TMI Blog2020 (3) TMI 426X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of AMP expenses and accordingly direct the AO to delete the impugned addition. - IT(TP)A No.2837/BANG/2017 & 3391/BANG/2018 (Assessment year’s : 2013-14 & 2014-15) - - - Dated:- 5-3-2020 - SHRI B.R BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER Appellant by: Shri Ajay Vohra, Sr. Advocate And Shri Neeraj Jain And Bharath T, Advocates Respondent by: Shri Pradeep Kumar, CIT (DR ITAT) ORDER Per B.R Baskaran, Accountant Member : These two appeals of the assessee are directed against the orders passed by the assessing officer for assessment years 201314 and 2014-15 u/s 143(3) r.w.s 144C(13) of the Act in pursuance of directions given by Ld Dispute Resolution Panel (DRP). 2. The appeal pertaining to assessment year 2013-14 was disposed of by the Tribunal along with the appeal relating to AY 2012-13, by a common order dated 10-05-2019. Subsequently the assessee moved a miscellaneous application pointing out that the Tribunal has not adjudicated the ground Nos.32 to 41 urged in AY 2013-14 while passing the common order, referred above. Accordingly, vide order dated 25-09-2019 passed in M.P No.102/Bang/2019, the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring advertisement and marketing expenses. The observations made by the TPO are extracted below, for the sake of convenience:- The taxpayer is doing added services apart from activity of a mere distributor by protecting trademarks of the AE in India, incurring advertising and marketing expenses, promoting the sale of goods of the AE, using the brand of the AE thereby increasing the visibility of AEs brand, keeping the AE informed of the market conditions thereby providing market support services, etc. The taxpayer, in the distribution(trading) segment, has not confined itself just to distribution of trading goods but has performed additional functions as mentioned above. Therefore, the company needs to be adequately compensated for such additional functions undertaken by it. In such circumstances, without considering these functions performed by the assessee company, it is not right to conclude that the transactions are at Arm's length just by comparing the gross margin earned by the assessee company. The expenditure relating to the additional function carried out by the assessee in the form of the AMP are not reflected in computing the gross margin as they are captured be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cost of goods sold 17,246,283,134 12,936,425,469 12,131,301,570 Other Operating expenses 2,111,077,433 1,161,712,006 1,020,383,898 Total Expenses 19,357,360,567 14,098,137,475 13,151,685,468 Operating Profit/ loss -300,200,451 -90,326,521 53,850,834 Net Operating profit margin based on income (%) -1.58% -0.64% 0.41% From the above table, it can be seen that the taxpayer's losses have been increasing over a period of time. A routine trader would not incur tosses in the above manner year after year. 6.1.5. In the case of the taxpayer, it is necessary to look below the gross margin level to understand why in trading segment, the assessee is incurring such huge losses. It is obvious that there are many functions which the assessee performs which are not suitably compen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30,337 0.02% 5 Savex Computers Ltd. 43,992,366,000 52,092,000 0.12% 6 Priva Ltd. 2,132,334,900 4,275,455 0.20% Average 0.11% Following the decision of the Hon'ble Delhi High Court in the case of MIs. Sony Ericsson (Supra), since the comparables used by the taxpayer have much lower AMP spend than the taxpayer, RPM as a method for benchmarking analysis is not suitable. 6.1.7. It is clear that in this case, the taxpayer has taken up additional functions, for which it has not been suitably compensated resulting in loss. The RPM can be applied to the taxpayers who are engaged in pure trading activity of buying and selling. Hence, in the case of the taxpayer, RPM is not the correct method for determination of ALP and the TPO proposes to apply TNMM for this purpose. 5. The assessee strongly objected to the proposal of the TPO to adopt TNMM as most appropriate method. The main conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that the AMP expenses incurred by the assessee constitutes value addition, which is misconceived. He submitted that the assessee is incurring AMP expenses for its own purposes for the purpose of increasing expenses and major portion of AMP expenses consists of trade discounts, sales commission and scheme discounts. Accordingly he submitted that the TPO was not justified in holding those expenses as representing value addition items. Accordingly he submitted that the Resale Price Method is most appropriate method for the trading operations undertaken by the assessee. In support of his contentions, he placed reliance on the following case law:- (a) M/s Celio Future Fashion P Ltd (ITA No.1928/Mum/2016) (b) M/s Videojet Technologies (I) P Ltd (ITA No.6956/Mum/2012) (c) M/s A.O. Smith India Water Heating P Ltd (ITA No.176/Bang/2015) 8. On the contrary, the Ld D.R strongly placed his reliance on the order passed by Ld DRP/TPO. 9. We heard the parties on this issue and perused the record. The details of AMP expenses incurred by the assessee have been extracted by TPO at page 24 of his order as under:- Sales Promotion and Advertisement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aws on the matter, held that the RPM is the most appropriate method in case of a distributor of products. For the sake of convenience, we extract below the relevant observations made by the Tribunal in the case of A.O Smith India Water Heating P Ltd (supra):- 14. Now the assessee is before us with the submission that it is an accepted principle that the computation of ALP based on a direct method like RPM, which tests the results at gross level unlike the TNMM which tests the results at net level, extinguishes the requirement o making adjustment in relation to the difference in operating expenses, which could be different from enterprise to enterprise. It was further contended that as provided in Rule l0B, under RPM price of international transaction needs to be computed on the basis of gross profit margin earned in uncontrolled transactions, while under TNMM price of international transaction is computed on the basis of net profit margin of uncontrolled transactions. As per Rule 100(1), the most appropriate method for determining the ALP depends upon the facts and circumstances of each case. Similarly, the operating expenses incurred by the assessee is different from the opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving heard the rival submissions and from a careful perusal of the record, we find that undisputedly the assessee is a trading company and carries out distribution and marketing of products of AOS group in India. It imports water filters from AO Smith China and sells them in India. AO Smith India is, according to the TP document, a distributor of AOS Water Heaters in India. The Tribunal has examined the most appropriate method in the case of distributor to determine the ALP for the international transactions. In the case of Horiba India Pvt. Ltd. (supra), the Tribunal has held that in the case of a distributor where the goods are purchased from the AE and resold to other independent entities without any value addition, then the resale price method should be reckoned as most appropriate method. One of the main reason given by the TPO as well as the DRP is that the assessee is full fledged/full risk distributor and performing host of functions, therefore RPM should not be taken as the most appropriate method, because all these functions require huge cost which may not represent the gross profit margin. This contention of the revenue was rejected by the Tribunal and it was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal transaction, and which provides the most reliable measure of an arm's length in relation to the international transaction. Sub-rule (2) of Rule 10C lists certain factors which should be taken into account in selecting the most appropriate method as specified in sub-rule (1). These factors, inter olio, include , the availability coverage and reliability of data necessary application of the method'; and (d) the degree of comparability existing between the international transaction and the uncontrolled transaction........... 8.2 An overview of the factors prescribed for choosing the most appropriate method indicates that firstly, the data necessary for application of the given method should be available and secondly, the uncontrolled transactions should be functionally similar, if not identical. A company, in order to be ranked as comparable under the RPM, should preferably be engaged in doing similar activity as that of the assessee or at least of the some genus of the activity, with a different product. The Ld. TPO himself has categorized the corn parables chosen by the assessee as traders akin to computer industry or engaged in trading of instruments. As the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of law. The Appeal is devoid of merits and is, therefore, dismissed. There would be no orders as to costs. 19. Copy of the order of the Tribunal in the case of L'Oreal India Pvt. Ltd., is also placed on record to demonstrate as to under what circumstances the RPM was considered to be most appropriate method. Similarly, in the case of Mettal Toys India Pvt. Ltd., v. DCIT (supra), the Tribunal again reaffirmed its view that in the case of distributor, the RPM is the most appropriate method by holding that ultimate aim of the transfer pricing is to examine whether price of the margin arising from the international transactions with a related party is at ALP or not. The determination of the approximate ALP is a key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed method other than choosing earlier, the most appropriate ALP can be determined, the assessng authorities as well as the appellate authorities should take into consideration such a plea raised before them provided it is demonstrated as to how a change in the method will produce better or more appropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of trading segment. As in AY 2013-14, the TPO rejected the Resale Price Method (RPM) adopted by the assessee to bench mark its trading segment on the reasoning that the AMP expenses should also be included in the cost, as the assessee is, in effect, making value addition to the brand of its AE by incurring AMP expenses. Accordingly the TPO adopted TNMM method as most appropriate method and made an adjustment of ₹ 42.96 crores. However, he did not make any addition in this regard by holding that this addition is not warranted, since T.P adjustment has been made in respect of AMP expenses. The TPO also observed that, if the TP adjustments made in respect of AMP expenses is deleted or reduced in the appeal at a later stage, the T.P adjustment of ₹ 42.96 crores made in respect of trading/distribution segment requires to be revived. 15. The Ld A.R submitted that the first issue relating to Transfer Pricing adjustment in respect of AMP expenses was considered by this bench in AY 2012-13 in the assessee s own case in IT(TP)A No.502/Bang/2017, wherein, following the decision rendered by Hon'ble Delhi High Court in the case of Maruti Suzuki Ltd (381 ITR 117) and the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 424,25,98,549 Expenditure on AMP by the appellant 689,60,79,670 Expenditure in excess of bright line 265,34,81,121 Mark-up at 12.5% on excessive AMP as per DRP direction 33,16,85,139 Reimbursement that appellant should have received. 298,51,66,260 Reimbursement that appellant has received. 33,55,48,510 Adjustment to assessee's income 264,96,17,750 9. Before us, the ld. AR has vehemently stated that the TPO has proceeded by inferring the expenses of international transaction by applying BLT by drawing support from the judgment of the Special Bench of the Tribunal in the case of assessee in ITA No. 5140/DEL/2011. 10. At the outset, we have to state that the Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT 374 ITR 118 has discarded the BLT. The Hon'ble High Court, at para 120 held as under: 120. Notwithstanding the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cases which were disposed of by the judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson having di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. XXX 68....................In other words, it emphasises that wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have acted in concert . XXX 37. The provisions under Chapter X do envisage a 'separate entity concept'. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses. XXX 39. It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the purpose of business of the assessee but it is in performance of function of market development for the brands and products of the AE that enhances the value of the marketing intangibles owned by the foreign AE, and hence there is a transaction of rendering of service of market development to the AE. ii) The short term benefit of the transaction accrues both to assessee and AE in terms of higher sales but long term benefit accrues only to the AE. iii) The benefit to the AE is not incidental but significant. Once, it is established that the act of incurring of AMP expenditure is not a unilateral act of the assessee; the AE needs to compensate the assessee for AMP expenses. iv) It is a fact that brands are valuable and even loss making enterprises having no real assets are purchased for substantial value for their brand and marketing intangibles. v) The issue is not that of transfer of marketing intangibles to AE as the brands and marketing intangibles are already owned by the AE. The issue is that of addition in the value of marketing intangibles owned by the AE owing to the services of development of brand and markets by the assessee for the AE and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by analysis ofsection 92(1) of the Act, which seeks to benchmark income / expenditure arising from an international transaction, having regard to the arm's length price. The income / expenditure must arise qua an international transaction, meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expenditure payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and unrelated third parties in India, where there is no income arising to the Indian enterprise from the foreign payee or there is no payment of expense by the Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not seek to benchmark transactions between two Indian enterprises. 23. The Revenue further contends that the assessee is not an independent manufacturer but is manufacturing for the benefit of the group entities and his status is akin to that of a contract manufacturer. Hence AMP activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. XXX 45. Since none of the above issues that arise in the present appeals were contested by the Assessees who appeals were decided in the Sony Ericsson case, it cannot be said that the decision in Sony Ericsson, to the extent it affirms the existence of an international transaction on account of the incurring of the AMP expenses, decided that issue in the appeals of MSIL as well. 27. At this stage, it would not be out of place to refer to para 6.38 of the OECD Transfer Pricing Guidelines which apply only to limited risk distributors and not to full risk manufacturers like the assessee. The said para from OECD TP Guidelines read as under: 6.38 Where the distributor actually bears the cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the assessee. The Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd (supra) disagreed with the finding of the Special Bench that the concept of economic ownership is not recognized under the Act. The relevant observations in paras 151 to 154 of the judgement are reproduced hereunder: 151. Economic ownership of a trade name or trade mark is accepted in international taxation as one of the components or aspects for determining transfer pricing. Economic ownership would only arise in cases of longterm contracts and where there is no negative stipulation denying economic ownership. Economic ownership when pleaded can be accepted if it is proved by the assessed. The burden is on the assessed. It cannot be assumed. It would affect and have consequences, when there is transfer or termination of economic ownership of the brand or trademark. 152. Determination whether the arrangement is long-term with economic ownership or short-term should be ordinarily based upon the conditions existing at the start of the arrangement and not whether the contract is subsequently renewed. However, it is open to the party, i.e. the assessed, to place evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t towards promoting the brand name of the AE. In such circumstances, the alleged excess AMP expenditure does not result in an international transaction and the assessee cannot be expected to seek compensation for such expenses unilaterally incurred by it from the AE. 31. The Revenue has strongly objected for the aggregated bench marking analysis for the AMP. According to the Revenue, the assessee company has not been able to demonstrate that there is any logic or rationale for aggregation or that the transactions of advertisement expenditure and the other transactions in the distribution activity are inter-dependent, the clubbing of transactions cannot be allowed. According to the Revenue, bench marking of AMP transaction is to be carried out using segregated approach and for determination of ALP of such transactions, Bright Line is used as the tool. 32. This contention of the Revenue is no more good as BLT has been discarded by the Hon'ble High Court of Delhi as mentioned elsewhere. The Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd in Tax Appeal NO. 16 of 2014 has held that if the Indian entity has satisfied Transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al discussion hereinabove and without prejudice to these findings, since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment is warranted. Ground Nos. 3 to 3.34 of the assessee are allowed. 21. We notice that the above said decision squarely applies to the facts of the present case. In his arguments, the Ld A.R also submitted that the economic ownership of brand lies in the hands of the assessee. As noticed earlier, the revenue has not shown that there existed any international transaction on account of incurring of AMP expenses. Accordingly, following the above said decision, we hold that the AO/TPO was not justified in making T.P adjustment on account of AMP expenses. Accordingly we hold that no adjustment needs to be done in respect of AMP expenses and accordingly delete the addition made by the AO in this regard. 17. Since the facts are identical, following the decision rendered in AY 2012-13 in the assessee s own case, we hold that no adjustment needs to be done in respect of AMP expenses and accordingly direct the AO to delete the impugned addition. 18. The second issue relates to the T.P adjustment made by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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