TMI Blog2013 (9) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration of the market conditions and the terms of the contract entered into in the Importation Agreement by the assessee with the AE, it necessarily leads us to the conclusion that the assessee has performed the function 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 - assessee has performed greater intensity of service than a normal distributor and has incurred expenditure for advertising marketing and promoting the brand of its AE. Whether on account of rendering of non-routine service was the assessee entitled to receive compensation with a mark-up from its AE - Held that:- in the facts of the present case there was no occasion for the AE to further compensate the assessee for the services rendered towards building the brand of the AE as the same already stood factored in the pricing adjustment of the contract goods. As such the occasion to consider the applicability of mark-up does not arise. - Decided partly in favour of assessee. - I.T.A .No.-5354/Del/2012 - - - Dated:- 16-8-2013 - SMT. DIVA SINGH AND SHRI B.C.MEENA, JJ. For t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the overseas AEs, was purely incidental. 5. The LD. DRP and consequently the Ld. AO (following the directions of the Ld. DRP) erred on facts and in law in disregarding that the appellant s international transactions are demonstrated to be at arm s length after application of Resale Price Method ( RPM ) and corroborated by Transactional Net Margin Method ( TNMM ) as the most appropriate method and also the fact that premium profits earned by the appellant had actually more than compensated the appellant for the extra functions, if any, represented by the allegedly excessive AMP spends, incurred by it. 6. The Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP) erred on facts and in law in selecting inappropriate comparable set for the computation of the alleged excessive AMP spend based on bright line limit application of which in itself is inappropriate, being based in erroneous or inappropriate reasoning. 2. The assessee in the year under consideration declared an income of Rs.83,80,71,485/- by way of E-filing its return which was subsequently revised on 15.12.2009 at an income of Rs.99,89,99,667/-. 2.1. A perusal of the record shows that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l support service 29,449,506 CUP 7. Receipt of IT support services 2,739,917 CUP 8. Market survey expenses 11,711,690 CUP 9. Reimbursement of personal cost 17,252,074 CUP 10. Reimbursement of expenses 12,270,724 CUP 11. Interest of loan 12,9773,291 CUP 2.5. Referring to the Transfer Pricing Study of the assessee, the TPO observed that the assessee described its activities as that of a distributor. The TPO referred to the Importation Agreement between the parent company BMW AG and the assesse and observed that the same had been entered into w.e.f 01.01.2006 and it stated that the assessee had the following duties in regard to marketing and promotion of the products of the parent company: 2.2. Responsibility in the Contract Territory BMW India represents the interest of BMW AG in the Contract Territory. It is responsible for the sale promotion and the full utilization of the market potential for the Contract Goods in the Contract Territory. It is further responsible for ensuring the provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rand promotion activities which resulted in creating marketing intangibles for its AE as admittedly the brand ownership vested with the AE. 2.8. Advertising, Marketing and Promotion (hereinafter referred to as the AMP ), the explanation of the assessee that the Amp expenses calculation included expenditure like after sales support costs etc. which needed to be corrected; that IPH (International Power House) is the organizational unit of BMW and as such it is responsible for marketing and development consequently the assessee had no role to develop campaigns etc; that the five year trend calculation of AMP expenses/sales showed that there was a decline in the percentage; that the bright line test had no application in the face of high profit margin shown in RPM/TNMM; that the comparables should be those who had similar intensity of functions; that there was no international transaction in incurring AMP expenditures were all not agreed to by the TPO who was of the view that judicial mandate was that form should prevail over substance ; and that the fact remains that by incurring the expenditure over and above the bright line the assessee has incurred expenses which were nonrout ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reliance paced on Nestle India Ltd. Vs DCIT (111 TTJ 53) by the assessee was held to be not relevant as it was not in the context of transfer pricing for determining the ALP of the AMP expenditure. The argument of the assessee that high margins earned by the assessee when compared to its comparables was also considered to be not relevant as margins were considered to be dependent on many factors like economics of scale, low over heads and such other factors like low end assembly etc. 2.9.1. The TPO considering the five comparables of the assessee excluded Concorde Automobiles Ltd. and TV Sundaram Iyengar Sons Ltd. Concorde was excluded as it was found that being fully owned by Tata Motors promoted Tata brand, it was not an uncontrolled comparable and TV Sundaram Iyengar Sons was also excluded as it was a tainted comparable as it owned TV Sundaram and Lucas brand. The average AMP sales ratio of the remaining three companies which worked out to 0.52% accordingly was taken as the bright line and accepting the expenditure of Rs.4,30,91,936/- as routine expenditure considered the amount of Rs.54,48,86,304/- out of total AMP expenses of Rs.58,79,782,410/- as expenditure exceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works out to 1.99%. 