Himanshu Sinha, Bhuwan Dhooper, Vrinda Tulsian, Advs. for the Assessee. Anupam Kant Garg, CIT DR for the Revenue.

Appellant, M/s. Samsung India Electronics Pvt. Ltd. (hereinafter referred to as the ‘taxpayer’) by filing the present appeal sought to set aside the impugned order dated 11.11.2019 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2014-15 on the grounds inter alia that :-

“1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the total income of the Appellant at Rs.56,44,23,32,210/- as against the returned income of Rs.40,66,96,11,000/-.

2. That on the facts and circumstances of the case and in law, the Ld. Dispute Resolution Panel ("DRP")/AO/Transfer Pricing Officer ("TPO") erred in making a transfer pricing adjustment of Rs.1409,51,89,261/- on account of (i) advertising, marketing, promotion ("AMP") expenses of Rs.802,61,48,069/- and (ii) international transactions pertaining to trading segment of Rs.606,90,41,192/- alleging the same to be not at arm's length in terms of the provisions of section 92C of the Act read with Rule 10B of the Income Tax Rules, 1962 ("the Rules").

3. That on the facts and circumstances of the case and in law, the Ld. DRP/AO erred in making an addition of Rs.167,75,31,950 on account of disallowance of salary expenditure incurred in relation to expatriate employees under section 37(1) of the Income-tax Act, 1961.

GROUNDS AGAINST SUBSTANTIVE ADJUSTMENT MADE IN RELATION TO AMP EXPENSES

4. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making substantive adjustment of Rs.802,61,48,069 on account of AMP which comprised of Rs.680,19,00,772 for the Trading Segment (Non- IT) and Rs.122,42,47,297 for Networking Segment (Non-IT).

5. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in holding that the AMP expenditure incurred by the Appellant in India is an 'international transaction' as per the provisions of the Act.

6. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred OM:

a. not demonstrating the existence of an 'understanding' or an 'arrangement or 'action in concert' between the Appellant and its Associated Enterprises (AEs) w.r.t. the AMP spend; and

b. not appreciating that the AMP expenses incurred by the Appellant are wholly and exclusively focused on generating domestic sales for its own business operations (and aligned with the risk profile of the Appellant) and the benefit arising from the incurrence of the AMP expenses by the Appellant has been received by the Appellant and the benefit, if any, resulting to its AEs is merely incidental.

7. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in holding that the AMP expenses incurred by Appellant has led to the creation of marketing intangibles and resulted in promotion of' Samsung Brand' for which the Appellant should be compensated by the legal owner of the brand.

8. That on the facts and circumstances of the case and in law, the Ld. DRP/ AO/ TPO have erred in adopting intensity- based approach which is not a prescribed method under the Income-tax Rules, 1962.

9. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in applying mark-up on the alleged incurred excessive AMP expenditure by selecting companies providing market support functions in order to determine the mark-up to be imputed on AMP adjustment.

10. That on the facts and circumstances of the case and in law, the Ld. DRPI AO/TPO have erred in artificially making a duplicative adjustment as the alleged AMP expenses and AMP activities are already included in the arm's length determination of the trading segment.

11. That on the fact and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in not appreciating that after application of Transactional Net Margin Method (“TNMM”) as the Most Appropriate Method ("MAM") for benchmarking the international transactions, no separate arm's length analysis was required in respect of the individual elements of cost (AMP expenditure) as it is inconsistent with the tenets of applications of TNMM as per Rule 10B(l)(e) of the Rules.

12. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making transfer pricing adjustment on account of AMP expenditure in networking segment ignoring the fact that under networking segment, the Appellant operates under a Business-to-Business ('B2B') model wherein the it caters to a single customer and does not undertake any activity pertaining to AMP.

13. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in considering all 'value added expenses' (excluding employee costs) as part of the AMP expenditure on the premise that all value-added expenses lead to promotion of the brand 'Samsung' disregarding the fact that many of such expenses are purely operational in nature.

14. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in not allowing the exclusion of sales related expenses from the ambit of AMP disregarding the fact that exclusion of such expenses has been allowed in Appellant's own case by DRP in prior years.

15. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in modifying the comparable set, in contravention of section 92C(3) of the Act read with Rule 10B(2) of the Rules, by including/selecting companies that are not comparable to the Appellant in terms of functions performed, assets employed, risks assumed and rejecting companies selected by the Appellant.

16. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in incorrectly computing margin of the Appellant and the comparables.

GROUNDS AGAINST PROTECTIVE ADJUSTMENT MADE IN RELATION TO AMP EXPENSES UNDER BRIGHT LINE TEST METHOD

17. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making protective adjustment of Rs.18,29,02,10,040/- on account of AMP which comprised of Rs.11,73,56,19,026/- for Manufacturing Segment and Rs.6,55,45,91,014/- for Trading Segment which, is impermissible under law.

18. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making protective adjustment when substantive adjustment has already been done in the hands of the same Assessee for same assessment year which is impermissible under law.

19. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred applying the 'bright line' test as a tool to identify and benchmark the alleged AMP transaction which has no statutory mandate under the Act as laid down by the Hon'ble Delhi HC in the case of Sony Ericson Mobile Communications India Pvt. Ltd. [2015] 374 ITR 118 (Delhi).

20. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in levying a further mark up on the alleged AMP expenses incurred over and above the so- called 'bright-line' limit, stating that it tantamount to services being provided by Appellant to its AEs.

GROUNDS AGAINST SUBSTANTIVE ADJUSTMENT MADE IN TRADING SEGMENT

21. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making an adjustment of Rs.606,90,41,192/- in trading segment by rejecting Resale Price Method applied by the Assessee and instead applying TNMM as the MAM and by including companies that are not comparable to the Assessee in terms of functions performed, assets employed, risks assumed, and rejecting comparable companies selected by the Assessee.

22. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in incorrectly computing the margin of the Assessee and the comparables.

23. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in considering the foreign exchange gain as non-operating in nature for the purpose of computation of margins of the Appellant as well as of the comparables.

24. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in denying working capital adjustment under Rule10B(1)(e) for the purpose of determination of ALP to account for the difference in working capital employed by the Assessee vis-a-vis the comparable companies by ignoring the fact that working capital adjustment was allowed by the Ld. TPO in AY 2005-06, 2006-07, A Y 2010- 11 and 2011-12 and by Hon'ble DRP in AY 2013-14.

25. That on the facts and circumstances of the case and in law, the Ld. DRP/TPO/AO erred in wrongfully computing proportionate adjustment.

GROUNDS AGAINST CORPORATE TAX ADJUSTMENT

26. That on the facts and circumstances of the case and in law, the Ld. DRP /AO erred in disallowing the salary expenditure of INR 1,677,531,950 incurred in relation to expatriate employees under section 37(1) of the Act ignoring the fact that this Hon'ble Tribunal has decided the" issue in favour of the Appellant in the case of Samsung Electronics Co. Ltd v DCIT: [2018] 92 taxmann.com 171 (Delhi - Trib.).

27. That on the facts and circumstances of the case and in law the Ld. DRP IAO in holding that there was no employer- employee relationship between expatriate employees and the Appellant and the expatriate employees were the employees of the parent company, i.e., Samsung Electronics Co. Limited.

28. That on the facts and circumstances of the case and in law the Ld. DRP /AO erred in holding that expatriate employees were not working wholly and exclusively for the business of the Assessee and accordingly, their salary expenditure is disallowable under section 37(1) of the Act.

29. That on the facts and circumstances of the case and in law, the AO has erred in charging interest under Sections 234B and 234C of the Act.

30. That on the facts and circumstances of the case and in law, the AO erred in initiating penalty proceedings under Section 271(1)(c) and Section 271BA and Section 271AA of the Act for furnishing of inaccurate particulars and concealment of income.”

2. Briefly stated the facts necessary for adjudication of the issue at hand are : Samsung India Electronics Pvt. Ltd. (SIEL), the taxpayer is a wholly owned subsidiary of Samsung Electronics Co. Ltd., Korea (SEC, Korea) and is into the business of manufacturing and trading of consumer electronics, home appliances, mobile phones and IT products. It is also into contract software development activities for SEC, Korea and has also started import of telecommunication equipments and import of medical equipments for resale.

3. The taxpayer’s business is divided into four segments which are as under :-

(i) Licensed Manufacturing of products such as consumer electronics, home appliances and mobile phones (‘Licensed Manufacturing Segment’)

(ii) Trading of products such as consumer electronics, home appliances, mobile phones, IT Products (Trading/Distribution Segment)

(iii) Provision of contract software development services (Contract Software Development Segments) and

(iv) Operations involving Buy-Sell of Telecommunication Equipment from Samsung Korea to third party customers in India (Network Segment)

4. Out of the aforesaid segments, ld. TPO made adjustment in trading and distribution segment only. Ld. TPO made transfer pricing adjustment on account of Advertisement, Marketing and Promotion (AMP) expenditure incurred by the taxpayer during assessment year by applying “intensity approach” for trading segment as well as network segment. Ld. TPO also proceeded to make protective adjustment by applying a Brightline Test (BLT) in case of licencing manufacturer segment as well as trading segment.

5. In case of trading segment, the taxpayer in its TP study chosen 19 comparables by applying Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) and computed the margin of comparables at 10.61% as against margin of the taxpayer at 14.98% and found its international transactions qua trading segment at arm’s length. However, ld. TPO in its TP analysis rejected 14 comparables out of the 19 comparables and introduced 3 new comparables with OP/OR as the PLI and computed the margin at 5.10% of the comparables. Ld. TPO also recomputed the comparables margin of taxpayer at (-) 5.57% as against margin given by the taxpayer during assessment proceedings of (-) 2.66%. Ld. TPO also denied the working capital and risk adjustment to the taxpayer and thereby made upward adjustment of Rs.775,43,37,415/- in the trading segment. AO also disallowed salary expenditure of Rs.167,75,31,950/- paid to the expatriate employee of SEC, Korea u/s 37(1) of the Act.

6. Assessee carried the matter before the ld. Disputes Resolution Panel (DRP) by way of filing objections which were partly allowed. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.

7. 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.

GROUNDS NO.1, 2 & 3

8. Grounds No.1, 2 & 3 are general in nature hence need no specific adjudication.

GROUNDS NO.4 TO 20

9. The aforesaid grounds raised by the taxpayer pertained to adjustment made by the ld. TPO/DRP/AO on account of AMP expenditure incurred by the taxpayer in a trading segment as well as network segment. Ld. TPO used the “intensity approach” by comparing the VAE (Value Added Expenditure)/Sales ratio of each comparable with that of the taxpayer. Ld. TPO has also made protective adjustment by applying BLT in licensed manufacturing segment and trading segment.

10. At the very outset, ld. AR for the taxpayer brought to the notice of the Bench that this issue has already been decided in favour of the taxpayer in taxpayer’s own case vide order dated 04.10.2019 in a consolidated order for AYs 2005-06 to 2011-12 and order passed in AY 2012-13 order dated 07.01.2020, available at pages 1 to 225 of the paper book.

11. However, on the other hand, ld. DR for the Revenue contended that since, in case of AMP issue, Special Leave Petition (SLP) filed by the Revenue has already been admitted by the Hon’ble Supreme Court and the issue is alive but has fairly conceded that there is no change in the facts and circumstances of the case at hand vis-à-vis facts of AYs 2005-06 to 2012-13.

12. Undisputedly, there is a Marketing Development Fund (MDF) Agreement between the taxpayer and its Associated Enterprises (AE) vide which part reimbursement qua ALP expenses incurred by the taxpayer has been reimbursed by the AE. It is also not in dispute that the taxpayer has itself treated the transaction qua AMP expenses as international transactions in Form 3CEB. So, the ld. TPO noticed that the taxpayer has incurred significant amount of AMP expenses during the year under assessment to promote the brand not owned by it. Consequently, ld. TPO reached the conclusion that “significant non-routine AMP expenditure incurred by the taxpayer is an international transaction” which led to creating marketing intangibles and as such, AE has to compensate the taxpayer for significant functions performed, assets utilized and for creating economic value for the AEs brand by enhancing, maintaining and promoting the brand. Ld. TPO by using BLT approach proposed protective adjustment of Rs.16,83,57,78,332/- and thereafter proceeded to make alternative benchmarking of international transactions under TNMM by applying intensity approach. TPO by adopting the intensity approach made adjustment and also recharacterized the transaction of the taxpayer.

