| 2018-TII-INSTANT-ALL-557 | 07 April 2018 |
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TII BRIEF UK imposes sugar tax on soft drinks to tackle obesity CASE LAWS DCIT Vs WHIRPOOL OF INDIA LTD: DELHI ITAT (Dated: March 28, 2018) Income tax - ALP - adhoc adjustment of profit - international transaction - seperate benchmarking - tolerance margin - working capital adjustment The Assessee company, engaged in the business of manufacturing/sale of consumer durables/home appliances namely, refrigerators, washing machines, micro wave, air conditioners etc, had filed its return declaring a loss of Rs.63,36,09,640/-. Later on, the case was selected for scrutiny, wherein it was found that assessee in Form No. 3CEB had reported different international transactions undertaken with its AE comprising of import & export of raw material & finished goods, interest on ECB loan, guarentee commission, reimbursement of expenses, etc. For benchmarking these international transactions, the assessee carried out TP analysis by segregating its operation in manufacturing and trading segment. Subsequently, upon reference made by AO u/s 92CA(3), the TPO recommended adjustment of Rs.79,67,93,400/- being difference between the margin from ALP of international transactions entered into by assessee company with its AEs. The AO therefore asked the assessee to show cause as to why the adjustment proposed by TPO should not be added to its income. In response, the assessee submitted that the TPO failed to understand and appreciate the diverse nature of assessee's business and had aggregated the manufacturing and trading function together to determine the ALP from the international transactions. It was also stated that the order of the TPO suffered from arithmetic errors since it was based on inaccurate figures and data. The AO after considering such submissions, observed that the TPO had given detailed reasons for his decision to club manufacturing and trading functions for computation of margins from international transactions entered into by assessee. He accordingly made addition of Rs.79,67,93,400/-. On appeal, the FAA rejected the claim of assessee for separate benchmarking of the manufacturing and trading functions. However, on merit, the FAA held that after making adjustment on account of utilization of the capacity, the operating margins of assessee increased to 2.36% which was higher than that of the comparable companies. He also observed that the TPO had not considered the claim of assessee for working capital adjustment, as he admitted that their existed difference in the level of working capital deployed by assessee vis-à-vis comparable companies and accordingly, 0.5% adjustment of profit was to be allowed on ad-hoc basis towards working capital adjustments. Accordingly, the FAA deleted the addition made by AO. On appeal, the ITAT held that, Whether when average profit margins of comparables vis-à-vis operating profit margins of assessee comes within tolerance range of (+/-) 5% after incorporating working capital adjustment, then no further TP adjustment is neccesary - YES: ITAT + the AR of the assessee has stated that if only working capital adjustment is to be done, then the average profit margins of the comparables vis-à-vis operating profit margins of the assessee would be in the range of ± 5% and no adjustment is required. It was also stated that in the subsequent years, the TPO had himself allowed the working capital adjustment while working out the average profit margins of the comparables. The DR however argued that the matter may be restored to the TPO for verification of the calculations furnished by the assessee for the working capital adjustment. The AR also did not object if the matter be restored to the TPO/AO for verification of the working capital adjustment and to allow the same as has been done by the TPO in subsequent assessment years. Therefore, this issue is remitted back to the file of TPO/AO for verification of the calculations given by the assessee for the working capital adjustment and decide the issue for claim of the assessee on account of working capital adjustment on the same line as has been done in the subsequent assessment years. Case remanded
PHILIPS INDIA LTD Vs ACIT: KOLKATA ITAT (Dated: April 4, 2018) Inome tax - Sections 92B, 92CA, 92D(1) & 92F(v) Keywords - ALP - AMP expenses - bright line test - benefit test - CUP - intra group services - international transaction - stewardship services - TNMM A) The Assessee, a part of the Royal Philips Organisation, Headquartered in Netherlands, operates in consumer electronics and personal care. During the relevant year, it had undertaken international transaction with its AEs and had submitted sector wise transfer pricing study report along with functional analysis and information required u/s 92D(1) before the TPO. The assessee submitted before the TPO that some of the transactions pertain to services which were commonly described in international tax and transfer pricing context as 'intra-group services', and these services were benchmarked by adopting TNMM as the MAM. This intra-group services received by assessee were covered under what was described as a General Services Agreement. Under the overall umbrella package of this GSA, the assessee entered into a 'Management Support Services Agreement' with KPENV. The assessee stated that the reason of entering into the MSSA has been described in the preamble to the Agreement. It mentioned that KPENV had substantial resources in commercial, financial, accounting and other matters which would be beneficial to successfully conducting a business. These resources 'would be employed for the benefit of individual member companies of the Philips concern'. Thus, it would appear that KPENV, on the basis of the resources available at its disposal, had decided to employ those resources for the benefit of its AEs. The assessee thereafter submitted a separate TP Study Report with regard to the 'Philips General Service Agreement' and it was stated that KPENV had applied the indirect method for allocating the costs to the assessee under the MSSA and then added a margin of 10% on the costs while making the charge. So far as the margins were concerned, they were benchmarked through a separate benchmarking study which had relied on data from Pan-Asia comparables. During TP proceedings, the TPO however applied CUP method as MAM by observing that unless it was shown that tangible and direct benefit had been derived by such payment and that the payment made was commensurate to the benefit derived or expected to be derived when parties deal with each other at arm's length, the ALP of such payment for intra group services was to be treated either as Rs. Nil or to the extent of the benefit actually derived from such payment. After considering the submissions of assessee, the TPO concluded that the services rendered by KPENV to assessee was only in the nature of stewardship services (control, supervisory and monitoring functions) and thus there cannot be any charge