TaxTMI 
TaxTMI 
2019 (6) TMI 696
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.... 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 order u/s 144C of the Act. The Dispute Resolution Panel-2, vide their ....
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....[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 the overseas supplier. The sale of a branded products to a distributor carries with it the stated or implied right to use the supplier's trade mark or trade name only fo....
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.... 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. 16. Accordingly, show cause notice was issued to the assessee vide letter dated 12.12.2014. We find that the entire exercise is in sync with the exercise done in assessment year 2008-09. 17. The list of 23 companies which were qual....
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.... 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 remunerated as a service fee. 20. After considering the submissions of the assessee, the TPO observed as under: "10.3 The arguments of the assessee have been examined on the aggregated benchmarking analysis for AMP. It would be -in order to first briefly set out the law on aggregation of transactions. Section 92C(1) refer to arm's length price in relation to an international transaction. Rule 10B(l}(e) read with....
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.... 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 distribution activity are inter-dependent, the clubbing of transactions cannot be allowed. It is therefore held that the international transaction of "creation and development of local marketing intangible" shall be benchmarked separately. 10.7 The contention on behalf of the assessee that if the overall profit of the Indian entity is than the comparable cases then it should be presumed that the foreign enterprise 'supplied goods at relatively low price to make ....
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....cess 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 Particulars Distribution Total AMP Operating income A B Operating Expenses (Excluding AMP and S & D) 625,49,95,909 Selling and Distribution expenses(as per remand report) 47,82,21,579 Advertisement, Marketing and Promotion expense("AMP"] - 36,70,36.207 Total Operating Expenses 673,32,17,488 , Operating margin/sales (Arms Length) As per the final comparables selected (2.65% as per the discussion above)' This figure is total operating expenditure less selling and Based ca the above segm....
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....nce 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 by the taxpayer and non availability of sufficient time with this office, the segregated approach is required to be followed, iv The analysis is required to be earned out for each segment separately, v The com parables identified by the assessee for the segment are not appropriate and contention i.r.o the comparables are already made above, It is again reiterated that the comments are made in few of the limited time available and should not be considered as exhaustive and stand of this office vi For determination of arm's length price corresponding to AMP Junction, the distribution related return is ident....
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....edia 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 pricing decisions of the products and are also responsible for undertaking global sales and distribution function. 41. "Marketing" means the management process through which goods and services move from concept to the customer. It includes the coordination of four elements: (i) identification, selection and development of a product, (ii) determination of its price, (iii) selection of a distribution channel to reach the customer's place, and (iv) development and implementation of a promotional strategy. 42. Items 1, 2 and 4 mentioned hereinabove are not applicable in the case of the assessee company. Further, marketing is based on thinking abo....
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....e 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. The business model of the assessee with its AE is such that the AE ensures that the assessee achieves an arms' length return on sales made by it. 48. Assuming, yet not accepting that the assessee should have been compensated by its AE towards AMP and such compensation as worked out by the TPO is Rs. 69.94 crores, then also no adjustment is required since the assessee has received credit notes worth 74.83 crores and has been suitably compensated. 49. If the AMP expenses are considered as an independent transaction and combined transaction approach is not considered, then also excessive profit derived by bench marking of distribution segment should be adjusted with alleged excessive AMP expenditure thereby providing benefit of set off. This view finds sup....
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....at 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 been said to inure to the benefit of the AE, which was otherwise a well known brand overseas. Similarly, the nature of its marketing and business expenditure was considered. The revenue's grouse that the TPO had treated the AMP expenditure as a bundled one, is not also tenable. Sony Ericsson itself indicates that there cannot be a dogmatic approach as to whether bundled transactions of the kind ought to be segregated and that the entire issue is a fact dependent exercise. The TPO treated the transactions as a bundled one; this court holds that as such that is not a question of law. Lastly, both on the credit notes as well as the fact that in the case of comparables, the margins were in fact lower; the ITAT therefore, correctly, in the opinion of this court recorded its findings that the assessee had been....