TaxTMI 
TaxTMI 
2019 (6) TMI 696
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....ssessee had undertaken international transactions with its associated enterprises. As the value of the international transaction was more than Rs. 15 crores, with the previous approval of CIT, Delhi-Ill and in accordance with the provisions of section 92CA of the I.T. Act, the international transactions entered into by the assessee with the Associated Enterprises was referred to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price. 3.2 The TPO passed an order u/s 92CA(3) on 29/01/2015, wherein he has determined that an adjustment of Rs. 35,75,26,343/- should be made to the value of international transactions entered into by the assessee company. A copy of the order was already issued to the assessee company. Therefore, as per TPO order under section 92CA(3) dated 29/01/2015, a sum of Rs. 35,75,26,343/- was proposed to be added to the income of the assessee in the draft assessment order dated 09/03/2015 issued u/s 144C of the I.T. Act. The order dated 29/01/2015 of the TPO is being made part of this order as per Annexure - 1. 3.3 The assessee filed objections before the Hon'ble Dispute Resolution Panel- 2 against the draft assessment or....
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....tand the facts of the appeal under consideration. 8. The business profile of the assessee and its Associated Enterprises [AEs] are similar to the business profile considered by the Tribunal in ITA No. 6410/DEL/2012 for assessment year 2008-09. 9. During the year under consideration, the assessee entered into the following international transactions with the AEs: S.No Type of international transaction Method used by Assessee Total value of transaction (Rs.) MAM PLI 1. Purchase of Mobile Handsets & Spares TNMM OP/Sales 5,815,076,882 2. Business Promotion expenses paid 20,687,701 3. Cost Recharges paid/payable CUP 677,049 4. Cost Recharge 424,640,697 10. The functions performed by the assessee are marketing and distribution of mobile phones/technology products and provision of repair and maintenance services. In carrying out its business, the assessee used the brand name, trade mark, know how technical data, operating/quality standards, etc developed/owned by the AEs. The trade name 'Sony Ericsson is owned by overseas group companies. The Indian entity is a distributor of branded products, the brand being owned by....
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....ement dated 01.06.2007, was furnished by the assessee along with letter dated 28.05.2013 during the proceedings for last year. e) The assessee has not made any payment to its AE for using the brand name. f) The advertisement and marketing activity of the assessee is the party of its distribution activity. 14. The OP/OR shown by the assessee is at 2.07% which is compared with OP/OR of the comparables at (-) 0.12%. In doing so, the assessee has included the credit notes amounting to Rs. 42,46,40,697/- received which represents business model arrangement of the assessee. 15. The TPO was of the opinion that the pricing arrangement between the assessee and its AEs appears to be more of reimbursement of excess price charged by the AEs which, later on, is credited to the assessee's account by way of credit. The TPO was of the firm belief that the credit notes amounting to Rs. 42,46,40,697/- have no relation to with the expenditure that the assessee has incurred on the AMP for which no compensation/reimbursement has been made by the AE. The TPO concluded by holding that this is an international transaction within the meaning of sec. 92B(1) r.w.s 92F(v) of the Act. ....
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....bles alongwith calculation of AMP/Sales ratio is as under: S. No. Company Name Sales Selling & distribution expenses AMP/Sales Ratio 1 Compuage lnfocom Ltd. 1314.7 0 0.00% 2 Computer Point Ltd. 109.92 0.03 0.03% 3 Dynalog (India) Ltd. 37.82 1.68 4.44% 4 Kandtioners Sales Pvt Ltd. 15.46 0.04 0.26% 5 LalaniComputech Ltd. 17.54 0.14 0.80% 6 Redington (India) Ltd. 7905.3 16.97 0.21% 7 Savex Computers Ltd. 1867 11.33 0.61% 8 Vivek Ltd. 335.06 13.91 4.15% 9 Munoth Industries Limited 12.84 0.11 0.86% Aangha! Computers Limited 8.60 0.03 0.35% AVERAGE 1.17% 19. In its submissions, the ld. counsel for the assessee strongly argued that as per the business model followed by it, an OP/sales margin of 2.07% has been earned which was higher than the Arm's Length Margin of (-)0.12% accepted by the TPO. It was further contended that the assessee has been remunerated for all its functions together by way of gross margin and credit notes instead of the AMP function being isolated and remunerat....
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....pply of vital components to an associated manufacturer; it may be more reasonable to assess the arm's length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis. The above guidelines in very clear terms point out that ideally the transactions should be benchmarked using transaction by transaction approach. 10.6 The fundamental rule for benchmarking under Indian Transfer Pricing regulations is to benchmark based on a transactional approach. There should be some prior understanding, design or commercial logic as to why two transactions can be clubbed or set off against each other. Since the assessee company has not been able to demonstrate that there is any logic or rationale for aggregation or that the transactions of the advertisement expenditure and the other transactions in the distr....
