Motorola Solutions India (P) Ltd. v. Asstt. CIT

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The Tax PublishersI.T.A. No. 5637/Del/2011 2014 TaxPub(DT) 4144 (Del-Trib) : (2014) 035 ITR (Trib) 0546 Motorola Solutions India (P.) Ltd. v. Asstt. CIT INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALPAdjustment for advertisement, marketing and promotion expenses--The assessee-company a M group company, is a leading supplier of mobile phones and equipment for mobile broadband and automobile networks. The company was originally founded as a galvanising manufacturing corporation in 1928, with the first product being the battery eliminator. The company also provides software development services to the group companies. Additionally, the company also provides marketing and administrative support services to its group companies. The AO noticed that the assessee had undertaken major international transactions with its associated enterprise (AE) during the financial year 2006-07. As regards the contention of the assessee that the assessee-company was already getting credit notes towards reimbursement in trading account, to sustain a constant profit margin as per the groups global transfer pricing policy, the assessee received an amount of Rs. 1,50,67,56,362 from its associated enterprises as a cost credit/purchase price adjustment, the Transfer Pricing Officer observed as under : The assessee has not been able to produce any documentary evidence in the form of credit notes itself, or any other communication or any other supporting evidence to prove that the credits received by the assessee from its associated enterprises are the compensation for advertising, marketing and promotion expenses. In fact, the assessee itself is stating that these are the credits for purchase price adjustments. Therefore, by no stretch of imagination, the purchase price adjustment credits, can be taken as compensation for advertising, marketing and promotion activities undertaken by the assessee. Therefore, the contention of the assessee in this regard is without any basis and is therefore rejected.' Accordingly, the Transfer Pricing Officer proposed to compare advertising, marketing and promotion expenses of the tested party with advertising, marketing and promotion expenses of other comparables engaged in distribution business in order to benchmark the cost of intra-group services provided by the assessee-company to Motorola Inc. Considering the five comparables, the Transfer Pricing Officer proposed the bright-line percentage of advertising, marketing and promotion at 0.65 per cent, to sales being average of the advertising, marketing and promotion expenses incurred by SI Ltd. and ST Ltd. He, accordingly, proposed to treat 6.735 per cent (7.385 - .65) of the expenditure of the assessee-company, which worked out to Rs. 15,86,39,382, as expenditure which the assessee had incurred on advertisement and publicity for promoting the brand name of Motorola Inc. for which no payment had been received by the assessee-company. In view of these facts he treated the expenditure incurred by the assessee, over and above the bright-line, as an international transaction under section 92B(1) read with clause (v) of section 92F. The assessee filed objections before the Dispute Resolution Panel after considering which, the Dispute Resolution Panel directed the Transfer Pricing Officer to examine the assessee's objection in regard to exclusion of comparables by the Transfer Pricing Officer. SM and GS Ltd. being functionally similar must be taken as a comparable. The Transfer Pricing Officer is directed to include both after verification regarding ownership of brand.' The main contention of assessee was that before considering the application of BMW India P. Ltd.'s case (2013) 28 ITR (Trib) 716 (Delhi) to the assessee's case, it is necessary that the business profile of the assessee's case vis-a-vis BMW's case with reference to L. G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB) is to be considered. Admittedly, the decision in the L.G. Electronics India P. Ltd.'s case has been rendered in regard to advertising, marketing and promotion expenses and for quantification of advertising, marketing and promotion. expenses also detailed guidelines have been laid down in the case of L.G. Electronics India P. Ltd.*Held:* Thus, it is evident that L.G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB) is squarely applicable in the case of all kinds of distributors and the distinction between distributor and an assessee holding a manufacturing licence has been made for determination of excess advertising, marketing and promotion expenses because the considerations between the two differ. Therefore, guidelines laid down therein would govern the determination of the arm's length price of impugned international transaction. The assessee is primarily engaged in the distribution of telecom equipment, mobile phones and the provision of telecommunication service in India. The company also provides software development services to the group companies. Additionally the company also provides