TMI Blog2015 (10) TMI 2675X X X X Extracts X X X X X X X X Extracts X X X X ..... d to find out AMP functions of comparables and compare the same with the AMP functions performed by the assessee and then after making adjustments if any compute the arms length price of the international transaction in bundled manner for distribution as well as AMP expenses and if not possible to compute in bundled manner, then only in separate manner. But in the case in hand the AMP functions performed by the external comparable are neither submitted by assessee before the AO/TPO nor examined by the TPO. The learned Authorised Representative has also failed to exhibit us the AMP functions carried out by the assessee and compare those functions with the AMP functions of the comparables and without that analysis the arms length price of the AMP functions cannot be determined at our level. We are also in agreement with the submission of the learned Senior Departmental Representative that the figures given in the tables by the learned Authorised Representative are not verifiable from the orders of the AO/TPO. In view of the above facts and circumstances, we are unable to determine the ALP of AMP expenses at our own either in the bundled or a separate approach. We remit the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant assessment year, the assessee reported following international transaction with the AE in the transfer pricing audit report submitted to the Assessing Officer( in short AO ): (a) Purchase of finished products from the foreign AE i.e. HAH (HK) Company Ltd., Hong Kong, amounting to ₹ 41.66 crores for the purpose of distribution/ resale in India. (b) Purchase of capital items of ₹ 1,95,97,166/-. 4. The AO made a reference to the transfer pricing Officer (in short TPO ) u/s 92CA (1) of the Act. The TPO accepted the arms length price reported by the assessee in respect of international transactions, however, the TPO observed that from the profit and loss account that the assessee had incurred expenses of ₹ 74,04,23,369/- on AMP, which also included selling expenses like rebate and discounts given to the dealers . According to the TPO, the substantial part of AMP expenses incurred by the assessee were towards promotion of brand/ trade name/ trade mark etc. owned by the AE, whereas the AE only reimbursed ₹ 13,11,47,568/- as capital grant towards such expenses. The TPO held that incurring expenses on advertising, marketing, and promotion (AMP) on b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken place 436.48% 6. The assessee challenged the adjustment of ₹ 57,24,40,796 made by the AO/TPO before the Dispute Resolution Panel ( in short DRP ), but could not succeed and therefore filed the present appeal before the Income-Tax Appellate Tribunal ( in short ITAT ) against the order passed by the AO in conformity with the order of DRP, challenging the action of the AO/TPO/DRP in holding the AMP expenses as international transaction as well as the adjustment made in this regard. The ITAT after having heard both the parties, following the decision of the Special Bench of the ITAT in the case of LG Electronics India P Ltd. versus Asst. CIT (2013) 22 ITR ( Trib) 1 (Delhi)(SB), held that the incurring AMP expenses of non routine nature on behalf of the AE was an international transaction. The ITAT further approved the application of bright line test for working out the non routine AMP expenses and held that ALP of AMP expenses should be determined on cost plus method, but excluded the selling expenses like rebate, discount etc from the ambit of AMP expenses for determining international transaction and remitted the matter back to the fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench marking/comparability analysis should be undertaken by the Transfer Pricing Officer by applying the parameters specified in paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd. ? Revenue s Appeals 1. Whether the Income Tax Appellate Tribunal was right in distinguishing and directing that selling expenses in the nature of trade/volume discounts, rebates and commission paid to retailers/dealers etc. cannot be included in the AMP Expenses? 8. Their lordship decided all the appeals referred above led by the case of Sony Erricsson Mobile Communication India Pvt. Ltd in a common judgement dated 16.03.2015 reported in 374 ITR 118 including the appeals of the assessee and Revenue referred in para -1 of this order. Their lordship has propounded legal findings on the relevant issues in heading D to P of the judgment and summed up the view taken on the substantial questions of law in their judgment as under: Answer to Substantial Questions of Law Para 194. In view of the aforesaid discussion, substantial questions of law in the appeals filed by the assessee are answered as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /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 obligations performed by the tested party including AMP 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 difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate the effect of such differences on the price or margin. Thus, identification of the potential comparables is the key to the transfer pricing analysis. As a sequitur, it follows that the choice of the most appropriate method would be dependent upon availability of potential comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ality. Brand has reference to a name, trademark 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 passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. (x) Parameters specified in paragraph 17.4 of the order dated 23rd January, 2013 in the case of L.G. Electronics India Pvt. Ltd (supra) are not binding on the assessed or the Revenue. The 'bright line test' has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate 'routine' and 'non-routine' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer 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 subject matter of arm's length price by applying CP Method, cannot be again factored or included as a part of inter-connected international transaction and subjected to arm‟s length pricing. Para 195. The above noted pointers have to be read along with our discussion under the headings D to P. In case of any doubt, debate or purported conflict, it would be preferable to rely upon detailed elucidation made under the headings, D to P. Para 196. Common questions raised by the Revenue in their appeals:- 1. Whether the Income Tax Appellate Tribunal was right in distinguishing and directing that selling expenses in the nature of trade/volume discounts, rebates and commission paid to retailers/dealers etc. cannot be included in the AMP Expenses? In terms of and subject to our discussion under the headings O and P, the substantial question of law has to be answered against the Revenue and in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the third parties (for resale in the domestic market) satisfy the comparability criteria as laid down in Sub-rule (2) of Rule 10B of the Rules, in as much as apart from the product comparability they satisfy functional comparability and the two transactions are undertaken under similar market and economic conditions. Accordingly, the appellant, in its transfer pricing document, compared the gross profit margin and operating profit margin from resale of goods purchased from associated enterprises and unrelated third parties, as under: It was submitted that the gross profit margin (Gross Profit/ Sales) earned by the appellant on transactions undertaken with the associated enterprise at 36.61% is higher than the gross profit margin earned on similar transactions undertaken with unrelated third parties at 30.64%. Further, the operating profit margin (OP/ Sales) earned by the appellant on transactions with the associated enterprise is at {-)4.41% was also found to be higher than the average operating profit margin earned on similar transactions undertaken with unrelated third parties at (-)10.37%. It is further submitted that Hon'ble High Court, while dealing wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould not be adopted. If on comparable analysis, including AMP expenses, gross profit margins match or are within the specified range, no transfer pricing adjustment is required. In such cases, the gross profit margin would include the margin or compensation for the AMP expenses incurred. Routine or non-routine AMP expenses would not materially and substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions. Applying the Principles laid down by the Hon'ble Delhi High Court, the results of the benchmarking analysis is as under; (i) Comparison of adjusted gross profit margin - internal comparable: (ii) Comparison of adjusted gross profit margin external comparable: It is submitted that the TPO in his order has considered two companies, namely (i) Vivek Limited and (ii) Goa electronics Limited as comparable to the appellant for the purpose of benchmarking AMP expense of the appellant. The computation of adjusted gross margin of the aforesaid companies are as follows: In view of the aforesaid, it would be seen that the adjusted gross profit margin earned by the appellant is higher than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent option of compensating the local AE for AMP expenses like low purchase price, no or low charges of royalty or direct compensation. Accordingly, the Hon ble High Court directed that the arms length price of the transaction of AMP expenses should be computed preferably along with the arms length price of international transaction of distribution in a bundled manner and for this purpose AMP function of the assessee should be first compared with the AMP functions of the comparables. The Hon ble High Court in their judgment (supra) has analyzed various methods of computation of international transaction of AMP expenses. While discussing Resale Price Method, in para 162 of the impugned judgment, the Hon ble High Court in respect of choosing internal comparable has held as under:- 162 In the case of Reebok India Co. Ltd., the assessee has applied RS Method using internal comparable. Contrary to the general rule, the internal comparable possibly may not be appropriate when the assessed has incurred considerable (not necessarily extra-ordinary or non-routine) AMP expenses. The reason is obvious; there is no comparability analysis possible. In such cases, it is not possible to exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o AMP expenses. In case of a mismatch, adjustment could be made when the result would be reliable and accurate. Otherwise, RP Method should not be adopted. If on comparable analysis, including AMP expenses, gross profit margins match or are within the specified range, no transfer pricing adjustment is required. In such cases, the gross profit margin would include the margin or compensation for the AMP expenses incurred. Routine or non-routine AMP expenses would not materially and substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions. 166. On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument. Moreover, the contention of the assessed in these appeals would mandate rejection of the RP Method, as an appropriate or most appropriate method. Comparison or comparative analysis is undertaken at stage (ii). Adjustments are permissible and undertaken at stage (iv). Under clause (iii), i.e. at stage (iii), from the price ascertained at s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad us to a result where the AMP transaction will be rendered as non international transaction, as against the findings of the Hon ble High Court in the case of Sony Erricsson (supra). The Hon ble High Court has directed to find out AMP functions of comparables and compare the same with the AMP functions performed by the assessee and then after making adjustments if any compute the arms length price of the international transaction in bundled manner for distribution as well as AMP expenses and if not possible to compute in bundled manner, then only in separate manner. But in the case in hand the AMP functions performed by the external comparable are neither submitted by assessee before the AO/TPO nor examined by the TPO. The learned Authorised Representative has also failed to exhibit us the AMP functions carried out by the assessee and compare those functions with the AMP functions of the comparables and without that analysis the arms length price of the AMP functions cannot be determined at our level. We are also in agreement with the submission of the learned Senior Departmental Representative that the figures given in the tables by the learned Authorised Representative are not v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). Ex consequenti, the ground raised about the TPO having no jurisdiction to determine the ALP of AMP expenses, is dismissed following the judgment in the case of Sony Ericsson Mobile (supra). 20. In view the above decisions of the Tribunal and our findings in the facts and circumstances of the case, we remit the matter back to the file of AO/TPO for determination of ALP on international transaction on AMP expenses, in accordance with the direction laid down by the Hon ble High Court in the case of the assessee led by Sony Ericson Mobile Communication P Ltd (supra). Needless to say that the assessee shall be afforded a reasonable opportunity of being heard. 21. In the result the appeal of the assessee is allowed for statistical purposes. 22. In view of the above findings given in ITA No 4680/del/2010 for Assessment Year 2006-07, the matter in ITA 5235/Del/2010 and ITA No. 4404/Del/2010 for Assessment Year 2007-08 and 2008-09 respectively are also restored back to the file of A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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