ITO, New Delhi V. M/s. Bose Corporation India P. Ltd., New Delhi

ITA 2523/DEL/2014

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6364 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 11 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 09-03-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 24-04-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MONA SINGH
• Assessee Lawyers: A K SINGH S
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Rule of consistency; Wholly owned subsidiary; Revenue expenditure
• Section: 143(3); 92B; 92F; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1509/DEL./2014 (ASSESSMENT YEAR : 2009-10) M/S. BOSE CORPORATION INDIA PVT. LTD., VS. ITO, WAR D 3 (1), SALCON AURUM, 3 RD FLOOR, NEW DELHI. PLOT NO.4, JASOLA DISTRICT CENTRE, NEW DELHI 110 025. (PAN : AAACB3260A) ITA NO.2523/DEL./2014 (ASSESSMENT YEAR : 2009-10) ITO, WARD 3 (1), VS. M/S. BOSE CORPORATION INDIA PV T. LTD., NEW DELHI. SALCON AURUM, 3 RD FLOOR, PLOT NO.4, JASOLA DISTRICT CENTRE, NEW DELHI 110 025. (PAN : AAACB3260A) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI DIVYANSHU AGRAWAL & A.K. SINGH, ADVOCATES REVENUE BY : SMT. MONA SINGH, CIT DR DATE OF HEARING : 09.03.2017 DATE OF ORDER : 30.03.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE AFORESAID APPEAL FILED BY THE ASSESSEE AS WELL AS CROSS APPEAL FILED BY THE REVENUE ARE BEING DISPOSED OFF BY WAY OF CONSOLIDATED ORDER TO AVOID REPETITION OF DISCUSSIO N. ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 2 2. THE APPELLANT, M/S. BOSE CORPORATION INDIA PVT. LTD., (HEREINAFTER REFERRED TO AS THE ASSESSEE) IN ITA NO.1509/DEL/2014 BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE TH E IMPUGNED ORDER DATED 24.02.2014, PASSED BY THE AO UNDER SECTION 14 3(3)/144C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) IN C ONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO QUA THE ASSESS MENT YEAR 2009-10 ON THE GROUNDS INTER ALIA THAT :- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE ORDER PASSED BY THE LD. ASSESSING OFFICER ('LD. AO') UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT IS BAD IN LAW TO THE EXTENT OF ADDITIONS/ADJUSTMENTS OF RS.14,52,78,812 MADE IN THE IMPUGNED ASSESSMENT ORDER. 2. THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO [FOLLOWING THE DIRECTIONS OF LEARNED DISPUTE RESOLUTION PANEL ('LD. DRP')] ERRED IN ASSESSING THE RETURNED INCOME OF THE APPELLANT OF RS.4,09,24,720 AT RS.18,62,03,530. 3. THE LD. TRANSFER PRICING OFFICER (TPO)/ DRP ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN ENHANCING THE INCOME OF THE APPELLANT BY RS.7,96,25,681 ON ACCOUNT OF. NON-RECEIPT OF THE REIMBURSEMENT FOR 'ALLEGEDLY EXCESSIVE' ADVERTISING, MARKETING AND PROMOTION ('AMP') EXPENSES INCURRED BY THE APPELLANT AND IN DOING SO HAVE GROSSLY ERRED IN: 3.1 DISREGARDING THE CORRECT CHARACTERISATION OF T HE APPELLANT'S BUSINESS I.E. BEING A NORMAL RISK BEARING DISTRIBUTOR UNDERTAKING ALL THE RISKS RELATING TO ITS BUSINESS OF DISTRIBUTION AND INSTEA D, ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 3 WRONGLY CHARACTERIZING THE APPELLANT AS A LIMITED/ NO RISK DISTRIBUTOR; 3.2 DISREGARDING THE NATURE OF AMP EXPENSES INCURRED BY THE APPELLANT AND INCORRECTLY HOLDING THAT SUCH EXPENSES RESULTS IN DEVELOPING MARKETING INTANGIBLES FOR THE AES; 3.3 MISINTERPRETING/ PLACING INCORRECT RELIANCE ON THE INTERNATIONAL GUIDANCE FROM OECD, US TP REGULATIONS AND AUSTRALIAN TAX OFFICE ('ATO') AND MAKING SEVERAL ERRONEOUS/ FACTUALLY INCORRECT AND CONTRADICTORY STATEMENTS/ OBSERVATIONS