TaxTMI 
TaxTMI 
2026 (3) TMI 865
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....he assessee is engaged in the business of selling high end Bose Audio Products to retail customers and also to large institutional customers (hotels, auditorium, etc.), through their professional sales division. The assessee is the sole distributor of Bose products in India and for retail customers it primarily purchases only Bose products, while for the professional sales division it also purchases Non-Bose Products to provide complete Audio/Video solutions to the customers. Based on a detailed functional asset and risk profile of the company a Transfer Pricing study by the assessee himself his activities have been characterized as buy sale distributor. The assessee selected the Resale Price Method (hereafter as RPM) to benchmark its support services income and purchase of finished goods. It may be mentioned that its AMP expenses had not been benchmarked. 2.1 These two cases are second round proceedings as in the first round the ITAT had adjudicated the issues and remanded the matter back on certain specific points. Since the discussion on such points, as had been dealt with by the ITAT in the first round, would be relevant for deciding the present two appeals also hence [ITA 5....
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....G. Electronics (supra) itself has been partially reversed and the matter has been remitted to be reconsidered in light of the directions in Sony Ericsson Mobile Communications India Private Limited v. CIT 374 ITR 118, no question of law arises while considering the matter afresh. It goes without saying that the directions in Sony (supra) will be kept in mind and duly applied. The second question urged is with respect to the service charges agreed but not shown during the year under consideration. On this, we notice that the principle of consistency was applied. Furthermore, this Court had in a previous order refused to frame a question of law (in Commissioner of Income Tax-I v. Bose Corporation India Pvt. Ltd. ITA 304/2013, (decided on 12.07.2013). No question of law arises. The appeals are accordingly dismissed as unmerited along with the pending application. S. RAVINDRA BHAT, J DEEPA SHARMA, J AUGUST 23, 2016 2.3 In the mean time it is seen that prior to the Hon'ble Delhi High Court's order in the case, on 29.01.2016 the Ld.TPO passed the order ostensibly in line with the directions given by the ITAT, while remanding the matter back. The Ld.TPO proposed....
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....nd report by the Ld. DRP for determining two broad issues as under: - i) Whether AMP expenses incurred by the assessee constituted an International Transaction; and ii) In case the AMP constituted an International Transaction then it was directed to determine the amount of adjustment in light of the ruling of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Private Limited reported in 374 ITR 118 (Del). It was observed through this interlocutory order the ITAT had considered the fact that in the Sony Ericsson case (supra) it was directed to principally follow the "aggregate" approach for computing the AMP expenses adjustments, along with the distribution function. It was also directed that in case this is not feasible then only the "segregated" approach would need to be followed. It was observed by the ITAT that for computing the adjustment as per the directions of the Hon'ble High Court (supra),complete financial data of the comparables and the tested party would be required as it was not readily available at that stage. 2.6 In response to the interlocutory order of the ITAT, two remand reports are available before us. One ....
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....in this regard. The Ld. TPO also asked for minutes of meetings of the Board of Directors and shareholders for the relevant financial years. It is seen from the Ld. TPO's order that here also the assessee apparently could not supply details to the extent desired by the Ld. TPO. All these factors prompted the Ld. TPO to give a finding that there was an arrangement and understanding between the assessee and the AE regarding the quantum of AMP expenses and the way in which such expenses needed to be incurred. It is also a finding that the AE had total control over these expenses. This led to the conclusion that AMP was an International Transaction within the meaning of Section 92B r.w.s. 92F(v) of the Act. Thereafter, the Ld. TPO proceeded ahead with working out the AMP expenses and the amount of adjustment thereon. To illustrate the stand of Revenue the following picture emerges from the remand report: TABLE A S. No. Nature of Expenses 2007-08 Amounts 2008-09 Amounts 1. Expenses admitted by Assessee as AMP 4,75,83,987 6,87,46,178 2. Expenses declared by Assessee as "Selling & Distribution Expenses" 51,71,029 22,59,718 3. Expenses declare....
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....as submitted that high gross profit margins of the assessee incorporated the reward for AMP Expenses incurred by the assessee. The Ld. AR relied on the case of Maruti Suzuki India Limited reported in 381 ITR 117 (Del), to canvass the point that the burden was on the Revenue to prove the existence of an International Transaction by presenting any agreement, understanding or arrangement regarding the AMP spent. It was argued that since there was no such arrangement or agreement existing between the assessee and the ALP hence, it could not be inferred that an International Transaction was in place. The Ld. AR attempted to distinguish the Sony Ericsson case (supra) by stating that in that case it was always presumed that an International Transaction existed regarding the AMP Expenses. It was averred that the substantial gross margin of M/s Bose India adequately demonstrated the fact that there could be no presumption that any kind of benefit has arisen to the AE with regard to the AMP Expenses incurred by the assessee. It was also submitted that even if the AMP Expenses incurred are held to be an International Transaction, there is no mechanism available under the TP regulation to enab....
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....chmarking ALP transactions, which have been used by the Ld. TPO for working out adjustments on a protective basis and the Ld. DRP for directing that such protective adjustments should be converted to substantive once after following the BLT, was not permitted. It was the submission that in the Sony Ericsson case (supra), in para 121 the use of BLT has not been approved. The Ld. AR quoted from several judgments as under: i) Sony Ericsson case (supra): Though the clauses of the agreement in extenso go to show that WC was protective of its brand but it is not discernible from the clauses of the said agreement that WOIL was under any obligation to incur an extent of AMP expense for building the brand or mark of WC. The revenue has been unable to explain why there should be a presumption that as a result of the agreement, there must have been an understanding between WC and WOIL that WOIL will spend 'excessively' on AMP in order to promote the 'Whirlpool' brand in India. In other words, it is not clear why a presumption should be drawn that since an incidental benefit might ensure to the brand of WC, a proportion of the AMP expenses incurred must be attributed t....
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...." iii) The case of Whirlpool of India Limited reported in 381 ITR 154 (Del) "47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP." It was pointed out that in the assessee's own case for a subsequent assessment year (AY 2009-10) the Hon'ble Delhi High Court has stated that BLT could not be used following several judicial precedents. The Ld. AR thus, assailed the action of both TPO & DRP in terms of using the BLT to determine the ALP regarding AMP expenses. The Ld. AR also relied on several cases of Coordinate Benches of ITAT and the case of Honda Siel ....
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....ies. This point itself would prove that the AMP is an International Transaction in the case of the assessee. vi) The Ld. DR relied on the case of Sony Ericsson (supra) as the assessee is a non-exclusive distributor and hence the benefit of AMP expenses accrues directly to the AE. The Ld. DR relied on a Coordinate Bench decision in the case of Olympus Medical Systems India Pvt. Ltd. [ITA No.838/Del/2021] to canvass the point that an International Transaction is duly proved in this case. 4.1 The Ld. DR also drew our attention to various portions of the remand report of the TPO submitted in response to interlocutory order of the ITAT. It was pointed out that the ITAT had specifically directed the TPO to determine whether an International Transaction existed in the case or not with respect to AMP expenses. The Ld. DR pointed out that during the course of such remand proceedings the assessee was asked to supply a number of documents which could have helped in understanding the exact nature of the commercial relations between the assessee and the AE. However, very few documents were supplied to the Ld. TPO and thus, he was constrained to hold that the AMP expenses constituted....
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.... sufficient evidence to show that the AE was considerably benefitted from such expenses and hence, the assessee needed to be compensated thereon. At this stage it needs to be recapitulated that the Ld. TPO had worked out allegedly excessive expenses on AMP on a protective basis and had applied the BLT in doing so. At the level of Ld. DRP the BLT has been accepted and the expenses worked out on protective basis were directed to be taken as substantive. Importantly in doing so the order of the Hon'ble Delhi High Court [dated 23.08.2016 (supra)] was not considered, whereby it was specifically directed that the directions in the case of Sony Ericsson (supra) needed to be duly applied. It is also a point that the Ld. DRP had directed the TPO to examine and exclude selling expenses, but apparently this was not done by the Ld. TPO and since that was not done hence it would not be fruitful to venture into any assessment of the AMP/Sales figure in case such expenses are excluded. At this stage we cannot also overlook a significant working regarding the gross profit margin comparison of the assessee and comparables. Even at the expense of repetition it needs to be mentioned that for AY 2007-....
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.... an International Transaction or not is still vide open as a number of cases mentioned in the body of this order are pending before the Hon'ble Apex Court, where SLP has been granted. Thus, this fact itself lends a degree of caution in the exercise to determine whether in this particular case the AMP constituted an International Transaction because by applying the BLT certain alleged excessive expenses under the head have been worked out. 5.1 After considering the judgments relied upon by both the sides and also after considering the specific directions given in the assessee's own case by the Hon'ble Delhi High Court [order dated 23.08.2016 - (supra)], we need to confine ourselves to considering the issue in light of the case laws discussed above and especially the case of Sony Ericsson (supra). The first broad issue pertains to whether AMP expenses constitute International Transaction and the consequential issue would be whether the BLT could be used for determining so called "excessive" AMP expenses. The question of AMP expenses, in principle, being International Transactions, has to be considered in the affirmative considering the observations in paras 52 and 53 of the Sony E....