13. Bare perusal of the order under challenge passed by the ld. TPO more particularly paras 38, 39 & 40 of the order goes to prove that entire adjustment qua AMP expenses on protective basis has been made by the ld. TPO on the basis of BLT method and no material whatsoever has been brought on record to show if the taxpayer and AE has acted in concert. So, mere existence of Marketing Development Fund Agreement and reimbursement thereunder to the taxpayer by the AE cannot lead to the conclusion that there was an arrangement/understanding/action in concert between the taxpayer and AE for any excess amount incurred by the taxpayer. Moreover, BLT approach adopted by the ld. TPO is not tenable in law.

14. Hon’ble Delhi High Court in Sony Ericsson India Pvt. Ltd. v. CIT (2015) 374 ITR 118 (Del.) and subsequently in Maruti Suzuki India Ltd. v. CIT (2016) 328 ITR 210 (Del.) has categorically held that BLT is not a valid basis for determining the existence of international transaction or for that matter for computing the ALP of such international transaction involving AMP expenses. So, in these circumstances, the order of TPO passed by making BLT as basis of the ALP adjustment is not sustainable in the eyes of law.

15. Furthermore, Hon’ble Delhi High Court in subsequent decisions viz. Bausch & Lomb Eye Care (India) Pvt. Ltd. v. Additional CIT (2016) 381 ITR 227 (Del.) and Honda Siel Power Products Ltd. v. Dy. CIT (2016) 237 Taxman 304 held that it is for the Revenue to firstly discharge the onus to prove the existence of an international transaction between the taxpayer and its AE and only thereafter ALP of international transactions involving AMP can be computed.

16. It is further contended by the ld. AR for the taxpayer that quantitative adjustment made by the TPO on account of AMP expenses is not permissible within the framework of Chapter-X as has been held by the Hon’ble Delhi High Court in Maruti Suzuki India Ltd. v. CIT – ITA No.110/2014 & 710/2015). Hon’ble High Court has categorically held that none of the substantive or procedural provisions of Chapter-X permits adjustment on account of AMP expenses.

17. This issue has already been decided by the coordinate Bench of the Tribunal in favour of the taxpayer in its own case for AYs 2005-06 to 2011-12 (supra). Operative part thereof is extracted for ready perusal as under :-

“36. We have heard the rival submissions, perused the relevant findings given in the impugned orders as well as material referred to before us in respect of transfer pricing issue pertaining to AMP adjustment made by the TPO. We have already discussed in detail, the brief facts and background of the cases in the light of the material on record and as captured in the arguments placed by the parties. From the discussion made above, we will deal with various issues relating to AMP adjustment. The first issue for our consideration is:- Whether AMP expenditure incurred by the assessee during the year is an international transaction? In the present context can the value of the AMP transaction be extended or expanded beyond the amount received as reimbursement under the MDF agreement?

39. It is also pertinent that the Hon’ble Court further held that as per the principles laid down by the Apex Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC), in the absence of a machinery provision, bringing an imagined transaction to tax is not possible. If such a transaction with an ascertainable price is not shown to exist, Chapter X cannot be invoked. The aforementioned principles have also been applied by the Hon’ble Delhi High Court in the case of Valvoline Cummins Private Ltd. (ITA 158/2016) wherein the Court observed as below:

“17....... The mere fact that the Assessee was permitted to use the brand name ‘Valvoline’ will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand ‘Valvoline’. The onus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose.”

40. Therefore, the argument advanced by the Ld. CIT (DR) that the MDF Agreement should be viewed as an evidence to demonstrate the existence of an understanding and arrangement to carry out AMP in India at the behest of the AE needs to be examined in light of the above principles laid down by the Delhi High Court. In the present facts, we find that this transaction of having received assistance /reimbursement has already been shown by the assessee in its Form 3CEB as an international transaction. It has been contended by the Revenue that by virtue of this agreement, the entire AMP expenditure incurred by the assessee should be treated as an international transaction and subject to the provisions of Chapter X of the Act.

41. We find that the Appellant-assessee has entered into an understanding with its AE in respect of a portion of the AMP expenditure by way of the MDF agreement. Under this agreement, the AE of the assessee gives assistance to the assessee for carrying out certain advertising and marketing activities in India. Varying amounts have been received by the assessee from its AE under this agreement as reimbursements in all the assessment years impugned before us. The amounts received as assistance under this agreement in all these years have also been indisputably disclosed and explained in the Form 3CEB and in the TP study. The question that requires our adjudication is whether by virtue of this agreement, the so-called “excessive” AMP expenditure of the assessee (which is much higher than the assistance received under the MDF agreement) can be treated as an international transaction u/s 92B. For this we need to advert to the terms of the MDF agreement. Relevant clauses of the MDF agreement applicable for A.Y. 2005-06 (the agreements pertaining to other years are materially similar) are extracted as below:

“Marketing Fund Agreement

THIS AGREEMENT made and entered into this 1st day of January, 2004 by and between Samsung Electronics Co., Ltd., a corporation duly organized and existing under the laws of the Republic of Korea, having its head office at Samsung Main Bldg, 250-2Ka Taepyung-Ro, Chung-Gu, Seoul, Korea (hereinafter referred to as “SEC”) and Samsung India Electronics a corporation duly organized and existing under the laws of INDIA, having its principal office at 3rd, IFCI Tower, Nehru Place, New Delhi, INDIA (hereinafter referred to as “DISTRIBUTOR”)

Article 1. Purpose

1.1 The objectives of this Agreement are to provide for terms and conditions of the Marketing Fund activities as set forth in Article 4.3 which shall be carried out by DISTRIBUTOR on behalf of SEC in the territory to further enhance Samsung corporate and brand images therein.

