARE ON BULK BASIS AND HAVE TO BE HELD AS COMPARABLE IF PRODUCTS ARE SIMILAR. THE LEARNED ITA NO. 1482/DEL./2015 30 TRANSFER PRICING OFFICER HAS NOWHERE QUESTIONED SIMILARITY OF PRODUCTS. IN VIEW OF THE ABOVE FACTS, IT IS HELD THAT THE INVOICES OF THE ALDEN GROUP LTD., U.K. OF PURCHASES FROM UNRELATED PARTIES AS WELL AS QUOTATIONS WILL HAVE TO BE CONSIDERED AS COMPARABLE UNCONTROLLED TRANSACTIONS AND THE LEARNED TRANSFER PRICING OFFICER HAS CLEARLY ERRED IN IGNORING SUCH IMPORTANT DATA. IT CAN BE SEEN FROM THE DETAILS SUBMITTED BY THE ASSESSEE COMPANY THAT THERE IS A COMPARABLE UNCONTROLLED PRICE AVAILABLE FOR ALL THE PRODUCTS (WHERE THE LEARNED TRANSFER PRICING OFFICER HAS RECOMPUTED THE ALP) IN THE FORM OF PURCHASE INVOICE OR QUOTATION FROM UNRELATED PARTY AND THE PRICE CHARGED BY THE ASSESSEE - COMPANY IS WITHIN 5% VARIATION FROM THE COMPARABLE UNCONTROLLED PRICE. ' '6.11. XX..XX.. THEREFORE, IN THE LIGHT OF ABOVE DECISION OF THE DELHI BENCH OF THE TRIBUNAL, IT IS HELD THAT THE TRANSFE R PRICING OFFICER OR THE ASSESSING OFFICER SHOULD NOT HAVE REJECTED THE ARM'S LENGTH PRICE DETERMINED BY THE APPELLANT WITHOUT SHOWING HOW THE PRICING WORKED OUT BY THE APPELLANT WAS INCORRECT OR PERVERSE. ' THE ABOVE CASE LAW CLEARLY SUGGESTS THAT IN CAS E OF AVAILABILITY OF DATA FOR THE APPLICATION OF CUP THE SAME SHOULD BE USED BY THE LD. TPO FURTHER, THE ASSESSEE WOULD ALSO LIKE TO BRING TO THE NOTICE OF YOUR HONOUR'S THAT APPLICATION OF CUP METHOD HAS ALSO BEEN UPHELD BY VARIOUS APPELLATE AUTHORITIES.SOME OF SUCH JUDICIAL PRECEDENTS ARE QUOTED BELOW: IN CASE OF M/S AGILITY LOGISTICS PVT. LTD (ITA NO.2000/MUM/2010), THE HON'BLE MUMBAI TRIBUNAL UPHELD THE PREFERENCE OF CUP METHOD OVER TNMM. THE RELEVANT EXTRACTS ARE REPRODUCED BELOW: - '2.13 . XX...XX. THE APPELLANT THEREFORE ASSERTED THAT WHERE A VALID CUP DOES EXIST FOR BENCHMARKING AN INTERNATIONAL TRANSACTION, ANY ANALYSIS OF THE NET PROFIT MARGIN IS NOT WARRANTED. ' ITA NO. 1482/DEL./2015 31 IN CASE OF M/S BAYER MATERIAL SCIENCE P. LTD. (ITA NO. 7977/MUM/20L0), T HE HON'BLE MUMBAI TRIBUNAL UPHELD THE APPROPRIATENESS OF CUP METHOD. THE RELEVANT EXTRACTS ARE REPRODUCED BELOW: - '26. XX..XX. - ON THE OTHER HAND, THE CUP METHOD IS USEFUL WHERE THE A.ES BUY OR SELL SIMILAR GOODS OR SERVICES. IN THE PRESENT CASE, WE ARE C ONCERNED WITH THE RENDERING OF SERVICES BY ONE A.E. TO ANOTHER. IN THAT VIEW OF THE MAILER. CUP METHOD APPEARS TO BE THE MOST APPROPRIATE METHOD IN THE GIVEN CIRCUMSTANCES. IT IS FURTHER RELEVANT TO NOTE THAT THE QUESTION OF APPLYING ONE METHOD OR THE OTHE R CAN ARISE IF THE DATA OF THE COMPARABLE CASES CONCERNING SUCH METHOD IS AVAILABLE. ' IN CASE OF M/S ARVIND MILLS LTD. (ITA NO.L304/AHD/2006), THE HON'BLE AHMEDABAD TRIBUNAL UPHELD THE APPROPRIATENESS OF CUP METHOD. THE RELEVANT EXTRACTS ARE REPRODUCED B ELOW: - '6. XX. ..XX. THERE IS NO DISPUTE THAT IN THE INSTANT CASE CUP METHOD, ONE OF THE PRESCRIBED METHOD, WAS CONSIDERED TO BE THE MOST APPROPRIATE METHOD BY THE ASSESSEE AND THE TPO IN DETERMINING THE ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS RELATI NG TO PAYMENT OF COMMISSION TO THE AFORESAID TWO AES. ' IN CASE OF M/S CLEAR PLUS INDIA PRIVATE LIMITED (ITA NO. 3944/D/2010), THE HON'BLE DELHI TRIBUNAL UPHELD THE APPROPRIATENESS OF CUP METHOD. THE RELEVANT EXTRACTS ARE REPRODUCED BELOW: - '7.7 XX XX..T HEREFORE, THE CUP METHOD COULD VALIDLY BE EMPLOYED PROVIDED PRODUCT COMPARABILITY IS ESTABLISHED. ' IN CASE OF DCIT, CIRCLE - 2(2), MUMBAI V. M/S. NHAVA SHEVA INTERNATIONAL CONTAINER [ITA NO.4078/M/2009], ON APPLICABILITY OF CUP METHOD, THE HON'BLE MUMBAI T RIBUNAL HELD AS UNDER: ITA NO. 1482/DEL./2015 32 'AS REGARDS THE SERVICES MENTIONED IN CLAUSES (D) & (E) RELATING TO PROCUREMENT SERVICES AND TECHNOLOGY TRANSFER SERVICES CIT(A) OBSERVED THAT THESE SERVICES WOULD BE REQUIRED MOSTLY IN INITIAL YEARS AND WOULD GRADUALLY GET REDUCED THEREAFTER. THEREFORE THOUGH SOME PAYMENTS MAY BE REQUIRED FOR THESE SERVICES, QUANTUM OF PAYMENT WAS NOT JUSTIFIED. FURTHER THERE WAS NO EVIDENCE FOR MARKETING SERVICES AS MENTIONED IN CLAUSE (F) AND ALSO IN RESPECT OF OTHER SERVICES MENTIONED IN CLAUSE ( G). CIT(A) ALSO ABSENTED THAT THE ASSESSEE HAD FOLLOWED TNMM METHOD OF ANALYSIS WHICH WAS NOT A VERY ACCURATE METHOD. THE PROPER METHOD COULD HAVE BEEN CUP METHOD IN RESPECT OF WHICH THE ASSESSEE HAD NOT GIVEN THE STUDY REPORT. WE THEREFORE SEE NO INFIRMITY IN THE ORDER OF CIT(A) WHICH IS A REASONED AND SPEAKING ORDER AND THE SAME IS THEREFORE UPHELD. ' IN CASE OF M/S RBS EQUITIES (INDIA) LIMITED/I. T.A. NO. 3077/MUM/2009 & [I.T.A. NO. 1236/MUM/2010], ON APPLICABILITY OF CUP METHOD, THE HON'BLE MUM BAI TRIBUNAL HELD AS UNDER: '12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS REGARDS THE METHOD TO BE ADOPTED FOR COMPARABILITY ANALYSIS, WE AGREE WITH THE CONTENTION OF THE LEARNED OR THAT CUP IS THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THE CASE INCLUDING ESPECIALLY THE FACT THAT INTERNAL CUPS ARE AVAILABLE FOR THE COMPARABILITY ANALYSIS. WE, THEREFORE, FIND NO INFIRMITY IN THE ACTION OF THE AO/TPO IN ADOPTING CUP METHOD FOR COMPARABIL ITY ANALYSIS INSTEAD OF TNMM APPLIED BY THE ASSESSEE. ' IN CASE OF M/S KNORR - BREMSE INDIA PVT. LTD, [ITA NO. 5097/DE L /2011], ON APPLICABILITY OF CUP METHOD, THE HON'BLE DELHI TRIBUNAL HELD AS UNDER: '7.2. THE APPELLANT IN THE PRESENT CASE ALSO DID NOT DE MONSTRATE AS TO HOW THE TRANSACTION BY TRANSACTION APPROACH IN HIS CASE IS NOT POSSIBLE. IT HAS ALSO NOT BEEN ITA NO. 1482/DEL./2015 33 SHOWN AS TO WHETHER THERE HAS BEEN ANY REAL OR TANGIBLE BENEFIT BY CARRYING SUCH INTERNATIONAL TRANSACTIONS WITH THE AES. THE COMPARABLE UNCONTROL LED PRICE METHOD ('CUP ' METHOD), FOR THE SUBJECT TRANSACTIONS BEING MOST DIRECT METHOD FOR DETERMINING ARM 'S LENGTH PRICE AND CHOSEN AS MOST APPROPRIATE METHOD IN THIS CASE BY TPO, THEREFORE, CANNOT BE FAULTED WITH. WE, THEREFORE, DO NOT FIND ANY ERROR I N REJECTING THE TNMM METHOD APPLIED BY THE ASSESSEE AND DETERMINATION OF ALP BY APPLYING CUP METHOD FOR BENCHMARKING INTERNATIONAL TRANSACTIONS IN A CASE LIKE THIS. ' IN CASE OF ACIT VS. MSS INDIA PVT. LTD. (32 SOT 132) (PUNE) [ITA NO. 393/PN/07J, ON APPL ICABILITY OF CUP METHOD, THE HON'BLE PUNE TRIBUNAL HELD AS UNDER: 'AS LONG AS THE ASSESSEE HAS ENTERED INTO RAW MATERIAL PURCHASE TRANSACTION WITH THE AE AT AN ARM 'S LENGTH PRICE, IT IS OF NO CONSEQUENCE WHETHER OR NOT THE ASSESSEE MAKES SUFFICIENT PROFI TS ON MANUFACTURING PRODUCTS FROM SUCH RAW MATERIAL. THERE ARE A NUMBER OF FACTORS GOVERNING THE PROFITS THAT THE ASSESSEE EARNS IN ITS BUSINESS AND MERELY BECAUSE THE ASSESSEE'S BUSINESS RESULTS ARE NOT SHOWING PROFITS, OR SHOWING LESSER PROFITS THAN INDU STRY AVERAGES, SUCH PROFITS PER SE CANNOT LEAD TO CONCLUSION THAT PURCHASE OF RAW MATERIAL IS NOT AT AN ARMS LENGTH PRICE. ON THE GIVEN FACTS, PARTICULARLY WHEN THE COMPARABLE UNCONTROLLED PRICES OF THE RAW MATERIALS ARE READILY AVAILABLE, IT IS NOT AT ALL NECESSARY TO JUMP TO TNMM METHOD. THE ONLY FACTOR WHICH HAS PREVAILED ON THE TRANSFER PRICING OFFICER IN REJECTING THE METHOD ADOPTED, OR CANVASSED, BY THE ASSESSEE IS THE FACT THAT THE ASSESSEE HAS INCURRED LOSS IN THE RELEVANT PREVIOUS YEAR, BUT. IN OUR HUMBLE UNDERSTANDING, SUCH A CONSIDERATION IS WHOLLY IRRELEVANT. THE TRANSACTIONAL NET MARGIN METHOD, ON A CONCEPTUAL NOTE, IS DESCRIBED AS ONE OF THE METHOD OF LAST RESORT AND IS PUT INTO SERVICE ONLY WHEN NO STANDARD OR TRADITIONAL METHOD OF ALP DETERMI NATION IS APPROPRIATE FOR DETERMINATION OF ARMS LENGTH PRICE.' ITA NO. 1482/DEL./2015 34 IN CASE OF M/S HERO MOTOCORP LIMITED (ITA NO.5I30/DEL/2010], ON APPLICABILITY OF CUP METHOD, THE HON'BLE DELHI TRIBUNAL HELD AS UNDER: 'WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF BOTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. AFTER CONSIDERING THE FACTS OF THE CASE AND THE ARGUMENTS OF BOTH SIDES, WE AGREE WITH THE REVENUE THAT FOR DETERMINING THE ALP OF PURCHASE OF THE SPARE PARTS/COMPONENTS, CUP METHOD WOULD BE MOST APPROPRIATE METHOD. THEREFORE, WE UPHOLD THE SELECTION OF CUP METHOD BY THE TPO. HOWEVER, WHILE APPLYING THE CUP METHOD, IT IS TO BE ASCERTAINED WHETHER SIMILAR GOODS WERE AVAILABLE INDIGENOUSLY. IF THE GOODS WERE NOT AVAILABLE INDIGENOUSLY, THEN NATURALLY THE RATE O F INDIGENOUS GOODS CANNOT BE APPLIED FOR DETERMINING THE ALP. IT IS THE CONTENTION OF THE ASSESSEE THAT WHEN THE GOODS WERE NOT AVAILABLE INDIGENOUSLY THEN ONLY THE SAME WERE PURCHASED FROM AE. HOWEVER, NO EVIDENCE IN THIS REGARD IS PRODUCED BY THE ASSESSE E. ' IN CASE OF M/S DELPHI TVS DIESEL SYSTEMS LTD. V. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE 1(4), CHENNAI [IT.A. NO. 2163/MDS/2010], ON APPLICABILITY OF CUP METHOD, THE HON'BLE MADRAS TRIBUNAL HELD AS UNDER: 'THE SAID OECD GUIDELINES IS REPRODUCED HEREUNDER: - '3.27 ONE STRENGTH OF THE TRANSACTIONAL NET MARGIN METHOD IS THAT NET MARGINS (E.G. RETURN ON ASSETS, OPERATING INCOME TO SALES, AND POSSIBLY OTHER MEASURES OF NET PROFIT) ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES THAN IS TH E CASE WITH PRICE, AS USED IN THE CUP METHOD. THE NET MARGINS ALSO MAY BE MORE TOLERANT TO SOME FUNCTIONAL DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGINS. DIFFERENCES IN THE FUNCTIONS PERFORMED BETWEEN ENTERPRISE S ARE OFTEN REFLECTED IN VARIATIONS IN OPERATING EXPENSES. CONSEQUENTLY, ENTERPRISES MAY HAVE A WIDE RANGE OF GROSS PROFIT MARGINS BUT STILL EARN BROADLY SIMILAR LEVELS OF NET PROFITS. ' ITA NO. 1482/DEL./2015 35 THE ABOVE GUIDELINES DO NOT SAY THAT EVEN WHERE THERE WERE SUBSTANTIA L DIFFERENCES BETWEEN THE ITEMS MANUFACTURED, A CANDIDATE FOR TNM METHOD COULD BE SELECTED. IN SUCH CIRCUMSTANCES, THE TPO WAS PERFECTLY JUSTIFIED IN REJECTING THE TNM METHOD HAVING FOUND THAT THE COMPARABLE ENTITIES SELECTED BY THE ASSESSEE HAD SUBSTANTIA L RELATED PARTY TRANSACTIONS AND DIFFERENCE IN FUNCTIONALITY WHICH ERODED THE COMPARABILITY MATERIALLY. AS AGAINST THIS, ASSESSEE ITSELF HAS ADMITTED THAT IT HAD SIMILAR ITEMS OF IMPORT FROM BOTH AES AND NON - AES. IN OUR OPINION, ADOPTION OF CUP METHOD WAS APPROPRIATE ESPECIALLY WHEN SUCH ITEMS COULD BE IDENTIFIED. ' SIMILAR VIEW WAS ALSO UPHELD IN CASE OF M/S TWILIGHT JEWELLERY PVT, LTD. [ITA NO. 728I/MUM/20I2], M/S INDIAN ADDITIVES LIMITED V. ASSISTANT COMMISSIONER OF INCOME TAX COMPANY CIRCLE - II(3), CHENNAI (ITA NO.703/MDS/2009], VIPIN ENTERPRISES (HC) (ITA NO.30/2013) AND TRUETZCHELER INDIA P. LTD. (ITA NO. 798/MUM/2010 A Y 2006 - 07) FURTHER, THE ASSESSEE WOULD ALSO LIKE TO BRING TO THE NOTICE OF YOUR HONOUR'S THAT APPLICATION O F CUP METHOD HAS BEEN PREFERRED OVER OTHER PRESCRIBED METHODS BY VARIOUS APPELLATE AUTHORITIES. SOME OF SUCH JUDICIAL PRECEDENTS ARE QUOTED BELOW: IN CASE OF M/S ISAGRO (ASIA) AGROCHEMICAL PVT. LTD (ITA NO.2044/MUM/2010), THE HON'BLE MUMBAI TRIBUNAL HEL D THAT CUP METHOD IS PREFERRED OVER TNMM. THE RELEVANT EXTRACTS ARE REPRODUCED BELOW: - '4. XX. ..XX. IL IS OBVIOUS THAT WHEN THE PRICE OF SIMILAR GOODS OR SERVICES AS SOLD OR PROVIDED TO THE NON - AES IS AVAILABLE, SUCH A PRICE CONSTITUTES THE BEST GUIDE TO FIND OUT WHETHER THE PRICE CHARGED OR PAID TO THE AES IS AT ALP OR NOT. IT IS MORE SO WHEN SUCH COMPARABLE UNCONTROLLED TRANSACTIONS IS INFERNAL. WHEN SIMILAR GOODS AS TRADED WITH AES CONSTITUTING INTERNATIONAL TRANSACTIONS ARE TRADED WITH NON - AES, IT IS ALWAYS PROPER TO CONSIDER THE PRICE OF GOODS TRADED WITH ITA NO. 1482/DEL./2015 36 NON - AES, FOR BENCHMARKING PRICE OF GOODS TRADED WITH AES. IN OUR CONSIDERED OPINION THE ID. C1T(A) WAS JUSTIFIED IN UPHOLDING THE PREFERENCE OF CUP METHOD OVER TNMM. ' (EMPHASIS SUPPLIED) IN CASE OF M/S. J.P. MORGAN INDIA PRIVATE LIMITED (ITA NO. 670/MUM/2006), ON APPLICABILITY OF CUP METHOD, THE HON'BLE MUMBAI TRIBUNAL HELD AS UNDER: '3. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENTIONS HAVE CAREFULLY CONSIDERED. THE FACTS OF THE CASE HAVE ALREA DY BEEN DISCUSSED IN DETAIL IN THE ABOVE PART OF THIS ORDER. WE ARE IN AGREEMENT WITH THE OBSERVATIONS OF LD. CIT(A) THAT IN CASE OF AVAILABILITY OF INTERNAL CUP METHOD, TNMM COULD NOT BE APPLIED. WHAT WAS NECESSARY WAS THAT ASSESSEE SHOULD HAVE BEEN ALLOW ED THE RELIEF AS PET - DIFFERENCE IN THE ACTIVITIES IN THE SERVICES RENDERED BY IT TO RELATED AND UNRELATED PARTIES. THE SAID DIFFERENCE HAS BEEN DESCRIBED IN THE AFOREMENTIONED TABLES SUBMITTED BY THE ASSESSEE TO THE TPO VIDE LETTER DATED 29/11/2004. HOWEVE R, TPO DID NOT DISCUSS THOSE FIGURES IN HIS ORDER BUT THESE FIGURES ARE DISCUSSED IN THE ORDER OF LD. CIT(A). THE TPO DID NOT POINT OUT ANY DEFECT IN SUCH CALCULATION OF THE ASSESSEE. IT HAS BEEN DESCRIBED IN THE ABOVE SUBMISSION THAT ASSESSEE HAD TO INCUR ADDITIONAL COST TO THE TUNE OF 0.29% IN RELATION TO SERVICES RENDERED BY IT TO UNRELATED PARTIES WHEN THE SAME IS COMPARED TO THE SIMILAR SERVICES RENDERED TO THE RELATED PARTIES. IN VIEW OF THESE FACTS, WE ARE OF THE OPINION THAT LD. C1T(A) WAS RIGHT IN GRUNTING RELIEF TO THE ASSESSEE AND WE DECLINE TO INTERFERE IN HIS FINDINGS ON THIS ISSUE. ' IN CASE OF SERDIA PHARMACEUTICAL (INDIA) PRIVATE LIMITED VS. ACIT (2011 - TII - 02 - ITAT - MUM - TP), ON APPLICABILITY OF CUP METHOD, THE HON'BLE MUMBAI TRIBUNAL HELD AS U NDER: 'WHETHER WE PROCEED ON THE BASIS THAT (HERE IS AN ORDER OF PREFERENCE IN WHICH TRANSFER PRICING METHODS ARE TO BE APPLIED, OR WHETHER WE PROCEED WITHOUT ANY SUCH PRIORITY ORDER, THE TRADITIONAL TRANSACTION METHODS, AND PARTICULARLY CUP, ARE PREFERRE D METHODS IN THE SENSE THAT ALL OTHER THINGS ITA NO. 1482/DEL./2015 37 BEING EQUAL, CUP AND TRADITIONAL TRANSACTION METHODS LEAD TO MORE RELIABLE RESULTS VIS - A - VIS THE RESULTS OBTAINED BY APPLYING TRANSACTION PROFIT METHOD. AS A RESULT, WHEN CUP METHOD CAN BE REASONABLY APPLIED IN DETERMINING THE ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION IN A PARTICULAR FACT SITUATION, AND UNLESS ANOTHER METHOD IS PROVEN TO BE MORE RELIABLE A METHOD VISA - VIS THE FACT SITUATION OF THAT PARTICULAR CASE, THE CUP METHOD IS TO BE PREFERRED' IN CASE OF M/S. LIVINGSTONES (ITA NO. 7303/ MUM/2011 A Y 2007 - 08), ON APPLICABILITY OF CUP METHOD, THE HON'BLE MUMBAI TRIBUNAL HELD AS UNDER; 'ONCE A DIRECT METHOD OF INTERNAL CUP IS AVAILABLE THEN THERE IS NO NEED TO RESORT TO TNMM METHOD. ' IN CASE OF NOB LE RESOURCES & TRADING INDIA PVT. LTD, (ITA NO. 5722/ DEL/ 2010 A Y 2006 - 07), ON APPLICABILITY OF CUP METHOD, THE HON'BLE DELHI TRIBUNAL HELD AS UNDER: 'IF THE ASSESSEE SUCCEEDS IN PROVIDING APPROPRIATE DATA RELEVANT FOR COMPARISON UNDER THE CUP METHOD, T HEN THE TPO SHOULD DETERMINE THE ALP UNDER THE CUP METHOD.' BASED ON THE ABOVE, IT IS RESPECTFULLY SUBMITTED THAT THE LD. TPO HAS ERRED IGNORED THE CUP DATA SUBMITTED BY THE ASSESSEE. THE ASSESSEE WOULD AGAIN LIKE TO REITERATE ITS RELIANCE ON THE HON'BLE MADRAS TRIBUNAL'S RULING IN CASE OF ALDEN PREPRESS SERVICES (ITA NO. 927/ MDS/ 2008 AY 2004 - 05), WHEREIN THE HON'BLE TRIBUNAL HELD THAT 'THE INVOICES OF PURCHASES FROM UNRELATED PARTIES AS WELL AS QUOTATIONS WILL HAVE TO BE CONSIDERED AS COMPARABLE UNCONTR OLLED TRANSACTIONS AND THE LEARNED TRANSFER PRICING OFFICER HAS CLEARLY ERRED IN IGNORING SUCH IMPORTANT DATA.'. THE ASSESSEE FURTHER SUBMITS THAT COMPARATIVE ANALYSIS OF THE FOB (PER UNIT) SALE VALUES OF THE GOODS SOLD BY THE AE TO THE INDEPENDENT DISTRIBUTORS AS WELL AS TO THE ASSESSEE DURING FY 2009 - 10. SINCE IN ALL THE INSTANCES, FOB SALE ITA NO. 1482/DEL./2015 38 PRICE CHARGED BY THE AE FROM THE ASSESSEE WAS LESS THAN THE AVERAGE FOB SALE PRICE CHARGED BY THE AE TO THE INDEPENDENT CUSTOMERS FOR THE SAME MODEL, THE INTERNATIONAL TRANSACTIONS OF IMPORT OF MACHINES SHOULD BE CONSIDERED TO BE CONSISTENT WITH ARM'S LENGTH STANDARD. IT IS HUMB LY REQUESTED THAT YOUR HONOUR MAY PLEASE GIVE DUE COGNIZANCE TO THE COMPARABLE PRICES SUBMITTED BY THE ASSESSEE, DEMONSTRATING COMPLIANCE WITH THE ARM'S LENGTH STANDARD IN RELATION TO ITS INTERNATIONAL TRANSACTION PERTAINING TO IMPORT OF MACHINES FROM THE AE AND DIRECT THE LD. TPO TO DELETE THE ADJUSTMENT OF RS. 12,71,34,142 MADE TO THE VALUE OF AFORESAID INTERNATIONAL TRANSACTION. 19. ON GROUND NO. 1 OF APPEAL BEFORE US, SHRI MANOJ PARDASANI, THE LD. AR OF THE ASSESSEE REPEATED THE SAME ARGUMENTS AND FURTHER SUBMITTED THAT CUP METHOD HAS BEEN ACCEPTED IN PRINCIPLE BY THE TPO. HOWEVER, HE DISREGARDED THE METHOD. HE FURTHER SUBMITTED THAT MERELY BECAUSE TNMM METHOD HAS BEEN ADOPTED BY THE ASSESSEE FOR THE PURPOSE OF BEN CHMARKING, THE SAME CANNOT BE RECONSIDERED LATER ON . HE HAS FURTHER STATED IN THE SUBMISSIONS DATED 10.07.2013 THAT THE AE DID NOT SALE ANY PRODUCT TO INDEPENDENT THIRD PARTY DISTRIBUTOR IN INDIA AS IT S ALES DIRECTLY TO THE END - CUSTOMERS IN INDIA. THEREFORE, THE PRICE FOR SALE OF SAME ORDERS MADE TO INDEPENDENT DISTRIBUTORS IN INDIA, IS NOT AVAILABLE. HE FURTHER STATED THAT AE SELLS THE PRODUCT TO INDEPENDENT THIRD PARTY DISTRIBUTORS LOCATED OUTSIDE INDIA AND HE DREW ATTENTION TO THE FOB PRICE OF THESE PRODUCTS SOLD TO THE ASSESSEE BY T HE AE AND ALSO THE PRODUCTS SOLD TO INDEPENDENT DISTRIBUTORS IN OTHER COUNTRIES BY THE ITA NO. 1482/DEL./2015 39 AE. HE STATED THAT THESE DATA IS EFFECTIVELY COMPARABLE UNCONTROLLED PRICE FOR THE MODELS SOLD BY ITS AE AS WELL AS INDEPENDENT THIRD PARTIES. HE FURTHER STATED THAT SIN CE THE PRICE PAID BY THE ASSESSEE TO ITS AE IS LESS THAN THE PRICE PAID BY THE INDEPENDENT DISTRIBUTORS, THEREFORE, IT CORROBORATES THE ALP NATURE OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF GOODS. THEREFORE, HIS SUBMISSION WAS THAT THE CONTENTION OF T PO SUPPORTS THE CONTENTION OF THE ASSESSEE THAT IN CASE AE IS SELLING SIMILAR PRODUCTS TO OTHER COUNTRIES, THEN AFTER CLAIMING ADJUSTMENT FOR GEOGRAPHICAL DIFFERENCE, CUP METHOD CAN BE EASILY APPLIED FOR WHICH NO EXTRA EFFORTS HAVE BEEN PUT ON RECORD. HE S UBMITTED THAT FOB VALUE OF THE GOODS ARE COMPARABLE FOR WHICH THE ASSESSEE HAS SUBMITTED ENOUGH DATA. THEREFORE, THE CONTENTION OF THE TPO, IN PRINCIPLE , ACCEPTS THE CUP METHOD. HE FURTHER STATED THAT THE LD. DRP HAS INCORRECTLY OBSERVED THAT COMPARABLE PR ICE INDICATED BY THE ASSESSEE IS CHARGED TO RELATED PARTIES. IN THE END, HE SUBMITTED THAT THOUGH THE ASSESSEE HAS TAKEN TNMM AS THE MOST APPROPRIATE METHOD IN ITS TP STUDY REPORT, HOWEVER, SUBSEQUENTLY HAS GIVEN ADEQUATE REASONS FOR ADOPTION OF CUP METHOD AND FOR COMPARABILITY, SUFFICIENT DATA HAS ALSO BEEN PROVIDED FOR. HE FURTHER STATED THAT THE LD. DRP DID NOT VERIFY THAT THE DETAILS OF PRODUCTS SOLD TO VARIOUS INDEPENDENT THIRD PARTY DISTRIBUTORS IN OTHER COUNTRIES WERE PROVIDED AND THEY WERE, IN FACT, NOT THE RELATED PARTY. FURTHER AS PER SUBMISSIONS DATED ITA NO. 1482/DEL./2015 40 10.07.2013, THE ASSESSEE HAS WORKED OUT AVERAGE FOB VALUE FOR INDEPENDENT DISTRIBUTORS IN OTHER COUNTRIES, THEREFORE, THERE IS A RELIABLE BASIS FOR COMPARABILITY ANALYSIS. REGARDING THE OTHER TERMS A ND CONDITIONS AND ITS COMPARABILITY, HE STATED THAT AT PAGE NO. 2098 ONWARDS, THE GEOGRAPHICAL REGION WISE SALE PRICE WHICH IS SHOWN TO BE CIF VALUE AND ADEQUATE ADJUSTMENT OF FREIGHT AND EXPENSES HAVE BEEN MADE TO ARRIVE AT FOB VALUE AND THEREFORE, THE OB SERVATION OF DRP REGARDING ABSENCE OF ADEQUATE COMPARABLE DATA, IS NOT CORRECT. IN VIEW OF THIS, HIS SUBMISSION WAS THAT CUP METHOD IS THE MOST APPROPRIATE METHOD FOR COMPARABILITY ANALYSIS AND ADEQUATE DATA ARE AVAILABLE. THEREFORE, TNMM METHOD IS NOT THE MOST APPROPRIATE METHOD. HE FURTHER SUBMITTED THAT WHEN THE ERROR COMES TO THE NOTICE OF THE ASSESSEE, IT WAS SUBMITTED BEFORE THE TPO AS WELL AS BEFORE DRP THAT THE ASSESSEE REQUESTED FOR ADOPTION OF CUP METHOD. IN THE END, HE REITERATED ALL HIS SUBMISSI ONS MADE BEFORE THE LD. DRP. 20. THE LD. DR SUBMITTED THAT IN CASE OF SOLE DISTRIBUTOR, COMPARABLE DATA MAY NOT BE AVAILABLE AND THEREFORE, CUP METHOD THOUGH MAY BE APPROPRIATE, BUT IN ABSENCE OF ANY COMPARABLE PRICE, COMPARABILITY ANALYSIS FAILS AND HENC E, THE CUP METHOD NEEDS THE REQUISITE DATA, WHICH THE ASSESSEE FAILED TO PROVIDE. HE FURTHER SUBMITTED THAT WHEN THE ASSESSEE HIMSELF DESPITE HAVING ITA NO. 1482/DEL./2015 41 ALL DATA RELIED UPON, HAS HELD THAT IT ACTS AS SOLE DISTRIBUTOR OF ITS AE IN INDIA AND ACCORDING TO THE OWN ADMISSION OF THE ASSESSEE, DUE TO LACK OF AVAILABILITY OF DATA OF COMPARABLE COMPANIES, CUP WAS REJECTED AS MOST APPROPRIATE METHOD. HE FURTHER STATED THAT LD. DRP HAS ALSO HELD THAT THERE IS NO RELIABLE BASIS FOR VERIFYING DATA WHICH IS SUBMITTED BY THE ASSESSEE. HE ALSO CHALLENGED THE DATA WHICH IS SUBMITTED BY THE ASSESSEE AS PER ITS SUBMISSIONS DATED 10.07.2013. 21. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE FACTS HAVE ALREADY BEEN NARRATED IN THE ABOVE - SAID PARAGRAPHS. THE COMPARABLE UNC ONTROLLED PRICE METHOD COMPARES THE PRICE CHARGED FOR PROPERTY OR SERVICES TRANSFERRED IN A CONTROLLED TRANSACTION TO THE PRICE CHARGED FOR PROPERTY OR SERVICES TRANSFERRED IN COMPARABLE UNCONTROLLED TRANSACTIONS. HOWEVER, WHERE THE COMPARABLES ARE AVAILAB LE, IT IS UNDISPUTEDLY, THE BEST METHOD FOR COMPUTING THE ALP AS ALL OTHER METHODS ARE BASED ON JUST ESTIMATION BASED ON GROSS MARGIN OR NET MARGIN. HOWEVER, THE SIMILARITY OF PRODUCTS AND SERVICES IS THE GREATEST DIFFICULTY TO THE COMPARABILITY ANALYSIS. WHEN THERE IS A SALE OF IDENTICAL PRODUCT TO UNRELATED PARTY, IT WILL FORM BASIS OF DETERMINING ALP IN RESPECT OF SALES TO AN AE, BUT ONE OF THE ESSENTIAL PRE - REQUISITE IS THAT REASONABLY ACCURATE ADJUSTMENT ARE TO BE MADE TO ELIMINATE ITA NO. 1482/DEL./2015 42 MATERIAL FACTORS AFF ECTING PRICE, COST OR THE PROFIT ARISING FROM SUCH TRANSACTION. ADEQUATE WEIGHTAGE IS ALSO REQUIRED TO BE GIVEN TO THE MARKET CONDITION OF DIFFERENT GEOGRAPHICAL LOCATIONS. THEREFORE, CUP METHOD COULD VALIDLY BE EMPLOYED PROVIDED PRODUCT COMPARABILITY IS F IRST ESTABLISHED. ON LOOKING TO THE FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT CUP METHOD IS THE MOST APPROPRIATE METHOD PROVIDED THE VALID DATA WHICH CAN BE TESTED FOR COMPARISON IS AVAILABLE. THOUGH BEFORE THE LD. DRP, THE APPELLANT HAS RELIED ON MANY JUDICIAL PRECEDENCE REGARDING APPLICABILITY OF CUP METHOD, WE ARE OF THE VIEW THAT THERE IS NO DISPUTE BETWEEN THE PARTIES ABOUT APPLICABILITY OF CUP AS THE MOST APPROPRIATE METHOD. HOWEVER, THE DOUBT IS ABOUT THE RELIABILITY OF THE DATA PROVIDED BY T HE ASSESSEE. MERELY FOR THE REASON THAT IN ITS TP STUDY REPORT, THE ASSESSEE HAS ADOPTED TNMM AS THE MOST APPROPRIATE METHOD, CANNOT PREVENT THE ASSESSEE NOW SUBMITTING BEFORE THE DRP THAT CUP METHOD SHOULD BE APPLIED AND THERE IS REASONABLE DATA AVAILABLE FOR COMPARABILITY ANALYSIS. THERE IS NO BASIS IN LD. DRP SATING THAT THERE IS NO RELIABLE BASIS FOR VERIFYING THE DATA. IT WOULD ALWAYS BE THE ONUS OF THE ASSESSEE TO SHOW THE BASIS OF COMPARABILITY ANALYSIS AND VERACITY OF THE DATA USED FOR COMPARABILITY . IN THE PRICE SUBMITTED BY THE ASSESSEE, IT HAS MADE ADJUSTMENT BETWEEN CIF PRICE AND FREE ON BOARD PRICE. THEREFORE, IT HAS ALSO MADE THE ADJUSTMENT ARISING OUT OF THE GEOGRAPHICAL DISSIMILARITIES IN THE TRANSACTIONS. HOWEVER, AS ITA NO. 1482/DEL./2015 43 AT THE STATE OF TPO, THE CUP METHOD HAS BEEN REJECTED AT THE THRESHOLD BOTH BY THE ASSESSEE AS WELL AS LD. TPO, THERE IS NO OCCASION TO GO TO COMPARABILITY ANALYSIS AND VERIFY THE TRANSACTIONS AND PRICE. IN VIEW OF THE ABOVE, WE HOLD THAT (I) THE CUP METHOD IS THE MOST SUITABLE METH OD IN THE CASE OF ASSESSEE; (II) THAT AS THE ASSESSEE IS THE SOLE DISTRIBUTOR OF ITS AE IN INDIA, THE ASSESSEE HAS STATED THAT ITS PRICE SHOULD BE COMPARED WITH THE SALE OF GOODS WHICH ARE SIMILAR AND TO INDEPENDENT THIRD PARTIES, BUT IN DIFFERENT GEOGRAPHICAL LOCATIONS, THEREFORE IT SHALL BE THE DUTY OF THE ASSESSEE TO PROVIDE THE SALE DATA OF THE AE IN TERMS OF SALE PRICE OF ASSESSEE IN INDIA AS WELL AS OTHER GEOGRAPHICAL LOCATIONS, WHICH ARE CL AIMED TO BE COMPARABLE PRICE; (III) THAT THE ASSESSEE SHALL ALSO PROVID E QUANTITATIVE DATA OF PURCHASE IN DIFFERENT GEOGRAPHICAL LOCATIONS AND OTHER TERMS AND CONDITIONS ATTACHED TO THOSE SALES INCLUDING THE TERMS OF PAYMENT; (IV) ASSESSEE SHALL BE FURTHER DUTY BOUND TO SUPPORT ITS T P STUDY REPORT FOR ROBUST COMPARABILITY OF T HE INTERNATIONAL TRANSACTION BY PROVIDING REQUISTE INFORMATION REQUIRED BY LD TPO FOR DETERMINING ALP APPLYING CUP AS MAM (V) ON THE BASIS OF ABOVE DATA PROVIDED, THE LD. TPO/AO SHALL COM PUTE THE ALP USING THIS DATA APPLYING CUP ITA NO. 1482/DEL./2015 44 METHOD. IF AT ANY STAGE, THE DATA IS FOUND TO BE NOT ADEQUATE AND THE TERMS AND CONDITIONS OF SALE S ARE MATERIALLY DIFFERENT OR THAT NO ADJUSTMENT CAN BE MADE TO THE PRICE, THEN THE AO AND TPO SHALL PROCEED TO DETERMINE THE ALP IN ACCORDANCE WITH OTHER METHODS AND THEN DETERMINING TH E MOST APPROPRIATE METHOD. (VI) NEEDLESS TO SAY THAT THE APPELLANT - ASSESSEE MAY BE GRANTED ADEQUATE OPPORTUNITY OF PRODUCING DATA, ITS OWN COMPARABILITY ANALYSIS AND ITS OWN REVISED TP STUDY REPORT ON THE BASIS OF CUP METHOD. IF THERE IS ANY DIFFERENCE OF OPIN ION THEN THE LD. TPO SHALL GRANT ADEQUATE OPPORTUNITY OF HEARING TO THE APPELLANT. 22. IN VIEW OF THIS, GROUND NO. 1 OF APPEAL OF THE ASSESSEE IS SET ASIDE TO THE FILE OF LD. AO/TPO WITH THE ABOVE DIRECTIONS. IN THE RESULT, GROUND NO. 1 OF THE APPEAL OF T HE ASSESSEE IS ALLOWED. 23. GROUND NO. 2 OF APPEAL IS AGAINST ENHANCEMENT IN THE VALUE OF INTERNATIONAL TRANSACTION OF PURCHASE OF FINISHED GOODS CKD/SKD AND SPARE PARTS BY RS.9,56,91,501/ - . GROUND NO. 3 OF APPEAL IS AGAINST INCORRECT COMPUTATION OF THE NET PROFIT MARGIN REALIZED BY THE APPELLANT AT MINUS 8.45% FROM INTERNATIONAL TRANSACTION WITH ITS AE INSTEAD OF 4.49%. 24. DURING THE YEAR THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION OF PURCHASE OF SPARE PARTS OF RS.7,85,15,567/ - . FOR ITS CO MPARABILITY ANALYSIS, ITA NO. 1482/DEL./2015 45 IT HAS QUOTED THREE TRANSACTIONS, I.E., PURCHASE OF MACHINES, PURCHASE OF SPARE PARTS AND COMMISSION INCOME AND THEREAFTER APPLIED NET MARGINAL METHOD ADOPTING PLI OF NET OPERATING PROFIT BY SALES AND THEN DETERMINING THE COMPARABLE P LI AT 1.17% WITH ASSESSEE S PLI OF 2.21%. AS WE HAVE HELD IN GROUND NO. 1 THAT FOR THE PURCHASE OF HEAVY EARTH MOVING MACHINES AND JIG - FIXTURES, THE CUP METHOD IS MOST APPROPRIATE METHOD AND THEREAFTER DIRECTED FOR FRESH COMPARABILITY ANALYSIS FOR THE SAME . AS THE PURCHASE OF HEAVY EARTH MOVING MACHINES IS NOW TAKEN OUT BY APPLYING DIFFERENT METHOD AND NOW FRESH WORKING OF PLI IS REQUIRED TO BE DETERMINED OF COMPARABLE VIS A VIS ASSESSEE. THEREFORE, IN VIEW OF THIS, GROUND NO. 2 AND 3 OF THE ASSESSEE BECOME PRE - MATURE. THEREFORE, WE SET ASIDE GROUND NO. 2 OF THE APPEAL BACK TO THE FILE OF LD. TPO FOR FRESH COMPARABILITY ANALYSIS IN TERMS OF OUR DIRECTIONS CONTAINED IN GROUND NO. 1. 25. GROUND NO. 3 IS AGAINST THE INCORRECT COMPUTATION OF NET PROFIT MARGIN OF THE APPELLANT ALSO REQUIRES TO BE SET ASIDE TO THE FILE OF LD. TPO. IN THE RESULT GROUND NO. 2 & 3 OF APPEAL ARE ALLOWED SUBJECT TO DETERMINING THE MOST APPROPRIATE METHOD AFRESH AND RE - DOING COMPARABILITY ANALYSIS BASED ON THAT. ITA NO. 1482/DEL./2015 46 26. GROUND NO. 4 IS AGAINST CARRYING OUT FRESH SEARCH FOR COMPARABLE COMPANIES BY THE LD. TPO WHERE THE ASSESSEE HAS CHALLENGED THAT THE FILTERS AND CRITERIA ARE INAPPROPRIATE AND ARE ARBITRARY. 27. AS TH E APPELLANT IS ENGAGED IN TRADING OF HEAVY EARTH MOVING EQUIPMENTS, THE LD. TPO APPLYING TNMM METHOD, HAS SELECTED CERTAIN COMPARABLES APPLYING CERTAIN FILTERS AND CRITERIA. HOWEVER, IN VIEW OF OUR DECISION IN GROUND NO. 1 OF APPEAL, WHEREIN WE HAVE HELD T HAT CUP METHOD NEEDS TO BE APPLIED AND THIS OBJECTION OF THE ASSESSEE RELATES TO COMPARABILITY ANALYSIS UNDER TNMM METHOD, HENCE, IN VIEW OF OUR DIRECTION IN GROUND NO. 1 OF APPEAL, GROUND NO. 4 & 5 OF THE APPEAL WITH RESPECT TO FRESH SEARCH FOR COMPARABLE COMPANIES BY THE LD. TPO AS WELL AS COMPARISON OF FAR ANALYSIS BECOMES INFRUCTUOUS. IN VIEW OF THIS, GROUND NO. 4 & 5 OF APPEAL ARE DISMISSED. 28. GROUND NOS. 6 TO 14 ARE PERTAINING TO ADDITION OF RS.1,25,33,385/ - TO THE TOTAL INCOME OF THE APPELLANT BY ALLEGING THAT SELLING AND DISTRIBUTION EXPENSES INCURRED BY THE ASSESSEE FOR ITS OWN BUSINESS IN INDIA HAS RESULTED INTO CREATION OF MARKET INTANGIBLES IN VIEW OF ITS ASSOCIATE ENTERPRISES. THE LD. TPO HAS OBSERVED THAT THE ASSESSEE HAS INCURRED HIGH LEVEL OF SELLING THE DISTRIBUTION EXPENSES WHICH ARE IN THE NATURE OF AMP EXPENSES WHICH CREAT E S ITA NO. 1482/DEL./2015 47 HIGH POSSIBILITY THAT THESE EXPENDITURES ARE TO EXPAND THE REACH OF THE BRAND OF AE IN INDIA. THEREFORE, A SHOW CAUSE NOTICE WAS ISSUED THAT SELLING AND DISTRIBUTIO N EXPENSES TO THE EXTENT OF RS.5,07,37,429/ - IS 9.68% OF THE TOTAL SALES AND THEREFORE, USING TWO COMPARABLES WHY ADJUSTMENT ON ACCOUNT OF A L P SHOULD NOT BE MADE. AGAINST THIS, THE ASSESSEE REPLIED THAT THE EXPENDITURE S INCURRED BY THE ASSESSEE ARE NOT IN THE NATURE OF AMP EXPENSES, BUT COMMISSION ON SALES, WARRANTEE EXPENSES AND OUTWARD FREIGHT. THE CONTENTION OF THE ASSESSEE WAS REJECTED AND THEN THE LD. TPO HELD THAT THE APPELLANT IS INCURRING AMP EXPENSES THAT IS CREATING VALUE MARKETABLE INTANGIBLES IN FAVOUR OF ITS AE WHICH IS AN INTERNATIONAL TRANSACTION . IT WAS FURTHER HELD THAT COMMISSION EXPENSES, WARRANTEE EXPENSES AND FREIGHT IS ALSO PART OF AMP EXPENSES. THE AMP EXPENSES WERE DETERMINED AT 0.99% OF SALES COMPARED TO 9.68% IN CASE OF ASSESSEE AND DETERMINING A MARK - UP OF 15%, THE ADJUSTMENT TO THE ASSESSEE S TOTAL INCOME WAS PROPOSED AT RS.5,23,82,317/ - . 29. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. DRP WHO, IN TURN, HELD THAT THE ASSESSEE IS NOT THE OWNER OF THE BRAND BUT ITS FOREIGN AE AND, THEREFORE, THE AMP EXPENDITURE ENHANCED THE BRAND OF ITS AE. THE LD. DRP ALSO HELD THAT APPLYING THE RATIO OF DECISION OF THE SPECIAL BENCH OF ITAT IN CASE OF ITA NO. 1482/DEL./2015 48 L.G. ELECTRONICS INDIA LTD., THE BRIGHT LINE TEST ON THE AMP EXPENDITURE IDENTIFIES THE EXPE NDITURE ATTRIBUTABLE TO THE REQUIREMENT OF OVER AND ABOVE THIS REQUIREMENT AND THEREFORE, UPHELD THE ADJUSTMENT ON ACCOUNT OF AMP EXPENSES MADE BY THE LD.TPO. 30. BEFORE US, THE LD. AR HAS CONTENDED THAT LD. TPO S ARGUMENT THAT AMP EXPENSES CREATES A MARK ET INTANGIBLE IS INCORRECT. HE FURTHER SUBMITTED THAT BRIGHT LINE TEST HAS FURTHER BEEN NOT THE PART OF INDIA TAX LAW AND CANNOT BE APPLIED FOR DETERMINING EXCESS AMP EXPENSES. HE SUBMITTED THAT HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERRICTION MOBILE COMMUNICATION COVERS THE ISSUE IN FAVOUR OF THE ASSESSEE. 31. THE LD. DR RELIED ON THE ORDER OF THE LD. TPO AND LD. DRP. HE VEHEMENTLY SUBMITTED THAT AMP EXPENSES ARE INTERNATIONAL TRANSACTIONS AND THEREFORE, THE ADDITION MAY BE UPHELD. 