Contact us   Feedback   Annual Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2015 (11) TMI 15 - ITAT DELHI

2015 (11) TMI 15 - ITAT DELHI - TMI - Transfer pricing adjustment - determine the ALP of 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

afresh in accordance with the manner laid down by the Hon’ble High Court in Sony Ericsson Mobile Communications India (P.) Ltd. (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 Communications India (P.) Ltd. (supra). - Decided in favour of assessee for statistical purposes. - ITA No.789/Del./2015 - Dated:- 28-8-2015 - SHRI R.S. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2010-11. 2. Briefly stated, the facts of the case are that the assessee, is a wholly owned subsidiary of Nikon Corporation, Japan ( Nikon Japan ). It is engaged in the distribution and marketing services for Nikon products in India. 2.1 The assessee e-filed its return declaring loss of Rs. (-) 22,93,287/- which was duly processed u/s 143(1) on 31.05.2011. 2.2 During the course of assessment proceedi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ived CUP 2,29,50,609 7 Cost of reimbursements paid CUP 28,54,154 2.3 The assessee employed the Transactional Net Margin Method (TNMM) in respect of three international transactions; the Comparable Uncontrolled Price (CUP) method in respect of three transactions; Resale Price Method in respect of one international transaction. On a reference made by the AO for determining the arm s length price (ALP) of the international transactions, the TPO noted that for (i) Purchase of fixed assets (ii) Sales .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Point Ltd. 6.27 -0.48 5 Empower India Ltd. 2.89 0.03 6 General Sales Ltd. 23.66 -4.79 7 MVL Industries Ltd. 11.08 8.58 8 Mobile Telecommunications Ltd. 6.20 0.51 9 Salora international ltd. 9.32 2.24 10 Spice Mobiles Ltd. 18.87 2.07 Average 10.05 1.37 Nikon India 17.65% -1.76% 2.4 The assessee s contention was that for above mentioned international transactions, the PLI being operating profit/sales of comparable was 1.37% as compared to -1.76% of assessee i.e. within +-5% range as per proviso to .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

hmarked by aggregating it with other transactions in different business segments which have been analyzed under RPM/TNMM without any further analysis as can be observed from the TPO s order which reads as under: (Benchmarking of international transactions relating to Advertisement and Sales Promotion:- 2. It is seen from your audited financials that a sum of 37,62,75,469/- has been incurred by you on advertisement and marketing and sales promotion (AMP). This transaction does not appear to have .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

promotional activities (AMP), was developing marketing intangible for Nikon Japan. The TPO, for benchmarking the AMP expenditure, took the following companies as comparable and rejected the other companies by stating that some of these companies are either developing brands or are not comparable companies. For benchmarking the AMP expenditure, we require companies which are not developing brands. Hence, only following companies can be taken as comparable: Sr.No. Company name Sales AMP AMP% 1 All .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ne is for the development of marketing intangible (which is owned by the AE) that needs to be suitably compensated by the AE. The amount which represents the bright line and the amount that should have been compensated to the assessee company were computed as under: Particulars Amount Advertising 20,10,75,600 Business Promotion 17,51,99,869 Total AMP expenditure 37,62,75,469 Net Sales 203,87,33,264 AMP/Sales ratio 18.46% 2.8 Accordingly, the arm s length price of this international transaction w .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

eject companies where turnover is less than ₹ 1 Crore (v) Select companies where the ratio of service income to total income is at least 75% (vi) Reject companies where related party transactions exceed 25% of sales (vii) Reject companies that have employee cost less than 25% of total cost (viii) Reject companies that have interest cost more than 25% of total cost (ix) Reject companies that are affected by some peculiar economic circumstances (x) Select companies providing advertising and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cost comes out to be 6%, therefore, total mark-up was held to be 18.36% (12.36% + 6%) which in his view should have been charged by the assessee and calculated the arm s length price of the international transaction related to the AMP expenditure leading to the creation of a marketing intangible as below:- Total Sales Rs.203,87,33,264/- Arm s length level of AMP expense (0.69% of sales) ₹ 1,40,67,260/- AMP expenses actually incurred ₹ 37,62,75,469/- AMP expenditure which should have .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Bright line concept (v) India s position as stated in UN transfer pricing manual needs to be applied (vi) Assessee has a long term royalty free distribution right (vii) Selling expenses (expense in connection with sales) should be excluded from AMP expenses (viii) Quantitative adjustments to be made to determine the value of AMP expenditure/Sales ratio. (ix) Choice of comparables for determining bright line is not correct (x) Mark up charged on the AMP amount above bright line is incorrect, 2.1 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

