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2018 (7) TMI 1991

n incurred exclusively to promote the brand/trade name ‘Sony Ericsson’ and such expenditure has resulted into brand building and increased awareness of the products bearing brand/trade name ‘Sony Ericsson’ and also that such expenditure incurred by the assessee company is for the advantage of its AE. Testing the functions performed by the assessee vis a vis AMP expenses incurred by it, we do not find that the assessee has incurred AMP for the benefit of its AE. All the expenditure incurred by the assessee are in relation to its business and its promotion. Moreover, as mentioned elsewhere, the net margin is much higher than the comparables and looking from that angle also, we do not find any merit in the transfer pricing adjustments. It is incorrect to say that the amount of ₹ 73.83 crores received by the assessee by way of credit notes represents the excess price charged by AE which has been credited to the assessee. The business model of the assessee with its AE is such that the AE ensures that the assessee achieves an arms’ length return on sales made by it. Assuming, yet not accepting that the assessee should have been compensated by its AE to .....

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ax Range - 9, New Delhi for determination of Arm s Length Price [ALP] for international transactions undertaken by the assessee during the F.Y. 2007-08 with its Associated Enterprises [AE]. 4. The assessee was incorporated in India on 23.04.2007 and is a subsidiary of Sony Ericsson Mobile Communications AB, a company incorporated under the laws of Sweden. The Sony Ericsson Group offers mobile multimedia devices including feature rich phones and accessories, PC cards and M2M solution for end users. The Sweden entity is a 50:50 joint venture between Telefonakiebolaget LM Ericsson and Sony Corporation, Japan. The group companies own significant valuable intellectual property rights, know how, patents, copyrights etc and other commercial or marketing intangibles i.e., brand name, trademarks, logos, etc and are involved in complex product development, manufacturing and brand development of the products. The assessee company is primarily engaged in the business of importing, buying and selling and distribution of wide range of mobile phones in India and providing related post sale support services. 5. In its transfer pricing report, the assessee has stated that the development of ALP in .....

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see is not able to achieve arm s length return with respect to the distribution activity, then as per the policy it receives credit notes from the AE to achieve an arm s length return on sales. During the year under consideration, the assessee received a credit note of ₹ 738,370,409/- from the AE to in order to achieve an arm s length result. 9. In its reply, the assessee stated that it has not made any payment to its AE for using brand name and there is no agreement for using the brand name between overseas AE and the assessee. It was emphasised that the advertisement and marketing expense incurred by the assessee are for furthering its sales in the Indian market and is nowhere related to brand promotion expense, therefore, such transaction does not warrant a reimbursement from AE since these costs represent transactions that are purely domestic in nature and have been undertaken by the assessee to promote its own sale and nowhere related to the international transactions entered into by the assessee with the AE. 10. Subsequently, the assessee filed details of credit notes and explained that the credit notes have been netted off against the cost of traded goods in the profit .....

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mark the impugned international transaction. 15. The TPO determined the ratio of AMP/sales at 7.06% and compared the same by adopting Brightline Test in the case of comparables, which, according to the TPO was at 1.08%. Comparing the ratio of AMP/sales in the case of the assessee with Brightline the TPO found that the assessee has incurred excess expenditure of ₹ 98.02 crores. The TPO was of the strong belief that such excess of brightline limit should have been compensated by the AE and since the assessee has not been compensated by its AE, the TPO proposed to determine the ALP of the impugned international transaction at ₹ 980,237,631/-. 16. The TPO was also of the opinion that independent entities would not incur expenditure for promoting the trade names owned by some third party and, therefore, would have been remunerated for such efforts. A mark-up of 15% on cost incurred by the independent party would be reasonable and applying the same, the TPO computed the adjustment at ₹ 1,127,273,275/-. 17. This whole exercise by the TPO has been dismissed by the Hon'ble High Court of Delhi in Tax Appeal No. 16/2014. At para 127 the Hon'ble High Court has observ .....

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hat the choice of the most appropriate method would be dependent upon availability of potential comparable keeping in mind the comparability analysis including befitting adjustments which may be required. As the degree of the comparability increases, extent of potential differences which would render the analysis inaccurate necessarily decreases. (iv) The assessed, i.e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis should be 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 incongruous to accept the comparables and de .....

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ine and 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 and contribution is attributed to the aggregate package. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we would disagree with the majority decision in L.G. Electronics India Pvt. Ltd. (supra). This would be necessary when the arm s length price of the controlled transaction cannot be adequately or reliably determined without segmentation of AMP expenses. (xi) The Assessing Officer/TPO for good and sufficient reasons can debundle interconnected transactions, i.e. segregate distribution, marketing or AMP transactions. This may be necessary when bundled transactions cannot be adequately compared on aggregat .....

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oducts are technologically in line with the market requirements and trends. The AEs are responsible for manufacturing the products that are sold across the globe. They are responsible for quality control, production scheduling vendor development, inventory management, supply chain management, packaging etc. We further find that the AEs own brand rights of all the products and are responsible for core marketing and pricing decisions of the products. The AEs are also responsible for undertaking global sales and distribution function. The AEs shall also provide marketing and product related information to the assessee like brochures, technical information material, etc. to enable the assessee to perform its functions in an efficient manner. 22. We find that the functions performed by the assessee are as follows: (i) local marketing of mobile phones; (ii) distribution of mobile phones/technology products; and (iii) provision of repair and maintenance services. 23. These functions can be elaborately understood as under: SEIN has employed a team of employees for carrying out local marketing of mobile phones in India. The global recognition of brand name of Sony Ericsson provides good bra .....

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ng model receives credit notes from its AEs to achieve an arm's length return on sales. Based on the above model followed by SEIN, it is able to achieve an arm's length margin after considering all total operating cost. 27. Based on the above guidance and facts as enunciated above, it is evident that the compensation model of the assessee is structured in such a manner that the reimbursement of any excess third party expenses is already in-built in the transfer price adjustment compensation received by SEIN which allows it to consistently earn an operating margin which is higher than the comparables. Provision of post sales support services 28. Prior to SEIN starting its operations in India, the AEs were selling mobile phones directly into India and for rendering warranty support services, they had engaged third party providers. In its initial period of operations, SEIN neither had the necessary set up nor developer processes for providing warranty services to its customers. Accordingly, its AEs provided such post sales support to SEIN by subcontracting the warranty support services to third service providers and subsequently charged the cost to SEIN without any mark-up. Ho .....

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ssessee has undertaken a fresh search for comparables indentifying a set of 19 comparable with average margin of 0.48%. In addition, the assessee has also furnished a margin of 12 comparables identified by the TPO for BLT computation where average margin works out to minus 0.35%. 34. From the above, it can be safely concluded that the assessee earned margin of 2.5% after considering AMP expenditure which is much higher than the average margin of comparables. Moreover, as mentioned elsewhere, AE has assured that the assessee company earns net margin of at least 2% on its sales and remunerates it for any shortfall in margins by way of credit notes. During the year, the assessee company has received two credit notes totalling to ₹ 73.83 crores which were adjusted against purchases in financial statements since the same were received to cover up for short fall in margin under TNMM for transaction of purchase of goods. 35. Para 6.37 of the OECDs Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations edition 2010 suggests that : where the marketer / distributor acts as an agent of a principal which supplies goods, it will normally be sufficient to compens .....

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wareness of the products bearing brand/trade name Sony Ericsson and also that such expenditure incurred by the assessee company is for the advantage of its AE. 38. Brand means unique design, sign, symbol, words, or a combination of these, employed in creating an image that identifies a product and differentiates it from its competitors. Over time, this image becomes associated with a level of credibility, quality, and satisfaction in the consumer's mind. Thus brands help harried consumers in crowded and complex marketplace, by standing for certain benefits and value. 39. As mentioned elsewhere, the assessee s AEs are engaged in designing and developing new technology and products for mobile communication and over the years have successfully developed several new products and technologies. The AEs are responsible for core marketing and pricing decisions of the products. Also the AEs are responsible for undertaking the global sales and distribution functions. Therefore, in our opinion, by incurring advertisement expenses in the domestic market, the assessee could not have done any value addition to the brand name of the AE. 40. Advertisement expenditure incurred by the assessee c .....

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eam of employees for carrying out local marketing of mobile phones in India. Global recognition of the brand name Sony Ericsson provides support to the assessee company in its marketing effort. The assessee has also undertaken various product promotion activities such as conducting road shows, participating in industry events, advertisement in all forms of media channels, etc. 44. Advertisement means a means of communication with the users of a product or service. Advertisements are messages paid for by those who send them and are intended to inform or influence people who receive them. 45. Business Promotion Expenses means all expenses incurred in respect of promotion of business. Though, all expenses relating to the advertisement and publicity also help to promote the sales of a business firm but there are so many expenditures which are not advertisement expenses even then they play very important role in maintaining the prestige of the business firm. For example:- (a) Refreshment expenses for business clients. (b) Gifts to the business clients on certain events. (c) To sell the goods to the clients at special discount for their personal use etc. 46. Though, these expenses can be .....

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