ACIT, Circle- 14(1), New Delhi V. Karl Storz Endoscopy India Pvt. Ltd., New Delhi

ITA 3750/DEL/2018

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 5698 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-09-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I1
• Assessment Year: 2010-2011
• Appeal Filed On: 18-05-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AGAINST DATED PASSED
• Keywords: Transfer pricing; International transaction; TDS

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: I-1 NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER [THROUGH VIDEO CONFERENCING] ITA NO.3750/DEL/2018 ASSESSMENT YEAR: 2010-11 ACIT, CIRCLE-14(1), NEW DELHI VS. KARL STORZ ENDOSCOPY INDIA PVT. LTD., 11 TH FLOOR, GOPALDAS BUILDING, BARAKHAMBA ROAD, NEW DELHI PAN :AAACK4816D (APPELLANT) (RESPONDENT) ORDER PER O.P. KANT, AM: THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST ORDER DATED 22/03/2018 PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-44, NEW DELHI [IN SHORT THE L EARNED CIT(A)]FOR ASSESSMENT YEAR 2010-11 RAISING FOLLOWIN G GROUNDS: 1. WHETHER IN THE FACTS AND THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE A MP ACTIVITIES OF THE ASSESSEE SHOULD BE AGGREGATED WITH OTHER INTERN ATIONAL APPELLANT BY SH. BHAGWATI CHARAN, SR.DR RESPONDENT BY SH. V.K. SABHARWAL, ADV. SH. RAVI KAPOOR, CA DATE OF HEARING 09.09.2021 DATE OF PRONOUNCEMENT 17.09.2021 2 ITA NO.3750/DEL/2018 TRANSACTIONS OF THE ASSESSEE, IN ABSENCE OF EVIDENC E FROM THE ASSESSEE TO PROVE THAT THESE TRANSACTIONS ARE HOMOG ENOUS AND INTERLINKED? 2. WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. C1T(A) WAS JUSTIFIED IN HOLDING THAT COMMIS SION IS AN APPROPRIATE REMUNERATION FOR THE MARKETING AND SUPP ORT SERVICES WHICH HAVE BEEN RENDERED BY THE ASSESSEE? 3. WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. C1T(A) HAS ERRED IN NOT APPRECIATING THE FA CT THAT BRAND BUILDING AND CREATION OF MARKETING INTANGIBLES IS A SEPARATE FUNCTION ALTOGETHER, AND THUS REQUIRES SEPARATE BEN CHMARKING? 4. WHETHER UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN NOT APPRECIATING T HAT FACT THAT AS PER INDIA TRANSFER PRICING LEGISLATION, COMPENSATIO N FOR THE FUNCTION PERFORMED AMP SERVICES RENDERED TO THE AES IN THIS CASE] NEEDS TO BE BENCHMARKED SEPARATELY? 5. THAT THE GROUNDS OF APPEAL ARE WITHOUT PREJUDICE TO EACH OTHER. 6. THAT THE APPELLANT CRAVES LEAVE TO ADD, ALTER, A MEND OR FOREGO ANY GROUND(S) OF THE APPEAL RAISED ABOVE AT THE TIME OF HEARING. 2. THE FACTS IN BRIEF OF THE CASE ARE THAT IN THE SCRUTINY ASSESSMENT COMPLETED ON 07/03/2014, THE ASSESSING O FFICER MADE ADDITION OF 4,13,60,114/- FOR TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ADVERTISEMENT, MARKETING AND PROMOTIO N (AMP) EXPENSES AND DISALLOWANCE OF LATE PAYMENT OF INTERE ST AMOUNTING TO 37,980/-. ON THE ISSUE OF AMP EXPENSES, THE LD. CI T(A) ALLOWED RELIEF TO THE ASSESSEE AND SECOND ISSUE OF LATE PAYMENT OF INTEREST ON TDS WAS SENT FOR VERIFICATION. AGGRIEVE D WITH THE DELETING OF AMP EXPENSES, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL RAISING THE GROUNDS AS REPRODUCED ABOVE. 