brand by making excessive AMP expenditure for penetration of brands in India which is much more than the functionally comparable companies taken by the assessee. (Para 9.4 of the TPO order) (iv) The payment for additional functions is deferred till the termination and not given in the due course regularly. Secondly, the royalty might have been embedded in the price of the product that the assessee is importing from the AE. (Para 10.3 of the TPO order) (v) The benefit of AE is significant and onl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

TPO in Para 14.4 of his order held that the adjustment which the assessee is seeking to make in respect of advertisement of new products is not permissible in view of LG s case. Because, bright line is for determining the routine expenditure which is incurred just for exploitation of already established brand while the excessive expenditure is in respect of expenditure for brand penetration. Hence, on account of new products, in fact the expenses are clearly in the nature of brand penetration an .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rk-up of 6% was proposed to be charged to cover the return on funds that have been blocked and remuneration for the services provided, i.e. interest rate of 12% on half of funds which should have been reimbursed. The assessee contended the same and as per the inter-company agreement, Nikon India is allowed a credit period of 60 days. As per the agreement, if the company pays beyond 60 days, then an interest rate of LIBOR +2% would be charged. However, it is noted that the AE has not charged any .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

/- AMP expenditure which should have been reimbursed ₹ 36,22,08,209/- Mark-up @ 12.21% ₹ 4,42,25,622/- Adjustment u/s 92CA ₹ 40,64,33,832/- 2.17 The AO, accordingly, after giving opportunity to the assessee, passed the draft assessment order dated 18.03.2014 by making addition of ₹ 40,64,33,832/-. 2.18 The assessee, inter alia, filed the following objections before ld. DRP :- 1 That on the facts and circumstances of the case and in law, the draft order passed by the ld. A .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he draft assessment order based on which he reached the conclusion that it was expedient and necessary to refer the matter to the ld. TPO for computation of the arm s length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ( Act ) 4 The Ld. AO/Ld. TPO erred on facts and in law in enhancing the income of the assessee by INR 406,433,832 by holding that the assessee incurs excessive AMP (advertisement, marketing and promotion) expenses in relation to its business activities t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

O to the Ld. TPO, is beyond the powers vested with the TPO under section 92CA of the Act. 4.2 disregarding the detailed submissions made by the Assessee on the functional, asset and risk analysis of the Assessee related to its marketing function as an independent decision maker and hence should also assume the cost associated with its functions and decisions 4.3 disregarding the contractual arrangements between the Assessee and the AE wherein the Assessee acts as a long term, exclusive distribut .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the Assessee as part of sales promotion expenditure 4.6 not providing quantitative adjustments to take into account the differences in comparability between the assessee and the companies selected for the Bright line analysis. Specifically, the Ld. TPO/AO have not provided for quantitative adjustment to account for: a. no payment for royalty made by the Assessee to the AE for the right to use the brand name/trademark b. differences in expenses incurred by the assessee visa vis comparable compan .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ve AMP expenses and by holding that a mark-up has to be earned by the Assessee in respect of the alleged excessive AMP expenses; 4.9 applying a mark-up of 12.21% on the alleged excessive AMP expenses, for determining the compensation/ service fee towards alleged AMP service by the assessee to its AEs by disregarding the new comparables selected by the Assessee. 5 The Ld. AO erred in facts and in law in charging and computing interest under section 234A, 234B, 234C and 234D of the Act 6 That on t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

est of the natural justice. 2.19 The Ld. DRP after considering the assessee s objections, concluded as under :- (i) Ground of objection nos. 1 & 2 are general in nature therefore no specific direction is required on these grounds. (ii) Ground of objection nos. 3 to 4.9: Ld. DRP has placed his reliance on the judgment of LG Electronics India Pvt.Ltd. vs. ACIT reported in 29 taxmann.com 300 (Del)(SB) and the above Grounds of Objection are rejected in the instant case. (iii) Ground of objection .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s not required to issue any direction on this ground at this stage and objection is therefore rejected as being premature. 2.20 Accordingly, ld. AO, as per the directions of Ld. DRP, passed the Final Assessment order dated 05.01.2015 upholding the adjustment made of ₹ 40,64,33,832/- by the ld. TPO in his order dated 29.01.2014 u/s 92CA of the Act. 3. Being aggrieved with the order of AO, the assessee is in appeal before us and has taken following grounds of appeal as under :- 1 That on the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s incurred by the appellant, without any reference from the AO, was beyond jurisdiction and bad in law. 3 That on the facts and circumstances of the case and in law, the DRP/AO/TPO erred in making/upholding the Transfer Pricing ( TP ) adjustment of INR 40,64,33,832 on account of AMP expenditure, alleging the same to be not at arm s length as per provisions of sections 92C(1) and 92C(2) of the Act, read with Rule 10D of the Income Tax Rules 192 (the Rule ) 4 That on the facts and circumstances of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

not appreciating that no such TP adjustment can be made in respect of AMP expenses being legitimate, bonafide and deductible business expenditure incurred by the appellant towards payments to independent parties the benefit of which accrues to the appellant. 6 That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred, in concluding that the appellant, by incurring excessive AMP expenditure, was rendering intra group services to its AE resulting in creation of marketin .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ethod for benchmarking the AMP expenditure incurred by the appellant without correctly applying any of the methods in the manner prescribed under Rule 10B of the Rules. 9 That on the facts and in the circumstances of the case and in law, the DRP/AO/TPO have erred in applying the Bright line theory as articulated in Transfer Pricing regulations of foreign jurisdictions and decisions rendered by foreign courts (based on specific transfer pricing regulations of those countries). 10 That on the fact .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

erred in not appreciating that all the transactions of the appellant were established to be at arm s length by applying the Transactional Net Margin Method (TNMM) on entity-wide basis, and thereafter the AMP expenses cannot be alleged to be excessive, separately. 12 That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred in considering certain expenses which are inextricably linked to the product sales and did not lead to brand promotion and should have been exclud .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ing comparable companies for benchmarking the AMP expenditure and, further erred in not considering the functionally comparable companies for such alleged brand building services and the DRP further erred in not adjudicating the grounds of objections raised in relation thereto. 15 That the DRP/AO/TPO erred on the facts and circumstances of the case and in law in not appreciating that mark-up could not be levied on the AMP expenditure incurred by the appellant. 15.1 Without prejudice to the above .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the rival submissions and perused the relevant material on record. The Special Bench of the Tribunal in the case of LG Electronics India (P.). Ltd. v. Asstt. CIT [2013] 140 ITD 41/29 taxmann.com 300 (Delhi - Trib.), 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 specificall .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

o 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 consideration for determining the ALP of AMP expenses. In the ultimate analysis, the matter was sent back to the TPO for undertaking the exercise afresh in the light of its directions. 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 is .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

judgment on 16th March, 2015, upholding the majority view of Special Bench in LG Electronics India (P.) Ltd. (supra) treating AMP as an international transaction and also conferring jurisdiction in the TPO to determine the ALP of the international transaction of AMP expenses. The Hon ble High Court has held, inter alia, that the international transaction of AMP expenses should be bundled or aggregated with other international transaction carried out by the assessee as a distributor, who either .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

uld be clubbed. It further held that for determining the ALP of such transactions under a combined approach, only such comparables should be chosen which conform to the AMP functions and other distribution functions conducted by the assessee. If there is some difference in the functions under these international transactions, including that of AMP, between the assessee and the comparables, then, suitable adjustment should be made to bring both the transactions at par. If probable comparables are .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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. 5. We can summarize the relevant position emanating from the judgment of the Hon ble H .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

l; Bright line test cannot be applied to work out nonroutine AMP expenses for benchmarking [Para 194(x)]; • ALP of AMP expenses should be determined preferably in a bundled manner with the distribution activity [Paras 91, 121 & others] ; • For determining the ALP of these transactions in a bundled manner, suitable comparables having undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) & ot .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

& (vi)] ; • In the above eventuality, international transaction of AMP should be viewed in a de-bundled manner or separately [Paras 121& 194(xi)] ; • In separately determining the ALP of AMP expenses, the TPO is free to choose any other suitable method including Cost plus method [Para 194(xiii)]; • In so making a TP adjustment on account of AMP expenses, a proper set off/purchase price adjustment should be allowed from the other transaction of distribution of the products .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nsidered to be the most appropriate Profit Level Indicator ( PLI ). Since the profit margin declared by the assessee was favorably comparable with the average margin of the comparables, which fact has not been disputed by the TPO, then, no adjustment should be made on account of AMP expenses because such expenses stand subsumed in the overall operating profit. This was countered by the ld. DR with reference to certain paras of the judgment in Sony Ericsson (supra) not permitting the acceptance o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

onal 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 nonroutine 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 fu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 in a segregated manner. As such, it becomes immensely important to separately examine the distribution and AMP functions undertaken by the assessee as well as probable comparables. It is vital to highlight the difference between the AMP expenses and AMP .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ity 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 conclusion, will make the AMP spend as a noninternational transaction, which, in our considered opinion, is not appropriate. Once AMP expense has been held to be an international transaction, it is, but, natural that the functions performed by the assess .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 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 agg .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ade 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 functions, then, both the international transactions are required to be segregated and then examined on individual basis by finding out probable comparables d .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tment 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. In such a scenario, again the adjustment will be warranted. In another situation, the AMP functions performed by the assessee and probable comparable may be similar but with varying standards, which will also call for an adjustment. Crux of the matter i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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, so that surplus from the distribution activity could be adjusted against the deficit in the AMP activity. The Hon ble High Court has no where laid down that the AMP functions performed by the assessee should not be compar .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ara 165 of the judgment that, An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be mad .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

omparable undertake 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 functio .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

to be applied, must have reference to the strength and weakness of the TNM method or the applicable method. It was observed that aggregation of transactions is desirable and not merely permissible, if the nature of transaction(s) taken as a whole is so inter- related that it will be more reliable means of determining the arm s length consideration for the controlled transactions. It was further observed that there are often situations where separate transactions are inter wined and linked or are .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

9. Accordingly on a consideration of the entirety of the facts and submission of the parties, we find that reference may also be made to paras 162 and 168 of the said judgement where reference has been made to the position in 2008-09 Assessment year where the assessee is found to have applied resale price method using internal comparables. In para 166 of the said judgement it is seen that the arguments of the assessee were held to be flawed and fallacious for several reasons. However their Lords .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ent. The discussion on the most appropriate method by their Lordships would further support the view taken as the said exercise needs to be done in the facts of the present case. For ready-reference, we reproduce the aforesaid hereunder:- 162. In the case of Reebok India Co. Ltd., the assessee has applied RS Method using internal comparable. Contrary to the general rule, the internal comparable possibly may not be appropriate when the assessed has incurred considerable (not necessarily extra-ord .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he said function is compared. AMP expenses do not get factored and compared. As an abundant caution, we would still add that where adjustments clause (iv) can give reliable and accurate results, internal comparables could still be applied. This would likely happen, when AMP expenses are insignificant in quantum. 163. Thus, in such cases, external comparables where said parties are performing similar functions including AMP expenses would give more accurate and precise results. 164. However, it w .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made when the result would be reliable and accurate. Otherwise, RP Method should not be adopted. If on comparable analysis, including AMP expenses, gross profit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument. Moreover, the contention of the assessed in these appeals would mandate rejection of the RP Method, as an appropriate or most appropriate method. Comparison or comparative analysis is undertaken at stage (ii) Adjustments are permissible and undertaken at stage (iv). Under clause (iii), i.e. at stage (iii), from the price ascertained at stage (ii), expenses incurre .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

termined. In case, it is not possible to make adjustments, then RP Method may not be the most appropriate and best method to be adopted. 167. Before us, the Revenue has not pleaded or submitted that the RP Method should not have been adopted. The TPO and the Assessing Officer did not reject the RP Method adopted by the assessee. The assessed submit that the Revenue accepts functional parity and in fact, without adjustment. Contra, Revenue would argue that the Assessing Officer/TPO and the Tribun .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

eting company that does not own intangible brand rights. Contract value would be treated as NIL. In terms of our finding recorded above, the said finding would not be correct. The approach and procedure for ascertaining /determining arm s length price under the RP Method is different. For this reason, and other grounds recorded, we have passed an order of remit to the Tribunal for examination of the factual matrix. 10. Adverting to the facts of the instant case, we find that the TPO espoused the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he entire exercise carried out by the TPO, he proceeded on an altogether different line in examining the quantum of AMP expense for determining the value of the international transaction of AMP, 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 crys .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nctions. We find no reference in the order of the TPO of making any comparison of the assessee s AMP functions with those of the comparables. Going by the ratio in the case of Sony Ericsson Mobile Communications India (P.) Ltd. (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 simi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ned under sub-clause (ii) should be: adjusted to take into account the differences, if any, between the international transaction and the comparable 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). 12. Sub-rule (2) of Rule 10B provides that for the purposes of sub- rule (1) , the comparability of an international .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rties to the transactions; (d) conditions prevailing 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 i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ansaction and the uncontrolled transaction with which 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 sti .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

transaction. 14. It is discernible that the prescription of Rule 10B is in complete harmony with the ratio of the judgment in the case of Sony Ericsson Mobile Communications India (P.) Ltd. (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 prof .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

eed to be compared with uncontrolled transactions. Because of their inter-twinning, 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 wit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ment is not possible, then such probable comparable should be eliminated. If, by making 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 a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

his aforementioned arguments, ld. counsel further submitted that, in any view of the matter, while determining the AMP expenditure, the components relating to selling and distribution expenses have to be excluded. In view of decision of Hon ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra), ld. counsel submitted that in order to determine the AMP functions performed by assessee vis-a-vis comparables, then the matter should be restored back to the fil .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

le 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 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

O having no jurisdiction to determine the ALP of AMP expenses, is dismissed following the judgment in the case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra). 19. Also, in the following cases, similar view has been expressed as under :- 1. 59 taxmann.com 148 (Del) Perfetti Van Melle India (P.) Ltd. vs. DCIT 15. Turning to the facts of the case, we find that the TPO/AO have followed the Special bench decision in LG Electronics India (P.) Ltd. (supra) for determining the ALP of AMP .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rcumstances, we set aside the impugned order and remit the matter to the file of the AO/TPO for deciding it afresh as per law. In this fresh exercise, the TPO will follow the parts of the judgment in Sony Ericsson Mobile Communication (P.) Ltd. (supra) as are common to both Manufacturers and Distributors; apply the parts of the judgment as are applicable to a Manufacturer ; and ignore the parts of the judgment which pertain exclusively to a Distributor . Needless to say, the assessee will be all .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

etermining 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d. vs. Addl. CIT 13.15. Turning to the facts of the case, we find that the TPO/AO have computed disallowance of AMP expenses on the basis of bright line test. There is no discussion about the AMP functions carried out by the assessee or comparables. Now since the Special bench order has been partly modified by the Hon ble Delhi High Court, including the non applicability of the bright line test, and no material has been placed on record by the ld. AR to, firstly, demonstrate the AMP functions ca .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ore the parts of the judgment which pertain exclusively to a Distributor . Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. 13.16. Now we espouse the contention of the ld. AR to send the matter back to the TPO/AO for deciding this issue in conformity with the decision yet to be rendered by the Hon ble High Court in its own case, for which hearing is still going on. This contention, in our considered opinion, is devoid of any merit. It i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

f the Hon ble Delhi High Court in Sony Ericsson (supra), which has also dealt with the treatment to be given in the context of a manufacturer. The Delhi bench of the tribunal in some decisions including Perfetti Van Melle India (supra) has dealt with the manner of computation of the ALP of the AMP expenses incurred by manufacturers in the light of the judgment in the case of Sony Ericsson (supra). No reasons, except the pendency of the matter in the Hon ble High Court in assessee s own case, hav .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version