1.2 The Marketing Fund shall mean a strategic fund specifically reserved by SEC to support activities for upgrading corporate and brand images in the target markets and developing new opportunities to promote the sales of the target products therein.

Article 4. Scope of Reimbursement

4.1 The amount of reimbursement shall be the actual Marketing Fund related expenses DISTRIBUTOR incurs to carry out the pertinent activities as specified in Article 3 and 4.3 for the term of this Agreement and the yearly total amount of such reimbursement shall be limited to USD 30,000,000 assigned by SEC.

4.2 DISTRIBUTOR shall submit to SEC a detailed implementation plan pursuant to the annual Marketing fund schedule in writing at least two weeks in advance of the proposed implementation date for approval of said activities. DISTRIBUTOR shall be entitled to claim a reimbursement for the expenses hereof only when execution of such activities are pre-approved by SEC in a manner stated herein.

4.3 The extent of the Marketing Fund related activities to be reimbursed shall be limited to the following:

Category ACTIVITIES

Advertising Broadcast media, print media, outdoor ad. Sponsor, intent and PR

Marketing infrastructure

Market research, consulting, market data subscription database

Other marketing infrastructure activities

Promotion Sales promotion activities

Dealer support activities (dealer convention, product training, incentive tour)

Exhibition, trade, roadshow Sales kit and POP materials Shop display Samsung shop corner Rack & shop light box Other store display activities

A perusal of the aforesaid terms of the MDF agreement shows that the reimbursement of a portion of the advertising and marketing expenditure incurred by the assessee by its AE is on a preapproval basis and under an annual budget decided solely by the AE. The nature of reimbursement received is a form of assistance or subsidy and does not arise on account of any service rendered by the assessee. There is no obligation on the AE to approve any particular item of expenditure. It is solely on its own volition that the AE determines the activity it wants to finance/reimburse/assist. Therefore, it is not possible to infer the existence of an international transaction beyond what has been reimbursed.

42. In a similar situation, coordinate Bench of this Tribunal has examined the issue of existence of an “international transaction” in the case of PepsiCo India Holdings Pvt. Ltd. v. Addl. CIT (I.T.As. No. 1334/CHANDI/2010, 1203/ CHANDI /2011, 2511/DEL/2013, 1044/DEL/2014 & 4516/DEL/2016) where the assessee, an Indian company had reimbursed a portion of the sponsorship expenditure (for international cricket events) incurred by the AE for the benefit of certain group companies including the assessee. The Revenue had contended that by virtue of this reimbursement the entire AMP expenditure of the assessee should be treated as an international transaction and subject to determination of arm’s length price under Chapter X of the Act. This view was categorically repelled by the Coordinate Bench by observing as below:

“52.... In any case, if at all, ALP was to be determined then it should have been strictly circumscribed to the reimbursement of the cost aggregating to Rs.33,60,15,501/-. Further, the transaction of reimbursement of expenditure of Rs.33,60,15,501/- cannot be expanded to the entire expenditure of AMP of Rs.202.34 crores. The reason being, the amount of Rs.202.34 crores have been incurred by the assessee on its own volition and business requirement to be in competition with other big players in the field of aerated and non-aerated beverages and food products. It is acclaimed fact that industry in which assessee company is operating has to face stiff competition not only from the Indian companies but also from many multinational companies; and to remain in the competition as a lead brand it has to aggressively promote its product under the brand to remain in the competition and to augment its sale. All the necessary functions of strategizing, advertising and marketing activities, its implementation for market penetration in India is solely carried out by the assessee and there is no material on record to infer that there is any arrangement or agreement with the AE at any point of time that assessee is required to spent on AMP or it has been done at the behest of the AE. The reason adopted by the Revenue to conclude that the incurrence of AMP expenditure by the assessee for promoting the brands which is owned by its AE constituting a separate international transaction for the purpose of Section 92B which requires separate bench marking, does not has any legs to stand, because the Revenue has failed to show the existence of any agreement, understanding or arrangement between the assessee company and AE regarding the quantum of AMP spent or it was spent on behest of AE. The TPO has not recorded or identified any such separate arrangement or agreement that AMP expenses incurred by the assessee company are in pursuance of any agreement or arrangement. It is also not the case of the Department that the expenses which has been incurred by the assessee company during the course of its business have any bearing whatsoever on any other international transaction with the AE, other than reimbursement of expenditure of Rs.33.60 crores as discussed above.

53. Section 92B defines the international transaction in the following manner: - “(1) For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises.

From the plain reading of the aforesaid Section, it is quite clear that: (i) the transaction has to be between two or more associated enterprises either or both of whom are non-resident; (ii) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of services or lending or borrowing money;

(iii) or any other transaction having bearing on the profits, income, loss or assets of such enterprises; (iv) all such nature of transaction described in the section will also include mutual agreement and the arrangement between the parties for allocation or apportionment or any contribution to any cost or expenses incurred or to be incurred in connection with benefit, services and facility provided to any of such parties. Relevant Explanation to Section 92B as inserted by the Finance Act, 2012 reads as under: - “i. the expression "international transaction" shall include— .. (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature;

Clause (ii) of the said explanation reads as follows ii. The expression "intangible property" shall include— (a) marketing related intangible assets, such as, trademarks, trade names, brand names,logos;....”

Thus, under the expanded definition of the term ‘international transaction’ intangible property has been defined to include marketing related intangible assets such as trademark, trade name, brand name and logos, etc. This inter alia means that where two AEs engaged in the transaction which involved, purchase, sale, transfer, lease or use of intangibles rights then the same shall be classified as international transaction. From the above, definition, apart from transaction relating to purchase, sale or lease of tangible or intangible property, services lending or borrowing money, etc. functions having bearing on the profits, income, losses or assets is reckoned as international transaction. Besides this, if such a transaction is based on any mutual agreement or arrangement between the AEs for allocation or any contribution to any cost or expenditure incurred or to be incurred for the benefit, service or facility, then also such an agreement or arrangement is treated as international transaction.

