Alcon laboratories India Pvt Ltd , Bangalore V. Income Tax Officer Ward-1(1)(4), Bangalore

ITA 726/BANG/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 3356 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-04-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 29-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 92B; 234B; 144C; 143(2); 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI. B.R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No. 726/Bang/2017 Assessment Year : 2012-13 M/s. Alcon Laboratories (India) Pvt. Ltd., 11 th Floor, RMZ Azure, Bellary Road, Hebbal, Bangalore – 560 092. PAN: AACCA3430F Vs. The Deputy Commissioner of Income Tax, Circle – 1(1)(1), Bangalore. APPELLANT RESPONDENT Assessee by : Shri Percy Pardiwala, Sr. Advocate Revenue by : Dr. Manjunath Karkihalli, CIT (DR) Date of Hearing : 12-04-2022 Date of Pronouncement : 29-04-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 23/01/2017 passed by the Ld.ITO, Ward-1(1)(4), Bangalore for assessment year 2012-13 on following revised grounds of appeal: “Based on the facts and circumstances of the case and in law, Alcon Laboratories (India) Private Limited (hereinafter referred to as "Appellant”), respectfully craves leave to prefer an appeal against the order passed by the learned Assessing Officer [hereinafter referred to as the "learned AO”] in pursuance to the directions issued by Hon'ble Page 2 of 20 IT(TP)A No. 726/Bang/2017 Dispute Resolution Panel (“DRP”), under section 143(3) read with section 144C of the Income-tax Act. 1961 ('the Act") on the following grounds: That on the facts and circumstances of the case and in law- 1. The learned AO I Transfer Pricing Officer (''TP0"), based on directions of the DRP, erred in assessing the total income at Rs.53,66.26.873 as against returned income of Rs.17,12,92.190 computed by the Appellant, 2. The learned AO / TPO and the learned DRP have erred in making an addition of Rs.36,53.34.683 to the total income of the Appellant on account of the alleged excessive expenditure incurred towards Advertising. Marketing and Promotion ("AMP") and adjustment to the Arms Length Price ("ALP") of the IT Support Services transaction entered by the Appellant with its Associated Enterprises ("AE"); Grounds relating to adjustment on account of alleged excessive AMP expenditure 3. The learned AO / TPO and the learned DRP have erred, in law and in facts, by concluding that the Appellant has incurred excessive or extraordinary AMP expenses for the purpose of development of marketing intangibles of AE and that such expenditure is a separate international transaction of provision of service: 4. Without prejudice to the above ground, the learned AO / TPO and the learned DRP have erred, in law and in facts. by failing to accept the aggregation approach adopted by the Appellant and not appreciating that the sales and distribution expenditure incurred by the Appellant is included in the Profit Level Indicator ( 'PU") used for the distribution activity, which is tested under the Transactional Net Margin Method ("TNMM''); the arm's length benchmarking and the comparable companies so adopted are not disputed by the learned TPO: 5. The learned DRP has erred, in facts, by concluding that the commission paid to M/s Parekh Integrated Services Private Limited forms part of the AMP expenses by placing reliance on the remand report of the learned TPO. which states that "the taxpayer may have to provide required incentives to M/s Parekh Integrated Solutions Limited to distribute its product. than that of competitors": 6. The learned DRP, erred in law and in facts. by arbitrarily considering 25% of the distributor's commission as incurred towards warehousing facilities and treating the balance as part of AMP expenditure: 7. The learned AO I TPO and the learned DRP have erred, in law and in facts. by considering -distributor's commission'', "sales promotion expenses" and "seminar Page 3 of 20 IT(TP)A No. 726/Bang/2017 and conventions expenses' as part of AMP expenditure while measuring the so called -intensity of AMP expenditure": 8. Without prejudice to the above grounds the learned AO / TPO and the learned DRP have erred, in law and in facts. in computing the excessive or extraordinary AMP expenditure while computing the transfer pricing adjustment using the Bright Line Test ('BLT") which is not recognized under the Indian transfer pricing regulations: 9. Without prejudice to the above grounds. the learned AO / TPO and the learned DRP have erred, in law and in facts. in selecting the Comparable Uncontrollable Price ("CUP") method and not applying it in the manner prescribed under the Act. read with the Income-tax Rules, 1962 (the Rules") to benchmark the alleged international transaction of AMP expenditure. 