TMI Blog2015 (9) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... ase [ 2013 (6) TMI 217 - ITAT DELHI] keeping in mind our finding that the assessee is a distributor whose remuneration model is not only supported by International Tax Jurisprudence as available in the OECD Guidelines and Australian Tax Guidelines but is also found supported by Questions 1,9 10 of the L.G. Electronics case as considered by the Special Bench. The assessee has made a reference to its Global Pricing Policy on which the TP study is based, the same may be produce before the TPO/AO. As such the arguments of the assessee to the above extent are upheld. On the issue of mark-up if still so warranted on facts the arguments of the Ld. AR have been that the same is excessive. It is seen that there is no discussion in the TPO s order as to why a mark-up of 15% is adequate. Similarly DRP also does not give any justification for reducing the same to 12.5%. We refrain from substituting the arbitrary mark-up by our own arbitrary estimate in the absence of any facts or material on record. Even estimates have to have some rationale and reasoning which is completely absence in the orders and arguments advanced before us. Accordingly, we deem it appropriate to set aside the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... H AND SHRI B.C.MEENA, JJ. For the Appellant : Sh. Deepak Chopra, Adv. Sh. Manomeet Dalal, Adv. For the Respondent: Sh. Peeyush Jain, CIT DR TP ORDER PER DIVA SINGH, JM This is an appeal arising from the assessment order dated 26.11.2012 u/s 143(3) read with section 144(C) of the Income Tax Act (hereinafter referred to as the Act or the I.T.Act ). 2. The relevant facts of the case are that the assessee who is stated to be primarily engaged in the business of importing, buying and selling and distributing wide range of mobile phones in India, returned an income of INR 53,95,06,079/- for the year under consideration on 30.09.2008. The said return was referred by the Assessing Officer (hereinafter referred to as the AO ) to the ADIT, Transfer Pricing Officer II (hereinafter referred to as the TPO ) for determination of Arms Length Prices (hereinafter referred to as the ALP ) for the international transaction undertaken by the assessee with its Associated Enterprises (hereinafter referred to as the AEs ). 2.1. The TPO completed the transfer pricing assessment u/s 92CA(3) of the Act thereby making a transfer pricing adjustment of INR 69,94,95, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd name of Sony , and that the entire expenditure as had been incurred by it, on advertisement and marketing, had been incurred, solely for the purpose of its own business, in India, and any incidental benefit arising to its parent could not result in an adjustment in the hands of the Appellant. 9. That on the facts and the circumstances of the case and in law, the learned TPO/Hon ble DRP has erred in ignoring that the advertisement and marketing expenses incurred by the Appellant represents only domestic transaction(s) undertaken with third parties, which under the amended law (Finance Act 2012) were also outside the purview of section 92BA of the Act and hence no adjustment could be made in respect of the same. 10. That on the facts and circumstances of the case and in law, the learned TPO has grossly erred in applying the Bright Line Method for determining the arm s length advertisement and marketing expenditure incurred by the assessee as the same is not a prescribed method under the provisions of section 92C of the Act nor is the same notified by the Central Board of Direct Taxes under section 92C(1)(f) of the Act. 11. The learned DRP has failed to appreciate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO/DRP erred in making a disallowance of ₹ 11,57,21,515, being 10 percent of advertisement and selling expenses, on the ground that it resulted in enduring benefit to the appellant, and was, thus, capital in nature. 20. That the AO/DRP erred in making the above disallowance out of advertisement and selling expenses and in not following the decision of the ITAT in the case of Sony India Private Limited (315 ITR 150). 21. That the AO/DRP erred in law and in facts and circumstances of the case in making disallowance of the 10% of advertisement and selling expenses, as such expenditure has been adjusted by the TPO while making the transfer pricing adjustment, thereby resulting in double disallowance to the extent the same has been disallowed in view of the TPO s order. 22. That the AO/DRP erred in law and in facts and circumstances of the case in making arbitrary disallowance of 10% of advertisement and selling expenses holding the same as capital in nature which is not supplemented by proper examination of facts. PENALTY FOR CONCEALMENT OF INCOME 23. That on facts and in law, the AO/DRP erred in holding that the Appellant has furnished inaccurate particulars o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be relying upon the orders of the TPO, DRP and the AO. However, qua the grounds of appeals raised by the assessee in the present appeal, it was his submission that they are more or less covered in the department s favour by the detailed findings given by the Special Bench in the case of LG Electronics India Ltd. 4.2. In the above factual background, Ld. AR inviting attention to the grounds raised submitted that the ground nos-1 2 are general in nature; ground no-3-16 are addressing the Transfer Pricing adjustment in regard to the AMP i.e the advertisement, marketing and promotional expenses considered at the length in the LG Electronics case. The grounds No-17-21, it was stated are Corporate issues agitated by the assessee and ground No-22 is premature. 