Clause (v) of Section 92F reads as under: “92F (v). “transaction’ includes an arrangement, understanding or action in concert, - (A) Whether or not such arrangement, understanding or action is formal or in writing; or (B) Whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings.”

This definition of transaction has to be read in conjunction with the definition given in section 92B, which means that the transaction has to be first in the nature given in Section 92B (1); and then when such transaction includes any kind of arrangement, understanding or action in concert amongst the parties, whether in writing or formal, then too it is treated as international transaction. Here the conjoint reading of both the sections lead to an inference that in order to characterized as international transaction, it has to be demonstrated that transaction arose in pursuant to an arrangement, understanding or action in concert. Such an arrangement has to be between the two parties and not any unilateral action by one of the parties without any binding obligation on the other or without any mutual understanding or contract. If one of the party by its own volition is entering any expenditure for its own business purpose, then without there being any corresponding binding obligation on the other or any such kind of an arrangement actually existing in wring or oral or otherwise, it cannot be characterized as international transaction within the scope and definition of Section 92B (1).

Here, in this case, it has been vehemently argued from the side of the assessee that assessee-company had incurred expenditure on AMP to cater to the needs of the customers in the local market and such an expenditure was neither incurred at the instance or behest of overseas AE nor there was any mutual understanding or arrangement or allocation or contribution by the AE towards reimbursement of any part of AMP expenditure incurred by it for the purpose of its business. If no such understanding or arrangement exists, then no transaction or international transaction could be said to be involved between the AE and the assessee which can be reckoned to be covered within the provision of Transfer Pricing Regulation. The incurring of expenditure by the assessee is in fact purely a domestic transaction by a domestic enterprise with a third party in India for its own business purpose. Even the reimbursement, as discussed above, by the assessee to its AE was in lieu of sponsorship fee paid to ICC which again was wholly and exclusively for the assessee’s own business and was not at the behest or mandate of AE. This contention of the learned counsel on the face of record is liable to be accepted and in absence of any material or any kind of arrangement discovered or brought on record by the Revenue, remains unrebutted.

The onus is on the Revenue to show that the twin requirement of Section 92B exists, that is, firstly, the transaction involved was between the AE, one of which is resident and other a non-resident was involved; and secondly, the transaction of AMP expenses has taken place between the two AEs (except for reimbursement of Rs.33.60 crore). Now it has been well settled by the Hon'ble Jurisdictional High Court in the case of Maruti Suzuki India Pvt. Ltd. (supra) that onus is upon the Revenue to demonstrate that there existed an arrangement between the assessee and its AE under which assessee was obliged to incur excess amount of AMP expenses to promote the brands owned by the AE.

The relevant observation and the finding of the Hon'ble High Court in paragraph 60 reads as under:

“60.Even if the resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL is “any other transaction having a bearing” on its “profits, income or losses” for a ‘transaction’ there has to be two parties. Therefore, for the purposes of the ‘means’ part of clause (b) and the ‘includes’ part of clause (c,) the revenue has to show that there exists an ‘agreement’ or ‘arrangement’ or ‘understanding’ between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand SMC....

61......Even if the word ‘transaction’ to include ‘arrangement’, ‘understanding’ or ‘action in concert’, ‘whether formal or in writing’, it still incumbent on the revenue to show the existence of an ‘understanding’ or an ‘arrangement’ or ‘action in concert’ between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the ‘means’ part and the ‘includes’ part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC.” Same proposition has been upheld by the Hon'ble Jurisdictional High Court in the case of Whirlpool of India Ltd. vs. DCIT, Bausch & Lomb Eyecare India Pvt. Ltd. vs. ACIT (supra) and Honda Siel Power Products Ltd. vs. DCIT (supra)”

43. In the present case we find that the Revenue has not been able to place any material to record to show or suggest that the Appellant’s AMP activity was carried out at the behest of its AE, beyond what was approved and reimbursed under the MDF Agreement. No understanding or arrangement or “action in concert” can be inferred from the terms of the MDF agreement or the conduct of the assessee to show that “excessive” AMP expenditure has been incurred at the behest of the brand-owning AE. The appellant being one of the major players in the Indian market has carried out its AMP activity and function based on its own judgement and commercial realities. Revenue has not placed any material or evidence to show that there existed an understanding to incur “excessive” AMP expenditure. The arrangement and understanding were limited to the amounts agreed to be paid as assistance under the MDF Agreement. The amounts incurred as AMP expenditure by the appellant under the MDF Agreement have already been received as reimbursement/assistance and have indisputably been disclosed as an international transaction in Form 3CEB and form part of the transfer pricing study conducted under Rule 10D. The AMP expenditure which is outside the ambit of reimbursement received under the MDF Agreement, has been incurred by the appellant on its own volition as per its own requirements and without any interference of the AE and have been paid to third parties.

44. In view of the above, we hold that the scope and value of international transaction cannot be expanded beyond the reimbursements received under MDF agreement to cover the entire gamut of AMP expenditure incurred by the assessee during the year.”

18. So, in view of what has been discussed above, we are of the considered view that merely by applying the BLT method which has no legal existence and merely on the basis of MDF agreement vide which taxpayer has received part reimbursement of the AMP expenses incurred by it duly disclosed this expenditure in Form 3CEB and in TP study, so called excessive AMP expenditure of the taxpayer cannot be treated as international transactions u/s 92B of the Act. So, we cannot infer the existence of international transactions qua AMP expenses between taxpayer and AE beyond the reimbursement already made by the AE under MDF Agreement.

