TMI Blog2015 (12) TMI 561X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire AMP spend for business purpose, thereby leaving nothing for the promotion of brand of its AE, which will be contrary to the judgment of the Hon’ble High Court in assessee’s own case for the A.Y. 2008-09. Under such circumstances, we set aside the impugned order on this issue also and send it to the file of AO/TPO for deciding it afresh after hearing the assessee. Needless to say, the AO, while disposing of this issue, will keep into consideration the context and the ratio of the decision rendered by the Hon’ble High Court in the assessee’s own case for AYs 2002-03 to 2004-05. - Decided partly in favour of assessee for statistical purposes. - ITA No.2931/Del/2015 - - - Dated:- 4-12-2015 - SHRI R.S. SYAL, AM SHRI KULDIP SINGH, JM For the Petitioner : Shri Manoj Pardasani, CA Shri S.K. Agarwal, Advocate For the Respondent : Shri Amrendra Kumar, CIT, DR ORDER PER R.S. SYAL, AM: This appeal by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) on 27.2.2015 u/s 143 (3) read with Section 144C of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2010- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of ALP of AMP expenses. However, the TP adjustment of `Interest on receivables was not altered. The TPO passed consequential order in conformity with the direction of the DRP on 26.2.2015 revising the amount of total adjustment to ₹ 21,50,12,004 instead of the order amount of ₹ 27,41,91,464 inclusive of adjustment on account of Interest on receivables. In the final order passed, the AO made addition for a sum of ₹ 21.50 crore and odd, comprising of ₹ 20,33,78,769/- towards AMP and ₹ 1,16,33,235/- towards interest on receivables. No argument has been advanced before us on account of addition on account of TP adjustment of `Interest on receivable . The assessment order to that extent is, therefore, approved. 4. We have heard the rival submissions and perused the relevant material on record qua the addition on account of transfer pricing adjustment of AMP expenses. In this regard, it is imperative to note that Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. Vs. ACIT (2013) 152 TTJ (Del) 273 (SB), by its majority decision held, inter alia, that AMP is a transaction and also an international transaction within the meanin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of a Distributor, the Hon ble High Court held that where TNMM has been applied as the most appropriate method, which method has not been disturbed by the TPO, then, the international transactions of AMP and Distribution activities should 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 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 pricing provisions for the purposes of determining its ALP separately. In such determination of ALP of AMP expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed 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. 8. The ld. AR initially contended that the assessee is a service company and hence cannot be considered either as a Distributor or a Manufacturer. It was however admitted that considering the totality of the nature of business, the assessee is more akin to that of a Distributor rather than a Manufacturer. The Hon ble High Court has dealt with the case of the assessee in a group of cases who are either distributors or manufacturers. There is no separate discussion qua the assessee in the judgment on the determination of the ALP of AMP expenses. This shows that the assessee has not been considered by the Hon ble High Court as belonging to a separate class other than a Distributor or a Manufacturer. Since the ld. AR has admitted that out of these two options, it is more close to a `Distributor , we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 functions. Whereas the AMP functions are the means by which the AMP activity is performed, the AMP expenses are the amount spent on the performance of such means (functions). To put it simply, an examination 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. The argument of the ld. AR, if taken to a logical conclusion, will make the AMP spend as a non-international 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 is that the AMP functions performed by the assessee must be similar to those done by the comparable, in the same manner as such functions are compared in any other international transaction. However, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pense 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 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, the AMP spend is an international transaction, which is required to be processed under Chapter X of the Act by taking into account the AMP functions performed by the assessee and then comparing such functions with those performed by comparable entities, though, firstly in a combined manner with the Distribution functions. We find no reference to the AMP functions carried out by the assessee in the order of the TPO. As such, there can be no question of making any comparison of the assessee s AMP functions with those of the comparables. Going by the ratio in the case of Sony Ericson Mobile (supra), it is mandatory to make a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... characteristics of the property transferred or services provided in either transaction ; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties 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 if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 can be found having performed both Distribution and AMP functions, then, their ALP should be determined on aggregate basis. If, however, there is some difference in the Distribution or AMP functions performed by the assessee vis- -vis the probable comparables, then an attempt should first be made to iron out such difference by making a suitable adjustment to the profit margin of comparables. If such an adjustment 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 suitab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x issue raised in this appeal is against the disallowance of proportionate advertisement expenses of ₹ 3,17,71,475/- out of total advertisement expenses amounting to ₹ 8,51,90,351/- incurred by the assessee. The facts apropos this issue are that the assessee showed `Advertising sale commission @ 20% of total advertisement income received on behalf of its AE. Remaining 80% was transferred to the parent company with whom the assessee entered into advertising sale agreement. The AO segregated total advertisement expenses as per Profit Loss Account to the tune of ₹ 8,51,90,351/- into two parts, viz, advertisement expenses allocable to total income from advertisement sales commission; and advertisement expenses allocable to advertisement revenues not offered to tax. The later amount of ₹ 3,17,71,475/- was added to the total income, against which the assessee has come up in appeal before us. 19. At the outset, the ld. AR submitted that this issue has been decided by the Tribunal in assessee s favour for the AYs 2002-03, 2003-04 and 2004-05 and the view taken by the Tribunal has been upheld by the Hon ble Delhi High Court. A copy of the judgment of the Hon bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in full. The facts of the current year are thus clearly distinguishable from those of the A.Ys. 2002-03 onwards because in such years the entire amount of advertisement expenses was for earning income and no part was attributable to the creation or promotion of the brand of its AE. The Hon ble High Court in assessee s own case for the A.Y. 2008-09 has restored the computation of the transfer pricing adjustment on account of AMP expenses for marketing intangibles to the tribunal, which has been dealt with by us in a separate order. In disposing of the appeal of the assessee against the transfer pricing adjustment towards AMP expenses for the said A.Y. 2008-09, we have restored the matter to the file of TPO/AO for deciding it in conformity with our directions as deduced from the judgment of the Hon ble Delhi High Court in the case of Sony Ericson Mobile Communication India (P) Ltd. (supra). As admittedly the AMP expenses are one composite amount and there is no separately identifiable advertisement expenses relatable to promotion of TV channels of its AEs, the acceptance of the view point of the ld. AR in treating the entire amount of AMP expenses as deductible u/s 37(1), would amou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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