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TMI Blog2013 (9) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... he LD. AO (following the directions of the Ld. DRP) erred on facts and in law in upholding that the appellant has rendered services to the AEs by incurring the AMP expenses and by holding that a mark-up has to be earned by the appellant in respect of the "alleged excessive" AMP expenses and applying a mark-up of 15% in respect of the appellant's "alleged excessive" AMP expenses, without any basis for the same whatsoever. 3. The Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP) erred on facts and in law in misinterpreting or placing incorrect reliance on the international guidance in relation to the 'marketing intangibles' and 'bright line test' from Organization for Economic Co-operation and Development ('OECD'), US TP Regulations and Australian Tax Office ('ATO') and relying on several erroneous/factually incorrect and contradictory statements/observations in the TP order, which are not relevant to the instant case, only in order to justify an otherwise inappropriate and unwarranted TP adjustment. 4. The Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP) erred on facts and in law in ignoring the fact that the AMP expenses in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer (hereinafter referred to as the "AO") for determining the Arm's Length Price (hereinafter referred to as the "ALP") in respect of international transaction entered into by the assesse during the financial year 2007-08 relevant to assessment year 2008-09 passed an order dated 17.10.11 u/s 92CA(iii) of the Act. 2.4. A perusal of the same shows that the TPO took note of the fact that the BMW Group has global operations in 3 segments namely Automobiles, Motorcycles and Financial Services. The parent company of the group is BMW AG i.e the associated enterprise (hereinafter referred to as the "AE") which is headquartered in Munich, Germany and is primarily engaged in the manufacturing of automobiles and motorcycles. The major car brands manufactured by BMW AG are stated to be BMW, Mini and Rolls-Royce. The TPO takes note of the fact that the assessee had undertaken the following international transactions :- S.N. Description of transaction Value (in Rs.) Method 1. Purchase of raw material 167,051,934 TNMM 2. Purchase of traded vehicle 535,438,461 RPM 3. Purchase of spare parts 18,057,016 RPM 4. Purchase of fixed asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Group owns valuable intellectual property rights (know-how, copy rights, patents etc.) and other commercial or marketing intangibles (brands, trademarks etc.) and is involved in complex product development, manufacturing of products and brand development operations. BMW India, on the other hand, can be characterized as a distributor, also performing low value and added assembly of automobiles, utilizing the intangibles developed and owned by the BMW Group. BMW India undertakes all the routine functions and assumes all the risks associated with such business activities." Further, the TP study also states, "Para 4.5.3 BMW India does not own non-routine intangibles and does not undertake any research and development on its own account that leads to the development of non-routine intangibles. BMW India uses the brand name, trademarks, processes technical know-how/data, operating/quality standards etc. developed/owned by BMW Group. Accordingly BMW India does not own any non-routine intangibles." 2.7. Considering the TP Study documentation of the assessee, the TPO show caused the assessee that why it had not been compensated by its AE for its brand promotion activities which resulted i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the brand, the TPO was of the view that in such a situation re-imbursement from the legal owner of the brand must flow. The TPO further referred to the advertisements from the company's website and the print media observed that it showed that the assessee had advertised the product of the AE along with "BMW logo" which did not bear the name "BMW India" and the "BMW India" logo. The argument that the assessee had no role in the level of publicity was also not accepted as assessee had purchased brochures worth Rs.7.68 crores and other advertising/marketing materials from its AE. The TPO referring to the international practices and the article titled "The significance of Intangibles Property Rights in Transfer Pricing" by Gregory J. Ossi specific paras 60, 55 relied upon by the assessee in its submissions dated 04.10.2011 extracted in the TPO's order at page 21-23 of his order, concluded that the tenure of the assessee is quiet tenuous and could be snapped anytime which could leave the assessee without any benefit for the hard work put by it as such he concluded that the compensation should have been received alongwith a mark-up. 2.9. The reliance paced on Nestle India Ltd. Vs DCI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10% 10.56% Shree Sancheti Motors Pvt. Ltd. P 12.15% 0.95% 1.61% 11.20% Machino Techno Sales Ltd. P 12.69% 1.07% 4.42% 11.62% Eastman Industries Ltd. P 16.22% 3.80% 1.25% 12.42% Bharat Power Corpn. Pvt. Ltd. P 24.79% 10.82% 0.87% 13.96% MGF Automobiles Ltd. P 15.90% 0.45% 6.31% 15.45% Lucas Indian Services Ltd. P 20.13% 4.16% 0.88% 15.97% Sri Ramadas Motor Transport Ltd. P 18.92% 2.19% 1.66% 16.73% Mean 15.46% 2.31% 2.48% 13.15% BMW India 27.36% 13.52% 2.69% 13.84% This set will be used along with the comparables already proposed in the show cause notice to be used from the original set taken under TP study. The average AMP/Sales works out to 1.99%." 2.9.3. Accordingly, the TPO proposed the addition of Rs.48,65,29,022/- in the following manner:- "10.8. Determination of arm's length price of receipt of subsidy : The computation of arm's length price of the international transaction of receipt of special purpose subsidy is done as under :- Particulars Formula Amount in Rs. Total Revenue of the assessee A 8,286,910,876 Arm's length % of AMP Expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues addressed by the parties before the Bench. 5.1. On 18.02.2013, Ld. AR referring to the affidavit filed before us and the order of the Special Bench which is in public domain stated that the assessee sought permission to become an intervener in L.G' Electronics' case. However when during the hearing on 2.11.2012, the Members of the Special Bench clarified that the Special Bench would adjudicate only on the facts emanating from L.G. Electronics India Pvt. Ltd. i.e. the principal appellant and would not discuss the facts of any other case and since the principal appellant was "a licensed manufacturer" and the assessee in the present case being "a distributor", the Ld. AR sought permission to be allowed to withdraw as an intervener. It was stated by Sh. Rahul K. Mitra referring to the affidavit filed by him dated 14.02.2013 that the permission was granted and consequently the name of the assessee does not appear in the list of interveners before the Special Bench. It was stated that no separate order in writing was passed. Accordingly it was his submission that the order of the Special Bench proceeds entirely on different facts would not have any applicability to the assessee's ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is not an intervener, as such the contents of the affidavit of the Ld. AR to the said extent are correct as the record shows that the assessee sought to implead itself as an intervener and thereafter sought permission to withdraw as an intervener from the hearing in LG Electronics case and the order available in the public domain shows that the assessee has not been named as an intervener. As such to that extent, the Ld. CIT DR was in agreement with the submissions of the Ld. AR. 5.1.2. On considering the stand of the parties before the Bench, we hold that the assessee was not an intervener in the proceedings before the Special Bench in the case of L.G. Electronics as its name does not find a mention in the list of interveners and the affidavit dated 14.02.2013 of the Ld. AR Sh. Rahul Mitra addresses the background as to how after seeking permission to be impleaded as an intervener, the permission to withdraw was moved. Accordingly, we hold that the assessee is not precluded from advancing arguments on facts and law which were either not addressed before the Special Bench by the intervener/parties nor considered consequently by the Special Bench. Having thus held, we clarif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable on record. In the afore-mentioned peculiar facts and circumstances, we are of the view that the additional ground raised by the assesse deserves to be admitted as the said ground emanates from the impugned order. 5.3. Having disposed the preliminary issues, we now proceed to address the arguments of the parties before the Bench on merits. 5.3.1. The Ld. AR inviting attention to the synopsis filed before the Bench contended that the assessee BMW India is engaged in the import and sale of premium segment cars in India and operates as a normal risk distributor in India. It was his submission that it would be his endeavour to address the facts of the present case as opposed to facts of the case considered by the Special Bench where the Special Bench was considering the facts of a licensed manufacturer. It was his submission that the FAR analysis of the assessee i.e the functions performed, the assets employed and risks assumed by a distributor would be very different from the FAR analysis of a licensed manufacturer, where the assessee assumes higher risk as it also functions as an entrepreneur qua his manufacturing activity. Addressing the facts on record, it was submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 5.3.4. In the context of the above facts it was submitted that solely based on this comparison of AMP/sales ratio of BMW India vis-à-vis the comparable companies, the TPO has alleged that the assessee should have been reimbursed by the BMW Group for the excessive AMP spend and has also over and above this held that the assessee has rendered services to its overseas BMW Group by incurring additional expenses and as such applied a mark-up of 15% on the incremental AMP spend visà- vis the comparables. It was his submission that the TP adjustment incorporated in the draft assessment order u/s 144C(i) on challenge by the assessee was upheld by the DRP. It was submitted that the DRP upheld the TPO's approach in holding that the assessee has incurred extraordinary AMP expenses for the promotion and development of BMW brand and also upheld that the assessee has contributed in creation of the marketing intangibles in India apart from that the other arguments on facts and law addressed by the objections of the assessee were also not accepted by the DRP except the direction to exclude certain items from the AMP calculation. The final assessment order, it was subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's argument on facts demonstrates the fact that compensation already stood received was discarded on the reasoning that the assessee is trying to place the arguments, which it had preferred in sub ground 2.1 again through the back door. It was questioned how can such a decision be considered a reasoned finding. The said stand by the DRP according to the Ld. AR ignores the fact that the OECD Transfer Pricing Guidelines itself supports such adjustments. 5.3.6. It was re-iterated that the assessee had empirically demonstrated that additional remuneration has already been recovered by the assessee through premium profits both at gross level as well as net level as such there was no occasion to hold that compensation was still due to the assessee from the AE. It was submitted that before the TPO and the DRP also the assessee had addressed these arguments. Ld. AR elaborated that for evaluating whether any TP adjustment was necessitated at all reliance had been placed on OECD Transfer Pricing Guidelines and Australian Tax Office Guidelines on Marketing Intangibles. For ready reference, we reproduce from pages 4-6 of the synopsis filed on behalf of the assessee:- International gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s able to share in the potential benefits deriving from its functions, assets, risks and costs currently or in the future. As also stated in the OECD TP Guidelines, the Discussion Draft also states that in arm's length transactions the ability of a party that is not the registered or legal owner of trademarks and related intangibles to obtain the benefits of marketing activities that increase the value of those intangibles will depend principally on the substance of rights of that party. 