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2015 (12) TMI 1333 - HC - Income TaxTPA - AMP expenses - Does the decision in Sony Ericsson apply? - Held that - As noticed in MSIL (2015 (12) TMI 634 - DELHI HIGH COURT ) the facts of the cases of the Assessees in Sony Ericsson (2015 (3) TMI 580 - DELHI HIGH COURT ) did not give rise to a dispute that there is no international transaction involving the Assessee therein and its AEs. In fact each of the Assessees were receiving subsidies/subventions from their respective AEs. The second factor taken note of by the Court is that as BLT was invalidated as a means of determining the existence of an international transaction, the onus was on the Revenue to show the existence of an international transaction. In the present case, the existence of such a transaction was ascertained only by applying the BLT. For the above reasons, the Court is satisfied that the case of the present Appellant would not stand covered by the decision in Sony Ericsson (supra). Question (i) is accordingly answered in favour of the Assessee and against the Revenue. Existence of an international transaction - whether the Revenue has been able to discharge the initial onus of showing that there was an international transaction concerning the Assessee and its foreign AEs - Held that - During the financial year 2007-2008 relevant to the AY in question, of the total turnover of ₹ 251.06 crore only ₹ 9.57 crore, constituting 3.81 per cent, is towards distribution activity whereas the balance revenue of ₹ 241.48 crore was from the manufacturing activity. Further it is pointed out that the contention of the Revenue that market development in India is the function of the AE is factually incorrect. It is pointed out that para 4.30 of the TP documentation has stated that the Assessee plans and executes its own marketing strategy as it considers necessary and appropriate. Further as an independent manufacturer the Assessee bears all the risks associated with its business of manufacturing and sale of products in India and abroad. The condition in the license agreement that the technology will be used for sale of goods in designated jurisdictions or specified territories is not an unusual arrangement. The question of re-characterising the Assessee as a contract manufacturer was unwarranted. The Court finds that the Revenue has not been able to controvert any of the above submissions. In that view of the matter, the question of a benchmarking analysis by evaluating the AMP expenses incurred by the Assessee in relation to its total sales vis- -vis its comparables is not called for. There is nothing to indicate that the AMP expenses incurred by the Assessee is at the instance of foreign AE and that the Assessee has to be compensated by the foreign AE in that behalf. Question is answered in favour of the Assessee and against the Revenue by holding that the Revenue has not been able to demonstrate that there exists an international transaction involving the Assessee and a foreign AE on the question of AMP expenses. - Decided against the Revenue
Issues Involved:
1. Applicability of the decision in Sony Ericsson to the present case. 2. Existence of an international transaction between the Assessee and its AE regarding AMP expenses. 3. Determination of ALP for the AMP expenses if such a transaction exists. Detailed Analysis: Issue 1: Applicability of the Decision in Sony Ericsson The court examined whether the case of the Assessee is covered by the decision in Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015). The court noted that the decision in Sony Ericsson pertained to entities engaged in distribution and marketing of imported branded products and did not involve manufacturers like the Assessee in the present case. The court concluded that the decision in Sony Ericsson does not apply to the present case, as the facts and circumstances differ significantly. Issue 2: Existence of an International Transaction The court analyzed whether the Revenue has demonstrated the existence of an international transaction concerning AMP expenses between the Assessee and its AE. The court emphasized that the Bright Line Test (BLT) is not a valid method for determining the existence of an international transaction. The court further noted that the mere existence of agreements for the use of the trademark and technical collaboration does not imply an arrangement regarding AMP expenses. The court reviewed the Transfer Pricing (TP) report and agreements cited by the Revenue but found no tangible evidence of an arrangement or understanding between the Assessee and its AE concerning AMP expenses. The court reiterated that the burden of proof lies with the Revenue to establish the existence of such a transaction, which it failed to do. Issue 3: Determination of ALP Since the court concluded that there is no international transaction involving AMP expenses, it did not proceed to address the method for determining the Arm's Length Price (ALP) for such expenses. Conclusion: The court set aside the impugned order of the ITAT dated 12th December, 2014, and allowed the appeal, holding that the Revenue failed to demonstrate the existence of an international transaction involving AMP expenses. Consequently, the court did not address the question of determining the ALP for such expenses.
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