TaxTMI 
TaxTMI 
2015 (10) TMI 2675
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....ising, marketing and promotion ( in short 'AMP') expenses is involved in the appeals before us and the facts and circumstances also being similar, the appeal in ITA No.4680/Del/2010 for Assessment Years 2006-07 is decided first and other appeals are decided accordingly. 3. The facts in brief are that the assessee company is a wholly owned subsidiary company of 'Haier Electrical and Appliances Corporation Ltd.', China and is engaged in the business of distribution of consumer durable products, for example Air Conditioner, Washing machine, refrigerator, television etc., purchased from foreign associated enterprise ( in short 'AE'). However, the intangible rights contained in brand name or trademark/ trade name in respect of goods so purchased and distributed were owned by the foreign AE only. In the previous year corresponding to the relevant assessment year, the assessee reported following international transaction with the AE in the transfer pricing audit report submitted to the Assessing Officer( in short 'AO'): (a) Purchase of finished products from the foreign AE i.e. HAH (HK) Company Ltd., Hong Kong, amounting to Rs. 41.66 crores for the purpose of distribution/ res....
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....96 - Rs. 3,68,35,032 Rs. 70,35,88,364/- Arm's length value of the Capital Grant Rs.70,35,88,364/- Amount of Capital Grant received by the assessee Rs. 13,11,4 7,568/- Difference Rs.57,24,40,796/- % of difference with value at which international Transaction has taken place 436.48% 6. The assessee challenged the adjustment of Rs. 57,24,40,796 made by the AO/TPO before the Dispute Resolution Panel ( in short 'DRP'), but could not succeed and therefore filed the present appeal before the Income-Tax Appellate Tribunal ( in short 'ITAT') against the order passed by the AO in conformity with the order of DRP, challenging the action of the AO/TPO/DRP in holding the AMP expenses as international transaction as well as the adjustment made in this regard. The ITAT after having heard both the parties, following the decision of the Special Bench of the ITAT in the case of LG Electronics India P Ltd. versus Asst. CIT (2013) 22 ITR ( Trib) 1 (Delhi)(SB), held that the incurring AMP expenses of non routine nature on behalf of the AE was an international transaction. The ITAT further approved the application of bright line test for working out the non routi....
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....is in favour of the Revenue, whether the Income Tax Appellate Tribunal was right in holding that transfer pricing adjustment in respect of AMP Expenses should be computed by applying Cost Plus Method. 5. Whether the Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by the Transfer Pricing Officer by applying the parameters specified in paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd. ?" Revenue's Appeals "1. Whether the Income Tax Appellate Tribunal was right in distinguishing and directing that selling expenses in the nature of trade/volume discounts, rebates and commission paid to retailers/dealers etc. cannot be included in the AMP Expenses?" 8. Their lordship decided all the appeals referred above led by the case of Sony Erricsson Mobile Communication India Pvt. Ltd in a common judgement dated 16.03.2015 reported in 374 ITR 118 including the appeals of the assessee and Revenue referred in para -1 of this order. Their lordship has propounded legal findings on the relevant issues in heading 'D' to 'P' of the jud....
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....ine and ascertain facts and apply the ratio enunciated in this decision. For the purpose of clarity, we would like to enlist our findings:- (i) In case of a distributor and marketing AE, the first step in transfer pricing is to ascertain and conduct detailed functional analysis, which would include AMP function/expenses. (ii) The second step mandates ascertainment of comparables or comparable analysis. This would have reference to the method adopted which matches the functions and obligations performed by the tested party including AMP expenses. (iii) A comparable is acceptable, if based upon comparison of conditions a controlled transaction is similar with the conditions in the transactions between independent enterprises. In other words, the economically relevant characteristics of the two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably acc....
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....ity analysis and the most reliable means of determining arm's length price. (ix) To assert and profess that brand building as equivalent or substantial attribute of advertisement and sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. "Brand" has reference to a name, trademark or trade name and like 'goodwill' is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. (x) Parameters specified in paragraph 17.4 of the order dated 23rd January, 2013 in the case of L.G. Electroni....
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....an transfer pricing regulation. It can be applied by the Assessing Officer/TPO in case AMP expenses are treated as a separate international transaction, provided CP Method is the most appropriate and reliable method. Adoption of CP Method and computation of cost and gross profit margin comparable must be justified. (xiv) The object and purpose of Transfer Pricing adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. Costs or expenses incurred for services provided or in respect of property transferred, when made subject matter of arm's length price by applying CP Method, cannot be again factored or included as a part of inter-connected international transaction and subjected to arm‟s length pricing. Para 195. The above noted pointers have to be read along with our discussion under the headings D to P. In case of any doubt, debate or purported conflict, it would be preferable to rely upon detailed elucidation made under the headings, D to P. Para 196. Common questions raised by the Revenue in their appeals:- "1. Whether the Income Tax Appellate Tri....
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....tions, and assuming normal risk associated with carrying on of its business. The appellant performs similar functions, assumes similar risks and employs similar assets, while distributing finished products imported from the associated enterprise and also with respect to the finished goods purchased from the third parties. Further, the transaction of purchase of finished goods from the third parties (for resale in the domestic market) satisfy the comparability criteria as laid down in Sub-rule (2) of Rule 10B of the Rules, in as much as apart from the product comparability they satisfy functional comparability and the two transactions are undertaken under similar market and economic conditions. Accordingly, the appellant, in its transfer pricing document, compared the gross profit margin and operating profit margin from resale of goods purchased from associated enterprises and unrelated third parties, as under: It was submitted that the gross profit margin (Gross Profit/ Sales) earned by the appellant on transactions undertaken with the associated enterprise at 36.61% is higher than the gross profit margin earned on similar transactions undertaken with unrelated third pa....
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....c. 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. Applying the Principles laid down by the Hon'ble Delhi High Court, the results of the benchmarking analysis is as under; (i) Comparison of adjusted gross profit margin - internal comparable: (ii) Comparison of adjusted gross profit margin - external comparable: It is submitted that the TPO in his ord....
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.... the assessee. 14. After considering rival submissions, issue which arises before us is that whether we can compute the arms length price of the international transaction of AMP expenses in the given circumstances or we need to remit the matter back to the AO as submitted by the learned SR DR. The Hon'ble High court in Sony Erricsson (supra) has held that the foreign AE may choose different option of compensating the local AE for AMP expenses like low purchase price, no or low charges of royalty or direct compensation. Accordingly, the Hon'ble High Court directed that the arms length price of the transaction of AMP expenses should be computed preferably along with the arms length price of international transaction of distribution in a bundled manner and for this purpose AMP function of the assessee should be first compared with the AMP functions of the comparables. The Hon'ble High Court in their judgment (supra) has analyzed various methods of computation of international transaction of AMP expenses. While discussing Resale Price Method, in para 162 of the impugned judgment, the Hon'ble High Court in respect of choosing internal comparable has held as under:- "162 In t....
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....n 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 and substantially affect the gross profit margins when the tested party and the comparable undertake similar 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 fallaciou....
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.... 17. Once we examine the facts of the case in hand, we find that the learned Authorised Representative has submitted that gross profits margin earned by the assessee being higher than gross profit margins earned by comparables companies, no adjustment is required for the purpose of computing arms length price of international transaction of AMP expenses. If the argument of the learned AR is accepted, it will lead us to a result where the AMP transaction will be rendered as non international transaction, as against the findings of the Hon'ble High Court in the case of Sony Erricsson (supra). The Hon'ble High Court has directed to find out AMP functions of comparables and compare the same with the AMP functions performed by the assessee and then after making adjustments if any compute the arms length price of the international transaction in bundled manner for distribution as well as AMP expenses and if not possible to compute in bundled manner, then only in separate manner. But in the case in hand the AMP functions performed by the external comparable are neither submitted by assessee before the AO/TPO nor examined by the TPO. The learned Authorised Representative has also failed to....
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....e and then applying the cost plus method for determining its ALP. The ld. AR also failed to draw our attention towards any material divulging the AMP functions performed by the assessee as well as comparables. As such, we are handicapped to determine the ALP of AMP expenses at our end, either in a combined or a separate approach. Under such circumstances, we set aside the impugned order and send the matter back to the file of the TPO/AO for determining the ALP of the international transaction of AMP spend afresh in accordance with the manner laid down by the Hon‟ble High Court in Sony Ericson Mobile (supra). Ex consequenti, the ground raised about the TPO having no jurisdiction to determine the ALP of AMP expenses, is dismissed following the judgment in the case of Sony Ericsson Mobile (supra)." 20. In view the above decisions of the Tribunal and our findings in the facts and circumstances of the case, we remit the matter back to the file of AO/TPO for determination of ALP on international transaction on AMP expenses, in accordance with the direction laid down by the Hon'ble High Court in the case of the assessee led by Sony Ericson Mobile Communication P Ltd (supra). Need....
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.... 749,27,420 742,47,258 1491,74,678 2 763,16,874 209,18,535 972,35,409 Purchases & Direct Expenses Purchases & Direct Expenses 3 4199,32,495 12182,73,010 16382,05,505 Other Clearing Expenses 4 146,31,339 269,34,517 415,65,856 Sales Sales 5 6320,03,433 18377,67,613 24697,71,046 Sales Tax 6 653,02,343 1898,89,051 2551,91,394 Net Sales (5-6) 7 5667,01,089 16478,78,563 22145,79,652 Closing Stock Closing Stock 8 883,18,799 1752,48,536 2635,67,335 GIT 9 1382,72,964 222,34,962 1605,07,926 Gross Profit (8+9+7-1-2-3-4) 10 2074,84,725 5049,88,741 7124,73,465 Gross Profit Ratio(10/7 %) 20 36.61% 30.64% 32.17% AMP Expenses Advertisement, Publicity and 15 669,88,607 1947,92,442 2617,81,049 Sales Promotion Less: Grant From Promoters 16 335,60,080 975,87,488 1311,47,568 Net AMP Expenses 15-16 334,28,527 972,04,954 1306,33,481 Adjusted Gross profit 17 1740,56,197 4077,83,787 5818,39,984 Adjusted Gross Profit Ratio 2.43 30.71% 24.75% 26.27% Document 3 Particulars ....