M/s. Xerox IndiaLtd., Gurgaon V. DCIT, New Delhi

ITA 6151/DEL/2013

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 0263 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I
• Next Hearing Date: 20-07-2022
• Assessment Year: 2009-2010
• Appeal Filed On: 17-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAHESH SHAH
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Rule of consistency; TDS
• Section: 154; 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘I’ NEW DELHI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND DR. B.R.R. KUMAR, ACCOUNTANT MEMBER ITA No.6151/Del/2013 Assessment Year: 2009-10 M/s. Xerox India Ltd. (Previously known as Xerox Modicorp Limited), 5 th and 6 th Floor, Vatika Business Park, Sector-49, Sohna Road, Gurgaon, Haryana Vs. Deputy Commissioner of Income Tax, Central Circle-20, New Delhi PAN :AAACM8634R (Appellant) (Respondent) ORDER PER SAKTIJIT DEY, JM: Captioned appeal has been filed by the assessee challenging the final assessment order dated 21.10.2013 passed under section 144C/143 of the Income-tax Act, 1961 (in short ‘the Act’) Appellant by Sh. Tarandeep Singh, Advocate Sh. Pulkit Verma, Advocate Respondent by Sh. Mahesh Shah, CIT (DR) Date of hearing 21.07.2022 Date of pronouncement 19.10.2022 ITA No.6151/Del/2013 AY: 2009-10 2 | P a g e for the assessment year 2009-10, in pursuance to the directions of learned Dispute Resolution Panel (DRP). 2. At the outset, learned counsel appearing for the assessee did not press ground nos. 1 to 7 by stating that they are of general nature. Accordingly, these grounds are dismissed as not pressed. 3. In ground nos. 8 to 8.14, the assessee has challenged the transfer pricing adjustment of Rs.28,81,09,571/- relating to determination on arm’s length price of expenditure incurred by the assessee for advertisement, marketing and promotion (AMP) of the brand of Associated Enterprises (AEs) 3.1 Briefly the facts relating to this issue are, the assessee is a resident corporate entity and is a part of Xerox group of companies. As stated by the Assessing Officer, the assessee is engaged in the business of providing a range of office equipments, software solution and document management services. The assessee sells xerographic equipments, printers, scanners, multifunctional devices, high-end equipments etc. In course of proceeding under section 92CA of the Act, the Transfer Pricing Officer (TPO) noticed that the assessee had incurred expenditure on AMP. After calling for and examining the necessary details, he observed that by incurring such expenditure, the assessee is ITA No.6151/Del/2013 AY: 2009-10 3 | P a g e extending the reach of the brands owned by the AEs. Thus, the final beneficiary of the expenditure incurred by the assessee on AMP is the AE, as, the brand owned by it are gaining in value due to marketing efforts of the assessee. In other words, by incurring such expenditure, the assessee has created marketing intangibles of the AE. Accordingly, he issued a show-cause notice to the assessee to explain, why incurring of AMP expenditure, being an international transaction, should not be benchmarked to find out the arm’s length nature of such transaction. In response, the assessee submitted that incurring of AMP expenditure is not an international transaction. The TPO, however, was not convinced with the submission of the assessee and held that incurring of AMP expenses, since, created marketing intangibles of the AE, it is an international transaction. 3.2 Having held so, he proceeded to benchmark the transaction by applying Bright Line Test (BLT) method and proposed an adjustment of Rs.28,81,09,571/-. While deciding assessee’s objections on the issue, learned DRP followed the decision of ITAT, Special Bench, in case of LG Electronics Pvt. Ltd. Vs. ACIT (ITA No.5140/Del/2011) and upheld the adjustment proposed by the TPO. ITA No.6151/Del/2013 AY: 2009-10 4 | P a g e 3.3 Before us, learned counsel appearing for the assessee submitted that the issue is squarely covered by a number of decisions of the Tribunal in assessee’s own case in preceding assessment years. In this context, he drew our attention to the relevant observations of the Tribunal. 3.4 Per contra, learned Departmental Representative submitted that the assessee is not a manufacturer but distributor of goods imported from the AE. He submitted, the AE also effects direct sales to Indian customers. He submitted, due to incurring of AMP expenses by the assessee, there is direct benefit to the AE as AE’s brand is getting promoted. In support of such contention, learned Departmental Representative relied upon a decision of the Coordinate Bench in case of M/s. Olympus Medical Systems India Pvt. Ltd., ITA No.838/Del/2021, dated 20.04.2022. 