10. Without prejudice to the above grounds. the learned AO / TPO and the learned DRP have erred in law and in facts, in treating the sales and distribution expenses incurred as a separate international transaction to benchmark it independently from distribution activity, as in the absence of any computation mechanism prescribed under the Act. the machinery provision fails Grounds relating to adjustment in respect of IT support services 11. The learned AO / TPO and the learned DRP have ignored the functional analysis undertaken by the Appellant in accordance with the provisions of the Act, read with the Rules. Further, the learned AO TPO and the learned DRP, have erroneously concluded that the IT support services function performed by the Appellant is in the nature of end-to end software development services. 12. The learned AO I TPO and the learned DRP have erred, in law and in facts. by making an addition to the total income of the Appellant, by disregarding the aggregation approach adopted by the Appellant in the transfer pricing documentation and adopting a transaction by transaction approach to arrive at the ALP for IT support services transaction; 13. The learned AO / TPO and the learned DRP have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act, read with the Rules and rejecting the companies engaged in providing support services, further conducting a fresh economic analysis for determining the ALP in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length, Page 4 of 20 IT(TP)A No. 726/Bang/2017 14. The learned AO / TPO and the learned DRP have erred, in law and in facts, in accepting companies without appreciating that such companies engaged in providing end-to-end software development services and are not functionally comparable to the Appellant, providing IT support services: 15. Without prejudice to the above grounds. the learned AO / TPO and the learned DRP have erred, in law and in facts, by rejecting certain comparable companies additionally proposed by the Appellant during the assessment proceedings before the learned TPO, as not comparable; 16. The learned DRP erred, in law and in facts, by rejecting certain comparable companies not disputed by both the Appellant and the learned AO / TPO based on unreasonable comparable criteria: 17. The learned AO / TPO and the learned DRP have erred, in law and in facts. by rejecting comparable companies additionally proposed by the Appellant during the assessment proceedings before the learned TPO by applying / modifying the following qualitative and quantitative filters: a) Turnover exceeding Rs.1 crore: b) Different year ending filter; c) Employee cost greater than 25%; d) Export earnings greater than 75%: 18. The learned AO / TPO and the learned DRP have erred, in law and in facts, by determining the arm's length margin/ price using only Financial Year ("FY") 2011-12 data: 19. The learned AOTTPO and the learned DRP have erred. in law and in facts, by incorrectly computing the working capital adjustment benefit: 20. The learned AO/TPO and the learned DRP have erred in incorrectly computing the operating margin of some of the comparable companies; 21. The learned AO / TPO and the learned DRP have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparables: 22. The learned AO / TPO and the learned DRP have erred in computing the ALP without considering the +I- 5 percent variation from the arm's length price as permitted to the Appellant under the provisions of Section 92C(2) of the Act. General Grounds 23. The learned AO has erred. in law and in facts, by levying interest under section 234A and 234B of the Act: Page 5 of 20 IT(TP)A No. 726/Bang/2017 24. The learned AO erred, in law and in facts. in initiating penalty proceedings u/s 271(1)(c), 271AA and 271G of the Act: The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.” 2. Brief facts of the case are as under: 2.1. The assessee filed its return of income for the year under consideration on 09/02/2013 declaring total income of ₹17,12,92,190/-. The case was selected for scrutiny and notice under section 143(2) of the act along with notice under section 142(1) of the act were issued. In response to the statutory notices, the assessee appeared before the Ld.AO, through its representatives and filed requisite details as called for. 2.2 The Ld.AO observed that, the assessee is engaged in sale of ophthalmic surgical electronic equipments, intraocular lenses, spare parts and pharmaceutical products. 