M/s Avnet India Pvt Ltd , Bangalore V. The Income Tax Officer Circle-1(1)(4), Bangalore

ITA 744/BANG/2017

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1402 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-12-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 31-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; TDS
• Section: 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ES : B , BANGALORE BEFORE SHRI A.K.GARODIA, ACCOUNTANT MEMBER AND S MT.BEENA PILLAI , JUDICAL MEMBER IT (TP) A N O . 744 (BANG) /201 7 (ASSESSMENT Y E AR : 20 12 - 13 ) M/S A VNET INDIA P VT.L TD., NO.402, 4 TH FLOOR, RMZ I N FINITY T OWER - B, NO.3 , OLD MADRAS ROAD, BANGALORE - 560 016. APPELLA NT VS THE INCOME TAX OFFICER, CIRCLE - 1(1)(4), BMTC BUILDING, KORAM A NGALA, 6 TH BLOCK, BANGALORE RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, CA RE VENUE BY : MS.NEERA MALHOTRA, CIT DR DATE OF HEARING : 1 1 - 12 - 2019 DATE OF PRONOUNCEMENT : 13 - 12 - 2 - 019 O R D E R PER BEENA PILLAI, JUDICIAL MEMBER : PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST FINAL ASSESSMENT ORDER DATED 27/01/17 PASSED BY LD.ITO, WARD 1 (1) (4), BANGALORE FOR ASSESSMENT YEAR 2012 - 13. 2. LD.AR SUBMITTED THAT REVISED GROUNDS OF APPEAL HAS BEEN FILED VIDE APPLICATION DATED 24/07/18 , WHICH NEEDS TO BE ADDRESSED. HE IT (TP) A NO .744(B) /201 7 2 SUBMITTED THAT ASSESSEE IS ENGAGED IN BUSINESS OF PROVIDING MARKETING SERVICES TO AVNET ASIA PTE LTD ., WHICH INTER - ALIA INVOLVES IN SOU RCING OF CUSTOME RS FOR PRODUCTS OF AVNET GROUP C OMPANIES IN 2 BUSINESS SEGMENTS BEING ELECTRONIC MARKETING AND TECHNOLOGY SERVICES. 2.1 LD.TPO HAS OBSERVED THAT ASSESSEE IS 100% SUBSIDIARY OF AVNET HOLDING LLC AND THAT AVNET GROUP AS PER TP DOCUMENTATION, IS ONE OF THE WORLD S LARGEST B2B DISTRIBUTORS. LD.TPO OBSERVED THAT FOLLOWING ARE THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY ASSESSEE AS REPORTED IN FORM 3 CEB: PARTICULARS AMOUNT IN RS.) PURCHASE OF TRADING MATERIAL 4,99,58,613 PROVISION OF MARKETING AGENCY SERVICES 335,055,007 REIMBURSEMENT ON ACCOUNT OF EQUANT LEASE LINE CHARGES 19,17,003 RECOVERY OF EXPENSES 67,71,169 ONLY DISPUTED SEGMENT BY LD.TPO WAS IN RESPECT OF P URCHASE OF T RADING M ATERIALS, WHICH ASSESSEE HAD HELD TO BE AT ARMS LENGTH BY APPLYING RPM AS MOST APPROPRIATE METHOD WITH THE SET OF 4 COMPARABLES HAVING AVERAGE MARGIN OF 4.44% AS AGAINST 2.05% OF ASSESSEE ITSELF. 2.2 LD.TPO REJECTED THE MOST APPROPRIATE METHOD ADOPTED BY ASSESSEE AND USED TNMM, W HEREIN 5 COMPARABLES WERE SELECTED WITH AN AVERAGE MARGIN OF 4.40% (AT NET LEVEL) THEREBY COMPUTING THE PROPOSED ADJUSTMENT AT RS. 93, 30, 487/ - . 2.3 LD.AR SUBMITTED THAT ON OBJECTIONS BEING RAISED BEFORE DRP REGARDING THE SELECTION OF MOST APPROPRIATE MET HOD BY LD. TPO, IT WAS HELD AS UNDER: IT (TP) A NO .744(B) /201 7 3 HAVING CONSIDERED THE SUBMISSIONS, WE HAVE PERU S ED THE RECORD TO OBSERVE THAT THE ASSESS E E HAS APPLIED RPM FOR TP ANALYSIS PURPOSE IN ITS TP STUDY AND TPO IN THE TPO IN THE TP ORDER EXAMINED THI S ISSUE IN PARA - 6 OF THE ORD E R, HAS REJECTED THE APPLICATION OF RPM AS MOST APPROPRIATE METHOD, SAYING TH A T THE HUGE LOSS OF RS.21 , 50,77,762/ - AT NET LEVEL IN THE TRADING SEGMENT AGAINST THE TURNOVER OF RS.75,55,12,586/ - MAK E S THE FINANCIALS AND THE ACTIVITY OF THE ASSESSEE ( AS CLAIM E D BY IT HAS A MERE DISTRIBUTOR/ TRADER) , DOUBTFUL, SAYING THAT THE HUGE LOS SUGGESTS