M/s.Epson India Private Limited, Bangalore V. Assistant Commissioner of income tax, Bangalore

ITA 293/BANG/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 7651 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-07-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 21-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 09-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S UMA VENKATESAN
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, B ENGALURU BEFORE S HRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER I T (TP) A NO. 293 & 2479 / BANG/2 0 1 7 (ASSESSMENT YEAR S : 2012 - 13 & 2013 - 14 ) M/S.EPSON INDIA PVT.LTD. 12 TH FL OOR, THE MILLENIA, TOWER A, NO.1, MURPHY ROAD, ULSOOR, BENGALURU - 560001. PAN: AAACE 7858 F VS. APPELLANT ASST. COMMISSIONER OF INCOME - TAX / DEPUTY COMMISSIONER OF INCOME - TAX CIRCLE 2(1)(2), BENGALURU. RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, CA. RESPONDENT BY : SMT. S.UMA VENKATESAN, CIT(DR) DATE OF HEARING : 30/05/2018 DATE OF PRONOUNCEMENT : 27 /0 7 /2018 O R D E R PER I NTURI RAMA RAO, AM : TH ESE ARE APPEAL S FILED BY THE ASSESSEE DIRECTED AGAINST THE FIN AL ASSESSMENT ORDER S DATED 29/12/2016 AND 30/10/2017 FOR ASSESSMENT YEAR 2012 - 13 AND 2013 - 14 RESPECTIVELY, PASSED U/S 143(3) R.W.S. 144(13) OF THE INCOME - TAX ACT,1961 ['THE ACT']. SINCE COMMON ISSUE IS INVOLVED, BOTH THE APPEALS WERE HEARD TOGETHER AND AR E DISPOSED OF VIDE COMMON ORDER. FOR THE SAKE OF CONVENIENCE, FACTS RELEVANT TO ASSESSMENT YEAR 2012 - 13 ARE STATED HEREUNDER: 2 . BRIEFLY THE FACTS OF THE CASE ARE AS UNDER: THE ASSESSEE IS A COMPANY DULY INCORPORATED UNDER THE PROVISI ONS OF THE COMPANIES ACT, 1956. IT IS WHOLLY OWNED SUBSIDIARY OF EPSON SINGAPORE PTE. IT IS ENGAGED IN THE BUSINESS OF DISTRIBUTION OF EPS ON GROUP PRODUCTS LIKE PRINTERS, CARTRIDGES, SCANNER AND PROJECTOR, ITA NO . 293 & 2479 /BANG/20 17 PAGE 2 OF 8 SPARES AND OTHER CONSUMABLES . THE RETURN OF IN COME FOR THE ASSESSMENT YEAR 2012 - 13 WAS FILED ON 29/11/2912 DECLARING TOTAL INCOME OF RS.17,01,86,550/. - . THE ASSESSEE ALSO REPORTED THE FOLLOWING INTERNATIONAL TRANSACTIONS IN FORM 3CED: 3. THE ASSESSEE - COMPANY ALSO SUBMITTED TRANSFER PRICING STUD Y REPORT ADOPTING RPM FOR BENCH MARKING ITS TRANSACTIONS IN TRADING SEGMENT. THE TRANSFER PRICING OFFICER (TPO) HOWEVER, OBSERVED THAT THE ASSESSEE - COMPANY IS NOT CONFINED TO ACTIVITIES IN TRADING ALONE BUT A LSO UNDERTAKEN THE ACTIVITY OF ADVERTISEMENT, M ARKETING AND S ALES PROMOTION (AMP) OF EPSON PRODUCTS IN INDIA FOR WHICH ASSESSE - COMPANY WAS NOT SUITABLY COMPENSATED. THEREFORE, THE TPO HAD PROCEEDED TO COMPUTE THE ARMS LENGTH PRICE (ALP) OF THE AMP EXPENDITURE BY ALLEGING THAT THE ASSESSEE HAD INCURRED AMP