TMI Blog2015 (6) TMI 514X X X X Extracts X X X X X X X X Extracts X X X X ..... d for benchmarking the AMP functions only Remi Elektrotechnik Ltd. is common in both. Therefore, the plea that since TPO has accepted TNMM method, therefore, AMP expenditure should not be separately considered is devoid of any merit. In view of the decision of Hon’ble High Court in Sony Ericsson case (2015 (3) TMI 580 - DELHI HIGH COURT ), there is no dispute that the discount and sales commission being directly attributable to selling activities of assessee, have to be excluded from the components selected by TPO in regard to AMP expenses. However, as far as submissions of ld. counsel with regard to the expenses in connection with the sponsorship and sales promotion are concerned, we are of the opinion that since the assessee’s plea has not been examined by ld. DRP/ TPO, the matter should be restored to file of TPO/ DRP to record a finding on the assessee’s claim as noted in the submissions of ld. authorized representative. - Decided in favour of assessee for statistical purposes. - ITA nos. 674/Del/2015 - - - Dated:- 5-6-2015 - Shri S.V. Mehrotra and Shri A.T. Varkey,JJ. For the Petitioner: Shri Himanshu S. Sinha Adv. For the Respondent: Shri Ajit Kumar Singh CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r processing. (vi) Inventory management inventory planning/ forecasting. 7. He further pointed out that as per the TP report, the marketing strategy followed by the assessee was to sell its products through three principal channels: (a) Direct to health care institutions, such as hospitals; (b) Through stock distributors and in the Asia Pacific region, healthcare dealers. (c) Directly to dental practices and dental laboratories. 8. After considering the functional profile and marketing strategy, the ld. TPO pointed out that this indicated that the expenses incurred in connection with the sale channels, like sales commissions, discounts etc. were also relevant to the issue of evaluating AMP expense. He pointed out that the kinds of products dealt by the assessee were not those that could be pushed by direct marketing or marketing strategies that would be applicable in the FMCG sector. The product could be advertised by and through persons like dealers of such products, hospitals etc. He, therefore, pointed out that expenses shown under the head advertisement and market promotion in the P L A/c would not be the only expense relevant to the AMP related activity i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales Amount in INR AMP/Sales(%) 1. Remi Sales Engg. Ltd. Advertisement Sales promotion 3,702,485 781,192,364 Commission on sales 4,220,610 Discount allowed 786,253 Total 8,709,348 1.11 2. AFCO Industrial Chemicals Ltd. Nil 6,829,960 0.00 3. Ambalal Sarabhai Enterprises Ltd. Selling commission 5,054,000 591,170,000 Wholesalers/distributors discount 308,000 Selling expense 2,563,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29 Rent for hoarding 75,000 Total 1,308,213 35,947,789 3.64 Average AMP/Sales 2.41% 11. The assessee in its reply pointed out that discount and commission should not be included under the head of AMP. The sales and distribution expenses have no nexus with the creation of brand or trade mark. Ld. TPO pointed out that trauma implants, the products that the assessee deals in are not of such nature that they are purchased from a shop or store by a person at his leisure. This is used by doctors and hospitals and the patients will have little choice as to the brand of the trauma implant. The choice will be made by the doctor and the hospital and the brand will be pushed by the dealer. The expense items like discount and commission are the incentives that the assessee provides to the dealer who push the brand with the hospital and doctors. He pointed out that which particular expense will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had relied on the decision in the case of BMW India Pvt. Ltd. for AY 2008-09. (ii) The TPO incorrectly computed the AMP expenses/ sales ratio by taking into account the items like discount allowed of ₹ 54,994/- and sales commission of ₹ 1,82,98,811/- which were purely linked with actual sales made by the assessee. (iii) The assessee objected to the application of the mark up of 12.50% in respect of assessee s AMP expenses. (iv) The assessee also objected to the selection of 5 comparable companies by TPO. (v) The assessee also objected to the use of bright line test. 15. The ld. DRP referred to the decision of special Bench in the case of LG Electronics India Pvt. Ltd. Vs. ACIT and pointed out that the clubbing of transaction is possible only when the underlying international transactions were homogenous in nature. It pointed out that the international transaction relating to AMP expenditure was not recognized by the assessee as an international transaction which view has not been accepted by Special Bench in L.G. Electronics India (P) Ltd. (supra). Ld. DRP has also held that the assessee had incurred huge AMP expenditure for the value addition of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in doing so have grossly erred in: 4.1 disregarding that the AMP expenses incurred by the Appellant represent purely domestic transaction(s) undertaken towards third parties, not covered under the purview of Section 92 of the Act; 4.2 disregarding submissions made by the Appellant on the functional and risk characterization of its marketing function to demonstrate that the AMP expenses incurred by the Appellant were in respect of its own business requirements/ considerations/ purposes as an independent decision maker and that all benefit resulting from such expenditure are to its own account 4.3 disregarding the nature of sales and sponsorship expenses incurred by the Appellant which clearly set forth that the expenses were incurred by Appellant on various events and conferences organized which were in the nature of selling expenses and thus had no nexus with brand promotion; and incorrectly holding that such expenses result in developing marketing intangible for the AEs; 4.4 without prejudice to its above contentions, incorrectly computing AMP expenses/ sales ratio of the Appellant by taking into account the items like discount allowed of ₹ 54,99 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in initiating penalty proceedings u/s 271(1)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation. 