19. Coordinate Bench of the Tribunal has also examined the issue if the concept of brand promotion is being for the benefit of AE and found it not applicable in case of licensed manufacturer such as the taxpayer by returning following findings :-

“50. In view of the above, we hold that in case of licensed manufacturers like the appellant who bear the full risks and rewards of manufacturing and selling their goods in the Indian market, the concept of brand promotion being for the benefit of the AE has no application at all. As regards brand building expenses incurred by a distributor who does not own the brand, the same needs to be examined from a long-term perspective whereby the ability of the distributor to recover the advertising costs by way of increased sales for a reasonable period of time is to be judged. Once a distributor arrangement in place for a fairly long period of time (as in the present situation where the assessee is the distributor of “Samsung” products in India), expenses on advertising cannot be subjected to a stand-alone analysis as a “service” to its AE on a year to year basis. This question of compensating an Indian distributor would arise only if the parties prematurely terminate the distributor arrangement. In such an event, if the Indian distributor has been deprived of the opportunity of recovering its investment in AMP, it could be a valid reason for a transfer pricing adjustment because third parties would not agree to a premature termination of this kind without demanding compensation. Therefore, the question of compensating the taxpayer for any loss suffered due to excess AMP spend would arise only at the time of such premature termination and not during the pendency of the distributorship arrangement. Thus, in case of a routine distributor, disallowance/adjustment on account of AMP spend on the mere assumption that the supplier may terminate the agreement in the future is not sustainable. A taxpayer cannot be penalized on the presumption of a future event (which may not even occur) while ignoring the present facts and circumstances. It is also worthwhile to note that in the present case, the assessee has not paid any trade-mark or brand royalty to its AE for having used its brand.”

20. Coordinate Bench of the Tribunal also held that the concept of protective adjustment has no place in the law and as such cannot be applied by returning following findings :-

“It is settled law that protective addition along with substantive addition of an item of income can be made only when the identity of the real owner of the income is unclear. The following observations made by the coordinate bench in MSD Pharmaceuticals Pvt. Ltd. (supra) make this amply clear:

“The very concept of protective addition is relevant only when an income is to be added in the hands of more than one taxpayer, in a situation in which there is an element of ambiguity as to in whose hands the said income can be rightly brought to tax. That's not the case before us. In our humble understanding, therefore, the concept of 'protective assessment', as is known to the income tax law, has no application in the cases like the one before us.”

52. The last issue before us is:

If AMP expenditure incurred by the Appellant is held to be an international transaction, can it include selling costs within its ambit? Further, would the Appellant be eligible to receive a mark-up on the AMP expenditure to capture the arm’s return on the cost?

Since we have held that there is no international transaction in the nature of AMP expenditure which needs to be subjected to Chapter X analysis, these issues are rendered infructuous and academic.

53. Thus, in view of our finding given above we hold that, no adjustment can be made in the case of the appellant on account of AMP expenses and same is directed to be deleted.”

21. Ld. AR for the taxpayer challenging the intensity approach adopted by the ld. TPO relied upon the order passed by the coordinate Bench of the Tribunal in case of Casio India Co. Pvt. Ltd. vs. DCIT (2019) 107 taxmann.com 307 (Delhi-Trib) and Widex India (P.) Ltd. vs. ACIT (2019) 108 taxmann.com 125 (Chandigarh – Trib.).

22. Coordinate Bench of the Tribunal in case of Casio India Co. Pvt. Ltd. vs. DCIT (supra) also discarded the intensity approach in making adjustment on account of AMP expenditure by determining following findings :-

“28. Otherwise also, it would be very difficult to determine the impact of increase intensity of advertisement function on profit margin, the impact of advertisement on sale cannot be determined or quantified in a particular year, and therefore, even if AMP expenditure is to be compared with other comparables by applying any method, it would be very difficult to make reasonably accurate adjustment to the profit margins of the comparables companies. Thus, it would be very difficult to treat AMP as separate international transaction and any attempt to benchmark such a presume transaction in any manner would be a very difficult exercise.”

23. Coordinate Bench of the Tribunal in case of Widex India (P.) Ltd. vs. ACIT (2019) (supra) discarded the intensity approach as a method on the same line as a Bright line Test by returning following findings :-

“18.2 ....When we consider how "Intensity approach" as a method which has been carved out by the DRP which we have referred to in the earlier part of this order while adverting to the objections posed by the taxpayer, we find ourselves in agreement to the objections posed and we have no hesitation in holding that what applies to bright line test fully applies to the Intensity approach as worked out in the facts of the present case as it is a reverse of bright line test as its mirror image. The said mental acrobatics and athletics do not have any judicial sanction and cannot be approved.”

24. Ld. TPO by adopting the intensity approach qua trading segment and network segment proceeded to make alternative benchmarking as a substantive adjustment. In AY 2012-13, similar adjustment was made by the ld. TPO by adopting the intensity approach which was held not to be sustainable by the coordinate Bench of the Tribunal in ITA No.6813/Del/2017 for AY 2012-13 order dated 07.01.2020 in taxpayer’s own case by following the order passed by the coordinate Bench of the Tribunal in taxpayer’s own case in earlier years.

25. So, in view of what has been discussed above and by following the aforesaid order passed by the coordinate Bench of the Tribunal, we are of the considered view that scope and value of the international transactions cannot be extended to the so-called excessive expenditure incurred by the taxpayer on account of non- routine AMP beyond the reimbursement already received by the taxpayer under MDF agreement and as such, adjustment made by the TPO on account of AMP expenses is not sustainable in the eyes of law, hence ordered to be deleted.

GROUND NO.21

26. Ground No.21 is not pressed, hence needs no adjudication.

GROUNDS NO.21 TO 25 EXCLUSION AND INCLUSION OF COMPARABLES SOUGHT FOR BY THE TAXPAYER

27. In case of trading segment, the taxpayer in its TP study chosen 19 comparables by applying Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) and computed the margin of comparables at 10.61% as against margin of the taxpayer at 14.98% and found its international transactions qua trading segment at arm’s length. However, ld. TPO in its TP analysis rejected 14 comparables out of the 19 comparables and introduced 3 new comparables with OP/OR as the PLI and computed the margin at 5.10% of the comparables. Ld. TPO also recomputed the comparables margin of taxpayer at (-) 5.57% as against margin given by the taxpayer during assessment proceedings of (-) 2.66%. Ld. TPO also denied the working capital and risk adjustment to the taxpayer and thereby made Upward adjustment of Rs.775,43,37,415/- in the trading segment.

28. Ld. TPO granted proportionate adjustment of 74.14%, however denied the working capital and risk adjustment under Rule 10B(1)(e) for the purpose of determining the ALP to account for difference in working capital employed and risk undertaken by the applicant vis-à-vis comparable company.