THAT THE ASSESSEE IS PERFORMING MANY MORE FUNCTIONS BEYOND THE REALM OF ROUTINE TRADER RESULTING IN LOSSES. T PO FURTHER SAID THAT HIS FACT IMPLIES THAT THE BLOW THE LINE EXPENSIVE HAVE NOT BEEN FACTORED IN TH E SALE P[RICE OF THE GOODS SOLD IN THE TRADING SEGMENT. IN C ASE OF NORMAL DISTRIBUTOR/TRADER THE MARGINS A RE BUILT IN TO SAL E PRICE TO INCLUDE COTS PLUS MARK UP COVERING ALL EXPENSES AND GIVING A REASONABLE PROFIT MARGIN. UP ON CONSIDERATION OF THE FACTS AND CIRCUMSTANCES, WE FIND THAT THE ASSESSEE AGAINST THE TOTAL TRADING TURNOVER OF RS.75.55 CRORES HAD INCURRED AN EXPENDITURE OF RS.86.36 CRORES ( PER TPO) WI TH A LOSS OF RS.10.81 CRORES WHICH COMES TO 14.31% LOSS. HOWEVER, OUT OF THE TOTAL COST, THE CO S T OF PURCHASES IS RS.75.65 CRORES WHICH IS NEARLY 6.59%. CONSIDERING THE FACT THAT THE ASSES SE E IS A MERE RESELLER, WHO IS IT (TP) A NO .744(B) /201 7 4 RESELLING THE GOODS WITHOUT ANY VA LUE ADDITION, AND ALSO CONSIDERING THE VERY LOW PERCENTAGE OF PURCHASES MADE FROM THE AE(6.59%) IN THE TOTAL TRADING SEGMENT PURCHASES, IT IS APPROPRIATE TO APPLY RPM IN THIS CASE. ACCORDINGLY, WE ACC E PT THE OBJECTION OF THE ASSESSEE AND DIR E CT THE TPO T O ADOPT RPM AS THE MAM . 3. DRP HOWEVER , UPHELD COMPARABLES SELECTED BY LD.TPO FOR COMPUTING ALP USING TNMM AS MOST APPROPRIATE METHOD. DRP ALSO HELD THE FOREX LOSS AS OPERATING IN NATURE BY FOLLOWING VIEW ADOPTED BY PREDECESSORS FOR ASSESSMENT YEAR 2011 - 12. 3.1 LD.TPO/AO UPON RECEIPT OF DIRECTIONS BY DRP , COMPUTED ARMS LENGTH PRICE USING RPM AS MOST APPROPRIATE METHOD AND THE 5 COMPARABLES SELECTED BY LD.TPO. 4. AG GRIEVED BY ADDITION MADE BY LD. AO, ASSESSEE IS IN APPEAL BEFORE US NOW. 4.1 AT T HE OUTSET, BOTH SIDES AGREE THAT, ISSUE NEEDS TO BE SET - ASIDE TO LD.TPO FOR RE - DETERMINING ARMS LENGTH PRICE OF THE TRANSACTION BY USING RPM AS MOST APPROPRIATE METHOD AND THE COMPARABLES THAT ARE SUITABLE TO BE USED IN THIS METHOD. 4.2 HAVING UPHELD RPM TO BE MOST APPROPRIATE METHOD , THE COMPARABILITY ANALYSIS HAS TO BE CARRIED OUT IN ACCORDANCE TO RULE 10B(4) OF THE A CT , BY USING THE RELEVANT DATA. THE COMPARABLES SO SELECTED IS TO BE ANALY Z ED BY DETERMINI NG THE GROSS MARGIN EARNED BY DISTRIBUTOR ON RESALE PRODUCTS . 4.3 IN OUR CONSIDERED OPINION , COMPARABLES SELECTED BY LD. TPO UPHELD BY DRP ARE NOT IN TRADING SEGMENT. WE THEREFORE , DIRECT IT (TP) A NO .744(B) /201 7 5 LD.TPO TO CARRY OUT FRESH COMPARABILITY ANALYSIS WHICH INCLUDES COMPANIES IN TRADING SEGMENT. 4.4 WE SHALL ALSO ADD THAT ASSESSEE SHALL NOT BE DENIED THE ADJUSTMENT ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS WHICH HAS BEEN ALREADY UPHELD BY DRP BY FOLLOWING DECISION OF THIS TRIBUNAL IN CASE OF SAP LABS INDIA PVT.LTD VS ACIT REPORTED IN 8 TAXMANN.COM 207. 4.5 WITH ABOVE DIRECTIONS , WE SET - ASIDE DETERMINATION OF ALP BACK TO LD.TPO , FOR DECIDING AFRESH. NEEDLESS TO SAY THAT ASSESSEE SHALL BE GRANTED PROPER OPPORTUNITY OF REPRESENTATION AS PER LAW. ACCORDINGLY , GROUNDS RAISED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. IN THE R ESULT APPEAL FILED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13 - 12 - 2019. SD/ - SD/ - ( A.K.GARODIA ) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 13 - 12 - 2019 *AM COPY OF THE ORDER FORWARDED TO: 1.APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT(A); 5. DR 6. ITO (TDS) 7.GUARD FILE BY ORDER ASSTT.REGISTRAR IT (TP) A NO .744(B) /201 7 6