3.5 We have considered rival submissions and perused the materials on record. The issue arising for consideration is, whether the AMP expenditure incurred by the assessee can be regarded as an international transaction. Undisputedly, while deciding the issue, learned DRP has relied upon a decision of the ITAT, Special Bench in case of LG Electronics India Pvt. Ltd. (supra). However, the ratio laid down in case of LG Electronics ITA No.6151/Del/2013 AY: 2009-10 5 | P a g e India Pvt. Ltd. (supra) has been disapproved by the Hon’ble Jurisdictional High Court, hence, no more a good law. 3.6 Be that as it may, it is observed, identical issue came up for consideration before us in assessee’s own case for the assessment year 2008-09. While deciding the issue in ITA No. 5528/Del/2012, dated 16.12.2019, the Coordinate Bench has held that the AMP expenses incurred by the assessee does not fall within the definition of international transaction. The Bench further disapproved the determination of ALP by applying BLT method. Ultimately, the adjustment made on account of AMP expenses was deleted. Identical view was expressed by the Tribunal while deciding the issue in assessment year 2010-11 in ITA No. 2060/Del/2015, dated 05.08.2020. In the latest order passed for the assessment year 2011-12, the Bench has deleted the adjustment holding as under:- “6.5 As question of existence of international transaction of AMP and adjustment on account of the same in the case of assessee have been deleted in the assessment year 2008-09 and 2010-11, thus, respectfully following the finding of the Tribunal (supra), we hold that no international transaction of AMP exist in the case of assessee. Hence, we deleted the adjustment made on account of the AMP transaction. Corresponding grounds raised by the assessee are accordingly allowed. Accordingly, the appeal of the assessee is allowed.” ITA No.6151/Del/2013 AY: 2009-10 6 | P a g e 3.7 For the sake of completeness, we must observe, learned Departmental Representative has cited before us a decision of the Coordinate Bench in case of Ms. Olympus Medical Systems India Pvt. Ltd. (supra). However, in our humble opinion, the decisions rendered by the Coordinate Bench in assessee’s case will carry greater precedentiary value. Therefore, facts being identical, respectfully following the consistent view of the Coordinate Benches in assessee’s own case, as discussed above, we delete the addition made by the Assessing Officer. These grounds are allowed. 4. In ground no. 9 with its sub-grounds, the assessee has challenged the addition of Rs.44,11,43,239/- on account of transfer pricing adjustment made to the arm’s length price of purchase of finished goods for distribution in India. 4.1 Briefly the facts are, while examining the transfer pricing study report of the assessee, the TPO noticed that during the year under consideration the assessee had purchased finished goods from AE for resale in India. He observed that the payment made towards purchase of finished goods have been aggregated with various other transactions and benchmarked by applying Transactional Net Margin Method (TNMM). Stating that the ITA No.6151/Del/2013 AY: 2009-10 7 | P a g e assessee, being a pure reseller of the imported goods without any value addition, the TPO held that Resale Price Method (RPM) is the most appropriate method to benchmark the transaction with AEs. Thus, proceeded to benchmark the transaction by applying RPM. While doing so, he recomputed the margin of the tested party. In the process, he proposed an adjustment of Rs.44,11,43,239/-. While doing so, he rejected assessee’s claim of working capital adjustment. While considering assessee’s objections in this regard, learned DRP concurred with the finding of the TPO. 4.2 Before us, learned counsel appearing for the assessee submitted that neither the TPO, nor DRP have properly appreciated the facts placed before them to understand the function carried on by the assessee in the distribution segment. He submitted, the assessee not only resells the imported equipments but also earns substantial rental and other services income from deployment of equipments at customer’s premises. He submitted, before the TPO and DRP, the assessee had furnished the details of receipts from sale of equipments as well as rental received from leasing of equipments. However, these facts have been completely ignored by the departmental ITA No.6151/Del/2013 AY: 2009-10 8 | P a g e authorities. He submitted, though, an application for rectification under section 154 of the Act was filed before the TPO, however, it is still pending. Proceeding further, he submitted, assessee’s business model is unique and not akin to routine distributors of office automation products. He submitted, as far as the assessee is concerned, there are two revenue streams, one is from sale of equipment and other from lease rental of equipment. He submitted, as far as sale of products is concerned, the pricing could not be set in similar way as the pricing for equipments given on lease to customers. In respect of leased of equipments, the assessee will not be able to recover the cost of equipment given on lease in one go. Rather, it would be recovered over a period of years considering the useful life of such equipments/components. 