TMI Blog2019 (2) TMI 1643X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ITAT itself in Sony Ericsson [ 2015 (9) TMI 483 - ITAT DELHI] and in view of the further circumstance that the remit was pending for 3 years, the revenue s arguments have no force. AMP exercise as flawed - this court again feels that the analysis carried out by the ITAT, having regard to the details pertaining to the comparable entities, is fairly exhaustive and reasonable; the findings are in Paras 39-49 of the impugned order. The ITAT s findings, consequently that since the brand under which the assessee s products were marketed were relatively unknown in India, the advertisement expenditure could not have been said to inure to the benefit of the AE, which was otherwise a well known brand overseas - the nature of its marketing and business expenditure was considered. The revenue s grouse that the TPO had treated the AMP expenditure as a bundled one, is not also tenable. Sony Ericsson itself indicates that there cannot be a dogmatic approach as to whether bundled transactions of the kind ought to be segregated and that the entire issue is a fact dependent exercise. TPO treated the transactions as a bundled one; this court holds that as such that is not a question o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t s decision dated 16.03.2015 had set aside the matter of AMP to the ITAT to be decided on the principles outlined in the said order of the Court. As the matter of TP adjustment was pending before the ITAT, therefore, an order dated 30.03.2016 was passed under Section 254/143(3) read with Section 144C. Now, ITAT by order dated 26.07.2018 allowed the assessee s appeal with respect to Transfer Pricing adjustment which was remitted by this court to it on the AMP issue. 4. The Revenue questions the ITAT s impugned order as erroneous, submitting that the order of the Ld. ITAT is not acceptable because the impugned order seriously erred in holding that the TPO had accepted the comparables (adopted by the assessee) as bundled transaction and therefore, it would be illogical and improper to treat the AMP expenses as separate international transactions. It is urged, besides, by Mr.Ashok Manchanda, that the ITAT erred in not appreciating that the TPO had not accepted the assessee's adoption of TNMM as the most appropriate method. On the contrary, the TPO had used only the comparables selected by the assessee for determining the excessive AMP spent as compared to that of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction relating to the expenditure incurred on AMP and receipt of compensation/reimbursement has not been discharged. The AO proceeded to benchmark the impugned international transaction. 8. The TPO determined the ratio of AMP/sales at 7.06 per cent and compared the same by adopting Bright Line Test in the case of comparables, which, according to the TPO was at 1.08 per cent. Comparing the ratio of AMP/sales in the case of the assessee with Bright Line the TPO found that the assessee has incurred excess expenditure of ₹ 98.02 crores. The TPO was of the strong belief that such excess of Bright Line limit should have been compensated by the AE and since the assessee has not been compensated by its AE, the TPO proposed to determine the ALP of the impugned international transaction at ₹ 98,02,37,631. Further, the TPO held that independent entities would not incur expenditure for promoting the trade names owned by some third party and, therefore, would have been remunerated for such efforts. A mark-up of 15 per cent on cost incurred by the independent party would be reasonable and applying the same, the TPO computed the adjustment at ₹ 1,12,72,73,275. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to eliminate the effect of such differences on the price or margin. Thus, identification of the potential comparables is the key to the TP analysis. As a sequitur, it follows that the choice of the most appropriate method would be dependent upon availability of potential comparable keeping in mind the comparability analysis including befitting adjustments which may be required. As the degree of the comparability increases, extent of potential differences which would render the analysis inaccurate necessarily decreases. (iv) The assessee, i.e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis should be appropriated and reliable so as to include the AMP functions and costs. (v) Where the AO/TPO accepts the comparables adopted by the assessee, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne Test' has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate 'routine' and 'non-routine' AMP or brand building exercise by applying 'Bright Line Test' of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be 'NIL', or at best would mean the amount or compensation expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to treat the segregated transactional value as 'NIL' when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to the aggregate package. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we would disagree with the majority decision in L.G. Electronics India (P) Ltd. (supra). This would be necessary when the ALP of the controlled transaction cannot be adequately or reliably determined without segmentation of AMP expenses. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd entrepreneurial risks. 20. The AEs undertake complex R D operations relating to the products. They are responsible for ensuring that the products are technologically in line with the market requirements and trends. The AEs are responsible for manufacturing the products that are sold across the globe. They are responsible for quality control, production scheduling, vendor development, inventory management, supply chain management, packaging etc. We further find that the AEs own brand rights of all the products and are responsible for core marketing and pricing decisions of the products. The AEs are also responsible for undertaking global sales and distribution function. The AEs shall also provide marketing and product related information to the assessee like brochures, technical information material, etc. to enable the assessee to perform its functions in an efficient manner. 21. We find that the functions performed by the assessee are as follows : (i) local marketing of mobile phones; (ii) distribution of mobile phones/technology products; and (iii) provision of repair and maintenance services. 22. These functions can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price level development in the market, and operating cost changes in SEIN. Therefore, based on the price level development in the market, if at the year-end SEIN is not able to achieve arm's length return with respect to its distribution activity, then as per the transfer pricing model receives credit notes from its AEs to achieve an arm's length return on sales. Based on the above model followed by SEIN, it is able to achieve an arm's length margin after considering all total operating cost. 26. Based on the above guidance and facts as enunciated above, it is evident that the compensation model of the assessee is structured in such a manner that the reimbursement of any excess third party expenses is already in-built in the TP adjustment compensation received by SEIN which allows it to consistently earn an operating margin which is higher than the comparables. Provision of post-sales support services 27. Prior to SEIN starting its operations in India, the AEs were selling mobile phones directly into India and for rendering warranty support services, they had engaged third party providers. In its initial period of operations, SEIN ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sony Ericsson products. 32. Having considered the respective functions of the AE and the assessee-company, we find that insofar as comparables are considered, there is no quarrel. There is no dispute that TNMM is the most appropriate method and the assessee's net margin is at 2.5 per cent whereas the mean margin of comparable companies is at 0.4 per cent. As mentioned elsewhere, during the course of assessment proceedings, the assessee has undertaken a fresh search for comparables indentifying a set of 19 comparable with average margin of 0.48 per cent. In addition, the assessee has also furnished a margin of 12 comparables identified by the TPO for BLT computation where average margin works out to minus 0.35 per cent. 33. From the above, it can be safely concluded that the assessee earned margin of 2.5 per cent after considering AMP expenditure which is much higher than the average margin of comparables. Moreover, as mentioned elsewhere, AE has assured that the assessee-company earns net margin of at least 2 per cent on its sales and remunerates it for any shortfall in margins by way of credit notes. During the year, the assesseecompany has received tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcess of the normal routine expenses and should have been compensated by the AE. As mentioned elsewhere, the assessee has spent advertisement expenses at ₹ 66,05,56,778 business promotion and selling expenses at ₹ 49,66,58,381 totalling to ₹ 1,15,72,15,159. 36. We do not find any force in the findings of the lower authorities that the abovesaid expenditure on AMP has been incurred exclusively to promote the brand/trade name 'Sony Ericsson' and such expenditure has resulted into brand building and increased awareness of the products bearing brand/trade name 'Sony Ericsson' and also that such expenditure incurred by the assessee-company is for the advantage of its AE. 37. Brand means unique design, sign, symbol, words, or a combination of these, employed in creating an image that identifies a product and differentiates it from its competitors. Over the time, this image becomes associated with a level of credibility, quality, and satisfaction in the consumer's mind. Thus, brands help harried consumers in crowded and complex marketplace, by standing for certain benefits and value. 38. As mentioned e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er needs and their satisfaction. Marketing differs from selling because selling concerns itself with the tricks and techniques of getting people to exchange their cash for your product. It is not concerned with the values that the exchange is all about. And it does not, as marketing invariably does, view the entire business process as consisting of a tightly integrated effort to discover, create, arouse and satisfy customer needs. In other words, marketing has less to do with getting customers to pay for your product as it does developing a demand for that product and fulfilling the customer's needs. 42. In the light of the aforesaid definition, the assessee has employed a team of employees for carrying out local marketing of mobile phones in India. Global recognition of the brand name Sony Ericsson provides support to the assessee-company in its marketing effort. The assessee has also undertaken various product promotion activities, such as, conducting road shows, participating in industry events, advertisement in all forms of media channels, etc. 43. Advertisement means a means of communication with the users of a product or service. Advertisements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adjusted with alleged excessive AMP expenditure thereby providing benefit of set off. This view finds support from the judgment of the Hon'ble High Court of Delhi in its findings at cl. xii at p. 140 in Tax Appeal Nos. 16 of 2014 at paras 136 to 146. 49. But this will only be considered when the AO/TPO has rejected the comparables adopted by the assessee as a bundled transaction. In the case in hand, and as mentioned elsewhere, the AO/TPO has accepted the comparables adopted by the assessee as bundled transaction and, therefore, it would be illogical and improper to treat the AMP expenses as separate international transaction as mentioned by the Hon'ble High Court in its list of findings at cl. (v) at p. 138 of its order. 50. To sum up, considering the guidelines/findings of the Hon'ble High Court of Delhi (supra) and considering the facts of the case in hand from all possible angles, we are of the considered view that the assessee-company has been suitably compensated by its AEs and, therefore, no further adjustment is required. We order accordingly. 51. Before closing, the dispute that AMP expenses are not international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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