2.3 The Ld.AO observed that, the assessee had international transactions exceeding ₹15 crores, and therefore, the case was referred to the transfer pricing officer for data mining the ALP of the transaction between assessee and the AE. 2.4 On receipt of reference, the Ld.TPO called upon assessee to file the economic details of international transactions undertaken by assessee. The Ld.TPO found that assessee had following international transaction during the year under consideration: Page 6 of 20 IT(TP)A No. 726/Bang/2017 Particulars Amount Purchase of Parts 52,275,750 Purchase of Ophthalmic Surgical, equipment, IOL's Pharmaceuticals and other Eye care products 2,564,228,548 Purchase of Capital Goods 167,947,741 Provision of Marketing Support Services 191,539,792 Reimbursement of expenses from AE 740,526 Total 2,976,732,357 2.5 The Ld.TPO observer that, the assessee classified its transactions under 2 segments being ophthalmic surgical and pharmaceutical distribution and provision of marketing support services. The Ld.TPO called upon assessee to provide the segmental financials with IT support service as a separate segment. The assessee filed following details: 2.6 The Ld.TPO noted that, in the marketing support services, assessee had aggregated transactions relating to IT support service, (software development services). Page 7 of 20 IT(TP)A No. 726/Bang/2017 2.7 The Ld.TPO was of the view that the marketing support services and IT support services cannot be said to be interlinked and word to be separately analysed. He thus carried out an independent analysis of the IT support service segment. 2.8 The Ld.TPO, after considering various submissions of assessee shortlisted following 10 comparable is having a margin of 22.63%. 2.9 The Ld.TPO thus proposed shortfall being ₹1,11,42,238/-as an adjustment to IT support service segment. 2.10 The Ld.TPO further noted that assessee in the distribution segment has carried out additional functions in the form of advertisement, marketing and sales promotion. The Ld.TPO was of the view that, the AE has not adequately compensated the assessee for such additional functions undertaken by the assessee. He thus called upon assessee to propose the excess of AMP expenditure incurred by assessee for promoting and marketing intangible owned by the AE, by making necessary transfer pricing adjustment. The Ld.TPO proposed to make transfer pricing adjustment on account of markup for the service Page 8 of 20 IT(TP)A No. 726/Bang/2017 of brand promotion rendered by assessee to its AE. After considering various submissions filed by assessee, the Ld.TPO selected following set of comparables and it remind the adjustment for the excess AMP incurred by assessee towards the benefit of AE at ₹ 6,09,88,000/-. 3. The total adjustment proposed by the Ld.TPO are as under: IT support service-₹ 1,11,42,238 AMP expenditure-₹ 62,06,30,238 On receipt of the order under section 92CA of the act, the Ld.AO pass the draft assessment order incorporating the proposed additions in the hands of assessee. Against the draft assessment order, the assessee filed objections before the DRP 4. The DRP excluded 6 comparable companies the 10 comparable companies chosen by the Ld.TPO. However, on the AMP expenditure added, the DRP confirmed the view of the Ld.AO/TPO. 5. On receipt of the DRP order, the Ld.AO passed the final assessment order making addition of Rs.36,53,34,638/- in the hands of the assessee. Against the impugned assessment order, the assessee is in appeal before this Tribunal. The broad issued that arises for consideration in the present appeal are as under: 6. Ground no.1 is general in nature and therefore do not require any adjudication. Page 9 of 20 IT(TP)A No. 726/Bang/2017 7. In Ground no.2-10, the assessee is challenging the addition made in respect of AMP spent by using the bright line test which is not recognized under the TP regulations. 8. In the Grounds 11 to 22, the assessee is seeking exclusion of only two comparables being Persistent systems Ltd., Persistent Systems Ltd., and L & T Infotech Ltd. It may also be mentioned that the revenue is not in appeal against the comparables excluded by the DRP. 9. Ground No.2-10: 9.1 The Ld.AR submitted that, the assessee purchases ophthalmic pharmaceuticals and ophthalmic surgical products from its AE is for distribution in India. It was submitted that assessee also renders services in relation to the products during and after warranty period. The Ld.AR submitted that, on one hand the revenue accepts the distribution activities and marketing activities carried on by assessee to be at arm’s length whereas on the other hand while making the AMP expenditure the Ld.TPO holds that the selling and distribution expenses incurred by assessee promotes the intangibles of AE in India and the distribution expenses incurred being towards the products amounts to advertisement. 