marketing and administrative support services to its group company. [Para 40] In the present case, unlike BMW India P. Ltd. v. Addl. CIT (2013) 28 ITR (Trib) 716 (Del), the assessee has carried out apart from acting as a distributor, the function of software development services to the group companies and also provided marketing and administrative support services to its group company. Therefore, the decision in the case of BMW, is not applicable to the present set of facts. [Para 42] In BMW India P. Ltd. v. Addl. CIT (2013) 28 ITR (Trib) 716 (Del) the Tribunal has observed that the assessee has performed the functions of sales promotion and advertisement in order to make a dent in the market while performing the functions of a distributor with greater intensity as opposed to a routine distributor. Therefore, this decision is not applicable to the facts of the present case. The Tribunal also took note of the fact that BMW as distributor performed higher functions and undertook to establish distributorship network, advertise, promote and market the brand remuneration/compensation/rewards of distributorship were also guaranteed. Thus, the Tribunal primarily proceeded on the premise that in the remuneration model the compensation for advertising, marketing and promotion expenses was duly embedded. This aspect in the present case needs to be demonstrated by the assessee with reference to global transfer pricing policy, as per factor laid down in L.G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB) out of 14 conditions in paragraph 125. [Para 43] However, in any view of the matter, the decision of the Special Bench in the case of L. G. Electronics India P. Ltd. is applicable to distributors also as is evident from the following observations in L.G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1, 83 (Delhi) (SB) : 125. In court considered opinion, following are some of the relevant questions, whose answers have considerable bearing on the question of determination of the cost/value of the international transaction of brand/logo promotion through â€¦â€¦ 1. Whether the Indian associated enterprises is simply a distributor or is a holding a manufacturing licence from its foreign associated enterprises ?' [Para 44] Thus, it is evident that decision in L. G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB) is squarely applicable in the case of all kinds of distributors and the distinction between distributor and an assessee holding a manufacturing licence has been made for determination of excess advertising, marketing and promotion expenses because the considerations between the two differ. Therefore, guidelines laid down therein would govern the determination of the arm's length price of impugned international transaction. [Para 45] While enumerating the ninth factor to be taken into consideration for determination of cost/value of international transaction with reference to advertising, marketing and promotion expenses, the Special Bench itself has taken note of the fact that if the compensation has been received for excess advertising, marketing and promotion expenses regarding brand building then the same is a relevant consideration and this will ensure no double addition as pleaded by counsel for the assessee. However, the assessee has to establish that in its global transfer pricing policy the advertising, marketing and promotion expenses had duly been taken into consideration. [Para 47] In view of the observations read with the observations in paragraphs 136 to 148 in L.G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Delhi) (SB), this Tribunal is in agreement with the CIT (Departmental Representative) that as per the Special Bench decision, it has to be established by the assessee that foreign associated enterprises was compensating the Indian entity for the promotion of its brand in any form, such as subsidy (credit notes in the present case, as claimed) on the goods sold by the Indian associated enterprises. In view of specific observations made, inter alia, in paragraph 140 of L. G. Electronics India P. Ltd.'s case, Tribunal is not inclined to accept counsel's contention that merely because operating margin to sales is better than the other comparables, it has to be inferred that the assessee had duly been compensated towards advertising, marketing and promotion expenses. In this regard the Departmental Representative's contentions are well founded that each international transaction has to be separately benchmarked and overall profitability cannot be a determinative factor as held in L. G. Electronics India P. Ltd.'s case also. Further, in factor No. 10 Special Bench has specifically qualified such subsidy for the purposes of adequacy or sufficiency of quantification and this also supports the contention of the Revenue that the subsidy has to be specifically received for promotion of brand. When specific guidelines have been laid down in the Special Bench decision, it cannot be held that unless this nexus, though not necessarily one to one, is established, the credit notes can be considered towards excess advertising, marketing and promotion expenses for brand promotion. However, agree with counsel that while determining the cost/value of the advertising, marketing and promotion transaction on a standalone basis, the direction of the Special Bench with regard to the 14 economic and business facts has to be followed. It is mandatory for the Transfer Pricing Officer to consider all facts and evidence, as may be submitted by the assessee to substantiate that it had received credit notes/subsidy for projects of goods as per factor 9 and the value of the subsidy so received was commensurate with the expenses incurred by the assessee on advertising, marketing and promotion as per factor 10. Further, as rightly submitted by counsel, presence or lack of agreements between related parties do not matter much. What matters is the conduct of parties. In this regard it has to be demonstrated by the assessee that the global transfer pricing policy of the assessee takes into consideration the compensation/contribution towards excess advertising, marketing and promotion expenses (brand promotion expenses) incurred by the assessee. The OECD Guidelines cannot take precedence over the decision of the Special Bench and, therefore, once the Special Bench has held that one of the factors to be taken into consideration is that foreign associated enterprises is compensating the Indian entity for the promotion of its brand in any form such as subsidy on the goods sold, then, merely with reference to the overall operating margin of the administrative and marketing division segment, it cannot be held that nexus is not required to be established. There is no gainsaying that decision of the Special Bench is binding on the Division Bench and, therefore, when the Special Bench has specifically laid down that one of the aspects to be taken into consideration, while determining the cost/value of transaction, is that how foreign associated enterprises has compensated the Indian entity for the promotion of its brand, then it cannot be held that overall percentage of operating profit may be taken into consideration for holding that credit notes issued by the foreign associated enterprises in pursuance to transfer pricing policy were towards the compensation for promotion of its brand. It has to be specifically demonstrated by the assessee. One of the contentions of counsel for the assessee is that there is no royalty payment by the assessee to its associated enterprises. One agrees with counsel that this is a relevant factor which has to be taken into consideration for determination of excess advertising, marketing and promotion expenditure in the light of decision in L. G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB). All these aspects need to be examined afresh by the TPO. [Para 50] In the light of the above observations, the matter is restored to the file of the Transfer Pricing Officer for deciding the issue afresh in the light of the decision in L. G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB) after taking into consideration the credit notes, the global transfer pricing policy and other documents to be produced by the assessee for substantiating its plea that credit notes were issued by the foreign associated enterprises towards compensation for promotion of brand. [Para 51] Income Tax Act, 1961, Section 92C INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALPCurrent year or multiple year(s) data--The reason for rejecting the use of multiple years data has been noted in the defects highlighted by the Transfer Pricing Officer. The assessee's contention is that the Transfer Pricing Officer has utilised the data for the earlier years also while examining the trend of companies incurring losses. Therefore, the multiple year data should have been used for computing the average margin also. *Held:* TPO was justified in using current year data as the TPO has given various judicial pronouncements holding that only current year data has to be used for carrying out transfer pricing analysis. Counsel has very fairly conceded that this issue stands decided against the assesee in numerous cases. Tribunal does not find much substance in the argument of counsel for the assessee because as per rule 10B(4) the data to be utilised and for analysing the comparability of uncontrolled transaction with an international transaction is to be the data relating to the financial year in which the international transaction has been entered into. As per the proviso to rule 10D, earlier year data can be used, in addition to the data pertaining to the relevant financial year, only for taking a decision as to how much the factors obtaining in the earlier years impact the profit of the current year, for both the taxpayer and the comparable. Therefore, as rightly submitted by the CIT (Departmental Representative), it has to be demonstrated as to how the earlier year conditions have influenced the profit of the relevant financial year. Since the assessee had not given details in this regard, therefore, the Transfer Pricing Officer's action was justified on this count. At pages 17 to 19, the Transfer