32. WE HAVE CARE FULLY CONSIDERED THE RIVAL CONTENTIONS. THE ISSUE OF AMP EXPENSES APPLYING THE BRIGHT LINE TEST HAS BEEN DISAPPROVED BY HON BLE DELHI HIGH COURT IN SERIES OF DECISIONS RENDERED RECENTLY. THE RELIANCE IS PLACED ON SPECIAL BENCH DECISION IN LG ELECTRONICS IN DIA LTD. (SUPRA) , WHICH IN VIEW OF ITA NO. 1482/DEL./2015 49 CATENA OF DECISIONS OF HON BLE DELHI HIGH COURT IS NO MORE A GOOD LAW. HON BLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI AND SONY ERRICTION HELD THAT IT IS NOT AN INTERNATIONAL TRANSACTION AND BRIGHT LINE TEST CANNOT BE APPLIED IN VIEW OF IT AND IT DOES NOT HAVE SANCTION OF IT ACT & RULES. RECENTLY HON BLE DELHI HIGH COURT IN 381 ITR 117 IN MARUTI SUZUKI INDIA LIMITED V CIT HAS HELD AS UNDER : 41. HAVING CONSIDERED THE ABOVE SUBMISSIONS THE COURT PROCEEDS TO ANALYSE THE DECISION IN SONY ERICSSON TO DETERMINE IF IT CONCLUSIVELY ANSWERS THE ISSUE CONCERNING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION AS A RESULT OF INCURRING OF AMP EXPENDITURES BY AN ASSESSEE. 42. AS ALREADY NOTICED, THE JUDGMENT IN SONY ERICSSON DOES NOT SEEK TO COVER ALL THE CASES WHICH MAY HAVE BEEN ARGUED BEFORE THE DIVISION BENCH. IN PARTICULAR, AS FAR AS THE PRESENT APPEAL I. T. A. NO. 110 OF 2014 IS CONCERNED, ALTHOUGH IT WAS HEARD ALONG WITH THE BATCH OF APPEALS, INCLUDING THOSE DISPOSED OF BY THE SONY ERICSSON JUDGMENT, AT ONE STAGE OF THE PROCEEDINGS ON OCTOBER 30, 2014, THE APPEAL WAS DELINKED TO BE HEARD SEPARATELY. 43. SECONDLY, THE CASES WHICH WERE DISPOSED OF BY THE SONY ERICSSON JUDGMENT, I.E., OF THE THREE ASSESSEES CANON, REEBOK AN D SONY ERICSSON WERE ALL OF DISTRIBUTORS OF PRODUCTS MANUFACTURED BY FOREIGN ASSOCIATED ENTERPRISES. THE SAID ASSESSEES WERE THEMSELVES NOT MANUFACTURERS. IN ANY EVENT, NONE OF THEM APPEARED TO HAVE QUESTIONED THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE CONCERNED FOREIGN ASSOCIATED ENTERPRISE. IT WAS ALSO NOT DISPUTED THAT THE SAID INTERNATIONAL TRANSACTION OF INCURRING OF PAGE NO : 0139 ITA NO. 1482/DEL./2015 50 AMP EXPENSES COULD BE MADE SUBJECT MATTER OF TRANSFER PRICING ADJUSTMENT IN TERMS OF SECTION 92 OF THE ACT. 44. HOWEVER, IN THE PRESENT APPEALS, THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION IS IN ISSUE. THE SPECIFIC CASE OF MSIL IS THAT THE REVENUE HAS FAILED TO SHOW THE EXISTENCE OF ANY AGREEMENT, UNDERSTANDING OR ARRANGEMENT BETWEEN MSIL AND SMC REG ARDING THE AMP SPEND OF MSIL. IT IS POINTED OUT THAT THE BRIGHT LINE TEST HAS BEEN APPLIED TO THE AMP SPEND BY MSIL TO (A) DEDUCE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING SMC AND (B) TO MAKE A QUANTITATIVE 'ADJUSTMENT' TO THE ARM'S LENGTH PR ICE TO THE EXTENT THAT THE EXPENDITURE EXCEEDS THE EXPENDITURE BY COMPARABLE ENTITIES. IT IS SUBMITTED THAT WITH THE DECISION IN SONY ERICSSON HAVING DISAPPROVED OF BRIGHT LINE TEST AS A LEGITIMATE MEANS OF DETERMINING THE ARM'S LENGTH PRICE OF AN INTERNAT IONAL TRANSACTION INVOLVING AMP EXPENSES, THE VERY BASIS OF THE REVENUE'S CASE IS NEGATED. 45. SINCE NONE OF THE ABOVE ISSUES THAT ARISE IN THE PRESENT APPEALS WERE CONTESTED BY THE ASSESSEES WHO APPEALS WERE DECIDED IN THE SONY ERICSSON CASE, IT CANNOT BE SAID THAT THE DECISION IN SONY ERICSSON, TO THE EXTENT IT AFFIRMS THE EXISTENCE OF AN INTERNATIONAL TRANSACTION ON ACCOUNT OF THE INCURRING OF THE AMP EXPENSES, DECIDED THAT ISSUE IN THE APPEALS OF MSIL AS WELL. IN THIS CONTEXT, PARA 52 OF THE DECISION IN SONY ERICSSON HAS TO BE READ AS A WHOLE. IT READS AS UNDER (PAGE 157 OF 374 ITR) : 'THE CONTENTION THAT AMP EXPENSES ARE NOT INTERNATIONAL TRANS ACTIONS HAS TO BE REJECTED. THERE SEEMS TO BE AN INCONGRUITY IN THE SUBMISSION OF THE ASSESSEE ON THE SAID ASP ECT FOR THE SIMPLE REASON THAT IN MOST CASES THE ASSESSEE HAVE SUBMITTED THAT THE INTERNATIONAL TRANSACTIONS BETWEEN THEM AND THE ASSOCIATED ENTERPRISE, RESIDENT ABROAD INCLUDED THE COST/VALUE OF THE AMP EXPENSES, WHICH THE ASSESSEE HAD INCURRED IN INDIA. IN OTHER WORDS, WHEN THE ASSESSEE RAISE THE AFORESAID ARGUMENT, THEY ACCEPT THAT THE DECLARED PRICE OF THE INTERNATIONAL TRANSACTION INCLUDED THE SAID ELEMENT OR FUNCTION OF AMP EXPENSES, FOR WHICH THEY STAND DULY ITA NO. 1482/DEL./2015 51 COMPENSATED IN THEIR MAR GINS OR THE ARM'S LENGTH PRICE AS COMPUTED.' 46. THE SAID PASSAGE HAS TO BE READ IN THE CONTEXT OF THE DISCUSSION PRECEDING IT WHICH CONCERNS THE ASSESSEES WHOSE APPEALS WERE BEING DISPOSED OF BY THE SAID JUDGMENT. IT IS IN THE CONTEXT OF THOSE ASSESSEES THAT PARA 52 NOTES THAT 'IN MOST CASES THE ASSESSEE HAVE SUBMITTED THAT THE INTERNATIONAL TRANSACTIONS BETWEEN THEM AND THE ASSOCIATED ENTERPRISE, RESIDENT ABROAD INCLUDED THE COST/VALUE OF THE AMP EXPENSES . . . .'. 47. AS REGARDS THE SUBMISSION REGARDING THE BRIGHT LINE T EST HAVING BEEN REJECTED IN THE DECISION IN SONY ERICSSON IS CONCERNED, THE COURT NOTES THAT THE DECISION IN SONY ERICSSON EXPRESSLY NEGATIVED THE USE OF THE BRIGHT LINE TEST BOTH AS FORMING THE BASE AND DETERMINING IF THERE IS AN INTERNATIONAL TRANSACTION AND SECONDLY FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE. ONCE BRIGHT LINE TEST IS NEGATIVED, THERE IS NO BASIS ON WHICH IT CAN BE SAID IN THE PRESENT CASE THAT THERE IS AN INTERNATIONAL TRANSACTION AS A RESULT OF THE AMP EXPENSES INCURRED BY MS IL. ALTHOUGH THE REVENUE SEEMS TO CONTEND THAT THE BRIGHT LINE TEST WAS USED ONLY TO ARRIVE AT THE QUANTUM OF THE TRANSFER PRICING ADJUSTMENT, THE ORDER OF THE TRANSFER PRICING OFFICER IN THE PRESENT CASE PROCEEDS ON THE BASIS THAT AN INTERNATIONAL TRANSAC TION CAN BE INFERRED ONLY BECAUSE THE AMP EXPENSES INCURRED WERE SIGNIFICANTLY HIGHER THAT WHAT WAS BEING SPENT BY COMPARABLE ENTITIES AND IT WAS ALSO USED FOR QUANTIFYING THE AMOUNT OF THE TRANSFER PRICE ADJUSTMENT. CONSEQUENTLY, THE COURT DOES NOT AGREE WITH THE SUBMISSION OF THE LEARNED SPECIAL COUNSEL FOR THE REVENUE THAT DEHORS THE BRIGHT LINE TEST, WHICH HAS BEEN REJECTED IN THE SONY ERICSSON JUDGMENT, THE EXISTENCE OF AN INTERNATIONAL TRANSACTION ON ACCOUNT OF THE INCURRING OF THE AMP EXPENSES CAN BE ESTABLISHED. 48. THE SUBMISSION ALSO PROCEEDS ON THE BASIS THAT SINCE MSIL PAYS ROYALTY TO THE FOREIGN ASSOCIATED ENTERPRISE AND MAKES PAYMENT IN RESPECT OF THE USE OF COPYRIGHT AND PATENT, THE BENEFIT EMANATING FROM THE AMP FUNCTION CANNOT BE SAID TO BE ENJOYED BY MSIL ALONE. IT ALSO PROCEEDS ON THE BASIS THAT ITA NO. 1482/DEL./2015 52 THE BENEFITS TO THE ASSOCIATED ENTERPRISE FROM AMP FUNCTION WOULD BE SAME AS IN THE CASE OF A DISTRIBUTOR NAMELY INCREASE IN SALE OF RAW MATERIAL, INCREASE IN ROYALTY, AND INCREASE IN COPYRIGHT AND PATENT PAYMENTS, ETC. THE COURT FINDS THAT THESE SUBMISSIONS ARE NOT BASED ON ANY EMPIRICAL DATA AND PROCEEDS MORE ON THE BASIS OF SURMISES. ROYALTY PAYMENTS HAVE BEEN SEPARATELY ASSESSED FOR TRANSFER PRICING PURPOSES. LIKEWISE, PAYMENTS FOR COPYRIGHTS AND PATENTS HAVE ALSO BEEN SEPARATELY TREATED. 49. AS FAR AS THE BENEFIT TO THE ASSOCIATED ENTERPRISE, I.E., SMC, IS CONCERNED, THE REVENUE HAS BEEN UNABLE TO COUNTER THE SUBMISSION ON BEHALF OF THE MSIL THAT BY THE TIME SMC ACQUIRED A CONTROLLING INTEREST IN MSIL IN 2002, THE MARUTI BRAND HAD ALREADY BUILT A HUGE REPUTATION. A SIGNIFICANT AMOUNT OF AMP EXPENSES HAD ALREADY BEEN INCURRED BY MSIL ON ITS PRODUCTS. THESE PRODUCTS CARRIED THE CO - BRANDED MARK 'MARUTI - SUZUKI' WHICH HAD A HIGH DEGREE OF NAME RECOGNIT ION. THE REVENUE HAS BEEN UNABLE TO DISPUTE THAT MSIL HAS THE HIGHEST MARKET SHARE OF AUTOMOBILES MANUFACTURED IN INDIA (ABOUT 45 PER CENT. ) AND YEAR ON YEAR GROWTH OF TURNOVER OF ABOUT 21 PER CENT. IN OTHER WORDS, THE AMP EXPENSES INCURRED BY IT HAVE SUB STANTIALLY BENEFITTED MSIL. 50. THE SECOND ASPECT WHICH THE REVENUE HAS BEEN UNABLE TO DISPUTE IS THAT SMC'S AMP EXPENDITURE WORLDWIDE HAS BEEN 7.5 PER CENT. OF ITS SALES WHEREAS MSIL IS SPENDING ONLY 1.87 PER CENT. OF ITS TOTAL SALES TOWARDS AMP. THEREFORE, THIS BELIES THE POSSIBILITY OF ANY 'ARRANGEMENT' OR 'UNDERSTANDING' BETWEEN MSIL AND SMC WHEREBY MSIL IS OBLIGED TO INCUR THE AMP EXPENDITURE FOR AND ON BEHALF OF SMC. 51. THE RESULT OF THE ABOVE DISCUSSION IS THAT IN THE CONSIDERED VIEW OF THE COURT THE REVENUE HAS FAILED TO DEMONSTRATE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION ONLY ON ACCOUNT OF THE QUANTUM OF AMP EXPENDITURE BY MSIL. SECONDLY, THE COURT IS OF THE VIEW THAT THE DECISION IN SONY ERICSSON HOLDING THAT THERE IS AN INTERNATIONA L TRANSACTION AS A RESULT OF THE AMP EXPENSES CANNOT BE HELD TO HAVE ANSWERED THE ISSUE AS FAR AS THE PRESENT ASSESSEE MSIL IS CONCERNED SINCE FINDING IN SONY ITA NO. 1482/DEL./2015 53 ERICSSON TO THE ABOVE EFFECT IS IN THE CONTEXT OF THOSE ASSESSEES WHOSE CASES HAVE BEEN DISPOSED OF BY THAT JUDGMENT AND WHO DID NOT DISPUTE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION REGARDING AMP EXPENSES. EFFECT OF THE EARLIER DECISION IN THE WRIT PETITION BY MSIL 52. ANOTHER PRELIMINARY MAJOR ISSUE THAT HAS BEEN RAISED BY THE REVENUE CONCERNS T HE EFFECT OF THE EARLIER DECISION OF THIS COURT IN THE WRIT PETITION FILED BY MSIL AND THE DECISION OF THE SUPREME COURT IN THE SPECIAL LEAVE PETITION FILED AGAINST THE SAID DECISION. 53. IT IS SUBMITTED ON BEHALF OF THE REVENUE THAT IN LIGHT OF THE SAID J UDGMENT OF THIS COURT, THE FINDINGS WHICH HAVE NOT BEEN DISTURBED BY THE SUPREME COURT, IT CAN NO LONGER BE CONTENDED BY MSIL THAT THERE IS NO INTERNATIONAL TRANSACTION RESULTING FROM THE INCURRING OF AMP EXPENSES. THIS SUBMISSION IS COUNTERED BY THE ASSES SEE BY POINTING OUT THAT THE EARLIER DECISION IN MSIL'S WRIT PETITION VIRTUALLY SET ASIDE THE ORDER OF THE TRANSFER PRICING OFFICER AND ASSESSING OFFICER AND REQUIRED THE TRANSFER PRICING OFFICER TO PROCEED DE NOVO. THE SUPREME COURT IN ITS TURN DID NOT EX PRESS ANY VIEW ON THE EXISTENCE OF AN INTERNATIONAL TRANSACTION AND, THEREFORE, IT WAS INCORRECT TO CONTEND THAT THE JUDGMENT OF THE SUPREME COURT IMPLIEDLY AFFIRMED THE FINDING OF THE HIGH COURT REGARDING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. 