2017-VIL-1530-ITAT-DEL
Income Tax Appellate Tribunal DELHI
ITA No.4574/Del./2017
Date: 20.09.2017
M/s . NIKON INDIA PVT. LTD.
Vs
DCIT, CIRCLE 3 (1) , GURGAON
For The ASSESSEE : Shri Vishal Kalra, Advocate
For The REVENUE : Shri H.K. Choudhary, CIT DR
BENCH
SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER
JUDGMENT
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. Nikon India Pvt. Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 27.06.2017, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2010-11 on the grounds inter alia that :-
“1. That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant under section 143(3) of the Income-tax Act, 1961 ("the Act"), for the relevant assessment year at INR 22,07,25,680 as against the returned loss of INR 22,93,287.
2. That on the facts and circumstances of the case and in law, the AO has erred in passing the final assessment order which is not in conformity with the draft assessment order.
3. That on the facts and circumstances of the case and in law, the order passed by the AO being not passed in conformity with the provisions of section 92CA(4) of the Act, is void ab-initio and bad in law.
4. That on the facts and circumstances of the case and in law, the order of the Transfer Pricing Officer ('TPO') is non-est and invalid as the TPO has computed Arm's Length Price (‘ALP') of Advertising, Marketing and Promotional (,AMP') expenditure (alleged international transaction) simultaneously on substantive basis as well as protective basis which is against the contours of transfer pricing.
NOTWITHSTANDING AND WITHOUT PREJUDICE:
5. That on the facts and circumstances of the case and in law, the AO / TPO have grossly erred in applying Bright Line Test ('BL 1') to make transfer pricing adjustment amounting to INR 22,30,18,964, on protective basis, without appreciating that BLT was expressly rejected by the Hon'ble Tribunal vide order dated September 28,2015, thus, the order is bad in law and void ab-initio.
6. That on the facts and circumstances of the case and in law, AO / TPO have erred in not appreciating that the Appellant was not engaged in rendition of value added (brand building) services to Associate Enterprise ('AE'), which mandated charging of mark-up on incurrence of such AMP expenditure.
7. That on the facts and circumstances of the case and in law, the AO / TPO have erred in not granting quantitative / economic adjustments (such as non-payment of royalty / expenses incurred on new product launches) while quantifying ALP of the alleged international transaction of AMP expenditure.
8. That on the facts and circumstances of the case and in law, the AO / TPO have erred in not providing the benefit of (+/-) 5% range as provided by the proviso to section 92C(2) of the Act.
9. That on the facts and circumstances of the case and in law, the AO has erred in levying / computing interest under sections 2348 and 234C of the Act.”
2. Briefly stated the facts necessary for adjudication of the controversy at hand are : This is second round of litigation before the Tribunal because earlier assessment order passed by AO in consonance with the directions issued by DRP/TPO was set aside to pass a fresh order and thereafter assessment order dated 27.06.2017 has been passed in consonance with the order dated 28.09.2015.
3. Initially Assessing Officer has passed assessment order dated 05.01.2015 making Transfer Pricing adjustment of Rs. 40,64,33,832/- and completed the assessment at Rs. 40,41,40,545/-. But the said final assessment order was challenged before the Tribunal which set aside the TP order dated 28.09.2015. Thereafter, TPO passed a fresh order dated 20.03.2017.
4. The assessee company, M/s. Nikon India Private Limited (Nikon India or the assessee) is a wholly owned subsidiary of M/s. Nikon Corporation, Japan. M/s. Nikon India is engaged in the distribution and marketing services for Nikon products in India.
5. Assessee company entered into international transaction during the year under assessment to the following effect :-
|
S.No. |
Nature of Transaction |
Method |
Value of transaction (Rs.) |
|
1 |
Purchase of products, spares, promotional and other supplies |
RPM |
1,59,06,94,5642 |
|
2 |
Purchase of fixed assets |
TNMM |
3,09,931 |
|
3 |
Sales and service support income |
TNMM |
1,19,11,847 |
|
4 |
Commission income |
TNMM |
17,51,40,980 |
|
5 |
Purchase of fixed assets |
CUP |
16,74,880 |
|
6 |
Cost of reimbursement received |
CUP |
2,29,50,609 |
|
7 |
Cost of reimbursement paid |
CUP |
28,54,154 |
6. Ld. TPO, after making comparability adjustment in the margin of the comparable by identifying the excess of AMP expenditure incurred by the assessee company vis-à-vis the comparables worked out the adjustment margin of comparables as under :-
|
S.No. |
Name of the comparable companies |
Adjusted OP/OR (% ) |
|
1 |
Allied Photographics India Limited |
5.04% |
|
2 |
Compuage Infocom Limited |
Details not available |
|
3 |
Computer Point Limited |
1.16% |
|
4 |
CCS Infotech |
3.78% |
|
5 |
Empower Industries India Limited |
1.86% |
|
6 |
Kodak India Private Limited |
Significant RPT |
|
7 |
Mobile Telecommunications Limited |
3.28% |
|
8 |
MVL Industries Limited |
Significant RPT |
|
9 |
Salora International Limited |
-0.09% |
|
|
Average OP/OR (%) |
2.50% |
7. Consequently, TPO made cumulative adjustment as under :-
|
S.No. |
Nature of transaction |
|
Adjustment u/s 92CA |
|
1 |
AMP adjustment protective basis |
on |
Rs.22,30,18,964 |
|
2 |
AMP adjustment substantive basis |
on |
Rs.8,67,88,051 |
8. AO on the basis of TP order dated 20.03.2017 made addition of Rs. 22,30,18,964/- to the taxable income/loss declared by the assessee company by losing sight of the fact that the TPO has proposed adjustment on protective basis to the tune of Rs. 22,30,18,964/- and of Rs. 8,67,88,051/- on substantive basis.
9. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.
10. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUND NO.1
11. Ground No.1 is general in nature and does not require any adjudication.
GROUNDS NO.2 & 3
12. Undisputedly, during the assessment proceedings, taxpayer moved an application under section 154 of the Act before the TPO who has passed order dated 23.08.2017 to the following effect :-
“In this case, the TPO vide his order dated 20.03.2017 had computed the adjustment all on account of AMP expenses amounting to Rs. 8,67,88,051/- on substantive basis and Rs. 22,30,18,964/- on protective basis in pursuance of Hon'ble ITAT order.
The assessee has filed rectification application u/s 154 of the IT Act, 1961 dated 05.06.2017, which was received in this office on 07.06.2017. The relevant portion of the submission of the assessee is reproduced below:-
1) …..please note that average of adjusted operating margins earned by comparable companies (as computed by your goodself) is 2.50% as against the margin of Nikon India i.e. -1.76%. However, please note that margins earned by Nikon India falls within the +/- 5% range, as permitted under the provisions of the Act……
The contention of the assessee has been considered and the same is found to be correct after verification form records. The margins of the assessee (-1.76%) fall in the range of +/- 5% of the average margins of comparables.
Therefore, in view of the above, the 4earlier adjustment of Rs. 8,67,88,051/- is reduced to NIL.
Sd/-
(Sandeep Rana)
Deputy Commissioner of Income Tax,
Transfer Pricing Officer -1(3)(2), New Delhi.”
13. Since substantive adjustment to the tune of Rs. 8,67,88,051/- proposed by ld. TPO in his earlier order has been reduced to nil, both the grounds have since become infructuous and decided accordingly.
GROUND NO.4
14. Ground No.4 is dismissed having not been pressed.
GROUNDS NO.5
15. TPO by applying the Bright Line Test (BLT) proposed adjustment of Rs. 22,30,18,964/- on protective basis. The ld. AR for the assessee by relying upon the decisions rendered by the coordinate Bench of the Tribunal in Tianjin Tianshi Biologicial Development Company Ltd. vs. DCIT – (2014) 52 TAXMANN.COM 518 (Delhi-Trib, ITO vs. M/s. Fussy Financial Services Pvt. Ltd. in ITA No.4227/Del/2014 dated 05.06.2017, Perfetti Van Melle India Pvt. Ltd. vs. DCIT in ITA No.1073/Del/2017 dated 24.05.2017, decision rendered by Hon’ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. vs. CIT-III – (2015) 55 taxmann.com 240 (Delhi) and decision rendered by Hon’ble Gujarat High Court in Veer Gems vs. ACIT – (2011) 15 taxmann.com 355 (Gujarat) contended that TP adjustment on protective basis is not sustainable and order is itself void ab initio. The ld. AR for the assessee further contended that BLT could have been applied at the first stage.
16. The coordinate Bench of the Tribunal in case cited as Perfetti Van Melle India Pvt. Ltd. vs. DCIT in ITA No.1073/Del/2017 dated 24.05.2017 determined the issue as to applying the BLT for determining the ALP of AMP expenses and observed as under :-
“13. We want to clarify that if a situation for determining the ALP of AMP expenses arises, then no transfer pricing adjustment should be made by applying the bright line test, as has been done on protective basis, because of Hon’ble High Court has not approved the application of the bright line test in several decisions.”
17. Furthermore, Hon’ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. vs. CIT-III – (2015) 55 taxmann.com 240 (Delhi) also determined the identical issue as to applying the BLT for determining ALP of the AMP in favour of the assessee and has categorically held that BLT has no statutory mandate and it is not obligatory to subject AMP expenses to BLT and considered non-routine AMP as separate transactions by making following observations :-
“III. Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price (Comparables and adjustments/Adjustments - AMP expenses) - Assessees were several Indian subsidiaries of Multi National Enterprises (MNEs) engaged in distribution and marketing of imported and branded products, manufactured and sold to them by foreign AEs - They had applied TNMM/RPM for computing ALP - TPO accepted methods so applied by assessees, however, found that assessees had incurred AMP expenses towards promotion of brand in India, however, no reimbursement of expenses was made from AEs - Hence, he used bright line test by segregating nonroutine expenses and by deducting amount representing bright line from value of gross sales and determined excess AMP incurred by assessee and added same to income of assessee :- Whether where comparables adopted by assessee, with or without making adjustments as a bundled transaction had been accepted by TPO, it would be illogical and improper to treat AMP expenses as a separate transaction - Held, yes- Whether bright line test has no statutory mandate and it is not obligatory to subject AMP expenses as a bright line test and consider non-routine AMP as a separate transaction – Held, yes”
18. So, following the decision rendered by Hon’ble Delhi High Court in case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra) and coordinate Bench of the Tribunal in Perfetti Van Melle India Pvt. Ltd. (supra), TP adjustment amounting to Rs. 22,30,18,964/- by applying BLT is not sustainable on protective basis having no statutory mandate. So, ground no.5 is determined in favour of the assessee.
GROUNDS NO.6, 7 & 8
19. Grounds No.6, 7 & 8 are dismissed having not been pressed.
GROUND NO.9
20. Ground No.9 is consequential in nature.
21. Resultantly, the appeal filed by the assessee is partly allowed.
Order pronounced in open court on this 20th day of September, 2017.
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