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TMI Blog2015 (5) TMI 821X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee reported certain international transactions, which have been enlisted on page 2 of the order passed by the Transfer Pricing Officer (TPO). The assessee employed the Transactional Net Margin Method (TNMM) as the most appropriate method for demonstrating that its international transactions were at arm's length price (ALP). On a reference made by the AO for determining the ALP of the international transactions, the TPO accepted the reported international transactions at ALP. He, however, observed that AMP expenses to the tune of Rs. 45,27,63,518/-, including discount and rebates amounting to Rs. 22,65,33,296/-, were incurred by the assessee during the year in question. To determine the ALP of the international transaction of AMP expenses, he chose certain comparable companies. By applying the bright line test, he worked out non-routine expenditure in excess of bright line at Rs. 38.16 crore. Adding mark-up of 12.50% amounting to Rs. 4.77 crore and adjusting the Reimbursements, he worked out a transfer pricing adjustment of Rs. 40,14,26,892/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). Eventually, the AO vide his final impugned order made additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith other international transaction carried out by the assessee as a distributor, who either simply acts an agent of manufacturer or purchases goods from the manufacturer for resale at his own account. However, in the case of a manufacturer, the import of raw material has been held to be an independent transaction of marketing and distribution. In the case of a distributor, the Hon'ble High Court held that where TNMM has been applied as the most appropriate method, which method has not been disturbed by the TPO, then, the international transactions of AMP and distribution activities should be clubbed. It further held that for determining the ALP of such transactions under a combined approach, only such comparables should be chosen which conform to the AMP functions and other distribution functions conducted by the assessee. If there is some difference in the functions under these international transactions, including that of AMP, between the assessee and the comparables, then, suitable adjustment should be made to bring both the transactions at par. If probable comparables are not performing similar functions as done by the assessee and no adjustment is possible for bringing the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction of AMP should be viewed in a de-bundled manner or separately [Paras 121& 194(xi)] ; * In separately determining the ALP of AMP expenses, the TPO is free to choose any other suitable method including Cost plus method [Para 194(xiii)]; * In so making a TP adjustment on account of AMP expenses, a proper set off/purchase price adjustment should be allowed from the other transaction of distribution of the products [Para 93] ; * Selling expenses cannot be considered as part of AMP expenses [Paras 175 & 176 of the judgment]. 7. With the above background of the ratio decidendi of the judgment of the Hon'ble jurisdictional High Court, let us examine the contention put forth by the ld. AR in support of the deletion of addition. She submitted that the assessee applied TNMM as the most appropriate method. Since the profit margin declared by the assessee was favourably comparable with the average margin of the comparables, which fact has not been disputed by the TPO, then, no adjustment should be made on account of AMP expenses because such expenses stand subsumed in the overall operating profit. This was countered by the ld. DR with reference to certain paras of the j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gregate manner. What Their Lordships have held is to bundle the distribution activity with the AMP activity, being two separate but connected international transactions, for the purposes of determination of the ALP of both these international transactions in a combined manner. The argument of the ld. AR, if taken to a logical conclusion, will make the AMP spend as a non-international transaction, which, in our considered opinion, is not appropriate. Once AMP expense has been held to be an international transaction, it is, but, natural that the functions performed by the assessee under such a transaction need to be compared with similar functions performed by a comparable case. If AMP functions performed by the assessee turn out to be different from those performed by a probable comparable company, then, an adjustment is required to be made so as to bring the AMP functions performed by the assessee as well as the comparable, at the same pedestal. If we concur with the contention of the ld. AR that the addition on account transfer pricing adjustment of AMP expenses be deleted without any examination of the AMP functions carried out by the assessee as well as comparables, this will am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctions performed by the assessee must be similar to those done by the comparable, in the same manner as such functions are compared in any other international transaction. However, in computing ALP of AMP spend, the adjustment or set off, if any, available from the distribution function, should be made. The essence of the judgment in the case of Sony Ericson Mobile (supra) is that the two international transactions of Distribution and AMP should be examined on the touchstone of transfer pricing provisions, but on an aggregate basis. Determining the ALP of two transactions in an aggregate manner postulates making a comparison of both the functions of distribution and AMP carried out by the assessee with the comparables, so that surplus from the distribution activity could be adjusted against the deficit in the AMP activity. The Hon'ble High Court has no where laid down that the AMP functions performed by the assessee should not be compared with those performed by the comparable parties. On the contrary, it turned down the contention raised by the ld. AR urging for not treating AMP as a separate function, which is apparent from the extraction from para 165 of the judgment : & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down by the Hon'ble jurisdictional High Court, it becomes crystal clear that the approach adopted by the TPO for determining ALP of AMP expenses has been rendered incorrect. However, the fact remains that as per the verdict of the Hon'ble High Court, AMP spend is an international transaction, which is required to be processed under Chapter X of the Act by taking into account the AMP functions performed by the assessee and then comparing such functions with those performed by comparable entities, though, firstly in a combined manner with the distribution functions. We find no reference to the AMP functions carried out by the assessee in the order of the TPO. As such, there can be no question of making any comparison of the assessee's AMP functions with those of the comparables. Going by the ratio in the case of Sony Ericson Mobile (supra), it is mandatory to make a comparison of the AMP functions performed by the assessee and comparables and then making an adjustment, if any, due to differences between the two, so that the AMP functions performed by the assessee and comparable are brought to a similar platform. In fact, this is also the prescription of Rule 10B(1)(e), which provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Sub-rule (3) of Rule 10B stipulates that an uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market ; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 12. On a comparative reading of sub-rules (1), (2) and (3) of Rule 10B, it becomes palpable that the international transaction and the uncontrolled transaction with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be matched with the AMP functions carried out by probable comparables. If suitable comparables can be found having performed both distribution and AMP functions, then, their ALP should be determined on aggregate basis. If, however, there is some difference in the distribution or AMP functions performed by the assessee vis-à-vis the probable comparables, then an attempt should first be made to iron out such difference by making a suitable adjustment to the profit margin of comparables. If such an adjustment is not possible, then such probable comparable should be eliminated. If, by making a comparative analysis of the distribution and AMP functions jointly, there remains no comparable case performing such distribution and AMP functions, then, the international transaction of AMP should be segregated and its ALP be determined separately by applying a suitable method. However, in so determining the ALP of such an international transaction of AMP expenses on separate basis, a proper set off, if any, available from the distribution activity, should be allowed. 15. Coming back to the facts of the instant case, we find that no detail of the AMP functions performed by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id SAD and, hence, would have ordinarily become entitled to its refund on further sale. The amount in question represents the payment of SAD on the goods becoming obsolete and incapable of further sale. As such, the amount of SAD on such goods has ceased to be refundable. When the goods become obsolete, the payment of SAD already made assumes the character of a part of the purchase price of the goods. It can be seen from the assessee's submissions made before the DRP as recorded in para 11.1 of its Direction that the goods became obsolete and were 'ultimately written off in the books of account in the subsequent years.' This shows that the instant amount of SAD paid in relation to such goods cannot be claimed as deduction in the year under consideration because such goods were still appearing as closing stock in the books of account of the assessee. As the payment of SAD in such circumstances is nothing, but, a part of the purchase price, the same cannot be separated from the purchase price of goods, to be written off separately in the year in question, when the corresponding goods are still treated as stock-in-trade. We, therefore, approve the view taken by the AO on this issue. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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