54. THE COURT FINDS THAT THE DIVISION BENCH IN SONY ERICSSON HAD OCCASION TO DEAL WITH THIS VERY ISSUE. IN SONY ERICSSON IN PARA. 156 AFTER DISCUSSING THE ISSUE IT WAS OBSERVED AS UNDER (PAGE 219 OF 374 ITR) : 'A DIVISION BENCH OF THE DELHI HIGH COURT IN THE WRIT PETITION CHALLENGING THE TRANSFER PRICING ORDER HAD DEALT WITH TRANSFER PRICING ISSUES AND HAD ENROLLED AND CULLED OUT LEGAL RATIOS AND PRINCIPLES. DIRECTIONS WERE ISSUED. AT THE SAME TIME, AN ORDER OF REMAND TO THE TRANSFER PRICING OFFICER TO COMPUTE THE ARM'S LENGTH PRICE ON THE BASIS OF SAID PRINCIPLES WAS PASSED. IT WOULD NOT BE CORRECT TO HOLD THAT THE SUPREME COURT HAD ACCEPTED AND HAD GIVEN SEAL OF APPROVAL AND NOT ITA NO. 1482/DEL./2015 54 INTERFERED WITH THE PRINCIPLES/RATIO ENUNCIATED IN THE JUDG MENT BY THE DELHI HIG H COURT. THE SUPREME COURT AS IS LUCID DID NOT WANT TO EXAMINE THE PRINCIPLES OR RATIO AS ENUNCIATED AND EXPRESS THEIR OPINION ON THE MERITS, THOUGH THE DIRECTIONS ISSUED BY THE HIGH COURT, IT WAS OBSERVED, CONCLUDE THE MATTER. THE SUPREME COURT PER CEIVED AND ACCEPTED THAT THE ISSUE OF THE ARM'S LENGTH PRICE SHOULD BE RE - EXAMINED BY THE TRANSFER PRICING OFFICER WITHOUT BEING CURTAILED OR RESTRAINED BY THE LEGAL PRINCIPLES/RATIO DELINEATED. AS THE SUPREME COURT ITSELF WAS NOT EXAMINING THE PRINCIPLES/RATIO ON THE MERITS, IT DID NOT PASS ANY ORDER IN FAVOUR OR AGAINST THE ASSESSEE OR THE REVENUE. ACCORDINGLY, THE AFORESAID OBSERVATIONS. THE EFFECT THEREOF WAS THAT THE JUDGMENT OF THE DELHI HIGH COURT WOULD NOT OPERATE AS RES JUDICATA BETWEEN THE PARTIES AND M ERITS, IF REQUIRED, WOULD BE EXAMINED AND GONE INTO IN THE APPELLATE PROCEEDINGS. THE MAJORITY JUDGMENT HAS INCORRECTLY INFERRED THAT THE LEGAL PRINCIPLES AND DIRECTIONS ISSUED BY THE DELHI HIGH COURT WOULD CONTINUE TO BE BINDING DECIDENDI AND HAD ATTAINED FINALITY, VIZ. THE TAX AUTHORITIES AND THE TRIBUNAL. IT IS NOT SO INDICATED. IF THE LEGAL PRINCIPLES/RATIO WAS NOT BINDING ON THE WRIT PETITIONER, I.E., THE ASSESSEE IN THE SAID CASE, IT WOULD BE MALAPROPOS AND INAPPROPRIATE TO TREAT THE DIRECTIONS AS BIN DING RATIO, IN RESPECT OF THIRD PARTIES. THEREFORE, WE HAVE NOT TREATED THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI LTD. (SUPRA) AS A BINDING PRECEDENT. IMPORTANTLY, THE REVENUE HAS RELIED UPON THE FINAL CONCLUSIONS AS RECORDED AND TH E ASSESSEE HAVE RELIED UPON THE EARLIER PORTIONS OF THE JUDGMENT. WE HAVE CON SIDERED THE REASONING GIVEN IN THE AFORESAID DECISION AND HAVE REACHED OUR OWN CONCLUSION.' 55. CONSEQUENTLY, THIS COURT IN SONY ERICSSON PROCEEDED ON THE BASIS THAT THE DECISION OF THIS COURT IN THE WRIT PETITION BY MSIL WAS NOT A BINDING PRECEDENT. BE THAT AS IT MAY, THERE ARE OTHER REASONS WHY THE EARLIER DECISION IN THE WRIT PETITION FILED BY MSIL CANNOT BE HELD TO SURVIVE. A CAREFUL READING OF THE JUDGMENT OF THE SUPREME COUR T REVEALS THAT THE SUPREME COURT ASKED THE TRANSFER PRICING OFFICER TO PROCEED WITH THE MATTER IN ACCORDANCE WITH LAW 'UNINFLUENCED BY THE OBSERVATIONS/DIRECTIONS GIVEN BY THE JUDGMENT IN THE ITA NO. 1482/DEL./2015 55 IMPUGNED ORDER DATED JULY 1, 2010'. THAT VIRTUALLY NULLIFIES THE JUDGMENT OF THE HIGH COURT ON ALL ASPECTS. A FURTHER REASON IS THAT EVEN THIS COURT IN DISPOSING OF THE WRIT PETITION OF MSIL PROCEEDED ON THE BASIS OF THERE BEING AN INTERNATIONAL TRANSACTION ONLY ON ACCOUNT OF THE EXCESSIVE AMP EXPENSES INCURRED BY MSIL . IN OTHER WORDS, THIS COURT DISPOSING OF MSIL'S WRIT PETITION ALSO APPLIED THE BRIGHT LINE TEST TO DETERMINE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WHEREAS THROUGHOUT IT HAS BEEN MSIL'S CASE THAT THE FACT THAT ITS AMP SPEND IS SIGNIFICANTLY HIGHER CANNOT IPSO FACTO LEAD TO THE CONCLUSION REGARDING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION IN THAT REGARD BETWEEN MSIL AND SMC. WITH THE DECISION IN SONY ERICSSON HAVING JETTISONED THE BRIGHT LINE TEST, THE VERY BASIS OF THE JUDGMENT OF THIS COURT IN THE WRIT PETITION MUST BE HELD TO BE NO LONGER BINDING. IN ANY EVENT, AS FAR AS MSIL IS CONCERNED, IT DID QUESTION THE DECISION OF THE DIVISION BENCH AND SUCCEEDED IN ITS APPEAL IN THE SUPREME COURT IN SO FAR AS THE TRANSFER PRICING OFFICER WAS ASKED TO D ETERMINE THE ISSUE AFRESH UNINFLUENCED BY THE ORDER OF THE HIGH COURT. 56. THE UPSHOT OF THE ABOVE CONCLUSION IS THAT, IN THE CONSIDERED VIEW OF THE COURT, THE EARLIER JUDGMENT OF THE DIVISION BENCH OF THIS COURT IN THE WRIT PETITION BY MSIL CANNOT BE SAID TO PRECLUDE MSIL FROM CONTESTING THE FINDING REGARDING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION CONCERNING AMP EXPENSES. IS THERE AN INTERNATIONAL TRANSACTION CONCERNING AMP EXPENSES ? 57. THE COURT NEXT TURNS TO THE PRINCIPAL CONTENTION OF THE REVENUE THAT IN A PARTICULAR SITUATION OF INDEPENDENT DISTRIBUTORS/LICENSED MANUFACTURERS MATTERS RELATING TO PROMOTION OF A BRAND OF A FOREIGN ASSOCIATED ENTERPRISE WOULD NECESSARILY BE A MATTER OF NEGOTIATION BETWEEN THE PARTIES AND NOT NECESSARILY BE RE DUCED TO WRITING AS PART OF AN AGREEMENT BETWEEN THEM. 58. IT IS NECESSARY AT THIS JUNCTURE TO DISCUSS THE REASONS FOR ENACTMENT OF CHAPTER X IN THE ACT WITH THE WHOLE NEW SCHEME ITA NO. 1482/DEL./2015 56 OF PROVISIONS CONCERNING TRANSFER PRICING IN THE FORM OF SECTIONS 92B TO 92F. 59. NEVERTHELESS, THERE IS NO SPECIFIC MENTION OF AMP EXPENSES AS ONE OF THE ITEMS OF EXPENDITURE WHICH CAN BE DEEMED TO BE AN INTERNATIONAL TRANSACTION. FOR THIS PURPOSE, SECTION 92B(1) READ WITH SECTION 92(1) BECOMES SIGNIFICANT. UNDER SECTION 92B(1) AN 'INTERNATIONAL TRANSACTION' MEANS : '(A) A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NONRESIDENT (B) THE TRANSACTION IS IN THE NATURE OF PURCHASE, SALE OR LEASE OF TAN GIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICE OR LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOMES OR LOSSES OF SUCH ENTERPRISES, AND (C) SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR ALLOCATION OR APPO RTIONMENT OR CONTRIBUTION TO THE ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONNECTION WITH THE BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PRO VIDED TO ONE OR MORE OF SUCH ENTERPRISES.' 60. AS FAR AS CLAUSE (A) IS CONCERNED, SMC IS A NON - RESIDE NT. IT HAS, SINCE 2002, A SUBSTANTIAL SHARE HOLDING IN MSIL AND CAN, THEREFORE, BE CONSTRUED TO BE A NON - RESIDENT ASSOCIATED ENTERPRISE OF MSIL. WHILE IT DOES HAVE A NUMBER OF 'TRANSACTIONS' WITH MSIL ON THE ISSUE OF LICENSING OF IPRS, SUPPLY OF RAW MATERI ALS, ETC. THE QUESTION REMAINS WHETHER IT HAS ANY 'TRANSACTION' CONCERNING THE AMP EXPENDITURE. THAT BRINGS US TO CLAUSES (B) AND (C). THEY CANNOT BE READ DISJUNCTIVELY. EVEN IF RESORT IS HAD TO THE RESIDUARY PART OF CLAUSE (B) TO CONTEND THAT THE AMP SPEN D OF MSIL IS 'ANY OTHER TRANSACTION HAVING A BEARING' ON ITS 'PROFITS, INCOMES OR LOSSES', FOR A 'TRANSACTION' THERE HAS TO BE TWO PARTIES. THEREFORE FOR THE PURPOSES OF THE 'MEANS' PART OF CLAUSE (B) AND THE 'INCLUDES' PART OF CLAUSE (C), THE REVENUE HAS TO SHOW THAT THERE EXISTS AN 'AGREEMENT' OR 'ARRANGEMENT' OR 'UNDERSTANDING' BETWEEN MSIL AND SMC WHEREBY MSIL IS ITA NO. 1482/DEL./2015 57 OBLIGED TO SPEND EXCESSIVELY ON AMP IN ORDER TO PROMOTE THE BRAND OF SMC. AS FAR AS THE LEGISLATIVE INTENT IS CONCERNED, IT IS SEEN THAT CERTA IN TRANSACTIONS LISTED IN THE EXPLANATION UNDER CLAUSES (I)(A) TO (E) TO SECTION 92B ARE DESCRIBED AS 'INTERNATIONAL TRANSACTION'. THIS MIGHT BE ONLY AN ILLUSTRATIVE LIST, BUT SIGNIFICANTLY IT DOES NOT LIST AMP SPENDING AS ONE SUCH TRANSACTION. 61. THE SUB MISSION OF THE REVENUE IN THIS REGARD IS : 'THE MERE FACT THAT THE SERVICE OR BENEFIT HAS BEEN PROVIDED BY ONE PARTY TO THE OTHER WOULD BY ITSELF CONSTITUTE A TRANSACTION IRRESPECTIVE OF WHETHER THE CONSIDERATION FOR THE SAME HAS BEEN PAID OR REMAINS PAYAB LE OR THERE IS A MUTUAL AGREEMENT TO NOT CHARGE ANY COMPENSATION FOR THE SERVICE OR BENEFIT'. EVEN IF THE WORD 'TRANSACTION' IS GIVEN ITS WIDEST CONNOTATION, AND NEED NOT INVOLVE ANY TRANSFER OF MONEY OR A WRITTEN AGREEMENT AS SUGGESTED BY THE REVENUE, AND EVEN IF RESORT IS HAD TO SECTION 92F(V) WHICH DEFINES 'TRANSACTION' TO INCLUDE 'ARRANGEMENT', 'UNDERSTANDING' OR 'ACTION IN CONCERT', 'WHETHER FORMAL OR IN WRITING', IT IS STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN 'UNDERSTANDING' OR AN 'A RRANGEMENT' OR 'ACTION IN CONCERT' BETWEEN MSIL AND SMC AS REGARDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WORDS, FOR BOTH THE 'MEANS' PART AND THE 'INCLUDES' PART OF SECTION 92B(1) WHAT HAS TO BE DEFINITELY SHOWN IS THE EXISTENCE OF TRANSACTION WHEREBY MS IL HAS BEEN OBLIGED TO INCUR AMP OF A CERTAIN LEVEL FOR SMC FOR THE PURPOSES OF PROMOTING THE BRAND OF SMC. STEP WISE ANALYSIS OF STATUTORY PROVISIONS 62. IF A STEP BY STEP ANALYSIS IS UNDERTAKEN OF SECTIONS 92B TO 92F, THE SINE QUA NON FOR COMMENCING THE TRANSFER PRICING EXERCISE IS TO SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. THE NEXT STEP IS TO DETERMINE THE PRICE OF SUCH TRANSACTION. THE THIRD STEP WOULD BE TO DETERMINE THE ARM'S LENGTH PRICE BY APPLYING ONE OF THE FIVE PRICE DISCOVERY METHODS SPECIFIED IN SECTION 92C. THE FOURTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTION THAT IS SHOWN TO EXIST WITH THE ARM'S LENGTH PRICE AND MAKE THE TRANSFER PRICING ITA NO. 1482/DEL./2015 58 ADJUSTMENT BY SUBSTITUTING THE ARM'S LENGTH PRICE FOR THE CONTRACT PRICE. 63. A REA DING OF THE HEADING OF SECTION 92 OF CHAPTER X ('SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX') AND SECTION 92(1) WHICH STATES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE, SECTION 9 2C(1) WHICH SETS OUT THE DIFFERENT METHODS OF DETERMINING THE ARM'S LENGTH PRICE, MAKES IT CLEAR THAT THE TRANSFER PRICING ADJUSTMENT IS MADE BY SUBSTITUTING THE ARM'S LENGTH PRICE FOR THE PRICE OF THE TRANSACTION. TO BEGIN WITH THERE HAS TO BE AN INTERNAT IONAL TRANSACTION WITH A CERTAIN DISCLOSED PRICE. THE TRANSFER PRICING ADJUSTMENT ENVISAGES THE SUBSTITUTION OF THE PRICE OF SUCH INTERNATIONAL TRANSACTION WITH THE ARM'S LENGTH PRICE. 64. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTED TO BE MADE BY DEDUC ING 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 ASSOCIATED ENTERPRISE. AND, YET, THAT IS WHAT APPEARS TO HAVE BEEN DONE BY THE REVENUE IN THE PRESENT CASE. IT FIRST ARRIVED AT THE ' BRIGHT LINE ' BY COMPARING THE AMP EXPENSES INCURRED BY MSIL WITH THE AVERAGE PERCENTAGE OF THE AMP EXPENSES INCURRED BY THE COMPARABLE ENTITIES. SINCE ON APPLYING THE BRIGHT LINE TEST, THE AMP SPEND OF MSIL WAS FOUND 'EXCESSIVE' THE REVENUE DEDUCED THE EXISTENCE OF A N INTERNATIONAL TRANSACTION. IT THEN ADDED BACK THE EXCESS EXPENDITURE AS THE TRANSFER PRICING 'ADJUSTMENT'. THIS RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT V. EKL APPLIANCES LTD. [2012] 345 ITR 241 (DELHI), WHICH REQUIRED A TRANSFER PRICING OFFICER 'TO EXAMINE THE 'INTERNATIONAL TRANSACTION' AS HE ACTUALLY FINDS THE SAME'. IN OTHER WORDS THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE A MATTER FOR INFERENCE OR SURMISE. 65. AS ALREADY NOTICED, TH E DECISION IN SONY ERICSSON HAS DONE AWAY WITH THE BRIGHT LINE TEST AS MEANS FOR DETERMINING THE ITA NO. 1482/DEL./2015 59 ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES. THE REVENUE'S CONTENTIONS 66. IT IS CONTENDED BY THE REVENUE THAT THE MERE FACT THAT THE INDIAN ENTITY IS ENGAGED IN THE ACTIVITY OF CREATION, PROMOTION OR MAINTENANCE OF CERTAIN BRANDS OF ITS FOREIGN ASSOCIATED ENTERPRISE OR FOR THE CREATION/PROMOTION OF NEW/EXISTING MARKETS FOR THE ASSOCIATED ENTERPRISE, IS BY ITSELF ENOUGH TO DEMONSTRA TE THAT THERE IS AN ARRANGEMENT WITH THE PARENT COMPANY FOR THIS ACTIVITY. IT IS URGED THAT MERELY BECAUSE MSIL AND SMC DO NOT HAVE AN EXPLICIT ARRANGEMENT/AGREEMENT ON THIS ASPECT CANNOT LEAD TO THE INFERENCE THAT THERE IS NO SUCH ARRANGEMENT OR THE ENTIR E AMP ACTIVITY OF THE INDIAN ENTITY IS UNILATERAL AND ONLY FOR ITS OWN BENEFIT. ACCORDING TO THE REVENUE, 'THE ONLY CREDIBLE TEST IN THE CONTEXT OF TRANSFER PRICING PROVISIONS TO DETERMINE WHETHER THE INDIAN SUBSIDIARY IS INCURRING AMP EXPENSES UNILATERALL Y ON ITS OWN OR AT THE INSTANCE OF THE ASSOCIATED ENTERPRISE IS TO FIND OUT WHETHER AN INDEPENDENT PARTY WOULD HAVE ALSO DONE THE SAME.' IT IS ASSERTED : 'AN INDEPENDENT PARTY WITH A SHORT - TERM AGREEMENT WITH THE MULTI - NATIONAL COMPANY WILL NOT INCUR COSTS WHICH GIVE LONG - TERM BENEFITS OF BRAND AND MARKET DEVELOPMENT TO THE OTHER ENTITY. AN INDEPENDENT PARTY WILL, IN SUCH CIRCUMSTANCES, CARRY OUT THE FUNCTION OF DEVELOPMENT OF MARKETS ONLY WHEN IT IS ADEQUATELY REMUNERATED FOR THE SAME'. 67. REFERENCE IS MA DE BY MR. SRIVASTAVA TO SOME SAMPLE AGREEMENTS BETWEEN REEBOK (UK) AND REEBOK (SOUTH AFRICA) AND IC ISSACS AND CO AND BHPC MARKETING TO URGE THAT THE LEVEL OF AMP SPEND IS A MATTER OF NEGOTIATION BETWEEN THE PARTIES TOGETHER WITH THE RATE OF ROYALTY. IT IS FURTHER SUGGESTED THAT IT MIGHT BE NECESSARY TO EXAMINE WHETHER IN OTHER JURISDICTIONS THE FOREIGN ASSOCIATED ENTERPRISE, I.E., SMC IS ENGAGED IN AMP/ BRAND PROMOTION THROUGH INDEPENDENT ENTITIES OR THEIR SUBSIDIARIES WITHOUT ANY COMPENSATION TO THEM EITH ER DIRECTLY OR THROUGH AN ADJUSTMENT OF ROYALTY PAYMENTS. ITA NO. 1482/DEL./2015 60 ABSENCE OF A MACHINERY PROVISION 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 CHAS E 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 ARM'S LENGTH PRICE TO MEAN A PRICE 'WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN ASSOCIATED ENTERPRISE S IN UNCONTROLLED CONDITIONS'. SINCE THE REFERENCE IS TO 'PRICE' AND TO 'UNCONTROLLED CONDITIONS' IT IMPLICITLY BRINGS INTO PLAY THE BRIGHT LINE TEST. 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 ARM'S LENGTH PRICE. THE COURT DOES NOT SEE THIS AS A MACHINERY PROVISION PARTICULARLY IN LIGHT OF THE PAGE NO : 0147 FACT THAT THE BRIGHT LINE TEST HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WILL HAVE TO BE ESTABLISHED DEHORS THE BRIGHT LINE TEST. 69. THERE IS NOTHING IN THE ACT WHICH INDICATES HOW, IN THE ABSENCE OF THE BR IGHT LINE TEST, ONE CAN DISCERN THE EXISTENCE OF AN INTERNATIONAL TRANSACTION AS FAR AS AMP EXPENDITURE IS CONCERNED. THE COURT FINDS CONSIDERABLE MERIT IN THE CONTENTION OF THE ASSESSEE THAT THE ONLY TRANSFER PRICING ADJUSTMENT AUTHORISED AND PERMITTED BY CHAPTER X IS THE SUBSTITUTION OF THE ARM'S LENGTH PRICE FOR THE TRANSACTION PRICE OR THE CONTRACT PRICE. IT BEARS REPETITION THAT EACH OF THE METHODS SPECIFIED IN SECTION 92C(1) IS A PRICE DISCOVERY METHOD. SECTION 92C(1) THUS IS EXPLICIT THAT THE ONLY MA NNER OF EFFECTING A TRANSFER PRICING ADJUSTMENT IS TO SUBSTITUTE THE TRANSACTION PRICE WITH THE ARM'S LENGTH PRICE SO DETERMINED. ITA NO. 1482/DEL./2015 61 THE SECOND PROVISO TO SECTION 92C(2) PROVIDES A 'GATEWAY' BY STIPULATING THAT IF THE VARIATION BETWEEN THE ARM'S LENGTH PRICE AND THE TRANSACTION PRICE DOES NOT EXCEED THE SPECIFIED PERCENTAGE, NO TRANSFER PRICING ADJUSTMENT CAN AT ALL BE MADE. BOTH SECTION 92CA, WHICH PROVIDES FOR MAKING A REFERENCE TO THE TRANSFER PRICING OFFICER FOR COMPUTATION OF THE ARM'S LENGTH PRICE AND TH E MANNER OF THE DETERMINATION OF THE ARM'S LENGTH PRICE BY THE TRANSFER PRICING OFFICER, AND SECTION 92CB WHICH PROVIDES FOR THE 'SAFE HARBOUR' RULES FOR DETERMINATION OF THE ARM'S LENGTH PRICE, CAN BE APPLIED ONLY IF THE TRANSFER PRICING ADJUSTMENT INVOLV ES SUBSTITUTION OF THE TRANSACTION PRICE WITH THE ARM'S LENGTH PRICE. RULES 10B, 10C AND THE NEW RULE 10AB ONLY DEAL WITH THE DETERMINATION OF THE ARM'S LENGTH PRICE. THUS FOR THE PURPOSES OF CHAPTER X OF THE ACT, WHAT IS ENVISAGED IS NOT A QUANTITATIVE AD JUSTMENT BUT ONLY A SUBSTITUTION OF THE TRANSACTION PRICE WITH THE ARM'S LENGTH PRICE. 70. 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 B E PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DEDUCING THAT SINCE IT IS NOT AN ARM'S LENGTH PRICE, 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 DISCLOSE D 'PRICE' OF SUCH TRANSACTION AND THEREAFTER ASK WHETHER IT IS AN ARM'S LENGTH PRICE. IF THE ANSWER TO THAT IS IN THE NEGATIVE THE TRANSFER PRICING ADJUSTMENT SHOULD FOLLOW. THE OBJECTIVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO THE PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE ASSOCIATED ENTERPRISES INVOLVED MAY SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER. AN 'ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING AN ARM'S LENGTH PRICE ADJUSTMENT. 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSIBLE FOR THE PURPOSES OF A TRANSFER PRICING ADJUSTMENT UNDER CHAPTER X, EQUALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBEFORE, WHAT THE REVENUE HAS SOUGHT TO DO I N THE PRESENT CASE IS TO RESORT TO A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINING WHETHER THE AMP SPENT BY THE ASSESSEE ON APPLICATION OF THE BRIGHT ITA NO. 1482/DEL./2015 62 LINE TEST, IS EXCESSIVE, THEREBY EVIDENCING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE ASS OCIATED ENTERPRISE. THE QUANTITATIVE DETERMINATION FORMS THE VERY BASIS FOR THE ENTIRE TRANSFER PRICE EXERCISE IN THE PRESENT CASE. 72. AS RIGHTLY POINTED OUT BY THE ASSESSEE, WHILE SUCH QUANTITATIVE ADJUSTMENT INVOLVED IN RESPECT OF AMP EXPENSES MAY BE CO NTEMPLATED IN THE TAXING STATUTES OF CERTAIN FOREIGN COUNTRIES LIKE U.S.A., AUSTRALIA AND NEW ZEALAND, NO PROVISION IN CHAPTER X OF THE ACT CONTEMPLATES SUCH AN ADJUSTMENT. AN AMP TRANSFER PRICING ADJUSTMENT TO WHICH NONE OF THE SUBSTANTIVE OR PROCEDURAL P ROVISIONS OF CHAPTER X OF THE ACT APPLY, CANNOT BE HELD TO BE PERMITTED BY CHAPTER X. IN OTHER WORDS, WITH NEITHER THE SUBSTANTIVE NOR THE MACHINERY PROVISIONS OF CHAPTER X OF THE ACT BEING APPLICABLE TO AN AMP TRANSFER PRICING ADJUSTMENT, THE INEVITABLE C ONCLUSION IS THAT CHAPTER X AS A WHOLE, DOES NOT PERMIT SUCH AN ADJUSTMENT. 73. IT BEARS REPETITION THAT THE SUBJECT MATTER OF THE ATTEMPTED PRICE ADJUSTMENT IS NOT THE TRANSACTION INVOLVING THE INDIAN ENTITY AND THE AGENCIES TO WHOM IT IS MAKING PAYMENTS FOR THE AMP EXPENSES. THE REVENUE IS NOT JOINING ISSUE, THE COURT WAS TOLD, THAT THE INDIAN ENTITY WOULD BE ENTITLED TO CLAIM SUCH EXPENSES AS REVENUE EXPENSE IN TERMS OF SECTION 37 OF THE ACT. IT IS NOT FOR THE REVENUE TO DICTATE TO AN ENTITY HOW MUCH IT SHOULD SPEND ON AMP. THAT WOULD BE A BUSINESS DECISION OF SUCH ENTITY KEEPING IN VIEW ITS EXIGENCIES AND ITS PERCEPTION OF WHAT IS BEST NEEDED TO PROMOTE ITS PRODUCTS. THE ARGUMENT OF THE REVENUE, HOWEVER, IS THAT WHILE SUCH AMP EXPENSE MAY BE WHOLLY AND E XCLUSIVELY FOR THE BENEFIT OF THE INDIAN ENTITY, IT ALSO ENURES TO BUILDING THE BRAND OF THE FOREIGN ASSOCIATED ENTERPRISE FOR WHICH THE FOREIGN ASSOCIATED ENTERPRISE IS OBLIGED TO COMPENSATE THE INDIAN ENTITY. THE BURDEN OF THE REVENUE'S SONG IS THIS : AN INDIAN ENTITY, WHOSE AMP EXPENSE IS EXTRAORDINARY (OR 'NON - ROUTINE') OUGHT TO BE COMPENSATED BY THE FOREIGN ASSOCIATED ENTERPRISE TO WHOSE BENEFIT ALSO SUCH EXPENSE ENURES. THE 'NON - ROUTINE' AMP SPENT IS TAKEN TO HAVE 'SUBSUMED' THE PORTION CONSTITUTING T HE 'COMPENSATION' OWED TO THE INDIAN ENTITY BY THE FOREIGN ASSOCIATED ENTERPRISE. IN SUCH A SCENARIO ITA NO. 1482/DEL./2015 63 WHAT WILL BE REQUIRED TO BE BENCHMARKED IS NOT THE AMP EXPENSE ITSELF BUT TO WHAT EXTENT THE INDIAN ENTITY MUST BE COMPENSATED. THAT IS NOT WITHIN THE REAL M OF THE PROVISIONS OF CHAPTER X. 74. THE PROBLEM WITH THE REVENUE'S APPROACH IS THAT IT WANTS EVERY INSTANCE OF AN AMP SPENT BY AN INDIAN ENTITY WHICH HAPPENS TO USE THE BRAND OF A FOREIGN ASSOCIATED ENTERPRISE 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 92B OF THE ACT. THE PROBLEM DOES NOT STOP HERE. EVEN IF A TRANSACTION INVOLVING AN AMP SPEND FOR A FOREIGN ASSOCIAT ED ENTERPRISE 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 TRANSFER PRICING OFFICER PROCEED TO BENCHMARK THE PORTION OF SUCH AMP SPEND THAT THE INDIAN ENTITY SHOULD BE COMPENSATED FOR ? 75. AS AN ANALOGY, AND FOR NO OTHER PURPOSE, IN THE CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE RELATED PARTIES, REFERENCE MAY BE MADE TO SECTION 40A(2)(A) UNDER WHICH CERTAIN TYPES OF EXPENDITURE INCURRED BY WAY OF PAYMENT TO RELATED PARTIES IS NOT DEDUCTIBLE WHERE THE ASSESSING OFFICER 'IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS'. IN SUCH EVENT, 'SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION'. THE ASSESSING OFFICER IN SUCH AN INSTANCE DEPLOYS THE 'BEST JUDGMENT' ASSESSMENT AS A DEVICE TO DISALLOW WHAT HE CONSIDERS TO BE AN EXCESSIVE EXPENDITURE. THERE IS NO CORRESPONDING 'MACHINERY' PROVISION IN CHAPTER X WHICH ENABLES AN ASSESSING OFFICER TO DETERMINE WHAT SHOULD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD BE ENTITLED TO IF IT IS FOUND THAT THERE IS AN INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRACT ICAL TERMS, ABSENT A CLEAR STATUTORY GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFFICULTIES. THE STRENGTH OF A BRAND, WHICH COULD BE PRODUCT SPECIFIC, MAY BE IMPACTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITED TO THE NATURE OF THE INDUSTRY, THE GEOGRAPHICAL PE CULIARITIES, ECONOMIC TRENDS ITA NO. 1482/DEL./2015 64 BOTH INTERNATIONAL AND DOMESTIC, THE CONSUMPTION PATTERNS, MARKET BEHAVIOUR AND SO ON. A SIMPLISTIC APPROACH USING ONE OF THE MODES SIMILAR TO THE ONES CONTEMPLATED BY SECTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBITRARINESS. WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATING THE LEGISLATIVE POLICY AND MANDATE WHICH PROVIDES THE NECESSARY CHECKS AGAINST ARBITRARINESS WHILE AT THE SAME TIME ADDRESSING THE APPREHENSION OF TAX AVOIDANCE. 