29. Ld. DRP however partly allowed the objections raised by the taxpayer by including two comparables chosen by the taxpayer, namely, Redington India Ltd. and Ingram Micro India Ltd.. Ld.DRP excluded three comparables, namely, Celcom Impex Pvt. Ltd., United Telelinks (Bangalore) Pvt. Ltd. and Micromax Informatics Pvt. Ltd. and resultantly, from the final set of 7 comparables, the OP/OR of the comparable was reduced to 2.78%.

30. So, after DRP order, final list of comparables used for determining the ALP of the trading segment under TNMM is as under :-

Company Name OP/OR Priya Ltd. 2.75%

Ingram Micro India Pvt. Ltd. 2.68%

Iris Computers Ltd. 2.95%

Sataytej Commercial Co. Ltd. 6.28%

Optiemus Infracom Ltd. 3.73%

Redington India 3.66%

OTS E-Solutions Pvt. Ltd. 4.52%

Average 3.79%

31. At this stage, since there is no dispute in the method applied by the ld. TPO/ DRP, the ld. AR for the taxpayer compressed the controversy by seeking exclusion of two comparables, namely, OTS E-Solutions Private Ltd. & Sataytej Commercial Co. Ltd. and inclusion of Spice Mobility Limited. We would discuss suitability of aforesaid comparables for the purpose of benchmarking the international transactions qua trading segment one by one.

EXCLUSION OF COMPARABLES SOUGHT FOR BY THE TAXPAYER OTS E-SOLUTIONS PRIVATE LTD. (OTSE)

32. The taxpayer sought exclusion of OTS E-Solutions Private Ltd. (OTSE) on ground of functional dissimilarity vis-à-vis the taxpayer and relied upon the financial statement of OTSE for AY 2014-15, available at pages 426 to 495 of the paper book. Perusal of the disclosure of change in accounting policies and changes in estimates explanatory (Test Block) Note 22-Significant Accounting Policies show under the head ‘Corporation Information/ Overview’ that “OTSE is engaged in online marketing of goods”. OTSE is engaged in trading of electronics through its website “www.gagdetsguru.com” and other corporate clients and in the current year, it has also started selling goods through Amazon and Snapdeal.com. On the other hand, the taxpayer is a sole selling agent of Samsung brands in India.

33. Ld. DR for the Revenue drew our attention towards page 73 and contended that TPO did not have an opportunity to discuss the business profile of OTSE and as such, this comparable be remanded back to TPO to examine afresh. We are of the considered view that since ld. TPO was having benefit of the annual report referred to in the discussion made at page 73 and has retained this comparable by merely referring to profit & loss statement, no purpose would be served by remitting the issue back to the TPO. Moreover, ld. DRP was also having an opportunity to examine the factual position as to the functional dissimilarity between the OTSE vis-à-vis the taxpayer.

34. So, keeping in view the fact that OTSE is a routine distributor/supply chain shows that the functions performed, risk assumed and expected reward is not comparable to the taxpayer. The taxpayer is also performing critical functions such as quality control and post sale/warranty support as a routine distributor whereas OTSE being an aggregator provides a platform for sale of electronic products of multiple brands and as such having a different business model vis-à-vis taxpayer having routine buy-sell model. So, in these circumstances, we are of the considered view that OTSE is not a suitable comparable vis-à-vis the taxpayer hence ordered to be excluded.

SATAYTEJ COMMERCIAL CO. LTD. (SATAYTEJ)

35. This is taxpayer’s comparable. The taxpayer sought exclusion of Sataytej as a comparable on ground of different business profile as well as on the ground that the TPO has resorted to cherry picking by using Sataytej and at the same time, rejected other comparables, namely, ADS Diagnostics Ltd., Advanced Micronic Devices Ltd. and Frontline Electro Medical Ltd. on the same reasoning that these comparables are engaged in sale of medical equipments. No doubt, this is taxpayer’s own comparable but since there is no estoppel against statute and any claim wrongly made can be withdrawn at any stage and as such, contentions raised by the ld. DR that the taxpayer cannot be allowed to reprobate and approbate qua this comparable is not sustainable.

36. Perusal of pages 66 & 67 of the annual report for FY 2013-14 goes to prove that Sataytej is into the sale of surgical and medical equipment which is not comparable to taxpayer. Even otherwise, when the taxpayer has himself rejected other 3 comparables on the ground that those comparables are engaged in sale of medical equipments which is not comparable to the business of the taxpayer, he is required to adopt the principle of consistency. However, since it is a factual issue the same must be reexamined by the TPO. So, this comparable is remitted back to the TPO to examine afresh after providing an opportunity of being heard to the taxpayer.

INCLUSION OF COMPARBALE SOUGHT FOR BY THE TAXPAYER SPICE MOBILITY LTD. (SPICE)

37. The taxpayer sought inclusion of Spice to benchmark the international transactions qua trading segment on the ground that the coordinate Bench of the Tribunal vide its order dated 04.10.2019 for AYs 2005-06 to 2011-12 directed to include this comparable in the final set of comparables if quarterly results are available and information can be extrapolated.

38. Ld. TPO / DRP have rejected this comparable on the ground that it fails different financial year ended filter. We are of the considered view that no comparable can be rejected merely on the ground that its financial year is different particularly when result can be extrapolated using quarterly results. This position of law has not been disputed by the ld. DR for the Revenue. So, in these circumstances, this comparable is also remitted back to the ld. TPO to decide afresh by proving an opportunity of being heard to the taxpayer and shall provide necessary data to extrapolate the results by using quarterly results.

INCORRECT MARGIN COMPUTATION BY THE TAXPAYER OF THE COMPARBALES

39. The taxpayer challenged the margin computed by the ld. TPO of the taxpayer as well as comparables being incorrect. It is the case of the taxpayer that OP/OR of the taxpayer is (-) 2.66% whereas ld. TPO computed at (-) 5.57% by treating other income as non-operating and also used in operating cost without any basis.

