TMI Blog2015 (7) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... ricson Mobile (2015 (3) TMI 580 - DELHI HIGH COURT). It is, however, made clear that the TPO/AO, while computing adjustment, if any, on account of AMP expenses will not include Selling expenses directly incurred in connection with sales in the overall base of AMP expenses. With the above observations, we send the matter back to the TPO/AO for redetermination of the ALP of AMP expenses in accordance with the above guidelines. Needless to say, the assessee will be allowed a fresh opportunity of hearing in such fresh proceedings. Ex consequenti, the issue 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). Reduction in the amount of deduction u/s 10A - apportionment of certain STP unit specific expenses - Held that:- On a specific query, it was fairly admitted that there were certain non-STP unit specific expenses as well, but the AO aggregated all the specific and non-specific expenses and allocated them in the ratio of turnover of STP and non-STP units. In our considered opinion, this approach adopted by the AO is not correct. We, therefore, set aside the impugned ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee is aggrieved against the addition so made by the AO. 4. We have heard the rival submissions and perused the relevant material on record. Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. Vs. ACIT (2013) 152 TTJ (Del) 273 (SB), by its majority decision held, inter alia, that AMP is a transaction and also an international transaction within 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 transaction as a separate and distinct from other international transactions. It was further held that the selling expenses directly incurred in connection with the sales do not lead to brand promotion and hence should not be brought within the ambit of AMP expenses. The Special bench laid down certain parameters to be taken into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions 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 its ALP separately. In such determination of ALP of AMP expenses in a segregated manner, proper set off on account of excess purchase price adjustment should be allowed. The view taken by the Tribunal in segregating routine and non-routine expenses on the basis of bright line test has been set aside by the Hon ble High Court. The view taken by the Special Bench that the expenses concerned with the sales, such as, rebates and discounts etc., should be excluded from the ambit of AMP expenses, has been 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra) not permitting the acceptance of such a wide proposition. 8. We are unable to accept the argument advanced on behalf of the assessee for deletion of the addition towards AMP expenses on the plain 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- -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 comparables for working out the non-routine expenses. He did not examine the AMP functions carried out by the assessee and the comparables. As the bright line test primarily concentrates on the quantitative aspects of the AMP expenses alone, it overlooks the examination of the AMP functions carried out by the assessee on one hand and the comparables on the other. Now, the Hon ble High Court in Sony Ericson Mobile (supra) has held that AMP expense is a separate international transaction and also br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f international transaction from AMP expenses, assigned by the Hon ble High Court. What Their Lordships have held in the judgment is that the distribution activity and AMP expenses are two separate but related international transactions. It is only for the purposes of determining their ALP that these two should be aggregated. The process of such aggregation does not take away the separate character of the AMP transaction, albeit related. An analysis and examination of the distribution and AMP functions carried out by the assessee must be necessarily done in the first instance, which should 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 comparables. If, in doing this exercise, there remains no company doing comparable distribution and AMP functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally 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 . 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 both the transactions of Distribution and AMP cannot be determined in a combined manner, then the ALP of AMP function should be separately done. The submission advanced by the assessee of considering the profit on an entity level without making comparison of AMP functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view amounts to treating AMP spend as a non-international transaction, which is patently incapable 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-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 in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. 10. A perusal of the sub-clause (iii) of this Rule divulges that net profit margin under a comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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., then, a reasonably accurate adjustment should be made for eliminating the material effects of such differences so as to bring the international transaction and the comparable uncontrolled transaction on the same podium. If due to one reason or the other, no reasonable accurate adjustment can be made due to such differences, then, such uncontrolled transaction should not be considered as a comparable transaction. 13. It is discernible that the prescription of Rule 10B is in complete harmony with the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his applying the bright line test for determining the value of the international transaction of AMP expense and then applying the cost plus method for determining its ALP. The ld. AR also failed to draw our attention towards any material 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). It is, however, made clear that the TPO/AO, while computing adjustment, if any, on account of AMP expenses will not include Selling expenses directly incurred in connection with sales in the overall base of AMP expenses. 16. Another issue has been argued by the ld. AR about the computation of the base of AMP expenses. It was argued that the assessee got subsidy from its AEs on account of AMP expenses. It was ergo, urged that such amount of subsidy should be reduced from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following the judgment in the case of Sony Ericsson Mobile (supra). 19. The second issue raised in this appeal is against the reduction in the amount of deduction u/s 10A of the Act. 20. Succinctly, the assessee declared total turnover at ₹ 41,77,98,085/-, which included turnover of ₹ 48,87,014/- with respect to STP unit eligible for deduction u/s 10A. The remaining turnover was in relation to non-STP unit. The AO observed that the turnover of STP unit accounted for only 1.20% of total turnover, whereas the assessee had declared 38% of total net profit as attributable to the STP unit. The AO apportioned total expenses amounting to ₹ 2,84,56,217 incurred by the assessee between STP unit and non-STP unit on the basis of the respective turnover in both the units. This resulted in reduction in the amount of deduction u/s 10A to the tune of ₹ 1,12,072/-. The assessee remained unsuccessful before the DRP. In the final assessment order, the AO made addition for such sum of ₹ 1,12,072/-. 21. We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the assessee is otherwise eligible for dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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