IN INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I, NEW DELHI BEFORE SHRI N. K. SAINI ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. No.2614/Del/2014 (Assessment Year2009-10) Liugong India Private Limited, Vs. DCIT, Circle 4(1) 82, IIIrd Flor, Okhla Industrial Estate, New Delhi Phase III, New Delhi 110 020 GIR PAN :AABCL3456H (Appellant) (Respondent) Appellant by : Shri Manoj Pardasani, CA Ms. Aakansha Rathi, CA Respondent by : Shri N. S. Swain, CIT DR Date of hearing : 02.08.2016 Date of Pronouncement : 19.09.2016 ORDER PER BEENA A. PILLAI, JM: present appeal has been preferred by assessee for Assessment Year 2009-10. 2. brief facts of case are as under: 2.1 assessee company was incorporated on 14.08.2007 and is engaged in business of manufacturing and trading of heavy earthmoving equipments & spare parts. 3. assessee e-filed its return of income on 27.09.2009 declaring los of Rs.5,83,22,988/-. Since assessee had undertaken international transactions with its associated enterprises, reference was made by 2 I.T.A.No.2614/Del/2014 Assessing Officer to Transfer Pricing Officer, New Delhi u/s 92CA(1). S.N. Nature of ALP ALP Difference international determined determined transaction by by TPO taxpayer 1 Purchase of 27,14,65,928 machinery, Heavy earthmoving 28,06,78,795 7,28,65,474 machine Purchase of spare parts- 8,20,78,341 2 Selling and 3,45,51,729 nil 2,16,47,269 distribution expenses 3 Commission 1,64,62,067 3,91,68,988 2,27,06,921 income Total adjustment 11,72,19,664 u/s 92CA 3.1 Vide order dated 30.01.2013, Transfer Pricing Officer (TPO) proposed addition ofRs.11,72,19,664/- and Assessing Officer vide his draft assessment order after considering above international transaction, proposed to assessee taxpayer at income of Rs.5,88,99,80/- by making following additions/disallowances: S.No. Particulars Amount 1 Addition on account of transfer 11,72,19.6645 pricing adjustment 2. Disallowances u/s 14A 3007 3.2 Aggrieved by above action of Ld. TPO, assessee has filed objections before DRP. DRP upheld 3 I.T.A.No.2614/Del/2014 additions made by Ld. TPO. Ld. A.O. passed final assessment order following directions of DRP on 28.02.2014 u/s 143(3) read with Section 144C of Act. 3.3 Aggrieved by order of Ld. A.O., assessee is in appeal before us on following grounds of appeal: 1. Transfer Pricing - Purchase of Finished Goods and Spare Parts - Rs. 4,21,66,831/- On facts and in law, Hon'ble DRP/ Ld. AO/ Ld. TPO erred in rejecting on arbitrary basis, Comparable Uncontrolled Price ('CUP') data furnished by Appellant in relation to purchase of finished goods, violating provisions of Section 92C of Income Tax Act, 1961 ('the Act') read with Rule 10C of Income Tax Rules, 1962 ('the Rules'). 2. On facts and in law, Hon'ble DRP/ Ld. AO/ Ld. TPO erred in reducing value of international transactions of purchase of spare parts by Rs.4,21,66,831/-, violating provisions of Section 92C of Act read with Rule l0C. 3. On facts and in law, Hon'ble DRP/ Ld. AO/ Ld. TPO, erred in rejecting Transfer Pricing ('TP') Documentation maintained by Appellant u/s 92D of Act read with Rule 10D of Rules and in carrying out fresh search for comparable companies by using inappropriate and arbitrary criteria, contravening provisions of Section 92C(3) of Act. 4. On facts and in law, Hon'ble DRP/ Ld. AO/ Ld. TPO, erred in violating provisions of Rule 10B(2) by selecting comparables engaged in manufacturing activities even though Appellant is engaged in distribution activities during year. 4 I.T.A.No.2614/Del/2014 5. On facts and in law, Hon'ble DRP/ Ld. AO/ Ld. TPO, has erred in incorrectly computing net profit margin realized by Appellant from international transactions with its AEs at (2.33)% instead of correct NPM of 1.66%, thereby contravening provisions of Rule 10B( 1)( e). 6. On facts and in law, Hon'ble DRP/ Ld. AO/ Ld. TPO, erred in not allowing appropriate adjustments under Rule l0B to account for difference in working capital of comparable companies vis-a- vis Appellant. Transfer Pricing - Selling and Distribution Expenses - Rs.11,87,489/-: 7. On facts and in law, Ld. AO/ Ld. TPO, erred in making addition of Rs.11,87,489/- to total income of Appellant alleging that selling and distribution expenses incurred by Appellant for its own business in India has resulted in creation of marketing intangible in favour of AE. 8. On facts, Hon'ble DRP/ Ld. AO/ Ld. TPO, erred by considering amount of Rs.69,93,515/- incurred on exhibition of products of Appellant as expense towards creation of marketing intangible. 9. On facts, Hon'ble DRPI Ld. Assessing Officer/ Ld. TPO, erred by considering amount of Rs.12,38,525/- incurred on advertisement as expense incurred towards creation of marketing intangible. 