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Haier Appliances India Ltd. Versus DCIT, OSD, CIT-IV, New Delhi and Haier Appliances India Ltd Versus ACIT, Circle-12 (1) , New Delhi

2015 (10) TMI 2675 - ITAT DELHI

Adjustment for AMP expenses - AR has submitted that gross profit margin earned by the assessee being higher than gross profit margin by internal as well as external comparables, no adjustment for AMP expenses was required in the case of the assessee - whether we can compute the arms length price of the international transaction of AMP expenses in the given circumstances or we need to remit the matter back to the AO as submitted by the learned SR DR - Held that:- Authorised Representative has sub .....

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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 th .....

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ot 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 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 (2015 (3) TMI 580 - DELHI HIGH CO .....

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ony Ericsson Mobile Communications India Pvt. Ltd. (now known as Sony India Limited) reported in (2015) 374 ITR 118 (Delhi):- Assessment Year ITA No. Assessee Cross appeal by Revenue 2006-07 100 of 2014 Haier Appliances Pvt. Ltd. 621 of 2014 2007-08 101 of 2014 Haier Appliances Pvt. Ltd. 622 of 2014 2008-09 99 of 2014 Haier Appliances Pvt. Ltd. 642 of 2014 2. As common issue of determination of Arms Length Price ( in short ALP ) of international transaction of advertising, marketing and promotio .....

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ing machine, refrigerator, television etc., purchased from foreign associated enterprise ( in short AE ). However, the intangible rights contained in brand name or trademark/ trade name in respect of goods so purchased and distributed were owned by the foreign AE only. In the previous year corresponding to the relevant 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) .....

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hat 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) o .....

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o the dealers to the total expenses, at 1.4095% as follows: S. No. Name of the comparables companies Sale (Rs.) AMP Percentage of Adv. Exp of sales. 1. Goa Electronics Ltd. 231,731,837 139,642 0.060 2. Vivek Ltd. 2,988,076,269 82,467,269 2.759 Arithmetic Mean 1.4095 5. The percentage of 1.4095 was held as bright line and AMP expenses in excess of the ratio of the percentage were held as non routine and abnormal. The TPO, then applying the percentage of 1.4095 over the total expenses incurred in .....

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ength value of the Capital Grant Rs.70,35,88,364/- Amount of Capital Grant received by the assessee ₹ 13,11,4 7,568/- Difference Rs.57,24,40,796/- % of difference with value at which international Transaction has taken 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 ) ag .....

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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 file of the AO/TPO with the following directions:- i) Expenditure in connection with the sales as mentioned above cannot .....

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keeping in view the Special Bench directions in this behalf. 7. Aggrieved with the order of the ITAT, both the assessee as well as the Revenue, filed appeal u/s 260A of the Act before the Hon ble jurisdictional High Court of Delhi bearing ITA Nos.100 of 2014 and ITA No.621 of 2014 respectively. These appeals were heard by their lordship together with the appeals of the other assessee and cross appeals of the Revenue, led by the case of Sony Ericsson Mobile Communication India Pvt. Ltd., where th .....

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Act, 2012. 2. Whether AMP Expenses incurred by the assessee in India can be treated and categorized as an international transaction under Section 92B of the Income Tax Act, 1961. 3. Whether under Chapter X of the Income Tax Act, 1961, a transfer pricing adjustment can be made by the Transfer Pricing Officer/ Assessing Officer in respect of expenditure treated as AMP Expenses and if so in which circumstances? 4. If answer to question Nos.2 and 3 is in favour of the Revenue, whether the Income Tax .....

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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 .....

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Promotion Expenses ( AMP Expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by the Assessing Officer, having regard to retrospective amendment to Section 92CA of the Income Tax Act, 1961 by Finance Act, 2012. In terms of and subject to discussion under the heading C, paragraph Nas.41 to 50, the substantial 8uestion of law No.1 is answered in favour of the Revenue and against the assessee. "Q.2. Whether AMP Expenses incurred by the assessee in .....

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as AMP Expenses and if so in which circumstances? Q.4. If answer to question Nos.2 and 3 is in favour of the Revenue, whether the Income Tax Appellate Tribunal was right in holding that transfer pricing adjustment in respect of AMP Expenses should be computed by applying Cost Plus Method. Q.5. Whether the Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by the Transfer Pricing Officer by applying the parameters specified i .....

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iated in this decision. For the purpose of clarity, we would like to enlist our findings:- (i) In case of a distributor and marketing AE, the first step in transfer pricing is to ascertain and conduct detailed functional analysis, which would include AMP function/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 expense .....

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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 keeping in mind the comparability analysis includ .....

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e appropriated and reliable so as to include the AMP functions and costs. (v) Where the Assessing Officer TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be .....

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hod, and undertake comparability analysis. Selection 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 inter-connected and intertwined functions. Bunching of inter-connected and continuous transactions is permissible, provided the said transactions can be evaluated and adequately compared on aggregate basis. This would depend on the method adopted and comparability analysis and the .....

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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 .....

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9;non-routine' AMP or brand building exercise by applying 'bright line test' of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be 'NIL', or at best would mean the amount or compensation expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to treat the segregated transactional value as 'NIL' when in fact the two AEs had treated the international transactions as a package or a single one .....

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icer/TPO for good and sufficient reasons can de-bundle interconnected transactions, I.e. segregate distribution, marketing or AMP transactions. This may be necessary when bundled transactions cannot be adequately compared on aggregate basis. (xii) When segmentation or segregation of a bundled transaction is required, the question of set off and apportionment must be examined realistically and with a pragmatic approach. Transfer pricing is an income allocating exercise to prevent artificial shift .....

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a recognized and accepted method under Indian transfer pricing regulation. It can be applied by the Assessing Officer/TPO in case AMP expenses are treated as a separate international transaction, provided CP Method is the most appropriate and reliable method. Adoption of CP 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 uncontroll .....

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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 substant .....

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priate because the legal standards or ratio accepted and applied by the Tribunal was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. The Tribunal, at the first instance, would try and dispose of the appeals, rather than passing an order of remand to the Assessing Officer/TPO. The endeavor should be to ascertain and satisfy whether .....

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r and just conclusion on the arm s length price. 10. In above background, the appeal of the assessee and cross appeal of the Revenue have been re-fixed by the registry and heard by us. 11. At the time of hearing, the learned Authorised Representative of the assessee made a written submission, the relevant paras of which are reproduced as under:- In the transfer pricing document, on the basis of the functional analysis, the appellant was characterized as a reseller or distributor of white goods, .....

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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 wa .....

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ansactions undertaken with unrelated third parties at (-)10.37%. It is further submitted that Hon'ble High Court, while dealing with the applicability of most appropriate method prescribed under transfer pricing provision of the Act, with respect to business of trading, held as under: "159. RP Method, i.e. the Resale Price Method computes the arm's length price by ascertaining or identifying the price at which the product is resold by the AE to an independent enterprise. From this p .....

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cluding the accountancy practices, if any, between the tested international transaction and the comparable uncontrolled transactions to the extent they would materially affect the gross profit margins in the open market. The price computed after the two reductions and after the adjustment on account of the functional and other differences, determines the arm's length price of the purchased property or services obtained by the assessed from the AE." Further, Hon'ble High Court, also .....

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parable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made when the result would be reliable and accur .....

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plying 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 computati .....

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Bench in the case of LG Electronics, no adjustment on account of AMP expense will be sustained in the present case, for the reason submitted as under: Computation of adjustment: In view thereof, no adjustment will survive in the present case on account of alleged difference in arm's length price of AMP expenditure incurred by the appellant. 12. On the other hand, the learned Senior Departmental Representative vehemently argued that the matter needs to be remitted back to the file of the AO/ .....

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laid down by the Hon ble Jurisdiction High Court in case supra, was not feasible at the level of the ITAT. 13. We have heard the rival submissions and perused the relevant material placed on record including the impugned judgment of the Hon ble High Court. The learned Authorised Representative has submitted that the assessee company has followed Resale Price Method for benchmarking its international transaction of distribution. Further, the learned AR has submitted that gross profit margin earn .....

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ra) has held that the foreign AE may choose different 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 .....

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sibly 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 examine and compare the functional comparability between the controlled tested transaction and uncontrolled internal party transaction on account of AMP expenses. Internal comparable would not account for the credible gross profit rate, which an AE should be e .....

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s incurred considerable AMP expenses and the advertising, marketing and promotion functions performed either by the third parties or the associated enterprise are not emanating either from the order of the AO/TPO or DRP or from the transfer pricing studies submitted by the assessee, therefore it is not possible for us to examine and compare functional comparability between the assessee company and its associated enterprises or third parties. 16. Further, in para 163 to 168 the Hon ble Court, whi .....

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erforming marketing and selling function. This has to be tested and examined without any assumption against the assessed. A finding on the said aspect would require detailed verification and ascertainment. 165. An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the co .....

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ompensation 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 .....

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f functional difference which would include assets used and risk assumed. It is at stage (iv) of the RP Method that the Assessing Officer/TPO can make adjustments if he finds that an assessee has incurred substantial AMP expenses in comparison to the comparables. Once adjustments are made, then the appropriate arm's length price can be determined. In case, it is not possible to make adjustments, then RP Method may not be the most appropriate and best method to be adopted. 167. Before us, the .....

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this as it should be at first examined by the Tribunal. 168. The Tribunal has upheld adoption of CP Method after applying bright line test' in the case of Reebok India Co. Ltd. and Canon India Pvt. Ltd. The bright line test' adopted to demarcate the routine and non-routine AMP expenditure is predicated on selection of a domestic distributor and marketing company that does not own intangible brand rights. Contract value would be treated as NIL. In terms of our finding recorded above, the .....

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arables companies, no adjustment is required for the purpose of computing arms length price of international transaction of AMP expenses. If the argument of the learned AR is accepted, it will lead 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 .....

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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 d .....

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td (supra). The assessee in that case was following resale price method for determination of international transaction of distribution. Relevant para of the order is as under:- 17. Accordingly for the detailed reasons given herein above the issues addressed in Ground No.-2 2.27 are restored to the file of the AO/TPO to decide the same denovo in the light of the judgement of the Hon‟ble High Court. Needless to say that the assessee shall be affording a reasonable opportunity of being heard. .....

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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 method for determining its ALP. The ld. AR also failed to draw our attention towards any material divulging the AM .....

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