IN THE TP ORDER, WHICH ARE NOT RELEVANT TO THE INSTANT CASE, ONLY IN ORDER TO JUSTIFY AN OTHERWISE INAPPROPRIATE AND UNWARRANTED TP ADJUSTMENT; 3.4 INCORRECTLY HOLDING THE AMP EXPENSES INCURRED BY THE APPELLANT TO BE 'EXCESSIVE' ON THE BASIS OF A 'BRIGHT LINE LIMIT' ARRIVED AT BY, ERRONEOUSLY REJECTING COMPANIES SIMILAR IN FUNCTIONAL PROFILE TO THE APPELLANT ON BASIS OF INAPPROPRIATE REASONING; 3.5 DISREGARDING THE FACT THAT THE PREMIUM GROSS PROFIT EARNED BY THE APPELLANT MORE THAN COMPENSATE THE ALLEGEDLY EXCESSIVE AMP SPENDS, IF ANY, INCURRED BY IT; 3.6 ALLEGING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT NEED TO BE REIMBURSED BY THE ASSOCIATED ENTERPRISES C'AES') ALONG WITH A MARK-UP ON THE SAME BY IMPLICATING THE SAME AS AN INTRA-GROUP MARKETING SERVICE; 3.6.1 APPLYING THE CONCEPT OF 'INTRA-GROUP SERVICE S' WITHOUT A DUE UNDERSTANDING THEREOF AND WITHOUT DEMONSTRATING THAT SERVICES HAS BEEN RENDERED FOR THE BENEFIT OF THE AES OR ANY TANGIBLE BENEFITS HAVE BEEN RECEIVED BY THE AES FOR WHICH A RETURN NEEDS TO EARNED BY THE APPELLANT; ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 4 3.6.2 IN APPLYING A MARK-UP OF IS.27% IN RESPECT O F THE APPELLANT'S 'ALLEGED EXCESSIVE' AMP EXPENSES, WITHOUT ANY BASIS FOR THE SAME WHATSOEVER AND WITHOUT GIVING THE APPELLANT ADEQUATE OPPORTUNITY TO ANALYZE, PRESENT ITS CONTENTIONS ON THE SAME; 3.7 DISREGARDING THE DIRECTIONS ISSUED BY THE LD. DRP AND NOT INCLUDING INTEX TECHNOLOGIES INDIA PRIVATE LIMITED AS A COMPARABLE COMPANY FOR THE PURPOSE OF DETERMINING THE BRIGHT-LINE; 3.8 DISREGARDING THE DIRECTIONS ISSUED BY THE LD. DRP AND CONSIDERING PRIME LENDING RATE INSTEAD OF BASE RATE OF SBI AS DIRECTED BY THE HON'BLE DRP FOR THE PURPOSE OF APPLYING MARK- UP ON THE ALLEGED EXCESSIVE AMP EXPENSES INCURRED BY THE APPELLANT; 3.8.1 EVEN WHILE APPLYING THE BASE RATE INSTEAD OF PRIME LENDING RATE, THE LD. TPO COMMITTED A MISTAKE BY CONSIDERING A MARK-UP OF 300 BASIS POINTS ON THE SBI PRIME LENDING RATE INSTEAD OF ISO BASIS POINTS AS DIRECTED BY THE LD. DRP; 4. THAT THE LD. AO (FOLLOWING THE DIRECTIONS OF THE LD. DRP) ERRED IN DISALLOWING AN AMOUNT OF RS.6,10,91,813 (BEING 4/5 TH OF THE TOTAL EXPENDITURE) PAID TOWARDS ADVERTISEMENT CHARGES BY TREATING THE SAME AS DEFERRED REVENUE EXPENDITURE. 4.1 THAT THE LD. AO HAS MADE THE ADDITION IN AN ARBITRARY MANNER BY MERELY STATING THAT WHOLE OF THE EXPENDITURE INCURRED FOR ADVERTISING PRODUCTS THROUGH MEDIA IN INDIA CANNOT BE ALLOWED AS REVENUE EXPENDITURE IN ONE YEAR ITSELF; 4.2 THAT THE LD. AO RELYING ON THE APEX COURT'S DECISION WHICH WAS RENDERED IN A DIFFERENT CONTEXT ERRED IN ALLEGING THAT THE BENEFIT OF INCURRING SUCH EXPENDITURE IS STRETCHED OVER A ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 5 NUMBER OF YEARS AND ACCORDINGLY THE EXPENDITURE NEEDS TO BE AMORTIZED OVER A NUMBER OF YEARS; 4.3 THAT THE ACTION OF THE LD. AO SHALL RESULT IN DOUBLE WHAMMY ON THE APPELLANT AS AN ADDITION HAS ALREADY BEEN MADE ON AMP EXPENDITURE BY THE LD. TPO; 5. WITHOUT PREJUDICE TO THE APPELLANT'S CONTENTION IN GROUND NO.4 ABOVE , THE LD. AO ERRED IN NOT PROVIDING A DEDUCTION OF 1/5TH OF THE ADVERTISEMENT EXPENSES PERTAINING TO THE PRECEDING YEARS IN ASSESSING THE INCOME FOR THE YEAR UNDER CONSIDERATION. 