10. On facts, Hon'ble DRPI Ld. Assessing Officer/ Ld. TPO, erred by considering amount of Rs.3,91,356/-incurred on printing of product brochures, product leaflets, etc. as expense towards creation of marketing intangible. 1l. On facts, Hon'ble DRP/ Ld. Assessing Officer/ Ld. TPO, erred by considering amount of 5 I.T.A.No.2614/Del/2014 Rs.55,631/- incurred towards organizing meetings with distributors and customers of Appellant in India as expense towards creation of marketing intangible. 12. On facts and in law, Hon'ble DRP/ Ld. Assessing Officer/ Ld. TPO, erred by applying alleged 'Bright Line Test' for measuring selling and distribution expenses of Appellant vis-a-vis routine distributor, based on his conjectures and surmises. l3. On facts and in law, Hon'ble DRP/ Ld. Assessing Officer/ Ld. TPO, erred in adding mark- up on aforesaid alleged selling and distribution expenses incurred by Appellant, characterizing same as borrowing by AE, on its own conjectures and surmises. 14. On facts and in law, Ld. Assessing Officer/ Ld. TPO erred incorporating directions of Hon'ble DRP by incorrectly computing mark-up of 14.25% on aforesaid alleged selling and distribution expenses incurred by Appellant, instead of 9.20%. Transfer Pricing - Receipt of Commission Income - Rs.1,65,42,819/- 15. On facts and in law, Hon'ble DRP / Ld. Assessing Officer/Ld. TPO erred in specifying ad- hoc basis for Computing commission income of Appellant, ignoring facts and circumstances of case. Corporate Tax - Section 14A - Rs.3,007/- 16. On facts and in law, Hon'ble DRP/ Ld. AO erred in disallowing amount of Rs.3,007/- under Section 14A. 6 I.T.A.No.2614/Del/2014 grounds of appeal herein above are independent and without prejudice to each other. 4. At outset, Ld. A.R. submitted that all grounds raised in present appeal are covered by order of this Tribunal dated 28.06.2016 passed in assessee s own case in I.T.A. No. 1482/Del/2015, for Assessment Year 2010-11. He submitted that here is no change in functions and activities carried on by assessee in these years. 5. Ground No.1: In respect of ground No.1, this Tribunal has held in para 21 at pages 43 & 44 as under: In view of above, we hold that: (i) CUP method is most suitable method in case of assessee; (ii) that as assessee is sale distributor of its AE in India, assessee has stated that its price should be compared with sale of goods which are similar and to independent third parties, but in different geographical locations, therefore it shall be duty of assessee to provide sale data 1 of A E in terms of sale price of assessee in India as well as other geographical locations, which are claimed to be comparable price; (iii) that Assessee shall also provide quantitative data of purchase in different geographical locations and other terms and conditions attached to those sales including terms of payment; (iv) Assessee shall be further duty bound to support its TP STUDY report for robust comparability of international transaction by providing requisite 7 I.T.A.No.2614/Del/2014 information required by Ld. TPD for determining ALP applying CUP as MAM. (v) on basis of above data provided, Ld. TPO/ AO shall compute ALP using this data applying CUP method. If at any stage, data is found to be not adequate and terms and conditions of sales are materially different or that no adjustment can be made to price, then AD and TPO shall proceed to determine ALP in accordance with other methods and then determining most appropriate method. (vi) Needless to say that appellant assessee may be granted adequate opportunity of producing data, its own comparability analysis and its own revised TP study report on basis of CUP method. If there is any difference of opinion then Ld. TPO shall grant adequate opportunity of hearing to appellant. 22. In view of this, ground No.1 of appeal of assessee is set aside to file of Ld. A. 0./ TPO with above directions. In result, ground No. 1 of appeal is allowed. 5.1 Respectfully following same, we are inclined to set aside issue to file of L. A.O., / TPO with above referred direction. assessee is directed to provide requisite information required by Ld. TPO for determining 'ALP applying CUP. 6. Ground No.2: This issue has been dealt by this Tribunal in para 24 at page 45 as under: As we have held in ground No. I that for purchase of heavy earth moving machines and jig fixtures, CUP method is most appropriate method and thereafter directed for fresh comparability analysis for same. As purchase of heavy earth moving machines is now taken out by applying different 8 I.T.A.No.2614/Del/2014 method and now fresh working of PLI is required to be determined of comparable vis vis assessee. Therefore, we set aside ground No.2 of appeal back to file of Ld. TPD for fresh comparability analysis in terms of our directions contained in Ground No.1. 