Pricing Officer has given various judicial pronouncements holding that only current year data has to be used for carrying out transfer pricing analysis. Counsel has very fairly conceded that this issue stands decided against the assessee in numerous cases. [Para 83] Income Tax Act, 1961, Section 92C Income Tax Rules, 1962, Rule 10B(4) INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALPSelection of comparables--The assessee has assailed the Transfer Pricing Officer's action in excluding companies with diminishing revenues/persistent losses for last three years up to and including the financial year 2006-07. The Transfer Pricing Officer excluded companies with consistent losses on the ground that in an environment where software sector was growing at a CAGR (compound annual growth rate) of more than 30 per cent, during the last 10 years or at least for the last three years, the company incurring consistent losses cannot be taken as a representative of the industry. *Held:* The Transfer Pricing Officer has mentioned the distinction between the loss making company and a persistent losses/diminishing revenue making company. The Dispute Resolution Panel has observed that the Transfer Pricing Officer has examined the reasons for persistent losses. This filter was applied on the ground that such companies have some peculiar problems because of which revenue was declining and was not in line with the growth of software industry as company having persistent loss making nature/date for 3 years would be excluded as done by TPO. All this statistical data clearly demonstrate that information technology industry is growing with rapid pace and, therefore, the argument advanced by the Transfer Pricing Officer cannot be faulted. As far as the assessee's contention regarding contradictory stand adopted by the Transfer Pricing Officer in not considering the persistent loss making companies based on the earlier year;s data but taking into consideration the current year's data for computing the mean is concerned, there is no merit in the submission of counsel for the assessee because, as rightly submitted by the CIT (Departmental representative), the Transfer Pricing Officer has not excluded loss making companies but only those companies which incurred persistent losses. It cannot be disputed that persistent loss making by a company in this sector is not in normal behavioural pattern of the industry as a whole. Therefore, it triggers the enquiry into the causes of losses. Tribunal is in agreement with counsel for the assessee that if a particular comparable is incurring persistent losses on account of certain extraordinary circumstances, then only the same is to be excluded. However, the onus lies on the assessee to demonstrate such extraordinary economic circumstances. The Transfer Pricing Officer has mentioned the distinction between the loss making company and a persistent losses/diminishing revenue making company. The Dispute Resolution Panel has observed that the Transfer Pricing Officer has examined the reasons for persistent losses. This filter was applied on the ground that such companies have some peculiar problems because of which revenue was declining and not in line with the growth of software industry. Considering the statistical data noted earlier it can safely be observed that declining turnover and persistent loss is not a normal phenomenon of this sector under the Indian economic conditions. Diminishing revenue/persistent loss are not in conformity with the normal operational results in this line of activity. Therefore, the reasons for persistent losses incurred by a company needs to be identified. [Para 102] Income Tax Act, 1961, Section 92C INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALPSelection of comparables--The assessee has assailed the Transfer Pricing Officer's action in applying the filter of excluding the companies which have related party.' transactions of more than 25 per cent. The Transfer Pricing Officer noticed that the assessee did not mention anything regarding related party transaction filter. He, therefore, issued show-cause notice stating therein that this filter is appropriate to eliminate the companies which have controlled transactions and, thereby, have its significant influence on the margin earned. The Transfer Pricing Officer, after dealing with the objections of the assessee and after taking into consideration the definition of the 'associated enterprises' under sections 92A(2)(a), 40A(2)(b), OECD Guidelines and the mandate of rule 10B(l)(e)(iii) that net profit margin is required to be adjusted to take into account differences which could materially affect the amount of net profit margin in the open market and also rule 10B(3)(i) mandating such adjustment, concluded that related party filter of 25 per cent, is an adequate filter because on the one hand, it will help in excluding the companies with significant controlled transactions and at the same time, it also helps in obtaining an adequately large sample size. The Dispute Resolution Panel, after considering the assessee's submissions, upheld the Transfer Pricing Officer's action. *Held :* The Transfer Pricing Officer is directed to take into consideration only those comparables where related party transactions are to the extent of 15 per cent, because it is not the case of the Revenue that by applying the threshold limit of 15 per cent., it will not get sufficient number of comparables. SUBSCRIBE FOR FULL CONTENT

