TaxTMI 
TaxTMI 
2015 (6) TMI 514
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....d filed its return of income declaring total income of Rs. 11,47,33,153/-. The AO noticed that the assessee had entered into following international transactions: Nature of International transaction Method Selected Amount(In INR) Purchase of hip. Knee and trauma implants etc. TNMM 475,487,449 Purchase of instruments 21,494,576 Reimbursement of expenses received CUP 2,126,571 Reimbursement of expenses paid CUP 4,814,142 4. Accordingly, reference was made to TPO for determination of ALP of international transactions. 5. Ld. TPO has not disputed the ALP of above transactions. However, he noted from the audited accounts that the assessee was incurring huge amount on advertisement and market promotion ("AMP"). He was of the opinion that the assessee was spending this amount on extending the reach of the brands owned by the AEs. The final beneficiary was the AE as the brands owned by it were gaining in value due to the marketing efforts of the assessee. 6. Ld. TPO issued a detailed show cause notice which is reproduced in para 3 of his order. In this notice primarily TPO pointed out that the functional profiles as per....
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....0 3.64 5. AFCO Industrial & Chemicals Ltd. No AMP expenses during the year 0.00 6. Ambalal Sarabhai 591,170,000 Selling Commission 5-54,000 Wholesalers/ distributors discount 308,000 Selling expenses 2,563,000 Distribution Expense 3,277,000 1.89 7. Remi Elektrotechnik Ltd. This segment of Remi Group is a manufacturer of laboratory and blood bank instruments 10. Based on above analysis, he proposed that following companies shall be used as comparables for determining the bright line with reference to the AMP expenses incurred by them: S No. Name of the company AMP Head Sales Amount in INR AMP/Sales(%) 1. Remi Sales & Engg. Ltd. Advertisement & Sales promotion 3,702,485 781,192,364 Commission on sales 4,220,610 Discount allowed 786,253 Total 8,709,348 1.11 2. AFCO Industrial & Chemicals Ltd. Nil 6,829,960 0.00 3. Ambalal Sarabhai Enterprises Ltd. Selling commission 5,054,000 591,170,000 ....
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....ch particular expense will be part of the AMP expenses is a matter that will be decided by the nature of the business and the product that is being sold. What is the AMP for a product in the FMCG sector may not be so in another sector. Similarly, what is relevant AMP expenses in the case of marketing of trauma implants will be decided by the nuances of this industry. He did not accept the assessee's contention that the discount, commission and other incentives had managed to set up a quick response supply chain that will cater to the element of emergency that is inherent in this business. 12. Ld. TPO in final analysis adopted the following comparables: Sl. No. Name AMP/Sales(%) 1. Trivitron Healthcare Pvt. Ltd. 3.81 2. Frontline Electro Medical Limited 8.47 3. Sataytej Commercial Company Ltd. 3.64 4. Remi Sales & Sales Engg. Ltd. 1.11 5. Lifeline Drugs & Pharma Ltd. 0.01 Average 3.40 13. Accordingly he computed the ALP of the international transactions, related AMP expenditure leading to creation of marketing intangible benefiting the AE as under: Total sales made by you Rs. 77,47,89,626 Arm's leng....
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....distributors/ commission agents. They are the real foot soldiers pushing the goods of the assessee as against the goods of the competitor. It held that the commission on sales or sales discounts, rebates, dealers & salesmen bonus, other sales promotion expenses etc. helped the company to create a loyalty among the distributors or the middlemen between the assessee and the ultimate consumers. Thus, in sum and substance ld. DRP rejected all the objections raised by the assessee. Being aggrieved, the assessee has is in appeal before us and raised following grounds of appeal: 1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law and void ab-initio 3. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. Transfer Pricing Officer ("TPO")/ Ld. Dispute Resolution Panel ("DRP") erred on facts and circumstances of the case in determining the arm's length adjustment to the Appellant's alleged international transaction with Associated Enterprises ("AEs"), thereby resulting in the enhancement of returned income of the Appellant by Rs. 29,448,571. 3. That on the facts and circums....
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....ysing individual elements of costs (like the AMP expenses) is inconsistent with the tenets of the application of TNMM; 4.6 ignoring the fact that 'bright line test' is simply a tool and not a method prescribed under the Act read with the Income-tax Rules, 1962 (lithe Rules") and hence the arithmetic mean of the AMP expenses of comparable companies should not be considered for computing the impugned TP adjustment; 4.7 not taking cognizance of the ruling pronounced by the Hon'ble Income-tax Appellate Tribunal ("ITAT"), Delhi Bench in the case of BMW India Private Limited ("BMW India") wherein it was adjudged that if a distributor is sufficiently compensated by the AE through the pricing of products, i.e. through higher margins, the same would have catered to excess AMP expenses and does not warrant a separate compensation in the form of reimbursement from the AEs; 4.8 by incorrectly determining the AMP expenses as excessive by comparing against the bright line limit arrived at arbitrarily using inappropriate comparables that: (i) are not operating on the same level of business value chain as that of the Appellant; and (ii) are wholly dissimilar to the Appellant i....
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....de, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible." 18. To buttress his argument that the AMP expenses were subsumed in the overall profit margin, ld. counsel referred to page 118 of PB wherein schedule 2.4 - other expenses, is contained, which includes the three items taken as constituent of AMP expenses by TPO. 19. Ld. counsel referred to page 204 of the PB, wherein the TP study submitted by assessee is contained to demonstrate that the average PLI of six comparables, selected by assessee was 4.03% whereas assessee was 11.07%, as is evident from page 274 of the TP study. 20. The second limb of ld. counsel's submission was that ld. TPO has wrongly taken the components of AMP which had no role in the brand promotion but were only selling expenses. In this regard ld. counsel referred to paras 175 & 176 in the case of Sony Ericsson Mobile Communications India Pvt. Ltd & Ors. (supra) , wherein the Hon'ble High Court has approved the decision of Special Bench in the case of L.G. Electro....
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.... can be taken as component of AMP. 23. Ld. CIT(DR) submitted that the matter should be restored back to the file of AO/ TPO as the ITAT does not have the expertise of examining the components of AMP expenses in the light of the decision of Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd & Ors. (supra). In this regard he referred to para 116 of the decision and pointed out that Hon'ble High Court has observed as under: "116. It was urged by the Revenue that development of markets for the products is the core function of the entrepreneur, which in this case is the foreign company, an AE. Implementation depends upon the business models of MNEs and how they want this core function to be exercised. Performance of this function clearly benefits the brands and market intangibles owned by the parent company. The test to determine whether the Indian subsidiary was/is incurring the AMP expenses for itself or at the instance of the AE was/ is to find out whether an independent party would have undertaken the same level of AMP expenses. An independent party with short-term agreement with an MNE would not incur costs which give longterm benefits ....
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....ns, he can so proceed after giving justification and adequate reasons. At that stage, he would have apportioned the price received or the compensation paid by the foreign AE towards distribution and marketing or AMP functions. The TPO can then apply an appropriate method and compute the arm's length price of the two independently and even by applying separate methods. This will be in terms of the provisions of the Act and the Rules and also as per the general principles of international taxation accepted and applied universally. On the other hand, as recorded by us above, applying 'bright line test' on the basis of parameters prescribed in paragraphs 17.4 and 17.6 would be adding and writing words in the statute and the Rules and introducing a new concept which has not been recognised and accepted in any of the international commentaries or as per the general principles of international taxation accepted and applied universally. There is nothing in the Act or the Rules to hold that it is obligatory that the AMP expenses must and necessarily should be subjected to 'bright line test' and the non-routine AMP expenses as a separate transaction to be computed in the ....
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....ate return to the party controlling unique or difficult to value intangible assets .. Success or efficacy of a particular method would depend upon functional analysis of the tested party and the comparable. Once we accept the comparable on the basis of functional analysis and if required, after making adjustments, then there should be no difficulty in accepting the international transfer price. In case of discrepancy, addition may be justified where the net profit margin declared in the case of the tested party is lower than the comparable. A comparable should be accepted if it deals with the same or identical or similar property under the same or substantially the same circumstances as the controlled transaction so as to give reliable and more certain measure of arm's length result. All methods including the TNM Method acknowledge that there could be difference between tested part and the comparable on functional analysis, but this would not be material where it is possible to reasonably ascertain the effect on account of the differences for which appropriate adjustments can be made. Thus, selection of the comparable depends upon the functional analysis, similarity as to the s....
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....nsactions it is necessary that TPO has to record specific findings on these aspects particularly with reference to AMP functions of comparables vis a vis assessee. It needs to be examined whether comparables selected for bench marking distribution activity were also incurring AMP expenses or not and, if yes, the AMP functions performed by those comparables. 30. Para 101 relied upon by ld. counsel can come into play only when the comparables passed the functional analysis test and adjustments have been made because it is only the profit margin as declared by assessee can be compared with the profit margin of the comparables. Since TPO has not carried out this exercise the matter needs to be restored back to the file of AO/ TPO for carrying out detailed functional analysis of the comparables. It is pertinent to note that comparables selected by assessee in its TP study for benchmarking the distribution activity were as under: S. No. Name of the company Data Source Average PLI 1 Hicks thermometers (India) P 4.95% 2. Kusam Electrical Inds Ltd. P 11.06& 3. Remi Sales & Engg Ltd. P 3.57% 4. Sataytej Commercial co Ltd. AR ....