TaxTMI 
TaxTMI 
2015 (6) TMI 130
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....e Big Babool, Alpenlibe, Center Fresh, Center Fruit, Center Shok, Chater Patar, Chlor-mint, Choco-tella, Cofitos, Happydent White, Protex Happydent, Marbels, Mentos, etc. The assessee reported 14 international transactions, which have been enlisted on page 2 of the order passed by the Transfer Pricing Officer (TPO). The assessee employed the Transactional Net Margin Method (TNMM) in respect of six international transactions; the Comparable Uncontrolled Price (CUP) method in respect of three transactions; Cost Plus Method in respect of one international transaction; and no method for four international transactions of Reimbursement of expenses by AEs, Reimbursement of SAP licence, Reimbursement of IT support services and Reimbursement paid to AEs. On a reference made by the AO for determining the arm's length price (ALP) of the international transactions, the TPO accepted all the reported international transactions at ALP. He, however, noticed that the assessee incurred Advertisement, Marketing and Promotion (AMP) expenses to the tune of Rs. 183,73,82,000/-. To determine the ALP of the international transaction of AMP expenses, the TPO chose certain comparable companies. By ap....
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....l orders following the Special bench order. A batch of appeals in relation to `Distributors' (not Manufacturers) led by Sony Ericson Mobile Communications India Pvt. Ltd. Vs. CIT has been disposed of by Their Lordships of the Hon'ble Delhi High Court, delivering judgment on 16th March, 2015, upholding the majority view of Special Bench in LG Electronics (supra) treating AMP as an international transaction and also conferring jurisdiction in the TPO to determine the ALP of the international transaction of AMP expenses. Dealing with the computation of ALP of such transactions by a Distributor, the Hon'ble High Court has held, inter alia, that the international transaction of AMP expenses should be bundled/aggregated with other international transaction carried out by the assessee as a distributor, who either simply acts an agent of manufacturer or purchases goods from the manufacturer for resale at his own account. The Hon'ble High Court held that where the TNMM has been applied as the most appropriate method by a Distributor, which method has not been disturbed by the TPO, then, the international transaction of AMP and distribution activities should be clubbed. It further held that ....
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....rables having undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) & others]; • The choice of comparables cannot be restricted only to domestic companies using any foreign brand [Para 120] ; • If no comparables having performed both the functions in a similar manner are available, then, suitable adjustment should be made to bring international transactions and comparable transactions at par [Para 194 (iii)] ; • If adjustment is not possible or comparable is not available, then, the TNMM on entity level should not be applied [Paras 100, 121, 194(iii) & (vi)] ; • In the above eventuality, international transaction of AMP should be viewed in a de-bundled manner or separately [Paras 121& 194(xi)] ; • In separately determining the ALP of AMP expenses, the TPO is free to choose any other suitable method including Cost plus method [Para 194(xiii)]; • In so making a TP adjustment on account of AMP expenses, a proper set off/purchase price adjustment should be allowed from the other transaction of distribution of the products....
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.... account of AMP expenses because such expenses stand subsumed in the overall operating profit. The argument of the ld. AR, if taken to a logical conclusion, will make the AMP spend a noninternational transaction, which, in our considered opinion, is contrary to the verdict of the Hon'ble Delhi High Court in Sony Ericsson (supra). Once AMP expense has been held to be an international transaction, it is, but, natural that the functions performed by the assessee under such a transaction need to be compared with similar functions performed by a comparable case. If AMP functions performed by the assessee turn out to be different from those performed by a probable comparable company, then, an adjustment is required to be made so as to bring the AMP functions performed by the assessee as well as the comparable, at the same pedestal. If we concur with the contention of the ld. AR that the addition on account transfer pricing adjustment of AMP expenses be deleted without any examination of the AMP functions carried out by the assessee as well as comparables, this will amount to snatching away the tag of international transaction from AMP expenses, assigned by the Hon'ble High Court. What....
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.... are compared in any other international transaction. However, in computing ALP of AMP spend, the adjustment or set off, if any, available from the distribution function, should be allowed. The essence of the judgment in the case of Sony Ericson Mobile (supra) is that the two international transactions of Distribution and AMP should be examined on the touchstone of transfer pricing provisions, but on an aggregate basis. Determining the ALP of two transactions in an aggregate manner postulates making a comparison of both the functions of distribution and AMP carried out by the assessee with the comparables, so that surplus from the distribution activity could be adjusted against the deficit in the AMP activity. The Hon'ble High Court has nowhere laid down that the AMP functions performed by the assessee should not be compared with those performed by the comparable parties. On the contrary, it turned down the contention raised by the ld. AR urging for not treating AMP as a separate function, which is apparent from the extraction from para 165 of the judgment : `On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument....
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....tween the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.' 9. A perusal of the sub-clause (iii) of this Rule divulges that net profit margin under a comparable uncontrolled transaction as determined under sub-clause (ii) should be: "adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions." It is only such adjusted net profit margin in sub-clause (iii) of Rule 10B(1)(e) which is compared with the net profit margin realized by the assessee as per the mandate of sub-clause (iv) of Rule 10B(1)(e). 10. Sub-rule (2) of Rule 10B provides that 'for the purposes of subrule (1)', the comparability of an internatio....
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....odium. If due to one reason or the other, no reasonable accurate adjustment can be made due to such differences, then, such uncontrolled transaction should not be considered as a comparable transaction. 12. It is discernible that the prescription of Rule 10B is in complete harmony with the ratio of the judgment in the case of Sony Ericson Mobile (supra), to the effect that the AMP functions carried out by the assessee are required to be necessarily compared with the AMP functions carried out by a comparable entity in determining the AMP of ALP expenses. Difference between the functions, if capable of adjustment, should be given effect to in the profit rate of the comparable and if such difference cannot be given adjusted, then, the probable comparable should be eliminated. 13. We have noticed above that the assessee is a `Manufacturer' and not a `Distributor'. The judgment in the case of Sony Ericson Mobile (supra) deals with a case of Distributor, though the initial discussion about the character of AMP spend as an international transaction and the jurisdiction of the TPO etc. are common to a distributor and also a manufacturer. Similarly there are some other observations in....
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....hen we use the words `plain vanilla distributor' we do not mean plain vanilla situations, but value additions and each party making valuable unique contribution.' 14. It is discernible from the italicized part of the above para that the application of TNM Method is not appropriate and proper in case the assessee is engaged in manufacturing activities. In such circumstances, the import of raw material for manufacture would be an independent international transaction viz. marketing and distribution activities or functions. The core of the above para is that in the case of a `Manufacturer', the international transactions concerned with the manufacturing activity cannot be aggregated with the AMP activities as both are separate and distinct. Once both are held to be separate and TNMM is not to be applied, the only thing which remains is that the AMP transaction should be separately and independently processed under the Chapter X of the Act as per any suitable method (other than TNMM) including Cost plus method, but by excluding the selling expenses from the overall base of AMP expenses. 15. Turning to the facts of the case, we find that the TPO/AO have followed the Special be....