17. Ld. counsel for the assessee has primarily advanced two fold submissions. First is that since the assessee had adopted TNMM method in regard to benchmarking of international transactions, therefore, since the operating margin was 11.07% as against the operating margin of comparables of 4.03%, therefore, in view of the decision of Hon ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd Ors. (ITA no. 16/2014 dated 16-3-2015), no adjustment is called for. In this regard, ld. counsel referred to para 101 of Hon ble High Court s decision in the case of Sony Ericsson Mobile Communications India Pvt. Ltd Ors. (supra), which is reproduced hereunder: 10 1. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount (inRs.) Club Membership Annual fees for Confederation of Indian Industry for product demonstration 20,000 Meals Expenses reimbursement for meals of sales team during the site visits and travelling 688,225 Third party Grants Grant given to Chronic Care Foundation (CCF)(CCF is a trust which undertakes, various education activities for healthcare fraternity) Sales promotion Expenses on various events organized i.e. conferences, camps for creating patient awareness on orthopedic problems, educating surgeons and community at large on the usage of implants etc. 12,083,502 Advertisement 120,000 Business promotion Expenses on various events organized by the Medical education department for medical education and awareness. Further,it also includes the expenses incurred for cadaver workshops 6,560,648 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed sales and enhanced value to the brand. Benefit to the Indian entity is only marginal or incidental. The contention is that the action of the independent subsidiary amounts to rendering of service to the foreign AE for which arm's length compensation was/is payable. No third party distributor would incur expenditure on development of marketing and brand, which does not eventually belong to it. 24. Ld. CIT(DR) further referred to para 121 of Sony Ericsson Mobile Communications India Pvt. Ltd Ors. (supra) and pointed out that TPO had to examine the question whether the assessee was performing functions of a pure distributor or performing distribution and marketing functions and if the assessee was also performing marketing functions then TPO has to examine and ascertain whether the transfer price takes into consideration the marketing functions which would include AMP functions also. He pointed out that it is to be examined whether marketing and distribution functions are inter twined or not, because comparables have to be selected accordingly. Hon ble High Court observed as under:- 121. During the course of hearing before us, counsel for the Revenue had submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined, has given sufficient discretion and flexibility to Tribunal to reach a fair and just conclusion on the ALP and if necessary to remand the matter to AO/ TPO if the exercise cannot be carried out at Tribunal s level. 26. In rejoinder, ld. Counsel referred to TPO s order to submit that the bright line was determined by TPO by considering the assessee as a distributor. 27. We have considered the rival submissions and have perused the record of the case. As far as ld. counsel s submission that since the AO/ TPO had accepted and adopted TNMM method with regard to other international transaction, therefore, no separate bifurcation of AMP expenses is to be made in view of para 101 of Sony Ericsson case (supra), reproduced earlier, cannot be accepted because TPO had applied the bright line test by considering those comparables which were routine distributors. He did not carry out any study with reference to the functions performed by comparables selected by him vis a vis functions performed by assessee in regard to its marketing and distribution activities. Ld. counsel has relied on para 101 of the judgment in Sony Ericsson s case. However, the said para is to be read along ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly taxation of the subsidiary AE in the country of its residence. 28. In para 100, Hon ble High Court has observed as under:- 100. The TPO/ Assessing Officer can overrule the assessee as to the method adopted and select the most appropriate method. The reasons for selecting or adopting a particular method would depend upon functional analysis, comparison, which requires availability of data of comparables performing of similar or suitable functional tasks in a comparable business. When suitable comparables relating to a particular method are not available and functional analysis or adjustments is not possible, it would be advisable to adopt and apply another method. This would mean in the example given above, if the Assessing Officer/TP'O notices that operating expenses in the case of the tested party are substantially lower than the comparable or indicative of greater and better efficiency, he can make suitable adjustments and then compute the operating profit. In case it is not possible to make adjustment, he may reject the method selected by the assessed and adopt another method. Several recourses may be available. Of course, justification and reasons must be stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR 1.60% 5. AFCO Industrial Chemicals Ltd. Seg-P -2.83% 6. Ambalal Sarabhai Enterprises Ltd. Seg-P 4.39% 7. Remi Elektrotechnik Ltd. Seg-P 5.44% Mean 4.03% Median 4.39% Upper Quartile 5.20% Lower Quartile 2.59% 31. These were accepted by TPO applying TNMM method. However, for benchmarking the AMP functions TPO selected following five comparables:- S. No. Name AMP/Sales (%) 1. Trivitron Healthcare Pvt. Ltd. 3.81 2. Frontline Electro Medical Limited 8.47 3. Sata ..... X X X X Extracts X X X X X X X X Extracts X X X X
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