AI Drafter 
TaxTMI 
TaxTMI 
2020 (3) TMI 426
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....ile passing the common order, referred above. Accordingly, vide order dated 25-09-2019 passed in M.P No.102/Bang/2019, the Tribunal recalled the order of AY 2013-14 for the limited purpose of adjudicating the ground nos.32 to 41. These grounds relate to the Transfer pricing adjustment of Rs. 58.35 crores made by the AO/TPO in respect of AMP expenditure as an alternative proposition. It may be noticed that the TPO had made Transfer pricing adjustment of AMP expenditure to the tune of Rs. 207.42 crores in AY 2013-14. The assessee is also engaged in the business of distribution of laptops, monitors, projectors and peripheral products imported from its AE. This division was named as "trading segment". The assessee had benchmarked its trading segment transactions under "Resale Price Method". The TPO, however, adopted TNMM method as most appropriate method and computed transfer pricing adjustment of Rs. 58.35 crores. It is pertinent to note that the TPO had computed the operating margin of the assessee by considering the AMP expenses as part of operating cost. Since the TPO has already made T.P Adjustment of Rs. 207.42 crores under AMP expenses, he did not make separate addition of Rs. 5....
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....ssee in the form of the AMP are not reflected in computing the gross margin as they are captured below the line. Therefore, the gross margin analysis carried out by the assessee is flawed. 6.1.3. Perusal of the profit and loss account of the taxpayer it is seen that, the taxpayer has incurred huge expenditure towards advertisement, marketing and sales promotion as below: Particular AY 2012-13 AY 2013-14 Sales promotion and advertisement expenses 114,936,702 399,428,670 Sales and Trade Discounts 336,929,815 382,032,185 Sales Commission 114,425,734 101,289,783 Scheme Discounts 1,332,035,307 1,64,310,673 Total 1,898,327,558 2,04,061,311 6.14. The taxpayer has performed certain value added functions which a routine trader/ manufacturer would not have performed, if the taxpayer had been a routine trader/ manufacturer, like any other routine trader / manufacturer considered as a comparable in the TP study, the assessee should have made profit on sale of goods. But in case of the assessee, it is observed that there is net loss in the trading business. The Net operating loss during the year as shown in the P&L a/c is R....
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....ure, the Hon'ble Court has observed that RPM can be used as the most appropriate method only if the comparables are also carrying out similar level of AMP functions. The taxpayer has selected a set of 6 uncontrolled comparables for comparability analysis under RPM. It is seen that the ratio of AMP expenditure to Sales incurred by the comparable companies selected by the taxpayer, is much lower than the ratio of AMP expenditure to Sales, incurred by the taxpayer. Intensity of AMP expenditure: Taxpayer Particulars Sales AMP % of AMP on Sales Acer India 28,916,961,317 2,04,061,311 7.08% Comparable companies: Sl. No. Particulars Sales AMP % of AMP on Sales 1 Compuagelnfocom Ltd. 19,050,505,000 - 0.00% 2 Computer Point Ltd. 345,367,000 165,000 0.05% 3 Techpecific (India) Ltd. (Ingram Micro India. Ltd,) 121,489,555,860 316,134,889 0.26% 4 Iris Computers Ltd. 16,239,988,383 3,330,337 0.02% 5 Savex Computers Ltd. 43,992,366,000 52,092,000 0.12% 6 Priva Ltd. 2,132,334,900 4,275,455 0.20% Average &nb....
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.... PLI of the comparable companies was worked out at 1.49%. Accordingly, the TPO made adjustment of Rs. 58.35 crores. As stated earlier, no separate addition was made by the TPO, as telescoped this adjustment against the adjustment of AMP expenses made by him. Since the Tribunal has deleted the adjustment made towards AMP expenses, this addition shall revive. The Ld DRP also confirmed the addition. 6. The dispute here is about the method to be adopted for benchmarking the trading transactions. According to the assessee the Resale Price Method is the most appropriate method, while the TPO has held that the TNMM is the most appropriate method. 7. The Ld A.R submitted that the assessee is importing the computer and other items and sells them in India. He submitted that the TPO has taken the view that the AMP expenses incurred by the assessee constitutes value addition, which is misconceived. He submitted that the assessee is incurring AMP expenses for its own purposes for the purpose of increasing expenses and major portion of AMP expenses consists of trade discounts, sales commission and scheme discounts. Accordingly he submitted that the TPO was not justified in holding those ex....
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....as it is, then "Resale Price method" is held to be most appropriate method in the cases relied upon by Ld A.R. In the case of M/s Celio Future Fashion P Ltd (supra), the Mumbai bench of Tribunal held so by following the decision rendered by Delhi bench of Tribunal in the case of Burberry India P Ltd (ITA No.758 & 7684/Del/2017 dated 22.06.2018). Identical issue was considered by the Bangalore bench of Tribunal in the case of M/s A.O.Smith India Water Heating P Ltd (supra), wherein the Tribunal, after considering various case laws on the matter, held that the RPM is the most appropriate method in case of a distributor of products. For the sake of convenience, we extract below the relevant observations made by the Tribunal in the case of A.O Smith India Water Heating P Ltd (supra):- 14. Now the assessee is before us with the submission that it is an accepted principle that the computation of ALP based on a direct method like RPM, which tests the results at gross level unlike the TNMM which tests the results at net level, extinguishes the requirement o making adjustment in relation to the difference in operating expenses, which could be different from enterprise to enterprise....
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....be no two opinions that RPM should be preferred over the TNMM method. In support of these contentions, he placed reliance upon the following judgments-.- (1) Horiba India Pvt. Ltd., v. OCIT, 81 taxmann.com 209 (2) Bose Corporation Pvt. Ltd., v. ACIT, Circle 3(1), New Delhi, 77 taxmann.com 194 (3) ITO v. L'Oreal India Pvt. Ltd., (2015) 24 taxmann.com 192 (Born) (4) Mattel Toys India Pvt. Ltd., v. DOlT in ITA No.2476/Mum/2008. The Id. DR placed reliance upon the order of the AO and the DRP. 16. Having heard the rival submissions and from a careful perusal of the record, we find that undisputedly the assessee is a trading company and carries out distribution and marketing of products of AOS group in India. It imports water filters from AO Smith China and sells them in India. AO Smith India is, according to the TP document, a distributor of AOS Water Heaters in India. The Tribunal has examined the most appropriate method in the case of distributor to determine the ALP for the international transactions. In the case of Horiba India Pvt. Ltd. (supra), the Tribunal has held that in the case of a distributor where the goods....
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.... that the resale price method (RPM) is the most appropriate method and directed the TPO to calculate margin of the comparables by using RMP. The relevant observation of the Tribunal is extracted hereunder for the sake of reference: "8.1 At this juncture, we note the mandate of Rule 10C which defines the 'Most appropriate method'. Sub-rule (1) of Rule 10C states that: "For the purposes of subsection (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length in relation to the international transaction." Sub-rule (2) of Rule 10C lists certain factors which should be taken into account in selecting the most appropriate method as specified in sub-rule (1). These factors, inter olio, include (c), the availability coverage and reliability of data necessary application of the method'; and (d) the degree of comparability existing between the international transaction and the uncontrolled transaction...........' 8.2 An overview of the factors prescribed for choosing the most appropriate me....
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....ethod can be adopted. The findings of fact are based on the materials which have been produced before the Commissioner as also the Tribunal. Further, it was highlighted before the Commissioner as also the Tribunal that the RPM has been accepted by the TPO in the preceding as well as succeeding assessment years. That is in respect of distribution segment activity of the Assessee. In such circumstances, and when no distinguishing features were noted by the Tribunal, it did not commit any error in allowing the Assessee's Appeal. Such findings do not raise any substantial question of law. The Appeal is devoid of merits and is, therefore, dismissed. There would be no orders as to costs." 19. Copy of the order of the Tribunal in the case of L'Oreal India Pvt. Ltd., is also placed on record to demonstrate as to under what circumstances the RPM was considered to be most appropriate method. Similarly, in the case of Mettal Toys India Pvt. Ltd., v. DCIT (supra), the Tribunal again reaffirmed its view that in the case of distributor, the RPM is the most appropriate method by holding that ultimate aim of the transfer pricing is to examine whether price of the margin arising fr....
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....and advertisement expenses and the same was partially reimbursed by the AE of the assessee. The TPO took the view, as taken in the earlier years, that the assessee has performed value added fuctions, which would not have been done by a routine trader. Accordingly he took the view that the assessee is promoting the brand value of its AE through the AMP expenses. Accordingly, by comparing the average AMP expenses incurred by other comparable companies, the TPO made an adjustment of Rs. 227.79 crores. 14. The second issue relates to the Transfer Pricing adjustment made in respect of trading segment. As in AY 2013-14, the TPO rejected the "Resale Price Method" (RPM) adopted by the assessee to bench mark its trading segment on the reasoning that the AMP expenses should also be included in the cost, as the assessee is, in effect, making value addition to the brand of its AE by incurring AMP expenses. Accordingly the TPO adopted TNMM method as most appropriate method and made an adjustment of Rs. 42.96 crores. However, he did not make any addition in this regard by holding that this addition is not warranted, since T.P adjustment has been made in respect of AMP expenses. The TPO also o....
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....rred such AMP expenditure on brand promotion and development of marketing intangibles for the AE. The TPO further added a mark-up of 15%, which was subsequently reduced to 12.5% by the DRP and, accordingly, adjustment of Rs. 2,64,96,17,750/- was made, which was computed as under: Computation of TP adjustment Rs. Value of sales 8605,67,65,713 AMP/Sales of the comparables 4.93% Arms Length Price (as per Bright Line) 424,25,98,549 Expenditure on AMP by the appellant 689,60,79,670 Expenditure in excess of bright line 265,34,81,121 Mark-up at 12.5% on excessive AMP as per DRP direction 33,16,85,139 Reimbursement that appellant should have received. 298,51,66,260 Reimbursement that appellant has received. 33,55,48,510 Adjustment to assessee's income 264,96,17,750 9. Before us, the ld. AR has vehemently stated that the TPO has proceeded by inferring the expenses of international transaction by applying BLT by drawing support from the judgment of the Special Bench of the Tribunal in the case of assessee in ITA No. 5140/DEL/2011. 10. At the outset, we have to state that the Hon'ble High Court of Delhi in t....
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.... Court held that existence of an international transaction needs to be established de hors the Bright Line Test. The relevant finding of the Hon'ble High Court reads as under: "43. Secondly, the cases which were disposed of by the judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and....
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....n illustrative list, but significantly it does not list AMP spending as one such transaction. 61. The submission of the Revenue in this regard is: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existenc....
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....rder to determine the value of such AMP expenditure incurred for the AE. 35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have "acted in concert". XXX 37. The provisions under Chapter X do envisage a 'separate entity concept'. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further....
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....ensation. 18. The case of the ld. DR is that the act of incurring of AMP expenses by the assessee is not a unilateral act and is an international transaction for following reasons:- i) Though, the AMP expenditure may be for the purpose of business of the assessee but it is in performance of function of market development for the brands and products of the AE that enhances the value of the marketing intangibles owned by the foreign AE, and hence there is a transaction of rendering of service of market development to the AE. ii) The short term benefit of the transaction accrues both to assessee and AE in terms of higher sales but long term benefit accrues only to the AE. iii) The benefit to the AE is not incidental but significant. Once, it is established that the act of incurring of AMP expenditure is not a unilateral act of the assessee; the AE needs to compensate the assessee for AMP expenses. iv) It is a fact that brands are valuable and even loss making enterprises having no real assets are purchased for substantial value for their brand and marketing intangibles. v) The issue is not that of transfer of marketing intangibles ....
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....9; or 'arrangement' for incurring such AMP expenses. 22. The aforesaid view that existence of an international transaction is a sine qua non for invoking the transfer pricing provisions contained in Chapter X of the Act, can be further supported by analysis ofsection 92(1) of the Act, which seeks to benchmark income / expenditure arising from an international transaction, having regard to the arm's length price. The income / expenditure must arise qua an international transaction, meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expenditure payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and unrelated third parties in India, where there is no income arising to the Indian enterprise from the foreign payee or there is no payment of expense by the Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not seek to benchmark transac....
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....ccordingly held that such findings in the case of Sony Ericsson cannot be applied to the case of the manufacturers. 26. The Hon'ble High Court held as under: "43. Secondly, the cases which were disposed of by the Sony Ericsson judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. XXX 45. Since none of the above issues that arise in the present appeals were contested by the Assessees who appeals were decided in the Sony Ericsson case, it cannot be said that the decision in Sony Ericsson, to the extent it affirms the existence of an international transaction on account of the incurring of the AMP expenses, decided that issue in the appeals of MSIL as well." 27. At this stage, it would not....
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....This is clearly evidenced by the significantly higher profits made by assessee compared to its industry peers and also the very sizeable year on year increase in its turnover. In view of the aforesaid, it is respectfully submitted that the economic ownership of the trademark 'LG' rests with the assessee. The Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd (supra) disagreed with the finding of the Special Bench that the concept of economic ownership is not recognized under the Act. The relevant observations in paras 151 to 154 of the judgement are reproduced hereunder: "151. Economic ownership of a trade name or trade mark is accepted in international taxation as one of the components or aspects for determining transfer pricing. Economic ownership would only arise in cases of longterm contracts and where there is no negative stipulation denying economic ownership. Economic ownership when pleaded can be accepted if it is proved by the assessed. The burden is on the assessed. It cannot be assumed. It would affect and have consequences, when there is transfer or termination of economic ownership of the brand or trademark. ....
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....e being a full-fledged manufacturer, entire AMP expenditure is incurred at its own discretion and for its own benefit for sale of LG products in India. In the case of the appellant, the advertisements are aimed at promoting the sales of the product sold under trademark 'LG' manufactured by the assessee and not towards promoting the brand name of the AE. In such circumstances, the alleged excess AMP expenditure does not result in an international transaction and the assessee cannot be expected to seek compensation for such expenses unilaterally incurred by it from the AE. 31. The Revenue has strongly objected for the aggregated bench marking analysis for the AMP. According to the Revenue, the assessee company has not been able to demonstrate that there is any logic or rationale for aggregation or that the transactions of advertisement expenditure and the other transactions in the distribution activity are inter-dependent, the clubbing of transactions cannot be allowed. According to the Revenue, bench marking of AMP transaction is to be carried out using segregated approach and for determination of ALP of such transactions, Bright Line is used as the tool. 3....