The Tax PublishersI.T.A. No. 5637/Del/2011
2014 TaxPub(DT) 4144 (Del-Trib) : (2014) 035 ITR (Trib) 0546

Motorola Solutions India (P.) Ltd. v. Asstt. CIT

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPAdjustment for advertisement, marketing and promotion expenses--The assessee-company a M group company, is a leading supplier of mobile phones and equipment for mobile broadband and automobile networks. The company was originally founded as a galvanising manufacturing corporation in 1928, with the first product being the battery eliminator. The company also provides software development services to the group companies. Additionally, the company also provides marketing and administrative support services to its group companies. The AO noticed that the assessee had undertaken major international transactions with its associated enterprise (AE) during the financial year 2006-07. As regards the contention of the assessee that the assessee-company was already getting credit notes towards reimbursement in trading account, to sustain a constant profit margin as per the groups global transfer pricing policy, the assessee received an amount of Rs. 1,50,67,56,362 from its associated enterprises as a cost credit/purchase price adjustment, the Transfer Pricing Officer observed as under : The assessee has not been able to produce any documentary evidence in the form of credit notes itself, or any other communication or any other supporting evidence to prove that the credits received by the assessee from its associated enterprises are the compensation for advertising, marketing and promotion expenses. In fact, the assessee itself is stating that these are the credits for purchase price adjustments. Therefore, by no stretch of imagination, the purchase price adjustment credits, can be taken as compensation for advertising, marketing and promotion activities undertaken by the assessee. Therefore, the contention of the assessee in this regard is without any basis and is therefore rejected.' Accordingly, the Transfer Pricing Officer proposed to compare advertising, marketing and promotion expenses of the tested party with advertising, marketing and promotion expenses of other comparables engaged in distribution business in order to benchmark the cost of intra-group services provided by the assessee-company to Motorola Inc. Considering the five comparables, the Transfer Pricing Officer proposed the bright-line percentage of advertising, marketing and promotion at 0.65 per cent, to sales being average of the advertising, marketing and promotion expenses incurred by SI Ltd. and ST Ltd. He, accordingly, proposed to treat 6.735 per cent (7.385 - .65) of the expenditure of the assessee-company, which worked out to Rs. 15,86,39,382, as expenditure which the assessee had incurred on advertisement and publicity for promoting the brand name of Motorola Inc. for which no payment had been received by the assessee-company. In view of these facts he treated the expenditure incurred by the assessee, over and above the bright-line, as an international transaction under section 92B(1) read with clause (v) of section 92F. The assessee filed objections before the Dispute Resolution Panel after considering which, the Dispute Resolution Panel directed the Transfer Pricing Officer to examine the assessee's objection in regard to exclusion of comparables by the Transfer Pricing Officer. SM and GS Ltd. being functionally similar must be taken as a comparable. The Transfer Pricing Officer is directed to include both after verification regarding ownership of brand.' The main contention of assessee was that before considering the application of BMW India P. Ltd.'s case (2013) 28 ITR (Trib) 716 (Delhi) to the assessee's case, it is necessary that the business profile of the assessee's case vis-a-vis BMW's case with reference to L. G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB) is to be considered. Admittedly, the decision in the L.G. Electronics India P. Ltd.'s case has been rendered in regard to advertising, marketing and promotion expenses and for quantification of advertising, marketing and promotion. expenses also detailed guidelines have been laid down in the case of L.G. Electronics India P. Ltd.Held: Thus, it is evident that L.G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB) is squarely applicable in the case of all kinds of distributors and the distinction between distributor and an assessee holding a manufacturing licence has been made for determination of excess advertising, marketing and promotion expenses because the considerations between the two differ. Therefore, guidelines laid down therein would govern the determination of the arm's length price of impugned international transaction.