2.9.3. Accordingly, the TPO proposed the addition of Rs.48,65,29,022/- in the following manner:- 10.8. Determination of arm s length price of receipt of subsidy : The computation of arm s length price of the international transaction of receipt of special purpose subsidy is done as under :- Particulars Formula Amount in Rs. Total Revenue of the assessee A 8,286,910,876 Arm s length % of AMP Expenditure B 1.99% Arm s length AMP expenditure C=(A*B) 164,909,526 Expenditure incurred by the assessee on AMP D 587,978,241 Expenditure incurred for developing the intangibles E=D-C 423,068,715 Add Markup @ 15% F 63,460,307 Arm s length return for AMP expenditure G=E+F 486,529,022 Reimbursement received from the AE H NIL Amount by which income is to be enhanced I=G-H 486,529,022 3. Aggrieved by this the assessee moved the Dispute Resolution Panel (hereinafter referred to as the DRP ). The DRP concurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a licensed manufacturer and the assessee in the present case being a distributor , the Ld. AR sought permission to be allowed to withdraw as an intervener. It was stated by Sh. Rahul K. Mitra referring to the affidavit filed by him dated 14.02.2013 that the permission was granted and consequently the name of the assessee does not appear in the list of interveners before the Special Bench. It was stated that no separate order in writing was passed. Accordingly it was his submission that the order of the Special Bench proceeds entirely on different facts would not have any applicability to the assessee s case as the facts are entirely distinguishable, since the assesse predominantly is a distributor of automobiles with insignificant or low value added assembly functions. It was elaborated that when the Special Bench made it clear that it would not lay down any principle addressing the facts of a distributor accordingly a written request was made praying that the assessee may be permitted to withdraw as an intervener from the Special Bench. It was submitted that the said request was made in writing before the Special Bench (copy attached) supported by an affidavit asserting thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see was not an intervener in the proceedings before the Special Bench in the case of L.G. Electronics as its name does not find a mention in the list of interveners and the affidavit dated 14.02.2013 of the Ld. AR Sh. Rahul Mitra addresses the background as to how after seeking permission to be impleaded as an intervener, the permission to withdraw was moved. Accordingly, we hold that the assessee is not precluded from advancing arguments on facts and law which were either not addressed before the Special Bench by the intervener/parties nor considered consequently by the Special Bench. Having thus held, we clarify that it does not necessarily follow that the ruling of the Special Bench would not apply to the assessee wherever facts and law so demand. As such, the departmental stand that the said ruling is binding has to be upheld with the caveat to the extent facts and law support it. 5.2. The next preliminary issue which we need to address is the petition for admission of additional ground moved on behalf of the assessee. On the first date of hearing i.e 18.02.2013, Ld. AR invited attention to the petition dated 09.11.2011. Relying on the judgement of the Apex Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. It was his submission that it would be his endeavour to address the facts of the present case as opposed to facts of the case considered by the Special Bench where the Special Bench was considering the facts of a licensed manufacturer. It was his submission that the FAR analysis of the assessee i.e the functions performed, the assets employed and risks assumed by a distributor would be very different from the FAR analysis of a licensed manufacturer, where the assessee assumes higher risk as it also functions as an entrepreneur qua his manufacturing activity. Addressing the facts on record, it was submitted that the FAR analysis of the assessee describes the assessee as a normal risk distributor and the year under consideration it was submitted was the first full-fledged year of operation which fact it was submitted is borne out from page 2 of the DRP s order itself where the profile of the assessee is discussed. 5.3.2. Referring to the same, it was submitted that the BMW India was mainly engaged in the import and resale of completely built units ( CBU ) of the 6-Series, 7-Series, X3, X5 models of cars from the BMW Group for resale in the Indian market. In addition to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excessive AMP spend and has also over and above this held that the assessee has rendered services to its overseas BMW Group by incurring additional expenses and as such applied a mark-up of 15% on the incremental AMP spend vis - vis the comparables. It was his submission that the TP adjustment incorporated in the draft assessment order u/s 144C(i) on challenge by the assessee was upheld by the DRP. It was submitted that the DRP upheld the TPO s approach in holding that the assessee has incurred extraordinary AMP expenses for the promotion and development of BMW brand and also upheld that the assessee has contributed in creation of the marketing intangibles in India apart from that the other arguments on facts and law addressed by the objections of the assessee were also not accepted by the DRP except the direction to exclude certain items from the AMP calculation. The final assessment order, it was submitted though makes a reference to the directions of the DRP however does not give effort to the DRP s directions as TPO incorporates all the TP adjustments proposed originally and the AO was bound by the TPO s order passed pursuant to the directions of the DRP. 5.3.5. Addressing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision be considered a reasoned finding. The said stand by the DRP according to the Ld. AR ignores the fact that the OECD Transfer Pricing Guidelines itself supports such adjustments. 5.3.6. It was re-iterated that the assessee had empirically demonstrated that additional remuneration has already been recovered by the assessee through premium profits both at gross level as well as net level as such there was no occasion to hold that compensation was still due to the assessee from the AE. It was submitted that before the TPO and the DRP also the assessee had addressed these arguments. Ld. AR elaborated that for evaluating whether any TP adjustment was necessitated at all reliance had been placed on OECD Transfer Pricing Guidelines and Australian Tax Office Guidelines on Marketing Intangibles. For ready reference, we reproduce from pages 4-6 of the synopsis filed on behalf of the assessee:- International guidance on the subject 1.19 In order to evaluate whether the facts and circumstances of the Appellant would necessitate a TP adjustment on account of purported excessive AMP spend for creation of local marketing intangibles, the Appellant would pray for refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty that is not the registered or legal owner of trademarks and related intangibles to obtain the benefits of marketing activities that increase the value of those intangibles will depend principally on the substance of rights of that party. 