TaxTMI 
TaxTMI 
2015 (7) TMI 81
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....The AO noticed that assessee had entered into international transactions with Associated Enterprises ("AEs"), as detailed below:- S.N. Nature of transaction Method used by assessee Value of transaction 1. Purchase of raw material TNMM OP/OR 65,467,751 2. Sale of raw material TNMM OP/OR 1,333,743 3. Import of finished goods TNMM OP/OR 2,76,784,829 4. Finished goods capitalized TNMM OP/OR 4,224,946 5. Provision of services TNMM OP/OR 20,460,099 6. Availing of services TNMM OP/OR 1,10,819,241 7. Payment of license fees TNMM OP/OR 7,54,399 8. Cost of reimbursement No benchmarking 1,95,668 2.1. The assessee in its transfer pricing study had divided the entire business in two categories which were- (i) Vision care; (ii) Surgical equipment. 2.2. The AO noted that for vision care segment the assessee had used transactional net margin method ("TNMM") as the most appropriate method with adjusted operating profit/ sales as the profit level indicator.....
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....rejected 2. Aditya Medisales Ltd. Accepted 3. BA & Brothers (Eastern) Ltd. Data N/A, hence rejected 4. Cosme Farma Laboratories Ltd. Company is in brand building phase and hence 5. Gujarat Terce Laboratories Ltd. Company is in brand building phase and hence 6. Solumiks Herbaceuticals Ltd. Accepted 7. Serum International Ltd. Data N/A hence rejected. 2.7. Thus, in final analysis TPO accepted only two comparables for distribution segment viz. Aditya Medisales Ltd. and Abbott India Ltd. No new comparables was taken by TPO. The TPO has not made any adjustment in the profit margin of the taxpayer arising in the distribution segment. However, the ld. TPO after considering the TP documentation, also examined the advertisement, marketing and promotional expenses incurred by assessee and observed that the assessee being distributor of Bausch & Lomb products, manufactured by its group companies i.e. the AE and other subsidiaries, by incurring expenditure on advertisement marketing and promotional activities (AMP), was developing marketing intangible for Bausch & Lomb products. The AO noted from the P&L A/c, that d....
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....behalf of its AEs, it had been duly compensated for its AMP activities; - The nature of assessee industry warrants heavy expenditure on AMP. - The TPO ignored the fact that the assessee's AE had not charged any royalty from the assessee. - The TPO incorrectly considered selling and distribution expenses and sales promotion expenses incurred by B&L India as part of brand building expenses while benchmarking the AMP expenses. - The TPO erred in making selection of inappropriate companies as comparables for computation of the bright line. - The TPO erred in concluding that the assessee had rendered brand building services to its AE and it should have charged mark up on cost incurred for rendering such services. 2.11. Ld. DRP, after considering the assessee's objections, concluded as under: (i) AMP expenditure incurred by the taxpayer can be regarded as international transaction; (ii) The AEs of the taxpayers were the guiding factors in deciding the strategy of AMP function discharged by the taxpayer and, therefore, the expenditure on advertising and marketing activity was not solely for assessee's own business purposes. (iii) Ld. DRP further held that....
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....ot in accordance with provisions of law. Further, without prejudice, the decisions of Hon'ble Courts (including of this Hon'ble Tribunal) relied upon are distinguishable and have no application in the facts and circumstances of Appellant's case. 3. On the facts and in circumstances of the case and in law, ld. AO/DRP/TPO have erred in holding that the Advertisement, Marketing and Promotion ("AMP") expenditure incurred by the Appellant in India, being payments made to third parties, can be characterized as an 'intemational transaction' as per the provisions of the Act, without appreciating the following: (a) There was no understanding/arrangement between the Appellant and its associated enterprises ("AEs") for incurrence of such expenditure on behalf of the AEs; (b) The transaction in question was undertaken by the Appellant with unrelated domestic third parties; (c) Selective reliance cannot be placed on portions of submissions and information provided to presume existence of international transaction (d) Deeming fiction cannot be expanded out of context purely based on presumptions to include transactions not expressly covered in law 4. ....
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.... Method ("TNMM") to benchmark its international transactions, and thus, no separate arm's length analysis was required in respect of the alleged international transaction relating to AMP. 13. That on the facts and circumstances of the case and in law, the learned AO/DRP/TPO have erred, in benchmarking presumed international transaction of the Appellant relating to AMP, without considering that the Appellant has been fully compensated for its marketing efforts as evident from the arm's length margin earned by it. Without prejudice, the further direction to verify and modify the adjustment is also contrary to express provisions of law. 14. That on the facts and circumstances of the case and in law, learned AOIDRP/TPO were not justified in considering discounts, selling and promotion expenses, and other such expenditure while calculating the AMP expenditure of the Appellant. Without prejudice, the conclusions reached are contrary to the very same decisions which are relied upon by the tax authorities. 15. That on the facts and circumstances of the case and in law, learned AO/TPO/DRP have erred in incorrectly applying the Comparable Uncontrolled Price ("CUP") method fo....
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....ht in the facts and circumstances of the case and in law, learned AO/DRP /TPO have erred, in selection of inappropriate comparables (by wrongly applying the search parameters set out by themselves) for benchmarking the international transaction of the Appellant?" 4. Ld. counsel submitted that Hon'ble High Court has held that AMP is an international transaction and, therefore, ground nos. 2,3,4, 5 & 6 have to be dismissed. Accordingly, these grounds are dismissed. 5. Ld. counsel for the assessee submitted that assessee is primarily a distributor and at the entity level average profit earned was 18.45% for the two basic segments viz. vision care; and surgical equipment. 5.1. Ld. counsel pointed out that the ld. DRP has given direction to TPO to verify the results of the search from the annual reports of the comparables for the calculation of operating margin and AMP of sales ratio. However, the TPO has not correctly applied the said filter and, therefore, the matter should be restored to the file of TPO to correctly apply the trading filter. Ld. TPO had applied the trading filter of 75% of revenue of comparables from trading income. However, ld. RP applied a filter of 66.67%....
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....ith or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction. ...... viii) Distribution and marketing are inter-connected and intertwined functions. Bunching of inter-connected and continuous transactions is permissible, provided the said transactions can be evaluated and adequately compared on aggregate basis. This would depend on the method adopted and comparability analysis and the most reliable means of determining arm's length price. ....... . (xii) When segmentation or segregation of a bundled transaction is required, the question of set off and apportionment must be examined realistically and with a pragmatic approach. Transfer pricing is an income allocating exercise to prevent artificial shifting of net incomes of controlled taxpayers and to place them on parity with uncontrolled, unrelated taxpayers. The exercise undertaken should not result in over or double taxation. Thus, the Assessing Officer/TPO can segregate Al\1P expenses as an independent international transaction, but only after elu....
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....idered by assessee while computing margins or not. 4. Ld. CIT(DR) submitted that no proposition as such has been laid down by Hon'ble High Court that selling expenses in all circumstances to be excluded. In this regard he referred to page 127 of the said decision, wherein arguments of revenue have been reproduced by Hon'ble Delhi High Court. He pointed out that Hon'ble High Court in para 176 has given the findings with regard to assessee which was engaged in distribution and marketing of consumer goods and not in case of distributor simpliciter which is sin the present case. 4.1. Ld. CIT(DR) submitted that the discount and incentive that the assessee is passing on to the dealers is the tool which it employs to create a brand loyalty among them and, therefore, the commission and sales discount facilitates the company to create a loyalty among the chain of organization and personnel who are link between the asessee of the AE and the ultimate consumers. He, therefore, submitted that selling and distribution expenses cannot be excluded while computing AMP expenditure. 5. We have considered the rival submissions and have perused the record of the case. As per transfer pricing s....
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....sel has relied on the decision of Hon'bloe Delhi High Court in the case of Soni Erection's case (supra). 5.3. The Hon'ble Delhi High Court in the case of Soni Erection's case (supra) in para 137 has observed that the aggregation and disaggregation of transactions in the TNM method or even in other methods is sought to be applied, must have reference to the strength and weakness of the TNM method or the applicable method. It was observed that aggregation of transactions is desirable and not merely permissible, if the nature of transaction(s) taken as a whole is so interrelated that it will be more reliable means of determining the arm's length consideration for the controlled transactions. It was further observed that there are often situations where separate transactions are inter wined and linked or are continuous that they cannot be evaluated adequately on separate basis. Secondly, the controlled transaction should ordinarily be based on the transaction actually undertaken by the AEs as has been struck by them. Hon'ble jurisdictional High Court cautioned that it was not advocating the a broad-brush approach but, a detailed scrutinized ascertainment and determination whether or....