9.2 The Ld.AR submitted that, the Ld.TPO did not consider that the sales promotion expenses and the seminars and conventions carried on ease to educate the Indian market in respect of the products distributor by the assessee within the Indian territory he submitted that by these expenditures the assessee is promoting its own business in India as a distributor. The details of the expenditure are as under: Page 10 of 20 IT(TP)A No. 726/Bang/2017 Turnover 5,24,73,00,000 Distributor's Commission 36,80,00,000 Seminars & Conventions 14,87,00,000 Sales Promotion 7,97,00,000 Total AMP 59,64,00,000 Alcon India's AMP to Sales 11.37% 9.3 The Ld.AR submitted that, the revenue made adverse observation that assessee incurred excessive sales and distribution expenses and compared to the comparable companies by using CUP as the most appropriate method. He submitted that the revenue has attributed excessive sales and distribution expenditure to the additional function of promoting and developing the marketing intangibles of the AE by assessee in India by using bright line test. It is the submission of the Ld.AR that, this is not a recognised method under the trans- uprising regulation. 9.4 The Ld.AR submitted that, there is no agreement between the assessee and the AE to make such expenditure in order to promote the intangibles of the AE in India. And in the absence of any specific requirement to make such expenditure on behalf of AE, the expenditures incurred by assessee cannot be treated to be an international transaction. In support, he placed reliance on the decision of Hon’ble Delhi High Court in case of Maruti Suzuki India Ltd. vs. CIT, reported in 381 ITR 117 and M/s. Sony Ericsson Mobile Communications Pvt.Ltd. vs CIT reported in 374 ITR 118. 9.5 On the contrary the Ld.CIT.DR placed reliance on orders passed by authorities below. Page 11 of 20 IT(TP)A No. 726/Bang/2017 9.6 We have perused submissions advanced by both sides in light of records placed before us. 9.7 We know that the DRP refused to follow the above decisions of Hon’ble Delhi High Court by observing that these decisions have not been accepted by the Department and SLP has been filed before Hon’ble Supreme Court. 9.8 It is not the case of the revenue that assessee is mandated to incur such expenditure as per any agreement between the assessee and a. It is also not disputed that these expenditures incurred by assessee or towards its own business promotion in India as assessee is a distributor further from the transfer pricing study report we note that assessee operates in limited risk environment in respect of the distribution and marketing segment. As per the TP study the description of activities carried on by the assessee that has been allegedly characterised by the Ld.TPO towards the promotion of brand are as under: Sl.No. Nature of sales and distribution expenditure Brief description 1. Distributor's commission Comprises of commission paid to the third party distributor of ophthalmic surgical and ophthalmic pharmaceutical products on the basis of sales effected by them. The amount of commission includes consideration for various services provided by consignment agents to Alcon India like warehouse charges, collection charges, charges for distribution activities in 38 locations across India. 2. Sales promotion This predominantly comprises of education grants paid to hospitals and institutions Page 12 of 20 IT(TP)A No. 726/Bang/2017 3. Seminar and convections Comprises of cost incurred on sponsorship towards All India Ophthalmic Society Conference, All State level Conferences, performing live surgeries and all other conference held in the state level Ophthalmic societies. 9.9 On an identical situation, Coordinate Bench of this Tribunal in case of Essilor India Pvt.Ltd vs DCIT in IT(TP)A No 29/Bang/2014 and IT(TP)A No. 227/Bang/2015 observed and held as under: “12. We have heard the submissions of the learned counsel for the assessee as well as the ld.DR. The first aspect which was brought tour notice by the ld. counsel for the assessee is the decision of the ITAT in assessee's own case for assessment year 2009-10 and 2010-11 on the same issue of AMP expenses. The Tribunal took the following view after extracting the decision of the Hon'ble Delhi High Court in the case of M/s Maruti Suzuki India Ltd. (supra). "21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee - company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also ensure to its foreign AE is not sufficient to infer existence of international trans action. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee- company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act. 22.Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should 'co Page 13 of 20 IT(TP)A No. 726/Bang/2017 treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered a part of the operating cost Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed." 13. The ld. counsel for the assessee pointed out that none of the reasons given by the TPO in the order for assessment year 2013-14, for not following decision of the ITAT can be sustained. In this regard, the ld. counsel brought to our notice the facts which were highlighted by the assessee before the DRP. ......................... 16. We have given our careful consideration to the rival submissions. The Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (MSIL) v. Addl. CIT, TPO [2010] 328 ITR 210 (Delhi), in the case of a licensed manufacturer incurring AMP expenses it was held that it incurring of AMP expenses would be an international transaction and the issue of determination of ALP was remanded. This decision was however overruled in Maruti Suzuki India Ltd. v. Addl. CIT [2011] 335 ITR 121 (SC) wherein the Hon'ble Supreme Court left the question whether AMP expenses gives raise to international transaction or not open with the following observations: "In this case, the High Court has remitted the matter to the Transfer Pricing Officer ("the TPO" for short) with liberty to issue fresh show-cause notice. The High Court has further directed the Transfer Pricing Officer to decide the matter in accordance with law. Further, on going through the impugned judgment of the High Court dated July 1, 2010, we find that the High Court has not merely set aside the original show cause notice but it has made certain observations on the merits of the case and has given directions to the Transfer Pricing Officer, which virtually conclude the matter. In the circumstances, on that limited issue, we hereby direct the Transfer Pricing Officer, who, in the meantime, has already issued a show cause notice on September 16, 2010, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in the impugned judgment dated July 1, 2010. Page 14 of 20 IT(TP)A No. 726/Bang/2017 The Transfer Pricing Officer will decide this matter on or before December 31, 2010. The civil appeal is, accordingly, disposed of with no order as to costs." 17. The Hon'ble Delhi High Court in an other case of Maruti Suzuki India Ltd. Vs. CIT 381 ITR 117 (Delhi) held that the fact that the benefit of such AMP expenses would also ensure to the AE is itself insufficient to infer the existence of an international transaction. Similar decision was also rendered by the Hon'ble Delhi High Court in the case of CIT (LTU) v. Whirlpool of India Ltd., 381 ITR 154. The bright line test which was applied by the AO in the present case was also applied by the AO in the aforesaid cases. The bright line test which was accepted by the Special Bench of ITAT in the case of L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1 (Del)(SB) was held by the Hon'ble Delhi High Court to be not correct. In the case of Maruti Suzuki (supra), the facts were Maruti Suzuki India Ltd. (MSIL) was engaged in the manufacture of passenger cars in India. It was a subsidiary of SMC, a Japanese company. MSIL started its business in 1982 as a Government of India owned company. SMC was selected as the business partner independently by MSIL. The co-branded trade mark "Maruti-Suzuki" was used since the inception of MSIL. A licence agreement was entered into between MSIL and SMC in October 1982 for its models M-800, Omni and Gypsy. By the agreement, MSIL was permitted to use the co- branded trade mark "Maruti- Suzuki" on the vehicles. In the assessment of MSIL for assessment year 2005-06, the AO invoked the provisions of section 92CA(1) of the Act and referred the case to the Transfer Pricing Officer for determination of the arm's length price in relation to the international transactions undertaken by MSIL with its associated enterprise, SMC. The Transfer Pricing Officer passed an order making an adjustment of Rs. 154.12 crores towards the advertisement, marketing and sales promotion expenses imputing a notional arm's length compensation towards the advertisement, marketing and sales promotion expenses