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Toshiba India (P) Ltd. New Delhi Versus DCIT, Circle 25 (1) & 25 (2) , New Delhi

2015 (5) TMI 821 - ITAT DELHI

Transfer pricing adjustment - Advertising, Marketing and Promotion (AMP) expenses - Held that:- No detail of the AMP functions performed by the assessee is available on record. Similarly, there is no reference in the order of the TPO to any AMP functions performed by comparables. In fact, no such analysis or comparison has been undertaken by the TPO because of his applying the bright line test for determining the value of the international transaction of AMP expense and then applying the cost pl .....

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with the manner laid down by the Hon’ble High Court in Sony Ericson Mobile (2015 (3) TMI 580 - DELHI HIGH COURT). Ex consequenti, the ground raised about the TPO having no jurisdiction to determine the ALP of AMP expenses, is dismissed following the judgment in the case of Sony Ericsson Mobile (supra).

Disallowance of Advances written off - Held that:- Succinctly, the assessee claimed the above deduction by treating it as bad debts written off. On being called upon to justify the ded .....

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yment of SAD by any importer is refunded when the goods are further sold. Since the goods in respect of which this SAD was paid, became obsolete and written off in the accounts of subsequent years, the amount of SAD was claimed as deduction in this year. Unconvinced with the assessee’s submissions, the DRP approved the view taken by the AO in making the addition.

After considering the rival submissions and perusing the relevant material on record, it is noticed that the assessee, as a .....

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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 sep .....

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the DRP’s direction that the assessee took up this issue before the DRP claiming deduction of ₹ 7,22,50,345/- on account of warranty provision for the year in question. It is clear from para 12.3 of the Direction given by the DRP that the assessee voluntarily disallowed this amount at the time of filing income-tax return. It is not understandable as to under which circumstances the assessee suo motu disallowed the claim at the time of filing of income-tax return and sprang up claiming ded .....

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facts in this regard are not available before us, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of AO for deciding it afresh as per law, after allowing a reasonable opportunity of being heard to the assessee. - Decided partly in favour of assesse for statistical purposes - ITA No.1101/Del/2015 - Dated:- 25-5-2015 - SHRI R.S. SYAL AND SHRI C.M. GARG, JJ. For the Appellant : .....

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ent towards Advertising, Marketing and Promotion (AMP) expenses. 3. Briefly stated, the facts of the case are that the assessee, an Indian company, is a wholly owned subsidiary of Toshiba Corporation, Japan. It is engaged in the trading of consumer durables, IT products and also providing representative and marketing support services to Toshiba group companies worldwide. The assessee reported certain international transactions, which have been enlisted on page 2 of the order passed by the Transf .....

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,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 ₹ 38.16 crore. Adding mark-up of 12.50% amounting to ₹ 4.77 crore and adjusting the Reimbursements, he worked out a transfer pricing adjustment of ₹ 40,14,26,892/-. The assessee remained unsuccessful be .....

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thin the meaning of section 92B of the Act and that the TPO has jurisdiction to compute the ALP of this international transaction despite the same not having been specifically referred to by the AO. On the question of determination of the ALP of this international transaction, the Special bench approved the application of bright line test for working out the amount of non-routine AMP expenses and held that the ALP of AMP expenses should be determined on Cost plus method by treating AMP transacti .....

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ctions. 5. Following the said order, various benches of the Tribunal decided several cases involving AMP expenses, restoring the matter to the file of AO/TPO for deciding this issue in conformity with the directions given by the Special Bench in LG Electronics (supra). Several assessees as well as the Revenue preferred their respective appeals before the Hon ble High Courts against the tribunal orders following the Special bench order. A batch of such appeals led by Sony Ericson Mobile Communica .....

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ed with 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 .....

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able 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 international transactions of the assessee in an aggregate manner at par with those undertaken by the comparables, then, segregation should be done and the international transaction of AMP spend should be separately processed under the transfer pricing provisions for the purposes of determining it .....

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en upheld. 6. We can summarize the relevant position emanating from the judgment of the Hon ble High Court, as under : - AMP expense is an international transaction [Paras 52 & 53 of the judgment] ; The TPO has jurisdiction to determine the ALP of the international transaction of AMP expenses [Para 50 of the judgment]; Inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set-off [Paras 80 & 81]; AMP is a separate function. An external compa .....

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ould be chosen [Paras 194(i), (ii), (viii) & others]; The choice of comparables cannot be restricted only to domestic companies using any foreign brand [Para 120] ; If no comparables having performed both the functions in a similar manner are available, then, suitable adjustment should be made to bring international transactions and comparable transactions at par [Para 194 (iii)] ; If adjustment is not possible or comparable is not available, then, the TNMM on entity level should not be appl .....

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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 margi .....