1.24 The Discussion Draft also provides illustrative examples which demonstrate how a marketer/ distributor which is bearing the costs and risks of its marketing activities would be compensated under arm's length conditions. In one of the examples7 (please refer pages 174 to 175 of Compendium), it is explained that if a distributor is incurring marketing expenditure substantially in excess of the levels of independent distributors in comparable situation, and at the same time is not earning sufficient profits as compared to third parties, it should get an additional remuneration either (a) by reducing the import price, or (b) by applying a residual profit split method, or (c) by getting a direct reimbursement of the excess expenditure from the owner of the intangible. 1.25 This, in the humble observation of the Appellant, is an extremely important determination for evaluating the issue of excessive AMP spend in relation to local mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclude an appropriate profit element." Based on the above, it can be concluded that a marketer/ distributor undertaking excessive marketing activities on behalf of the owner of the brand can be remunerated either by way of a reduction in the purchase price or by way of a separate remuneration. The facts and circumstances of the Appellant's case are identical to the first remuneration methodology as enumerated by the ATO Guidelines. In the present case the Ld. TPO IDRP himself has accepted the benchmarking undertaken by the Appellant following RPM/TNMM whereby the facts clearly demonstrate that the Appellant has been already remunerated by BMW Group for the alleged "excessive" AMP spend by way of a higher gross margin as well as net margin vis-a-vis the comparable companies. 5.3.7. It was emphasized that the assessee is a normal risk taking distributor as opposed to a low risk distributor who would perform only routine distribution functions at the behest of the parent and whose inventory and debtor risks consequently would not be significant and they would necessarily be remunerated though an assured/guaranteed return on overall operating costs. Normally a low distributor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bution of goods is terminated by the parent, the Appellant would not have any rights over the brand promoted by it over a period of years. On the other hand, the parent would enjoy the fruits of the efforts put in by the Appellant for promoting the brand. 1.38 It is pertinent to note here that the Importation Agreement between the Appellant and BMW AG (please refer pages 239 to 243 of Paperbook) provides the Appellant the right to import and distribute BMW CBUs and CKDs and original BMW parts and accessories in India (clause 1.1). BMW India is responsible for the sales promotion and full utilization of the market potential for the said goods for which it could perform necessary function for establishment of an efficient distribution network and performance of adequate advertisement and sales promotion activities (clause 2.2). Further, clause 5.1 states that the agreement shall enter into force from 1st January 2006 and shall remain in force until terminated by other party after giving due written notice. 1.39 It is clearly mandated in international guidance such as the OECD TP guidelines and the UN TP Manual10 that if no written term exists the contractual relationships of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on record:- 1.42 As mentioned above, BMW India operates as a Normal Risk Distributor, remunerated through gross returns on sales. Further, without admitting but even if one assumes for the sake of discussion, that BMW India performs higher functions as compared to the comparable companies, it derives its additional returns through premium profits it earns at both gross as well as net level. The level of profits earned by BMW India during AY 2008-09, vis-a-vis that of com parables selected by the Ld. TPO in the TPO Order, as shown in the table below: Particulars BMW India TPO Order Comparables' Arm's Length Result GP/Sales 27.36% 13.65% OP/Sales 13.52% 2.11% 1.43 As discussed above, since at both gross as well as net level BMW India has earned much higher than the arm's length return, this amply evidences that even if it has spent excessively (as alleged by the Ld. TPO) on brand promotion, it is more than adequately compensated by higher return in India, and BMW India does not have any motives to shift profit outside Indian and that the international related party transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicate the assessee s position. We reproduce from the synopsis filed on behalf of the assessee:- 1.50 Even assuming but not admitting that the Appellant is undertaking all the entrepreneurial functions relating to the marketing and advertising function, then the point to note is that the GP/Sales and OP/Sales margin of 27.36% and 13.52% earned by the Appellant respectively, is significantly higher than the margins earned by the comparables selected by the Ld. TPO himself, i.e. 13.71% and 11.41 % at the gross and net level respectively. The following example vindicates our point: (Figures in Rs. crores) Particulars GP Sales OP Sales Margin earned by the Appellant (A) 27.36% 13.52% Arm's Length Margin using AY 2008-09 data (B) 13.65% 2.11% Excess Profit earned by the Appellant (C = A- B) [in %] 13.71% 11.41% Sales of the Appellant in crores (D) 936.68 936.68 Excess profit earned by the Appellant (E = D*C) [in Actuals] 128.42 106.85 Excess AMP Expense of the Appellant as alleged by the Ld. TPO 12 (F) 42.