5. Before referring to the arguments of the respective parties in detail, we think it appropriate to refer to the facts on record. 5.1. The relevant facts of the case in regard to the profile of the assessee and Sony Ericson group as appearing in the TPO s order u/s 92CA(3) are as under :- 2. Profile of the assessee and Sony Ericson Group:- 2.1 The Sony Ericson offers mobile multimedia devices, including feat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii. Receipt of Services ₹ 19,738,690 iv. Cost Recharge Paid ₹ 1,910,724 v. Cost Recharge Received ₹ 114,047,737 5.3. Considering the facts that the assessee had incurred a huge cost in advertising, marketing and sales promotions for promoting the brand name. The TPO required the assessee to explain the following points:- 1. Who owns the brand name? 2. Is there any agreement for use of brand name? 3. Whether any payment is being made to the AE for use of brand name? 4. Whether any payment is being received from the AE for promotion of brand name in India? 5.4. In response thereto, it was stated on behalf of the assessee that the trade name Sony Ericson is not a registered trademark and Sony Ericson Mobile Communication AB, Sweden is considered to be the economic owner of the brand/ that the trade name and trade mark were provided to the assessee without any charges/ that the assessee purchases the products at resale price minus transfer price/ that the price is adjusted according to the price level development in the marketing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of credit notes represents the excess price charged by the AE which has been credited to the assessee so as to achieve an arm s length return on sales by the assessee in accordance with the business model of the assessee. 5.6. On the basis of above facts it was clear that the credit notes amounting to ₹ 738,370,409/- have no relations with the expenditure that the assessee has incurred on the AMP for which no compensation/reimbursement has been made by the AE. 5.9. Taking note of the Transfer Pricing Study Report of the assessee company, the TPO observed as under :- SEIN (the assessee) has employed a team of employees for carrying out local marketing of mobile phones in India. The global recognition of brand name of Sony Ericson provides good brand equity in India as well as overseas. This also provides support to SEIN s marketing efforts. SEIN also undertakes various product promotion activities such as conducting road shows, participation in industry events, advertising in all forums of media channel, which includes magazines, newspaper, television, radio etc. 5.10. Further taking note of the Audited financials, he observed that the assessee company does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, the proposed adjustment of ₹ 1127,273,275/- was proposed in the following manner :- 4.12. The amount of ₹ 980,237,631/- was spent by the assessee company over and above the bright line limit for provision of services related to AMP purely for the AE. An independent enterprise would not incur expenditure for promoting the trade names owned by some third party. This involves both monetary expenditure and efforts of the independent enterprises. Such independent enterprises would be remunerated for such efforts. A mark up of 15% on cost incurred by the independent party would be reasonable and commensurate to the efforts put in by the independent enterprises. It would also represent the likely interest foregone by the enterprise. Thus the proposed adjustment is computed as under :- Value of Gross Sales Rs.16,386,808,123/- Bright line 1.08% Amount that represent bright line Rs.176,977,527/- Expenditure on AMP incurred by assessee Rs.1,157,215,159/- Expenditure in excess of bright line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010 which defined Marketing Intangibles and after discussing the situation where marketing activities are undertaken by an enterprise who is not the owner of the trade mark or trade names and also considering the Australia published Guidance in 2005 (NAT 14586-11.200) held that bright line is an internationally accepted economic tool which is applied to determine and ascertain the expenditure which a routine distributor would incur to market and promote the products which it is dealing with and incase the brand name is not owned by the assessee the expenditure incurred beyond the bright line is to be re-imbursed by the beneficial owner of the brand name. Accordingly rejecting the explanation of the assessee, the TPO accepted as pointed out by the assessee that the advertisement, marketing and distribution expenses, sales ratio of the 12 companies worked out at 3.35% and the AMD (Advertisement, Marketing and Distribution Expenses), sales ratio of the assessee was 7.06%. As such the AMP sales ratio of comparables at 3.35 % was accepted and the expenditure in excess of the bright line was computed at ₹ 60,82,57,087/- in the following manner :- 10.1. Thus, the amount which r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However since no grievance qua the comparables has been posed by the assessee, only the relevant finding under challenge is reproduced hereunder :- 7.18. The panel, therefore, confirm the action of TPO, subject our direction in para 7.14 and para 7.16 in regard to proposed adjustment on account of AMP expenses incurred by the assessee as no independent person, particularly in a long term arrangement, would forego the compensation for the additional marketing activities undertaken by him. The TPO has rightly held that for this effort of the taxpayer the AE needs to compensate it as it has been found that the assessee has incurred excessive AMP expenses there is a case of receiving suitable compensation from the AE. Development and promotion of a brand in India directly benefits the AE also. 7.19. The TPO had charged mark up of 15% on the AMP expenses for the entrepreneurial efforts including use of its infrastructure etc. The assessee has objected to the action of the TPO. We have considered the taxpayer s objections but are not in agreement with the same. No independent person would carry out such marketing activity involving promotion of brand name owned by other party with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 96 to 105 of the paper book) before the TPO, it was submitted that the assessee had argued that the remuneration of a distributor could be either by way of reduced price of goods purchased or a service fee or by receipt of a credit note that may be adjusted against any of the elements of costs incurred by the distributor. In the facts of the present case, it was submitted the assessee is in receipt of a credit note of ₹ 73 crore odd and this fact can be verified and L.G. Electronics case has specifically held that this is a fact to be examined as such the issue has to be remanded. Specific attention was invited to para 19 and 21.10 of the decision of the Special Bench. It was his submission that these facts were before the TPO/DRP and they have refused to give due consideration to these facts. It was argued that the TPO cannot dictate to the assessee to follow a specific business model to get remuneration and insist that remuneration necessarily has to come by way of a separate cost plus mark-up method only. 5.19.2. It was argued that a manufacturer may send goods to two different distributors at the same price and may compensate the distributor who takes the responsibi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... later stage. The Special Bench in the case of LG India has held that comparable gross margin does not necessarily mean that the price of goods has been reduced to compensate for higher AMP expenditure since a higher profit can be a function of many factors. While this may be true for an entrepreneurial manufacturer like LG, the same is not applicable to a distributor. A distributor has primarily two types of costs : one is the cost of goods sold the other is the overhead costs which have been incurred for undertaking various functions like advertising and marketing. In the context of the example outlined above, when the first a distributor who is responsible for undertaking advertising and marketing function (thus increasing the quantum of its overhead costs) is sold products at the price of 1.25 per unit, the distributor ends up making a loss till it is compensated by the manufacturer by way of a subsidy/subvention. (Refer page 349 to 350 and 108 of). 5.19.4. It was submitted that the FAR analysis of comparables and that of the assessee has not been disputed by the TPO. A perusal of the submission numbering 60 pages at page 21 of the same further states that without preju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are claimed to be no risk or low risk bearing entities and are getting fixed and routine return on cost plus basis. They do not get a share in the excess profit relatable to local marketing intangibles. Accordingly, extra-ordinary AMP expenditure does not enhance the profitability of Indian subsidiary or related party. This conclusion of the tax authorities is further supported by the fact that these so called risk-free or limited risk distributors have disclosed huge losses even when they are entitled for fixed return on cost plus basis and should not have incurred losses. 5.19.7. Accordingly it is argued that even in the Indian Tax Administration s view the marketing intangibles arise only in cases where profits for the distribution activities are not sufficient. It is further argued that all international literature on transfer pricing also holds the view that a distributor can be remunerated for its AMP activities through adequate net margin sale of imported products. 5.19.8. Reliance has been placed on para 6.38 of page 25 of vol.-3 contains the OECD Guidelines on transfer pricing, the same is reproduced hereunder:- 6.38. Where the distributor actually bears the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that of comparable companies, the benefits obtained by B result in profits similar to those made by independent distributors and therefore the arrangement are at arm s length. Since in the example, the profits earned by B were same as that of comparable companies, it was concluded that benefits obtained by B result in profits similar to those made by independent marketers and distributors from similar marketing and distribution agreements. Hence, the arrangement was held to be at arm s length. 5.19.10. Reference may also be made to the 3 paged written submissions filed on the date of hearing addressing Transfer Pricing issue. Para 2 of the same is extracted hereunder :- 2. During the year the assessee aggregated a PLI of 2.5% where as the comparables selected by applying the FAR analysis resulted in a comparable of 0.45%. By way of an arrangement between the assessee and its AE, the profit margin of the assessee is always maintained above 2% for any financial year, the AE reimburses the assessee by way of credit notes so that the profit margin of the assessee remains above 2%. In the year under consideration also the AE issued credit notes of ₹ 73 crores which retain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me is not in the context of transfer pricing as such does not have any relevance in the present proceedings. 5.20.1. Subsequently, the parties were required to clarify the position in view of the fact that the Ld. CIT(A) DR had placed on record his written submissions to which it was considered necessary to have the response on behalf of the assessee. The stand of the department was that the DRP s order is a very reasoned and speaking order. As such, there is no reason to restore the issue. The following note was placed on record by the CIT(A) DR reproduced hereunder :- MAY IT PLEASE YOUR HONOURS :- The plea of revenue is that the issue regarding AMP expense etc. are covered by the LG decision of ITAT (in ITA No. 5140/D/2011). The elaboration hereinafter is for treatment of subsidy only. If there is an element of Subsidy given by the AE to the Indian Entity, (by any name such as credit notes or subvention or anything similar), then it has to be established by the assessee that the subsidy was specifically towards AMP expenses (or towards brand building or for creating or feeding intangibles or for any similar purpose). This is for the reason that law mandates tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claims is not an international transaction. Even the Hon'ble ITAT, in the case of M/s. LG Electronics (as referred above), has held, on pages 101 102, point nos. 9 10, as follows- In our considered opinion, following are some of the relevant questions, whose answers have considerable bearing on the question of determination of the cost/value of the international transaction of brand/logo promotion through AMP expenses incurred by the Indian AE for its foreign entity:- ......................... 9. Whether the foreign AE is compensating the Indian entity for the promotion of its brand in any form~ such as subsidy on the goods sold to the Indian AE? 10 Where such subsidy is allowed by the foreign AE~ whether the amount of subsidy is commensurate with the expenses incurred by the Indian entity on the promotion of brand for the foreign AE? An analysis of item no. 9 above shows that the compensation by the AE has to be specifically for promotion of brand. This compensation, though, may be in the form of cash subsidy, or in the form of free advertising material, or free marketing assistance, or credit notes, or in any other form. Thus the first condition is that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respectfully submitted that during the course of the transfer pricing assessment it was specifically stated by the assessee that it has received subsidy from its parent amounting to ₹ 73.83 crores so as to maintain its profitability above 2% in any case. It would be seen that the TPO has made an adjustment of ₹ 69.94 crores to the arm's length price and if the amount of subsidy is considered no adjustment is required to be made on the facts of the present case. 2. Selling expenses and sales promotion expenses cannot be considered to be cost incurred for brand promotion expenditure To determine the value of the costs incurred by SOMC India for the purpose of brand promotion, the TPO in addition to advertising cost has considered the following two items of expenditure: Selling expenses Sales promotion expenses The appellant has clearly quantified the above stated amounts and explicitly determined the expenditure incurred only on advertising and place this information on record with the TPO/DRP. The quantification of these figures along with the relevant paperbook references are as follows: Nature of expense Amount ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esearch expenses of ₹ 567. 49 lacs. In view of our decision in allowing the claim of the assessee being relatable to sales promotion expenses, this ground of appeal is thus allowed. The ground nos. 2.14 to 2.16 and ground no 4 are thus allowed . Similar approach has been followed by Delhi ITAT in the case of Canon India Pvt. Ltd Vs. DCIT Cir 3(1) (ITA No. 4602/Del/2010, 5593/Del/2011 and 6086/Del/2012) in para 7.7 (Copy of order is attached herewith) Therefore, it is humbly submitted that following Special Bench and coordinate bench order the expenses in connection with sales are incurred post occurrence of ales and such expenses reduces the cot of goods sold and are directly linked to sales and cannot be attributed to advertisement. Therefore, expenses amounting to INR 49.66 crores cannot be held as such expenditure which helps in building/promoting Sony brand and should be excluded from advertisements, marketing and promotion expenses for determining the cost/value of the international transaction. 3. To the extent of expenditure incurred on advertising and sales promotion, there has been double disallowance/addition as this expenditure has been treated as capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry fact driven as such, we first propose to refer to the Transfer Pricing Study made available to the TPO by the assessee. The same is placed on paper book pages 1-53. 6.1. A perusal of the same shows that as per the Transfer Pricing study available on record, it is claimed that Sony Ericson is a company incorporated in India on 23.04.2007 and is a subsidiary of Sony Ericson Mobile Communication AB, a company incorporated under the laws of Sweden. The Swedish entity is a 50:50 joint venture between Telefonaktiebolaget LM Ericson (Sweden) and Sony Corporation (Japan). The ownership pattern depicted in the Transfer Pricing study is as under:- 1.2.2. SEIN is a company incorporated in India on April 23, 2007 and is a subsidiary of Sony Ericsson Mobile Communications AB , a company incorporated under the laws of Sweden. The Sweden entities a 50:50 joint venture between Telefonaktiebolaget LM Ericsson (Sweden) and Sony Corporation (Japan). 6.1.1. As per the Transfer Pricing study the Sony Ericson Group offers mobile multimedia devices, including feature-rich phones and accessories, PC cards and M2M solutions for end users. Addressing the ownership of intellectual proper and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e based on facts and financial data for FY 2007- 08 and are pertinent to financial year ended on March 31,2008. On a going forward basis, the results would need to be altered so as to incorporate latest financial results and any changes in the functions performed, risks assumed and the level of tangible and intangible assets owned and employed by SEIN and its AEs. Also, we recommend that SEIN reviews and update its transfer pricing arrangements to reflect changes in the market or changes in the nature of its intra-group transactions. (Bold-texted by the Bench) 6.1.3. The Group Companies Overview unique strength, background, role performance are addressed in the TP study as under:- 2.2.1. Sony Ericson Mobile Communications AB, a company incorporated in Sweden, is a 50:50 Joint Venture (JV) between the world renowned Sony Corporation and Ericson group. The JV entity was launched as an operational business on October 1, 2001. Its activities are focused on product development, industrial design, distribution, sales, marketing and customer services for mobile consumer products. The JV has come a long way since its inception in 2001 to become one of the world s most appealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench) 6.1.5. A perusal of Industry Overview at pages 11 to 18 of the TP study shows that the background has been discussed presumably to address the competition in the market. A perusal of the same shows that from a situation where there was regulated monopoly enjoyed by the Department of Telecommunications (DoT) the Indian telecommunication industry entered a deregulated market competition where there are stated to be multiple players like Reliance, Bharti, Tatas, HFCL etc offering parallel networks to those of Dot/Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL). The growth in the industry is attributed to favourable telecom regulations, reduction in call rates and rise in FDI limit and increasing competition among the service providers. The study points out the performance of earlier entrants using GSM and Code Division Multiple Access (CDMA), the competition amongst the entrenched and new entrants specially the Chinese companies resulting in the price wars amongst the players and need and necessity to fulfill the customer s demand of variety in colour, ringtones and demand for added features like camera, music, imaging, business needs, mobile naviga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mobile outlets to 1,30,000 out of which 75,000 belonged to Nokia. Hence, implying that while Nokia had registered an increase of 4% in number of retail outlets over last year, the other players registered a staggering growth of 684% in number of retail outlets over last year. 3.4.1. Mobile phones have moved to the masses in urban areas, but the challenge is how to address semi-urban and rural areas. Mobile operators already cover most of the urban market and the 40% of new subscribers are coming from rural market. By the end of FY 2007-08, rural subscribers accounted for close to 25% of the total mobile user base in the country. The rural population is likely to reach 800 million by 2010, which is indicates that there is a huge potential market waiting to be tapped by the telecom companies. According to Voice and Data estimates, of the next 250 million users as many as 100 million will be from the rural parts of the country . Turning these estimates into reality will indeed be a herculean task and will require the service providers, vendors, and channel partners to work together so that India can achieve the high telephone penetration levels. 