EXPENDITURE THEREBY DEVELOPING INTANGIBLES OF ASSOCIATED ENTERPRISES (AE) AND ALSO UNDERTAKEN SEPARATE BENCH MARKING OF PRE - SALES SERVICES RENDERED BY THE ASSESSEE. ACCORDINGLY, THE TPO, VIDE ORDER DATED 27/01/2016 PASSED U/S 92CA OF THE ACT, SUGGEST ED TP ADJUSTMENT OF RS.42,27,13,303/ - IN RESPECT OF AMP EXPENDITURE AND OF RS.3,53,758/ - IN RESPECT OF PRE - SALES SERVICES RENDERED BY THE ASSESSEE. THE AO PASSED DRAFT ASSESSMENT ORDER DATED 26/02/2016 INCORPORATING THE TP ADJUSTMENTS . 4. AGGR I E VED BY THE DRAFT ASSESSMENT ORDER, THE ASSESSEE PREFERRED OBJECTIONS BEFORE THE HON BLE DRP OBJECTING INFERENCE OF INTERNATIONAL ITA NO . 293 & 2479 /BANG/20 17 PAGE 3 OF 8 TRANSACTION TO AMP EXPENDITURE AND ALP ADJUSTMENT THEREON. THE HON BLE DRP, AFTER CONSIDERING THE SUBMISSIONS MADE, UPHELD THE ACTION OF THE TPO. HOWEVER , GRANTED RELIEF TO THE ASSESSEE ON THE CALCULATION OF AMP EXP ENDITURE BY DI R ECTING THE AO/TPO TO CONSIDER ONLY REVENUE FROM PRODUCT SALES FOR THE PURPOSE OF COMPUTING AMP RATIO FOR COMPARABLE ENTITIES. IN RESPECT OF TP ADJUSTMENTS MADE I N RELATION TO SALE SUPPORT SERVICES RENDERED BY THE ASSESSEE THE HON BLE DRP DIRECTED THE AO/TPO TO EXCLUDE TWO COMPARABLES. AFTER RECEIPT OF THE ABOVE DIRECTION S , THE AO PASSED FINAL ASSESSMENT ORDER. 5. BEING AGGRIEVED, THE ASSESSEE IS BEFORE US IN THE PRESENT APPEAL. THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF APPEAL FOR ASSESSMENT YEAR 2012 - 13: ITA NO . 293 & 2479 /BANG/20 17 PAGE 4 OF 8 ITA NO . 293 & 2479 /BANG/20 17 PAGE 5 OF 8 6. LEARNED AR VEHEMENTLY SUBMITTED THAT THE ASSESSEE - COMPANY IS THE SOLE DISTRIBUTOR OF EPSON PRODUCTS IN INDIA, UNDERTAKING THE SALE RELATED ACTIVI TIES IN INDIA SUCH AS IDENTIFYING CUSTOMERS, NEGOTIATING TERMS OF SALE AND INCLUDING PRICE TERMS AND CONCLUDING SALES. IN ORDER TO MAINTAIN ITS BUSINESS OF DISTRIBUTION, ASSESSEE - COMPANY INCURRED CERTAIN EXPENDITURE TOWARDS ADVERTISEMENT AND SALES PROMOTI ON. THIS ACTIVITY IS UNDERTAKEN ONLY IN ORDER TO PROMOTE SPECIFIC PRODUCTS DISTRIBUTION BY THE ASSESSEE - COMPANY. BEING EXCLUSIVE DISTRIBUTOR, ASSESSEE - COMPANY ALONE REAPED THE BENEFIT OF AMP EXPENDITURE INCURRED BY IT. IT IS FURTHER SUBMITTED THAT THE ASSESSEE DOES NOT PAY ANY BRAND RELATED ROYALTY TO ITS AE. THE ASSESSEE ACTUALLY BENEFITED FROM THE USE OF BRAND. THUS IT WAS SUBMITTED THAT THE AMP EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS OWN BUSINESS IN INDIA. IF IN THE CO URSE OF ITS OWN BUSINESS OPERATION ANY BENEFIT GOES TO ITS AE, THEN SUCH BENEFIT TO ITS AE IS INCIDENTAL IN NATURE AND ASSESSEE CANNOT BE EXPECTED TO BE REMUNERATED FOR SUCH INCIDENTAL BENEFIT. RELIANCE IN THIS REGARD WAS PLACED ON THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKU INDIA LTD. VS. CIT (64 TAXMAN.COM 150). IT IS FURTHER SUBMITTED THAT THESE TRANSACTIONS CANNOT BE TERMED AS INTERNATIONAL TRANSACTION AS THE TRANSACTION WAS NOT ENTERED INTO BETWEEN TWO OR MORE AE EITHER O F THEM BEING NON - RESIDENT ENTITY. HE FURTHER SUBMITTED THAT THE REVENUE HAD NOT BROUGHT ANYTHING ON RECORD TO DEMONSTRATE THAT THE ASSESSEE HAD AGREEMENT OR ARRANGEMENT WITH ITS AE WITH RESPECT TO INCURRING OF AMP EXPENDITURE. THUS IT WAS SUBMITTED THAT THE REVENUE HAD FAILED TO PROVE EXISTENCE OF ANY INTERNATIONAL TRANSACTION AND ACCORDINGLY NO ADJUSTMENT UNDER CHAPTER X CAN BE MADE. HE ALSO PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S.ESSILOR INDIA PVT.LT D. VS. DCIT (2016) 68 TAXMANN.COM 311)(BANG). 7. ON THE OTHER HAND, LD.CIT(DR) VEHEMENTLY SUBMITTED THAT THE ASSESSEE - COMPANY HAD NOT FURNISHED TP STUDY GIVING FAR ANALYSIS, FUNCTIONS, MARKETING PROMOTIONS UNDERTAKEN BY IT. THEREFORE, THE ISSUE REQUIRES T O BE SET ASIDE TO THE TPO FOR UNDERTAKING FRESH ANALYSIS OF THESE FUNCTIONS. R ELIANCE IN THIS REGARD WAS PLACED ON THE DECISION OF THE CO - ITA NO . 293 & 2479 /BANG/20 17 PAGE 6 OF 8 ORDINATE BENCH OF TRIBUNAL DELHI IN THE CASE OF TRANSITIONS OPTICAL INDIA PVT. LTD. VS. DCIT IN IT(TP)A NO.2208/BANG/2 016 DATED 22/11/2017. 8. WE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ONLY ISSUE INVOLVED IN THE PRESENT APPEAL IS WHETHER THE TPO WAS JUSTIFIED IN MAKING ALP ADJUSTMENT IN RESPECT OF ALLEGED EXPENDITURE INCURRED ON AMP FUNCTIONS. I T IS UNDISPUTED FACT THAT THE ASSESSEE IS AN EXCLUSIVE DISTRIBUTOR OF ITS AE I.E. EPSON SINGAPORE PTE IN INDIA. THAT APART, THE ASSESSEE - COMPANY WAS ALSO EARNING INCOME IN THE FORM OF COMMISSION BY ARRANGING DIRECT CUSTOMERS TO ITS AE. THE IMPORTANT FACT TO BE TAKEN INTO CONSIDERATION IS THAT THE ASSESSEE WAS ASSURED OF MINIMUM RETURN ON DISTRIBUTION BUSIN ESS. THESE FACTS, NO DOUBT, TRIGGER AN ENQUIRY INTO THE REAL NATURE OF RELATIONSHIP BETWEEN ASSESSEE AND ITS AE I.E. WHETHER IT IS DISTRIBUTOR OR A TRAD ER. THE REAL ECONOMIC SUBSTANCE OF TRANSACTION IS REQUIRED TO BE FOUND OUT HAVING REGARD TO THE ACTUAL CONDUCT OF THE PARTIES. FURTHER HAVING REGARD TO THE ACTUAL CONDUCT OF THE PARTIES AND THE REAL ECONOMIC SUBSTANCE OF THE TRANSACTION, IT REQUIRES TO BE ESTABLISHED WHETHER THERE IS ANY INTERNATIONAL TRANSACTION OF AMP EXPENDITURE. NEEDLESS TO MENTION, THE HON BLE DELHI HIGH COURT IN A SERIES OF JUDGMENTS SUBSEQUENT TO DECISION OF THE SONY ERICSSON MOBILE COMMUNICATIONS INDIA P LT D . VS. CIT (35 TAXMANN.C OM240 ) (DEL) LIKE YUM RESTAURANTS (INDIA) PVT. LTD. VS. ITO (380 ITR 637) HELD THAT AMP EXPENDITURE IS INTERNATIONAL TRANSACTION BUT DETERMINATION OF ALP WAS RESTORED TO THE FILE OF THE AO FOR THE PURPOSE OF DETAILED EXAMINATION OF THE AGREEMENT BETWEEN TH E ASSESSEE AND ITS AE TO ASCERTAIN WHETHER ANY PART OF AMP EXPENDITURE IS FOR THE PURPOSE OF CREATING MARKETING INTANGIBLES FOR AE OF THE ASSESSEE THEREIN. IF IT IS SHOW N THAT AMP EXPENDITURE IS AN INTERNATIONAL TRANSACTION , THEN FURTHER QUESTION OF DETE RMINATION OF ALP OF SUCH INTERNATIONAL TRANSACTION WOULD ARISE. IN THE PRESENT CASE ALSO TPO HAD NOT BROUGHT ANYTHING ON RECORD TO SHOW EXISTENCE OF INTERNATIONAL TRANSACTION WHEREBY THE ASSESSEE WAS OBLIGED TO INCUR AMP EXPENDITURE FOR THE PURPOSE OF PR OMOTING BRAND , INTANGIBLE OF ITS AE. SIMILARLY , T HE ASSESSEE - COMPANY ALSO HAS NOT FURNISHED FAR ANALYSIS OF AMP FUNCTIONS IN ITS TP STUDY. IN OUR CONSIDERED OPINION, THE MATTER REQUIRES REMISSION TO THE TPO FOR UNDERTAKING FRESH ANALYSIS TO ITA NO . 293 & 2479 /BANG/20 17 PAGE 7 OF 8 ESTABLISH EXIST ENCE OF INTERNATIONAL TRANSACTION IN RESPECT OF AMP EXPENDITURE AND TRUE NATURE OF TRANSACTION BETWEEN THE APPELLANT AND ITS AE. AFTER DUE ANALYSIS OF FAR OF THE AMP FUNCTIONS CARRIED OUT BY THE APPELLANT AND HAVING REGARD TO THE ACTUAL CONDUCT OF THE APP ELLANT VIS - - VIS ITS AE AND ECONOMIC SUBSTANCE OF THE TRANSACTIONS BETWEEN THE APPELLANT AND ITS AE, IF THE TPO IS OF OPINION THAT THERE EXISTED AN INTERNATIONAL TRANSACTION IN THE FORM OF AMP FUNCTIONS, THEN, TO UNDERTAKE TH E EXERCISE OF DETERMINATION OF ALP BY ADOPTING A SUITABLE METHOD OF COMPENSATION TO THE APPELLANT FOR PERFORMING THE AMP FUNCTIONS OF ITS AE. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2012 - 13 IS ALLOWED FOR STATISTICAL PURPOSES. 10. THE ASSESSEE RAISE D IDENTICAL GROUNDS OF APPEAL FOR ASSESSMENT YEAR 201 3 - 14 IN IT(TP)A NO.2479/BANG/2017. F OR PARITY OF REASONS STATED IN IT(TP)A NO.293/BANG/2017 FOR ASSESSMENT YEAR 2012 - 13, WE REMAND THE ISSUE OF AMP EXPENDITURE BACK TO THE FILE OF THE AO/TPO FOR THE PURP OSE OF DETERMINATION OF EXISTENCE OF INTERNATIONAL TRANSACTION BETWEEN APPELLANT AND THE AE INVOLVING AMP EXPENSES AND FURTHER THE QUESTION OF DETERMINATION OF ITS ALP. THUS, THE APPEAL FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2013 - 14 IS ALSO ALLOWED FOR STATISTICAL PURPOSES. 11. IN THE RESULT, THE APPEAL S FILED BY THE ASSESSEE IN IT(TPA) NO.293/BANG/2017 AND IT(TP)A NO.2479/BANG/2017 FOR THE ASSESSMENT YEAR S 2012 - 13 AND 2013 - 14 RESPECTIVELY ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOU NCED IN THE OPEN COURT ON 27 TH JU LY, 2018 SD/ - SD/ - ( SUNIL KUMAR YADAV ) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE : BENGALURU. D A T E D : 27 / 0 7 /201 8 SRINIVASULU, SPS ITA NO . 293 & 2479 /BANG/20 17 PAGE 8 OF 8 COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME - TAX APPELLATE TRIBUNAL BANGALORE