76 . AS EXPLAINED BY THE SUPREME COURT IN CIT V. B. C. SRINIVASA SETTY [1981] 128 ITR 294 (SC) AND PNB FINANCE LTD. V. CIT [2008] 307 ITR 75 (SC) IN THE ABSENCE OF ANY MACHINERY PROVISION, BRINGING AN IMAGINED INTERNATIONAL TRANSACTION TO TAX IS FRAUGHT WITH THE DANGER OF INVALIDATION. IN THE PRESENT CASE, IN THE ABSENCE OF THERE BEING AN INTERNATIONAL TRANSACTION INVOLVING AMP SPEND WITH AN A SCERTAINABLE PRICE, NEITHER THE SUBSTANTIVE NOR THE MACHINERY PROVISION OF CHAPTER X ARE APPLICABLE TO THE TRANSFER PRICING ADJUSTMENT EXERCISE. ECONOMIC OWNERSHIP OF THE BRAND 77. THE NEXT ISSUE IS CONCERNING THE ECONOMIC OWNERSHIP AND LEGAL OWNERSHIP OF THE BRAND. ACCORDING TO THE REVENUE, VIEWING LEGAL OWNERSHIP AS SOMETHING DISTINCT FROM ECONOMIC OWNERSHIP 'MAY NOT BE THE RIGHT WAY OF LOOKING AT THINGS'. 78. IT IS NECESSARY AT THIS JUNCTURE TO EXAMINE THE HISTORY OF THE RELATIONSHIP BETWEEN MSIL AND SMC . WHEN THE LICENCE AGREEMENTS WERE ORIGINALLY ENTERED IN 1982, MSIL WAS KNOWN AS MARUTI UDYOG LIMITED ('MUL') AND SMC DID NOT HOLD A SINGLE SHARE IN MARUTI UDYOG LIMITED. IN 2003 SMC ACQUIRED THE CONTROLLING INTEREST IN MSIL. THERE ARE VARIOUS MODELS OF SU ZUKI MOTOR CARS MANUFACTURED BY MSIL AND EACH MODEL IS COVERED BY A SEPARATE LICENCE AGREEMENT. UNDER THESE AGREEMENTS SMC GRANTS LICENCE TO MSIL TO MANUFACTURE THAT PARTICULAR CAR MODEL ; PROVIDES TECHNICAL KNOW - HOW AND INFORMATION AND RIGHT TO USE SUZUK I'S PATENTS AND TECHNICAL INFORMATION. IT ALSO GIVES MSIL THE RIGHT TO USE SUZUKI'S TRADE MARK AND LOGO ON THE PRODUCT. PURSUANT TO THE ABOVE AGREEMENT, MSIL HAS BEEN USING THE CO - BRAND, I.E., MARUTI - ITA NO. 1482/DEL./2015 65 SUZUKI TRADE MARK AND LOGO FOR MORE THAN 30 YEARS. AS AL READY NOTED, THIS CO - BRAND CANNOT BE USED BY SMC AND IS NOT OWNED BY IT. 79. THE CLAUSES IN THE AGREEMENT BETWEEN MSIL AND SMC INDICATE THAT PERMISSION WAS GRANTED BY SMC TO MSIL TO USE THE CO - BRAND 'MARUTI - SUZUKI' NAME AND LOGO. THE MERE FACT THAT THE CA RS MANUFACTURED BY MSIL BEAR THE SYMBOL 'S' IS NOT DECISIVE AS THE ADVERTISEMENTS ARE OF THE PARTICULAR MODEL OF THE CAR WITH THE LOGO 'MARUTI - SUZUKI'. THE REVENUE HAS BEEN UNABLE TO CONTRADICT THE SUBMISSION OF MSIL THAT THE CO - BRAND MARK 'MARUTI - SUZUKI' IN FACT DOES NOT BELONG TO SMC AND CANNOT BE USED BY SMC EITHER IN INDIA OR ANYWHERE ELSE. THE DECISION IN SONY ERICSSON REQUIRES THAT THE MARK OR BRAND SHOULD BELONG TO THE FOREIGN ASSOCIATED ENTERPRISE. THE REVENUE ALSO DOES NOT DENY THAT AS FAR AS THE B RAND 'SUZUKI' IS CONCERNED ITS LEGAL OWNERSHIP VESTS WITH THE FOREIGN ASSOCIATED ENTERPRISE, I.E., SMC. THE REVENUE PROCEEDS ON THE BASIS THAT THE BENEFIT OF THE ECONOMIC OWNERSHIP ALSO ACCRUES TO THE FOREIGN ASSOCIATED ENTERPRISE BY WAY OF INCREASED ROYAL TY, INCREASED RAW MATERIAL SALES, INCREASED BRAND VALUE, ETC. 80. THE REVENUE IS PROCEEDING ON A PRESUMPTION REGARDING THE COMPARATIVE BENEFITS TO MSIL AND SMC AS A RESULT OF THE AMP EXPENDITURE INCURRED BY MSIL. THE REVENUE IS UNABLE TO DENY THAT MSIL'S E XPENDITURE ON AMP IS ONLY 1.87 PER CENT. OF ITS TOTAL SALES WHEREAS SMC'S EXPENDITURE WORLDWIDE ON AMP IS 7.5 PER CENT. OF ITS SALES. IN THE CIRCUMSTANCES, IN THE ABSENCE OF SOME DATA, IT CANNOT BE SIMPLY ASSERTED THAT THE BENEFIT OF MSIL'S AMP SPEND TO SM C IS NOT MERELY INCIDENTAL. THE COURT IS UNABLE TO ACCEPT THE ASSERTION OF THE REVENUE THAT THE MERE FACT OF INCURRING AMP EXPENDITURE SHOULD LEAD TO AN INFERENCE OF THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. 81. IT MUST BE RECALLED HERE THAT THE ROYAL TY PAID TO SMC FOR USE OF ITS LOGO ON THE PRODUCT MANUFACTURED WITH ITS TECHNICAL KNOW - HOW IS SEPARATELY SUBJECT TO TRANSFER PRICING. LIKEWISE, PAYMENTS FOR USE OF PATENTS OR COPYRIGHTS ARE SEPARATELY ASSESSED. WHAT THE PRESENT APPEALS ARE CONCERNED WITH I S ONLY THE AMP EXPENDITURE INCURRED AND NOTHING MORE. AS POINTED ITA NO. 1482/DEL./2015 66 OUT BY THE REVENUE THE ISSUE IS NOT ABOUT THE EXPENDITURE INCURRED BY MSIL IN ENGAGING INDIAN THIRD PARTIES FOR AMP BUT THE EXTENT TO WHICH THE AMP SPEND CAN BE ATTRIBUTED TO ENURE TO THE BEN EFIT OF SMC'S BRAND. THIS CAN BE A COMPLEX EXERCISE AND IN THE ABSENCE OF CLEAR GUIDANCE UNDER THE STATUTE AND THE RULES, CAN RESULT IN ARBITRARINESS AS A RESULT OF PROCEEDING ON SURMISES OR CONJECTURES. THE TRANSFER PRICING OFFICER WILL NEED TO ACCESS DAT A AS REGARDS THE STRENGTH OF THE FOREIGN ASSOCIATED ENTERPRISE'S BRAND AND WHAT IT COMMANDS IN THE INTERNATIONAL MARKET AND TO WHAT EXTENT THE PRESENCE OF THE BRAND IN THE ADVERTISEMENT ACTUALLY ADDS TO THE BENEFIT OF THE BRAND INTERNATIONALLY. 82. PARA. 6 D OF THE OECD GUIDELINES DEALS WITH 'MARKETING ACTIVITIES UNDERTAKEN BY ENTERPRISES NOT OWNING TRADE MARKS OR TRADE NAMES'. IT CONTAINS A DISCUSSION ON PROMOTION OF TRADE MARKS BY DISTRIBUTORS OF BRANDED GOODS. IT ACKNOWLEDGES THE DIFFICULTIES IN DETERMINI NG THE EXTENT TO WHICH THE EXPENSES HAVE CONTRIBUTED TO THE SUCCESS OF A PRODUCT. IT IS STATED : 'FOR INSTANCE, IT CAN BE DIFFICULT TO DETERMINE WHAT ADVERTISING AND MARKETING EXPENDITURES HAVE CONTRIBUTED TO THE PRODUCTION OR REVENUE, AND TO WHAT DEGREE. IT IS ALSO POSSIBLE THAT A NEW TRADE MARK OR ONE NEWLY INTRODUCED INTO A PARTICULAR MARKET MAY HAVE NO VALUE OR LITTLE IMPRESSION ON THE MARKET (OR PERHAPS LOSES ITS IMPACT). A DOMINANT MARKET SHARE MAY TO SOME EXTENT BE ATTRIBUTABLE TO MARKETING EFFORTS O F A DISTRIBUTOR. THE VALUE AND ANY CHANGES WILL DEPEND TO AN EXTENT ON HOW EFFECTIVELY THE TRADE MARK IS PROMOTED IN THE PARTICULAR MARKET. MORE FUNDAMENTALLY, IN MANY CASES HIGHER RETURNS DERIVED FROM THE SALE OF TRADE MARKED PRODUCTS MAY BE DUE AS MUCH T O THE UNIQUE CHAR ACTERISTICS OF THE PRODUCT OR ITS HIGH QUALITY AS TO THE SUCCESS OF ADVER TISING AND OTHER PROMOTIONAL EXPENDITURES. THE ACTUAL CONDUCT OF THE PARTIES OVER A PERIOD OF YEARS SHOULD BE GIVEN SIGNIFICANT WEIGHT IN EVALUATING THE RETURN ATTR IBUTABLE TO MARKETING ACTIVITIES.' ITA NO. 1482/DEL./2015 67 83. THE ORGANISATION FOR ECONOMIC CO - OPERATION AND DEVELOPMENT GUIDELINES SET OUT BROAD PARAMETERS FOR DETERMINING THE EXISTENCE OF INTERNATIONAL TRANSACTION AND FOR ASCERTAINING THE ARM'S LENGTH PRICE OF SUCH TRANSACTI ON. THEY MAY NOT IPSO FACTO BECOME APPLICABLE IN SITUATIONS WHERE NO STUDIES HAVE BEEN CONDUCTED ON A SCIENTIFIC BASIS ON THE BEHAVIOUR OF MARKET AND ASSESSMENT OF BRAND VALUE. INCIDENTAL BENEFIT TO SMC 84. THE COURT NEXT DEALS WITH THE SUBMISSION OF THE REVENUE THAT THE BENEFIT TO SMC AS A RESULT OF THE MSIL SELLING ITS PRODUCTS WITH THE CO - BRAND 'MARUTI - SUZUKI' IS NOT MERELY INCIDENTAL. THE DECISION IN SONY ERICSSON ACKNOWLEDGES THAT AN EXPENDITURE CANN OT BE DISALLOWED WHOLLY OR PARTLY BECAUSE ITS INCIDENTALLY BENEFITS THE THIRD PARTY. THIS WAS IN CONTEXT ON SECTION 57(1) OF THE ACT. REFERENCE WAS MADE TO THE DECISION IN SASSOON J. DAVID AND CO. PVT. LTD. V. CIT [1979] 118 ITR 261 (SC). THE SUPREME COURT IN THE SAID DECISION EMPHASISED THAT THE EXPRESSION 'WHOLLY AND EXCLUSIVELY' USED IN SECTION 10(2)(XV) OF THE ACT DID NOT MEAN 'NECESSARILY'. IT SAID : 'THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BEN EFITED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10(2)(XV) OF THE ACT IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY THE LAW'. 85. THE ORGANISATION FOR ECONOMIC CO - OPERATION AND DEVE LOPMENT TRANSFER PRICING GUIDELINES, PARA 7.13 EMPHASISES THAT THERE SHOULD NOT BE ANY AUTOMATIC INFERENCE ABOUT AN ASSOCIATE ENTERPRISE GROUP SERVICE ONLY BECAUSE IT GETS AN INCIDENTAL BENEFIT FOR BEING PART OF A LARGER CONCERN AND NOT TO ANY SPECIFIC ACT IVITY PERFORMED. EVEN PARAS. 133 AND 134 OF THE SONY ERICSSON JUDGMENT MAKES IT CLEAR THAT AMP ADJUSTMENT CANNOT BE MADE IN RESPECT OF A FULL - RISK MANUFACTURER. MSIL'S HIGHER OPERATING MARGINS 86. IN SONY ERICSSON IT WAS HELD THAT IF AN INDIAN ENTITY HAS SATISFIED THE TRANSACTIONAL NET MARGIN METHOD, I.E., THE ITA NO. 1482/DEL./2015 68 OPERATING MARGINS OF THE INDIAN ENTERPRISE ARE MUCH HIGHER THAN THE OPERATING MARGINS OF THE COMPARABLE COMPANIES, NO FURTHER SEPARATE AD JUSTMENT FOR AMP EXPENDITURE WAS WARRANTED. THIS IS ALSO IN CONSONANCE WITH RULE 10B WHICH MANDATES ONLY ARRIVING AT THE NET PROFIT BY COMPARING THE PROFIT AND LOSS ACCOUNT OF THE TESTED PARTY WITH THE COMPARABLE. AS FAR AS MSIL IS CONCERNED, ITS OPERATING PROFIT MARGIN IS 11.19 PER CENT. WHICH IS HIGHER THAN THAT OF THE COMPARABLE COMPANIES WHOSE PROFIT MARGIN IS 4.04 PER CENT. THEREFORE, APPLYING THE TRANSACTIONAL NET MARGIN METHOD IT MUST BE STATED THAT THERE IS NO QUESTION OF TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE. [ PAGES FROM ITRONLINE EXTRACTED] 33. IN VIEW OF THE DECISIONS OF HON BLE DELHI HIGH COURT, WE SET ASIDE THE ISSUE BACK TO THE FILE OF ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH. IN VIEW OF THIS GROUND NO. 6 TO 14 RELATIN G TO AMP EXPENSES ARE SET ASIDE TO THE FILE OF LD. TPO. 34. GROUND NO. 15 OF APPEAL IS AGAINST ERRONEOUSLY COMPUTING THE COMMISSION INCOME AT RS.3 , 05 , 83 , 50 1 / - AGAINST THE CORRECT COMMISSION OF RS.2,04,40,169/ - . GROUND NO. 16 IS A CONNECTED GROUND STATING THAT THE LD. TPO HAS CONTRAVENED THE DIRECTIONS OF HON BLE DRP. 35. THE COMMISSION INCOME OF THE ASSESSEE HAS BEEN DETERMINED AS DIFFERENCE OF DEALER S STANDARD PRICE LESS ASSESSEE S TRANSFERRED PRICE WHICH IS PURCHASE PRICE FROM ITS AE. ACCORDINGLY, THE ASSESSEE HAS RECEIVED ITA NO. 1482/DEL./2015 69 COMMISSION INCOME OF RS.2,04,40,169/ - ON DIRECT SALES BY ITS AE TO THE CUSTOMERS IN INDIAN TERRITORY. THE LD. TPO OBTAINED THE DETAILS OF COMMISSION INCOME FROM THE ASSESSEE AND FOUND OUT CERTAIN DISCREPANCIES. THE ASSESSEE EXPLAINED THE ANOMALIES POINTED OUT. HOWEVER, THE LD.TPO HELD THAT THE TAXPAYER HAS NOT PERFORMED PROPER FAR ANALYSIS AND IT IS ACCEPTING THE COMMISSION INCOME WHICH IS CREDITED BY ITS ASSOCIATE ENTERPRISE. AFTER THAT THE LD. TPO COMPUTED THE TOTAL COMMISSION INCOM E RECEIVABLE BY THE ASSESSEE AMOUNTING TO RS.3,05,83,501/ - AND AFTER THAT REDUCED THIS AMOUNT BY THE INCOME OF COMMISSION SHOWN BY THE ASSESSEE OF RS.2,04,40,169/ - AND THEREAFTER MADE A PROPOSED ADJUSTMENT OF RS.1,01,43,332/ - . 