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er detail in the following section: Incorrect reliance on international and Indian cases 5.3.10. The decisions relied upon by the DRP it was submitted have no applicability. Whereas the judgement of the Hon ble High Court in Maruti Suzuki s case, it was submitted was on entirely different set of facts and the Hon ble Supreme Court has negated the judgment; the international decision relied upon in the case of Glaxosmithkline Holding (Americas) V Commissioner, T.C. No. 6959-05, it was submitted was an out of court settlement and no decision was publicly pronounced as such reliance on the same has no purpose. The decision in the case of DHL Corporation, it was stated was not correctly applied. The basis of inapplicability of the said decision as addressed in the Synopsis filed is extracted from the synopsisitself :- 1.57 Furthermore, the Ld. DRP placed reliance on the case of DHL Incorporated. In DHL's case, DHL Corporation ('DHL'), US had entered into a long term agreement with Document Handling Limited, International ('DHLI'), Hong Kong, the group entity responsible for DHL operations outside US. As per the agreement, DHL had exclusive right to use and sublic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble by way of advertisement and marketing spends; and (iii) in accordance with the arm's length principle, BMW India has earned and is expected to earn a suitable return for its marketing activities, over a period of time given the long term nature of the licensing agreement. 1.60 To summarize, where the licensing agreement is exclusive and long term and healthy margins are being earned by the licensee (as in case of BMW India), marketing and advertisement expenditure should be considered to be perfectly legitimate and in conformity with the arm's length principle. Advertising. Marketing and Promotional ('AMP') spend incurred by the Appellant 1.61 The AMP expenditure was incurred by BMW India for its own benefit (in the form of increased sales and profits), and therefore borne by it. Benefit, if any, arising to the overseas AEs is nothing more than indirect / incidental. 1.62 As already mentioned above, AY 2008-09 is only the second year (and first full year) of operations accordingly the AMP spend was imperative due to the initial phase of operations. Since then, the trend has declined over the years. Also keeping the initial phase of operations, the AMP expenditure may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are solely for its own business, the Ld. TPO's action of considering it as a service provided and seeking to recover the same as a "reimbursement" along with a mark-up is erroneous and not in line with the basic TP principles. 5.3.12. Addressing the facts of the case, it was submitted that in the comparables taken the assessee has placed a fresh search before the TPO which has been accepted based on the similar intensity functions. Relying on the comparables accepted by the TPO in para 10.5 of the TPO s order reproduced hereunder:- Name of the company Database GP/Sales OP/Sales A M/Sales VAE/Sales Pebco Motors Ltd. P 6.62% -3.84% 1.20% 10.46% Popular Vehicles Services Ltd. P 11.72% 1.16% 4.10% 10.56% Shree Sancheti Motors Pvt. Ltd. P 12.15% 0.95% 1.61% 11.20% Machino Techno Sales Ltd. P 12.69% 1.07% 4.42% 11.62% Eastman Industries Ltd. P 16.22% 3.80% 1.25% 12.42% Bharat Power Corpn. Pvt. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd marketing expenses of these companies are not controlled transactions. Therefore, in order to have a true and fair benchmark of the industry average advertising and marketing expenses, the ratios of these companies have to be necessarily taken into account. 3.8. A trend of the AMP spend of the following companies operating in Indian passenger car market would therefore be more appropriate to be compared with BMW India s AMP spend as depicted in the table below:- Name of the company FY 2005-06 FY 2006-07 FY2007-08 FY 2008-09 FY 2009-10 General Motors India Pvt. Ltd. 5.28% 6.53% 7.09% 6.41% 3.92% Honda Siel Cars India Ltd. 0.95% 1.07% 1.73% 2.30% 2.11% Hyundai Motor India Ltd. 2.79% 3.54% 3.48% 4.19% 4.98% Maruti Suzuki India Ltd. 1.65% 2.08% 1.88% 1.90% 1.52% Mean 2.67% 3.31% 3.54% 3.70% 3.13% BMW India 2.69% 3.9. From the above, it is evident that the AMP spend of BMW India vis- - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the DRP and the order of the TPO contended that on facts ALP adjustment has correctly been made barring the relief which may be due consequent to the directions of the DRP not implemented by the TPO which principle on facts has been upheld by L.G. Electronics case. Accordingly it was the vehement stand of the Ld. CIT DR that the issue is covered in favour of the Revenue by virtue of the order of the L.G. Electronics case rendered by the Special Bench. It was his stand that the principles laid down therein are fully applicable to the AMP expenses as such the argument that it would apply only to the facts of a licensed manufacturer it was submitted cannot be accepted and is strongly opposed. 5.4.1. Referring to the said order it was submitted that no doubt the said order does not reflect the name of the assessee as an intervener but the fact remains the Larger Bench has considered while adjudicating various parameters which can be examined while considering the AMP expenses and one of those is subsidy given to meet the specific AMP expenses or price adjustments etc but these facts it was his submission the assessee has to demonstrate. It was also vehemently submitted that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the duration of the agreement would show that the assessee s position is very tenuous as merely by a notice of six months or so, the Agreement can be terminated and the benefits of the brand building would be available to the AE at no cost wherein the assessee does not receive any compensation thus eroding the tax base of the country. The fact remains it was urged that the assessee has incurred high AMP expenses as compared to its comparables and these have contributed to building brand recognition and marketing intangibles for the AE as the ownership admittedly of the brand vests with the AE as such placing heavy reliance on the order of the TPO and DRP which have had an occasion to consider the various arguments of the assessee and which have been approved by the Special Bench, the said orders, it was submitted deserve to be upheld. 