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Toshiba India Pvt. Ltd. Versus DCIT, Circle-25 (2) , CR Building, New Delhi

2017 (9) TMI 376 - ITAT DELHI

Transfer pricing adjustment on Advertisement, Marketing and Promotion (AMP) expenses - determination of the existence or otherwise of an international transaction on account of AMP expenses incurred by the assessee - TPO treated the AMP spend as a separate international transaction - Held that:- We do not find any logic in applying 5% as a benchmark mark-up, which is not emerging from any discussion in the order. In other words, there is no attempt to find out the mark-up of comparables by analy .....

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s or comparison has been undertaken by the TPO. The ld. AR also failed to draw our attention towards any material divulging the AMP functions performed by the assessee as well as comparables. As such, we are handicapped to determine the ALP of AMP expenses at our end, either in a combined or a separate approach. - Since the orders of the authorities below are not in conformity with the ratio laid down in Sony Ericsson (supra) as discussed above and further necessary details for doing this ex .....

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by its separate orders, has restored the matter to the Assessing Officer/TPO for a fresh adjudication. - Not allowing deduction towards interest on Customs Duty - Held that:- We are convinced with the view canvassed by the DRP as followed in the impugned order. Obviously, the assessee paid interest on Customs Duty in the financial year 2015-16. The liability towards such interest got crystalised and paid during such later year only. By no standard, the assessee can claim deduction for a part .....

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order dated 30.01.2017 passed by the Assessing Officer (Assessing Officer) 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 2012-13. 2. The first issue raised in this appeal is against the addition of ₹ 38,60,51,832/- made by the Assessing Officer towards transfer pricing adjustment on Advertisement, Marketing and Promotion (AMP) expenses. 3. Succinctly, the facts of the case are that the assessee, an Indian .....

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g Officer made reference to the Transfer Pricing Officer (TPO) for determining the arm s length price of the international transactions. The TPO did not dispute any other international transaction except finding that the assessee incurred AMP expenses for promoting the brand owned by its AE. After carrying out a detailed exercise and dealing with the objections raised by the assessee, the TPO held that there was an international transaction between the assessee and its AE for promotion of brand. .....

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. After applying 5% mark-up as per international guidelines on such non-routine expenses, the TPO came to hold that the assessee ought to have recovered a sum of ₹ 94.14 crore (Rs.89.66 crore plus ₹ 4.48 crore mark-up) from its AE for brand building. As only a sum of ₹ 52.38 crore was actually recovered, the TPO proposed transfer pricing adjustment amounting to ₹ 41.75 crore (Rs.94.14 crore minus ₹ 52.38 crore) on this international transaction. The DRP reduced the .....

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can be no question of determining its arm s length price or making any addition thereon. He relied on the judgments of the Hon ble Delhi High Court in Maruti Suzuki India Ltd. & Another vs. CIT (2015) 129 DTR 25 (Del) and CIT vs. Whirlpool of India Ltd. (2015) 94 CCH 156 DEL-HC to contend that the AMP expenses cannot be considered as an international transaction. He accentuated that there was no international transaction of AMP expenses on the basis of the principles laid down in these judg .....

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risdictional High Court in Yum Restaurants (India) P. Ltd. vs. ITO (2016) 380 ITR 637 (Del) and still another judgment dated 28.1.2016 of the Hon ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expense is an international transaction has been restored for a fresh determination. It was argued, that the judgment in the case of Yum Restaurants and Sony Ericson (for AY 2010-11) delivered in January, 2016 is lat .....

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He further relied on the order of the tribunal for the immediately preceding year, that is, A.Y. 2011-12, in which the question of determination of the ALP of the AMP expenses has been restored to the file of TPO to be decided afresh in the light of various judgments of the Hon ble Delhi High Court. 6. The first moot question which, ergo, looms large before us is the determination of the existence or otherwise of an international transaction on account of AMP expenses incurred by the assessee. .....

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e assessee) to act as its distributor of certain Toshiba brand electronic products and to promote the sale of such products, accessories and consumables and the Toshiba brand name in the territory. Clause 3 of the Agreement provides for purchase and sale. Later part of this clause reads as under :- TIPL shall use its best efforts to promote and sell Products and to promote the Toshiba brand name generally in the Territory during the term of this Agreement. 7. It is apparent from the above Exclus .....

