TaxTMI 
TaxTMI 
2015 (11) TMI 15
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.....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 income (iii) ....
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....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 Compuage Infocom 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 international ltd. 524.5....
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....s, 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 pricing manual needs to be applied (vi) Assessee has a long term royal....
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....nd 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. In view of the assessee's explanation, interest mark-up of 6% was not charged and total mark-....
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.... 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 sales promotion expenditure 4.6 not providing quantitative adjustments to take into account the differences in comparability between the asses....
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....tion 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 erred in assessing the total income of the appellant u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ("the Act") for the relevant assessment year at IN....
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....ing 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 length by applying the Transactional Net Margin Method (TNMM) on entity-wide basis, and thereafter the AMP expenses cannot be alleged to be excessive, separately. 12 That on....
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.... line test for working out the amount of nonroutine 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 appeals before the Hon'ble High Courts against the tribunal orders following the Special bench order. A batch of such appeals led by Sony Ericsson Mobile Communications India (P.) ....
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....al 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 setoff [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 nonroutine AMP expenses for benchmarking [Para 194(x)]; * ALP of AMP expenses should be determined preferably in a bundled manner with the distribution activity [Paras 91, 121 & others] ; * For determining the ALP of these transactions in a bundled manner, suitable comparables having undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii)....
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....ied 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 nonroutine 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 also bright line test is not applicable for determining the ALP of AMP expenses. The manner for the determination of the ALP of the distribution activity and AMP activity has also been set out by the Hon'ble High Court to be conducted, firstly, in a bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable....
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....n 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 and AMP functions, then, both the international transactions are required to be segregated and then examined on individual basis by finding out probable comparables doing such separate functions similarly. For the international transaction of AMP spend, this can be done by, firstly, seeing the AMP functions actually performed by the assessee and then comparing it with th....
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....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 and substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions." Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. Let us we go a step further with the alternative prescription of the judgment that if ALP of both the transactions of Distribution and AMP cannot be determined in a co....
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....ronouncement 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 necessarily extra-ordinary or nonroutine) AMP expenses. The reason is obvious; there is no comparability analysis possible. In such cases, it is not possible to examine and compare the functional comparability between the controlled tested transaction and uncontrolled internal party transaction on account of AMP expenses. Internal comparable would not account for the credible gross profit rate, which an AE shoul....
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....mparison 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 RP Method may not be the most appropriate and best method to be adopted. 167. Before us, the Revenue has not pleaded or submitted that the RP Method should not have been adopted. The TPO and the Assessing Officer did not reject the RP Method adopted by the assessee. The assessed submit that the Revenue accepts functional parity and in fact, without adjustment. Contra, Revenue would argue that the Assessing Offic....
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.... 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) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled trans....
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....saction 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 characteristics. It is vivid that if the goods/services are different, then no effective comparison can be made. Once the goods/services under both the transactions are broadly similar but there is a difference in them because of certain specific characteristics; and/or the products/services in both the transactions are identical, but still there are certain differences due to the contractual terms or the geographical location, etc., then, a reasonably accurate adjustment....
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....h 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 along with comparables, the AR took our attention to pages 7-8 of TPO order but those were only figures of expenditure of AMP incurred by the comparables and NOT the functional analysis of the comparable done by the TPO 17. Without prejudice to his aforementioned arguments, ld. counsel further submitted that, in any view of the matter, while determining the AMP expenditure, the components relating to selling and distribution expenses have to be excluded. In view of....
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.... 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 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." 2. 58 taxmann.com 375 (Del) Casio India Co. (P.) Ltd. vs. DCIT "15. Coming back to the facts of the instant case, we find that no detail of the AMP functions performed by the assessee is available on record. Similarly, there is ....
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.... 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 to follow a decision, which itself has not yet seen the light of the day at that point of time. Presently, we have the benefit of the judgment of the Hon'ble Delhi High Court in Sony Ericsson (supra), which has also dealt with the treatment to be given in the context of a manufacturer. The Delhi bench of the tribunal in some decisions including Perfetti Van Melle India (supra) has dealt with the manner of computation of the ALP of the AMP expenses incurred by manufacturers in the light of the judgment in the case of Sony....