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....meters for advertising remain in line with the global standard....It further mentions that, Event participation primarily involves supporting large-scale events to promote the Bose brand..." A perusal of the documents before us does not reveal any dispute on this finding of the Ld. TPO. Furthermore, while some documents requisitioned by the Ld. TPO during the preparation of the Remand Report appear to be superfluous for deciding the issue at hand, but it is also not understood as to why certain documents like correspondences between the assessee and the AE regarding AMP could not be provided by the assessee. Also, when there is near total control by the AE, over the budget and the way in which AMP expenses are to be spent by the assessee, then it was all the more reason why the assessee should have been more forthcoming with documentation relevant for the assessment years under consideration. In this regard we do take cognizance of the argument of the Ld. AR that there is no specific document or contract between the assessee and the AE determining AMP expenditure, but following the Sony Ericsson case (supra), the relevant items of expenses needed to be tested for determining if the....
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....mand report that there is no written agreement or any contractual obligation on the part of the assessee to show that there was an inherent responsibility vested in the assessee to promote the AE,s brand name, notwithstanding the fact that the AE was in the driver's seat in terms of determining the quantum of the budget and also the way in which expenditure would be incurred towards AMP. In this respect an illuminating extract from the case of Whirlpool of India limited (supra) may be mentioned: "Though the clauses of the agreement in extenso go to show that WC was protective of its brand but it is not discernible from the clauses of the said agreement that WOIL was under any obligation to incur an extent of AMP expense for building the brand or mark of WC. The revenue has been unable to explain why there should be a presumption that as a result of the agreement, there must have been an understanding between WC and WOIL that WOIL will spend 'excessively' on AMP in order to promote the 'Whirlpool' brand in India. In other words, it is not clear why a presumption should be drawn that since an incidental benefit might ensure to the brand of WC, a proportion of....
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....ption that an International Transaction had come into existence, the issue has been clarified through this case law, from which certain relevant extracts deserve to be recorded for reference: "Upon considering the rival submissions which were addressed, the Tribunal has thereafter come to render findings that while dealing with the issue of bench marking of AMP expenses, the revenue needs to establish the existence of international transactions before undertaking bench marking of AMP expenses and such transaction cannot be inferred merely on the basis of BLT. [Para 8] The Tribunal has essentially intervened and set aside the orders of assessment in light of the revenue having failed to demonstrate on the basis of any tangible material that an international transaction between the assessee and its Associated Enterprise had come into existence. It has, thus, held that the existence of an international transaction cannot rest on a mere inference or surmise. In the context of these appeals it essentially held that it would be wholly erroneous to assume that the expenditure was incurred for the benefit of the AE merely because it was conceived or estimated to be excess....
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....ed. It thus constitutes an indelible precondition and which would apply notwithstanding the insertion of the Explanation in section 92B. The insertion of the Explanation was merely aimed at lending clarity to the use of intangible property and thus sought to allay all doubts that may have existed on account of conflicting judicial interpretation. However, and notwithstanding the insertion of the said Explanation, the revenue clearly does not stand absolved of proving or establishing the existence of a transaction itself in the first instance. [Par 21] * As is manifest from the line adopted by the TPO and which came to be affirmed by the DRP, the revenue had abjectly failed to analyze or examine the issue in the aforesaid light. The benchmarking analysis was commenced solely on the basis of a perceived excessive expenditure incurred by the respondent assessee with respect to AMP and the consequential invocation of the Bright Line Test. It is this procedure which had fallen for adverse comment of the Court in MARUTI SUZUKI (SUPRA) [Para 22] * Regard must also be had to the fact that the deeming fiction which came to be introduced in section 92B(2) would undisputedly....
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....n for advertisement with the intention to increase the brand value, but to increase the sales and thereby earn larger and greater profits. [Para 106] ■ Branded products and brand image is a result of consumerism and a commercial reality, as branded products own and have a reputation of intrinsic believability and acceptance which results in higher price and margins. But a new brand/trade-mark/trade-name would be relatively unknown. The said position has been referred not to make a comparison between different brands but to highlight that these are relevant factors and could affect the function undertaken which must be duly taken into consideration in selection of the comparables or when making subjective adjustment, and thus, for computing the arm's length price. [Para 112] ■ Routine or day-to-day marketing or sale promotion expenses even, when excessive and exorbitant, would not amount per se to brand building expenses. Promotion of products go hand in hand and at most of the times brand is distinguishable from products as only by display of products in a particular manner or emphasis on a particular feature of the product, the consumer is given t....
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....extracted as under: "165. An 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 b 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 c 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." Similarly, in the case of Sony India (supra) the following extracts are relevant for the present adjudication: "15. Having heard the Ld. Coun....