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TMI Blog2016 (9) TMI 1332X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. ("Haier Group), started its business operations in December 2003 in India. It deals with consumer products across six product categories- refrigerators, colour television/ DVDs, washing machines, microwave ovens and dishwashers. The assessee had reported 8 international transactions, as noted by ld. TPO in para 1.1 of his order, but he noted from the TP study, submitted by assessee that the TP study was silent about marketing intangibles developed by the assessee in India for the products of its AE by incurring huge AMP expenditure, on the ground of assessee not having any significant intangible and no research and development of non-routine intangibles being undertaken. He noted that assessee had entered into an agreement with Haier Electrical Appliances Corp. Ltd. ("in short Haier China"). He further noted that as per the agreement Haier China was the owner of trade name/ mark and was the owner of registered trade mark in India. The assessee had been allowed to use the trademarks for the first 5 years free of charge. After reproducing relevant parts of the agreement, ld. TPO noticed that following important facts emerged from the same: (i) Under the agreement the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r adjustment of Rs. 13,59,01,632/- as under: Arm's Length Mean Margin (%) 15 Total revenue of the assessee 2,916,711,067 Arm's Length price of AMP expenses (%) 3.87 Arm's Length AMP Expenses (A) 112,876,718 AMP expenses incurred by the assessee (B) 467,874,750 Expenditure incurred on creation of intangibles (B-A) 354,998,032 Mark up @ 15% 53,249,705 Arm's Length value of capital grant 408,247,736 Actual Grant Received 272,346,104 Difference 135,901,632 3.3. Ld. DRP confirmed the TPO's action but varied the markup applied by TPO from 15% to 9% and, thus, reduced the difference to be adjusted at Rs. 114,601,751/-. 4. At the time of hearing both the parties agreed that in view of the decision of Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications Vs. CIT (2015) 374 ITR 118 (Del), the matter needs to be restored back to the file of ld. AO/TPO for de novo consideration. 5. We have considered the submissions of both the parties and have perused the record of the case. The assessee is a distributor of various products of its AE. The Hon'ble Delhi High Court the case of Sony Ericsson Mobile Communications (supra), has, inter alia, obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reputation of the product or name, which is acquired gradually and silently over a passage of time. The following factors would govern the determination of arm's length price in relation to advertising, marketing and promotion expenses: (i) In the case of a distributor and a marketing associated enterprise, the first step in transfer pricing is to ascertain and conduct a detailed functional analysis, which would include the advertising, marketing and promotion functions/expenses. (ii) The second step mandates ascertainment of comparables or comparable analysis. This would have reference to the method adopted which matches the functions and obligation performed by the tested party including the advertising, marketing and promotion expenses. (iii) A comparable is acceptable, if based upon comparison of conditions a controlled transaction is similar with the conditions in the transactions between independent enterprises. In other words, the economically relevant characteristics of the two transactions being compared must be sufficiently comparable. This entails and implies that the difference, if any between controlled and uncontrolled transactions, should not material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of the method and comparables should be as per the command and directive of the Act and Rules and justified by giving reasons. (viii) Distribution and marketing are interconnected and intertwined functions. Bunching of interconnected and continuous transactions is permissible, provided the transactions can be evaluated and adequately compared on aggregate basis. This would depend on the method adopted and comparability analysis and the most reliable means of determining the arm's length price. (ix) To assert and profess that brand building is an equivalent or substantial attribute of advertisement and sales promotion would be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. "Brand" has reference to name, trade mark or trade name and like goodwill is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian transfer pricing regulation. It can be applied by the Assessing Officer/Transfer Pricing Officer in case the advertising, marketing and promotion expenses are treated as a separate international transaction, provided the cost plus method is the most appropriate and reliable method. Adoption of the cost plus method and computation of cost and gross profit margin comparable must be justified. (xiv) The object and purpose of transfer pricing adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. Costs or expenses incurred for services provided or in respect of property transferred, when made a subject matter of the arm's length price by applying tile cost plus method, cannot be again factored or included as a part of interconnected international transaction and subjected to the arm's length pricing. [Matter remanded.]" 5.1. Respectfully following the decision of Hon'ble Delhi High Court, the matter is restored to the file of AO with the direction to examine all the functions carried out by comparables vis a vis the tested party and thereafter select the comparables as per the gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble Supreme Court in the case of Woodward Governor India P. Ltd (supra). Thus, it is to be considered if the case of the taxpayer is covered by it or not? The reported decision was rendered in the context of loan liability in the books of account of the taxpayer. The said loan was on revenue account as a monetary transaction appearing in the balance sheet and was raised in the foreign exchange. The taxpayer debited the unrealized loss due to foreign exchange fluctuation as on the 31st March of the accounting year and the matter was about the determination of the said loss, which was directly in correlation with the liability appearing in the balance sheet. The basis of the decision can be understood from the hypothetical example given by the Court, reproduced as under: "A company imports raw material worth US $ 250000 in January 15, 2002, when the exchange rate was Rs. 46 per US $. The company records the transaction at that rate. The payment for the imports is made on April 15, 2002, when the exchange rate is Rs. 49 per US $. However, on the balance-sheet date, March 31, 2002, the rate of exchange is Rs. 50 per US $. In such a case, in terms of AS- 11, the effect of the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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