6. THAT THE LD. AO (FOLLOWING THE DIRECTIONS OF THE LD. DRP) ERRED IN DISALLOWING AN AMOUNT OF RS.45,61,318 BEING WRITE-OFF OF DEMONSTRATION EQUIPMENT INVENTORY BY HOLDING THAT SUCH INVENTORY SHOULD HAVE BEEN VALUED AT COST DISREGARDING THE FACT THAT THE NET REALIZABLE; VALUE ( OR 'NRV') OF DEMONSTRATION EQUIPMENT INVENTORY IS LOWER THAN THE COST. 6.1 THAT THE LD. AO ERRED IN EQUATING THE NRV OF NORMAL / NEW INVENTORY WITH THE DEMONSTRATION EQUIPMENT INVENTORY DISREGARDING THE FACT THAT THE LATTER UNDERGOES EXCESSIVE WEAR AND TEAR IN THE COURSE OF DISPLAY; 6.2 THAT THE LD. AO ERRED IN HOLDING THAT THE PROVISION FOR DEMO INVENTORY WAS CREATED PURELY ON ESTIMATION BASIS AND CANNOT BE TREATED AS REAL EXPENSE WITHOUT APPRECIATING THAT THE SAME IS IN THE NATURE OF AN ACTUAL WRITE-OFF; 6.3 THAT THE LD. AO ERRED IN NOT APPRECIATING THAT THE WRITE-OFF OF DEMONSTRATION EQUIPMENT ALSO NEEDS TO BE ALLOWED ON ACCOUNT OF 'RULE OF CONSISTENCY' AS THE APPELLANT HAS BEEN CONSISTENTLY CREATING SUCH CHARGE EACH YEAR AND NO ADDITION HAS BEEN MADE IN ANY OF THE PRECEDING YEARS; ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 6 7. WITHOUT PREJUDICE TO THE APPELLANT'S CONTENTION IN GROUND NO. 6, THE LD. AO ERRED IN NOT ALLOWING DEPRECIATION @ 15% ON THE OPENING BALANCE PLUS ADDITIONS DURING THE YEAR TO DEMONSTRATION EQUIPMENT IN LINE WITH THE PROVISION OF SECTION 32 OF THE ACT. 8. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. AO HAS GROSSLY ERRED IN GIVING ONLY A PART CREDIT OF TAX DEDUCTED AT SOURCE AMOUNTING TO RS.12,78,043 INSTEAD OF RS.15,25,403 AS CLAIMED IN THE RETURN OF INCOME. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C), 271BA AND 271AA OF THE ACT. 3. THE OBJECTOR, INCOME-TAX OFFICER, WARD 3 (1), NE W DELHI, (HEREINAFTER REFERRED TO AS THE REVENUE) IN ITA N O.2523/DEL/2014 BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE TH E IMPUGNED ORDER DATED 24.02.2014, PASSED BY THE AO UNDER SECTION 14 3(3)/144C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) IN C ONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO QUA THE ASSESS MENT YEAR 2009-10 ON THE GROUNDS INTER ALIA THAT :- 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD DRP ERRED IN DELETING THE ADDITION OF ARM'S LENGTH PRICE BY IGNORING THE FACTS THAT:- (I) APPLICATION OF BASE RATE OF SBI AS ON 30-6- 2008 CANNOT BE ACCEPTED AS THE CONCEPT OF BASE RATE COME INTO EFFECT ON 1-7-2010. (II) INTEX TECHNOLOGY (I)' P LTD. CANNOT BE TAKEN AS A COMPARABLE FOR BENCHMARKING ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 7 AMP EXPENDITURE AS IT HAS DIFFERENT FINANCIAL YEAR ENDING VIS-A-VIS THE ASSESSEE. 4. BRIEFLY STATED, FACTS OF THIS CASE ARE : THE ASS ESSEE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF BOSE CORPORATION, USA, (FOR SHORT BOSE US) AND PRIMARILY ENGAGED IN THE BUSINESS OF RESELLING HIGH END AUDIO PRODUCTS. IT IS A BUY-SELL DISTRIBUTOR O F BOSE PRODUCTS AND A SUPPORT SERVICE PROVIDER. BOSE INDIA HAS DIV IDED ITS OPERATION ON TWO LINES ONE : RETAIL SALES; AND TW O : PROFESSIONAL SALES; AND MARKETING EFFORTS IN BOTH THE BUSINESS L INES IS DIFFERENT. 5. ON THE REFERENCE MADE BY THE ASSESSING OFFICER U NDER SECTION 92CA (3) TO DETERMINE THE ARMS LENGTH PRIC E (ALP) IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE DURING FY 2008-09, LD. TPO ISSUED A NOTICE AND ASSE SSEE FILED NECESSARY DOCUMENTS THROUGH ITS AUTHORIZED REPRESEN TATIVE AND ALSO ATTENDED THE PROCEEDINGS FROM TIME TO TIME. 6. DURING THE YEAR UNDER ASSESSMENT, THE ASSESSEE H AS ENTERED INTO INTERNATIONAL TRANSACTIONS AS UNDER :- S.NO. DESCRIPTION OF THE TRANSACTION AMOUNT (IN RUPEES) 1 PURCHASE OF FINISHED GOODS AND SPARES 309,415,090 2 SUPPORT SERVICE INCOME 33,720,836 3 PURCHASE OF CAPITAL GOODS 5,967,973 4 REIMBURSEMENT OF EXPENSES PAID 2,724,717 ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 8 7. ASSESSEE COMPANY