TaxTMI 
TaxTMI 
2015 (10) TMI 1008
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....n 31.05.2011. 2.2 During the course of assessment proceedings, it was noticed that the assessee reported certain international transactions with its associated enterprises (AEs) which are enlisted hereunder :- Sr. No. Nature of Transaction Method Value of transaction (Rs.) 1 Purchases of products, spares, promotional and other supplies RPM 1,59,06,94,564 2 Purchase of fixed assets TNMM 3,09,931 3 Sales and service support income TNMM 1,19,11,847 4 Commission income TNMM 17,51,40,980 5 Purchase of fixed assets CUP 16,74,880 6 Cost of reimbursements received CUP 2,29,50,609 7 Cost of reimbursements paid CUP 28,54,154 2.3 The assessee employed the Transactional Net Margin Method (TNMM) in respect of three international transactions; the Comparable Uncontrolled Price (CUP) method in respect of three transactions; Resale Price Method in respect of one international transaction. On a reference made by the AO for determining the arm's length price (ALP) of the international transactions, the TPO noted that for (i) Purchase of fixed assets (ii) Sales and service support incom....
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.... by aggregating with the other transactions in different business segments which have been analyzed under RPM/TNMM without any further analysis." 2.6 The TPO after considering the TP documentation observed that the assessee, by incurring expenditure on advertisement marketing and promotional activities (AMP), was developing marketing intangible for Nikon Japan. The TPO, for benchmarking the AMP expenditure, took the following companies as comparable and rejected the other companies by stating that some of these companies are either developing brands or are not comparable companies. For benchmarking the AMP expenditure, we require companies which are not developing brands. Hence, only following companies can be taken as comparable: Sr.No. Company name Sales AMP AMP% 1 Allied Photographics India Ltd. 11.08 0.4 3.61 2 CCS Infotech Ltd. 63.79 0.53 0.83 3 CompuageInfocom Ltd. 1087.8 0 0.00 4 Computer Point Ltd. 116.17 0.03 0.03 5 Empower India Ltd. 67.67 0 0.00 6 MVL Industries Ltd. 437.51 0.49 0.11 7 Mobile Telecommunications Ltd. 55.32 0.15 0.27 8 Salora int....
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....ominal interest rate of 12% on half of funds, opportunity cost comes out to be 6%, therefore, total mark-up was held to be 18.36% (12.36% + 6%) which in his view should have been charged by the assessee and calculated the arm's length price of the international transaction related to the AMP expenditure leading to the creation of a marketing intangible as below:- Total Sales Rs.203,87,33,264/- Arm's length level of AMP expense (0.69% of sales) Rs. 1,40,67,260/- AMP expenses actually incurred Rs. 37,62,75,469/- AMP expenditure which should have been reimbursed Rs. 36,22,08,209/- Mark-up @ 18.36% Rs. 6,65,01,427/- Adjustment u/s 92CA Rs. 42,87,09,637/- 2.12 The Assessee in its reply dated 03.01.2014 raised the following contentions :- (i) AMP expense is not an international transaction (ii) Benefit of AMP expenditure accrue to the assessee only and so expenditure is wholly and exclusively for assessee's business - No disallowance u/s 37(1) possible (iii) Any benefit to AE is incidental in nature (iv) Arguments on the use of 'Bright line' concept (v) India's position as stated in UN transfer pricin....
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.... products, in fact the expenses are clearly in the nature of brand penetration and hence should fall outside the bright line Hence, in view of non-availability of data in respect of comparables, adjustment cannot be granted. 2.14 The TPO used the 'Cost Plus Method' for the benchmarking of the AMP expenses and selected the following comparables for determining mark-up on AMP expenses :- Sr. No. Company name OP/OC 1 Crystal Hues Ltd. (corrected margin by the assessee) 8.68% 2 Quadrant Communications Ltd. 13.11% 3 Cyber Media Research Ltd. 14.85% Average 12.21% 2.15 Further, a mark-up of 6% was proposed to be charged to cover the return on funds that have been blocked and remuneration for the services provided, i.e. interest rate of 12% on half of funds which should have been reimbursed. The assessee contended the same and as per the inter-company agreement, Nikon India is allowed a credit period of 60 days. As per the agreement, if the company pays beyond 60 days, then an interest rate of LIBOR +2% would be charged. However, it is noted that the AE has not charged any interest on the outstanding amount.....