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logic of the assessee s profit margin matching with those of comparables. There is a basic fallacy in the argument of the ld. AR. It is pertinent to note that the TPO examined and got satisfied with the assessee s profit margin vis-à-vis the comparables only qua the international transactions of distribution function. He determined the ALP of AMP expenses by applying bright line test and in this process simply compared the quantitative figures of AMP expenses incurred by the assessee and .....

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bright line test is not applicable for determining the ALP of AMP expenses. The manner for the determination of the ALP of the distribution activity and AMP activity has also been set out by the Hon ble High Court to be conducted, firstly, in a bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables, and if probable comparables having performed both the functions are not available, then to determine the ALP of AMP expenses i .....

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essee and the probable comparables is sine qua non in the process of determination of the ALP of the international transaction of AMP spend, either in a segregate or an aggregate 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 c .....

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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 amount to snatching away the tag of international transaction from AMP expenses, assigned by the Hon ble High Court. What Their Lor .....

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be then compared with similar functions performed by some probable comparables. If the distribution and AMP functions performed by the assessee turn out to be different from those performed by probable comparables, then, a suitable adjustment should be made to the profits of the comparable so as to counterbalance the effect of such differences. If however differences exist in such functions, but no adjustment can be made, then, such probable comparable should be dropped from the list of comparab .....

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comparable. If both are found out to be similar, then the matter ends and a comparable is found and one can go ahead with determining the ALP of such a transaction. If the AMP functions performed by the two entities are found to be different, then adjustment is required to be made in the case of a probable comparable, so as to make it uniform with the assessee. The assessee may have possibly done, say, four different AMP functions as against the probable comparable having done, say, only three. .....

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r 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, .....

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tially argued that the TPO canno 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 . It held vide para 165 of the judgment that : An external comparable should perform similar AMP functions. Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. Let us we go a step further with the alternative prescription of the judgment that if ALP of .....

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of acceptance. 9. Adverting to the facts of the instant case, we find that the TPO accepted TNMM as the most appropriate method and did not make any TP adjustment on account of the distribution activity carried out by the assessee. He, however, espoused the AMP expense as a separate and distinct. Treating the AMP spend as a separate international transaction, he applied the Cost plus method and proposed the extant adjustment. In doing so, he segregated routine AMP expenses incurred by the asses .....

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t by the assessee and the comparables. Distinct examination of AMP functions does not find place in this method of computing the value or the ALP of AMP spend. Now, when we look at the ratio laid 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 r .....

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io 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 provides as under :- (e) transactional net margin method, by which,- (i) the net profit margin realised by the e .....

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clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to .....

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h adjusted net profit margin in sub-clause (iii) of Rule 10B(1)(e) which is compared with the net profit margin realized by the assessee as per the mandate of sub-clause (iv) of Rule 10B(1)(e). 11. Sub-rule (2) of Rule 10B provides that for the purposes of sub rule (1) , the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely - (a) the specific characteristics of the property transferred or services provided in ei .....

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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 ente .....

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ng the ALP, in the first instance, must have overall similar characteristics. It is vivid that if the goods/services are different, then no effective comparison can be made. Once the goods/services under both the transactions are broadly similar but there is a difference in them because of certain specific characteristics; and/or the products/services in both the transactions are identical, but still there are certain differences due to the contractual terms or the geographical location, etc., t .....

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he ratio of the judgment in the case of Sony Ericson Mobile (supra), to the effect that the AMP functions carried out by the assessee are required to be necessarily compared with the AMP functions carried out by a comparable entity in determining the AMP of ALP expenses. Difference between the functions, if capable of adjustment, should be given effect to in the profit rate of the comparable and if such difference cannot be given effect to, then, the probable comparable should be eliminated from .....

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ALP that both these transactions can be aggregated in the first instance, so that the surplus from one could be adjusted against the deficit from the other in an overall approach. It does not mean that because of aggregation, the AMP expense transaction sheds its character of a separate international transaction and hence the AMP functions should not be matched with the AMP functions carried out by probable comparables. If suitable comparables can be found having performed both distribution and .....

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nd 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 d .....

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divulging the AMP functions performed by the assessee as well as comparables. As such, we are handicapped to determine the ALP of AMP expenses at our end, either in a combined or a separate approach. Under such circumstances, we set aside the impugned order and send the matter back to the file of the TPO/AO for determining the ALP of the international transaction of AMP spend afresh in accordance with the manner laid down by the Hon ble High Court in Sony Ericson Mobile (supra). Ex consequenti, .....

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ertain goods during the financial year under consideration paying Special Additional Duty (SAD). Since the goods in respect of which such amount of SAD was paid became obsolete, the amount of SAD was written off and claimed as deduction. It was stated that the nomenclature of bad debt was inadvertently given, whereas, in fact, this amount was payment of irrecoverable/unadjustable SAD. It was also stated before the DRP that the payment of SAD by any importer is refunded when the goods are further .....

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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 ultima .....

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