The assessee is primarily engaged in the distribution of telecom equipment, mobile phones and the provision of telecommunication service in India. The company also provides software development services to the group companies. Additionally the company also provides marketing and administrative support services to its group company. [Para 40] In the present case, unlike BMW India P. Ltd. v. Addl. CIT (2013) 28 ITR (Trib) 716 (Del), the assessee has carried out apart from acting as a distributor, the function of software development services to the group companies and also provided marketing and administrative support services to its group company. Therefore, the decision in the case of BMW, is not applicable to the present set of facts. [Para 42] In BMW India P. Ltd. v. Addl. CIT (2013) 28 ITR (Trib) 716 (Del) the Tribunal has observed that the assessee has performed the functions of sales promotion and advertisement in order to make a dent in the market while performing the functions of a distributor with greater intensity as opposed to a routine distributor. Therefore, this decision is not applicable to the facts of the present case. The Tribunal also took note of the fact that BMW as distributor performed higher functions and undertook to establish distributorship network, advertise, promote and market the brand remuneration/compensation/rewards of distributorship were also guaranteed. Thus, the Tribunal primarily proceeded on the premise that in the remuneration model the compensation for advertising, marketing and promotion expenses was duly embedded. This aspect in the present case needs to be demonstrated by the assessee with reference to global transfer pricing policy, as per factor laid down in L.G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB) out of 14 conditions in paragraph 125. [Para 43] However, in any view of the matter, the decision of the Special Bench in the case of L. G. Electronics India P. Ltd. is applicable to distributors also as is evident from the following observations in L.G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1, 83 (Delhi) (SB) : 125. In court considered opinion, following are some of the relevant questions, whose answers have considerable bearing on the question of determination of the cost/value of the international transaction of brand/logo promotion through â€¦â€¦ 1. Whether the Indian associated enterprises is simply a distributor or is a holding a manufacturing licence from its foreign associated enterprises ?' [Para 44] Thus, it is evident that decision in L. G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB) is squarely applicable in the case of all kinds of distributors and the distinction between distributor and an assessee holding a manufacturing licence has been made for determination of excess advertising, marketing and promotion expenses because the considerations between the two differ. Therefore, guidelines laid down therein would govern the determination of the arm's length price of impugned international transaction. [Para 45] While enumerating the ninth factor to be taken into consideration for determination of cost/value of international transaction with reference to advertising, marketing and promotion expenses, the Special Bench itself has taken note of the fact that if the compensation has been received for excess advertising, marketing and promotion expenses regarding brand building then the same is a relevant consideration and this will ensure no double addition as pleaded by counsel for the assessee. However, the assessee has to establish that in its global transfer pricing policy the advertising, marketing and promotion expenses had duly been taken into consideration. [Para 47] In view of the observations read with the observations in paragraphs 136 to 148 in L.G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Delhi) (SB), this Tribunal is in agreement with the CIT (Departmental Representative) that as per the Special Bench decision, it has to be established by the assessee that foreign associated enterprises was compensating the Indian entity for the promotion of its brand in any form, such as subsidy (credit notes in the present case, as claimed) on the goods sold by the Indian associated enterprises. In view of specific observations made, inter alia, in paragraph 140 of L. G. Electronics India P. Ltd.'s case, Tribunal is not inclined to accept counsel's contention that merely because operating margin to sales is better than the other comparables, it has to be inferred that the assessee had duly been compensated towards advertising, marketing and promotion expenses. In this regard the Departmental Representative's contentions are well founded that each international transaction has to be separately benchmarked and overall profitability cannot be a determinative factor as held in L. G. Electronics India P. Ltd.'s case also. Further, in factor No. 10 Special Bench has specifically qualified such subsidy for the purposes of adequacy or sufficiency of quantification and this also supports the contention of the Revenue that the subsidy has to be specifically received for promotion of brand. When specific guidelines have been laid down in the Special Bench decision, it cannot be held that unless this nexus, though not necessarily one to one, is established, the credit notes can be considered towards excess advertising, marketing and promotion expenses for brand promotion. However, agree with counsel that while determining the cost/value of the advertising, marketing and promotion transaction on a standalone basis, the direction of the Special Bench with regard to the 14 economic and business facts has to be followed. It is mandatory for the Transfer Pricing Officer to consider all facts and evidence, as may be submitted by the assessee to substantiate that it had received credit notes/subsidy for projects of goods as per factor 9 and the value of the subsidy so received was commensurate with the expenses incurred by the assessee on advertising, marketing and promotion as per factor 10. Further, as rightly submitted by counsel, presence or lack of agreements between related parties do not matter much. What matters is the conduct of parties. In this regard it has to be demonstrated by the assessee that the global transfer pricing policy of the assessee takes into consideration the compensation/contribution towards excess advertising, marketing and promotion expenses (brand promotion expenses) incurred by the assessee. The OECD Guidelines cannot take precedence over the decision of the Special Bench and, therefore, once the Special Bench has held that one of the factors to be taken into consideration is that foreign associated enterprises is compensating the Indian entity for the promotion of its brand in any form such as subsidy on the goods sold, then, merely with reference to the overall operating margin of the administrative and marketing division segment, it cannot be held that nexus is not required to be established. There is no gainsaying that decision of the Special Bench is binding on the Division Bench and, therefore, when the Special Bench has specifically laid down that one of the aspects to be taken into consideration, while determining the cost/value of transaction, is that how foreign associated enterprises has compensated the Indian entity for the promotion of its brand, then it cannot be held that overall percentage of operating profit may be taken into consideration for holding that credit notes issued by the foreign associated enterprises in pursuance to transfer pricing policy were towards the compensation for promotion of its brand. It has to be specifically demonstrated by the assessee. One of the contentions of counsel for the assessee is that there is no royalty payment by the assessee to its associated enterprises. One agrees with counsel that this is a relevant factor which has to be taken into consideration for determination of excess advertising, marketing and promotion expenditure in the light of decision in L. G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB). All these aspects need to be examined afresh by the TPO. [Para 50] In the light of the above observations, the matter is restored to the file of the Transfer Pricing Officer for deciding the issue afresh in the light of the decision in L. G. Electronics India P. Ltd.'s case (2013) 22 ITR (Trib) 1 (Del) (SB) after taking into consideration the credit notes, the global transfer pricing policy and other documents to be produced by the assessee for substantiating its plea that credit notes were issued by the foreign associated enterprises towards compensation for promotion of brand. [Para 51]

Income Tax Act, 1961, Section 92C

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPCurrent year or multiple year(s) data--The reason for rejecting the use of multiple years data has been noted in the defects highlighted by the Transfer Pricing Officer. The assessee's contention is that the Transfer Pricing Officer has utilised the data for the earlier years also while examining the trend of companies incurring losses. Therefore, the multiple year data should have been used for computing the average margin also. Held: TPO was justified in using current year data as the TPO has given various judicial pronouncements holding that only current year data has to be used for carrying out transfer pricing analysis. Counsel has very fairly conceded that this issue stands decided against the assesee in numerous cases.

Tribunal does not find much substance in the argument of counsel for the assessee because as per rule 10B(4) the data to be utilised and for analysing the comparability of uncontrolled transaction with an international transaction is to be the data relating to the financial year in which the international transaction has been entered into. As per the proviso to rule 10D, earlier year data can be used, in addition to the data pertaining to the relevant financial year, only for taking a decision as to how much the factors obtaining in the earlier years impact the profit of the current year, for both the taxpayer and the comparable. Therefore, as rightly submitted by the CIT (Departmental Representative), it has to be demonstrated as to how the earlier year conditions have influenced the profit of the relevant financial year. Since the assessee had not given details in this regard, therefore, the Transfer Pricing Officer's action was justified on this count. At pages 17 to 19, the Transfer Pricing Officer has given various judicial pronouncements holding that only current year data has to be used for carrying out transfer pricing analysis. Counsel has very fairly conceded that this issue stands decided against the assessee in numerous cases. [Para 83]

Income Tax Act, 1961, Section 92C

Income Tax Rules, 1962, Rule 10B(4)

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPSelection of comparables--The assessee has assailed the Transfer Pricing Officer's action in excluding companies with diminishing revenues/persistent losses for last three years up to and including the financial year 2006-07. The Transfer Pricing Officer excluded companies with consistent losses on the ground that in an environment where software sector was growing at a CAGR (compound annual growth rate) of more than 30 per cent, during the last 10 years or at least for the last three years, the company incurring consistent losses cannot be taken as a representative of the industry. Held: The Transfer Pricing Officer has mentioned the distinction between the loss making company and a persistent losses/diminishing revenue making company. The Dispute Resolution Panel has observed that the Transfer Pricing Officer has examined the reasons for persistent losses. This filter was applied on the ground that such companies have some peculiar problems because of which revenue was declining and was not in line with the growth of software industry as company having persistent loss making nature/date for 3 years would be excluded as done by TPO.

All this statistical data clearly demonstrate that information technology industry is growing with rapid pace and, therefore, the argument advanced by the Transfer Pricing Officer cannot be faulted. As far as the assessee's contention regarding contradictory stand adopted by the Transfer Pricing Officer in not considering the persistent loss making companies based on the earlier year;s data but taking into consideration the current year's data for computing the mean is concerned, there is no merit in the submission of counsel for the assessee because, as rightly submitted by the CIT (Departmental representative), the Transfer Pricing Officer has not excluded loss making companies but only those companies which incurred persistent losses. It cannot be disputed that persistent loss making by a company in this sector is not in normal behavioural pattern of the industry as a whole. Therefore, it triggers the enquiry into the causes of losses. Tribunal is in agreement with counsel for the assessee that if a particular comparable is incurring persistent losses on account of certain extraordinary circumstances, then only the same is to be excluded. However, the onus lies on the assessee to demonstrate such extraordinary economic circumstances. The Transfer Pricing Officer has mentioned the distinction between the loss making company and a persistent losses/diminishing revenue making company. The Dispute Resolution Panel has observed that the Transfer Pricing Officer has examined the reasons for persistent losses. This filter was applied on the ground that such companies have some peculiar problems because of which revenue was declining and not in line with the growth of software industry. Considering the statistical data noted earlier it can safely be observed that declining turnover and persistent loss is not a normal phenomenon of this sector under the Indian economic conditions. Diminishing revenue/persistent loss are not in conformity with the normal operational results in this line of activity. Therefore, the reasons for persistent losses incurred by a company needs to be identified. [Para 102]

Income Tax Act, 1961, Section 92C

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPSelection of comparables--The assessee has assailed the Transfer Pricing Officer's action in applying the filter of excluding the companies which have related party.' transactions of more than 25 per cent. The Transfer Pricing Officer noticed that the assessee did not mention anything regarding related party transaction filter. He, therefore, issued show-cause notice stating therein that this filter is appropriate to eliminate the companies which have controlled transactions and, thereby, have its significant influence on the margin earned. The Transfer Pricing Officer, after dealing with the objections of the assessee and after taking into consideration the definition of the 'associated enterprises' under sections 92A(2)(a), 40A(2)(b), OECD Guidelines and the mandate of rule 10B(l)(e)(iii) that net profit margin is required to be adjusted to take into account differences which could materially affect the amount of net profit margin in the open market and also rule 10B(3)(i) mandating such adjustment, concluded that related party filter of 25 per cent, is an adequate filter because on the one hand, it will help in excluding the companies with significant controlled transactions and at the same time, it also helps in obtaining an adequately large sample size. The Dispute Resolution Panel, after considering the assessee's submissions, upheld the Transfer Pricing Officer's action. Held : The Transfer Pricing Officer is directed to take into consideration only those comparables where related party transactions are to the extent of 15 per cent, because it is not the case of the Revenue that by applying the threshold limit of 15 per cent., it will not get sufficient number of comparables.