1.24 The Discussion Draft also provides illustrative examples which demonstrate how a marketer/ distributor which is bearing the costs and risks of its marketing activities would be compensated under arm's length conditions. In one of the examples7 (please refer pages 174 to 175 of Compendium), it is explained that if a distributor is incurring marketing expenditure substantially in excess of the levels of independent distributors in comparable situation, and at the same time is not earning sufficient profits as compared to third parties, it should get an additional remuneration either (a) by reducing the import price, or (b) by applying a residual profit split method, or (c) by getting a direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceiving a fee and a reimbursement of expenditure incurred in excess of a specified amount (based on what a distributor purchasing for the agreed price might be expected to spend on its own account). It is expected that such a fee would include an appropriate profit element." Based on the above, it can be concluded that a marketer/ distributor undertaking excessive marketing activities on behalf of the owner of the brand can be remunerated either by way of a reduction in the purchase price or by way of a separate remuneration. The facts and circumstances of the Appellant's case are identical to the first remuneration methodology as enumerated by the ATO Guidelines. In the present case the Ld. TPO IDRP himself has accepted the benchmarking undertaken by the Appellant following RPM/TNMM whereby the facts clearly demonstrate that the Appellant has been already remunerated by BMW Group for the alleged "excessive" AMP spend by way of a higher gross margin as well as net margin vis-a-vis the comparable companies." 5.3.7. It was emphasized that the assessee is "a normal risk taking distributor" as opposed to "a low risk distributor" who would perform only routine distribution functions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights 1.37 The Ld. DRP has alleged that BMW India does not have any long term contract for the distribution of the products manufactured by the parent and other group entities. In the Ld. DRP's view, in case the contract of distribution of goods is terminated by the parent, the Appellant would not have any rights over the brand promoted by it over a period of years. On the other hand, the parent would enjoy the fruits of the efforts put in by the Appellant for promoting the brand. 1.38 It is pertinent to note here that the Importation Agreement between the Appellant and BMW AG (please refer pages 239 to 243 of Paperbook) provides the Appellant the right to import and distribute BMW CBUs and CKDs and original BMW parts and accessories in India (clause 1.1). BMW India is responsible for the sales promotion and full utilization of the market potential for the said goods for which it could perform necessary function for establishment of an efficient distribution network and performance of adequate advertisement and sales promotion activities (clause 2.2). Further, clause 5.1 states that the agreement shall enter into force from 1st January 2006 and shall remain in force until termina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate that BMW India is adequately compensated by premium return for the excess AMP spend through the BMW Group's pricing policy for the excess AMP spend. We reproduce paras 1.42 to 1.48 form the synopsis available on record:- "1.42 As mentioned above, BMW India operates as a Normal Risk Distributor, remunerated through gross returns on sales. Further, without admitting but even if one assumes for the sake of discussion, that BMW India performs higher functions as compared to the comparable companies, it derives its additional returns through premium profits it earns at both gross as well as net level. The level of profits earned by BMW India during AY 2008-09, vis-a-vis that of com parables selected by the Ld. TPO in the TPO Order, as shown in the table below: Particulars BMW India TPO Order Comparables' Arm's Length Result GP/Sales 27.36% 13.65% OP/Sales 13.52% 2.11% 1.43 As discussed above, since at both gross as well as net level BMW India has earned much higher than the arm's length return, this amply evidences that even if it has spent excessively (as alleged by the Ld. TPO) on brand promotion, it is more than adequately compensated by higher return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns earned by the comparables selected by the TPO himself i.e 13.71% and 11.41%. It was submitted that the following facts indicate the assessee's position. We reproduce from the synopsis filed on behalf of the assessee:- "1.50 Even assuming but not admitting that the Appellant is undertaking all the entrepreneurial functions relating to the marketing and advertising function, then the point to note is that the GP/Sales and OP/Sales margin of 27.36% and 13.52% earned by the Appellant respectively, is significantly higher than the margins earned by the comparables selected by the Ld. TPO himself, i.e. 13.71% and 11.41 % at the gross and net level respectively. The following example vindicates our point: (Figures in Rs. crores) Particulars GP Sales OP Sales Margin earned by the Appellant (A) 27.36% 13.52% Arm's Length Margin using AY 2008-09 data (B) 13.65% 2.11% Excess Profit earned by the Appellant (C = A- B) [in %] 13.71% 11.41% Sales of the Appellant in crores (D) 936.68 936.68 Excess profit earned by the Appellant (E = D*C) [in Actuals] 128.42 106.85 Excess AMP Expense of the Appellant as alleged by the Ld. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing section: Incorrect reliance on international and Indian cases 5.3.10. The decisions relied upon by the DRP it was submitted have no applicability. Whereas the judgement of the Hon'ble High Court in Maruti Suzuki's case, it was submitted was on entirely different set of facts and the Hon'ble Supreme Court has negated the judgment; the international decision relied upon in the case of Glaxosmithkline Holding (Americas) V Commissioner, T.C. No. 6959-05, it was submitted was an out of court settlement and no decision was publicly pronounced as such reliance on the same has no purpose. The decision in the case of DHL Corporation, it was stated was not correctly applied. The basis of inapplicability of the said decision as addressed in the Synopsis filed is extracted from the synopsisitself :- "1.57 Furthermore, the Ld. DRP placed reliance on the case of DHL Incorporated. In DHL's case, DHL Corporation ('DHL'), US had entered into a long term agreement with Document Handling Limited, International ('DHLI'), Hong Kong, the group entity responsible for DHL operations outside US. As per the agreement, DHL had exclusive right to use and sublicense 'DHL' trademark in US while DHLI ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds; and (iii) in accordance with the arm's length principle, BMW India has earned and is expected to earn a suitable return for its marketing activities, over a period of time given the long term nature of the licensing agreement. 1.60 To summarize, where the licensing agreement is exclusive and long term and healthy margins are being earned by the licensee (as in case of BMW India), marketing and advertisement expenditure should be considered to be perfectly legitimate and in conformity with the arm's length principle. Advertising. Marketing and Promotional ('AMP') spend incurred by the Appellant 1.61 The AMP expenditure was incurred by BMW India for its own benefit (in the form of increased sales and profits), and therefore borne by it. Benefit, if any, arising to the overseas AEs is nothing more than indirect / incidental. 1.62 As already mentioned above, AY 2008-09 is only the second year (and first full year) of operations accordingly the AMP spend was imperative due to the initial phase of operations. Since then, the trend has declined over the years. Also keeping the initial phase of operations, the AMP expenditure may not reflect the true position, ideally a multiple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh search before the TPO which has been accepted based on the similar intensity functions. Relying on the comparables accepted by the TPO in para 10.5 of the TPO's order reproduced hereunder:- Name of the company Database GP/Sales OP/Sales A&M/Sales VAE/Sales Pebco Motors Ltd. P 6.62% -3.84% 1.20% 10.46% Popular Vehicles & Services Ltd. P 11.72% 1.16% 4.10% 10.56% Shree Sancheti Motors Pvt. Ltd. P 12.15% 0.95% 1.61% 11.20% Machino Techno Sales Ltd. P 12.69% 1.07% 4.42% 11.62% Eastman Industries Ltd. P 16.22% 3.80% 1.25% 12.42% Bharat Power Corpn. Pvt. Ltd. P 24.79% 10.82% 0.87% 13.96% MGF Automobiles Ltd. P 15.90% 0.45% 6.31% 15.45% Lucas Indian Services Ltd. P 20.13% 4.16% 0.88% 15.97% Sri Ramadas Motor Transport Ltd. P 18.92% 2.19% 1.66% 16.73% Mean 15.46% 2.31% 2.48% 13.15% BMW India 27.36% 13.52% 2.69% 13.84% 5.3.13. Reference was made to page 185 to 186 of the paper book addressing the dynamics of the competitive Indian market at the relevant point of time. For ready reference, we reproduce para 3.5 to 3.10 of the letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4% 3.48% 4.19% 4.98% Maruti Suzuki India Ltd. 1.65% 2.08% 1.88% 1.90% 1.52% Mean 2.67% 3.31% 3.54% 3.70% 3.13% BMW India 2.69% 3.9. From the above, it is evident that the AMP spend of BMW India vis-à-vis the comparable companies is similar during the year under consideration. Therefore, the Company resiliently states that purely of comparison of AMP spend of the Company, appropriate comparable companies should be selected by your good self. 1.39 The Company further provides the details of year of incorporation and the weighted average AMP/Sales for the FY 2005-06 to FY 2009-10 of the above mentioned companies, in the following table:- S. No. Company Name Year of Incorporation Weighted Average AMP 1. General Motors India Pvt. Ltd. 1994 5.84% 2. Honda Siel Cars India Ltd. 1995 1.67% 3. Hyundai Motor India Ltd. 1996 4.04% 4. Maruti Suzuki India Ltd. 1981 1.78% Mean 3.33% BMW India 2.69% 3.10. From the above, it is evident that the weighted average AMP spend of BMW India vis-à-vis the comparable companies is higher, despite the fact that these compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion the assessee has to demonstrate. It was also vehemently submitted that even though the assessee did not participate as an intervener however arguments on behalf of other interveners some of whom were distributors have been considered and the Special Bench has as such considered the position of the distributors also. 5.4.2. It was his submission that in transfer pricing it is well-settled that if the assessee wants to claim the benefit of some fact then the onus necessarily and primarily is on the assessee to demonstrate the fact by evidences. The fact remains that in none of the cases the assessee's had disclosed the specific AMP expense as an international transaction as such the occasion to benefit by hindsight in making a reference to the guidelines laid down by the Special Bench are of no benefit. In the facts of the present case also it was submitted the assessee has not disclosed the AMP expense as an international transaction and the issue is covered against the assessee by the order of the Larger Bench. 5.4.3. It was also submitted that the application of the bright line as a tool for considering the issue has also been considered and discussed and held as an accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of sales expenditure of the assessee they may be excluded, however it was submitted that it is not a concession on his part but recognition of judicial discipline that orders of higher forums have to be followed. 5.4.9. It was his submission that the Importation Agreement of the assessee with its AE clearly shows that the assessee has rendered services of brand building to its AE and by the efforts of the assessee benefit has accrued to the AE by virtue of greater brand recognition for the AE and brand building has been done at the cost of the profits of the Indian entity as such adjustment made are correct and appropriate as such should be sustained. 5.5. In reply the Ld. AR submitted that the principle laid down in Knorr-Bremse India Pvt. Ltd. is not disputed by the assessee and it was earnestly requested that the FAR analysis of a license manufacturer and a distributor are completely different as such in principle the decision which is considering the facts of a licensed manufacturer cannot be made applicable to a distributor. It was also stated that no doubt the principle of applying bright line test as a methodology has been decided in the Revenue's favour however the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the taxpayer belongs to pharmaceutical industry or to FMCG industry or to automotive industry or to software industry. Any dictum in TP would depend upon the characterisation made by the taxpayer and the manner of its representation before the judicial authority. For instance, Infosys and IBM are commonly known players operating in the software sector. However, when Infosys and IBM sell software products to their foreign related parties, the principles and methods of TP to be applied to each one of them would been entirely different. IBM, being a captive service provider in India, working for its parent company, IBM US, would need to be compensated under a cost plus / TNMM, while Infosys being a gigantic entrepreneur in India, selling software to its overseas distributors for on-sale to customers in the foreign market, would need to apply a resale minus methodology for framing its' TP policy, whereby the distribution/ profit margin of the overseas distributor would need to be tested and compared with similar distributor in the foreign territory. 5.5.2. Emphasizing the functions of a distributor, it was submitted that the entire gamut of marketing and selling functions are su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and selling functions is an integral and non-detachable part of the distributor's (here BMW India's) functions; and the profits from the respective sub-functions are subsumed in the overall profits of the distributors. BMW India is responsible for importing and selling the vehicles and for that purpose performs necessary selling and marketing service, which are interlinked. This fact is substantiated by clause1(importation and distribution rights) and clause 3 (scope of activity of BMW India) of the importation agreement entered into BMW India and BMW AG [Refer pages 240 and 241 of the paper book]. 10. It may be noted that BMW India had not applied an overall TNMM approach, by throwing in all possible transactions entered into with its foreign related parties into the cauldron of TNMM at an entity level. On the other hand, BMW India had actually applied a transaction-by-transaction approach, for the different transactions entered into with its foreign related parties, as borne out from page 2 of the TPO's order. It would be evident that for the main transaction of purchase of vehicles and spare parts for distribution, BMW India had applied a resale price method (RPM), by testing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said higher remuneration can be imputed by either of the following methodsi. Reducing the price of the goods, i.e. by allowing a higher gross margin; or ii.. Reimbursement of the excess AMP spent; or iii. Applying a residual profit split method. The TPO has not applied a residual profit split method and therefore one need not dwell further on the same. It has been explained earlier before the TPO, DRP and the Hon'ble Tribunal that BMW India had been more than adequately compensated for its incremental AMP spent by BMW AG through an adjustment to its import prices. 12. Thus, as opposed to a meagre 5.10% excess AMP spent made by BMW India as compared to the comparable companies, the gross margin earned by BMW India was 13.71% more than the same comparable companies chosen and accepted by the TPO in testing the distribution profits of BMW India. The corresponding net margins of BMW India and the comparable companies were 13.52 and 2.11% respectively, signifying an excess net margin of 11.41% earned by BMW India over the comparable companies. 13. The analysis is tabulated below: Particulars BMW India TPO Order Comparables' Arm's Length Result GP/Sales 27.36% 13.65% OP/Sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o refer to International jurisprudence/guidelines. Support was derived from the judgement of the Hon'ble Apex Court in the case of Azadi Bachao Andolan [263 ITR 706, 741 (SC)] and Graphite India Ltd. V DCIT [86 ITD 384 (KOL)]. It was submitted that wherever the Indian Tax Laws on the subject deviate from the OECD Guidelines the Indian Laws shall prevail like in the use of single year data as against the use of multiple year data and the use of arithmetic mean embodied in the Income Tax Act and Rules as against inter-quartile range. This position it was submitted has been confirmed by the Hon'ble Delhi High Court in the case of Mentor Graphics Pvt. Ltd. (TS-86-HC-2013 (Del)-TP). 5.5.4. It was reiterated that emphasis by the department that the distribution rights can be terminated at any time it was submitted is an academic hypothesis as there is nothing on record to suggest that such an event will occur. 5.5.5. Addressing the observations of the department that some of the interveners were distributors as such the argument on behalf of the assessee that Special Bench was only applicable to a licensed manufacturer it was submitted was advanced in the context of the observation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a was placed with a formidable task of distinguishing his case from that of an "adverse binding precedent" in L.G. Electronics case as referred to and heavily relied upon by the Ld. CIT DR. Undisputedly the onus of the argument was on the Ld. AR to make a distinction in order to set up his own case. Judicial rulings on the law are conditional on the strengths and persuasiveness of the arguments advanced on facts. By detailed careful arguments, the Ld. AR elaborated and addressed the facts so as to distinguish how L.G. Electronics case is distinguishable and not an adverse binding precedent and thereafter on the principles of transfer pricing and their application to the present case has to be decided independently. 6.2. On a consideration of the entire gamut of the arguments, submissions in the context of decisions and judgements, it would be necessary to address the settled legal precedents which have been judicially settled as binding for the Courts and Tribunals. It is a settled legal position that a precedent is an authority for what it actually decides and not what may remotely or even logically follow from it; similarly a question which has not been argued cannot be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44 ITR 689. Reference may also specifically be made to the celebrated judgement of the Hon'ble Apex Court in the case of CIT vs. Sun Engineering Works Pvt. Ltd. (1992) 198 ITR 297 (SC) that it is neither desirable nor permissible to pick out a word or a sentence from the judgement of the Hon'ble Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared. 6.4. We may also quote the observations as quoted in CIT vs K. Ramakrishnan (1993) 202 ITR 997 (Ker.) and state of Orris vs Sudhansu Shekhar Misra and others AIR 1968 SC 647 of Lord Halsbury LC from Quinn v. Leathem [1901] AC 495 (HL), at page 506: "....there are two observations of a general character which I wish to make, and one is to repeat what I have very often said before, that every judgement must be read as applicable to the particular facts proved, or assumed to be proved, since the generality of the expression which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found. The other is that a case is only an authority for what it actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority of a precedent should never be expanded unnecessarily beyond the needs of a given situation' as held by the Hon'ble Supreme Court in P.A.Shah vs. State of Gujarat AIR 1986 SC 468. More so in the case of transfer pricing the detailed analysis cannot be over looked as only thereafter the applicability of the decision to the facts of a case to which it is sought to be applied can be considered. 6.7. The need in the facts of the present case is more so, as transfer pricing legislation mandates that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to specific characteristics of the property transferred or services provided in transactions/functions performed taking into account the assets employed or to be employed and the risks assumed by the respective parties to the transactions; the contractual terms whether or not such terms are formally put in writing or are orally agreed which lay down explicitly or implicitly how the responsibilities and evidences the risks and benefits to be divided between the respective parties to the transactions how the parties have actually acted; and conditions prevailing in the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld in Ramesh Singh vs. State of A.P 2004 (2) Supreme 749. One may also refer to Rudrappa Ramoppa Vs. State of Karnatka AIR 2004 SC 4148 and Abdul Kayoom's case (cited supra). The applicability of the decisions and orders in transfer pricing adjudication can only come after it has been established that relevant facts are identical Tranfer Pricing issues, being fact driven the need and necessity to carefully examine the facts in order to cull out the relevant facts is thus imperative. Rules 10B framed under section 92C of the Income Tax Act, 1961 mandates that the comparability of an international transaction with an uncontrolled transaction in order to determine the arm's length price of the product or service etc. shall then be judged with reference to the specific characteristics of the property transferred or services provided in either transactions; functions performed taking into account the assets employed or to be employed and the risks assumed by the respective parties to the transactions; the contractual terms whether or not such terms are formal or in writing of the transactions contemplated and in fact undertaken which lay down explicitly or implicitly how the responsib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 of the said Importation Agreement addresses the following aspect "Importation Distribution Rights" to the assessee :- "1. Importation and Distribution Rights 1.1. Distribution Rights for Contract Goods "BMW AG hereby grants BMW India the right and BMW India undertakes the corresponding duty to import and distribute BMW completely built units (CBUs), completely knocked down (CKD) kits and original BMW parts/accessories (hereinafter referred to as "Contract Goods") according to the provisions of this Agreement. Original BMW parts are all parts, components, re-built parts and accessories, which BMW AG offers in its current sales program for original BMW AG parts, irrespective of whether these parts are manufactured by BMW AG or supplied to BMW AG by third parties." 6.10.2. Clause 1.2 addresses "Independence of BMW India' and states that the assessee operates its business "in its own name, on its account and at its own risk and it has no authority or power to legally bind" the AE. 6.10.3. Clause 2 addresses the Contract Territory and has the following responsibilities in the Contract Territory:- "2. Contract Territory 2.1 Description of the Contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upply of Original BMW Parts BMW India will maintain and offer to customers a supply of original BMW parts, which corresponds to customer expectations and to the requirements of BMW AG. 3.5. Customer Service BMW India will provide customer service pursuant to the provisions of the current customer service regulation, the regulations for warranty and goodwill as well as the information material published by BMW AG from time to time." (highlighted for emphasis by the Bench) 6.10.5. Clause 4 addresses sales to the assessee and sets out the terms and conditions of the supply of contract goods ordering of the same and assumptions of the warranty and payments etc. 6.10.6. Clause 5 addresses duration of the contract as under :- "5. Duration and Termination 5.1. Duration "The parties agree that this agreement shall enter into force as of 1st January 2006 and shall remain in force until terminated by either party. This Agreement may be terminated by either Party at any time upon 6 months prior written notice or as agreed between the Parties." 6.11. A perusal of the TP study of the assessee shows that the intangible assets are held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibutor is further elaborated in Clause 3 of the Importation Agreement. A perusal of the same shows that the assessee assumes the responsibility for sales and advertising and agrees "to apply its best efforts" and "adequate resources" towards "effective sales promotion and advertising" for the contract goods. These terms and conditions borne out from the Importation Agreement show that the assessee as a distributor agrees to perform the functions of advertising and sales promotion thereby doing greater service to market the goods by advertising marketing and promotion. As such in the TP study of the assessee itself the assessee has characterized itself as "a normal distributor" as opposed to a distributor who is a "low end distributor". 6.13. It is also seen that the assessee before the TPO has addressed that uncontrolled comparables be considered for comparison on the basis of near identical intensity of functions performed and the TPO has accepted comparables of the assessee. Accordingly it is seen that there is no denying that the assessee has assumed greater role and responsibility vis-a-vis the comparables as the record shows that applying the bright-line test the AMP expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to a few options today it is stated that there are about 150 models and variants available by way of customer option. The purpose of mentioning these facts and figures in the TP study is presumably to address the prevalent competition in the market necessitating aggressive marketing and sales promotion exercises. The following review of the trend in the performance of the passenger car industry over the 5 year period for 2003-08 has also been given:- Sales Trend-Passenger Cars Year Units Sold % change 2003-04 1,031,387 32.27% 2004-05 1,227,703 19.03% 2005-06 1,318,809 7.42% 2006-07 1,578,176 19.67% 2007-08 1,766,403 11.93% 6.15. The above facts and figures in order to establish a trend for computing the ALP issue is of no relevance as the Rules under the Statue specifically mandate the use of current year financials however sector performance addressed in the TP study to address decline in sales across the segment again presumably to justify advertising, marketing and promotion expenses needs a mention. However in the facts of the present case the assumption of greater role and performance of functions have been assumed by the assessee itself as incorporated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the TP study, it is mentioned that the small compact car owners accordingly are likely to upgrade to mid sized segment and as per estimates the proposed growth in the world car market is expected to come from Asian Countries which has created a very competitive environment. 6.19. Thus on a consideration of the market conditions and the terms of the contract entered into in the Importation Agreement by the assessee with the AE, it necessarily leads us to the conclusion that the assessee has performed the function of sales promotion and advertisement in order to make a dent in the market while performing the functions of a distributor with greater intensity as opposed to a routine distributor. Accordingly, we hold that the assessee has performed greater intensity of service than a normal distributor and has incurred expenditure for advertising marketing and promoting the brand of its AE. 6.20. In the context of the above finding, we are now required to examine the claim of the assessee whether on account of rendering of non-routine service was the assessee entitled to receive compensation with a mark-up from its AE. Arguments have been addressed on behalf of the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for our consideration is the remuneration model of a distributor. On examination of contemporary Guidelines/jurisprudence on the subject, we are of the view that a distributor is rewarded by the entity for whom the distributor works and the rewards are guaranteed upto an extent and the risk component vis-à-vis a manufacturer is necessarily very less. The rewards can be and generally are based on pricing adjustments and can also be compensated over and above that if greater services are rendered and pricing adjustments have not covered the cost of routine services rendered. Generally speaking the remuneration model for a distributor is reward-based and rewards are based on the quantity of sales. The rewards are guaranteed for a distributor on the performance of all the functions of a distributor which as per the Importation Agreement in the present case, the assessee has been tasked with "full utilization of the market potential of the contract goods by applying its best efforts and adequate resources towards effective sales promotion and advertising for the contract goods". Accordingly we on consideration of the TP study and the terms of the contract affirm our conclusion a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distributor necessitated the incurring of AMP spend and the cost of performing this function has been factored in the pricing arrangement consequent to which the assessee has shown high profits at the net level as well as the gross margin levels vis-à-vis the comparables of the TPO. It is seen that the comparables based on the intensity of functions performed by comparing the functionally comparable untainted companies had been provided by the assessee before the TPO the comparables have been accepted by the TPO at para 10.5 of his order. Considering these fresh comparables alongwith the 3 comparables retained by the TPO from the original 5 comparables, the TPO calculated the bright-line as AMP/sales of the comparables at 1.99%. The same is depicted from the original synopsis filed by the assessee on 18th February 2013:- "1.4 During the TP assessment proceedings the Learned ('Ld. ') Transfer Pricing Officer (TPO'), alleged that BMW India has incurred excessive Advertising, Marketing and Promotional ('AMP') expenses of 7.09% as a percentage to sales. The Ld. TPO alleged that the AMP/Sales ratio that BMW India had incurred is excessive vis-a-vis its comparable companies whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, we now proceed to consider the position on facts whether in the case of a distributor whose remuneration model is based on rewards as set out in the Importation Agreement was the assessee still required to be reimbursed following the L.G. Electronics decision. 6.25. For the said purpose, we have referred to the Importation Agreement which clearly sets out that the assessee shall be charged such a price which shall ensure adequate recovery of total costs of the contract goods "plus" representative profits. In the facts of the present case, it has been submitted on behalf of the assessee before the TPO as well as the DRP and also before us that the GP/sales ratio of the assesse is 27.36% as compared to the similar ratio of the comparables considered by the TPO which is 13.65%. Even the OP/sales ratio of the assessee vis-à-vis the comparable is higher namely 13.52% in the case of assessee as opposed to 2.11% in the case of the comparable companies. The AMP/sales ratio of the assessee is 7.09% as compared to the mean of the similar ratio of the comparables which is 1.99%. It may necessary be kept in mind that these ratios are calculated on the basis of the amounts mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les and Arm's Length OP/sales) which is greater than AMP spend of Rs.33.93 crore from which routine expenses are to be allowed. These figures have not been disputed by the department. In the said background rejecting the main ground of the assessee that no services were rendered by the assessee to its AE for which compensation was to be calculated and remunerated, we hold on a detailed reading of the terms of the Importation Agreement and perusing the facts and figures addressing the AMP spend vis-à-vis the comparables and upholding the application of the bright-line application as an accepted tool, we conclude that services over and above the routine services as a distributor have been rendered by the assessee which has resulted in brand building for the AE for which compensation has to be computed which has been done. Also on consideration of the terms of the Importation Agreement and the facts and figures addressing the incurring of expenditure and the resultant profits of the assessee vis-à-vis the comparable both at the net level and the gross level, we hold that in the facts of the present case the assessee has demonstrated that the compensation for the higher s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. In the facts of the present case, it has been emphasized that for exploiting the brand logo etc, no royalty has been paid by the assessee to its foreign AE. It is also necessary to note the fact that the AE has provided the assessee with a loan at a rate better than the external bench-mark, the average PLR as per the assessee's TP study is 13.30% and the BMW India's effective Rupee cost on the loan is 7.43%. This fact is borne out from the para 5.12.7 at page 54 whereas the projected financial information for 2008-09 to 2010- 11 addressing marketing cost is placed at page 69. 6.27. We on considerations of the contemporaneous international jurisprudence which supports the claim of the assessee are of the view that even if considering the arguments of the Ld. CIT DR for a moment, the contemporaneous international jurisprudence is ignored even then the claim of the assessee has merit as the assesse with the AE can agree to be rewarded/remunerated by price adjustments to earn profits which include the cost of rendering services with profit. The department cannot insist in the absence of any provision under the Act that the mode of compensation to the assessee by the foreign AE nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owards building the brand of the AE as the same already stood factored in the pricing adjustment of the contract goods. As such the occasion to consider the applicability of mark-up does not arise. We further find support form the decision of the Special bench in L.G. Electronics case which considers a deviance from the view taken in the case of an assessee who incurred higher AMP vis-à-vis the comparables in the initial years. As discussed in the earlier part of this order, the DRP specifically notes that this is the first full year of assessee's functioning. The TP study referred to by us in the earlier part of this order addresses the prevalent competition in the market and the fact that the sector is highly competitive becomes more so for a new entrant where there is a declining trend seen in the automobile sale market coupled with entrenched position of early entrants in the sector. 6.29. Before parting, we would briefly address certain other issues on which arguments have been addressed. One of the issues is that date of termination has not been mentioned which according to the Revenue is a detrimental facts and makes the agreement tenuous as with a mere notice of 6 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2013 which for want of specific arguments the Co-ordinate Bench had restored to the AO in RayBan Sun Optics India Ltd. 6.31. Before parting, we would also want to address the role of OECD Guidelines and ATO Guidelines etc. for interpreting and adjudicating on the issues arising in transfer pricing issues on which the parties have addressed at length invoking at times strong and patriotic sentiments. On a consideration of the issues and the orders and judgements on the issue, we are of the view that there can be no dispute with the principle that to the extent OECD Guidelines are repugnant to the Indian Income Tax provisions, the same have no role to play. As such if the provisions of the Statute and the Rules framed thereunder lay down a specific criteria which is to be met then there is no doubt that the provisions of the India Income Tax Act shall prevail whatever may be said to the contrary in the OECD TP Guidelines or the ATO Guidelines or any other International Legislation or decision thereunder. For instance where the Indian Statute and the Rules framed there under mandate the use of single year data or consideration of arithmetic mean, the use of multiple year data and us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It may not be out of place to mention that that "bright-line test" does not from part of Indian Income Tax Legislation and has been borrowed from the US Legislation. Section 1.482-4 of US-1RC incorporates Bright-Line Test within the US Legislation and the Revenue heavily relies on it to calculate the non-routine AMP spend. Similarly for valuation of AMP spend resulting in intangible benefits to the AE by building/promoting their brand OECD TP Guidelines are frequently resorted to by the Revenue to address that they have a value for which compensation should be computed then how and why a discussion on the possible and acceptable methods by which remuneration for the services rendered should be ignored on the arguments that the OECD Guidelines ventilate the view of developed economies and do not reflect the view of the developing economies is surprising. 7. Accordingly for the detailed reasons given hereinabove, Ground no-3,4 & 6 of the assessee are rejected and in view of the finding in Ground No-1 and additional Ground no-7, Ground No-2 becomes infructuous. Ground no-5 in view of the specific terms of the Importation Agreement borne out by the facts of the case for the detaile ..... X X X X Extracts X X X X X X X X Extracts X X X X
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