5.4.8. IN all fairness it was submitted that incurring of expenditure not related to the AMP expense in regard to which directions have been given by the DRP and the Special bench also has held that such expenses are not relatable to the AMP expenditure and are part of sales expenditure of the assessee they may be excluded, however i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functions primarily to make profits. Infact the record would show it was submitted that in order to use the brand name of the AE, the assessee is paying no royalty and is utilizing the same in order to sell the product of the AE. The efforts of the assessee, it was submitted have been assisted by the AE by creating favourable pricing policies so that the assessee earns a comfortable profit as such it was submitted the Revenue s argument that over and above earning premium profits the assessee should be compensated with a mark-up is against the accepted international tax Jurisprudence. It was his vehement argument that Transfer Pricing is not a subject of legal interpretation and it necessarily requires on the other hand consideration of keeping the nature of business and the FAR analysis in mind. For ready-reference we reproduce para 7 from the synopsis submitted after the case was fixed for clarification on 26.04.2013 addressing the assessee s stand:- 7. TP is not a subject of legal interpretation where a particular section would be interpreted and applied uniformly, irrespective of whether the taxpayer belongs to pharmaceutical industry or to FMCG industry or to automoti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent from those of LG India, for example, BMW India, which is predominantly a distributor and the principles of TP applicable in its case being entirely different to those applicable to a licensed manufacturer, like LG India, a fact even admitted the Special Bench during the course of the hearing, as encapsulated both in letter filed by BMW dated 6 th November 2012while withdrawing its application for intervention for the proceedings before the Special Bench and also in the affidavit sworn in by the authorised representative as above. 9. As represented during course of the oral arguments and also in the written submission filed earlier, there is no denying the fact that BMW India is predominantly a distributor of cars manufactured and supplied by BMW AG, for distribution and marketing in India. The act of distribution is akin to a service performed by the distributor in favour of the principal manufacturer of products. Distributors only function is to provide a supply chain service to the manufacturer; and in the process performs necessary marketing and selling functions. The entire gamut of marketing and selling functions is an integral and non-detachable part of the distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bane in the case of LG India before the Special Bench and a factor to be looked down with distain and apathy in the context of classical and cardinal principles of TP, which was also endorsed by the ruling highlighted by the Ld. DR in the case of Knorr Bremse (supra). 11. It has been submitted earlier that the issue of marketing intangibles/ bright-line in the context of the level of AMP spent needs to be properly addressed by applying international best practices, as there are no codified guidelines embodied in the Indian Income-tax Act, 1961orIncome-taxRules,1962inthis regard. It has been explained before the Hon'ble Tribunal, by referring to the OECD draft guidelines on intangibles office (refer page 174 and 175 of the Compendium) and also by the guidelines of the Australian Tax office (refer page 200 of the Compendium) if the taxpayer distributor carries out significantly higher functions in the context of AMP, as compared to comparable distributors, then the taxpayer distributor would admittedly deserve higher remuneration from its foreign principle as compared to comparable distributors in the market. The said higher remuneration can be imputed by either of the following me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istribution functions, as explained earlier. 16. In case the additional gross margin earned by BMW India was less than the incremental AMP spent of BMW India as compared to the comparable distributors, then a question of making a TP adjustment either with reference to lowering the import price of the goods and thereby giving the extra gross margin to BMW India or receiving a reimbursement of such incremental AMP expenses would have arisen, in line with both the OECD guidelines and ATO Guidelines. However, when such incremental AMP expenses was already built in the commensurately higher gross margin of BMW India as compared to the comparable distributors, there was no question of separately documenting any discount or adjustment to the import price of the vehicles, as alleged to the contrary by the Ld. DR. 5.5.3. The arguments of the Ld. CIT DR that the Guidelines of the OECD and ATO are not binding on the Tribunal it was submitted is not disputed but it may be pointed out that the DRP has itself liberally made references to the OECD Guidelines. It was also submitted that where there are no suitable aids or guidelines in the Indian Act or jurisprudence then there is a long stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occasion to make transfer pricing adjustments would have arisen. However when such incremental AMP expenses were already built in the commensurately higher gross margin of BMW India as compared to the comparable distributors it was submitted there was no question of separately documenting any discount or adjustment to the import price of the vehicle. The BMW India s gross margin it was emphasized was 12.67% (i.e 27.26%-13.65%) and net margin was 11.41% (i.e 13.52% -2.11%) higher than those of the comparables. It was his submission that in the facts of the present case, the adjustments proposed deserve to be deleted. 6. Having decided the preliminary issues in regard to the admission of additional ground and also holding that the assessee was not an intervener before the Special Bench as evident from the order of the L.G. Electronics, we now proceed to address the grounds raised by the assessee on the basis of the arguments advanced before the Bench on four different dates. 6.1. Both the Ld. AR, Sh. Rahul Kumar Mitra and the Ld. CIT DR Sh. Peeyush Jain have very patiently but very vehemently advanced various arguments in support of their respective claims and positions. Ld. AR, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w which constitutes ratio decidendi that is binding on the same set of facts. The Acts of Parliament on the other hand on account of the careful drafting-presumably with reference to analogous statutes; the multiple readings to which it is subjected in the legislature and the discussions which go behind the making of a statute inject a degree of sanctity and defiteness to the meaning of the words used by the Legislature. The same cannot necessarily be always said of a decision which deals with a certain given set of facts for answering the specific question posed to the Judges. The Judges while deciding the same may dwell on various possibilities without the benefit of the facts in those cases on which they may deliberate and at times without the benefit of specific arguments on those facts as such observations made in passing in these deliberations do not form the ratio decidendi. As such it would be too much to ascribe and read precise meaning to words in a decision which the judges who wrote them may not have had in mind. We may refer to CWT vs Dr. Karan Singh and Others. (1993) 200 ITR 614 (SC); CIT vs K. Ramakrishnan (1993) 202 ITR 997 (Kerala) and KTMTM Adbul Kayoom another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case in which it is rendered and while applying the decision to a later case, it is necessary for the Courts to ascertain the true principle laid down by the Court. Similar would necessarily be the position considering the decision of a Co-ordinate Bench or the Special bench in which case the Special Bench being a larger Bench has greater precedent value in the context of the question posed to it. The transfer pricing litigation and adjudication being fact based necessarily requires consideration of the business model of the assessee and the contractual terms entered into with the AE along with a detailed FAR analysis so as to characterize the transactions and the business model and after charactering the taxpayer on the basis of FAR analysis, a selection of comparable companies has to made where functional similarity qua the transaction on the basis of the FAR analysis of the comparable companies is necessarily required to be done. In order to decide the applicability of any section, rule or principle underlying the decision or judgement which would be binding as a precedent in a case, an appraisal of facts of the case in which the decision has been rendered is necessary since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 6.9. On a consideration of the arguments and consideration of the material available on record, we are of the view that the orders and judgements of Coordinate Division Benches or Special Benches of the Tribunal consisting of 3 Members as in L.G.Electronics case or the Hon ble High Cour and Hon ble Apex Court specially in Transfer Pricing adjudication cannot necessarily always be taken as a binding precedent unless facts and circumstances are in pari material in a case cited before the Court as held in Ramesh Singh vs. State of A.P 2004 (2) Supreme 749. One may also refer to Rudrappa Ramoppa V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er book page no-239-243 between BMG AG (Bayerische Motoren Werke Aktiengesellschaft, Petuelring 130, 80788 Munchen, Germany) and BMW India Pvt. Ltd, DLF Cyber City Phase-II, Tower B, Building No.-8, Gurgaon, Haryana-122002. The opening preamble of the said agreement sets out the following facts :- (A) BMW India is a hundred percent subsidiary of BMW Group. (B) The Parties endeavor, through their co-operation in production, distribution and maintenance of Contract Goods products, to satisfy in every way the expectations of the customers. (C) The objective is to ensure that the global standards of product quality and awareness of, or satisfaction or service to customers in India of BMW cars are achieved at par with the global standards in India; (D) BMW AG is willing to provide such contract goods to BMW India in return for payment of appropriate consideration by BMW India; and (E) The parties have agreed to the terms and conditions hereinafter contained and are desirous of recording the same as set out hereinafter. (highlighted for emphasis by the Bench) 6.10.1. Clause 1 of the said Importation Agreement addresses the following aspect Importation Distribution R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urces toward effective sales promotion and advertising for the Contract Goods including available optional equipment and accessories. 3.2. Inventory BMW India will maintain an inventory of Contract Goods that is adequate in view of its business volume. 3.3. Pricing The price charged for the Contract Goods is adequate to ensure recovery of total costs of the Contract Goods supplied plus representative profits. BMW AG, in order to arrive at the price of Contract Goods supplied to BMW India, adds to the cost of manufacture (CBU and CKD kits) or procurement (parts/accessories) as the case may be certain costs, including but not limited to:- - indirect cost (which includes costs like administrative, marketing and other overhead costs) of the Contract Goods; and - profit computed as percentage of the total costs, which is representative of BMW AG s overall profit attributable to the Contract Goods. BMW AG will inform BMW India of all price changes beforehand in writing and will provide BMW India with a sufficient number of price lists. 3.4. Supply of Original BMW Parts BMW India will maintain and offer to customers a supply of original BMW parts, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms to the contrary in the Agreement. As the interests of the AE cannot be easily ignored by them as such we are of the view that assertions in addressing their independence of decision may be required to be looked into if the situation so warrants. As such the sanctity which generally operates in favour of the terms of the agreement can be called upon to be explained in transfer pricing as such may be open to question. However in order to adjudicate the issue in the present proceedings the facts of the present case to our minds, do not warrant such an examination and it would not be of much relevance as without looking into the independable of the directors it is seen that as per the Importation Agreement itself assessee has agreed to perform greater intensity of functions to carry out sales promotion and achieve optimum utilization of the market potential in the luxury automobile segment to which it belongs as such service to the AE is accepted in the Agreement itself. This acceptance on the part of the assessee to perform the functions as a distributor is further elaborated in Clause 3 of the Importation Agreement. A perusal of the same shows that the assessee assumes the respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ern Europe and America, the growing markets are identified as China and India. In India due to the change in the policy and vision of the Government from 1970 s to 1984 and change of the role of the Government from a regulator to an enabler as per the TP study resulting in restructuring of the tariff structure, changes in the import policy, FDI and reducing the Quantitative Restrictions on imports etc. which have all contributed to creating the ground realities where major International players have entered in the Indian market contributing to the movement of market expectations from compact car segment to luxury car segment. The domestic market is stated to have the presence of almost all the global players represented in India as a consequence of improved infrastructure and policies as a result of which the market is described as competitive and consequently driven by price and technology which necessitates greater efforts in capturing the market share. The TP study also addresses the fact that whereas in the past, the choice of a customer was limited to a few options today it is stated that there are about 150 models and variants available by way of customer option. The purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. With the success of SUVs, the line of distinction between passenger cars and MUVs in the Indian market is getting blurred. 6.17. The assessee in the TP study has addressed that the key drivers of the Indian passenger car industry are changing technology necessitated by rising fuel costs, rising per capita income, the change in government policy in regard to import duty, excise duty and modern practices like vendor tiering, adoption of JIT (Just in Time technique) which has helped in reducing inventory carrying costs, creation of Special Economic Zones, tax holdings/incentives like sales tax relaxation, providing land at subsidized rates and liberalized FII norms and spending on infrastructure in roads, airports etc. are stated to be some of the reasons which have driven automobile industry in the country. 6.18. The rising incomes have been stated to be the cause of reducing the average holding period of a car from 7-8 years to 3-4 years in India, projecting that model may be frequently upgraded either to another model from the same or a higher segment and thus being the possible cause of increasing trend of a need for a second car stated to be on the rise in urban areas. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the rewards are guaranteed but low as compared to the distributor who undertakes to perform higher functions and undertakes to establish distributorship network, advertise, promote and market the brand the remuneration/compensation/rewards of distributorship herein is also guaranteed however they ought to exceed the rewards vis- -vis a low end distributor. Relying upon contemporaneous Guidelines/jurisprudence, it has been canvassed that for a distributor the rewards are inbuilt in the pricing itself and can also be directly compensated and international tax jurisprudence best practices contemplate that profit split method can also be resorted to in order to work out the compensation due apart from the other two methods. On consideration, we find merit in the argument and as such convinced that generally the remuneration model of a manufacturer or a licensed manufacturer can be the results of acting as an entrepreneur in its own capacity and exposing itself to all the risks and rewards which an entrepreneur is exposed to the argument appears to have merit, however for the purposes of the present proceedings, we need not examine the correctness of the same as what is relevant fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver the fact remains that it was not only a transaction but an international transaction which benefited the foreign AE and in terms of the bright-line test considered by the Special Bench was an expenditure which cannot be called to be a routine expenditure for which remuneration has to be considered. The claim advanced on behalf of the assesse which is to be examined is that has the remuneration already been factored in the pricing which as per the Importation Agreement ensures that after the costs of the assessee are met the assessee is left with representative profits which are much more than those of a routine distributor as such no further remuneration is necessary or is compensation still to be received from the AE. For examining this contention, we need to go back again to the Importation Agreement of the assessee with its AE and the facts on record. 6.22. A perusal of the Importation Agreement shows that as per Clause 3, the price charged for the contract goods is stated to be adequate to ensure recovery of total costs of the contract goods supplied plus representative profits . The argument on behalf of the assessee has been that the function performed by a distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.06% Mean 13.65% 2.11% 1.99% 6.23. It is seen that the use of bright-line as a tool for calculating the non-routine AMP spend has been upheld by the L.G. Electronics decision and even if the assessee was not an intervener before the Special Bench, the said principle is binding and as opposed to applying arbitrary estimation is a well accepted methodology in Transfer pricing and is an accepted tool for calculating non-routine expenditure for marketing intangibles where the brand ownership rests with the foreign AE. The said tool is accepted in both developing and developed countries alike in international tax jurisprudence and the applicability of the same has already been upheld in the present proceedings. The arguments that OECD Guidelines as international tax best practices and jurisprudence have no role to play shall be dealt with separately subsequently however the fact remains that international jurisprudence or for that matter OECD Guidelines are and have been frequently resorted to either by the department or by the assessee in order to canvass their respective stands and wherever it is found that in the abs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.20.93 crore (constituting after sales support costs and salesman bonus respectively)= Rs.3.93 crore odd]. These assertions are found made in para 1.47 of the synopsis filed in February 2013 and despite fixing the case for clarification and hearing the parties at length and almost requiring an addressal on facts de novo the calculations and statements have not been refuted by the department. Accordingly reverting back to para 1.47 of the Synopsis the resultant figure of Rs.33.93 crore odd amounts to 3.62% of the turnover. Thus the excess AMP spend ratio of the assessee would be 3.62% as opposed to 7.09 calculated by the TPO once the directions of the DRP are given effect to. It is seen that 1.99% is considered as the bright-line calculated by the TPO, the excess AMP/sales ratio after arithmetic corrections are carried out would be 1.63% i.e (3.62%- 1.99%=1.63%). The claim as per the Synopsis dated 18.02.2013 states that putting the things in the perspective would show that the assessee has got as compared to its comparables 13.71% higher gross margin (27.36%-13.65%) and 11.41% higher net margin (13.52%-2.11%) as compared to 5.10% (7.09%-1.99%) excess AMP if figures without car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll-recognized and well-accepted method for compensating a distributor. In support of the said methodology of compensation, reliance on behalf of the assessee has been placed on the OECD Guidelines (copy of the discussion draft on TP aspects of Intangibles issued by OECD Chapter V1 placed at pages 131-192 of the paper book and Australian Tax Guidelines (copy of the Australian Tax Officer ATO ) Guidelines on Marketing Intangibles placed at pages 193-203 of the paper book title Compendium of Statutory and Judicial Rulings Guidelines ). Addressing the examples illustrating the position in the OECD Guidelines, Ld. AR has canvassed that a distributor can be remunerated for the services/functions performed either by adjusting the pricing or by compensating the entity directly for excess marketing advertisement expenditure or by applying residual profit split method. In the facts of the assessee s case the adjustment has been based on the pricing so as to ensure adequate representative profits earned after meeting the cost of the goods sold. Similar view has been taken by the Australian Guidelines which has also been relied upon by the Ld. AR. Specific attention was invited to example 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Importation Agreement, the assessee for its functions performed beyond the routine functions as calculated by applying the bright-line test has been compensated by the AE by making pricing adjustments so as to ensure that the assessee is left with representative profits after meeting it costs. The fact that assessee s profits vis- -vis the comparables with similar intensity functions far exceeds the mean margin of the comparable stands established. The contemporaneous international jurisprudence supports this and even the Special Bench leaves the issue open by accepting its limitations while giving voice to the diverse nature of facts, business models and peculiar terms and conditions of different assessee by observing that there cannot be any straight-jacket formula. 6.28. Accordingly after a detailed analysis of the relevant provisions of the Act, the FAR analysis of the assessee, the terms of the Importation Agreement entered into by the assessee with its AE, the orders and judgements relied upon and considered by us in order to decide the issues and weigh the merits and relevance of the comprehensive arguments made at length by both the sides juxta posed with the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gone into in the present proceeding. Since compensation has been received, the worries and apprehension of the Revenue that assessee has rendered services for brand building reducing its domestic profit eroding the tax base does not arise as the tax base has not been eroded. 6.30. It may also not be out of place to mention here that a perusal of the decision of the Special Bench in the case of LG Electronics shows that while considering the specific facts of the assessee therein who admittedly was a license manufacturer, the Special Bench after referring to the vast ranges of possible arrangements which the AE in different business models may enter in para 17.3 attempts to formulate some of the relevant questions whose answers have a considerable bearing on the determination of the issue. Reference may specifically be made to Question No-1 which gives recognition to the fact that it is important to determine whether the Indian AE is a distributor or is holding a manufacturing license from its foreign AE. Similarly Question No-12 whether the year under consideration is the entry level of the foreign AE in India or is it a case of established brand in India. Admittedly this is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Courts and Tribunals in different tax jurisdictions as they definitely have a persuasive value. Similarly the OECD/ Australian Tax Office/UN Model Guideline definitely have a persuasive value and a decision rendered ignoring the same to our minds would be denying the concerned Authority with the benefit of contemporaneous and relevant literature on the constantly evolving issues. There is no brilliance in trying to re-invent the wheel, intelligence lies in utilizing the benefits of search and research which are already available and to proceed therefrom. The benefits of knowledge on evolving issues which has been internationally debated and discussed by academicians experts and various stake-holders is not to be ignored with contempt and should not be treated lightly and discarded without considering. Accordingly we hold that OECD TP Guidelines/ATO Guidelines and International Tax Jurisprudence to the extent, they do not run foul of the Indian Income Tax Act and Rules thereunder have a very important role to play and if one can say that they should be disregarded then such a decision may suffer from deliberate ignorance which could have been ideally avoided. The selective stand ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