DECLARED INCOME DURING THE YEAR UNDER ASSESSMENT AT RS.4,09,24,720/- AND AS PER P&L ACCOU NT, THE TOTAL REVENUE OF THE ASSESSEE AMOUNTING TO RS.1,06,60,46, 669/- FROM FOLLOWING SEGMENTS :- NATURE OF INCOME AMOUNT (IN INR) SALES (TRADED) 99,22,28,546/- SUPPORT SERVICES INCOME 3,37,20,836/- INSTALLATION CHARGES 2,36,62,296/- SERVICE INCOME 1,31,88,910/- OTHER INCOME 32,46,081/- 8. TPO NOTICED THAT THE ASSESSEE SPENT AN AMOUNT OF RS.7,63,64,766/- ON ADVERTISEMENT, MARKETING AND PR OMOTIONAL (AMP) EXPENDITURE. THE LD. TRANSFER PRICING OFFICE R (TPO) IN ORDER TO DETERMINE ALP OF INTERNATIONAL TRANSACTION S RELATING TO AMP EXPENDITURE NOTICED THAT THE ASSESSEE IS NOT O NLY ENGAGED IN PROMOTION OF BOSE PRODUCTS BUT ALSO DEVELOPED MARKE TING INTANGIBLES FOR THE ASSOCIATED ENTERPRISES (AE) BY LAUNCHING PRODUCTS AND CREATING AWARENESS FOR THE BOSE BRAND. TPO FURTHER NOTICED THAT THE ASSESSEE HAD LAUNCHED AND PERMITTE D BOSE BRAND IN INDIA AND HAD INCURRED HUGE EXPENDITURE UNDER HEADS ADVERTISEMENT, MARKETING AND PROMOTIONAL EXPENDITUR E IN EARLIER YEARS AND IN THE YEAR UNDER CONSIDERATION, THE DETA ILS THEREOF IS TABULATED AS UNDER :- ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 9 PARTICULARS FY 2006 - 07 FY 2007 - 08 FY 2008 - 09 SALES (RS.) 569,837,043 893,853,149 1,062,800,588 AMP EXPENDITURE 58,780,494 78,299,410 76,364,766 PERCENT AMP TO TOTAL SALES 10.32% 8.76% 7.18% 9. TPO TREATED THE AMP EXPENDITURE OF RS.7.63 CRORE S AS INTERNATIONAL TRANSACTION UNDER SECTION 92B (1) REA D WITH CLAUSE (V) OF SECTION 92F AND ACCORDINGLY, ISSUED SHOW-CAUSE N OTICE TO THE ASSESSEE. 10. ASSESSEE COMPANY FILED SUBMISSIONS DATED 20.11. 2012 THAT THERE IS NO AGREEMENT BETWEEN THE ASSESSEE AND AE F OR THE USE OF BRAND NAME AND TRADE NAME BY THE ASSESSEE AND THE T RANSFER PRICING REGULATIONS REQUIRE THAT IT IS NOT THE FORM BUT THE OVERALL ARRANGEMENT / SUBSTANCE OF THE TRANSACTION THAT MUS T BE BORNE IN MIND. 11. TPO, AFTER CONSIDERING THE RELEVANT PROVISIONS AND SUBMISSIONS MADE BY THE ASSESSEE, PROCEEDED TO CONC LUDE INTER ALIA THAT THE EXPENDITURE INCURRED ON AMP BY THE ASSESSE E TO PROMOTE THE BRAND NAME / TRADE NAME OWNED BY BOSE US IS INT ERNATIONAL TRANSACTIONS WHICH HAS NOT BEEN REPORTED BY THE ASS ESSEE IN FORM 3CB NOR BEEN BENCHMARKED IN TRANSFER PRICING STUDY; THAT THE EXPENDITURE INCURRED BY THE ASSESSEE COMPANY IS FOR THE ADVANTAGE OF ITS AE SINCE THE BRAND NAME AND TRADE NAME IS OW NED BY THE AE FOR WHICH THE ASSESSEE COMPANY SHOULD HAVE BEEN SUI TABLY ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 10 COMPENSATED BY THE AE; THAT THE ASSESSEE HAS NOT RE CEIVED ANY PAYMENT IN THIS REGARD FROM THE AE. 12. ON THE BASIS OF TP STUDY, TPO ADJUSTED RS.7,92, 95,484/- ON ACCOUNT OF AMP EXPENDITURE FOR THE BENEFIT OF AE AL ONG WITH MARK-UP OF 15.27%. 13. THE ASSESSEE COMPANY CARRIED THE MATTER BY WAY OF FILING OBJECTIONS BEFORE THE DRP AND THE SAME HAVE BEEN RE JECTED. FEELING AGGRIEVED, THE ASSESSEE AS WELL AS REVENUE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT CR OSS APPEALS. 14. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE S OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 15. ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF RESELLING HIGH END AUDIO PRODUCTS. IN OTHER WORDS, IT IS A B UY-SELL OF BOSE PRODUCTS AND A SUPPORT SERVICE PROVIDER. SYSTEMS D ESIGN AND INSTALLATION SERVICES ARE AN ESSENTIAL FEATURE IN T HE MARKET EFFORT OF BOSE INDIA AND THE PRICE OF THESE SERVICES IS GENER ALLY INCLUDED IN THE PRICE OF PRODUCT IN THE RETAIL SEGMENT. WHILE IN CASE OF PROFESSIONAL SEGMENT, SEPARATE INSTALLATION CHARGES MAY BE CHARGED. BOSE HAS DIVIDED ITS INDIAN OPERATION IN TWO SEGMEN TS ONE : RETAIL SALES; AND TWO : PROFESSIONAL SALES. ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 11 16. FROM THE FACTS AND CIRCUMSTANCES OF THE CASE AN D ORDER PASSED BY THE REVENUE AUTHORITIES, THE FIRST QUESTI ON ARISES FOR DETERMINATION IN THIS CASE IS :- AS TO WHETHER AMP EXPENSES IS NOT AN INTERNATIONAL TRANSACTION AND AS SUCH, THE QUESTION OF DETERMININ G ARMS LENGTH PRICE OF THIS TRANSACTION OR MAKING ADDITION THEREOF DOES NOT ARISE AS CONTENDED BY THE ASSESSEE. 17. LD. TPO / DRP PROCEEDED ON THIS ISSUE ON THE PR EMISE THAT THE ASSESSEE IS NOT ONLY ENGAGED IN PROMOTION OF BO SE PRODUCTS BUT ALSO DEVELOPED MARKETING INTANGIBLES FOR ITS AE BY LAUNCHING PRODUCTS AND CREATING AWARENESS OF THE BOSE BRAND. ASSESSEE COMPANY HAS INCURRED EXPENDITURE FOR TRADEMARK PROM OTION AND DEVELOPMENT OF MARKING THE INTANGIBLES TO THE FOLLO WING EFFECT :- PARTICULARS FY 2006-07 FY 2007-08 FY 2008-09 SALES (RS.) 569,837,043 893,853,149 1,062,800,588 AMP EXPENDIT URE 58,780,494 78,299,410 76,364,766 PERCENT AMP TO TOTAL SALES 10.32% 8.76% 7.18% 18. TPO FURTHER CAME TO THE CONCLUSION THAT THE ASS ESSEE HAS INCURRED A COST IN CONNECTION WITH THE BENEFIT OF S ERVICES PROVIDED TO THE AE THROUGH THE MARKETING EXPENDITURE AND SIN CE THE BENEFIT OF ENTIRE EXPENDITURE ON AMP IS BENEFICIAL, THE AE AMP EXPENDITURE OF RS.7.63 CRORES WAS AN INTERNATIONAL TRANSACTION U/S ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 12 92B (1) READ WITH CLAUSE (V) OF SECTION 92F. TPO F URTHER PROCEEDED ON THE PREMISE THAT THOUGH THERE IS NO AG REEMENT BETWEEN THE ASSESSEE AND AE FOR THE BRAND NAME AND TRADE NAME BY THE ASSESSEE, THE TRANSFER PRICING REGULATIONS R EQUIRED THAT IT IS NOT THE FORM BUT OVERALL ARRANGEMENT/SUBSTANCE OF THE TRANSACTION IS TO BE KEPT IN THE MIND. 19. SO, THE TPO, IN ORDER TO BENCHMARK THE TRANSACT IONS, PROPOSED TO COMPARE THE AMP EXPENDITURE OF THE TEST ED PARTY WITH AMP EXPENDITURE OF OTHER COMPARABLES ENGAGED IN THE DISTRIBUTION BUSINESS USING ADVERTISEMENT, MARKETING AND PROMOTI ONAL EXPENDITURE (INCLUDING TRADE DISCOUNT AND VOLUME RE PAID), TO THE SALES RATIO FOR COMPARABILITY ANALYSIS. TPO COMPUT ED THE RATIO OF AMP / SALES IN CASE OF TESTED PARTY AS UNDER :- EXPENDITURE ON AMP 76,364,766 VALUE OF GROSS SALES 992,228,546 AMP / SALES OF THE ASSESSEE 7.70% 20. ASSESSEE COMPANY PROVIDED 14 COMPARABLES HAVING GP/SALES OF 34.88% BUT ALL THE COMPARABLES HAVE BEE N REJECTED BY THE TPO BEING NOT FUNCTIONALLY COMPARABLE. HOWEVER , TPO BY RECORDING THAT THERE HAS BEEN NO CHANGE IN THE FUNC TIONAL PROFILE OF THE ASSESSEE COMPANY AS COMPARED TO LAST YEAR, UPDA TED MARGIN OF ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 13 THE COMPARABLES USED LAST YEAR ARE BEING USED FOR B ENCHMARKING AMP EXPENDITURE WHICH ARE AS UNDER :- S.NO. COMPANY NAME AMP/ SALES % 1 ADTECH SYSTEMS LTD. 3.97 2 COMPUAGE INFOCOM LTD. 0 3 COMPUTER POINT LTD. 0.04 4 DYNACONS SYSTEMS & SOLUTIONS LTD. 0.1 5 PRIYA LTD. 0.47 6 SPARC SYSTEMS LTD. 0 7 UNIPORT COMPUTER LTD. NA MEAN 0.7633 21. ON THE BASIS OF COMPARABLE STUDY AND BY DETERMI NING THE BRIGHT LINE LIMIT, THE TPO CAME TO THE CONCLUSION THAT ANY EXPENDITURE IN EXCESS OF THE BRIGHT LINE IS FOR THE PROMOTION OF BRAND / TRADE NAME WHICH IS OWNED BY AE THAT NEEDS TO BE SUITABLY COMPENSATED BY THE AE AND COMPUTED THE AMOUNT REPRE SENTING BRIGHT LINE AND THE AMOUNT THAT SHOULD HAVE BEEN CO MPENSATED AS UNDER :- VALUE OF GROSS SALES RS.1,062,800,588 AMP / SALES OF THE COMPARABLES 0.7633% AMOUNT THAT REPRESENT BRIGHT LINE 7,854,965 EXPENDITURE ON AMP BY ASSESSEE 76,156,646 EXPENDITURE IN EXCESS OF BRIGHT LINE 68,301,680 NO RELIEF HAS BEEN GRANTED BY THE LD. DRP TO THE AE . 