TaxTMI 
TaxTMI 
2013 (9) TMI 124
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.... companies. 2. The Ld. DRP and consequently the LD. AO (following the directions of the Ld. DRP) erred on facts and in law in upholding that the appellant has rendered services to the AEs by incurring the AMP expenses and by holding that a mark-up has to be earned by the appellant in respect of the "alleged excessive" AMP expenses and applying a mark-up of 15% in respect of the appellant's "alleged excessive" AMP expenses, without any basis for the same whatsoever. 3. The Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP) erred on facts and in law in misinterpreting or placing incorrect reliance on the international guidance in relation to the 'marketing intangibles' and 'bright line test' from Organization for Economic Co-operation and Development ('OECD'), US TP Regulations and Australian Tax Office ('ATO') and relying on several erroneous/factually incorrect and contradictory statements/observations in the TP order, which are not relevant to the instant case, only in order to justify an otherwise inappropriate and unwarranted TP adjustment. 4. The Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP) erred on facts and ....
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.... the "TPO") on receipt of the reference made u/s 292CA(i) from the Assessing Officer (hereinafter referred to as the "AO") for determining the Arm's Length Price (hereinafter referred to as the "ALP") in respect of international transaction entered into by the assesse during the financial year 2007-08 relevant to assessment year 2008-09 passed an order dated 17.10.11 u/s 92CA(iii) of the Act. 2.4. A perusal of the same shows that the TPO took note of the fact that the BMW Group has global operations in 3 segments namely Automobiles, Motorcycles and Financial Services. The parent company of the group is BMW AG i.e the associated enterprise (hereinafter referred to as the "AE") which is headquartered in Munich, Germany and is primarily engaged in the manufacturing of automobiles and motorcycles. The major car brands manufactured by BMW AG are stated to be BMW, Mini and Rolls-Royce. The TPO takes note of the fact that the assessee had undertaken the following international transactions :- S.N. Description of transaction Value (in Rs.) Method 1. Purchase of raw material 167,051,934 TNMM 2. Purchase of traded vehicle 535,438,461 ....
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.... on page 5, para 1.2.4 states that, "based on an analysis of the functions performed and risks assumed by BMW Group and BMW India, the development of the arm's length price in this analysis recognizes that BMW Group owns valuable intellectual property rights (know-how, copy rights, patents etc.) and other commercial or marketing intangibles (brands, trademarks etc.) and is involved in complex product development, manufacturing of products and brand development operations. BMW India, on the other hand, can be characterized as a distributor, also performing low value and added assembly of automobiles, utilizing the intangibles developed and owned by the BMW Group. BMW India undertakes all the routine functions and assumes all the risks associated with such business activities." Further, the TP study also states, "Para 4.5.3 BMW India does not own non-routine intangibles and does not undertake any research and development on its own account that leads to the development of non-routine intangibles. BMW India uses the brand name, trademarks, processes technical know-how/data, operating/quality standards etc. developed/owned by BMW Group. Accordingly BMW India does not own any non-rou....
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....expenditure which a routine distributor would incur to market and promote the products which it is dealing with. As such for the expenditure beyond the bright line in the hands of a person who is not the legal owner of the brand, the TPO was of the view that in such a situation re-imbursement from the legal owner of the brand must flow. The TPO further referred to the advertisements from the company's website and the print media observed that it showed that the assessee had advertised the product of the AE along with "BMW logo" which did not bear the name "BMW India" and the "BMW India" logo. The argument that the assessee had no role in the level of publicity was also not accepted as assessee had purchased brochures worth Rs.7.68 crores and other advertising/marketing materials from its AE. The TPO referring to the international practices and the article titled "The significance of Intangibles Property Rights in Transfer Pricing" by Gregory J. Ossi specific paras 60, 55 relied upon by the assessee in its submissions dated 04.10.2011 extracted in the TPO's order at page 21-23 of his order, concluded that the tenure of the assessee is quiet tenuous and could be snapped anytime which....
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....bution function of the AE. The set is as under: Name of the company Database GP/Sales OP/Sales A&M/Sales VAE/Sales Pebco Motors Ltd. P 6.62% -3.84% 1.20% 10.46% Popular Vehicles & Services Ltd. P 11.72% 1.16% 4.10% 10.56% Shree Sancheti Motors Pvt. Ltd. P 12.15% 0.95% 1.61% 11.20% Machino Techno Sales Ltd. P 12.69% 1.07% 4.42% 11.62% Eastman Industries Ltd. P 16.22% 3.80% 1.25% 12.42% Bharat Power Corpn. Pvt. Ltd. P 24.79% 10.82% 0.87% 13.96% MGF Automobiles Ltd. P 15.90% 0.45% 6.31% 15.45% Lucas Indian Services Ltd. P 20.13% 4.16% 0.88% 15.97% Sri Ramadas Motor Transport Ltd. P 18.92% 2.19% 1.66% 16.73% Mean 15.46% 2.31% 2.48% 13.15% BMW India 27.36% 13.52% 2.69% 13.84% This set will be used along with the comparables already proposed in the show cause notice to be used from the original set taken under TP study. The average AMP/Sales works out to 1.99%." 2.9.3. Accordin....
