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2016 (3) TMI 581 - ITAT DELHI

2016 (3) TMI 581 - ITAT DELHI - TMI - Transfer pricing adjustment of advertisement, marketing and promotion (AMP) expenses - Held that:- We find that the Hon’ble jurisdictional High Court of Delhi in the case of Sony Ericsson Mobile Communication India (P) Ltd. [2015 (3) TMI 580 - DELHI HIGH COURT] has been pleased to hold that marketing and selling expenses like trade discount etc. are not AMP expenses.

As there is inappropriate discussion about the precise nature of expenses which h .....

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ircumstances, 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) - Decided partly in favour of assessee for the statistical purposes. - ITA No.5490/Del/2012 - Dated:- 3-12-2015 - SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM For The Assessee : Shri Manoj Pardasani, CA For The Department : Shr .....

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ed by the assessee was earlier disposed of by the Tribunal vide its order dated 13.9.2013 restoring the computation of ALP of AMP expenses to the TPO to be decided in accordance with the Special Bench decision in the case of LG Electronics India (P) Ltd. vs. ACIT (2013) 152 TTJ 273 (Del) (SB). The assessee appealed against the Tribunal order. The Hon ble jurisdictional High Court has disposed of the assessee s appeal in a batch of appeals with the leading order in Sony Ericson Mobile Communicati .....

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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 .....

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,56,62,586/-. Adding the mark up of 15%, he worked out a transfer pricing adjustment of ₹ 12,15,11,974/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). Eventually, the AO, vide his final order, made an addition of ₹ 12.15 crore and odd on this issue. The assessee is aggrieved against this addition. 5. We have heard the rival submissions and perused the relevant material on record. Special Bench of the Tribunal in the case of LG Electronics India Pvt. L .....

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f non-routine AMP expenses and held that the ALP of AMP expenses should be determined on Cost plus method by treating AMP transaction as a separate and distinct from other international transactions. It was further held that the selling expenses directly incurred in connection with the sales do not lead to 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 e .....

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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 int .....

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d 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, 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 asses .....

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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 expenses in a segregated manner, proper set 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 .....

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ected international transactions can be aggregated and section 92(3) does not prohibit the set-off [Paras 80 & 81]; AMP is a separate function. An external comparable should perform similar AMP functions. [Paras 165 &166] ; Bright line test cannot be applied to work out non-routine 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 the .....

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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 .....

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. 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 d .....

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favourably 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 of such a wide proposition. 11. We are unable to accept the argument advanced on behalf of the assessee for deletion of .....

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s of AMP expenses incurred by the assessee and comparables for working out the non-routine 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 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 .....

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e, 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 the AMP activity is performed, the AMP expenses are the amount spent on the performance of such means (functions). To put it simply, an exami .....

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rgument 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 the assessee under such a transaction need to be compared with similar functions performed by a comparable case. If AMP functions performed by the assessee turn out to be different from those performed by a pro .....

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gned 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 aggregation does not take away the separate character of the AMP transaction, albeit related. An analysis and examination of the Distribution and AMP functions carried out by the assessee must be necessa .....

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ld 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 th .....

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omparable 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 compu .....

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t 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 compared with those performed by the comparable parties. On the contrary, it turned down the contention raised by the ld. AR urging for not treating AMP as a separate function, which is apparent from the extraction from para 165 of the judgment .....

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cription 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 functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view amounts to treating AMP spend as a non-international .....

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d 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 .....

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r 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 mak .....

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der :- (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transac .....

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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, .....

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namely - (a) the specific 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 parti .....

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(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 arising from, such transactions in the open market ; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 15. On a comparative reading of sub-rules (1), (2) and (3) of Rule 10B, it becomes palpable that the international tran .....

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there are certain differences due to the contractual terms or the geographical location, etc., then, a reasonably accurate adjustment should be made for eliminating the material effects of such differences so as to bring the international transaction and the comparable uncontrolled transaction on the same podium. If due to one reason or the other, no reasonable accurate adjustment can be made due to such differences, then, such uncontrolled transaction should not be considered as a comparable t .....

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uch 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 uncontroll .....

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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-à-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 pro .....

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activity, should be allowed. 18. Coming back to the facts of the instant case, we find 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 applying the cost plus .....

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