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TMI Blog2015 (3) TMI 580X X X X Extracts X X X X X X X X Extracts X X X X ..... n undertaken by the resident Indian assessee towards brand building for the brand owner, i.e. the foreign Associated Enterprise ('AE', for short). Other core issues pertain to aspects of arm's length pricing of international transactions. 2. The details of appeals and cross-appeals by the assessees and the Revenue and the assessment years involved are as under: Assessment year ITA No. Assessee Cross Appeal by Revenue 2008-09 16/2014 Sony Ericsson Mobile Communications India Pvt. Ltd / Sony Mobile Communication India Pvt. Ltd. Now known as, Sony India Ltd. 155/2014 2008-09 70/2014 Discovery Communications India 218/2014 2006-07 521/2013 Canon India Pvt. Ltd 132/2014 2008-09 92/2014 Daikin Air Conditioning (India) Pvt. Ltd 214/2014 2007-08 93/2014 Daikin Air Conditioning (India) Pvt. Ltd 215/2014 2008-09 99/2014 Haier Appliances Pvt. Ltd 642/2014 2006-07 100/2014 Haier Appliances Pvt. Ltd 621/2014 2007-08 101/2014 Haier Appliances Pvt. Ltd 622/2014 2008-09 109/2014 Reebok India Company 213/2014 2007-08 512/2014 Casio India Company Pvt. Ltd 618/2014 2008-09 513/2014 Casio India Company Pvt. Ltd 498/2014 The common substantial q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Intangible rights in the brand-name/ trademark/ trade-name were owned by the foreign AEs. There is no dispute or lis that the assessed are AEs who had entered into controlled transactions with the foreign AEs. It is also uncontested that the controlled international transactions can be made subject matter of the transfer pricing adjustment in terms of Chapter X of the Income Tax Act, 1961 ('Act', for short). 4. In order to appreciate the controversy, we are reproducing in brief the findings of the Assessing Officer/TPO and the Income Tax Appellate Tribunal ('Tribunal', for short) in the case of Sony Mobile Communication Ltd, i.e. the assessee/appellant in ITA No.16/2014 and the assessee/respondent in ITA No.155/2014 filed by the Revenue pertaining to assessment year 2008-09; Reebok India Company Ltd., i.e. the assessee/appellant in ITA No.109/2014 and the assessee/respondent in ITA No.213/2014 filed by the Revenue relating to assessing year 2008-09; and, Canon India Pvt. Ltd., i.e. the appellant in ITA No.512/2013 and respondent in ITA No.12/2014 filed by the Revenue relating to assessment year 2006-07. The said three assessees have been selected because in the case of Sony Mob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d included credit notes worth Rs. 73,83,70,409/- received from the overseas/foreign AEs in December, 2007 and March, 2008. 7. The TPO held that Rs. 73,83,70,409/- represented excess price charged by the AE and were issued to achieve the arm's length return in accordance with the business model of the assessee. He observed that the total AMP expenditure of Rs. 115,72,15,159/- on gross sales of Rs. 1,638,68,08,123/- gave AMP to sales ratio of 7.06%. Business promotion and selling expenses of Rs. 49,66,58,381/- were included and added to arrive at the figure of AMP expenses of Rs. 115,72,15,159/-. Out of the 18 comparables suggested by the assessee, the TPO accepted 12 and rejected 6 for they were involved in brand promotion activities being the owners of the brand-name or the intangibles. The mean AMP to sales ratio of the 12 comparables was 3.35%. This figure of 3.35% was treated as the 'bright line' and accordingly the AMP expenditure, exceeding the said ratio was treated as non-routine or abnormal. Thus, Rs. 60,82,57,087/- was treated as abnormal or excessive AMP expenditure. To this, the TPO added a mark-up of 15%. Rs. 73,83,70,409/- received as credit notes was not set off agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions: " S. No. Nature of Transaction Method used by assessee Amount 1. Import of apparels and footwear for resale RPM 34,75,63,922 2. Royalty CUP 15,28,77,527 3. Identification of factories in India for sourcing/exporting the goods TNMM 73,87,878 The aforesaid table also gives details of method adopted by the assessee. The assessee had received reimbursement of advertisement and other expenses to the tune of Rs. 44,67,273/- from the AE. 12. In the appeals, we are concerned with the international transaction at Sl. No.1, i.e. import of apparels and footwear for resale in India. Transaction No.2 also arises for consideration, but has been examined separately. The assessee had adopted RP Method for arm's length determination of transaction No.1. The gross margin earned and declared by the assessed from controlled transactions was 42.95%, compared to 42.52% earned from internal comparables, i.e. transactions of the assessed with unrelated parties. Thus, it was claimed that the price of uncontrolled transaction was at arm's length. 13. The TPO quoted and relied on the clauses of the agreement dated 1st March, 1995, with Reebok International Ltd., Engla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure of Rs. 39,01,24,915/- to reach a figure of Rs. 55,62,36,980/-, which gave the ratio of AMP to sales of 12.33%. 15. On the question of 'bright line' comparables, the TPO rejected companies like Colgate India Ltd., Dabur India Ltd., GlaxoSmithKline Consumer Healthcare Ltd., Hindustan Unilever Ltd., Marico Ltd., Trent Ltd., and Emami Ltd., with the ratio of AMP to sales of Rs. 12.52%, observing that these companies were engaged in promotion of their own name and the AMP expenses incurred by them were non-routine. Another list of five comparables was rejected on different grounds. This list included Khadim India Ltd. and Liberty Retail Revolutions Ltd. engaged in similar business of footwear. 16. The TPO adopted the following comparables for bright line limit: S.No. Name of the Company AMP Expenses/sales (%) 1. Bhartiya Global Marketing Ltd. 2.15 2. Globus Stores Pvt. Ltd. 4.66 3. Pokarna Fashions Ltd. 1.49 4. Snowhite Apparels Ltd. 1.72 Mean 2.51 17. On this base/ratio of 2.51% of AMP to sales, excess or disproportionate AMP expenses in the case of the assessed were calculated as under: " Value of Gross Sales 451,23,49,038/- AMP/Sales of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO shall examine the veracity of description and quantification of the amount of selling expenses and accordingly, allow the assessee's claim. ii) After deducting the selling price from the AMP expenses as mentioned above, the TPO shall decide the issue of AMP expenses by applying the proper comparables after hearing the assessee and keeping in view the Special Bench directions in this behalf. CANON INDIA PVT. LTD. ITA No.521/2013 (by the assessee) and ITA No.132/2014 (by the Revenue) Assessment Year 2006-07 22. The assessee, Canon India Pvt. Ltd., is a wholly owned subsidiary of Canon Singapore Pte Limited. The assessee had started Indian operations in 1996 and had entered into various international transactions with Canon group of companies. It had entered into agreements pertaining to purchase and re-sale of Canon products like photocopiers, fax machines, printers, scanners and cameras in India. Besides, the assessee was also engaged in software development and related services to Canon group of companies. As per the transfer pricing report, the assessee had entered into the following international transactions: Table 1 S N . Nature of transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notion that it was incurred on behalf of foreign trademark owner." 