incurred by MSIL for SMC. On the above facts, the Hon'ble Delhi High Court held as follows: ".... when the licence agreements were originally entered into in 1982, MSIL was known as MUL and SMC did not hold a single share in MUL. In 2003 SMC acquired the controlling interest in MSIL. There were various models of Suzuki motor cars manufactured by MSIL and each model was covered by a separate licence agreement. Under these agreements, granted licence to MSIL to manufacture that particular car model and provided technical know-how and information and right to use Suzuki's patents and technical information. It also gave MSIL the right to use Suzuki's trade mark and logo on the product. Pursuant to this agreement, MSIL was using the co-brand, i.e., Maruti Suzuki trade mark and logo for more than 30 years. This co-brand could not be used by SMC and was not owned by it. The clauses in the agreement between MSIL and SMC indicated that Page 15 of 20 IT(TP)A No. 726/Bang/2017 permission was granted by SMC to MSIL to use the co- brand "Maruti Suzuki" name and logo. The mere fact that the cars manufactured by MSIL bore the symbol "S" was not decisive as the advertisements were of a particular model of the car with the logo "Maruti- Suzuki". The Revenue had been unable to contradict the submission of MSIL that the co-brand mark "Maruti-Suzuki" in fact did not belong to SMC and could not be used by SMC either in India or anywhere else. The decision in the case of Sony Ericsson requires that the mark or brand should belong to the foreign associated enterprise. The Revenue also did not deny that as far as the brand "Suzuki" was concerned its legal ownership vested with the foreign associated enterprise, i.e., SMC. Moreover as MSIL was concerned, its operating profit margin was 11.19 per cent. which was higher than that of the comparable companies whose profit margin was 4.04 per cent. Therefore, applying the transactional net margin method it must be stated that there was no question of a transfer pricing adjustment on account of advertisement, marketing and sales promotion expenditure. The advertisement, marketing and sales promotion expenses incurred by MSIL could not be treated and categorised as an international transaction under section 92B of the Act." 18. In the case of Whirlpool of India Ltd. (supra), it was held that there had to be an international 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. The transfer pricing adjustment was not expected to be made by deducing from the difference between the excessive advertising, marketing and sales promotion expenditure incurred by the assessee and the advertising, marketing and sales promotion expenditure of a comparable entity that an international transaction existed and then proceeding to make the adjustment of the difference in order to determine the value of such advertising, marketing and sales promotion expenditure incurred for the associated enterprise. Thus, the bright line test had been rejected as a valid method for either determining the existence of an international transaction or for the determination of the arm's length price of such transaction. Although under section 92B read with section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this could not be a matter of inference. There had to be some tangible evidence on record to show that two parties had acted in concert. It was also held that the provisions under Chapter X envisaged a separate entity concept. In other words, there could not be a presumption that the assessee was a subsidiary of the foreign company and that all the activities of the assessee were in fact dictated by the foreign company. Merely because the foreign company had a financial interest, it could not be presumed that advertising, marketing and sales promotion expenses incurred by the assessee were at the instance or on behalf of the foreign company. The initial onus was on the Revenue to demonstrate through some Page 16 of 20 IT(TP)A No. 726/Bang/2017 tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning advertising, marketing and sales pro-motion expenses." 19. In the light of the law as it exists today, we shall examine the arguments of the rival parties. There has been no agreement between Essilor International which owns the various brands set out by the TPO in his order and the Assessee to incur any Advertisement and Marketing or Sales promotion expenses. None of the other reasons given by the TPO which have been explained by the Assessee and set out in the earlier paragraph can be the basis to hold that there was in fact an international transaction in the matter of incurring of AMP expenses by the Assessee. The order of the Tribunal in Assessee's own case for A.Y.2009-10 and 2010-11 in our view requires to be followed and there are no reasons whatsoever to take a different view. Consequently, there could not be any exercise of determining the ALP of the AMP expenses by comparing the expenses incurred by the Assessee with comparable companies. In view of the above conclusions, the other aspects whether the comparable companies chosen by the TPO are in fact comparable in terms of Functions performed, Assets employed and Risks assumed (FAR) analysis and other aspects of determination of ALP does not require any consideration. Therefore the addition made on account of determination of ALP of AMP expenses in AY 2011-12 to 2014-15 is directed to be deleted.” 10. In our view the above view by the coordinate bench requires to be followed, and there are no reasons whatsoever to take a different view. Respectfully following the above view, we redirect the Ld.AO/TPO to delete the addition made towards AMP expenses. Accordingly these grounds raised by assessee stands allowed. 11. Ground No.11-22: The Ld.AR submitted that assessee seeks to exclude the following 2 companies which were chosen as comparable companies by the Ld.TPO and retained by the DRP viz., a) Persistent Systems Ltd., and b) L&T Infotech Ltd., 12. The ld.AR submitted that in assessee’s own case for assessment year 2011-12, in IT(TP)A No.221/Bang/2016 & CONo.33/Bang/2017 vide order dated 20/11/2020, excluded Page 17 of 20 IT(TP)A No. 726/Bang/2017 these comparables by relying on the decisions of coordinate bench of this Tribunal in case of Applied Materials (I) Pvt. Ltd. in IT(TP)A No.17&39/Bang/2016 for assessment year 2011-12 and LG Soft India Pvt.Ltd vs. DCIT in IT(TP)A No.52/Bang/2016 by order dated 05/08/2020 for assessment year 2011-12. The Ld.CIT.DR relied on orders passed by the authorities below. We have perused the submission advanced by both sides in light of records placed before us. 13. We note that coordinate bench of this Tribunal in case of SAP Labs India Pvt.Ltd vs. DCIT in IT(TP)A No.684/Bang/2017 for assessment year 2012-13 excluded these comparables by observing as under: “6.1 At the outset, the Ld.AR submitted that, above comparables have been considered by coordinate bench of this Tribunal in case of NXP India Pvt.ltd. vs DCIT in ITA No. 692/B/2017 by order dated 27/04/2020. It has been submitted that NXP India Pvt.Ltd., was also characterised to be a captive software service provider to its AE. 6.2 The Ld.CIT.DR though objected, could not controvert the observations of this Tribunal in case of NXP India Pvt. Ltd., (supra). 7. We have perused submissions advanced by both sides in light of records placed before us. We note that the functional profile of this assessee and the assessee in the decision cited by the Ld.AR are same. Above comparables have been dealt with by this Tribunal as under: “PERSISTENT SYSEMS LIMITED 6. The assessee objected for the exclusion of this company by the lower authorities in the tally of comparables by arguing that it is engaged in OPD and there is a difference in OPD and IT services and that the assessee is having revenue from other sources and no segmental data is available. It was also submitted that in the assessment year 2012-2013, it is an abnormal year of operation and it is owning various intangibles. For this purpose, he relied on the order of the Bangalore Bench of the Tribunal in the case of NXP Semiconductor India Private Limited in IT(PA) No.1634/Bang/ 2014 for assessment year 2009-2010 - order dated 22 nd July, 2015. 6.1 We have carefully gone through the order of the co- ordinate Bench in the case of NXP Semiconductor India Pvt. Ltd. (supra) for the assessment year 2009-2010, Page 18 of 20 IT(TP)A No. 726/Bang/2017 wherein it was observed that Persystent Systems Limited was engaged in product development and product design and analysis services is functionally different from a pure software service provider and therefore, excluded it from the list of comparables for software development services. The same view was taken in the case of Saxo India Put. Ltd. in ITA No.6148/De1/2015 - order dated 05th February, 2016, by observing that Persystent Systems Limited is engaged in running software development services as well as sale of software products. Albeit the percentage of software products in the total revenue is less, as has been noted by the TPO, and also there is no precise information about the contribution made by such small sale of software products to the total profits of the company. As nc segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, it was directed to exclude Persystent Systems Limited from the list of comparables. In the present case also, it is noticed that Persystent Systems Limited is engaged in software products development. There is a difference between the outsourced software product development and IT services, which is evident from page nos. 973 and 974 of the paper book, as under:- "Outsourced Software Product Development (OPD) is different from IT services. Unlike a typical IT services project, where requirements are fixed while time and money are variable, a software product development project starts with fixed time and money, thus leaving requirements as the only variable. Essentially, the product development team's task is to produce the best set of requirements within a fixed time and budget. Persistent Systems has emerged as a leader in the OPD segment — a segment which is fast growing. OPD and outsourced IT services: the difference. How is OPD different from outsourced IT services is an oft asked question. In IT services, projects start with well- defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for the project. After completion, the project goes into maintenance mode. In product development, requirements are less clearly defined. Instead, most product developers are given ship- dates for the product that are typically determined by external factors. Once the ship-dates are identified, the budgets for the product are frozen. In product development projects, all requirements can never be Page 19 of 20 IT(TP)A No. 726/Bang/2017 completely fulfilled in a particular version. As a result, most product companies plan multiple product versions for their product. Every team member must contribute not only to building features for the .current release but must also contribute enhancements and provide feedback for future releases of the product." 6.2 Persystent Systems Limited having revenue of 8103.64 Million from software services and other income of 323.76 million from income from other sources. Assessment year 2012-2013 is an abnormal year of operation to Persystent Systems Limited, which is evident from the annual report placed on record by the assessee in its paper book. Further, Persystent Systems Limited is having intangibles to the tune of 2402.67 million as evident from its balance sheet ended on 31.03.2012. Being so, it is not comparable to assessee's case. We, therefore, direct the TPO to exclude Persystent Systems Limited from the list of comparables. LARSEN & TOUBRO INFOTECH LIMITED 7. The learned AR relied on the order of the ITAT Bangalore Benches in the case of CGI Information Systems and Management Consultants Private Limited in IT(TP)A No.586/Bang/2015 - order dated 11.04.2018 and submitted that it was excluded from the list of comparables for the reason that Larsen & Toubro Infotech Limited was a software product company and segmental information on SWD services was not available. In the present case, Larsen & Toubro Infotech Limited engaged in development of software onsite and its overseas revenue for the financial year 2011-2012 was Rs.27,838,752,995 and domestic revenue was Rs.1,756,792,454. Further in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A NO.1939/Bang/2017 for assessment year 2012-2013 — order dated 31.10.2018 has taken the same view that it cannot be a comparable with that of the assessee. Being so, we direct the TPO to exclude the same from the list of comparables.” 7.1 Above views has been consistently followed by coordinate benches of this Tribunal in various case more particularly in case of CGI Information Systems and Management Consultants Pvt.Ltd., vs ACIT reported in (2018) 94 Taxmann.com 97 for assessment year 2012- 13. Respectfully following the view taken by this tribunal we hold that the aforesaid for companies are to be excluded from the final list of comparables for the purpose of determining the arm's length margin. Page 20 of 20 IT(TP)A No. 726/Bang/2017 14. Respectfully following the above view and the view taken in assessee’s own case for preceding assessment year we direct the Ld.AO/TPO to exclude Persistent Systems Ltd and L&T Infotech Ltd from the final list. Accordingly these grounds raised by assessee stands allowed. In the result the appeal filed by the assessee stands allowed as indicated herein above. Order pronounced in open court on 29 th April, 2022. Sd/- Sd/- (B.R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 29 th April, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore