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2015 (5) TMI 307 - ITAT DELHI

2015 (5) TMI 307 - ITAT DELHI - TMI - Transfer Pricing Adjustment on AMP Expenses - Whether the Income Tax Appellate Tribunal was right in distinguishing and directing that selling expenses in the nature of trade/volume discounts, rebates and commission paid to retailers/dealers etc. cannot be included in the AMP Expenses? - Whether the additions suggested by the Transfer Pricing Officer on account of Advertising/Marketing and Promotion Expenses (‘AMP Expenses’ for short) was beyond jurisdiction .....

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Electronics India Pvt Ltd. [2013 (6) TMI 217 - ITAT DELHI] accepted and applied by the Tribunal is erroneous and unacceptable - For reasons set out above, we have passed an order of remand to the Tribunal to examine and ascertain facts and apply the ratio enunciated in this decision. For the purpose of clarity, we would like to enlist our findings:-

In case of a distributor and marketing AE, the first step in transfer pricing is to ascertain and conduct detailed functional analysis, w .....

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evant characteristics of the two transactions being compared must be sufficiently comparable. The assessed, 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. Where the Assessing Officer/TP .....

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enses as an international transaction. The Assessing Officer/TPO can reject a method selected by the assessed for several reasons including want of reliability in the factual matrix or lack / non-availability of comparables. (see Section 92C(3) of the Act).When the Assessing Officer/TPO rejects the method adopted by the assessed, he is entitled to select the most appropriate method, and undertake comparability analysis. Selection of the method and comparables should be as per the command and dir .....

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ubstantial attribute of advertisement and sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. “Brand” has reference to a name, trademark or trade name and like ‘goodwill‘ is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts rele .....

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of L.G. Electronics India Pvt Ltd (supra) are not binding on the assessed or the Revenue. The ‘bright line 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 expe .....

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. To this extent, we would disagree with the majority decision in L.G. Electronics India Pvt. Ltd. (supra). This would be necessary when the arm‘s length price of the controlled transaction cannot be adequately or reliably determined without segmentation of AMP expenses.

The Assessing Officer/TPO for good and sufficient reasons can de-bundle interconnected transactions, i.e. segregate distribution, marketing or AMP transactions. This may be necessary when bundled transactions cannot b .....

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r/TPO can segregate AMP expenses as an independent international transaction, but only after elucidating grounds and reasons for not accepting the bunching adopted by the assessed, and examining and giving benefit of set off. Section 92(3) does not bar or prohibit set off.

CP Method is a recognised and accepted method under Indian transfer pricing regulation. It can be applied by the Assessing Officer/TPO in case AMP expenses are treated as a separate international transaction, provid .....

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d, cannot be again factored or included as a part of inter-connected international transaction and subjected to arm‘s length pricing.

Transfer pricing adjustment made on account of payment of royalty - Held that:- The finding of the Tribunal that the question of payment of Royalty cannot be determined on the basis of profitability or earnings was upheld as once it is accepted that knowhow was provided the same cannot be questioned. Suitable profits relatable it was not held to relevan .....

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be considered afresh at length by the TPO on the basis of agreements and facts and evidences on the record in the light of the direction of the Hon’ble High Court. It is unfortunate that none of these facts were addressed by the Revenue. Even the opportunity so provided after the inappropriate behaviour of a duly appoint standing counsel who obdurately abdicated his onerous responsibility was followed by ill prepared representation by the Revenue as addressed in para 7 above where the entire re .....

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of the expenditure extracted herein above from the DRP’s order that the said expenditure cannot be considered to be legal and professional charges and the argument that it is related to the business of the assessee appears to be correct as per the narrations extracted in the order. However the claim cannot be decided in terms of the narrations given by the assessee and since the primary vouchers in support of the narrations given are claimed to be available and infact were made available in the .....

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Singh, CIT DR ORDER Per Diva Singh, JUDICIAL MEMBER By the present appeal the assessee assails the correctness of the order passed by the Assessing Officer (hereinafter referred to as AO ) u/s 143(3) r.w.s 144C of the Income Tax Act, 1961 in 2010-11 Assessment year passed in pursuant to the direction of the DRP (hereinafter referred to as 'DRP') dated 18.12.2014 on the following grounds:- 1 . That the impugned order of assessment framed by the assessing officer in pursuance of the direc .....

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law in making transfer pricing adjustment amounting to ₹ 52,98,12,391 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. Transfer Pricing Adjustment on AMP Expenses: 2.1 That the DRP/TPO erred on facts and in law in not appreciating that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a 'transaction' in the absen .....

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nd the associated enterprise, the associated enterprise was under no obligation to reimburse the AMP expenses incurred by the appellant for sale of its products. 2.4 That the DRP/TPO erred on facts and in law in holding that AMP expenses incurred by the appellant resulted in promotion of brand owned by the associated enterprise, thereby creating marketing intangibles whose ultimate benefit inured to the associated enterprise. 2.5 That the DRP/TPO erred on facts and in law in holding that the app .....

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appellant, did not result in creation of any marketing intangibles; much less on account of the AE. 2.8 That the DRP erred on facts and in law in confirming the adjustment made by the TPO with regard to the AMP expenses holding that (i) no independent person, would forego the compensation for the additional marketing activities undertaken by the appellant. (ii) the AE needs to compensate the appellant as it had been found that the appellant had incurred excessive AMP expenses, and development a .....

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he assessing officer erred on facts and in law in not appreciating that the power of the TPO is restricted to the determination of arm's length price of international transactions by applying one of the prescribed method as the most appropriate method and not to make disallowance of business expenses incurred by the appellant. 2.12 That the assessing officer erred on facts and in law in not appreciating that in absence of specific provision under the Transfer Pricing Regulations in India, ad .....

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red on facts and in law in considering the following companies as comparable for benchmarking advertisement and publicity expenses: S.No. Name of the Company AMP/Sales(%) 1. Mayur Leather Products Ltd. 1.75 2. Sant Rubbers Limited 0.13 3. Phoenix International Ltd. 0.14 4. Sohum Shopee Ltd. 1.7 5. Super Shoes Ltd. 0.5 6. Ashapura Intimates Fashion Ltd. 4.9 7. Mayfair Leather Exports Pvt. Ltd. 0.77 8. Spenta International Ltd. 1.17 9. Subhash Polytex ltd. 3.29 10. Super Tannery ltd. 1.18 11. Supe .....

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otion expenses:- S.No. Company Name AMP/ Sales (%) 1. Amin International Ltd. 9.15% 2. Ashapura Intimates Fashion Ltd. 4.90% 3. Bodycare International Ltd. 5.71% 4. Cantabil Retail India Ltd. 25.40% 5. Celebrity Fashions Ltd. 6.61% 6. Cheviot International Ltd. 6.22% 7. Cotton County Retail Ltd. 15.01% 8. Detail Clothing Ltd. 9.45% 9. Dollar Industries Ltd. 19.70% 10. Euro Fashion Inners lntl, Pvt. Ltd. 20.50% 11. Huma Poly Plast Ltd. 7.40% 12. Indus-League Clothing Ltd. 8.50% 13. locee Exports .....

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Islands Apparels Ltd. 23.60% 29. Subhash Polytex Ltd. 3.29% 30. Super Tannery Ltd. 1.18% 31. Superfine Knitters Ltd. 3.25% 32. Suryakiran International Ltd. 5.96% 33. Veejay Lakshmi Textiles Ltd. 0.97% 34. Zodiac Clothinq Co. Ltd. 13.02% Average 9.37% 2.16. Without prejudice that the assessing officer erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm's length applying Transactional Net Margin Method (TNMM .....

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ing officer I ORP erred on facts and in law in holding that the appellant has rendered service to the AEs by incurring the AMP expense and by holding that markup has to be earned by the appellant in respect of the AMP expenses, alleged to have incurred for and on behalf of the AE. 2.20. That the DRP/TPO erred on facts and in law in applying a markup of 12.50% on the alleged excess AMP expenditure incurred by the appellant, while computing the value of compensation to be received by the appellant .....

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ional expenses on an ad-hoc basis, without providing any cogent reasons for doing so. 3.1 That the DRP erred on facts and in law in holding that the appellant had not provided any evidences for establishing that the expenses pertain to legal and professional charges. 4. That the assessing officer erred on facts and in law in levying interest under Section 2348 and Section 234C of the Act. The appellant craves leave to add, amend, alter or vary, any of the afore said grounds of appeal before or a .....

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e judicial notings of the said date. The query so raised qua his authority was raised as a result of his own pleadings that he does not have the authority to argue all appeals. Due to his leaving the Court, the Bench re-assembled and the hearings could resume only afterwards when CIT DR (Transfer Pricing), Mr. A. K. Singh was available. Consequently the Ld. AR was required to address the issues again qua the grounds raised. 3. On behalf of the assessee copy of the judgement of the Hon ble High C .....

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G. Electronics case and the Hon ble High Court in the aforesaid decision has not approved of the majority decision of the Special Bench and considering para 17.4 of the Special Bench and the findings of the Tribunal has deprecated the broad brush approach upheld by the Tribunal as unwarranted and amounting to judicial legislation. For the said purpose specific attention was invited to para 120 of the judgement of the Hon ble High Court. 3.1. Accordingly it was his prayer that since the Hon ble H .....

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urt. It was submitted that the said order has been considered by the DRP which stands restored by the Hon ble High Court as the majority decision of the Special Bench in the L. G. Electronics Case was held to be erroneous and unacceptable in terms of the discussion held in the judgement which had been summed up at pages 135-141 in paras 194-196 by their Lordships. 4. Addressing Ground No.3 it was his submission that the nature of expenses demonstrate that they were for the business purpose of th .....

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unsel as per the Court proceedings in the respective appeals and petitions in the cause list. On the said date the Court was forced to rise as the standing counsel for the Revenue left the Court thereby leaving the Revenue unrepresented. Subsequently the Court re-assembled in order to afford the Revenue to represent its case by some responsible person and as observed on the arrival of CIT DR (Transfer Pricing), Sh. Ajit Kumar Singh the Ld. AR was required to re-argue afresh for the benefit of th .....

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ue has not been looked into by the tax authorities from the perspective of the decision of the Hon ble High Court as the same was not available. Accordingly it was his stand that if the Revenue was of the view that the issue has to be decided by the ITAT he would argue on those lines. Thereupon the Ld. CIT DR in the circumstances on considering the specific and speaking observations of the Hon ble Delhi High Court stated that he has no objection if the facts are looked into by the AO/TPO, howeve .....

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be a German Athletic giant as Adidas AG had acquired Reebok for about 3.8 billion USD. Adidas Group is considered to be a global leader in the sportswear goods industry and is considered to have the broadest portfolio of products. The assessee company as per record is incorporated on 01.03.1995 as a joint venture between the Reebok Mauritius Ltd. and Focus Energy Ltd. (formerly known as Phoenix Overseas). The assessee is stated to be engaged in the business of distribution of footwear, apparel, .....

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resulting in the assessment being concluded at a total income of ₹ 72,76,13,240/-. 9. The assessee is in appeal against the said action on the afore-mentioned grounds. A perusal of the record shows that the assessee disclosed the following international transaction in the year under consideration:- 2.1. International Transactions Nature of transaction Method Selected Amount (In Rs.) Payment of royalty CUP/TNMM 261,930,480 Purchase of laptop CUP/TNMM 14,559 Purchase of office equipment CUP .....

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arm s length. Royalty has been benchmarked using CUP and royalty payment by Sierra Industrial Enterprises Ltd. of 5% to Nike International Ltd. for marketing and sale of Nike Brand athletic footwear, apparels, bags and accessories was taken as relevant CUP. The assessee has also compared this transaction to Reebok South Africa (Pty) Ltd. (RSA) royalty payment to Reebok UK (RUK) at 6% for transfer of Technical know-how. 9.1. The TPO considering the audited account of the assessee concluded that t .....

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nsidering the 3 comparables of the assessee the TPO rejected one of those and instead introduced 5 new comparables which were considered to be engaged in similar distribution and sales activities of similar products and thereby he arrived at the arithmetic mean of 0.85% and concluded that the assessee had incurred expenditure in excess of the bright line to the following extent:- Amount in INR Value of Gross Sales 7,78,15,09,376 AMP/Sales of the Comparables 0.85% Amount that represent bright lin .....

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,89,03,336 9.4. The assessee thereafter is found to have submitted a list of 34 comparables for benchmarking the AMP/sales as the average mean of 9.37%. Considering the same the TPO accepted 7 of these and ultimately arriving at a list of 16 comparables. As a result thereof the AMP sales percentage of the comparables was taken at 3.03% resulting in computing the expenditure in excess of the bright line at ₹ 60.27 crore odd. Applying a mark-up of 12.15% (SBI PLR) adjustment of ₹ 67,17 .....

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er had decided the issue in favour of the Revenue. The DRP further took of the fact that the ITAT vide its order dated 31.05.2014 in the case of the assessee in 2008-09 assessment year has held that it is an international transaction which needs to be bench-marked in line with the decision of the aforesaid Special Bench. 10.2. It is seen that the objection No.-1.2, 1.21 & 1.26 of the assessee was not accepted by the DRP. For the said conclusion reliance was placed upon the two decision of th .....

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RP who distinguished the same as a case of pure distributor as opposed to the assessee who was a manufacturer and a distributor. Further relying upon the decision of Special bench specific para 21.8 & 21.10, it is seen that these aforesaid objections of the assessee were not accepted. 10.3. It is further seen that Objection Nos.-1.9 & 1.10 were also dismissed primarily relying again upon the decision of the Special Bench in L. G. Electronics case in view of the findings therein on the cr .....

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missed relying upon the aforesaid decision of the Special Bench. Similar fate was met by objection No.1.15 where the without prejudice argument put forth by the assessee being an economic owner of the marketing intangibles was also not accepted as the concept following the view of the Special Bench. 10.6. Objection No.-1.22 addressing the issue of selling and distribution expenses following the decision of ITAT in assessee s own case in 2008-09 assessment year was restored back to the AO. The ob .....

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ms brand and brand building referring to the minority view of the decision of the Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra) and in para 105 of the said judgement have observed that there is a line of demarcation between development and exploitation . Holding that development of a trademark or goodwill is a slow ongoing process which takes place over a passage of time and also taking note of the fact that expenditure incurred for promoting products of the trade-mark wh .....

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be looked at afresh both by the taxpayer as well as the tax authority:- 106. Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. There are a good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also cases where i .....

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brand would depend upon how many customers you have, which has reference to brand goodwill, compared to a baseline of an unknown brand. It is in this manner that value of the brand or brand equity is calculated. Such calculations would be relevant when there is an attempt to sell or transfer the brand name. Reputed brands do not go in for advertisement with the intention to increase the brand value, but to increase the sales and thereby earn larger and greater profits. It is not the case of the .....

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have been held to own and have a reputation and intrinsic believability and acceptance which also results in higher price and margins contrary to the conclusions of the majority view in the decision of the Special Bench consequently both the tax authority and the tax payer will need to address the issues afresh. For ready-reference, we reproduce the same:- 111. Accepting the parameters of the bright line test and if the said parameters and tests are applied to Indian companies with reputed bran .....

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a) in paragraph 17.6 to bifurcate and segregate AMP expenses towards brand building and creation, the results would be startling and unacceptable. The same is the situation in case we apply the parameters and the bright line test in terms of paragraph 17.4 or as per the contention of the Revenue, i.e. AMP expenses incurred by a distributor who does not have any right in the intangible brand value and the product being marketed by him. This would be unrealistic and impracticable, if not delusive .....

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icially and in the commercial world. Well known and renowned brands had extensive goodwill and image, even before they became freely and readily available in India through the subsidiary AEs, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/ trade-mark/ trade-name would be relatively unknown. We have referred to the said position not to make a comparison between different brands but to highlight that these are releva .....

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ine test, the minority and the majority view in the context of para 17.4 and 17.6, and the stand of the Revenue; and the varied nuances of the brand and brand building in para 117 their Lordships found the argument of the Revenue as sceptical and conjectural. Their Lordships held that the Revenue has generalised and the argument adopts a universal and ubiquitous approach in the contention that increased turnover would not benefit the Indian AE. 11.3. Inviting attention to para 118 it was submitt .....

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cannot be combined as one package or a bundle and consequently the FAR analysis of the assessee as well as the comparables will necessarily be required to be done afresh. 11.5. Addressing para 119 it was submitted their Lordships considering the position of marketing and distribution companies have held that it cannot be said that brand building is taken as an independent activity as from the AMP expenditure Indian assessee is also benefited alongwith the foreign AE. The said approach it was sub .....

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r day-to-day marketing or sale promotion expenses even, when excessive and exorbitant, would not amount per se to brand building expenses. The Revenue in the written submissions in fact have accepted in paragraph 8.8 that promotion of products go hand in hand and at most of the times brand is distinguishable from products as only by display of products in a particular manner or emphasis on a particular feature of the product, the consumer is given the message of what to expect from a given brand .....

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dvertisement as equivalent or synonymous with brand building for the latter in commercial sense refers to several facets and components. The primary being the quality and reputation of the product or name, which is acquired gradually and silently over a passage of time. The aforesaid arguments fails to notice the fundamental principle of international taxation and Chapter X of the Act that the foreign AE and the Indian AE are two separate tax centres and taxable entities. Profits or enhanced pro .....

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nefit the Indian AE. The argument is sceptical and conjectural. Moreover, transfer pricing can always correct profit shifting, albeit, by reducing/increasing price/consideration payable to the Indian AE. 118. The Indian subsidiaries in the present case are engaged in distribution and marketing functions of the products manufactured by foreign AEs and in some cases, products are also manufactured by them under license in India. Figure 2.1 refers to the value chain analysis, and treats marketing a .....

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or a bundle, the Indian subsidiary, i.e. an assessee, must be adequately compensated by adhering to the arm s length price. This is the core of the transfer pricing adjudication. Price paid by or compensation paid to the domestic AE must complement and reciprocate for the functions performed. 119. A pure distribution company would be a comparatively low risk company as compared to a marketing and distribution company. The profits and earnings or arm s length price would accordingly vary. The ar .....

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arketing operations could devise its own marketing strategies, determine as to the nature and type of advertisements, media selection, timings, etc. Even the choice of products could depend upon local/national conditions. While determining the arm s length price, the issue would be whether or not the Indian assessee is adequately compensated by the foreign AE. The Indian assessee also benefits from the increased sales which results in higher profits and more taxable income in India. AMP, i.e. ad .....

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d building is being independently undertaken and, therefore, should be treated as a separate international transaction. However, the arm s length computation made both by the assessee as well as the TPO must take into account the AMP expenses. 120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be su .....

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tion and thereafter applied Cost Plus Method or Cost Method to compute the arm s length price. The said approach is not mandated and stipulated in the Act or the Rules. The list of parameters for ascertaining the comparables for applying bright line test in paragraph 17.4 and, thereafter, the assertion in paragraph 17.6 that comparison can be only made by choosing comparable of domestic cases not using any foreign brand, is contrary to the Rules. It amounts to writing and prescribing a mandatory .....

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nnection. It does not matter whether the comparables are domestic enterprises or not. However, and it is manifest that the comparable should have similar rights, if any, as the tested party in the brand name, trademark, etc. 11.6. A perusal of para 150 to 154 of the aforesaid judgement shows that the view of the Special Bench (para 10.2 of the Special Bench) referred to and extracted in para 113 by their Lordships at page 83 of this 142 paged judgement was not approved. Reference may also specif .....

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ip gets transferred to a third party. Transfer Pricing valuation, therefore, would be mandated at that time. The international transaction could then be made a subject matter of transfer pricing and subjected to tax. 154. Brand or trademark value is paid for, in case of sale of the brand or otherwise by way of merger or acquisition with third parties. Revenue in paragraph 8.9 of the written submissions have referred to acquisition of brand name Reebok by Adidas and asserted that the entire benef .....

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they have accepted the said position and stated as under:- 7.8. Two inferences are therefore inevitable- till a brand gets terminated, transferred or sold, its value is measured only in terms of the market share or sales turnover. At the time of the sale, in certain circumstances it becomes an independent standalone transfer of an intangible right commanding a separate value or consideration. As a result of which: 7.8.1 The commercial benefit of advertisement or marketing accrues to the appella .....

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under challenge and the material available on record we find on facts that the prayer of the assessee is borne out from the record. Reference may also be made to para 124 of the judgement of the Hon ble High Court which was also cited to justify the stand taken that the issue has to be restored as in the facts of the present case the FAR analysis has to be done considering the agreements and the conduct of the assessee alongwith risks, functionality and the assets in the light of the judicial p .....

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tributor takes all economic risk of product distribution and ultimately gains or makes loss depending upon market and other conditions. The manufacturer is not concerned. In case of a low or no risk distributor and he virtually acts as an agent for the loss and gain is that of the manufacturer. There is no economic risk on distribution of profits. He is, therefore, entitled to fixed remuneration for the self efforts, i.e., relating to the task or function of distribution. Similar will be the pos .....

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price and accordingly shoulders the burden in case of a bad judgment. Profits or losses, therefore, correspond to the risk and market consideration. There is also functional incompatibility between a distributor and a retailer. Retailers cannot be compared with distributor also performing marketing functions. Foreign global enterprises frequently adopt a subsidiary model, i.e. the products are distributed and marketed in a targeted country through a wholly owned subsidiary or a sales subsidiary .....

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t by the Jurisdictional High Court as would be further evident from the aforesaid paras where their Lordships have summed up the view taken:- 194. In view of the aforesaid discussion, substantial questions of law in the appeals filed by the assessee are answered as under: Q.1. Whether the additions suggested by the Transfer Pricing Officer on account of Advertising/Marketing and Promotion Expenses ( AMP Expenses for short) was beyond jurisdiction and bad in law as no specific reference was made .....

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d subject to discussion under the heading C, paragraph Nos.51 to 57, the substantial question of law No.2 is answered in favour of the Revenue and against the assessee. Q.3. Whether under Chapter X of the Income Tax Act, 1961, a transfer pricing adjustment can be made by the Transfer Pricing Officer/ Assessing Officer in respect of expenditure treated as AMP Expenses and if so in which circumstances? Q.4. If answer to question Nos.2 and 3 is in favour of the Revenue, whether the Income Tax Appel .....

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o discussion under the headings D to P, we hold that the legal ratio accepted and applied by the Tribunal relying upon the majority decision in L.G. Electronics India Pvt. Ltd (supra) is erroneous and unacceptable. For reasons set out above, we have passed an order of remand to the Tribunal to examine and ascertain facts and apply the ratio enunciated in this decision. For the purpose of clarity, we would like to enlist our findings:- (i) In case of a distributor and marketing AE, the first step .....

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between independent enterprises. In other words, the economically relevant characteristics of the two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be mad .....

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alysis inaccurate necessarily decreases. (iv) The assessed, 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 Assessing Officer/TPO accepts the comparables adopted by the ass .....

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The Assessing Officer/TPO can reject a method selected by the assessed for several reasons including want of reliability in the factual matrix or lack / non-availability of comparables. (see Section 92C(3) of the Act). (vii) When the Assessing Officer/TPO rejects the method adopted by the assessed, he is entitled to select the most appropriate method, and undertake comparability analysis. Selection of the method and comparables should be as per the command and directive of the Act and Rules and .....

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sement and sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. Brand has reference to a name, trademark or trade name and like goodwill is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It .....

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ia Pvt Ltd (supra) are not binding on the assessed or the Revenue. The bright line 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 w .....

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with the majority decision in L.G. Electronics India Pvt. Ltd. (supra). This would be necessary when the arm s length price of the controlled transaction cannot be adequately or reliably determined without segmentation of AMP expenses. (xi) The Assessing Officer/TPO for good and sufficient reasons can debundle interconnected transactions, i.e. segregate distribution, marketing or AMP transactions. This may be necessary when bundled transactions cannot be adequately compared on aggregate basis. .....

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an independent international transaction, but only after elucidating grounds and reasons for not accepting the bunching adopted by the assessed, and examining and giving benefit of set off. Section 92(3) does not bar or prohibit set off. (xiii) CP Method is a recognised and accepted method under Indian transfer pricing regulation. It can be applied by the Assessing Officer/TPO in case AMP expenses are treated as a separate international transaction, provided CP Method is the most appropriate an .....