24. Reference was made to the decisions in DHL Inc. and subsidiaries and GlaxoSmithKline Holding (America's) Inc., and Australian Tax Office Guidelines to hold that the AMP expenses should be separately benchmarked. 25. The TPO held that the assessee had incurred AMP expenses totalling Rs. 37,88,97,359/-, or 12.08% of the total sales, whereas subsidy of Rs. 12,10,48,124/- was received. Thus, balance expenditure of Rs. 25,78,49,235/- was borne by the assessee. The assessee had failed to bench mark international transaction of Rs. 12,10,48,124/-. He rejected the argument of the assessee that the subsidy was to lend financial support and this support was akin to discount and reduction of sale price, relying on the written submission of the assessee, bifurcating the subsidy in the following manner: Computation of subsidy Description Amount (INR) Price support for government tender 43,65,000 Advertisement activities for DV 15,66,296 Channel schemes and consumer promos 22,52,385 Consumer promo awareness building 23,51,211 Product launches and market research report 26,16,549 Retail activities and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Advertisement and Promotion for DV -To implant promoters in stores for 6 months 2,86,250 Advertisement and promotion for DC -1 GB CF card for promo 7,80,000 Advertisement and promotion for DC POS MERCHANDISING, PHOTOFAIR 19,02,556 Shows and seminar for copiers 18,94,916 Black & white and colour advertisement for copiers 18,53,126 Advertisement and promotion - Expenses BIS-PGA 3,12,236 Total 12,10,48,124 (The table is extracted from reply of the assessee dated 20.03.2009)" 26. The Indian assessed was described by TPO, as limited risk distributor whose profit margin during different financial years were as under: F.Y. 2001- 02 2002- 03 2003- 04 2004- 05 2005-06 Profit margin of the assessee -1.33% -0.75% 4.82% 4.47% 4.10% But the profit margin of Canon Inc., Japan was substantial higher and was as under: F.Y. 2001- 02 2002- 03 2003- 04 2004- 05 2005-06 profit margin of Canon Inc. Japan (AE) * 9.68% 11.23% 14.01% 15.92% 16.30% *the profit margins of the Canon as mentioned in the table pertain to year 2001,2002,2003,2004 and 2005 as extracted from Orbis database." 27. He did a comparison between percen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted the comparables adopted by the assessee to benchmark the international transaction for purpose of non-routine AMP expenses, recording:- Company Name Gross advertisement sales promotion and related expenditure Trade discount Operating income from third parties Percentage of Adv. Exp to sales Comments ACI Infocom Limited NA NA 357,682,028 NA Not separately disclosed in financials Compuage Infocom Limited NA NA 2,150,581,000 NA Not separately disclosed in financials HCL Infosystem Limited NA NA 24,362,000,000 NA Repair schedule 17. advertisement publicity and entertainment net of reimbursements Kilbum Office automation Limited 6,099,997 NA 292,627,187 2.08 Trade discount not shown separately Savex computers Limited 96,628,689 NA 2,879,632,210 3.36 Trade discount not shown separately Spice Limited 61,046,000 NA 1,195,018,000 5.11 Trade discount not shown separately Spice systems Limited 49,146 NA 19,187,953 0.26 Trade discount not shown separately SPS international Limited 951,969 NA 110,577,806 0.86 Trade discount not shown separately Universal print systems limited 759,065 NA 124,953,087 0.61 Trade discount not shown se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer/TPO. The details of the subsidy, trade and volume discount, cash discount and commissions as quantified were:- " Particulars AY 2006-07 AY 2007-08 AY 2008-09 Amount (INR) Amount (INR) Amount (INR) A AMP including trade discount and volume rebates and before reducing subsidy 378,897,359 (para 7.26 page 200 of PB 1) 581,062,073 (para 7.29 page 388 of PB 2) 958,063,110 (para 4.2 page 46 of PB 1) B Less: Subsidy 12,10,48,124 27,10,87,594 50,16,13,022 C Less: Trade Discount & volume rebates 14,00,83,068 15,59,68,614 19,65,29,801 D Less: Cash Discount / Commission 2,06,76,094 - 51,49,784 E Total AMP expendi-ture to be consider-ed for purpose of comparison in light of Special Bench Order 9,70,90,073 15,40,05,865 25,47,70,503 " 35. On reducing the aforesaid figure from the AMP expenses of Rs. 37,88,97,359/-, the total AMP expenses were computed as Rs. 9,70,90,073/-. 36. Subject to the aforesaid, an order of remand was passed to apply and determine the arm's length price of the AMP expenses by applying the ratio of the majority judgment in L.G. Electronics India Pvt Ltd. (supra). B. L.G. Electronics India Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s entitled to re-categorize any transaction; (i) where the economic substance of the transaction differs from its form; (ii) where the form and substance of the transaction are the same, but the arrangements made in relation to the transaction, when viewed in their totality, differ from those which would have been adopted by an independent enterprise behaving in a commercially rational manner. Relying upon the decision of the Delhi High Court in CIT versus EKL Appliances Ltd. [2012] 345 ITR 241 (Del), which refers to the OECD Commentary carving out the two exceptions, it has been held that the second exception was applicable. Thus, the TPO could have re-categorized the international transaction as declared to determine arm's length price of the unravelled and deciphered international transaction as per the mandate of Section 92CA(2B) of the Act. (vi) In order to determine and decide whether an assessed had an AMP international transaction with an AE, the TPO could rely upon the 'bright line test', both to determine and re-categorize the international transaction, and to compute the contractual value or the price of the said transaction. Application of the 'bright line test' was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose answers have considerable bearing on the question of determination of the cost/value of the international transaction of brand/logo promotion through advertising, marketing and promotion expenses incurred by the Indian associated enterprise for its foreign entity : 1. Whether, the Indian associated enterprise is simply a distributor or is a holding a manufacturing licence from its foreign associated enterprise? 2. Where the Indian associated enterprise is not a full-fledged manufacturer, is it selling the goods purchased from the foreign associated enterprise as such or is it making some value addition to the goods purchased from its foreign associated enterprise before selling it to customers? 3. Whether, the goods sold by the Indian associated enterprise bear the same brand name or logo which is that of its foreign associated enterprise? 4. Whether, the goods sold bear logo only of foreign associated enterprise or a logo which is only of the Indian associated enterprise or is it a joint logo of both the Indian entity and its foreign counterpart? 5. Whether, the Indian associated enterprise, a manufacturer, is paying any royalty or any similar amount by whatever name ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re economic owners of the brand and in commercial sense their right in the brand name / trademark should be accepted. Concept of economic ownership of a brand, albeit relevant in commercial sense, was not recognized for the purposes of the Act. Retailers or dealers of electronic products etc. who sell branded products do not become economic owners of the branded products sold by them. Paragraph 17.6 reads: "17.6. In principle, we accept the contention of the ld. AR about the necessity of choosing properly comparable cases in the first instance before starting the exercise of making comparison of the AMP expenses incurred by them for finding out the amount spent by the assessee for its own business purpose. However the way in which such comparable cases should be chosen, as advocated by the ld. AR, is not acceptable. He submitted that only such comparable cases should be chosen as are using the foreign brand. We find that choosing cases using the foreign brand ex facie cannot be accepted. It is but natural that the AMP expenses of such cases will also include contribution towards brand building of their respective foreign AEs. In such a situation the comparison would become meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the two AEs, was also rejected on the ground that the effect of five methods prescribed under Chapter X was towards one end, i.e. determination of arm's length price of an international transaction and consequences of each method qua the international transaction cannot be at variance. Thus, TNM Method should not be applied at entity level. (xvi) The contention of the assessed that set off or adjustment of 'excessive'/'higher' net profit declared on international transactions should be allowed, if the AMP expenses were treated as a separate international transaction, was rejected, relying upon Section 92(3) of the Act. Set off or adjustments cannot be allowed in respect of profits and gains of one international transaction against another international transaction. (xvii) The Assessing Officer/ TPO without specific reference had in substance applied the Cost Plus Method ('CP Method', for short) for computing the arm's length price of the international transaction, i.e. the AMP transaction between the AE resident abroad and the Indian assessed. The CP Method was one of the methods prescribed in Chapter X of the Act. (xviii) Mark-up is mandated under the CP Method. The mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Pvt Ltd. (supra) with which we concur and hold are as per the mandate of the law and the Act. C. Findings on which we concur with the Tribunal Section 92CA of the Act 41 Our decision in this and ensuing paragraphs would decide substantial question No.1. For our decision, we would like to reproduce Section 92CA Clauses (1), (2), (2A), (2B) and (2C) of the Act which read: " 92CA. Reference to Transfer Pricing Officer.-(1) Where any person, being the assessee, has entered into an # international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arm's length price in relation to the said #international transaction or specified domestic transaction under section 92C to the Transfer Pricing Officer. (2) Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm's le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt assessments etc. are without jurisdiction and authority of law. 43. This argument on behalf of the assessees would have been weighty and perhaps justified, if the Legislature by the Finance Act, 2012 had not inserted sub-section (2B). The said Sub-Section is squarely applicable and negates the challenge. In these appeals under Section 260A of the Act, we are not concerned with the constitutional validity of the aforesaid retrospective amendment and are only required to interpret the said provision and apply the retrospective provision if it is applicable. Under sub-section (2B) to Section 92CA, a TPO to whom reference has been made under sub-section (1), is entitled to apply the provisions of the Chapter in respect of an international transaction for which the assessee has not furnished a report under Section 92E of the Act. Thus, where an assessee has failed or not furnished a report in respect of an international transaction, a specific reference for the said transaction under sub-section (1) is not required. It is sufficient, if arm's length pricing issue of any international transaction has been referred to the TPO. 44. On careful analysis of sub-section (2B) to Section 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 260A of the Act. 47. The majority decision of the Tribunal in L.G. Electronics India Pvt Ltd. (supra) has rightly drawn a distinction between sub-section (2B) and sub-section (2A) to Section 92CA of the Act. Sub-section (2A) was inserted in 2011, i.e. nearly one year before insertion of Section (2B) by the Finance Act, 2012. Sub-section (2A) has not been given retrospective effect and it applies only w.e.f. 1st June, 2011. Sub-section (2A) applies to any international transaction or specified domestic transaction of which reference has not been made to the TPO under sub-section (1). With effect from 1st June, 2011, the TPO can go into arm's length pricing of an international transaction or a specified domestic transaction not referred to him. The distinction between sub-section (2A) and (2B) being that the first clause relates to a declared international transaction, i.e. in respect of which a report under Section 92E has been furnished, whereas sub-section (2B) refers to international transactions in respect of which report under Section 92E is not furnished. 48. Decision in the case of CIT versus Max India Ltd., [2007] 295 ITR 282 (SC) is not applicable as it examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax [2013] 351 ITR 35 (Guj) would no longer be applicable as the ratio of the said decisions reflects the position of the statute before enactment of Sub-Section (2B) with retrospective effect. 50. With the aforesaid observations, we decide the first substantial question of law in abstract without reference to the facts as a legal proposition, in favour of the Revenue and against the assessee. Transaction and International Transaction; Difference between Section 37(1) and Chapter X of the Act 51. The term 'international transaction' has been defined in Section 92B. The section also had retrospective amendment which was inserted by the Finance Act, 2012 w.r.e.f. 1st April, 2002. Section 92B(1) reads as under: " Meaning of international transaction. 92B - (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of arm's length price, per se does not arise, when deduction under Section 37(1) is claimed. Expenditure and decision of the assessee, whether or not to incur the said expenditure; the quantum thereof, cannot be a subject matter of challenge or disallowance by the Assessing Officer, once it is accepted that the expenditure was wholly, i.e. the quantum of expenditure incurred was fully, and exclusively for business purpose. In Sassoon J. Davit & Co. Pvt. Ltd. versus CIT [1979] 118 ITR 261 (SC), it has been held that an assessee can claim deduction for expenditure incurred for business purposes and no one else has authority to decide whether or not the assessee should have incurred the said expenditure. The expenditure cannot be disallowed wholly or partly because it would incidentally benefit a third person once the requirements of Section 37(1) were satisfied. Reference can be also made to the decision of Delhi High Court in CIT versus Nestle India Limited [2011] 337 ITR 103 (Del), holding that the question of reasonableness or measure of expenses to be allowed cannot be a subject matter of adjustment or disallowance under Section 37(1) of the Act. 55. Section 40A(2) clause (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprises as distinct from uncontrolled transactions which are between two entities which are not associated and operate on arm's length basis. Transfer Pricing adjustment enables the tax administration of a country to correct the transfer price and compute the same on arm's length price, to check, avoid and ensure correct payment of taxes. Arm's length price in simple words means fair market price. The reason is that each entity belonging to MNE is treated as a separate profit centre and every entity should necessarily make profit and loss at arm's length conditions. This is prevented by correcting either under charging or over charging by AE in intra group transactions. The key issue, therefore, in transfer pricing is valuation of the intra group transfers. The arm's length principle as set forth in Article 9 of the OECD Model Convention stipulates that "where conditions are made or imposed between two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profit which would, but for those conditions, have accrued to one of the enterprises, but by reason of those conditions, having so accrued, may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. xxx Computation of arm's length price. 