3. BEFORE US, THE PARTIES APPEARED THROUGH VIDEO CONFE RENCING FACILITY AND FILED PAPER-BOOK PHYSICALLY AS WELL AS THROUGH EMAIL. 4. THE SOLE ISSUE INVOLVED IN ALL THE GROUNDS OF THE R EVENUE IS DELETION OF AMP ADJUSTMENT MADE BY THE ASSESSING OF FICER. 5. BEFORE US, THE LEARNED DR SUBMITTED THAT ASSESSEE IS MANUFACTURER AND THEREFORE FINDINGS IN THE CASE OF SONY ERRICTION 3 ITA NO.3750/DEL/2018 (SUPRA) FOLLOWED BY THE LD. CIT(A) IS NOT APPLICABL E, WHICH IS IN THE CASE OF DISTRIBUTOR COMPANY. 6. ON THE OTHER HAND, LEARNED COUNSEL OF THE ASSESSEE REFUTED THE CLAIM OF THE LEARNED DR AND SUBMITTED THAT ASSE SSEE IS IMPORTEE OF TRADE GOODS AND NOT MANUFACTURE AND THE REFORE SQUARELY COVERED BY THE DECISION OF THE HONBLE DEL HI HIGH COURT IN THE CASE OF SONY ERICSSON (SUPRA). 7. WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON T HE ISSUE IN DISPUTE AND PERUSED THE RELEVANT MATERIAL ON REC ORD. THE BRIEF PROFILE OF THE ASSESSEE MENTIONED BY THE LD. CIT(A) HAS NOT BEEN DISPUTED BY THE PARTIES AND THEREFORE FOR READY REF ERENCE, WE ARE EXTRACTING THE SAME AS UNDER: 5.2 THE APPELLANT PROVIDES MARKETING AND SERVICE S UPPORT TO THE EXISTING DEALER NETWORK OR KARL STORZ GERMANY IN IN DIA. IT ALSO SOLD PRODUCTS IN INDIA WHICH WERE MANUFACTURED BY THE AE DURING THE YEAR UNDER REFERENCE. THE MARKETING SUPPORT PROVIDE D BY THE APPELLANT PRIMARILY ENCOMPASSES SPONSORSHIP OF SEMI NARS AND CONFERENCES OF PROMINENT ASSOCIATIONS OF THE MEDICA L COMMUNITY AND ADVERTISEMENT CAMPAIGNS IN THE PRINT MEDIA WHILE SE RVICE SUPPORT PERTAINS TO WARRANTY REPAIR AND EXCHANGE OF DAMAGED EQUIPMENTS SOLD BY KARL STORZ GERMANYS DEALERS IN INDIA. IN R ETURN FOR THE SERVICES RENDERED AND IN RETURN FOR THE SIGNIFICANT EXPENSES INCURRED BY THE APPELLANT ON MARKETING, KARL STORZ GERMANY P AYS A COMMISSION TO THE APPELLANT ON THE SALES MADE BY IT S DISTRIBUTORS IN INDIA. THE APPELLANT ALSO PROVIDES POST WARRANTY RE PAIR AND MAINTENANCE SERVICE ON CHARGEABLE BASIS. 5.3 DURING THE YEAR UNDER REFERENCE, THE APPELLANT APPLIED THE TNMM AS THE MOST APPROPRIATE METHOD AND CALCULATED ITS OPERATING MARGIN AS 8.57% IN COMPARISON TO 6.29% EARNED BY TH E COMPARABLES IN THE SAME INDUSTRY. THE APPELLANT CLUBBED ITS TRA NSACTIONS RELATING TO PROVISION OF MARKETING AND WARRANTY SERVICES TO ITS OTHER TRANSACTIONS PERTAINING TO SALE OF IMPORTED GOODS E TC. THE APPELLANT CLAIMED THAT, IN VIEW OF THE ABOVE, ITS TRANSACTION S WERE AT ARMS LENGTH. 