3.4.2 The first challenge is to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xury end of handset market is particularly prone to economic slowdown. Besides that, there is significant pressure on telecom companies to reduce cost that will require efficient distribution of resources. In short, Telecom handset companies might have to fight on all fronts to stay in the race or even survive. (Bold-texting provided for emphasize) 6.2. The functions of the assessee are stated to be local marketing of mobile phones distributor of mobile phones/products; provision for repair and maintenance services which involve, determining long-term and short term policies in relation to the market in India; framing and implementing market penetration and future growth strategies. Based on the broad guidelines provided by the AEs who is responsible for all Research, Core, strategic and complex decisions, it may be relevant to extract para 4.4.5, 4.4.6, 4.4.8 4.4.9 of the TP study as under :- 4.4.5. The overall marketing strategy is developed by the AEs as they have the requisite experience for undertaking this activity. Based on the broad guidelines provided by the AE, SEIN develops the local advertising and marketing initiatives. 4.4.6. Since the mobile handsets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under :- 4.5.4. The trade name Sony Ericson is owned by overseas Group Companies. Accordingly, the Indian entity is a distributor of branded products, the brand being owned by the overseas supplier. The sale of a branded product to a distributor carries with it the stated or implied right to use the supplier s trademark or trade name only for the purpose of reselling the supplier s products. SEIN does not have nay other additional rights to use or exploit the marketing intangibles (trademarks or trade names) owned by Group Companies. 6.4. As per the risk profile the assessee is characterized as a normal risk distributor carrying out sales marketing and distribution activities. Before we proceed to consider how and to what extent the decision of the Special Bench in the case of L.G. Electronic s case is applicable to the facts of the present case, it is necessary to emphasize a relevant fact that the principal appellant in the case of L.G.Electronic s case was a licensed manufacturer. On the other hand in the present case, the assessee is a distributor. Hence while considering the precedent value of Special Bench in L.G.Electronic s case to the facts of the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in those cases and consequently arguments thereon which they may deliberate and at times without the benefit of specific arguments on those facts. The observations which may have been made in passing in these deliberations do not form the ratio decidendi of the decision. It would be too much to ascribe and read precise meaning to words in a decision which the judges who wrote them may not have had in mind. In support of the above legal position, we may make specific reference to CWT vs Dr. Karan Singh and Others. (1993) 200 ITR 614 (SC); CIT vs K. Ramakrishnan (1993) 202 ITR 997 (Kerala) and KTMTM Adbul Kayoom another vs. CIT (1962) 44 ITR 689. The observations of the Hon ble Apex Court in the case of CIT vs. Sun Engineering Works Pvt. Ltd. (1992) 198 ITR 297 (SC) specifically observed that it is neither desirable nor permissible to pick out a word or a sentence from the judgement of the Hon ble Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared. 6.6. We may also quote the observations as quoted in CIT vs K. Ramakrishnan (1993) 202 ITR 997 (Ker.) and State of Orrisa vs Sudhansu Shekhar Misra and others AIR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action on the basis of the FAR analysis of the comparable companies is necessarily required to be done. In order to decide the applicability of any section, rule or principle underlying the decision or judgement which would be binding as a precedent in a case, an appraisal of facts of the case in which the decision has been rendered is necessary since the scope and authority of a precedent should never be expanded unnecessarily beyond the needs of a given situation as held by the Hon ble Supreme Court in P.A.Shah vs. State of Gujarat AIR 1986 SC 468. More so in the case of transfer pricing the detailed analysis cannot be over looked as only thereafter the applicability of the decision to the facts of a case to which it is sought to be applied can be considered. 6.8. The need in the facts of the present case is more so, as transfer pricing legislation and the Rules thereunder specifically Rule 10B(2) framed u/s 92C of the Income Tax Act mandate that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to specific characteristics of the property transferred or services provided in transactions/ functions performed taki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tirely different. 6.10. In the facts of the present case on behalf of the assessee, the stand has been that keeping its legal claim alive the issue may be restored considering the without prejudice arguments, in terms of the decision of the Special Bench in L.G. Electronic s case. The claim of the department on the contrary has been that the legal issues having been decided against the assessee, the order may be confirmed as the issue is covered . Accordingly, considering the above legal principles addressing the precedent value of decision, we hold that in order to decide the issue reference has to be made to the specific facts of the case and then apply the legal principle which can be said to constitute a precedent for deciding the issues. It would be a grave error of judgement to blindly rely upon a decision as a precedent for all future cases simply because the decision is by a larger Bench or an earlier Co-ordinate Bench since the facts of each and every case will determine the extent to which the said decision is binding. To hold otherwise would set a bad precedent of deciding on issues de-horse the facts on records. This mandatory exercise is always required to be don ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted by the DRP as a result of excluding Rediton India Ltd. and Compuage Infocom will result in 4.02% as the bright line. Applying this bright line there is still a difference in 7.06% and 4.02% as there is still expenditure in excess to the extent of 3.04% (7.06-4.02=3.04). Thus applying the precedent, the expenditure to that extent shall constitute non-routine functions as a result of which the brand owned by the AE has benefited resulting in service to the AE which has been done at the cost of the profits of the assessee earned in India. Accordingly upholding the application of the bright line test and upholding the finding that assessee has entered into an international transaction, the legal issues to that extent are decided against the assessee following the precedent in the decision of the Special Bench in L.G. Electronics case. Consequently, the grounds assailing the action of the DRP in upholding the TPO s order, holding the transaction as an international transaction; and holding that compensation for nonroutine incurring of expenditure for advertising the brand of the AE by which the benefit has accrued to the AE applying the bright line test is decided against the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al on Transfer Pricing Manual on Transfer Pricing for Developing countries where India has been represented through the Representative of the Revenue. Para 10.3.8.15 (extracted in the earlier part of this order) addresses the concern of the Revenue on which it has been argued that the concern expressed is in the context of distributors who are stated to be no risk/low risk entities showing negative incomes/huge losses. From a perusal of page 23-26 paged written submission numbering 60 pages, it is seen that in the recently released Practical Manual on Transfer Pricing Manual for developing countries which includes the working of various authors including Representatives of Revenue, Govt. of India as is evident from the Forward to the Manual the concerns address loss making distributors who are stated to be no risk//low risk distributor. The participation of the Representative of India evidenced from the Forward to the Manual is reproduced for ready-reference :- While consensus has been sought as far as possible, it was considered most in accord with a practical manual to include some elements where consensus could not be reached, and it follows that specific views expressed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also supports the argument that a distributor can be rewarded by pricing adjustment; direct payment of fees for services rendered and also by subsidies and credit notes etc. In the facts of the present case, it needs to be kept in mind that the assessee is characterized as a distributor and considering its FAR analysis it has performed a higher intensity of services when compared to its comparables. The distinguishing feature that whereas the assessee has received Credit notes worth 78 crore odd is a fact, the position whether the comparables have also received any such benefit or subsidy as observed in para 19 in the case of the L.G. Electronics needs to be considered as submitted on behalf of the assessee who requests similar enquiry qua the comparables may also be done. As seen the Special Bench in the case of L.G. Electronics was considering the facts of a licensed manufacturer who was the principal appellant and though the Special bench did attempt to consider the situation of all possible diverse business models and various possible permutations and combinations which may be incorporated in the terms of the agreements by the parties finally accepted its humane limitations wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not only supported by International Tax Jurisprudence as available in the OECD Guidelines and Australian Tax Guidelines but is also found supported by Questions 1,9 10 of the L.G. Electronics case as considered by the Special Bench. The assessee has made a reference to its Global Pricing Policy on which the TP study is based, the same may be produce before the TPO/AO. As such the arguments of the assessee to the above extent are upheld. 6.15. On the issue of mark-up if still so warranted on facts the arguments of the Ld. AR have been that the same is excessive. It is seen that there is no discussion in the TPO s order as to why a mark-up of 15% is adequate. Similarly DRP also does not give any justification for reducing the same to 12.5%. We refrain from substituting the arbitrary mark-up by our own arbitrary estimate in the absence of any facts or material on record. Even estimates have to have some rationale and reasoning which is completely absence in the orders and arguments advanced before us. Accordingly, we deem it appropriate to set aside the orders and restore the issue back to the TPO/AO with the direction to give a rationale basis for applying a mark-up after hea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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