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.... their arguments, subsequently the case was fixed for clarification and the Ld. AR filed a synopsis and re-joinder to the arguments advanced by the CIT DR. Ld. CIT DR on the next date made oral submissions on the submissions of the Ld. AR and the time was given to the Ld. CIT DR to sum up his arguments. 5. Before addressing the detailed arguments on the merits of the claims of the respective parties qua the grounds raised, we first propose to consider the preliminary issues addressed by the parties before the Bench. 5.1. On 18.02.2013, Ld. AR referring to the affidavit filed before us and the order of the Special Bench which is in public domain stated that the assessee sought permission to become an intervener in L.G' Electronics' case. However when during the hearing on 2.11.2012, the Members of the Special Bench clarified that the Special Bench would adjudicate only on the facts emanating from L.G. Electronics India Pvt. Ltd. i.e. the principal appellant and would not discuss the facts of any other case and since the principal appellant was "a licensed manufacturer" and the assessee in the present case being "a distributor", the Ld. AR sought permission to be allowed to wit....
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....stributors. As such it was submitted that the department would be heavily relying on the order of the Special Bench which has decided all the legal issued in favour of the Revenue. It was his stand that the order of the Special Bench would bind the assessee as the principles laid therein are applicable to the AMP expenses as such the argument that the said order would apply only to a license manufactured cannot be accepted. It was also his stand that the order shows that the assessee is not an intervener, as such the contents of the affidavit of the Ld. AR to the said extent are correct as the record shows that the assessee sought to implead itself as an intervener and thereafter sought permission to withdraw as an intervener from the hearing in LG Electronics case and the order available in the public domain shows that the assessee has not been named as an intervener. As such to that extent, the Ld. CIT DR was in agreement with the submissions of the Ld. AR. 5.1.2. On considering the stand of the parties before the Bench, we hold that the assessee was not an intervener in the proceedings before the Special Bench in the case of L.G. Electronics as its name does not find a mentio....
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....is incumbent upon the TPO to follow and comply with the directions of a higher forum, the DRP definitely is a higher forum for a TPO whom he is statutorily and mandatorily bound to follow. It is not open and should not be open to anyone to thumb his nose on the statutorily supported directions of a higher forum and it is for the CBDT to look into this malaise which appears to have crept in the functioning of the department. As such it is seen that the issue arises from the material available on record. In the afore-mentioned peculiar facts and circumstances, we are of the view that the additional ground raised by the assesse deserves to be admitted as the said ground emanates from the impugned order. 5.3. Having disposed the preliminary issues, we now proceed to address the arguments of the parties before the Bench on merits. 5.3.1. The Ld. AR inviting attention to the synopsis filed before the Bench contended that the assessee BMW India is engaged in the import and sale of premium segment cars in India and operates as a normal risk distributor in India. It was his submission that it would be his endeavour to address the facts of the present case as opposed to facts of the ca....
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..... 12.69% 1.07% 4.42% Eastman Industries Ltd. 16.22% 3.80% 1.25% Bharat Power Corpn. Pvt. Ltd. 24.79% 10.82% 0.87% MGF Automobiles Ltd. 15.90% 0.45% 6.31% Lucas Indian Service Ltd. 20.13% 4.16% 0.88% Sri Ramadas Motor Transport Ltd. 18.92% 2.19% 1.66% AVG Motors Ltd. 8.96% 1.85% 0.31% TP Documentation Companies Competent Automobiles Co Ltd. 5.91% -0.04% 0.20% Sai Service Station Ltd. 9.82% 2.80% 1.06% Mean 13.65% 2.11% 1.99% 5.3.4. In the context of the above facts it was submitted that solely based on this comparison of AMP/sales ratio of BMW India vis-à-vis the comparable companies, the TPO has alleged that the assessee should have been reimbursed by the BMW Group for the excessive AMP spend and has also over and above this held that the assessee has rendered services to its overseas BMW Group by incurring additional expenses and as such applied a mark-up of 15% on the incremental AMP spend visà- vis the comparables. It was his submission....
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.... that the fact that the assessee has earned premium profit more than required goes to address the fact that no compensation was required to be received as the premium profits have already been earned due to the pricing benefits which the AE has ensured. It was his submission that the DRP did not dispute these facts was pleased to note them and observed that "on the face of it, the arguments looks convincing". However, instead of carrying the same to its logical conclusion they concluded on suspicious in holding that there are certain basic flaws in the same. It was submitted that what was the flaw apart from suspicious was not addressed the assessee's argument on facts demonstrates the fact that compensation already stood received was discarded on the reasoning that the assessee is trying to place the arguments, which it had preferred in sub ground 2.1 again through the back door. It was questioned how can such a decision be considered a reasoned finding. The said stand by the DRP according to the Ld. AR ignores the fact that the OECD Transfer Pricing Guidelines itself supports such adjustments. 5.3.6. It was re-iterated that the assessee had empirically demonstrated that add....
