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Casio India Company Pvt. Ltd. Versus DCIT, Circle 3 (1) , New Delhi.

2015 (7) TMI 79 - ITAT DELHI

Addition on account of transfer pricing adjustment towards 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 .....

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MP spend afresh in accordance with the manner laid down by the Hon’ble High Court in Sony Ericson 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 accorda .....

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re 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 order on this issue and remit the matter to the file of AO for a fresh determination of net profit eligible for deduction u/s 10A of the Act. In such a computation of net profit, the STP unit spec .....

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dgment of the Hon’ble jurisdictional High Court in CIT vs. BSES Yamuna Powers Ltd. [2010 (8) TMI 58 - DELHI HIGH COURT] in which it has been held that the depreciation on computer peripherals should be allowed at 60% instead of 15%. - Decided in favour of assessee. - ITA No.4726/Del/2010 - Dated:- 26-6-2015 - SHRI R.S. SYAL AND SHRI A.T. VARKEY, JJ. For The Assessee : Shri Deepak Chopra, Advocate For The Department : Shri Bhaskar Goswami, Sr.DR ORDER PER R.S. SYAL, AM: This appeal by the assesse .....

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omputer Company Limited, Japan. It distributes watches and some other information products and other related products of Casio, Japan in India. Certain international transactions were reported by the assessee in Form No.3CEB. On a reference made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO), the latter accepted the declared international transaction at arm s length price (ALP). However, the TPO proposed transfer pricing adjustment of ₹ 1,79,94,337/- on account of AMP .....

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ansaction 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 determ .....

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aking the exercise afresh in the light of its directions. 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 .....

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tion of AMP expenses should be bundled or aggregated 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 m .....

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tween 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 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 pri .....

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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 not prohibit the set-off [Paras 80 & .....

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he products and also incurring of AMP expenses, should 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, .....

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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. He submitted that the assessee applied TNMM as the most appropriate method. Since the profit margin declared by the assessee .....

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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-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 fig .....

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is a separate international transaction and also 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 avail .....

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amination of AMP functions carried out by the assessee 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. Th .....

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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 amount to snatching away the tag of international transaction from AMP expenses, a .....

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ssarily 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 compa .....

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it with the AMP functions performed by a probable 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 .....

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, 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 .....

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judgment : 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 . 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 altern .....

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rnational 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 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 seg .....

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P, without looking at the AMP functions carried out 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 .....

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ns 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 provides as under :- (e) transactional net margin method, by w .....

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; (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 .....

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mparable uncontrolled transactions. It is only such 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 subrule (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 th .....

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ng 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 .....

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ich comparison is sought to be made for determining 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 contra .....

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ription 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 the profit rate of the comparable and if such difference cannot be given effect to, then, .....

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it is only for the purposes of determining their 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 ca .....

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king 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 .....

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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 Cour .....

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ced from total AMP expenses incurred before the determination of the ALP of AMP expenses. 17. We are not convinced with the submission advanced on behalf of the assessee. What the assessee is seeking is the reduction in the amount of AMP expenses incurred for brand building with the amount of subsidy or reimbursement received from the AEs. This type of reduction at the stage of computation of the ALP of an international transaction is not contemplated under the transfer pricing legislation. On t .....

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fit mark up represents the amount which ought to have been recovered by the assessee from its AE. If no amount is received from the AE, then the entire amount incurred with the normal gross profit mark-up, depicting the ALP of this international transaction, calls for addition. If however some amount is received by the assessee from its AE, then the ALP as reduced by such amount received, by whatever name called as subsidy or reimbursement, gives the amount of addition ot be made. The contention .....

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therefore, fails. 18. 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). 19. The second issue raised i .....

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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 materia .....

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