22. NOW, COMING TO THE MOOT POINT TO BE DETERMINED BY THE BENCH IF AMP EXPENSES IS NOT INTERNATIONAL TRANSACTION AS ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 14 CONTENDED BY THE ASSESSEE COMPANY, WE HAVE GONE THROUGH THE JUDGMENTS OF HONBLE JURISDICTIONAL HIGH COURT RELI ED UPON BY THE ASSESSEE CITED AS MARUTI SUZUKI INDIA LTD. & ANR. VS. CIT (2015) 129 DTR 25 (DEL.) AND CIT VS. WHIRLPOOL OF INDIA LTD. (2015) 94 CCH 156 DEL-HC . 23. NO DOUBT, THE RATIO OF THE JUDGMENT IN AFORESAI D CASES OF MARUTI SUZUKI INDIA LTD. AND WHIRLPOOL OF INDIA LTD. (SUPRA) RELIED UPON BY THE ASSESSEE IS THAT THERE WAS NO IN TERNATIONAL TRANSACTION OF AMP EXPENSES AND AS SUCH THE ENTIRE EXERCISE OF DETERMINING ITS ALP AND CONSEQUENTLY MAKING TRANSFE R PRICING ADJUSTMENT IS TO BE SET ASIDE. 24. HOWEVER, ON THE OTHER HAND, LD. DR RELIED UPON THE JUDGMENT CITED AS SONY ERICSON MOBILE COMMUNICATIONS (INDIA) PVT. LTD. VS. CIT (2015) 374 ITR 118 (DEL.) IN WHICH AMP EXPENSES HAVE BEEN HELD TO BE INTERNATIONAL TRANSAC TION AND THE MATTER OF DETERMINATION OF ALP HAS BEEN RESTORED TO THE TPO. 25. FURTHERMORE, IN THE JUDGMENT CITED AS YUM RESTAURANTS (INDIA) PVT. LTD. VS. ITO (2016) 380 ITR 637 (DEL ) AND SONY ERICSON MOBILE COMMUNICATIONS (INDIA) PVT. LTD. OR AY 2010-11 DELIVERED ON 28.01.2016 , HONBLE HIGH COURT RESTORED THE ISSUE, AS TO WHETHER AMP EXPENSES IS INTERNATIONAL TRANSA CTION FOR FRESH DETERMINATION. ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 15 26. FURTHERMORE, THE ISSUE IN QUESTION AS TO WHETHE R AMP EXPENSES ARE INTERNATIONAL TRANSACTION AGAIN CROPPE D UP BEFORE THE HONBLE JURISDICTIONAL HIGH COURT IN JUDGMENT CITED AS RAYBAN SUN OPTICS INDIA LTD. VS. CIT (DATED 14.09.2016), P R. CIT VS. TOSHIBA INDIA PVT. LTD. (DATED 16.08.2016) AND PR. CIT VS. BOSE CORPORATION (INDIA) PVT. LTD. (DATED 23.08.2016) WHEREIN THE IDENTICAL ISSUE HAS AGAIN BEEN RESTORED FOR FRESH D ETERMINATION IN THE LIGHT OF THE DECISIONS RENDERED IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD . SUPRA). 27. COMING TO THE CASE AT HAND, WE ARE OF THE CONSI DERED VIEW THAT WHEN THE TPO HAS DETERMINED THE AMP EXPENSES T O BE INTERNATIONAL TRANSACTION, HE HAD NO OCCASION TO FO LLOW THE RATIO OF THE JUDGMENTS IN RAYBAN SUN OPTICS INDIA LTD. VS. CIT, PR. CIT VS. TOSHIBA INDIA PVT. LTD. AND PR. CIT VS. BOSE CO RPORATION (INDIA) PVT. LTD. (SUPRA) RENDERED BY HONBLE JURISDICTIONAL HIGH COURT DISCUSSED IN THE PRECEDING PARAS. AFORESAID DECISIONS HAVE CONSISTENTLY BEEN FOLLOWED BY COORDINATE BENCHES OF THE TRIBUNAL. IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED VI EW THAT IT WOULD BE IN THE INTEREST OF JUSTICE IF THE IMPUGNED ORDER IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF TPO/AO FOR FR ESH DETERMINATION OF THE QUESTION TO DETERMINE, AS TO WHETHER AMP EXPENDITURE IS INTERNATIONAL TRANSACTION, IN THE LIGHT OF THE JUDGMENTS RENDERED ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 16 BY HONBLE DELHI HIGH COURT DISCUSSED IN PRECEDING PARAS. IN CASE THE EXISTENCE OF SUCH AN INTERNATIONAL TRANSACTION IS NOT PROVED, THERE SHALL NOT BE ANY TRANSFER PRICING ADDITION. HOWEVER, IN CASE THE INTERNATIONAL TRANSACTION IS PROVED TO BE EXIST ED, THEN THE TPO WILL DETERMINE SUCH INTERNATIONAL TRANSACTION IN TH E LIGHT OF THE JUDGMENT RENDERED BY HONBLE JURISDICTIONAL HIGH CO URT AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSE SSEE. 28. SECOND GROUND RAISED BY THE ASSESSEE IS : AS TO WHETHER AO/DRP HAVE ERRED IN DISALLOWING AN AMOUNT OF RS.45,61,318/- BEING WRITE OFF OF DEMONSTRATION EQUIPMENT INVENTORY BY HOLDING THAT S UCH INVENTORY SHOULD HAVE BEEN VALUED AT COST DISREGARD ING THE FACT THAT NET REALIZABLE VALUE (NRV) OR DEMONSTRATION INVENTORY IS LOWER THAN THE COST. 29. LD. DRP DETERMINED THIS ISSUE BY MAKING FOLLOWI NG OBSERVATIONS :- 10.4 THE PANEL HAS EXAMINED THE ISSUE. IT IS SEEN THAT THE TAXPAYER HAS VALUED THE DEMO EQUIPMENT AT A BENCHMA RK FIXED BY IT, DEPENDING UPON THE NO. OF YEARS OF USE . PARA 3 OF THE AS-2 ISSUED BY THE INSTITUTE OF CHARTERED ACCOU NTANT OF INDIA (ICAI) DEFINES NET REALIZABLE VALUE AS UNDER: NET REALIZABLE VALUE = 'ESTIMATED SELLING PRICE' IN THE ORDINARY COURSE OF THE BUSINESS (-) ESTIMATED COST OF COMPLETION (-) THE ESTIMATED COST NECESSARY TO MAKE THE SALE. THUS, THE NET REALIZABLE VALUE IS THE ESTIMATED VAL UE OF GOOD WHICH IT CAN FETCH ON ITS SALE. IT IS FURTHER NOTED BY THE PANEL THAT THE AHMEDABAD ITAT IN ITS DECISION DATED 4.1.2008 IN THE CASE OF D SUBASHCHANDRA & CO. VIS ACIT IN ITA NO. 2805/AHD/20 06 HAS HELD THAT THE ONUS IS UPON THE ASSESSES TO PROV E THAT THE NRV SHOWN BY HIM IS THE CORRECT NET REALIZABLE VALU E. THUS, ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 17 IT IS TO BE SEEN IF THE TAXPAYER HAS DULY DISCHARGE D ITS ONUS OR NOT? THE PANEL FINDS THAT THE TAXPAYER HAS FAILE D ON THIS ACCOUNT FOR THE FOLLOWING REASONS: (I) THE AO IN ITS DRAFT ORDER HAS CLEARLY ESTABLIS HED THAT THE NRV ADOPTED BY THE TAXPAYER IS DRASTICALLY LOWE R THAN THE SALE PRICE OF THE EQUIPMENT. IT IS ALSO MUCH LO WER THE COST PRICE OF THE EQUIPMENT FOR BETTER UNDERSTANDIN G, THE SAID PORTION OF THE DRAFT ORDER IS REPRODUCED HEREU NDER; 'IN THE TAXPAYER'S CASE, THE SELLING PRICE OF ANY NORMAL EQUIPMENT (OTHER THAN DEMO EQUIPMENT), IS PRICED ABOVE 90% ABOVE THE COST PRICE ON AN AVERAGE AS IS EVIDENT FROM THE FOLLOWING WORKINGS; TOTAL SALES MADE DURING THE RELEVANT PREVIOUS YEAR : RS.99.22 CRORES COST OF GOODS AS DECLARED IN P&L A/C : RS.52.21 CR ORES DIFFERENCE : RS.47.01 CRORES PERCENTAGE OF DIFFERENCE OF THE COST PRICE (47.01/5 2.21) X 100: 90% GOING WITH STATEMENT OF THE TAXPAYER, IT CAN BE SEE N THAT THERE WILL BE A DIFFERENCE OF 110% IN THE SALE PRIC E OF THE EQUIPMENT OTHER THAN DEMO EQUIPMENT AND ESTIMATED N RV OF THE DEMO EQUIPMENT AFTER ONE YEAR AS IS ILLUSTRA TED BELOW: SUPPOSE, THE COST OF NORMAL EQUIPMENT : RS. 100 SELLING PRICE OF NORMAL EQUIPMENT : RS. 190 (90% ABOVE THE COST PRICE) THE ESTIMATED NRV OF DEMO EQUIPMENT (80% OF COST): RS.80/- DIFFERENCE IN NORMAL SELLING PRICE AND THE NRV OF DEMO EQUIPMENT :RS. 110/- THIS MEANS THAT THE TAXPAYER COMPANY IS CLAIMING THE NRV OF THE DEMO EQUIPMENTS AT BELOW THE HALF TH E SELLING PRICE (42% TO BE PRECISE) OF THE NORMAL EQU IPMENT. THE ABOVE POSITION IS ILLUSTRATED FOR THE DEMO EQUI PMENT AFTER THE ONE YEAR ONLY. THE GAP IS EVEN WIDER FOR THE SECOND YEAR AND FOR EACH INCREASING YEAR. SUCH A HEAVY DIS COUNT IS ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 18 NEVER GIVEN BY THE COMPANY AS IS EVIDENT FROM ITS S ALE RECORDS. IT APPEARS THAT THE PROVISION OF DEMO EQUIPMENTS IS BASED ON PURE ESTIMATION AND HENCE THE SAME CANNOT BE TREATED AS REAL EXPENSE . (II) BEFORE THE AO, THE TAXPAYER COMPANY COULD NOT PRODUCE ANY DOCUMENTARY EVIDENCE LIKE SALE BILL ETC TO SHOW THAT ANY OF THE DEMO EQUIPMENTS WERE SOLD AT 42% (O R LOWER FOR THE OLDER EQUIPMENT) OF ITS NORMAL SALE