6.1 Respectfully following same, we are inclined to set aside issue to file of L. A.O., / TPO with above referred direction. 7. Ground No.3 & 4 : This issue has been dealt with by Tribunal in para 27 page 46 as under: However, in view of our decision in ground No.1 of appeal, wherein we have held that CUP method needs to be applied and this objection of assessee relates to comparability analysis under TNMM method, hence, in view of our direction in ground No.1 of appeal, ground No.4 & 5 of appeal with respect to fresh search for comparable companies by Ld. TPO as well as comparison of far analysis becomes infructuous. In view of this, ground No.4 & 5 of appeal are dismissed. 7.1 Respectfully following same we dismiss grounds No.3 & 4. 8. Ground No.5: This issue is covered vide para 25 at page 45 of Tribunal order, wherein it was held as under: Ground No.3 is against incorrect computation of net profit margin of appellant also requires to be set aside to file of Ld. TPO. In result Ground No. 2 & 3 of appeal are allowed subject to determining most appropriate method and re-doing comparability analysis based on that. 9 I.T.A.No.2614/Del/2014 8.1 Respectfully following same, we set aside this issue to file of TPO for computation of net profit margin. 9. Ground No.6: Ld. A.R. submitted that similar and identical adjustment has been allowed by DRP in Assessment Year 2010-11 and 2011-12 and Ld. TPO himself has granted in Assessment Year 2012-13. He placed reliance on following decisions: i) TNT India (P) Ltd. Vs. ACIT ii) Income Tax Officer Vs M/s. Nextlinx India Pvt. Ltd. (I.T.A.No. 454/Bang/2011) iii) Nortel Network Vs ACIT (TS 65-ITAT-2014 (Del.). 9.1 In our considered opinion, assessee is operating under economic circumstances that warrant working capital adjustment to margins that is earned by comparable companies vis-a-vis assessee. We, therefore, direct Ld. A.O. to allow adjustment to arrive at correct margin. 10. Ground No.7-14: This issue has been dealt in para 32-33 at pages 48 to 68 of Tribunals order. Reliance has been placed on decision of Hon'ble Delhi High Court in case of Maruti Suzuki India Ltd. Vs CIT reported in 381 ITR 117 while setting aside issue of AMP expenses. Respectfully following same, we set aside issue to file of Ld. A.O. for determining AMP expenses in light of ratio laid down by 10 I.T.A.No.2614/Del/2014 Hon'ble Jurisdictional High Court in case of Maruti Suzuki India Ltd. (supra) followed by various other judgements. 11. Ground No.15: This ground has been discussed in page 70 & 71 of Tribunal order as under: We have carefully considered rival contentions and also perused orders of Ld. TPO and Ld. DRP. It is apparent that Ld. DRP as adopted ad-hoc increase of 50% on commission income being difference between dealers standard price and LIPS transferred price. On perusal of order of Ld. DRP, we also do not find any reason recorded by Ld. DRP in stating that 50% of difference between two prices is adequate remuneration. We reject such arbitrary approach adopted by Ld. DRP which did not have any support of nay comparability analysis. We also find that despite directions of Ld. DRP, Ld. TPO has changed dealers standard price and LIPS transferred price. In view of above contrary orders of lower authorities and confusion on prices, we set aside issue of commission income of assessee back to file of Ld. TPO with directions to compute commission income of assessee in accordance with provisions of Act and supporting calculations and margin (if any), with proper comparables. In result, we set aside ground No.15 and 16 to file of Ld. TPO. 11.1 Respectfully following same, we set aside issue to file of Ld. TPO/A.O. with similar direction to compute commission income in accordance with law 12. Ground No.16: 11 I.T.A.No.2614/Del/2014 Considering smallness, no arguments were pressed on this ground and therefore, this ground of appeal is rejected. 13. Accordingly, grounds raised by assessee is disposed off as above. Order pronounced in open court on 19th Sep., 2016. Sd./- Sd./- (N. K. SAINI) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Date:19.09.2016 Sp. Copy forwarded to:- 1. appellant 2. respondent 3. CIT 4. CIT (A)-, New Delhi. 5. DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy. By Order (ITAT, New Delhi) 12 I.T.A.No.2614/Del/2014 S.No. Details Date Initials Designation 1 Draft dictated on Sr. PS/PS 2 Draft placed before author Sr. PS/PS Draft proposed & placed before 3 JM/AM Second Member Draft discussed/approved by 4 AM/AM Second Member Approved Draft comes to 19/9/16 5 Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement 19/9 Sr. PS/PS 7 File sent to Bench Clerk 19/9 Sr. PS/PS Date on which file goes to 8 Head Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order Liugong India Private Limited v. DCIT, Circle 4(1), New Delhi