for them. Accordingly he held that the management support services charges were only in the nature of stewardship activities and hence there could not be any charge for them and also on the aspect that the assessee had not proved the benefits derived by it pursuant to this MSSA. Based on these observations, the ALP of the services provided to assessee by KPENV under the MSSA was held to be NIL and accordingly the TPO made an upward adjustment to ALP by Rs 300,40,09,360/-. On appeal, the DRP on verification of the working sheets detailing the payment of allocation keys giving out the basis of payments made to the AE, observed that the AE renders set of services to the assessee. He therefore held that it had to be seen in the context of these services as to whether these result in some tangible benefit to the assessee or not. The services as they appear were routine services and it may be just to standardize the output of assessee. The DRP further observed that the service content did not appear to be of the nature of stewardship nature and the TPO was well within his statutory domain to determine the ALP for the intra group services rendered apparently per force to the assessee. He also opined that the assessee had to meet the rigors of the benefit test. B) The Assessee during the relevant year, incurred expenses towards AMP in each of its business segments. As per the assessee, such expenses were critical for its business in India and it had also benefited from such expenses. The assessee, in order to promote its sales in the Indian region, had undertaken marketing and sales promotion activities which was a pre-requisite of any independent company competing to thrive in such competitive market. It was submitted that the AMP expenses incurred by assessee could not be treated as marketing & distribution services rendered to the AEs and thereby as an international transaction as these AMP expenses represent purely payments made to third party vendors and we not covered under the purview of section 92 of the Act. However, the TPO rejected the assessee's claim and held that excess of AMP expenses incurred by assessee was a service rendered by the assessee for promoting the brand on behalf of AE and hence categorized the same as an international transaction u/s 92B. He also rejected the assessee's contention that TNMM analysis was sufficient to show that the transactions of assessee were at ALP and determined the price of alleged AMP expenses by applying BLT. Based on the same, the TPO proposed an upward adjustment to the tune of Rs 1,55,30,056/- towards excess AMP expenses holding that the assessee should have received reimbursement of such alleged excess of AMP expenses from the AE. On appeal, the DRP held that mere absence of a formal agreement did not help the case of assessee, whereas the conduct had the transaction written all across. Accordingly the DRP held that the AMP expenditure to be an international transaction. The DRP on perusal of the tabulation of AMP expenses division wise done by the TPO observed that the profile of those expenses indicated direct and conspicuous role in buildup of the intangibles. On appeal, the ITAT held that, Whether ALP for intra group services rendered between AEs, should not be determined at NIL, without considering economic & commercial benefits derived by independent recipient in comparable circumstances - YES: ITAT + as far as intra group services are concerned, it is seen that a similar issue had cropped up before this Tribunal in assessee's own case for the Asst Years 2009-10, 2010-11, 2011-12 and 2012-13, wherein it was observed that: "....we are convinced that the assessee had indeed received the services from KPENV which fact is acknowledged by the DRP in the hands of KPENV. The benefits derived by assessee out of these services by way of substantial cost reduction and increase in turnover substantially cannot be swept under the carpet. It is found that no adjustments to ALP was made in the Asst Years 2005-06 to 2008-09 in respect of the very same MSSA by the TPO for the assessee. Thus, principles of consistency need to be followed and cannot be given a go by when there is no change in the facts and circumstances of the case from the earlier years. The Delhi High Court in the case of CIT vs Cushman and Wakefield (India) (P) Ltd - 2014-TII-07-HC-DEL-TP has observed that TPO cannot determine ALP of an international transaction at NIL, given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. The aspects which would require consideration in order to identify intragroup services requiring arm's length remuneration, is as to whether services were received from related party. Thus, nature of services including quantum of services received by the related party. Another aspect is whether economic and commercial benefits derived by the recipient of intra group services, and in comparable circumstances, an independent enterprise would be willing to pay the price for such services...."; + since there is no change in the facts and circumstances during the year under appeal with regard to MSSA when compared to that in the earlier years, hence, respectfully following the judicial precedents, it is held that determination of ALP for Management Support Services at Rs NIL is unwarranted and accordingly the upward adjustment made by TPO in the sum of Rs 300,40,09,360/- is deleted; Whether every arrangement between overseas parent company and its Indian subsidiary, has neccesarily to be treated as "international transaction" - NO: ITAT Whether AMP expenditure incurred by a manufacturer cum distributor, should not always be correlated to brand building of its oversea parent company, and hence does not merits any ALP adjustment - YES: ITAT + as far as AMP expenses are concerned, the TPO, AO and the DRP had categorically accepted the basic fact that the assessee is a manufacturer and also engaged in distribution of products. While this is so, this Tribunal is unable to comprehend the argument advanced by the DR that assessee is only a distributor and thereby the decision of Sony Ericsson would apply to the case. It is found that since the assessee is a manufacturer cum distributor as accepted by the lower authorities, the decision rendered in Maruti Suzuki case would be applicable to the assessee's case, since the contention of the DR that assessee is only distributor, is not emanating from the records of the lower authorities; + it is to be noted that the issue under dispute is squarely addressed by this tribunal in assessee's own case for the Asst Year 2011-12, wherein it was held that: "....the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson Mobile Communications India (P) Ltd. case holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to such effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses...." Therefore, respectfully following the same, the upward adjustment made by the TPO and upheld by the DRP is hereby directed to be deleted. Case remanded |
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