4.3 Drawing our attention to the computation of margin by the TPO, he submitted that the gross margin computed is by taking total cost of purchases from the AE but including only the revenue from the resale of equipments/components, which gives a distorted result under RPM. He submitted, such a comparable analysis cannot be done even when compared to a routine distributor of office automation products, as, it is not only the ITA No.6151/Del/2013 AY: 2009-10 9 | P a g e product similarity that determines the use of RPM but also the way different businesses are conducted. In this context, he drew our attention to para 2.33 of OECD Guidelines, 2022. He submitted, in assessee’s case, since, the business is conducted in a way that affects pricing at the gross level, when compared to the companies selected by the assessee in TP documentation, gross level testing is not appropriate. Further, he submitted, RPM cannot be applied as, though, based on available data in public domain gross margin of comparables can be computed, however, reliable data to indicate suitable comparability adjustment in order to align business model of comparables companies with that of the assessee are not available. He submitted, in assessee’s own case, the TPO has applied TNMM as most appropriate method consistently prior to year 2009-10. He submitted, even from assessment year 2011-12 onwards, TNMM has been applied as most appropriate method. Thus, he submitted, applying the rule of consistency, in this year also assessee’s benchmark under TNMM should have been accepted. 4.4 Without prejudice, he submitted, even if RPM is applied, the transaction for purchase of equipment for resale and lease can be benchmarked only when both streams of Revenue are considered. ITA No.6151/Del/2013 AY: 2009-10 10 | P a g e He submitted, this approach has been accepted by DRP in assessee’s own case in assessment year 2010-11, wherein, the DRP directed the TPO to include the income received from rental while computing RPM. He submitted, if this approach is adopted in the impugned assessment year, there would be no adjustment. 4.5 Learned Departmental Representative submitted, there is no disclosure in the TP study report that the assessee is doing any other activity, except resale. Thus, he submitted, there was no scope either to the AO or DRP to consider assessee’s claim. He submitted, if the assessee is earning two streams of revenue from resale and leasing, they cannot be considered as closely linked transaction for adopting aggregate approach. He submitted, however, the departmental authorities are prevented from taking any decision in this regard, as the assessee did not furnish the necessary details regarding resale and leasing. He submitted, in case, the assessee furnishes the necessary details, the matter can be examined by the TPO. 4.6 We have considered rival submissions and perused the materials on record. Undisputedly, the assessee has benchmarked the transaction relating to purchase of goods from AE for resale by applying TNMM. Whereas, the TPO as well as ITA No.6151/Del/2013 AY: 2009-10 11 | P a g e learned DRP have held that RPM is the most appropriate method to benchmark the transaction. On perusal of Rule 10(1)(b), it is observed that RPM can be applied in a case where the goods are purchased from the AE simply for the purpose of resale. However, in the facts of the present appeal, it is the say of the assessee that the imported goods are not only utilized for resale but were also leased out to customers to be installed at their premises on rental basis. Therefore, in case, there are two streams of revenue being generated by the assessee in respect of imported goods, one resale and second leasing, the issue which requires to be considered is, whether in such a scenario RPM can be applied as the most appropriate method to determine the ALP. In case, RPM is applied, what adjustments are required to be made. On a careful perusal of the order passed by the TPO and learned DRP, it is observed that assessee’s claim regarding two streams of revenue earned in relation to goods imported from the AE for resale have not been considered. We have further observed from the materials placed before us, though, the assessee is following the same business model as regards the purchase of office equipments from the AE in other assessment years. However, the TPO has benchmarked the transaction by applying TNMM. This is the ITA No.6151/Del/2013 AY: 2009-10 12 | P a g e factual position we noted on going through the assessment orders passed by the TPO in assessment years 2008-09, 2010-11 and 2011-12. In case, the facts are identical in the impugned assessment year, the departmental authorities must justify their action of taking a different approach in the impugned assessment year. However, no proper reasoning has been recorded by the departmental authorities while making a departure from the view taken in the other assessment years. 