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ch is apparent from page 157 of the TPO s order. Such reimbursement for AMP expenses has been duly accepted by the ld. AR during the course of instant proceedings before us. We fail to comprehend as to why the AEs of the assessee will reimburse ₹ 52.38 crore towards AMP expenses if the assessee was only to make advertisement for selling its products in India without the prior understanding of promotion of the brand. The very fact that the assessee expressly undertook to promote Toshiba bra .....

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ntive addition by considering the non-routine AMP expenses as incurred on behalf of its AE for brand promotion and then added 5% mark up. Impliedly, the TPO applied Cost Plus Method for determining the ALP of the international transaction. 9. At this juncture, it is relevant to note that the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (supra) has elaborately examined this issue. It considered the distribution and the brand promotion activities as inter-co .....

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r 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 these transactions in a bundled manner, suitable comparables having undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) & others]; * If no comparables having performed both the functions in a similar manner are .....

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PO 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 & 176 of the judgment]. 10. With the foregoing understanding of the ratio decidendi of the judgment of the Hon ble jurisdictional High Cou .....

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ofit. 11. We are unable to countenance the argument advanced on behalf of the assessee for deletion of the addition towards AMP expenses on the plain logic of the assessee s profit margin being higher than that of comparables. This is a fallacious argument. It is pertinent to note that the TPO examined and got satisfied with the assessee s profit margin visà- vis the comparables only qua the international transactions of distribution function. He separately determined the ALP of AMP expen .....

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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 examination of AMP functions carried out by the a .....

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margin of the comparables is much less than the assessee and hence no separate addition should be made for AMP functions, if taken to a logical conclusion, will make the AMP spend as a non-international transaction, which, in our considered opinion, is not appropriate in the given facts. 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 b .....

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s well as comparables, this will amount to snatching the tag of international transaction from AMP expenses, which admittedly exists in facts and circumstances of the instant case. What Their Lordships in Sony Ericsson (supra) have held 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 c .....

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parable so as to counterbalance 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 .....

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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 perf .....

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, but on an aggregate basis. Determining the ALP of two transactions in an aggregate manner postulates making a comparison of both the functions of distribution and AMP carried out 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 co .....

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perform similar AMP functions. Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. The alternative prescription of the judgment is that if ALP of both the transactions of Distribution and AMP cannot be determined in a combined manner, then the ALP of AMP functions 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 c .....

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g their ALP that both these 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 distribut .....

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ution 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 suitable method. However, in so determining the ALP of such an international transaction of AMP expenses on separate basis, a proper set off, if any, available from the distribution activity, should be allowed. 13. Adverting to the facts of the instant case, we find that .....

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ysis of the AMP functions carried out by the assessee vis-à-vis the comparables. The TPO treated the AMP spend as a separate international transaction. He applied the Cost plus method. 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. Then he applied a mark-up of 5% to determine the ALP of this transaction. We do no .....

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d 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. The ld. AR also failed to draw our attention towards any material divulging the AMP functions performed by the assessee as well as comparables. As such, we are handicapped to determine the ALP of AMP expenses at our end, either in a combined or a separate approach. 15. Since the or .....

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elevant to record that similar issue was raised by the assessee before the Tribunal for the immediately preceding two assessment years. The Tribunal in both the years, by its separate orders, has restored the matter to the Assessing Officer/TPO for a fresh adjudication. 16. The next issue raised by the assessee through ground nos.11 and 12 is that the Assessing Officer has erred in not following the directions of DRP and not allowing deduction for additional claim of employees contribution of PF .....

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both the sides and gone through the relevant part of the order of the DRP, it is observed that the assessee raised 8th ground of objection reading as under:- 1. Eighth Ground of Objection - a) The ld. A.O. has erred on facts and in law in not allowing the additional claim of employee s contribution to PF/ESIC made by the assessee following the judgment of the jurisdictional Delhi High Court in case of CIT vs. AIMIL Limited (2009) (321 ITR 508). b) That the Ld. A.O. erred in not passing a speaki .....

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