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....92 of the Act and that the analysis of "domestic" transactions undertaken with third parties, in respect of which no TP reference has been made by the Ld. AO to the Ld. TPO, is beyond the powers vested with the TPO under section 92CA of the Act. 4.2 disregarding the detailed submissions made by the Assessee on the functional, asset and risk analysis of the Assessee related to its marketing function as an independent decision maker and hence should also assume the cost associated with its functions and decisions 4.3 disregarding the contractual arrangements between the Assessee and the AE wherein the Assessee acts as a long term, exclusive distributor and has the right to receive an arm's length compensation in case of any termination of the inter-company distribution agreement 4.4 disregarding detailed submissions made by the assessee to demonstrate that the AMP expenses incurred by the Assessee were in respect of its own business requirement/ considerations/ purposes and that all benefit resulting from such expenditure are to its own account 4.5 incorrectly computing the AMP expenses/ sales by treating the selling expenditure incurred by the Assessee as part of sal....
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....n 29 taxmann.com 300 (Del)(SB) and the above Grounds of Objection are rejected in the instant case. (iii) Ground of objection no 5: Initiation and imposition of interest is prerogative of the AO while passing the assessment order and is based on the facts and circumstances of the case. Hence the DRP is not required to issue any direction on this ground at this stage and objection is therefore rejected as being premature. (iv) Ground of objection no 6: Initiation and imposition of penalty is prerogative of the AO while passing the assessment order and is based on the facts and circumstances of the case. Hence the DRP is not required to issue any direction on this ground at this stage and objection is therefore rejected as being premature." 2.20 Accordingly, ld. AO, as per the directions of Ld. DRP, passed the Final Assessment order dated 05.01.2015 upholding the adjustment made of Rs. 40,64,33,832/- by the ld. TPO in his order dated 29.01.2014 u/s 92CA of the Act. 3. Being aggrieved with the order of AO, the assessee is in appeal before us and has taken following grounds of appeal as under :- "1 That on the facts and circumstances of the case and in law, the AO has er....
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....t a prescribed method under the TP regulations in place in India, as a method for benchmarking the AMP expenditure incurred by the appellant without correctly applying any of the methods in the manner prescribed under Rule 10B of the Rules. 9 That on the facts and in the circumstances of the case and in law, the DRP/AO/TPO have erred in applying the "Bright line theory" as articulated in Transfer Pricing regulations of foreign jurisdictions and decisions rendered by foreign courts (based on specific transfer pricing regulations of those countries). 10 That on the facts and circumstances of the case and in law, the DRP erred in disposing the objections of appellant by passing a non speaking order, thus, the order passed is non est and bad in law. Without prejudice to the above grounds of the appellant that the AMP expenditure incurred by it does not constitute an international transaction under Chapter X of the Act, the appellant craves to raise following grounds of appeal on merits. 11 That on the facts and circumstances of the case and in law the DRP/AO/TPO erred in not appreciating that all the transactions of the appellant were established to be at arm's le....
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....g been specifically referred to by the AO. On the question of determination of the ALP of this international transaction, the Special bench approved the application of bright line test for working out the amount of non-routine AMP expenses and held that the ALP of AMP expenses should be determined on Cost plus method by treating AMP transaction as a separate and distinct from other international transactions. It was further held that the selling expenses directly incurred in connection with the sales do not lead to brand promotion and hence should not be brought within the ambit of AMP expenses. The Special bench laid down certain parameters to be taken into consideration for determining the ALP of AMP expenses. In the ultimate analysis, the matter was sent back to the TPO for undertaking the exercise afresh in the light of its directions. Following the said order, various benches of the Tribunal decided several cases involving AMP expenses, restoring the matter to the file of AO/TPO for deciding this issue in conformity with the directions given by the Special Bench in LG Electronics India (P.) Ltd. (supra). Several assessees as well as the Revenue preferred their respective appea....
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....owed. The view taken by the Tribunal in segregating routine and non-routine expenses on the basis of bright line test has been set aside by the Hon'ble High Court. The view taken by the Special Bench that the expenses concerned with the sales, such as, rebates and discounts etc., should be excluded from the ambit of AMP expenses, has been upheld. 5. We can summarize the relevant position emanating from the judgment of the Hon'ble High Court, as under :- • AMP expense is an international transaction [Paras 52 & 53 of the judgment] ; • The TPO has jurisdiction to determine the ALP of the international transaction of AMP expenses [Para 50 of the judgment]; • Inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set-off [Paras 80 & 81]; • AMP is a separate function. An external comparable should perform similar AMP functions. [Paras 165 &166] ; • Bright line test cannot be applied to work out non-routine AMP expenses for benchmarking [Para 194(x)]; • ALP of AMP expenses should be determined preferably in a bundled manner with the distribution act....
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....e argument advanced on behalf of the assessee for deletion of the addition towards AMP expenses on the plain logic of the assessee that all the transactions were established to be at arm's length by applying TNMM on entity wide basis. There is a basic fallacy in the argument of the ld. AR. It is pertinent to note that the TPO examined and got satisfied with the assessee's profit margin vis-à-vis the comparables only qua the international transactions of distribution function. He determined the ALP of AMP expenses by applying bright line test and in this process simply compared the quantitative figures of AMP expenses incurred by the assessee and comparables for working out the non-routine expenses. He did not examine the AMP functions carried out by the assessee and the comparables. As the bright line test primarily concentrates on the quantitative aspects of the AMP expenses alone, it overlooks the examination of the AMP functions carried out by the assessee on one hand and the comparables on the other. Now, the Hon'ble High Court in Sony Ericsson Mobile Communications India (P.) Ltd. (supra) has held that AMP expense is a separate international transaction and ....
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....y the tag of international transaction from AMP expenses, assigned by the Hon'ble High Court. What Their Lordships have held in the judgment is that the distribution activity and AMP expenses are two separate but related international transactions. It is only for the purposes of determining their ALP that these two should be aggregated. The process of such aggregation does not take away the separate character of the AMP transaction, albeit related. An analysis and examination of the distribution and AMP functions carried out by the assessee must be necessarily done in the first instance, which should be then compared with similar functions performed by some probable comparables. If the distribution and AMP functions performed by the assessee turn out to be different from those performed by probable comparables, then, a suitable adjustment should be made to the profits of the comparable so as to counterbalance the effect of such differences. If however differences exist in such functions, but no adjustment can be made, then, such probable comparable should be dropped from the list of comparables. If, in doing this exercise, there remains no company doing comparable distribution ....
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....udgment : 'On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument'. It held vide para 165 of the judgment that, "An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made when the result would be reliable and accurate. Otherwise, RP Method should not be adopted. If on comparable analysis, including AMP expenses, gross profit margins match or are within the specified range, no transfer pricing adjustment is required. In such cases, the gross profit margin would include the margin or compensation for the AMP expenses incurred. Routine or non-routine AMP expenses would not materially an....
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....d resale price method using internal comparables. In para 166 of the said judgement it is seen that the arguments of the assessee were held to be flawed and fallacious for several reasons. However their Lordships further in para 167 observed that the Revenue before the Hon'ble High Court did not plead that the R.P.Method should not have been adopted. Qua the same their Lordships observed that no final pronouncement was being made. A perusal of the para 168 shows that the Tribunal had upheld adoption of CP method after applying the bright-line test. The finding was found to be not correct as approach and procedure for ascertaining/determining arm's length price under the resale price method is different. The discussion on the most appropriate method by their Lordships would further support the view taken as the said exercise needs to be done in the facts of the present case. For ready-reference, we reproduce the aforesaid hereunder:- "162. In the case of Reebok India Co. Ltd., the assessee has applied RS Method using internal comparable. Contrary to the general rule, the internal comparable possibly may not be appropriate when the assessed has incurred considerable (not n....
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....AMP functions. 166. On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument. Moreover, the contention of the assessed in these appeals would mandate rejection of the RP Method, as an appropriate or most appropriate method. Comparison or comparative analysis is undertaken at stage (ii) Adjustments are permissible and undertaken at stage (iv). Under clause (iii), i.e. at stage (iii), from the price ascertained at stage (ii), expenses incurred by the enterprise in connection with the purchase of property or obtaining of services is reduced. Under clause (iv), adjustments have to be made on account of functional difference which would include assets used and risk assumed. It is at stage (iv) of the RP Method that the Assessing Officer/TPO can make adjustments if he finds that an assessee has incurred substantial AMP expenses in comparison to the comparables. Once adjustments are made, then the appropriate arm's length price can be determined. In case, it is not possible to make adjustments, then....
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....e ratio laid down by the Hon'ble jurisdictional High Court, it becomes crystal clear that the approach adopted by the TPO for determining ALP of AMP expenses has been rendered incorrect. However, the fact remains that as per the verdict of the Hon'ble High Court, AMP spend is an international transaction, which is required to be processed under Chapter X of the Act by taking into account the AMP functions performed by the assessee and then comparing such functions with those performed by comparable entities, though, firstly in a combined manner with the distribution functions. We find no reference in the order of the TPO of making any comparison of the assessee's AMP functions with those of the comparables. Going by the ratio in the case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra), it is mandatory to make a comparison of the AMP functions performed by the assessee and comparables and then making an adjustment, if any, due to differences between the two, so that the AMP functions performed by the assessee and comparable are brought to a similar platform. In fact, this is also the prescription of Rule 10B(1)(e), which provides as under :- "(e) transa....
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....ivided 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. Sub-rule (3) of Rule 10B stipulates that an uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market ; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 13. On a comparative reading of sub-rules (1), (2) and (3) of Rule 10B, it becomes palpable that the international transaction and the uncontrolled transaction with which comparison is sought to be made for determining the ALP, in the first instance, must have overall similar chara....
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.... suitable comparables can be found having performed both distribution and AMP functions, then, their ALP should be determined on aggregate basis. If, however, there is some difference in the distribution or AMP functions performed by the assessee vis-à-vis the probable comparables, then an attempt should first be made to iron out such difference by making a suitable adjustment to the profit margin of comparables. If such an adjustment is not possible, then such probable comparable should be eliminated. If, by making a comparative analysis of the distribution and AMP functions jointly, there remains no comparable case performing such distribution and AMP functions, then, the international transaction of AMP should be segregated and its ALP be determined separately by applying a suitable method. However, in so determining the ALP of such an international transaction of AMP expenses on separate basis, a proper set off, if any, available from the distribution activity, should be allowed. 16. The AR of the assessee stressed that AMP functions of the comparables have been examined by the TPO in this case. On being asked to show the examination of AMP functions of the assessee a....
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....Communications India (P.) Ltd. (supra)." 19. Also, in the following cases, similar view has been expressed as under :- "1. 59 taxmann.com 148 (Del) Perfetti Van Melle India (P.) Ltd. v. DCIT "15. Turning to the facts of the case, we find that the TPO/AO have followed the Special bench decision in LG Electronics India (P.) Ltd. (supra) for determining the ALP of AMP expenses. There is no discussion about the AMP functions carried out by the assessee or comparables. Now since the Special bench order has been partly modified by the Hon'ble Delhi High Court, including the non-applicability of the bright line test, and no material has been placed on record by the ld. AR to, firstly, demonstrate the AMP functions carried out by the assessee and then, to compare such functions with those done by comparables, this issue cannot be decided at our end. Under such circumstances, we set aside the impugned order and remit the matter to the file of the AO/TPO for deciding it afresh as per law. In this fresh exercise, the TPO will follow the parts of the judgment in Sony Ericsson Mobile Communication (P.) Ltd. (supra) as are common to both Manufacturers and Distributors; apply the par....
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....pugned order and remit the matter to the file of the AO/TPO for deciding it afresh as per law. In this fresh exercise, the TPO will follow the parts of the judgment in Sony Ericson (supra) as are common to both Manufacturers and Distributors; apply the parts of the judgment as are applicable to a 'Manufacturer'; and ignore the parts of the judgment which pertain exclusively to a 'Distributor'. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. 13.16. Now we espouse the contention of the ld. AR to send the matter back to the TPO/AO for deciding this issue in conformity with the decision yet to be rendered by the Hon'ble High Court in its own case, for which hearing is still going on. This contention, in our considered opinion, is devoid of any merit. It is axiomatic that there can be no direction to follow a forthcoming judgment which is not in existence at the time of giving direction. A direction can be given by a higher authority to the lower authority to follow only such a decision which is available for consideration at the time of giving direction by the higher authority. There can be no direction....