36. THE ASSESSEE CARRIED TH E MATTER BEFORE THE LD. DRP. THE LD. DRP HELD THAT COMMISSION INCOME IS REQUIRED TO BE COMPUTED ON THE BASIS OF DIFFERENCE BETWEEN DEALERS STANDARD PRICE MINUS LIP S TRANSFERRED PRICE AND 50% OF DIFFERENCE BETWEEN THE DEALER PRICE AND INDIA S TRANSFERRED PR ICE SHOULD BE THE ADEQUATE COMPENSATION TO APPELLANT FOR RENDERING SUCH SERVICES. BASED ON THIS, THEY REJECTED THE COMPUTATION OF TPO ON THE BASIS OF DIFFERENCE BETWEEN LI U NGONG CHINA PRICE MINUS CUSTOMERS PRICE. THE LD. DRP DIRECTED THE LD. TPO TO COMPUTE THE COMMISSION AND MAKE APPROPRIATE ADJUSTMENT. ITA NO. 1482/DEL./2015 70 37. IT WAS SUBMITTED BEFORE US THAT HON BLE DRP HAS DIRECTED TO COMPUTE 50% OF THE DIFFERENCE BETWEEN DEALER S PRICE AND LI U NGONG INDIA TRANSFERRED PRICE AS AN ADEQUATE COMPENSATION TO LIU NGONG INDIA FOR RENDERING SUCH SERVICES. HE SUBMITTED THAT ADHOC INCREASE OF 50% PROVIDED BY LD. DRP DID NOT HAVE ANY BASIS OR SUPPORT. HE SUBMITTED THAT PURSUANT TO THE DIRECTIONS OF LD.DRP, THE ADJUSTMENT IS OF RS.2,54,35,083/ - AGAINST THE ADJUSTMENT OF RS.1,01,43,332/ - MADE BY THE LD. TPO. HE SUBMITTED THAT THE LD. TPO HAS WRONGLY COMPUTED THE COMMISSION FORMULA AND HE HAS CHANGED THE APPELLANT S DIRECT SELLING PRICE ARBITRARILY. HE, THEREFORE, SUBMITTED THAT THE LD.DRP AND LD. TPO HAS ERRED IN MAKING TH EIR ADJUSTMENT. 38. THE LD . DR, ON THE OTHER HAND, RELIED ON THE ORDERS OF THE LD. TPO AND LD. DRP. 39. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND ALSO PERUSED THE ORDERS OF THE LD. TPO AND LD. DRP. IT IS APPARENT THAT LD. DRP AS ADOPTED ADH OC INCREASE OF 50% ON THE COMMISSION INCOME BEING DIFFERENCE BETWEEN THE DEALERS STANDARD PRICE AND LIPS TRANSFERRED PRICE. ON PERUSAL OF THE ORDER OF THE LD.DRP, WE ALSO DO NOT FIND ANY REASON RECORDED BY LD. DRP IN STATING THAT 50% OF THE DIFFERENCE BETW EEN ABOVE TWO PRICES IS ADEQUATE REMUNERATION. ITA NO. 1482/DEL./2015 71 WE REJECT SUCH AN ARBITRARY APPROACH ADOPTED BY THE LD. DRP WHICH DID NOT HAVE ANY SUPPORT OF ANY COMPARABILITY ANALYSIS. WE ALSO FIND THAT DESPITE THE DIRECTIONS OF LD. DRP, THE LD. TPO HAS CHANGED THE DEALER S STANDARD PRICE AND LIPS TRANSFERRED PRICE. IN VIEW OF THE ABOVE CONTRARY ORDERS OF THE LOWER AUTHORITIES AND CONFUSION ON THE PRICES, WE SET ASIDE THE ISSUE OF THE COMMISSION INCOME OF THE ASSESSEE BACK TO THE FILE OF LD. TPO WITH DIRECTION TO COMPUTE TH E COMMISSION INCOME OF THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF THE ACT AND SUPPORTING CALCULATIONS AND MARGIN, IF ANY, WITH PROPER COMPARABLES. IN THE RESULT, WE SET ASIDE THE GROUND NO. 15 AND 16 TO THE FILE OF LD. TPO. 40. GROUND NO. 17 IS AGA INST MAKING AN ADJUSTMENT OF RS.29,39,432/ - PERTAINING TO PLANT AND MACHINERY. DURING THE YEAR, THE ASSESSEE COMPANY PURCHASED PLANT AND MACHINERY AMOUNTING TO RS.1,05,95,004/ - FROM ITS AE. THE COMPANY ALSO PURCHASED CERTAIN J IGS AND FIXTURES AMOUNTING TO RS.21,73,875/ - . DURING THE COURSE OF HEARING, IT WAS STATED THAT THE AE HAS SOLD ITS PLANT AND MACHINERY AND A MARK - UP OF 10% WHICH IS A NOMINAL PROFIT ACCORDING TO THE ASSESSEE. THE LD. TPO OBJECTED TO THIS 10% MARK - UP AND HELD THAT AE INTENTIONALLY CHAR GED HUGE MARK - UP OF 10% WITHOUT RENDERING ANY SERVICE OR WITHOUT PROVIDING ANY BENEFIT TO THE ASSESSEE. THEREFORE, ON THE ITA NO. 1482/DEL./2015 72 TOTAL PURCHASE OF PLANT AND MACHINERY OF RS.3,23,33,749/ - , 10% MARK - UP WAS WORKED OUT AMOUNTING TO RS.29,39,432/ - AND UPWARD ADJUSTMEN T WAS MADE TO THE TOTAL INCOME OF THE ASSESSEE. 41. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. DRP. THE APPELLANT SUBMITTED THAT THE AE HAS TRANSFERRED THE PLANT AND MACHINERY OF RS.1,05,95,063/ - ON COST TO COST BASIS & NO MARK - UP HAS BEEN CHARGED. I N VIEW OF THIS STATEMENT, THE LD. DRP DIRECTED THE LD.TPO TO VERIFY THE ABOVE FACT AND IF NO MARK - UP IS CHARGED BY THE AE, THEN ADJUSTMENT WAS DIRECTED TO BE DELETED. HOWEVER, IT WAS FURTHER DIRECTED THAT IN CASE IF MARK - UP HAS BEEN CHARGED, THEN IT WAS NO T SUPPORTED BY EVIDENCE THAT SUCH MARK - UP WAS AT ARM S LENG T H. 42. ON APPEAL BEFORE US, THE LD. AR SUBMITTED THAT IN CASE OF PLANT AND MACHINERY, THERE IS NO MARK - UP. HOWEVER, IN CASE OF JIGS & DYES, 10% MARK - UP IS CHARGED. IT WAS FURTHER SUBMITTED THAT MARK - UP IS TO COVER ADMINISTRATIVE AND OTHER EXPENSES IN THE NATURE OF WAREHOUSING ETC. 43. THE LD. DR RELIED ON THE ORDER OF LD. DRP AND STATED THAT IF IT IS THAT COST TO COST BASIS, NO ADJUSTMENT CAN BE MADE. HOWEVER, IF THE MARK - UP IS CHARGED THEN IT H AS TO BE AT ARM S LENGTH. ITA NO. 1482/DEL./2015 73 44. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. IT IS APPARENT THAT THE ASSESSEE IS TAKING CONTRARY STANDS BEFORE THE LD. TPO AS WELL AS BEFORE THE LD.DRP. VIDE SUBMISSIONS DATED 10.07.2013, IT WAS SUBMITTED THAT ASSOCIAT E ENTERPRISE SOLD PLANT AND MACHINERY AT COST PLUS MARK - UP OF 10%. FURTHER, VIDE REPLY DATED 26.06.2013, IT WAS SUBMITTED BEFORE THE TPO THAT AE HAS SOLD PLANT AND MACHINERY AT COST PLUS NOMINAL MARK - UP. FURTHER BEFORE THE LD. DRP IT WAS SUBMITTED THAT NO MARK - UP HAS BEEN CHARGED. FURTHER, BEFORE US, IT HAS BEEN CATEGORICALLY STATED THAT NO MARK - UP IS CHARGED ON PURCHASE OF PLANT AND MACHINERY OF RS.1,05,95,0004/ - , 10% MARK - UP IS CHARGED ON PURCHASE OF PLANT AND MACHINERY OF RS.2,17,38,745/ - . THE LD. DRP HA S DIRECTED THE TPO TO VERIFY THE CONTENTION OF THE ASSESSEE AND VERIFY IT WITH RECORDS. APPARENTLY, THE ASSESSEE IS MAKING CONTRADICTORY STATEMENTS BEFORE DIFFERENT AUTHORITIES. THE ASSESSEE IS ALSO NOT COME OUT WITH CLEAN HANDS ABOUT THE FACT OF MARK - UP C HARGED. MERELY SAYING THAT MARK - UP IS TO COVER ADMINISTRATIVE AND OTHER EXPENSES IN THE NATURE OF WAREHOUSING AND OTHER EXPENSES IS DEVOID OF ANY EVIDENTIARY VALUE AND LACKS ANY MERIT. THE MARK - UP PAID BY THE ASSESSEE TO ITS AE IS REQUIRED TO BE BENCHMARKE D BY THE ASSESSEE ITSELF AT ARM S LENGTH PRICE. THE ASSESSEE HAS REASONABLY FAILED TO DO SO. WE, THEREFORE, DO NOT FIND ANY ITA NO. 1482/DEL./2015 74 ERROR IN THE DIRECTION GIVEN BY THE LD. DRP AND GROUND NO. 17 OF THE APPEAL OF THE ASSESSEE IS DISMISSED. 45. GROUND NO. 18 OF APPE AL IS AGAINST THE ADJUSTMENT OF RS.3,73,498/ - BY CONSIDERING ARM S LENGTH PRICE OF MISCELLANEOUS EXPENSES AS NIL. GROUND NO. 19 IS REGARDING LEVY OF PENALTY OF 2% ON NON - DISCLOSURE OF INTERNATIONAL TRANSACTION PERTAINING TO MISCELLANEOUS EXPENSES IN FORM N O. 3CEB. THE LD. TPO FOUND THAT THE ASSESSEE HAS INCURRED MISCELLANEOUS EXPENSES OF RS.3,73,498/ - AND IT WAS ASKED TO JUSTIFY ITS ALP. THIS TRANSACTION WAS ALSO NOT DISCLOSED IN FORM NO. 3CEB. IN ABSENCE OF ANY EXPLANATION BY THE ASSESSEE, THE ALP OF THIS EXPENDITURE WAS COMPUTED AT NIL. THE LD. TPO STATED THAT THIS WAS ASKED DURING THE COURSE OF HEARING. AGAINST THIS, BEFORE THE LD. DRP, IT WAS SUBMITTED BY THE APPELLANT THAT THESE EXPENDITURE HAVE BEEN INCURRED BY THE ASSESSEE AND HAS BEEN CLAIMED AS REIM BURSEMENT FOR CERTAIN MISCELLANEOUS EXPENSES. THIS AMOUNT WAS PAID TO ITS AE FOR REIMBURSEMENT AND STATED THAT IN SUCH EXPENSES, THE ACTUAL COST INCURRED BY AE IS RECOVERED. ON THE BASIS OF THIS, THE LD. DRP REJECTED THE CONTENTION OF THE ASSESSEE AND CONF IRMED THE ACTION OF THE LD. TPO. ITA NO. 1482/DEL./2015 75 46. BEFORE US, THE LD. AR SUBMITTED THAT THE LD. TPO DID NOT RAISE ANY QUERY AND INFORMATION WAS SUPPLIED VIDE LETTER DATED 13.12.2013. HE FURTHER SUBMITTED THAT THERE WAS NO INTENTION TO NOT TO DISCLOSE SUCH TRANSACTION. 47. THE LD. DR RELIED UPON THE ORDER S OF THE LOWER AUTHORITIES AND SUBMITTED THAT IN ABSENCE OF SUCH INFORMATION, THE ALP IS REQUIRED TO BE DETERMINED AT NIL AND FURTHER TRANSACTIONS HAVING NOT BEEN DISCLOSED IN FORM NO. 3CEB, PENALTY HAS RIGHTLY BEEN PRESSED. 48. WE HAVE CAREFULLY CONSIDER ED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE ORDERS OF THE LOWER AUTHORITIES. BEFORE US ALSO, IT WAS SUBMITTED THAT IT IS THE REIMBURSEMENT FOR CERTAIN EXPENSES. ONLY THE INVOICES RAISED BY AE W ERE STATED TO HAVE BEEN FURNISHED. THE INFORMATION WAS FURTHE R NOT DISCLOSED IN FORM NO. 3CEB DESPITE DISCLOSURE OF THE SAME IN ITS BALANCE SHEET AS RELATED PARTY TRANSACTION. IN ABSENCE OF ANY DETAILS, WE CONFIRM THE ACTION OF THE LD. TPO IN DETERMINING THE ALP OF REIMBURSEMENT OF EXPENDITURE OF RS.3,73,498/ - . REGA RDING THE DISCLOSURE OF THE TRANSACTIONS, WHEN THE BALANCE SHEET ITSELF WAS READY BEFORE PREPARATION OF FORM 3CEB, IT IS VERY UNUSUAL THAT IN AUDITED ACCOUNTS, SUCH TRANSACTIONS ARE DISCLOSED WHICH ARE INTERNATIONAL TRANSACTIONS AND IN FORM NO. 3CEB FILED BEFORE THE AUTHORITIES, THE SAME ARE NOT DISCLOSED. ITA NO. 1482/DEL./2015 76 IT DOES NOT SHOW ANY BONA FIDE WITH RESPECT TO THIS ITEM FOR NON - LEVY OF PENALTY. THEREFORE, GROUND NO. 18 AND 19 OF APPEAL ARE DISMISSED. 49. GROUND NO. 20 IS REGARDING ISSUE OF PROPOSAL OF PENALTY AT 2 % OF THE NON - DISCLOSURE OF ISSUE OF EQUITY SHARES. DURING THE YEAR, THE ASSESSEE HAS ISSUED EQUITY SHARES OF RS.84,57,59,640/ - AT A FACE VALUE OF RS.10/ - EACH AT PAR. THE LD. TPO HAS PROPOSED THE PENALTY AS THIS TRANSACTION WAS NOT DISCLOSED. THE LD. DRP HAS REJECTED THIS OBJECTION AS PRE - MATURE. 50. ON APPEAL BEFORE US, THE LD. AR SUBMITTED THAT SHARE VALUATION REPORT WAS SUBMITTED VIDE LETTER DATED 13.12.2013 AND FURTHER HELD THAT ISSUE OF SHARE CAPITAL IS A CAPITAL ACCOUNT TRANSACTION AND IT HAS NOTHI NG TO DO WITH THE INCOME. 51. THE LD. DR ALSO RELIED ON THE ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE ISSUE OF SHARE CAPITAL IS NOT ONLY CAPITAL ACCOUNT TRANSACTION, BUT IT IS ALSO REQUIRED TO BE DISCLOSED IN FORM NO. 3CEB. 52. WE HAVE CARE FULLY CONSIDERED THE RIVAL CONTENTIONS AND THE DIRECTION OF THE LD. DRP THAT THE ISSUE IS PRE - MATURE. WE AGREE WITH THE DIRECTION OF THE LD. ITA NO. 1482/DEL./2015 77 DRP. BEFORE US ALSO, THE ISSUE IS PRE - MATURE AND HENCE, GROUND NO. 20 OF APPEAL IS DISMISSED. 53. GROUND NO. 21 IS REGARDING DISALLOWANCE OF AN AMOUNT OF RS.1308/ - U/S. 14A. THE LD. ASSESSING OFFICER DISALLOWED RS.1308/ - U/S. 14A APPLYING RULE 8D. BEFORE THE LD. DRP, ONLY LEGAL ISSUES WERE RAISED, WHICH WERE REJECTED. THE LD. DRP HAS FURTHER HELD THAT THE AO HAS TAKEN AGGREGATE OF EXPENSES DIRECTLY ATTRIBUTED TO EARNING OF EXEMPT INCOME AND HAS CORRECTLY WOR K ED OUT THE DISALLOWANCE U/R 8D. BEFORE US, NO ARGUMENTS WERE PRESSED ON THIS GROUND AND THEREFORE, THIS GROUND OF APPEAL IS REJECTED. 54. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED, AS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 28.06.2016 . SD/ - SD/ - ( I.C. SUDHIR ) (L.P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 28.06.2016 *AKS/ - COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT. REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI