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TMI Blog2016 (3) TMI 581X X X X Extracts X X X X X X X X Extracts X X X X ..... Court has disposed of the assessee's appeal in a batch of appeals with the leading order in Sony Ericson Mobile Communication India (P) Ltd. vs. CIT (2015) 374 ITR 118 (Del) restoring the matter to the Tribunal for a fresh decision in terms of the guidelines laid down by their Lordships in this judgment. That is how this appeal has come up for a fresh consideration before us. 4. Briefly stated, the facts of the case are that the assessee is a subsidiary of Discovery Channel (Mauritius) Pvt. Ltd. with Discovery Communication Inc., USA as the parent company of this group. The assessee is engaged in the distribution of Discovery Channel, Discovery Travel and Living Channel and Animal Planet Channel in India region and also sale of advertisement inventory on the channels. The assessee reported three international transactions which have been enlisted on page 2 of the order passed by the Transfer Pricing Officer (TPO). The assessee employed Transactional Net Margin Method (TNMM) as the most appropriate method for demonstrating that its international transactions were at arm's length price (ALP). On a reference made by the AO for determining the ALP of the international transactions, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Courts against the tribunal orders following the Special bench order. A batch of such appeals, also including the case of the assessee for the year under consideration, led by Sony Ericson Mobile Communications India Pvt. Ltd. Vs. CIT (supra) has been disposed of by Their Lordships of the Hon'ble Delhi High Court, upholding the majority view of Special Bench in LG Electronics (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 simply acts an agent of manufacturer or purchases goods from the manufacturer for resale at his own account. However, in the case of a manufacturer, the import of raw material has been held to be an independent transaction of marketing and distribution. In the case of a distributor, the Hon'ble High Court held that where TNMM has been applied as the most appropriate method, which method has not been disturbed by the TPO, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) & others]; * The choice of comparables cannot be restricted only to domestic companies using any foreign brand [Para 120] ; * If no comparables having performed both the functions in a similar manner are available, then, suitable adjustment should be made to bring international transactions and comparable transactions at par [Para 194 (iii)] ; * If adjustment is not possible or comparable is not available, then, the TNMM on entity level should not be applied [Paras 100, 121, 194(iii) & (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 [Para 93] ; * Selling expenses cannot be considered as part of AMP expenses [Paras 175 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and the comparables. As the bright line test primarily concentrates on the quantitative aspects of the AMP expenses alone, it overlooks the examination of the AMP functions carried out by the assessee on one hand and the comparables on the other. Now, the Hon'ble High Court in Sony Ericson Mobile (supra) has held that AMP expense is a separate international transaction and also bright line test is not applicable for determining the ALP of AMP expenses. The manner for the determination of the ALP of the distribution activity and AMP activity has also been set out by the Hon'ble High Court to be conducted, firstly, in a bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables, and if probable comparables having performed both the functions are not 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 functions. Whereas the AMP functions are the means by which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , then, a suitable adjustment should be made to the profits of the comparable so as to balance 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 doing such separate functions similarly. For the international transaction of AMP spend, this can be done by, firstly, seeing the AMP functions actually performed by the assessee and then comparing it with the AMP functions performed by a probable comparable. If both are found out to be similar, then the matter ends and a comparable is found and one can go ahead with determining the ALP of such a transaction. If the AMP functions performed by the two entities are found to be different, then adjustment is required to be made in the case of a probable comparable, so as to make it uniform with the assessee. The assessee may have possibly done, say, four differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble, will render this alternative approach incapable of compliance. Canvassing such a view amounts to treating AMP spend as a non-international transaction, which is patently incapable of acceptance. 12. Adverting to the facts of the instant case, we find that the TPO accepted TNMM as the most appropriate method and did not make any TP adjustment on account of the reported international transactions carried out by the assessee during the course of its business. He, however, espoused the AMP expense as a separate and distinct item. Treating the AMP spend as a separate international transaction, he applied the Cost plus method and proposed the extant adjustment. In doing so, he segregated routine AMP expenses incurred by the assessee for his business from the non-routine AMP expenses by treating such non-routine AMP expenses leading to the creation of marketing intangible for its AE. This bifurcation of total AMP expenses was done by applying bright line test. It is obvious that in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.' 13. A perusal of the sub-clause (iii) of this Rule divulges that net profit margin under a comparable uncontrolled transaction as determined 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). 14. Sub-rule (2) of Rule 10B provides that 'for the purposes of subrule (1)', the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely - (a) the specific characteristics of the property transferred or services provided in either transaction ; (b) the functions p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the prescription of Rule 10B is in complete harmony with the ratio of the judgment in the case of Sony Ericson Mobile (supra), to the effect that the AMP functions carried out by the assessee are required to be necessarily compared with the AMP functions carried out by a comparable entity in determining the AMP of ALP expenses. Difference between the functions, if capable of adjustment, should be given effect to in the profit rate of the comparable and if such difference cannot be given effect to, then, the probable comparable should be eliminated from the list of comparables. Going further, if no proper comparable survives, then the TNMM should be discarded and an alternative method, may be, Cost plus or any other suitable method be applied for determining the ALP of AMP expenses. 17. At the cost of repetition, we summarize that the Distribution and AMP functions are two separate international activities, which need to be compared with uncontrolled transactions. Because of their intertwinning, 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses incurred for making sales are distinct from AMP expenses and, hence, should not be included in the base amount for consideration. The Hon'ble jurisdictional High Court in Sony Ericson Mobile Communication India (P) Ltd. (supra) has also held so. As there is inappropriate discussion about the precise nature of expenses which have been assailed before us, we consider it expedient to direct the AO to first ascertain the correct nature of such expenses. If these expenses are found to be in the nature of Selling expenses directly in connection with sales, then, they should be removed from the base amount for computing the ALP of AMP expenses. In the otherwise scenario, the AMP expenses, which are not in the nature of Selling expenses incurred directly for sales, should continue to include in the base amount. Under such circumstances, we set aside the impugned order and send the matter back to the file of the TPO/AO for determining the ALP of the international transaction of AMP spend afresh in accordance with the manner laid down by the Hon'ble High Court in Sony Ericson Mobile (supra). 19. In the result, the appeal is partly allowed for statistical purposes. The order prono ..... X X X X Extracts X X X X X X X X Extracts X X X X
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