4.7 Further, in assessment year 2010-11, though, learned DRP has held that RPM is the most appropriate method to benchmark the transaction, however, they directed the TPO to take into the account the total expenses as well as the total revenue in the distribution segment while determining the ALP of the international transaction. The observations of learned DRP in this regard is reproduced hereunder: “5.5. DRP has carefully considered the above submission of the assessee. It is clear that the assessee is not only re-selling the finished goods but also giving the imported finished goods on lease. It is but natural to recognize the two streams of revenue - one from sale of goods and the other from the rentals. In the same way, assessee has to maintain the equipments supplied on lease with replacement of spares or damaged parts. The purchase of equipments and spare parts can be benchmarked only when the two streams of revenue is recognized. It is obvious that the assessee will ITA No.6151/Del/2013 AY: 2009-10 13 | P a g e not be able to recover the cost of equipment given on lease at one go. Therefore, DRP directs the TPO to take into account the total expenses as well as total revenue involved in this segment while determining the ALP of the international transaction. The above submission of the assessee should be examined by the TPO in the light of the above direction of the DRP and calculate the margin of the assessee afresh. 4.8 Learned counsel appearing for the assessee has submitted before us that if DRP’s direction in assessment year 2010-11 is followed in the impugned assessment year, there would be no adjustment. Since, the aforesaid aspects have not been considered by the departmental authorities and needs to be considered qua the facts available on record, in our view, it has to be examined at the level of AO/TPO. Accordingly, we are inclined to restore this issue to the Assessing Officer for fresh adjudication, keeping in view the discussions made hereinabove. 4.9 Needless to mention, the assessee must be provided reasonable opportunity of being heard before deciding the issue. These grounds are allowed for statistical purposes. 5. In ground no. 10 and its sub-grounds, the assessee has challenged disallowance of depreciation on capital assets converted into stock in trade. ITA No.6151/Del/2013 AY: 2009-10 14 | P a g e 5.1 We have heard learned Representatives appearing for the parties. It is a common point before us that the issue is squarely covered in favour of the assessee by the decisions of the Tribunal in assessee’s own case in assessment years 2007-08 and 2008- 09. It is further submitted that the decision of the Tribunal in assessment year 2007-08 has been upheld by the Hon’ble Delhi High Court. 5.2 Having considered rival submissions and perused the materials on record, we are convinced that the issue is squarely covered by the decisions of the Coordinate Bench in assessee’s own case in assessment year 2007-08 as rendered in ITA No. 5389/Del/2011, which has been confirmed by the Hon’ble Jurisdictional High Court in judgment dated 18.01.2016 delivered in ITA No. 771/2015. The same view has been reiterated by the Coordinate Bench while deciding the issue in assessment year 2008-09 in ITA No. 5528/Del/2012. Again while deciding the issue in assessment year 2010-11, the Tribunal followed its earlier decisions. 5.3 Therefore, respectfully following the decisions of the Coordinate Bench and Hon’ble Jurisdictional High Court, we hold that assessee’s claim of depreciation is allowable. Accordingly, we ITA No.6151/Del/2013 AY: 2009-10 15 | P a g e delete the disallowance of Rs.37,54,845/-. Thus, these grounds are allowed. 6. In ground no. 11, the assessee has raised the issue of short grant of TDS credit. 6.1 Having heard the parties, we direct the Assessing Officer to verify the relevant facts and allow TDS credit in accordance with law. 7. Grounds no. 12 and 13 being consequently and premature, at this stage, are dismissed. 8. In the result, the appeal is partly allowed. Order pronounced in the open court on 19 th October, 2022 Sd/- Sd/- (DR. B.R.R. KUMAR) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 19 th October, 2022. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi