TaxTMI 
TaxTMI 
2026 (2) TMI 1371
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..../s 143(2) and 142(1) of the Act were issued and duly served upon the assessee. In response thereto, the AR of the assessee attended and submitted the relevant information as called for. 3. The assessee is an indirect subsidiary of Callaway Golf Company ('Callaway US') and is engaged in the distribution of golf equipment, golf balls, packaged kits and accessories etc., in India. Since, the assessee has declared international transactions with its parent company Callaway US for an amount of Rs. 59,24,242/- as specified in section 92B of the Act in Form No. 3CEB, a reference under section 92CA of the Act was made to the TPO-1(2)(1), New Delhi. 4. During the TP proceedings, the TPO observed that the assessee has incurred a significant amount of advertisement and marketing promotion ('AMP') expenditure. The assessee has incurred Rs. 23,924,629/- on account of AMP expenses. He observed that this represents 26.29% of its sales. He observed that the benchmarking has to be done on the AMP expenses. Ld. TPO further observed that the assessee is not only engaged in promotion of Callaway products but also developed marketing for Callaway products for the AE by launching products and crea....
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...."As discussed Issue wise above the TPO has given valid reasons for his decision. The various issues raised by the assessee in its Grounds of objections have been discussed in the above paras. The assessee has failed to controvert the findings of the TPO. The Assessee objection to it being an International Transaction has been discussed in great detail and on the basis of adequate support from Judicial Decisions it has been successfully held to be an International Transaction. The Far Analysis and Justification for Compensation has been discussed in Para 6 which is adequately supported by the BEPs report as discussed in para 7. This takes care of most of the Assessee's objections. As discussed, the assessee has also failed to demonstrate that the AMP expenditure done by the assessee was compensated by the AE through a set off in any other transaction. After discussion on why the transaction needs to be separately benchmarked the use of Cost plus method has been justified and is upheld. In view of the SLP filed against the decision of Sony Ericsson the TPO has been directed not to exclude selling and distribution expenses. The Protective adjustment made using th....
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....y adjustment based upon Adjusted TNMM method. However, the DRP has specifically directed the TPO to make adjustment based upon Adjusted TNMM (Intensity Adjustment) by driving the strength from the decision in the case of Sony Ericsson Mobile Communications India (P.) Ltd. (refer para 18.5 of the DRP Order at pages 121 to 124 of appeal set). The Ld. TPO, following the directions of the Hon'ble DRP, computed NIL adjustment by applying the Adjusted TNMM (Intensity Adjustment) (refer para 2 of the Final Assessment order at page 135 of the Appeal Set)." Accordingly, the final assessment order was passed. 8. Aggrieved with the above order, the assessee is in appeal before us raising following grounds of appeal: - "1. That on the facts and circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("Ld. AO") under section 143(3) read with section 144C (13) of the Act is bad in law to the extent of adjustment of INR 8,02,85,904 made in the impugned assessment order. 2. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. Transfer Pricing Officer (Ld. TPO) (following the directions of Hon'ble Dispute Resolution ....
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....d by the DRP is liable to be upheld or not, the application of Cost Plus Method by the TPO and affirmed by the DRP is correct in light of the decision of Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P) Ltd. (supra). 10. At the time of hearing, Ld. AR submitted that the assessee is a distributor of goods and has entered into a distribution agreement to this effect with its AE i.e. Callaway Golf Company. Furthermore, the assessee is also responsible for making sales of Callaway products in India by incurring marketing expenditure. Hence, the appellant is purely a distributor company which has a marketing function in connection with sales made to third parties in India. The relevant part of the Ld. AR submission is reproduced as under: "8. It is submitted that the decision of Sony Ericsson (supra) dealt with assumption that AMP function/expenditure can be subject to transfer pricing provisions without examining the issue of whether or not the AMP function/expenditure per se is an international transaction which was subsequently dealt by Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited, [2015] 64 taxmann.com 150 (....
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....in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis should be appropriated and reliable so as to include the AMP functions and costs. iv) The assessee, ie, the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis should be appropriated and reliable so as to include the AMP functions and costs (v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transacti....
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....ne AMP or brand building exercise by applying bright line test of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be NIL, or at best would mean the amount or compensation expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to treat the segregated transactional value as 'NII' when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to the aggregate package. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we would disagree with the majority decision in L.G. Electronics India (P.) Ltd. (supra). This would be necessary when the arm's length price of the controlled transaction cannot be adequately or reliably determined without segmentation of AMP expenses. (xi) The Assessing Officer/TPO for good and sufficient reasons can de-bundle interconnected transactions, i.e. segregate distribution, marketing or AMP transactions. This may be necessary when bundled transactions cannot be adequately compared on ag....
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....and sought information from the Ld. AO to calculate adjusted TNMM/intensity. The Appellant also, vide its submission dated December 14, 2016 (Copy enclosed at page 329 to 334 of the paper book), filed the calculation of adjusted TNMM with the Ld. AO, pursuant to DRP directions. Such calculation has been also been accepted by the Ld. TPO, with minor variations, in its effect order reproduced at page 135 of the appeal set wherein a NIL adjustment has been proposed. Accordingly, in the present case of Appellant, no adjustment on account of AMP function/expenditure is warranted which is also in line with the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson (supra). 12. It is also relevant to highlight that this position is accepted by undertaking Advanced Pricing Agreement (APA) dated 16 March 2021 under section 92CC of the Act, in subsequent years wherein after examining the detailed Functions, Assets and Risks (FAR) of the Appellant, TNMM method has been approved by applying aggregate approach (refer page 15 and 16 of the case law compendium). Accordingly, the Appellant humbly prays, without prejudice to the main contention that AMP doesn't const....
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.... comparison should be similar. Thus, the entire cost, i.e. marketing expense or distribution and marketing expense, can be made subject matter and included in 'cost', for determining arm's length price by applying CP Method. ........ 173. This task of arm's length pricing in the case of tested party may become difficult when a number of transactions are interconnected and compensated but a transaction is bifurcated and segregated. Allocation of price or compensation paid would be a contentious question and apportionment must be justified and fair. CP Method, when applied to the segregated transaction, must pass the criteria of most appropriate method. If and when such determination of gross profit with reference to AMP transaction is required, it must be undertaken in a fair, objective and reasonable manner. ........ 194. For the purpose of clarity, we would like to enlist our findings: - ........ (xi) The Assessing Officer/TPO for good and sufficient reasons can de-bundle interconnected transactions, i.e. segregate distribution, marketing or AMP transactions. This may be necessary when bundled transactions canno....
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.... deleted." 11. On the other hand, Ld. DR submitted that the matter may be remitted back to the file of AO/TPO for the purpose of segregation of AMP expenses in this regard he relied on the decisions of Various ITAT benches decisions, namely, Toshiba India (P) Ltd (2017) 85 Taxmann.com 298 (Delhi Trib), Sony Mobile Communications India Pvt Ltd (ITA No. 6410/Del/2012) dated 30/08/2013, BMW India (P) Ltd (2017) 88 taxmann.com 26 (Delhi Trib) and Canon India Pvt Ltd (ITA No 4602/Del/2010 and others) dated 03.05.2013. On merits, he relied on the findings of the lower authorities. 12. Considered the rival submissions and material placed on record. We observed that the assessee is only a distributor and not a manufacturer, it markets and distributes the products supplied by its AE. The functions performed by the assessee are to distribute the products and in our view, it is only vanilla distribution services provided, it performed the functions like purchases from the AE, sells the products and incurs business promotion expenses. It has incurred marketing functions/expenses in connection with the sales made in India. We observed that in the final assessment order, the AO had made bo....