TMI Blog2015 (8) TMI 1386X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction is clubbed with the other international transaction of the assessee. Even after giving effect to the AMP expenditure of the assessee the margins of the assessee would still the higher than the margin of the comparable which is =0.13%. Thus, in the facts and circumstances of the case, the inclusion of the sales related expenditure in the category of AMP is not justified as held in the light of the judgment of the Hon’ble Delhi High Court in the case of M/s Sony Ericsson Mobile Communication Ltd (2015 (3) TMI 580 - DELHI HIGH COURT ). Accordingly, we delete the addition made by the TPO on account of AMP adjustment. Adjustment on account of ‘Royalty” payment - Held that:- TPO has not undertaken any exercise as per the provisions of transfer price rules and regulation to determine the arm’s length price of royalty payment by the assessee to the AE. The assessee has also not furnished a separate comparable analysis to establish that the payment of royalty is at arm’s length. We find that the issue was not raised by the assessee before the DRP because the TPO did not make any adjustment on account of royalty payment on the ground that the same has got subsumed in the AMP adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant, without appreciating tht no such method has been prescribed under the Act and Rules. 6. Considering inappropriate companies as comparable for benchmarking AMP expenses. 7. Without prejudice to the above, erred in holding that items o selling expenditure such as incentives to distributors in the form of free samples, discount and other schemes.etc should be considered for making an adjustment without appreciating the fact that none of these expenses can in any way be considered as incurred from brand promotion but these are for effecting sales. 8. Without prejudice to the above, erred in not adopting a scientific search process to identify companies comparable to the appellant s for computing mark-up to be applied to the alleged excessive AMP expenses and considering inappropriate comparables. 9. Without prejudice to the above, erred in not adopting a scientific search process to identify companies comparable to the appellant for computing the mark up to be applied to the alleged excessive AMP expenses and considering inappropriate companies. Adjustment on royalty of ₹ 1,50,59,202/- 10.Erred in determining the arm s length price for royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred by the assessee are ₹ 57,70,313/- whereas the TPO has added various other expenses in the nature of selling expenses including free samples to distributors, additional discount to distributors, discount allowed, trade discount, sales promotion expenses and thereby the TPO took a total AMP expenses at ₹ 4,72,78,948/- as against the claim of AMP expenses of the assessee at ₹ 57,70,313/-. The TPO compared the AMP ratio of the comparables at 4.99% with the AMP ratio of the assessee adopted at 6.06% and observed that the excess AMP expenses should be reimbursed by the AE to the assessee along with the arm s length mark up. Hence, the learned AR of the assessee submitted that the TPO made an adjustment on account of AMP expenses of ₹ 97,87,309/-. The learned AR further submitted that while making the said adjustment on account of AMP expenses the TPO had relied upon the decision of the Special Bench of this Tribunal in the case of L.G.Electronics India Pvt. Ltd. Vs ACIT (2013) 22 ITR (Trib.) 1(Del.)(SB). The learned AR has pointed out that the Special Bench has specifically observed that the expenses which are selling in nature should not be considered for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m s length, than no further adjustment on account of AMP expenses is warranted. In support of his contention he has relied upon the judgment of the Hon ble Delhi High Court in case of M/s Sony India (Supra) and submitted that the Hon ble High Court has observed that the bundled transaction approach has been endorsed and it would be illogical to treat AMP as a separate transaction, where TPO/AO has accepted the comparables under TNM Method. He has referred the relevant finding/observations of the Hon ble Delhi High Court in para-Nos.101 193 of the said judgment. 