5.4 THE TPO DID NOT ACCEPT THE CONTENTION OF THE AP PELLANT. THE AO HELD THAT THE APPELLANT WAS PROVIDING SERVICES TO I TS AES BECAUSE ITS AMP EXPENSES WERE EXCESSIVE. THE TPO APPLIED A MARK UP OF 15% ON 4 ITA NO.3750/DEL/2018 THE NON-ROUTINE EXPENDITURE OF THE APPELLANT BASED ON THE PLR OF THE SBI. THUS THE TPO MADE AN ADDITION OF ACCOUNT MARKE TING INTANGIBLES DEVELOPED BY THE APPELLANT AS A RESULT OF MARKETING EXPENDITURE ON THE BASIS OF BRIGHT LINE TEST (BLT). 7.1 THE LEARNED CIT(A) HAS DELETED THE TRANSFER PRICIN G ADDITION OBSERVING AS UNDER: 5.7 THE MAIN CONTENTION OF THE APPELLANT AND AN AD MITTED FACT THAT THE APPELLANT IS PROVIDING MARKETING / AND SUPPORT SERVICES WHICH HAD ALREADY BEEN REMUNERATED BY THE AE AS COMMISSIO N WHICH COVERS NOT ONLY THE EXPENSES INCURRED BY THE APPELL ANT BUT ALSO A REASONABLE RETURN FOR SUCH EXPENSES AND ACTIVITIES. THE COMMISSION INCOME RECEIVED BY THE APPELLANT IS IN LIEU OF MARK ETING SUPPORT SERVICES TO THE EXITING DEALER NETWORK IN INDIA AND HENCE THE MARKETING EXPENDITURE OF THE APPELLANT IS TOWARDS T HE MARKETING ACTIVITIES UNDERTAKEN ON BEHALF OF THE AE FOR WHICH THE APPELLANT HAS SPECIFICALLY RECEIVED COMMISSION INCOME. 5.8 IT IS ALSO NOTED THAT THE YEAR UNDER REFERENCE IS THE FIRST YEAR IN WHICH A TRANSFER PRICING ADJUSTMENT HAS BEEN MADE B Y THE TPO ON THE BASIS OF BRIGHT LINE TEST USING SBI PLR AS MA RK UP. IT IS ALSO SEEN THAT A TRANSFER PRICING ADJUSTMENT WERE MADE B Y THE TPO IN THE SUBSEQUENTYEAR-LEAY20LL-L_2_WHICH HAS BEEN RELATED BY THE CIT (A). IN AY 2011-12, THE APPELLANT HAD PREPARED SEPARATE SEGMENTAL ACCOUNTS FOR THE MARKETING SEGMENT AND USED TNMM AS THE MOST APPROPRIATE METHOD. TRANSFER PRICING ADJUSTMENTS ON ACCOUNT OF AMP EXPENSE HAD NOT BEEN MADE IN AYS 2012-13, 2013-14 A ND 2014-15. 5.9 IN THE YEAR UNDER REFERENCE, THE TPO/AO HAS ACC EPTED THAT TNMM AT THE ENTITY LEVEL IS THE MOST APPROPRIATE ME THOD FOR DETERMINATION OF ALP. HOWEVER, THE TPO HAS CONSIDER ED MARKETING SERVICES PROVIDED BY THE APPELLANT AS A SEPARATE IN TERNATIONAL TRANSACTION AND APPLIED A MARKUP OF 15% ON THE SAME . HOWEVER, IT IS SEEN THAT THE APPELLANT HAS RECEIVED COMMISSION AND REIMBURSEMENT OF COST FOR ALL MARKETING ACTIVITIES UNDERTAKEN BY IT ON BEHALF OF ITS AE. IT IS ALSO SEEN THAT ITS MARKE TING ACTIVITIES ARE INTER LINKED WITH OTHER INTERNATIONAL TRANSACTIONS I.E. IMPORT OF GOODS FOR SALE AND EARNING OF SERVICE INCOME FOR WARRANTY SERVICES PROVIDED ON BEHALF OF THE AE, IN VIEW OF THE ABOVE, PLACING RELIANCE ON THE ORDER OF THE HONBLE DELHI HIGH COURT IN CAS E OF SONY ERICSSON(SUPRA), IT IS HELD THAT THE TRANSFER PRICI NG ADJUSTMENTS MADE BY THE TPO GIVES RISE TO AN INCONGRUOUS SITUAT ION AS SUCH EXPENSES ARE FACTORED IN THE NET PROFIT OF THE INTE R LINKED TRANSACTIONS AS STATED BY THE HONBLE DELHI HIGH CO URT IN THE CASE OF SONY ERICSSON (SUPRA) :- 5 ITA NO.3750/DEL/2018 THIS WOULD BE ALSO IN CONSONANCE WITH RULE 10B(L)( E), WHICH MANDATES ONLY ARRIVING AT THE NET PROFIT MARGIN BY COMPARING THE PROFITS AND LOSS