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....nfiniti Retail Ltd. 2.17 Average 2.18% 19. Computation of ALP i.r.o AMP Expenses: 20.1 Thus, in view of the above discussion, the amount which represents the bright line and the amount that should have been compensated to the assessee company are computed hereunder: Particulars Amount in INR Total sales 6,812,468,061 Arm's length level of AMP exp. {% of sale} 2.18% Arm's length AMP 148,511,804 Amount actually spent on AMP exp. 845,257,786 Amount spent in excess of bright-line' and on creation of marketing intangible 696,745,982 Mark-up @ 12.26% 85,421,057 Total ALP reimbursement 782,167,040 Amount of reimbursement received 424,640,697 The amount by which the assessee company should have been reimbursed by A.E, and for which the adjustment is proposed to be made 357,526,343 23. Objections were raised before the DRP and after considering the facts and submissions and after analysing the comparables, the DRP concluded as under: "Based on these figures, the calculation of segmental margin with AMP as separate segment in he cusp of the a»«ss<s? as given below P....
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....ot submitted any search process id which the return on AMP activity is calculated. In the absence of sufficient time with this office to carry out a search process in this regard, the search is being submitted by this office also, However, a search may be got conducted in this regard. Depending upon the margin of AMP function in. the case of the assessee, an adjustment may or may net result Conclusion 18. On the basis of discussion made above, the objections of this office in respect of the submission of letter by the assesses can be summarized as below; i The primary reliance is placed on the analysis carried out by this office in the TP order the TP commissionerate has recommended filing SIP before the Hon'ble Supreme Court of India on this issue against the order of Hon'ble High Court, ii Without prejudice, the .comments of this office are limited to the contention of the assesses regarding the applicability of the judgment of the High Court in the case of Sony Ericsson for benchmarking of AM? Expenditure iii In view of the non furnishing of suitable comparables for carrying out comparability analysis using aggregated approach....
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....ment expenses in the domestic market, the assessee could not have done any value addition to the brand name of the AE. 40. Advertisement expenditure incurred by the assessee company could not have added any value to the brand Soni Ericsson owned by the AE. Since this is the first year of business in India, the assessee had to advertise aggressively but could not be considered as expenditure incurred for brand building. At the most, the same can be considered as having been incurred for brand maintenance. As the saying goes "Public memory is very short", such companies have to hit the public eyes through advertisements via print, media or electronic media or any other mode of advertisement because, again as the saying goes "Out of sight, out of mind". Sony Ericsson being a new entrant in the mobile segment in the year under consideration, the assessee had to incur advertisement expenses to remind the general public of its existence in the domestic market. In our considered view, such advertisement expenses cannot be considered as being incurred towards brand building. As mentioned elsewhere, the AEs own brand rights of all products and are responsible for core marketing and....
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....prestige of the business firm. For example:- (a) Refreshment expenses for business clients. (b) Gifts to the business clients on certain events. (c) To sell the goods to the clients at special discount for their personal use etc. 46. Though, these expenses can be booked in Advertisement and Publicity Expenses Account but to have the idea of actual expenditures on these types of expenses, a separate head as 'Business Promotion Expenses' or 'Sales Promotion Expenses' or 'Expenses With Business Clients' is created. 47. Testing the functions performed by the assessee vis a vis AMP expenses incurred by it, we do not find that the assessee has incurred AMP for the benefit of its AE. All the expenditure incurred by the assessee are in relation to its business and its promotion. Moreover, as mentioned elsewhere, the net margin is much higher than the comparables and looking from that angle also, we do not find any merit in the transfer pricing adjustments. It is incorrect to say that the amount of Rs. 73.83 crores received by the assessee by way of credit notes represents the excess price charged by AE which has been credited to the assessee. Th....
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....ourt is of the opinion that the revenue's arguments are insubstantial and unmerited. There is no per se rule that in every case, the ITAT had to necessarily remit each matter. Given that the materials in the form of reports and documents were available with the ITAT, that the tribunal itself carried out the analysis, based on the record, of the facts which were disclosed before the TPO, does not result in any credence to the revenue's complaint that it was not given sufficient opportunity. This court notices that the matters were required to be re-examined by the ITAT itself in Sony Ericsson, and in view of the further circumstance that the remit was pending for 3 years, the revenue's arguments have no force. 13. On the second issue, i.e. that the AMP exercise is flawed, this court again feels that the analysis carried out by the ITAT, having regard to the details pertaining to the comparable entities, is fairly exhaustive and reasonable; the findings are in Paras 39-49 of the impugned order. The ITAT's findings, consequently that since the brand under which the assessee's products were marketed were relatively unknown in India, the advertisement expenditure could not have....