TMI Blog2020 (2) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... n or marketing activities when goods are purchased from associated entities and sales are effected to unrelated parties without any further processing, then, RPM (resale price method) is most appropriate method to determine ALP of said transaction. In ACIT v. L Oreal India (P.) Ltd. [ 2015 (2) TMI 407 - BOMBAY HIGH COURT] it is held that where assessee buys products from its AEs and sells to unrelated parties without any further processing, RPM is most appropriate method to determine ALP. Having examined the facts of the present case, we are of the considered view that the principles laid down in the above decisions are applicable here. Therefore, we set aside the order of the Ld. CIT(A) on the above grounds of appeal and delete the adjustment made by the AO u/s 92CA(3) of the Act. Adjustment as the compensation for its Advertisement Marketing and Promotion ('AMP') services - appellant incurs 'excessive' AMP expenses in relation to its distribution activities thereby qualifying as 'services' as per the arm's length principle - HELD THAT:- We find that out of total expenses on advertisement of ₹ 1.22 crore, only ₹ 36.34 lacs are e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses ( AEs') and thereby resulting in the enhancement of returned income of the appellant by ₹ 11,917,839/-. 3. The learned CIT(A) / TPO erred on the facts and in the circumstances of the case and in law, in not appreciating that in respect of the concerned international transactions, none of the conditions set out in section 92C(3) of the Act are satisfied and therefore, it is incorrect to disregard the transfer pricing analysis carried out by the appellant and to re-determine the arm's-length price for the said transactions. 4. The learned CIT(A) / TPO erred both on facts and in law in making an adjustment of ₹ 11,917,839/- to the income of the appellant by holding that its international transaction of purchase of IT peripherals does not satisfy the arm's length principle envisaged under the Act. In doing so, the learned CIT(A) / TPO has grossly erred in: rejecting the economic analysis in the transfer pricing('TP') documentation of the appellant used to determine the ALP; rejecting the Resale Price Method ('RPM') applied by the appellant and applying the Transaction Net Margin Method ('TNMM'); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit margin to third parties; (iv) the assessee has only considered the cost of goods/materials in cost while calculating the gross profit margin of the assessee as well as comparables ; certain miscellaneous costs such as freight expenses, import duty etc. are not considered as part of cost while calculating the gross profit margin in the case of the assessee as well as comparables and thus, there is no question of distortion in the GP margin of comparables; (v) the assessee is engaged in trading of IT peripherals and bears of the risks associated with distribution of such goods ; similarly, all the comparables selected by the assessee are also full fledged traders performing all the functions generally performed by traders and bears full risk involved in distribution and hence RPM should be selected as the most appropriate method to benchmark the international transaction of import of information and communication equipments from its AEs. However, the TPO was not convinced with the above explanation of the assessee for the reason that for achieving proper comparability, complete information about business profile and functional data should be available in respect of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te order and forward copier of the TP order u/s. 92CA of the IT Act 1961 to the AO and assessee for necessary action. 5. Before us, the Ld. counsels for the assessee reiterate their submission before the TPO and CIT(A). On the other hand, the Ld. Departmental Representative (DR) supports the order passed by the TPO/AO. 6. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. As mentioned earlier, the assessee is a wholly owned subsidiary of Brother Japan. It is engaged in the business of distribution of information and communication equipments such as printers and facsimile machines by importing from AE and selling in the local market. RPM is a transfer pricing method where the resale price to the independent party is reduced by comparable resale price margin to arrive at ALP of the product transferred between the related parties. Resale price margin is a margin representing the amount out of which a reseller would seek to cover its selling and other operating expenses and, in the light of the functions performed (taking into account assets used and risks assumed) make an appropriate pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses incurred by the appellant represent purely domestic transaction(s) undertaken towards third parties, not covered under the purview of Section 92 of the Act and that the analysis of ''domestic transactions undertaken with third parties in respect of which no TP reference has been made by the AO to the TPO, is beyond the powers vested with the TPO under Section 92CA of the Act; incorrectly applying the bright line concept to the appellant's distribution segment/ operations; while disregarding the fact that the AMP expenses of the appellant after reducing selling expenses was just 0.91% of the total sales, which is nearly equivalent to the average AMP expenses of comparables i.e. 0.90% ; ignoring the fact that the AMP expenses incurred by the appellant were in respect of its own business requirements/ considerations/ purposes and that all and any benefit resulting from such expenditure are to its own account (in the form of increased sales and market share) and benefit, if any, to the overseas AEs, was purely incidental. erroneously holding that the appellant has rendered services to the AEs by incurring 'excessive' AMP expenses and by h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ared to 0.9% incurred by the comparable selected by the assessee during the year. Again the issue boils down to the same issue but from a different perspective, that is, vis-a-vis the AMP Expenses incurred by the assessee company. Again the facts are the same, that is, selection of four comparable by the assessee was wrong and hence the adoption of figures of AMP expenses to sales was equally erroneous because assessee operated its business in a domain different from the domain in which four software development companies operated and basically parameters of their operations required incurrence of a different set of parameters. As discussed in foregoing paragraphs, the issue is the selection of wrong comparables and it will be fair and reasonable if the TPO collects details of advertising and marketing from a total of nine (six plus three) companies also, compares it with the advertising and marketing expenses especially advertising expenses with that of the assessee and re-determines the arm's length price in respect of the brand value created out of the actual expenses incurred on advertising and marketing which contained the brand name Brother and which is deemed to have c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment exercise . In Bausch Lomb Eyecare (India) Pvt. Ltd. Ors. v. Additional Commissioner of Income Tax Ors. (2015) [2016] 381 ITR 227 (Delhi), the Hon ble Delhi High Court again held that where existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is Nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. In Commissioner of Income Tax v. Whirpool of India Limited (2015) [2016] 381 ITR 154 (Delhi), the Hon ble Delhi High Court again held that where revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between Indian subsidiary and foreign parent, revenue cannot proceed to determine ALP of AMP expenses by inferring existence of an international transaction based on bright line test. In Honda Siel Power Products Limited v. Deputy Commissioner of Income Tax (2015) (94 CCH 0170), the Hon ble Delhi High Court again held that when assessee is carrying on business as independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of AE ..... X X X X Extracts X X X X X X X X Extracts X X X X
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