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.... whether the distributor/marketer is earning sufficient profits in the immediate and long term. OECD's Discussion Draft on Intangibles (Chapter VI of the OECD Guidelines) 1.23 OECD's Discussion Draft on Intangibles (please refer pages 131 to 192 of Compendium) has also dealt in further detail on the issue of arm's length compensation for functions performed by Associated Enterprise related to the development, enhancement, maintenance or protection of intangibles6 (please refer pages 146 to 148 of Compendium). The Discussion Draft states that where the distributor bears the cost of its marketing activities, the issue is the extent to which the distributor is able to share in the potential benefits deriving from its functions, assets, risks and costs currently or in the future. As also stated in the OECD TP Guidelines, the Discussion Draft also states that in arm's length transactions the ability of a party that is not the registered or legal owner of trademarks and related intangibles to obtain the benefits of marketing activities that increase the value of those intangibles will depend principally on the substance of rights of that party. 1.24 The Discussion Draft also pro....
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....ibution agreements. An alternative might be to apply a residual profit split method. This method would split the combined profits from sales of the branded watches by first giving B and A a basic return for the functions they perform and then splitting the residual profit on a basis that takes into account the intangible assets owned by B and A 11 and the relative contributions of both B and A to the value of the trade name Rist. (b) Directly compensating B for the excess marketing expenditure it has incurred over and above that incurred by comparable independent enterprises. This may be appropriate, for instance, if independent enterprises might be expected to have agreed to B receiving a fee and a reimbursement of expenditure incurred in excess of a specified amount (based on what a distributor purchasing for the agreed price might be expected to spend on its own account). It is expected that such a fee would include an appropriate profit element." Based on the above, it can be concluded that a marketer/ distributor undertaking excessive marketing activities on behalf of the owner of the brand can be remunerated either by way of a reduction in the purchase price or by way o....
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....marketing intangible issue would have no relevance. It was his submission that marketing intangible issue would typically arise in case of normal distributors who are incurring excess AMP expenditure and at the same time not earning higher remuneration as compared to comparable normal distributors. Accordingly it was argued that it can be demonstrated that marketing intangibles should not arise in the case of the assessee as BMW India has long-term distribution rights. Attention was invited to the Importation Agreement between the assesse and BMW AG. For ready-reference, we reproduce para 1.37 to 1.41 from the synopsis filed by the assessee :- "(i) BMW India has long term distribution rights 1.37 The Ld. DRP has alleged that BMW India does not have any long term contract for the distribution of the products manufactured by the parent and other group entities. In the Ld. DRP's view, in case the contract of distribution of goods is terminated by the parent, the Appellant would not have any rights over the brand promoted by it over a period of years. On the other hand, the parent would enjoy the fruits of the efforts put in by the Appellant for promoting the brand. 1.38 It is....
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....ny loss is suffered due to excess AMP spend would arise only at the time of such premature termination and not during the pendency of the agreement. Thus, disallowance of AMP spend on the mere assumption that BMW AG may terminate the agreement in the future is not sustainable in fact or law. A taxpayer cannot be penalised on the presumption of a future event (which may not even occur) while ignoring the present facts and circumstances." 5.3.8. It was also submitted that another reason which operates in assess's favour for not making adjustment for marketing intangibles is that premium profits have been earned by the assessee. It was his submission that facts available on record would demonstrate that BMW India is adequately compensated by premium return for the excess AMP spend through the BMW Group's pricing policy for the excess AMP spend. We reproduce paras 1.42 to 1.48 form the synopsis available on record:- "1.42 As mentioned above, BMW India operates as a Normal Risk Distributor, remunerated through gross returns on sales. Further, without admitting but even if one assumes for the sake of discussion, that BMW India performs higher ....
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....-vis 1.99% of that of the comparable companies as selected by the Ld. TPO. 1.48 In this regard it is worth mentioning at this stage that the in the directions issued by the Ld. DRP for the immediate previous year i.e. AY 2008-09 has also appreciated such contention on the excessive profitability earned by the Appellant, stating that" .... the arguments look convincing". 5.3.9. It was his submission that although the stand of the assessee is that it does not carry out the brand promotion activities for the AE but even if it is assumed for the sake of an argument that the assessee does perform the functions even then it cannot be ignored that the GP/Sales and OP/sales margin of 27.36% and 13.52% earned respectively is significantly higher than the gross and net margins earned by the comparables selected by the TPO himself i.e 13.71% and 11.41%. It was submitted that the following facts indicate the assessee's position. We reproduce from the synopsis filed on behalf of the assessee:- "1.50 Even assuming but not admitting that the Appellant is undertaking all the entrepreneurial functions relating to the marketing and advertising function, then the point to note is that the....
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....ive AMP spend and therefore not further compensation is required to be earned by the Appellant. 1.53 The above discussion clearly demonstrates that the Appellant has retained more than adequate profits in India as a Normal Risk Distributor and it has not siphoned off the same by way not getting adequate remuneration for its functions. 1.54 Further, it is submitted that a separate reimbursement, as contended by the Ld. TPO is merely one of the ways whereby such "excessive" AMP expenses can be remunerated. Alternatively, the BMW Group can also compensate the Appellant for the AMP expenses by charging a discounted transfer price for the products supplied to the latter. Where such a discounted transfer price is already being charged, there is no need for any separate compensation for the AMP cost. This is aspect is explained in further detail in the following section: Incorrect reliance on international and Indian cases 5.3.10. The decisions relied upon by the DRP it was submitted have no applicability. Whereas the judgement of the Hon'ble High Court in Maruti Suzuki's case, it was submitted was on entirely different set of facts and the Hon'ble Supreme Court has negated th....
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....ment. In fact it was urged that the said decision supports the assessee's case. The following arguments reproduced from the synopsis address the issue:- "1.59 Moreover, without prejudice to the above, the facts and decision in the DHL case, do not support disallowance of AMP spend of the Appellant. On the contrary, the DHL case allows undertaking of marketing and advertisement expenditure if there is an exclusive and long term distribution agreement. As in DHL's case, BMW India also has entered a long term agreement with BMW AG for distribution of premium cars. Accordingly, there is no contradiction between the DHL ruling and the facts in the case of BMW India as in both cases: (i) the licensee had entered into a long term agreement for the use of the trademark; (ii) the licensee may have developed the local intangible by way of advertisement and marketing spends; and (iii) in accordance with the arm's length principle, BMW India has earned and is expected to earn a suitable return for its marketing activities, over a period of time given the long term nature of the licensing agreement. 1.60 To summarize, where the licensing agreement is exclusive and long term an....
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....as the secondary method, and the economic analysis was not challenged by the Ld. TPO neither during the course of proceedings nor while applying the test of purported excessive AMP spend. 1.66 In this regard, it is reiterated that any and all of the AMP expenses with respect of the local operations undertaken by the Appellant are solely for its own business. Accordingly, the Ld. TPO's action of considering it as a service provided by the Appellant to the AEs and seeking to recover the same by way of a "reimbursement" from the AEs along with a mark-up is erroneous and not in line with the basic TP principles. 1.67 Since, the AMP expenses undertaken by BMW India are solely for its own business, the Ld. TPO's action of considering it as a service provided and seeking to recover the same as a "reimbursement" along with a mark-up is erroneous and not in line with the basic TP principles." 5.3.12. Addressing the facts of the case, it was submitted that in the comparables taken the assessee has placed a fresh search before the TPO which has been accepted based on the similar intensity functions. Relying on the comparables accepted by the TPO in para 10.5 of the TPO's order reprod....
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....l players in the passenger car industry having similar product/brand profile (in terms of quality, recognition/brand equity, market/customer base, etc.) to be compared from the viewpoint of AMP spend. These companies are operating in same/similar industry dynamics and market forces. Moreover, the brands advertised/marketed by these companies are also legally owned by their overseas group companies just as is the case with BMW India. The advertising and marketing expenses of these companies are not controlled transactions. Therefore, in order to have a true and fair benchmark of the industry average advertising and marketing expenses, the ratios of these companies have to be necessarily taken into account. 3.8. A trend of the AMP spend of the following companies operating in Indian passenger car market would therefore be more appropriate to be compared with BMW India's AMP spend as depicted in the table below:- Name of the company FY 2005-06 FY 2006-07 FY2007-08 FY 2008-09 FY 2009-10 General Motors India Pvt. Ltd. 5.28% 6.53% 7.09% 6.41% 3.92% Honda Siel Cars India Ltd. 0.95% 1.07% 1.73% 2.30% 2.11% Hyun....
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.... corrected following the directions of the DRP which are supported by identical directions given in L.G. Electronics case, it would show that no addition as a result of ALP adjustment need be done. 5.4. The Ld. CIT DR relying upon the order of the DRP and the order of the TPO contended that on facts ALP adjustment has correctly been made barring the relief which may be due consequent to the directions of the DRP not implemented by the TPO which principle on facts has been upheld by L.G. Electronics case. Accordingly it was the vehement stand of the Ld. CIT DR that the issue is covered in favour of the Revenue by virtue of the order of the L.G. Electronics case rendered by the Special Bench. It was his stand that the principles laid down therein are fully applicable to the AMP expenses as such the argument that it would apply only to the facts of a licensed manufacturer it was submitted cannot be accepted and is strongly opposed. 5.4.1. Referring to the said order it was submitted that no doubt the said order does not reflect the name of the assessee as an intervener but the fact remains the Larger Bench has considered while adjudicating various parameters which can be examine....
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....omics of scales the low end assembly cost etc., the specific nature of the product and the trends in the market and all these stand considered and decided by the DRP. 5.4.7. Addressing the Importation Agreement placed in the paper book, it was submitted that the duration of the agreement would show that the assessee's position is very tenuous as merely by a notice of six months or so, the Agreement can be terminated and the benefits of the brand building would be available to the AE at no cost wherein the assessee does not receive any compensation thus eroding the tax base of the country. The fact remains it was urged that the assessee has incurred high AMP expenses as compared to its comparables and these have contributed to building brand recognition and marketing intangibles for the AE as the ownership admittedly of the brand vests with the AE as such placing heavy reliance on the order of the TPO and DRP which have had an occasion to consider the various arguments of the assessee and which have been approved by the Special Bench, the said orders, it was submitted deserve to be upheld. 5.4.8. IN all fairness it was submitted that incurring of expenditure not related to the....
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....n the remote possibility of such an event occurring it was submitted the Revenue cannot presume to conclude that the assessee is performing functions for the benefit of the AE as there is no reason to ignore the basic fact that the assesse exists and functions primarily to make profits. Infact the record would show it was submitted that in order to use the brand name of the AE, the assessee is paying no royalty and is utilizing the same in order to sell the product of the AE. The efforts of the assessee, it was submitted have been assisted by the AE by creating favourable pricing policies so that the assessee earns a comfortable profit as such it was submitted the Revenue's argument that over and above earning premium profits the assessee should be compensated with a mark-up is against the accepted international tax Jurisprudence. It was his vehement argument that Transfer Pricing is not a subject of legal interpretation and it necessarily requires on the other hand consideration of keeping the nature of business and the FAR analysis in mind. For ready-reference we reproduce para 7 from the synopsis submitted after the case was fixed for clarification on 26.04.2013 addressing the a....
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....y that its dictum has to be restricted in the manner of characterization of the taxpayer and application of an erroneous overall TNMM to the said case; and that the said principles cannot and should not apply to the facts of any other taxpayer, which are significantly different from those of LG India, for example, BMW India, which is predominantly a distributor and the principles of TP applicable in its case being entirely different to those applicable to a licensed manufacturer, like LG India, a fact even admitted the Special Bench during the course of the hearing, as encapsulated both in letter filed by BMW dated 6^th November 2012while withdrawing its application for intervention for the proceedings before the Special Bench and also in the affidavit sworn in by the authorised representative as above. 9. As represented during course of the oral arguments and also in the written submission filed earlier, there is no denying the fact that BMW India is predominantly a distributor of cars manufactured and supplied by BMW AG, for distribution and marketing in India. The act of distribution is akin to a service performed by the distributor in favour of the principal manufacturer of ....
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....icles carried out by BMW India. It may be noted, as accepted by the TPO in his order (page 2 of the TPO order), BMW India had tested each and every such transaction separately by applying the CUP method; and did not engulf all of them under an overall TNMM, which was the bane in the case of LG India before the Special Bench and a factor to be looked down with distain and apathy in the context of classical and cardinal principles of TP, which was also endorsed by the ruling highlighted by the Ld. DR in the case of Knorr Bremse (supra). 11. It has been submitted earlier that the issue of marketing intangibles/ bright-line in the context of the level of AMP spent needs to be properly addressed by applying international best practices, as there are no codified guidelines embodied in the Indian Income-tax Act, 1961orIncome-taxRules,1962inthis regard. It has been explained before the Hon'ble Tribunal, by referring to the OECD draft guidelines on intangibles office (refer page 174 and 175 of the Compendium) and also by the guidelines of the Australian Tax office (refer page 200 of the Compendium) if the taxpayer distributor carries out significantly higher functions in the context of A....
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....no question of granting any such additional discount or adjustment since the gross margin of the vehicles were already fixed a much higher price so as to adequately and necessarily compensate BMW India for the intensity of distribution functions, as explained earlier. 16. In case the additional gross margin earned by BMW India was less than the incremental AMP spent of BMW India as compared to the comparable distributors, then a question of making a TP adjustment either with reference to lowering the import price of the goods and thereby giving the extra gross margin to BMW India or receiving a reimbursement of such incremental AMP expenses would have arisen, in line with both the OECD guidelines and ATO Guidelines. However, when such incremental AMP expenses was already built in the commensurately higher gross margin of BMW India as compared to the comparable distributors, there was no question of separately documenting any discount or adjustment to the import price of the vehicles, as alleged to the contrary by the Ld. DR." 5.5.3. The arguments of the Ld. CIT DR that the Guidelines of the OECD and ATO are not binding on the Tribunal it was submitted is not disputed but it m....
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....ct that compensation has already been factored in. The additional gross margin earned by BMW India it was submitted was higher than the incremental AMP spent of BMW India as compared to the comparables. Had it been less than the occasion to make transfer pricing adjustments would have arisen. However when such incremental AMP expenses were already built in the commensurately higher gross margin of BMW India as compared to the comparable distributors it was submitted there was no question of separately documenting any discount or adjustment to the import price of the vehicle. The BMW India's gross margin it was emphasized was 12.67% (i.e 27.26%-13.65%) and net margin was 11.41% (i.e 13.52% -2.11%) higher than those of the comparables. It was his submission that in the facts of the present case, the adjustments proposed deserve to be deleted. 6. Having decided the preliminary issues in regard to the admission of additional ground and also holding that the assessee was not an intervener before the Special Bench as evident from the order of the L.G. Electronics, we now proceed to address the grounds raised by the assessee on the basis of the arguments advanced before the Bench on fo....
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....urts after weighting the pros and cons of all conceivable situations that may arise, they constitute just the reasoning of the judges in the particular case, tailored to a given set of facts and circumstances, and only the proposition of law which constitutes ratio decidendi that is binding on the same set of facts. The Acts of Parliament on the other hand on account of the careful drafting-presumably with reference to analogous statutes; the multiple readings to which it is subjected in the legislature and the discussions which go behind the making of a statute inject a degree of sanctity and defiteness to the meaning of the words used by the Legislature. The same cannot necessarily be always said of a decision which deals with a certain given set of facts for answering the specific question posed to the Judges. The Judges while deciding the same may dwell on various possibilities without the benefit of the facts in those cases on which they may deliberate and at times without the benefit of specific arguments on those facts as such observations made in passing in these deliberations do not form the ratio decidendi. As such it would be too much to ascribe and read precise meaning ....
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....hich a ruling was necessary to justify the decision in that particular case in the light of the question which was before the Court. A decision of the Court and that equally applies to the Tribunal also takes its colour from the questions posed in the case in which it is rendered and while applying the decision to a later case, it is necessary for the Courts to ascertain the true principle laid down by the Court. Similar would necessarily be the position considering the decision of a Co-ordinate Bench or the Special bench in which case the Special Bench being a larger Bench has greater precedent value in the context of the question posed to it. The transfer pricing litigation and adjudication being fact based necessarily requires consideration of the business model of the assessee and the contractual terms entered into with the AE along with a detailed FAR analysis so as to characterize the transactions and the business model and after charactering the taxpayer on the basis of FAR analysis, a selection of comparable companies has to made where functional similarity qua the transaction on the basis of the FAR analysis of the comparable companies is necessarily required to be done. I....
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....ternational transaction with an uncontrolled transaction shall be judged with reference to the following, namely- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account asset employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." 6.9. On a consideration of the arguments and consideration of the material available on record, we are of the view that the orders and judgements of Coordinate Division Benches or Special Benches of the Tribu....
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....umed. 6.10. Accordingly in the light of the above legal principles, we consider it necessary to address the facts available on record and cull out the relevant facts in order to adjudicate upon the issue which we are called upon to decide. In the facts of the present case, there is no dispute that the assessee is a 100% subsidiary of its AE and has entered into an Importation Agreement placed at paper book page no-239-243 between BMG AG (Bayerische Motoren Werke Aktiengesellschaft, Petuelring 130, 80788 Munchen, Germany) and BMW India Pvt. Ltd, DLF Cyber City Phase-II, Tower B, Building No.-8, Gurgaon, Haryana-122002. The opening preamble of the said agreement sets out the following facts :- "(A) BMW India is a hundred percent subsidiary of BMW Group. (B) The Parties endeavor, through their co-operation in production, distribution and maintenance of Contract Goods products, to satisfy in every way the expectations of the customers. (C) The objective is to ensure that the global standards of product quality and awareness of, or satisfaction or service to customers in India of BMW cars are achieved at par with the global standards in India; (D) BMW AG is willing to pro....
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....nd communication of market information to BMW AG." (highlighted for emphasis by the Bench) 6.10.4. The scope of the activity of the assessee is addressed in Clause 3 which reads as under :- "3.1 Responsibilities for Sales and Advertising BMW India will meet its responsibility for the promotion of sales and the full utilization of the market potential for the Contract Goods by applying its best efforts and adequate resources toward effective sales promotion and advertising for the Contract Goods including available optional equipment and accessories. 3.2. Inventory BMW India will maintain an inventory of Contract Goods that is adequate in view of its business volume. 3.3. Pricing The price charged for the Contract Goods is adequate to ensure recovery of total costs of the Contract Goods supplied plus representative profits. BMW AG, in order to arrive at the price of Contract Goods supplied to BMW India, adds to the cost of manufacture (CBU and CKD kits) or procurement (parts/accessories) as the case may be certain costs, including but not limited to:- - indirect cost (which includes costs like administrative, marketi....
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....se in its own name, on its own account, at its own risk and as such the functions performed of advertising and sales promotion is stated to be at its own discretion. 6.12. The fact that the independence of a taxpayer who is 100% subsidiary company of its holding company wherein because of the economic control and overall control necessarily lies with the holding company who has the right to appoint all or most of the directors, the independence of the directors appointed by the AE can become questionable notwithstanding claims to the contrary in the Agreement. As the interests of the AE cannot be easily ignored by them as such we are of the view that assertions in addressing their independence of decision may be required to be looked into if the situation so warrants. As such the sanctity which generally operates in favour of the terms of the agreement can be called upon to be explained in transfer pricing as such may be open to question. However in order to adjudicate the issue in the present proceedings the facts of the present case to our minds, do not warrant such an examination and it would not be of much relevance as without looking into the independable of the directors i....
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.... The fact that they far exceed the functions of a routine distributor stands demonstrated and is found in confirmation with the terms of the contract. As such, it is evident that the assessee has conducted its affairs by performing non-routine functions which it agreed to do so. 6.14. The TP study of the assessee also addresses the global overview of the automobile sector as well as the India overview of the sector. A perusal of the same shows that whereas the sales are stated to be stagnant in the last three years in the Western Europe and America, the growing markets are identified as China and India. In India due to the change in the policy and vision of the Government from 1970's to 1984 and change of the role of the Government from a regulator to "an enabler" as per the TP study resulting in restructuring of the tariff structure, changes in the import policy, FDI and reducing the Quantitative Restrictions on imports etc. which have all contributed to creating the ground realities where major International players have entered in the Indian market contributing to the movement of market expectations from compact car segment to luxury car segment. The domestic market is stated....
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.... to offer promotions and discounts to push products in the market. Moreover automobile makers do not enjoy the luxury of increasing their prices commensurate to the rise in the backdrop of a sluggish market scenario. 3.5.11. With the launch of new models, the market for Multi Utility Vehicles (MUVs) has also been redefined in India, especially at the high-end. Currently, Sports Utility Vehicles (SUVs), occupy a niche in the urban market. With the success of SUVs, the line of distinction between passenger cars and MUVs in the Indian market is getting blurred." 6.17. The assessee in the TP study has addressed that the key drivers of the Indian passenger car industry are changing technology necessitated by rising fuel costs, rising per capita income, the change in government policy in regard to import duty, excise duty and modern practices like vendor tiering, adoption of JIT (Just in Time technique) which has helped in reducing inventory carrying costs, creation of Special Economic Zones, tax holdings/incentives like sales tax relaxation, providing land at subsidized rates and liberalized FII norms and spending on infrastructure in roads, airports etc. are stated to be some of ....
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....for its manufacturing activities it functions as an entrepreneur and the rewards are not guaranteed. A distributor on the other hand operates on a lesser risk and the remuneration model is reward-based and it also may or may not pay royalty/fee for the use of Brand-logo etc. On behalf of the assessee, it has been argued that whereas the low end distributor would not undertake higher functions and would limit itself to the basic distribution function and the rewards are guaranteed but low as compared to the distributor who undertakes to perform higher functions and undertakes to establish distributorship network, advertise, promote and market the brand the remuneration/compensation/rewards of distributorship herein is also guaranteed however they ought to exceed the rewards vis-à-vis a low end distributor. Relying upon contemporaneous Guidelines/jurisprudence, it has been canvassed that for a distributor the rewards are inbuilt in the pricing itself and can also be directly compensated and international tax jurisprudence best practices contemplate that profit split method can also be resorted to in order to work out the compensation due apart from the other two methods. On co....
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....ansaction as it was a function within the bundle of functions performed as a distributor which includes costs of warehousing etc. also is not agreed with in view of the binding precedental value of the decision of the Special Bench in L.G. Electronics case. 6.21. No doubt the remuneration model of a distributor is different from the remuneration model of a manufacturer as is borne out from the Importation Agreement on which we shall deliberate subsequently however the fact remains that it was not only a transaction but an international transaction which benefited the foreign AE and in terms of the bright-line test considered by the Special Bench was an expenditure which cannot be called to be a routine expenditure for which remuneration has to be considered. The claim advanced on behalf of the assesse which is to be examined is that has the remuneration already been factored in the pricing which as per the Importation Agreement ensures that after the costs of the assessee are met the assessee is left with representative profits which are much more than those of a routine distributor as such no further remuneration is necessary or is compensation still to be received from the AE.....
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....4.16% 0.88% Sri Ramadas Motor Transport Ltd. 18.92% 2.19% 1.66% AVG Motors Ltd. 8.96% 1.85% 0.31% TP Documentation Companies Competent Automobiles Co Ltd. 5.91% -0.04% 0.20% Sai Service Station Ltd. 9.82% 2.80% 1.06% Mean 13.65% 2.11% 1.99% 6.23. It is seen that the use of bright-line as a tool for calculating the non-routine AMP spend has been upheld by the L.G. Electronics decision and even if the assessee was not an intervener before the Special Bench, the said principle is binding and as opposed to applying arbitrary estimation is a well accepted methodology in Transfer pricing and is an accepted tool for calculating non-routine expenditure for marketing intangibles where the brand ownership rests with the foreign AE. The said tool is accepted in both developing and developed countries alike in international tax jurisprudence and the applicability of the same has already been upheld in the present proceedings. The arguments that OECD Guidelines as international tax best practices and jurisprudence have no role to play shall be deal....
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.... bundle in compliance to the direction of the DRP by the TPO which has also been so directed in para 18.3 by the Special Bench in L.G. Electronics case the resultant figure of AMP would be Rs.33.93 crore odd [Rs.58,79,78,241/- (AMP as per the assessment order) to be subtracted by Rs.3.94 crore odd and Rs.20.93 crore (constituting after sales support costs and salesman bonus respectively)= Rs.3.93 crore odd]. These assertions are found made in para 1.47 of the synopsis filed in February 2013 and despite fixing the case for clarification and hearing the parties at length and almost requiring an addressal on facts de novo the calculations and statements have not been refuted by the department. Accordingly reverting back to para 1.47 of the Synopsis the resultant figure of Rs.33.93 crore odd amounts to 3.62% of the turnover. Thus the "excess' AMP spend ratio of the assessee would be 3.62% as opposed to 7.09 calculated by the TPO once the directions of the DRP are given effect to. It is seen that 1.99% is considered as the bright-line calculated by the TPO, the excess AMP/sales ratio after arithmetic corrections are carried out would be 1.63% i.e (3.62%- 1.99%=1.63%). The claim as per t....
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....advanced on behalf of the assessee that no further compensation was required to be made by the AE as the same has already been received. 6.26. In support of the remuneration model of the assessee who is a distributor rewarded by way of price adjustments to ensure profitability upto mutually accepted terms is a well-recognized and well-accepted method for compensating a distributor. In support of the said methodology of compensation, reliance on behalf of the assessee has been placed on the OECD Guidelines (copy of the discussion draft on TP aspects of Intangibles issued by OECD Chapter V1 placed at pages 131-192 of the paper book and Australian Tax Guidelines (copy of the Australian Tax Officer "ATO") Guidelines on Marketing Intangibles placed at pages 193-203 of the paper book title "Compendium of Statutory and Judicial Rulings Guidelines"). Addressing the examples illustrating the position in the OECD Guidelines, Ld. AR has canvassed that a distributor can be remunerated for the services/functions performed either by adjusting the pricing or by compensating the entity directly for excess marketing advertisement expenditure or by applying residual profit split method. In the fa....
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....have not arisen as the mandate of the Statute necessarily prevails on the terms of the Agreement entered into between the parties. Similarly reliance on OECD TP Guidelines etc. would then have no relevance. In the absence of any such bar in the Statute and the provision, we do not see any infirmity if in the terms of the Importation Agreement, the assessee for its functions performed beyond the routine functions as calculated by applying the bright-line test has been compensated by the AE by making pricing adjustments so as to ensure that the assessee is left with representative profits after meeting it costs. The fact that assessee's profits vis-à-vis the comparables with similar intensity functions far exceeds the mean margin of the comparable stands established. The contemporaneous international jurisprudence supports this and even the Special Bench leaves the issue open by accepting its limitations while giving voice to the diverse nature of facts, business models and peculiar terms and conditions of different assessee by observing that there cannot be any 'straight-jacket' formula. 6.28. Accordingly after a detailed analysis of the relevant provisions of the Act, the....
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....and the facts of the case have held that it has already been factored in the pricing adjustment by the AE. As such where compensation has already been received more than adequately as vis-à-vis the comparable doing similar intensity of functions the finding that assessee's claim is tenuous on account of duration does not need to be gone into in the present proceeding. Since compensation has been received, the worries and apprehension of the Revenue that assessee has rendered services for brand building reducing its domestic profit eroding the tax base does not arise as the tax base has not been eroded. 6.30. It may also not be out of place to mention here that a perusal of the decision of the Special Bench in the case of LG Electronics shows that while considering the specific facts of the assessee therein who admittedly was a license manufacturer, the Special Bench after referring to the vast ranges of possible arrangements which the AE in different business models may enter in para 17.3 attempts to formulate "some of the relevant questions" whose answers have a considerable bearing on the determination of the issue. Reference may specifically be made to Question No-1 wh....
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....wn the proposition that OECD TP Guidelines or any international Jurisprudence per se be ignored where the situations warrant on the issues which are not addressed in the Indian Transfer Pricing Laws contained in the Income Tax Act & Rules. Similarly there cannot be a blanket ban to considering/referring to judgements and orders rendered by the Courts and Tribunals in different tax jurisdictions as they definitely have a persuasive value. Similarly the OECD/ Australian Tax Office/UN Model Guideline definitely have a persuasive value and a decision rendered ignoring the same to our minds would be denying the concerned Authority with the benefit of contemporaneous and relevant literature on the constantly evolving issues. There is no brilliance in trying to re-invent the wheel, intelligence lies in utilizing the benefits of search and research which are already available and to proceed therefrom. The benefits of knowledge on evolving issues which has been internationally debated and discussed by academicians experts and various stake-holders is not to be ignored with contempt and should not be treated lightly and discarded without considering. Accordingly we hold that OECD TP Guidelin....