PRICE. (III) THE DEMO EQUIPMENTS ARE NOT GENERALLY USED F OR MORE THAN ONE YEAR FOR DISPLAY. THESE ARE MOSTLY SO LD WITHIN THAT PERIOD. TO KEEP PACE WITH THE COMPETITION, THE MODELS ARE CHANGED FREQUENTLY AND THE OLD INVENTORIES ARE SOLD TO GIVE SPACE TO THE NEW RANGE OF EQUIPMENTS. THE AO H AS NOTED CLEARLY THAT THE DETAILS OF THE DEMO EQUIPMEN T FILED BY THE TAXPAYER REVEALS THAT THE MAJOR PORTION OF THE DEMO EQUIPMENTS WAS LESS THAN ONE YEAR OLD. (IV) THE TAXPAYER WAS REQUESTED BY THE PANEL TO SU BMIT THE PARTICULARS OF THE SCRAP SALE FOR THE LAST 5 YE ARS. HOWEVER, THE TAXPAYER DID NOT SUBMIT THE RELEVANT PARTICULARS FOR THE REASONS BEST KNOWN TO IT. THE PANEL WOULD LIKE TO REFER TO THE DECISION OF SUPREME COURT IN THE CASE OF CIT VS. BRITISH PAINTS INDIA LIMITED 188 ITR 44 (SC), WHICH LAYS DOWN IMPORTANT PRINCIPLES FOR THE VALUATION OF CLOSING STOCK OF GO ODS. THE RATIO OF THIS DECISION HAS BEEN THAT EACH YEAR BEIN G SELF CONTAINED UNIT AND THE TAX LIABILITY ARISING WITH R EFERENCE TO THE INCOME OF A SPECIFIC ASSESSMENT YEAR THE ARGUME NT THAT THE CLOSING STOCK OF ONE YEAR IS ONLY OPENING STOCK OF THE NEXT YEAR, IS NOT VALID. THE PANEL THEREFORE, HOLDS THAT THE TAXPAYER HAS FAILED TO DISCHARGE THE ONUS CAST UPON IT TO DISPRO VE THAT THE NRV ACTUALLY REMAINS SUFFICIENTLY ABOVE THE COST PR ICE, OF THE EQUIPMENT AND LICENCE AND HENCE AS PER THE ACCO UNTING POLICY OF THE COMPANY AND THE AS-2 OF ICAI PRESCRI BED FOR THE VALUATION OF THE CLOSING STOCK, THE TAXPAYER SH OULD HAVE ADOPTED THE COST VALUE OF FOR VALUATION OF CLOSING STOCK OF THE DEMO EQUIPMENTS. THE ADDITION PROPOSED TO BE MA DE BY THE AO IS THEREFORE, UPHELD. ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 19 30. LD. DRP PREDOMINANTLY DECIDED THE ISSUE ON THE GROUND THAT TAXPAYER HAS FAILED TO DISCHARGE THE ONUS CAST UPON IT TO DISPROVE THAT NRV ACTUALLY REMAINS SUFFICIENTLY ABOVE THE CO ST PRICE OF THE EQUIPMENT AND HENCE AS PER THE ACCOUNTING POLICY OF THE COMPANY AND THE AS-2 OF ICAI PRESCRIBING VALUATION OF THE C LOSING STOCK, THE TAXPAYER SHOULD HAVE ADOPTED COST VALUE OF THE VALUATION OF THE CLOSING STOCK OF THE DEMO EQUIPMENT. DRP ALSO HELD THAT IT APPEARS THAT THE PROVISION OF DEMO EQUIPMENT IS BAS ED UPON PURE ASSUMPTION, HENCE THE SAME CANNOT BE TREATED AS REA L EXPENSES AND BEFORE THE AO, TAXPAYER COULD NOT PRODUCE ANY DOCUM ENTARY EVIDENCE LIKE SALE BILL TO PROVE THAT ANY OF THE DE MO EQUIPMENTS WAS SOLD AT 42% OF ITS NORMAL SALE PRICE. THE ASSE SSEE COMPANY HAS ALSO NOT SUBMITTED THE PARTICULARS OF SCRAP SAL E FOR LAST FIVE YEARS BEFORE DRP. 31. IN THE GIVEN CIRCUMSTANCES, WE DEEM IT NECESSAR Y TO PROVIDE AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE COMPA NY TO PRODUCE THE DOCUMENTARY EVIDENCE QUA CLAIM OF RS.45,61,318/ - BEFORE THE AO WHO WILL DECIDE AFRESH IN ACCORDANCE WITH LAW. SO, THE GROUND IS DETERMINED IN FAVOUR OF THE ASSESSEE. 32. SINCE THE ASSESSMENT ORDER PASSED BY THE AO U/S 143(3) R/W 144C OF THE ACT HAS BEEN SET ASIDE AND MATTER HAS B EEN RESTORED BACK TO THE AO/TPO, THE ISSUE RAISED BY THE REVENUE BY FILING ITA NO.1509/DEL./2014 ITA NO.2523/DEL./2014 20 SEPARATE APPEAL IS ALSO RESTORED TO THE FILE OF TPO /AO FOR FRESH DETERMINATION. 33. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, BOTH THE APPEALS FILED BY THE ASSESSEE AS WELL AS REVENUE ARE ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 30 TH DAY OF MARCH, 2017. SD/- SD/- (R.S. SYAL) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 30 TH DAY OF MARCH, 2017 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.