8. On the other hand, learned DR has submitted that the AO has applied bright line test for determination of the arm s length price of AMP expenses incurred by the assessee. The learned DR has further, contended that the TPO has followed the Delhi Special Bench decision in case of L.G.Electronics India Pvt. Ltd (Supra) 22 ITR (Trib.) 1 (Supra). Therefore, the finding of the TPO are supported by this Special Bench decision in case of L.G.Electronics India Pvt. Ltd. The learned DR has further, contended that the assessee itself has submitted the revised working of AMP to sales ratio in the comparable companies before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 10. The learned DR has submitted that a fresh analysis comparables would be required for testing transaction on aggregate basis for treating them as bundled transaction in view of the judgment of the Hon ble High Court in the case of M/s Sony Ericsson (Supra). He has relied upon the decision of Delhi Bench of the Tribunal in case of M/s Reebok India Co. Vs DCIT in ITA No.1246/D/2015 for AY: 2010-11 and submitted that this Tribunal has restored the matter to the file of the TPO/AO for fresh analysis of the comparables. In rejoinder, the learned AR of the assessee submitted that all details and facts are already on record, as submitted before the TPO and further, the facts were placed before the DRP therefore, the matter should not be remanded for any fresh analysis, but has to be considered in the light of the decision of the Hon ble Delhi High Court in the case of M/s Sony Ericsson Mobile Communication India Ltd(Supra). 11. We have considered the rival submissions as well as the material on record. The assessee has entered into various international transactions with its AE in respect of the purchase of raw materials, purchase of traded goods, export of finished goods, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rison with the prevailing LIBOR at 5.38%. The TPO accepted the purchase and sales, interest on debentures international transactions at arm s length. However, the TPO propose to make the adjustment on account of AMP expenses incurred by the assessee because in view of the TPO, it was incurred for promoting the brand value of the associated enterprise. The dispute before us is regarding the items of expenditure which can be part of the AMP expenses. The assessee has shown AMP expenses at ₹ 57,70,313/- and arrived AMP to sales ratio at 0.74%. The TPO recomputed the AMP sales ratio by including certain other expenses on account of free samples to distributors, discount to distributors, trade discount, sales promotion expenses etc. and arrived at AMP to sales ratio at 6.06% as under; Sl.No. Nature of expenses Amount(INR) 1 Total income 78,05,61,766 2 AMP expenses incurred by FC India (as submitted by assessee vide reply dated 20 Jan 2013.) 57,70,313 3 Free samples to distributors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untancy practices and commercial and business sense. The expenses being in the nature of selling expenses have an immediate connect with price/consideration payable for the goods sold. They are not incurred for publicity or advertisement. Direct marketing and sale related expenses or discounts/concessions would not form part of the AMP expenses . 14. Thus, it is settled by the Hon ble High Court that the marketing or selling expenses like trading discounts, volume discounts etc. offered to the distributors or retailers are not in the nature or character of brand promotion. The Hon ble High Court has observed that these expenses are not directly or immediately related to brand building exercise but, have a live link and direct connect with marketing and increased volume of sales or turnover. To include and treat the direct marketing expenses like the trade or volume discount or incentive as brand building exercise would be contrary to common sense. Thus, the Hon ble High Court has held that the direct selling and marketing expenses or discount concession would not form part of AMP expenses. As similar view has been taken by this Tribunal in the series of decisions, as relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid after the approval taken from the Government of India, FIPB approved the rate of royalty payment up to 8% on exports and 5% domestic sales. Thus, the assessee claimed that the payment of royalty at the rate of 3% which is less than the approved rate by the FIPB is at arm s length. The TPO while determining the arm s length price of the royalty concluded that no royalty was required to be paid by the assessee and accordingly, determined the arm s length price at NIL. However, no adjustment was made by the TPO by observing it got subsumed in the AMP adjustment. 16. Before us, learned AR of the assessee has submitted that no specific method is used by the TPO while determining the arm s length price in respect of royalty as NIL. The learned AR has further contended that all the international transactions including the payment of royalty meets arms length test, because the assessee s operating margin are higher than the comparable companies engaged in the similar activities. He has relied upon the decision of the Hon ble jurisdictional High Court in case of CA Computer Associates Pvt.Ltd 351 ITR 69 as well as the decision of the Co-ordinate Bench of this Tribunal in case of M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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