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ncluded as a part of inter-connected international transaction and subjected to arm s length pricing. 195. The above noted pointers have to be read along with our discussion under the headings D to P. In case of any doubt, debate or purported conflict, it would be preferable to rely upon detailed elucidation made under the headings, D to P. 196. Common questions raised by the Revenue in their appeals:- 1. Whether the Income Tax Appellate Tribunal was right in distinguishing and directing that se .....

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estored cannot be accepted. As has been brought out in great detail in the earlier part of this order where it is eminently clear that the tax payer and the tax authority have proceeded to consider the issue in the light of the decision of the Special Bench. Reference may also be made to paras 162 and 168 of the said judgement where reference has been made to the position in 2008-09 Assessment year where the assessee is found to have applied resale price method using internal comparables. In par .....

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he finding was found to be not correct as approach and procedure for ascertaining/determining arm s length price under the resale price method is different. The discussion on the most appropriate method by their Lordships would further support the view taken as the said exercise needs to be done in the facts of the present case. For ready-reference, we reproduce the aforesaid hereunder:- 162. In the case of Reebok India Co. Ltd., the assessee has applied RS Method using internal comparable. Cont .....

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e credible gross profit rate, which an AE should be ensured when it incurs AMP expenses. Functionally the comparable is merely a manufacturer and thus, the said function is compared. AMP expenses do not get factored and compared. As an abundant caution, we would still add that where adjustments clause (iv) can give reliable and accurate results, internal comparables could still be applied. This would likely happen, when AMP expenses are insignificant in quantum. 163. Thus, in such cases, externa .....

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and ascertainment. 165. An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made whe .....

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able undertake similar AMP functions. 166. On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument. Moreover, the contention of the assessed in these appeals would mandate rejection of the RP Method, as an appropriate or most appropriate method. Comparison or comparative analysis is undertaken at stage (ii) Adju .....

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ssee has incurred substantial AMP expenses in comparison to the comparables. Once adjustments are made, then the appropriate arm s length price can be determined. In case, it is not possible to make adjustments, then RP Method may not be the most appropriate and best method to be adopted. 167. Before us, the Revenue has not pleaded or submitted that the RP Method should not have been adopted. The TPO and the Assessing Officer did not reject the RP Method adopted by the assessee. The assessed sub .....

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Ltd. The bright line test adopted to demarcate the routine and nonroutine AMP expenditure is predicated on selection of a domestic distributor and marketing company that does not own intangible brand rights. Contract value would be treated as NIL. In terms of our finding recorded above, the said finding would not be correct. The approach and procedure for ascertaining /determining arm s length price under the RP Method is different. For this reason, and other grounds recorded, we have passed an .....

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stantial profit increase. The finding of the Tribunal that the question of payment of Royalty cannot be determined on the basis of profitability or earnings was upheld as once it is accepted that knowhow was provided the same cannot be questioned. Suitable profits relatable it was not held to relevant by approving the finding of the Tribunal. The justification given by the assessee for explaining lower profits claimed to be on account of bad debt, high rent, increase in legal costs etc. accepted .....

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these facts were addressed by the Revenue. Even the opportunity so provided after the inappropriate behaviour of a duly appoint standing counsel who obdurately abdicated his onerous responsibility was followed by ill prepared representation by the Revenue as addressed in para 7 above where the entire responsibility to address the Court meaningfully was evidently shirked by the Revenue. Serious note of the casual manner of representation by the Revenue needs to be taken note of and addressed. Co .....

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rtunity of being heard. 18. The facts relatable to Ground no-3 of the assessee are found discussed in paras 4 to 4.3 of the assessment order wherein out of the total legal and professional expenses debited to the dune of ₹ 4,93,05,419/- a disallowance of ₹ 11,68,364/- was made. The specific breakup of this is set out in para 15.3 of the DRP s order and extracted hereunder for ready-reference:- 15.3. The DRP examined the details/vouchers filed by the taxpayer. Examination of details r .....

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ance charges-J.K.Sharma Rs.17,000 17.07.2009 Conveyance expenses to Nisha Verma & Vinita Sharma Rs.6,244 29.07.2009 Reimbursement of expenses Vinita Shetty Rs.11,000 29.07.2009 Rent club into cell Rs.40,000 07.08.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 07.09.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 07.10.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 19.11.2009 Rent to club into cell Rs.40,000 04.12.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 07.01.2010 Gym Mainte .....

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