40. The ld. TPO has allocated the direct cost to compute the margin which cannot be. The taxpayer has given comparative analysis as per taxpayer and ld. TPO which is extracted for ready perusal as under :-

Margin computation of Appellant (Trading Segment) Particulars As per Assessee As per TP Order Income

Net Sales 98,054,150,814 98,054,150,814

Other Income 388,895,918 Non-Operating Operating Income (A) 98,443,046,732 98,05,41,50,814 Expenditure

Detailed Computation not shared

Raw Materials, Spares Consumed and Cost of Goods Sold

86,906,341,287

Personnel Expenses 1,952,658,059

Logistic Expenses 578,603,705

Advertising, Marketing & Promotion Expenses (Net) 5,717,454,983

After Sales Service Expenses (Net)

2,452,913,942

IT Consultancy Charges 294,004,504

Rent & Insurance 319,292,339

Depreciation 88,601,947

Provision for doubtful advances 252,163,674

Miscellaneous Expenses 2,331,706,283

Loss/(Gain) on Exchange Fluctuation (net) 92,686,326

Provision for doubtful debts 72,958,332

Total Expenditure 101,059,385,383

Operating Cost (B) 101,059,385,383 103,512,299,323

Operating Profit A-B) (2,616,338,651) (5,458,148,509) OP/OR -2.66% -5.57%

41. Since this is a factual aspect and taxpayer’s computation stated to be consistent throughout in the earlier years and accepted by the ld. TPO, the issue is remitted back to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer.

TAXPAYER SOUGHT WORKING CAPITAL ADJUSTMENT

42. Ld. TPO denied the working capital adjustment sought by the taxpayer on the ground that, “since the working capital indices such as ‘Debtors’, ‘Creditors’ and ‘Inventory’ cannot be obtained for each of the Appellant’s segment, working capital adjustment cannot be computed.”

43. However, ld. DRP allowed the working capital adjustment to the taxpayer but TPO at the time of giving effect to the ld. DRP order has failed to grant the working capital adjustment. The taxpayer has already given the detailed working capital calculation before the TPO as well as DRP, as is evident form pages 840 to 858 of the paper book, during the TP as well as DRP proceedings. Working capital adjustment was also granted to the taxpayer consistently from AYs 2005-06 to 2011-12. So, in these circumstances, TPO is directed to grant the working capital adjustment to the taxpayer after due verification.

INCORRECT COMPUTATION OF PROPORTIONATE ADJUSTMENT BY THE TPO FOR TRADING SEGMENT

44. The taxpayer challenged the adjustment made to the proportion of international transactions with AE made by the ld. TPO incorrectly without providing any calculation as to how the proportion was made. The taxpayer given comparable analysis as under :-

International Transaction Amount (in INR)

Total Value of International Transactions as per Form 3CEB

A 72,924,168,988

Total Operating Income (as per TP Report)

B 98,443,046,732

Total Operating Expenditure (as per TP Report)

C 101,059,385,383

Sum of Total Operating Income & Total Operating Expenditure

D=B+C 199,502,432,115

Total value of International Transaction as a percentage of sum of Total Operating Income & Total Operating Expenditure

E=A/D% 36.55%

Corresponding proportion considered by TPO

74.13%

45. Since this is a factual issue not controverted by the ld. DR for the Revenue the issue is remitted back to the TPO to make correct computation of proportionate adjustment of international transactions of the taxpayer with its AE after providing an opportunity of being heard to the taxpayer.

GROUNDS NO.26 TO 28

46. AO disallowed salary expenditure of Rs.167,75,31,950/- paid to the expatriate employee of SEC, Korea u/s 37(1) of the Act. This issue has already been decided in favour of the taxpayer by the coordinate Bench of the Tribunal in case of taxpayer’s parent company, SEC, Korea, in ITA No.65 to 70/Del/2013 for AYs 2004-05 to 2009-10, ITA No.315/Del/2016 for AY 2011-12 and ITA Nos.4705 & 4706/Del/2017 for AYs 2012-13 & 2014-15, copy of order is available at pages 226 to 2465 of the case Law Compilation.

47. However, ld. DRP passed a conditional order that in case appeal against the order passed by the Tribunal has not been filed before the Hon’ble High Court, AO has to delete the disallowance. Undisputedly, order passed by the Tribunal in AYs 2005-06 to 2011-12 (supra) has been challenged before the Hon’ble High Court. But we are of the considered view that mere pendency of the appeal before the Hon’ble High Court unless operation of the impugned order has not been stayed is not a ground for the AO to decline the relief to the taxpayer.

48. Ld. DR for the Revenue supported the order of the AO by contending that since there is no termination clause in the employment contract of the expatriate employee, the same has been rightly disallowed. However, we are of the considered view that since DRP after examining the issue has directed the AO to delete the disallowance but subject to a condition that Tribunal’s order is not challenged before the Hon’ble High Court, the contentions raised by the ld. DR for the Revenue is not sustainable.

49. Ld. AR for the taxpayer contended that expatriate employee was engaged on the basis of local employment contract and placed on record their employment letters, available at pages 865 to 872 of the paper book. Perusal of the employment letters show that the taxpayer is the employer of expatriate employees engaged for carrying out the day-to-day business efficiently and that they were governed by the conditions of the employment. Moreover, salary to the expatriate employees have been paid in India after deducting tax u/s 192 of the Act. Moreover, when SEC, Korea /AE is having no Permanent Establishment in India the expatriate employees were working under the control of taxpayer to carry out its business.

50. However, this issue is covered in case of taxpayer’s parent company, SEC, Korea, vide order dated 22.03.2018 reported in (2018) 64 ITR (T) 99 (Delhi-Trib). In these circumstances, disallowance made by the AO and accepted by the ld. CIT (A) is ordered to be deleted.

GROUNDS NO.29 & 30

51. Grounds No.29 & 30 being consequential in nature need no specific findings.

52. Resultantly, the appeal of the taxpayer is allowed for statistical purposes.

Order pronounced in open court on this 31st day of August, 2020.

Sd/- sd/-

(N.K. BILLAIYA) (KULDIP SINGH)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated the 31st day of August, 2020