ASSUMPTION THAT FUNCTIONS, ASS ETS AND RISK BEING BROADLY SIMILAR AND ONCE SUITABLE ADJUST MENTS HAVE BEEN MADE, ALL THINGS GET TAKEN INTO ACCOUNT AND ST AND RECONCILED WHEN COMPUTING THE NET PROFIT MARGIN. ON CE THE COMPARABLES PASS THE FUNCTIONAL ANALYSIS TEST AND ADJUSTMENTS HAVE BEEN MADE, THEN THE PROFIT MARGIN AS DECLARED WHEN MATCHES WITH THE COMPARABLES WOULD RE SULT IN AFFIRMATION OF THE TRANSFER PRICE AS THE ARMS LENG TH PRICE. THEN TO MAKE A COMPARISON OF A HORIZONTAL ITEM WITH OUT SEGREGATION WOULD BE IMPERMISSIBLE. 5.10 IN ACCORDANCE WITH THE PRINCIPLE OF CONSISTENC Y AND RESPECTFULLY FOLLOWING THE ORDER OF THE JURISDICTION HIGH COURT IN THE CASE OF SONY ERICSSON(SUPRA) THE TRANSFER PRICING ADJUSTMENT MAD E BY THE AO ON ACCOUNT OF AMP EXPENSES IS DELETED. THE GROUNDS OF APPEAL ARE DECIDED IN FAVOR OF THE APPELLANT. 7.2 IN OUR OPINION, THE CONTENTION OF THE LEARNED DR T HAT THE ASSESSEE IS MANUFACTURER IS NOT FOUND TO BE CORRECT . THE ASSESSEE HAS REPORTED INTERNATIONAL TRANSACTION OF PURCHASE OF TRADE GOODS AND CAPITAL GOODS FROM ITS AES FOR FURTHER SALE IN INDIA AND THUS STATUS OF THE ASSESSEE IS IN THE NATURE OF DISTRIBU TOR OF GOODS OF AES. FURTHER, WE FIND THAT LD. CIT(A) HAS DELETED THE ADDITION ON TWO GROUNDS. FIRSTLY, THE ASSESSING OFFICER HAS MAR KED UP EXPENSES INCURRED BY THE ASSESSEE ON ADVERTISEMENT AND MARKETING ON BEHALF OF ITS ASSOCIATED ENTERPRISES ( AES) FOLLOWING THE BRIGHT LINE TEST (BLT). THE BRIGHT LINE TEST AP PROACH HAS BEEN REJECTED BY THE HONBLE DELHI HIGH COURT IN TH E CASE OF SONY ERRICTION (SUPRA). THE LD. CIT(A) FOLLOWING HONBLE DELHI HIGH COURT, BEING A BINDING PRECEDENT HAS DELETED THE AD DITION. SECONDLY, THE LEARNED CIT(A) HAS NOTED THAT IN SUBS EQUENT ASSESSMENT YEARS, I.E., 2012-13, 2013-14 AND 2014-1 5, THE ASSESSING OFFICER HIMSELF HAS NOT MADE ANY TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENSES IN SAME SET O F 6 ITA NO.3750/DEL/2018 CIRCUMSTANCES AND, THEREFORE, KEEPING IN VIEW OF TH E PRINCIPLE OF THE CONSISTENCY, THE ASSESSING OFFICER IS NOT JUSTI FIED IN MAKING ADJUSTMENT IN THE YEAR UNDER CONSIDERATION. 7.3 FURTHER, WE NOTE THAT THE ASSESSEE HAS ALREADY BEE N REMUNERATED FOR THE MARKETING EXPENSES INCURRED ON BEHALF OF THE AES ALONG WITH COMMISSION MARKUP, AND, THEREFORE, T HERE WAS NO REQUIREMENT OF MAKING SEPARATE AMP ADDITION IN THE CASE OF THE ASSESSEE. 7.4 IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, WE D O NOT FIND ANY ERROR OR INFIRMITY IN THE ORDER OF THE LD. CIT( A) ON THE ISSUE IN DISPUTE AND ACCORDINGLY, UPHOLD THE SAME. THE GROUN DS RAISED BY THE REVENUE ARE ACCORDINGLY DISMISSED. 7.5 IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH SEPTEMBER, 2021 SD/- SD/- (AMIT SHUKLA) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 17 TH SEPTEMBER, 2021. RK/- (DTDC) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI