TaxTMI 
TaxTMI 
2017 (5) TMI 1367
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....r these two years is against the addition on account of transfer pricing adjustment in advertisement, marketing and promotion (AMP) expenses. The Revenue in its appeal for the A.Y. 2010-11 is also aggrieved against certain aspects impacting only the AMP adjustment. 3. Briefly stated, the facts of the case are that the assessee is a part of Luxottica group which is a leader in design, manufacture and distribution of sun glasses and prescription frames in mid and premium price categories. The assessee was incorporated in India on 15.11.2007 and commenced its actual operations from February, 2008. The assessee reported four international transactions, namely, Purchase of finished goods and Advertising Material and also reimbursement of expenses to and from AEs for the A.Y. 2010-11; and three international transactions, namely, import of finished goods and reimbursement of expenses to and from AEs for the A.Y. 2011-12. On a reference made by the AO to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions, the TPO noticed that the assessee incurred AMP expenses amounting to Rs. 19,31,44,379/- for the A.Y. 2011-12. Applying t....
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....r AY 2010-11) delivered in January, 2016 is later in point of time to the earlier judgments in the case of Maruti Suzuki and Whirlpool, etc. and, hence, the matter should be restored for a fresh determination. It was further submitted that there is no blanket rule of the AMP expenses as a non-international transaction. He stated that the Hon'ble High Court in Whirlpool (supra) has made certain observations, which should be properly weighed for ascertaining if an international transaction of AMP expense, exists. It was argued that the Tribunal in several cases, including the assessee's own case for the preceding year, has restored this issue to the file of TPO to be decided afresh in the light of the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del). He also relied on another judgment dated 28.1.2016 of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expense is an international transaction, has been restored for a fresh determination. He still further referred to three later judgments of the Hon'ble Delhi Hi....
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....tion that the AMP expenses is not warranted in the circumstances. It is needless to mention over here that while deciding the issue afresh as directed above, the learned TPO will afford opportunity of being heard to the assessee. The appeal of the assessee is accordingly allowed for statistical purposes." 7. It is clear from the order passed by the Tribunal in assessee's own case for the immediately preceding assessment year that the matter has been sent back to the A.O./TPO for deciding it afresh in the light of the judgment of the Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. 8. The ld. AR contended that the TPO for the A.Y. 2012-13 in assesse's own case has not made any transfer pricing adjustment on account of AMP expenses but has factored in the AMP intensity adjustment in the profit margin of the comparables and made transfer pricing addition on account of the international transaction of `Import of finished goods'. It was urged that instead of restoring the matter to the A.O./TPO for deciding the existence of an international transaction and determining the ALP of this transaction, if any, the matter should be restored with a direc....
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....Ground no. 2 is the main ground, with several sub-grounds. Such main ground has been captioned as :`Transfer pricing adjustment in respect of AMP expenses'. The sub-grounds are: `No transaction much less than an international transaction'; `No arrangement/ Agreement/ Understanding/ contract with AEs'; `Erroneous approach for determining the ALP of alleged AMP expenses'; etc. etc. Though all the grounds are aimed at challenging the addition of transfer pricing adjustment on AMP transaction treated as an international transaction, we notice that the TPO has not made any separate transfer pricing adjustment for AMP expenses. In fact, the transfer pricing adjustment is only for the international transaction of `Import of finished goods', albeit, factoring in the AMP intensity adjustment in the profit rates of comparables. The ld. AR fairly accepted this position and requested for proceeding with the issue actually arising from the impugned order. The ld. DR did not raise any serious objection to it. We are, therefore, espousing the issue in the appeal de hors the language of separate grounds taken in the memorandum of appeal. 14. Succinctly, the facts for the year under consideratio....
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....ined on page 42 of his order as under:- * "The taxpayer's selling, marketing and promotion expenses were determined as a percentage of sales - Intensity of expenses incurred by taxpayer. * Companies which were comparable with the taxpayer were identified. * Selling, marketing and promotion expenses as a percentage of sale of such comparable companies were determined - Intensity of expenses incurred by comparable companies * The intensity of expenses of taxpayer was compared with the intensity of expenses of comparable. * The excess intensity of expenses in taxpayer's expenses as compared to the intensity of comparable was considered as excessive AMP expenditure considered by the taxpayer. " 15. The assessee claimed before the TPO that out of total AMP expenses incurred by it to the tune of Rs. 13.01 crore, only the AMP expenditure incurred on in-house brands of Luxottica Group i.e. Rs. 11.55 crore, should be considered for the purposes of benchmarking. This contention was accepted and the TPO carried out the excess AMP intensity adjustment in the profit margins of the comparables and computed their average reselling margin at 6.03%. By applying such average adjust....
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...... Comparable analysis of the tested party and the comparable would include reference to AMP expenses'. The ld. AR has not raised any objection, and rightly so, to the carrying out of the AMP intensity adjustment to the profit rates of the comparables, as the same is in accordance with the view of the Hon'ble jurisdictional High Court. It will be seen infra that his objection is confined only to the computation of the amount of transfer pricing adjusting by using the ratio for apportionment of the excess cost incurred by the assessee over and above the arm's length cost. Coming back, the TPO carried out the AMP intensity adjustment in the profit rates of the comparables as under :- TABLE-A 17. It can be seen from the above Table that the TPO has carried out AMP intensity adjustment in the profit margins of the comparables and that is how the adjusted average margin of the comparables has been computed at 6.03%. This exercise done by the TPO has not been disputed by the assessee. The ld. AR challenged the computation of ALP of the international transaction of import of finished goods determined by the TPO as under:- TABLE-B 18. The above computation of ALP shows that the....
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....nator have to remain same. There cannot be item-wise difference in the composition of the two. If the numerator has only the purchase cost of Material from AEs, then the denominator should also have only the purchase cost of Material consumed from AEs and non-AEs. As the numerator in the instant case is the purchase cost of Material from the AE, which is not disputed by the assessee, then as a natural corollary, the denominator cannot be any figure other than the purchase cost of Material consumed purchased from AEs and non-AEs. If we accept the view buttressed by the ld. AR and proceed with restricting the numerator as the purchase cost of Material from the AEs and extend the denominator also to other indirect costs, the result will obviously be distorted. Such a contention advanced on behalf of the assessee is aimed at expanding the denominator to the maximum possible extent so that the amount of the resulting transfer pricing addition, from the total excess cost over the arm's length cost attributable to international transaction of purchase of Material, could be reduced. We cannot countenance it. As such, we hold that the TPO has taken an unimpeachable view in making apportionm....
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....the international transaction of purchase of material from its AE. As such there was no need to subsume the AMP function in the determination of the ALP of the international transaction of purchase of material. But in so far as the facts for the extant year are concerned, it is patent that the AMP function has been embedded by the TPO in the international transaction of purchase of Material from the AE and the transfer pricing adjustment has been made for such an international transaction alone, though by factoring in the effect of higher intensity AMP functions carried out by the assessee. Respectfully following the decision taken for the A.Y. 2009-10, we hold that, firstly, the RPM should be applied as the most appropriate method for determining the ALP of the international transaction of purchase of material from the AE, but, by carrying out the AMP intensity adjustment in the profit rate of comparables. If, however, it turns out that such an adjustment cannot be done due to one reason or the other, then the RPM should be discarded and another suitable method be adopted, which encompasses the effect of AMP intensity adjustment. Our view is fortified by the judgment in the case o....