92C. (1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely:- (a) comparable uncontrolled price method; (b) re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer either to assess or reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year the proceedings of which have been completed before the 1st day of October, 2009. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction [or specified domestic transaction] has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction [or specified domestic transaction] have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provided. An international transaction, therefore, means transaction between two or more AEs when either one or both are non-resident; the transaction should be in nature of sale, purchase or lease of tangible or intangible property or in the nature of provision for services or lending of money or any other transaction having bearing on the profits, income, losses or assets. A mutual agreement or arrangement for allocation of expenses would also be an international transaction. Section 92F defines the term "transaction" broadly and is a very wide definition, and we observe, that clause (v) thereof stipulates that an arrangement, understanding or action in concert would be a transaction whether or not such arrangements, etc. are formal or whether or not such arrangements are legally enforceable. Under Section 92 (1) and (2), the cost, expense allocated or apportioned or as the case may be contribution by an AE shall be determined having regard to the arm's length price of such benefit, service or facility. 64. Section 92C(1) is of significance and relevance as it stipulates that arm's length price in relation to an international transaction can be determined by any of the five me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h price. This method has been explained below when examining the individual case of M/s Canon India Ltd. and Reebok India Company Ltd. Cost Plus Method ('CP Method', for short) requires determination of the appropriate gross profit margin which would be charged by a comparable and adding the same mark up to the expenditure/cost incurred by the AE to determine the appropriate profit in view of market conditions and functions performed. The aforesaid three methods are treated as traditional transactional methods. 66. TNM Method or Profit Split Method are called transactional profit methods or profit based methods. United Nations' Practical Manual on Transfer Pricing in paragraph 1.5.10 observes that there is growing acceptance of practical importance of profits based methods. TNM Method has been elucidated in detail below. Profit Split Method takes the combined profit earned by two related parties from one or series of transactions and then divides those profits using economically valid defined basis and aims on replicating the division of profits which would have been anticipated in an agreement made at arm's length. It requires working back from the profit to the price. &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red with a tested party. The comparables can be internal i.e. when one of the AEs enters into a similar uncontrolled transaction with an independent enterprise; or external i.e. involving an independent enterprise in the same market or industry. It is obvious that an internal comparable could in several cases be more dependable and reliable, than an external comparable. A comparable is acceptable, if based upon comparison of conditions a controlled transaction is similar with the conditions in the transactions between independent enterprises. The comparison must be with reference to the comparability analysis as elucidated in paragraph 5.1.1 of the United Nations Practical Manual on Transfer Pricing. In other words, the economically relevant characteristics of the two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate the effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... size of market, extent of competition, position of buyers and sales availability or risk of competitive goods and services, level of demand and supply sold in a particular region, consumer purchasing power, nature and extent of government control, labour and capital, transportation, level of the market, i.e. retail or wholesale and so forth. The Rules and the analytical steps. 71. Sub-Sections (1) and (2) to Section 92C are applicable to the assessed, as well as the Assessing Officer invoking power under Sub-Section (3) to Section 92C of the Act. As noted above, sub-section (2) to Section 92C stipulates that most appropriate method, out of the methods specified in sub-section (1) shall be applied to determine the arm's length price in the manner as may be prescribed. Rule 10C prescribes the manner for determining the most appropriate method. Rule 10C reads:- "10C. (1) For the purposes of sub-section (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 or specified domestic transaction, and which provides the most reliable measure of an arm's length price in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty and accuracy of adjustment, which can be made between the tested and uncontrolled transactions and between enterprises. Lastly and significantly, it refers to nature, extent and reliability of assumption required to be made for application of the method. 73. Rule 10B after elucidating on the five methods, in Sub-rule (2) states that comparability of an international transaction, i.e. the tested transaction, with an uncontrolled transaction shall be judged in the manner stipulated therein. The said Rule reads:- "10B. xxx (2) For the purposes of sub-rule (1), the comparability of an international transaction or a specified domestic transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, ris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly affect the price or the cost charged or profits arising from such transactions in open market. Uncontrolled transaction can be also treated as a comparable, when reasonably adequate adjustments can be made to eliminate material effect of difference(s). 76. It must be stated that transfer pricing is not an exact science but a method of legitimate quantification which requires exercise of judgment on the part of the tax administration and the taxpayer. It is method and formula based and, therefore, is rational and scientific. However, not being perfect or infallible, first and the second proviso to sub-section (2) along with stipulations in Sub-section (2A) and 2(B) of section 92C posit a 'getaway' clause when the arm's length price so determined and the controlled price does not exceed 5%( reduced to 3% w.e.f. 1st April, 2012). In such cases the actual price paid or received by the assessed from the foreign AE is not disturbed. In other cases, the transaction price gets substituted with the arm's length price so determined. Sub-section 2A to Section 92C was inserted by the Finance Act, 2012 with retrospective effect from 1st April, 2002. It states that where the arm's length pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonableness of the result for the determination is to ascertain a fair and just result. G. Section 92(3) of the Act and Bundled / Inter-Connected Transactions 79. At this stage and before we examine the TNM Method exhaustively, we deem it necessary to interpret and refer to in some detail sub-section (1) to Section 92C and reference to the term 'transaction' with the vowel 'an', which has been interpreted by the majority judgment of the Tribunal to mean a single independent transaction and not a group or bundle of transactions. We do not think that use of vowel 'an' or the word 'transaction' instead of the word 'transactions' should be given undue notability and prominence. One of the primary rules of statutory construction is that singular includes plural and vice-versa. This rule applies unless a contrary intention is manifest and exhibited. Merely because a statutory provision is drafted in singularity as opposed to plurality, is not enough to exclude application of the general rule that singular includes plural. The rule is not to be discarded on the ground that the relevant provision is singular or plural and the subsidiary and ancillary provision follow the same patte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81. Similarly, sub-rule (3) to Rule 10B refers to transactions being compared or comparison of the enterprises entering into such transactions likely to affect the price or cost charged etc. A reading of Rule 10C reassures and affirms that the general principle of plurality is not abandoned or discarded. 82. There is considerable tax literature and text that CUP Method, i.e. Comparable Uncontrolled Price Method, RP Method, i.e. Resale Price Method and CP Method, i.e. Cost Plus Method can be applied to a transaction or closely linked, or continuous transactions. Profits Split Method and TNM Method grouped as 'transactional profit methods', can be equally effective and reliable when applied to closely linked or continuous transactions. Thus, it would be inappropriate to proceed with the arm's length computation methods, with a pre-conceived suppositions on singularity as a statutory mandate. Clubbing of closely linked, which would include continuous transactions, may be permissible and not ostracized. Aggregation of closely linked transactions or segregation by the assessed should be tested by the Assessing Officer/TPO on the benchmark and the exemplar; whether such aggregation/ seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction" 85. Sub-clause (i) refers to net profit margin realized by an enterprise from an AE in an international transaction which could be with reference to cost incurred; sales affected; assets employed or to be employed in an enterprise or having regard to any other base. Thus, Sub-clause (1) refers to net profit in proportion to the selected base. The appropriate base is referred to as the Profit Level Indicator ('PLI', for short). Generally, the net profit is applied with reference to sales, i.e. operating profit margin; operating expenses, also referred to as the berry ratio; and operating assets, i.e. return on capital. Clause (i) above, gives a wider selection choice by stipulating an optional base with reference to any other base. The selection, it is obvious, must be appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rolled and uncontrolled transactions in comparison with resort to gross profit margins. Yet the net profit indicators have potentiality to introduce an element of volatility, primarily for two reasons. Firstly, factors which do not affect gross profit margin and prices can influence net profit indicators due to variation of operating expenses or vice-versa. This potentiality has reference to variation in operational expenses including AMP expenses. The other factors include tax-payers competitive position in the form of price and margins and in some cases, it may be difficult to eliminate or compute the effect of these factors. These difficulties in applying or accepting the TNM Method arise when there is complexity of functions and each party to the transaction(s) makes valuable unique contribution. Reliability of the TNM Method is sufficiently certain where one of the parties makes all contribution involved in the controlled transaction. This is the position even as per the Revenue's case in the present set of appeals. Revenue has asserted that the Indian subsidiaries, i.e. the assessees are mere dummies which implement, promote and incur AMP expenses for building brand value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le value additions by the subsidiary AEs. In paragraph 22.9, the majority decision has observed that all costs including the AMP expenses are independent of cost of material. This indicates that the observations have been made with reference to manufacturing activities. It would not be appropriate and proper to apply the TNM Method in case the Indian assessed is engaged in manufacturing activities and distribution and marketing of imported and manufactured products, as interconnected transactions. Import of raw material for manufacture would possibly be an independent international transaction viz. marketing and distribution activities or functions. We have earlier used the term 'plain vanilla distributor'. When we use the words 'plain vanilla distributor' we do not mean plain vanilla situations, but value additions and each party making valuable unique contribution. 93. An example given below would make it clear: Particulars Case 1 Case 2 Sales 1,000 1,000 Purchase Price 600 500 Gross Margin 400 (40%) 500 (50%) Marketing, Sale Promotion expenses 50 150 Overhead expense 300 300 Net profit 50 (5%) 50 (5%) The above illustrations draw a distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a change in case the operating expenses are different in case 1 and case 2, as these relate to operational costs and expenses incurred. Better and more efficient management or other valid ground or contrarily could justify the difference. If there is substantial difference in the said figure which cannot be justified and explained, suitable adjustment is permissible and allowed under clause (iii) of Rule 10B(1)(e). If the said adjustment is made, and the actual net profit margin is computed, the difference of Rs. 20/- as pointed out by the majority judgment of the Tribunal would not arise. In the alternative, the comparable or even TNM Method can be rejected. 96. The United Nations' Practical Manual on Transfer Pricing in paragraph 6.3.12.1 acknowledges that TNM Method is usually applied to broad comparable functions, rather than broad controlled transactions. Return on these functions when measured with the PLI base in proportion to the net profit margins, would get affected by factors unrelated to arm's length pricing, which is a negative factor, and for this reason TNM Method is typically applied when the related parties are engaged in continuous series of transactions and one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m contracts for the supply of commodities or services, 2. Rights use intangible property, and. 3. pricing a range of closely linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm's length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis. 3.10 Another example where a taxpayer's transactions may be combined is related to portfolio approaches. A portfolio approach is a business strategy consisting of a taxpayer bundling certain transactions for the purpose of earning an appropriate return across the portfolio rather than necessarily on any single product within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax administration should nonetheless consider whether in total the transfer pricing for the entire package is arm's length. 3.12 Even in uncontrolled transactions; package deals may combine elements that are subject to different tax treatment under domestic law or an income tax convention. For example, royalty payments may be subject to withholding tax but lease payments may be subject to net taxation. In such circumstances; it may still be appropriate to determine the transfer pricing on a package basis, and the tax administration could then determine whether for other tax reasons it is necessary to allocate the price to the elements of the package. In making this determination, tax administrations should examine the package deal between associated enterprises in the same way that they would analyze similar deals between independent enterprises. Taxpayers should be prepared to show that the package deal reflects appropriate transfer pricing." 98. Paragraph 3.9 at the outset states that ideally in order to arrive at more precise approximation, the arm's length computation should be made on transaction to transaction basis. But this valuation may not possible on separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. I. Brand and Brand Building 102. We begin our discussion with reference to elucidation on the concept of brand and brand building in the minority decision in the case of L.G. Electronics India Pvt Ltd. (supra). The term 'brand', it holds, refers to name, term, design, symbol or any other feature that identifies one seller's goods or services as distinct from those of others. The word 'brand' is derived from the word 'brandr' of Old Norse language and represented an identification mark on the produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the air, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such. For my part, I think that if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again.............." 104. "Brand" has reference to a name, trademark or trade name. A brand like 'goodwill', therefore, is a value of attraction to customers arising from name and a reputation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... device by which the consumers identify the goods and services and their source. In the context of trademark, the said mark symbolises the goodwill or the likelihood that the consumers will make future purchases of the same goods or services. Value of the brand also would depend upon and is attributable to intangibles other than trademark. It refers to infrastructure, know-how, ability to compete with the established market leaders. Brand value, therefore, does not represent trademark as a standalone asset and is difficult and complex to determine and segregate its value. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. 106. Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. There are a good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also cases where in spite of extens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -26 records that expenditure on materials and services used or consumed, salary, wages and employment related costs, overheads, etc. contribute in generating internal intangible asset. Thus, it is possible to compute goodwill or brand equity/value at a point of time, but its future valuation would be perilous and an iffy exercise. 108. In paragraph 44 of AS-26, it is stated that intangible asset arising from development will be recognised only and only if amongst several factors, it can demonstrate a technical feasibility of completing the intangible asset so that it will be available for use or sale and the intention is to complete the intangible asset for use or sale is shown or how the intangible asset will generate probable future benefits, etc. 109. The aforesaid position finds recognition and was accepted in Commissioner of Income Tax versus B. C. Srinivasa Setty, (1981) 2 SCC 460 (SC), a decision relating transfer to goodwill. Goodwill, it was held, was a capital asset and denotes benefits arising from connection and reputation. A variety of elements go into its making and the composition varies in different trades, different businesses in the same trade, as one elem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess of profit earning and not in the nature of capital outlay. The expenses in the present case were not incurred once and for all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an on-going expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting the profit earning machinery in motion or not for earning profits. (Also see, CIT versus M/s Spice Distribution Ltd., ITA No.597/2014, decided by the Delhi High Court on 19th September, 2014; and CIT versus Salora International Limited, [2009] 308 ITR 199]) 111. Accepting the parameters of the 'bright line test' and if the said parameters and tests are applied to Indian companies with reputed brands and substantial AMP expenses, would lead to difficulty and unforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Bajaj, Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of brand names. They incur substantial AMP expenditure. If we apply the 'bright line test' with reference to indicators mentioned in paragraph 17.4 as well as the ratio expoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as essential and non-routine; paragraph 17.6 rejecting AEs of reputed brands as comparables; whether the 'bright line tests' comparables mentioned in paragraph 17.4 of the majority decision are justified and correct; whether the CP Method is the appropriate method; and concept and effect of economic ownership of brand. Discussion under the heading 'I' 'Brand and Brand Building', deals and answers several issues. In order to decide remaining aspects, we would like to reproduce the following relevant paragraphs from the majority judgment: "9.10. We do not find any force in the contention of the ld. DR that the mere fact of the assessee having spent proportionately higher amount on advertisement in comparison with similarly placed independent entities be considered as conclusive to infer that some part of the advertisement expenses were incurred towards brand promotion for the foreign AE. Every businessman knows his interest best. It is for the assessee to decide that how much is to be incurred to carry on his business smoothly. There can be no impediment on the power of the assessee to spend as much as he likes on advertisement. The fact that the assessee has spent proportionately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances Ltd. (supra). There is absolutely no doubt that para 17 of the judgment unambiguously lays down that the tax administration should not disregard the actual transaction and substitute other transactions for it. However, it is imperative to note that the proposition laid down in para 17 is not infallible or is not an unexceptionable rule. Caveat has been included in the immediately next para no. 18. Two exceptions have been carved out of the general rule against recharacterization of any transaction as set out in para 17, viz. "(i) where the economic substance of a transaction differs from its form; and (ii) where the form and substance of the transaction are the same but the arrangements made in relation to the transaction, viewed in their totality differ from those which would have been adopted by the individual enterprise behaving in a commercially rational manner." In our considered opinion, the second exception governs the extant situation, as per which, where the form and substance of the transaction are the same, but arrangements made in relation to transaction viewed in totality differ from those which would have been adopted by independent enterprises behaving in a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred AMP expenses towards promotion of brand which is legally owned by the foreign entity. Economic vis-à-vis legal ownership of brand xxx 10.2. We do not find any weight in the contention put forth about the economic ownership and legal ownership of a brand. It is not denied that there can be no economic ownership of a brand, but that exists only in a commercial sense. When it comes in the context of the Act, it is only the legal ownership of the brand that is recognized. If we accept the contention of the ld. AR that it be held as an economic owner of the brand or logo of its foreign AE for the purposes of the Act and hence expenses incurred for brand building, which is legally owned by the foreign AE, should be allowed as deduction in its hands, then incongruous results will follow. It is patent that a manufacturer does not ordinarily sells its goods directly to the ultimate customers. There is normally a chain of middlemen ending with retailer. Going by that logic and descending in the line, the distributors or wholesalers to whom the assessee sells its goods, also become economic owners of the brand on the parity of reasoning that they also exploit the brand for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haviour of one depends on the wish of the other, can never be totally lost sight of. Due to this factor, it becomes significant to verify as to whether the decisions taken by the Indian AE are influenced by its foreign AE. If any decision taken by the Indian AE is found to be uninfluenced, then the transaction is accepted as such by the Revenue at its face value. If however it turns out that the behavior of the Indian AE has been influenced by the foreign AE, then there arises a need for adjustment to that extent by removing the effect of such influence. In fact, the transfer pricing provisions (hereinafter also called `the TP provisions') are aimed at discovering, in the first instance, if there is any influence of the foreign AE over transactions between it and its Indian counterpart ; and if the answer is in affirmative, then by unloading the effect of such influence on the transaction. This entire exercise is executed by firstly visualizing the value of an international transaction between the two AEs; then ascertaining the ALP of such transaction; and then eventually computing the total income of the Indian AE having regard to the ALP of the international transaction. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Now the pertinent question is where to draw such line. If the assessee fails to give any basis for drawing this line by not supplying the cost/value of the international transaction, and further by not showing any other more cogent way of determining the cost/value of such international transaction, then the onus comes upon the TPO to find out the cost/value of such international transaction in some rational manner. 15.8. In the present case, the assessee did not declare any cost/value of the international transaction in the nature of brand building. As such, it fell upon the TPO to find out such amount out of the total AMP expenses incurred by the assessee. In the absence of any assistance from the assessee in determining such cost/value, logically it could have been by first identifying comparable independent domestic cases ; ascertaining the amount of advertisement, marketing and promotion expenses incurred by them and percentage of such AMP expenses to their respective sales ; noting the total AMP expenses incurred by the assessee ; discovering the amount of AMP expenses incurred by the Indian entity for its business purpose, by applying the above percentage of comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igure 2.1, exposits details of Value Chain Analysis of the MNEs and their interaction with third parties including the subsidiaries. The said figure is as under:- 115. In the written arguments filed by the Revenue, it is stated that the various MNEs use different business models, sometimes country specific. Some of the common business models used have been elucidated as under:- (i) Execute licensing agreements with independent parties for manufacturing the product having brands owned by the MNCs. Since these products have established brands, MNCs charge franchise fees or royalty for use of brands and technology developed by them. Prominent examples of this model are Domino's Pizza being sold by independent party Jubilant Food Works Ltd. or undergarments of Jockey brand sole by Page Industries Ltd. (ii) Establish a subsidiary for carrying out the distribution function. Examples of this include various appellants before this court. (iii) Establish a subsidiary for carrying out the distribution and manufacturing function. Maruti Suzuki Ltd. one of the appellants is an example of this business mode. (iv) Establish a subsidiary for manufacturing the product and use independent comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the message of what to expect from a given "brand" (sic, product). Hence, it is difficult to compartmentalise promotion of product or promotion of brand expenses and record them as separate from each other. The aforesaid assertions reflect the thin edge and the difficult path Revenue has adopted in bifurcating AMP expenses into marketing or sale promotions and "brand building" by creating and adopting the "bright line test". We have elaborately discussed the concept of term "brand" and "brand building" and observe that it would be incorrect to treat advertisement as equivalent or synonymous with "brand building" for the latter in commercial sense refers to several facets and components. The primary being the quality and reputation of the product or name, which is acquired gradually and silently over a passage of time. The aforesaid arguments fails to notice the fundamental principle of international taxation and Chapter X of the Act that the foreign AE and the Indian AE are two separate tax centres a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay have certain common worldwide elements and would normally be the creation and premised by the parent foreign AE but the Indian assessee engaged in marketing operations could devise its own marketing strategies, determine as to the nature and type of advertisements, media selection, timings, etc. Even the choice of products could depend upon local/national conditions. While determining the arm's length price, the issue would be whether or not the Indian assessee is adequately compensated by the foreign AE. The Indian assessee also benefits from the increased sales which results in higher profits and more taxable income in India. AMP, i.e. advertisements, marketing and sale promotions, therefore, benefit both the Indian AE, i.e. the assessee and the foreign AE resident abroad. Same is true and correct position even in case of a distribution company, though in the said case sales would increase and there would not be any element of AMP. The fact that increased sales benefit the foreign manufacturer is the reason why services of Indian assessees have been engaged by the AEs resident abroad. This argument itself does not show that brand building is being independently undertaken and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer/ TPO can go and must examine the question whether the assessee is performing functions of a pure distributor or performing distribution and marketing functions, in the latter case, he must examine and ascertain whether the transfer price takes into consideration the marketing function, which would include AMP functions. This would ensure adequate transaction price and hence assure no loss of revenue. When the distribution and marketing functions are inter-connected and reliable comparables are available, arm's length price could be computed as a package, if required and necessary by making adequate adjustments. When the Assessing Officer/TPO comes to the conclusion that it is not possible to compute arm's length price without segregating and dividing distribution and marketing or AMP functions, he can so proceed after giving justification and adequate reasons. At that stage, he would have apportioned the price received or the compensation paid by the foreign AE towards distribution and marketing or AMP functions. The TPO can then apply an appropriate method and compute the arm's length price of the two independently and even by applying separate methods. This will be in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of income to controlled taxpayers, routine contribution will not reflect profit attributable to each controlled taxpayers contribution, but non-routine contribution is not to be accounted for as routine contribution. A non-routine contribution of intangible property may be measured by external benchmarks that reflect the fair market value of such intangible property, or in alternative the relative value of non-routine property contributions may be estimated by capital cost of differentiating the intangible property and all related improvements updates, less an appropriate amount of amortisation based on the useful life of each intangible property. In the present case, none of the parties had applied Profit Split Method and, therefore, the observations in paragraph 1.482-6 would not be of much relevance. Section 1.482-4, however, does state that development or enhancement of intangible property owned by another controlled taxpayer should be accounted for in evaluating the availability of the controlled transaction with comparable transactions. We have quoted the Indian position on the subject under the heading "Brand and brand building". We are not examining and evaluating Profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et distribution rights for a trademark product, where market development activities and extraordinary marketing expenditures are in excess of what comparable independent enterprise with similar rights would incur, adjustment may be required, provided such compensation has not been paid. Reference was made to paragraph 6.38 of the OECD Transfer Pricing Guidelines, which stipulate that the said AE might obtain an additional return from the owner of the trademark perhaps through a lower purchase price of the product or reduction in royalty rate. It could also be direct compensation. For distinguishing short-term and long-term contracts, reference has been made to paragraph 3.74 and 2.130 of the 2010 OECD Transfer Pricing Guidelines, to observe that this has to be determined ordinarily based on the conditions existing at the start of the arrangement and, therefore, the consequent effect that a contract is or is not renewed, ordinarily would not be a factor in its initial pricing. This may be otherwise, if there is evidence at the start of the arrangement to indicate that the contract would be renewed. Therefore, in cases of short-term contract, adjustment would be justified, if there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e United Nations' Manual in Chapter 10 relating to country specific practices notes the Indian stand, but records that the first nine chapters of the Manual provide practical guidance for application of transfer pricing rules based upon Article 9(1) of the U.N. Model Tax Convention and the arms length principle embodied therein. However, there were disagreements on certain points in the sub-committees and Chapter 10 records individual country's view point and experiences for information of readers. This does not reflect a consistent or consensus view of the sub-committee (See paragraph 10.1.1.2) 126. The United Nations' Manual Transfer Pricing in paragraph 10.4.8.15 records that determination of arm's length price in cases of marketing intangibles would involve functional assets analysis of the profile of the Indian entity and the parent company to ascertain whether Indian entity has a risk free, limited risk bearing or risk bearing entity. This mandates identification of the nature, types and stages of development of marketing intangibles, i.e. whether the foreign parties are new entrants into the Indian market and, therefore, related party in India would incur substantial expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this extent, we would disagree with the majority decision in L.G. Electronics India Pvt. Ltd. (supra). Decisions in the case of GlaxoSmithKline and DHL 128. In respect of GlaxoSmithKline, very little information is available except that in 1993 an advance pricing agreement was accepted by the IRS and SmithKline Beecham in respect of sale of certain drugs. Glaxo, was then a competitor of SmithKline Beecham and was marketing a similar drug. In 1992, the IRS initiated audit in the case of Glaxo for the years 1989-1990. In 1994, Glaxo and IRS tried to resolve the dispute through advance pricing agreement, but were unsuccessful. The Double Taxation Avoidance Agreement between U.K. and U.S. was invoked. The dispute, it appears was predicated on IRS's assertion that advertisement and marketing was more valuable in respect of the said drug, whereas Glaxo and the U.K. taxing authority believed that the high transfer price was reasonable because the research and development work was more valuable. In December, 2000, Glaxo merged with SmithKline Beecham Corporation. As noted above, SmithKline Beecham had earlier entered into an advance tax agreement with the IRS in respect of the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rders, do not assist or foster Revenue's stand. Paragraphs 6.36 to 6.39 of the OECD Transfer Pricing Guidelines 133. Transfer Pricing Officers have referred to paragraphs 6.36 to 6.39. For the sake of completeness, we would quote the said paragraphs from the OECD Transfer Pricing Guidelines, which read:- "6.36 Difficult transfer pricing problems can arise when marketing activities are undertaken by enterprises that do not own the trademarks or tradenames that they are promoting (such as a distributor of branded goods). In such a case, it is necessary to determine how the marketer should be compensated for those activities. The issue is whether the marketer should be compensated as a service provider, i.e., for providing promotional services, or whether there are any cases in which the marketer should share in any additional return attributable to the marketing intangibles. A related question is how the return attributable to the marketing intangibles can be identified. 6.37 As regards the first issue- whether the marketer is entitled to a return on the marketing intangibles above a normal return on marketing activities- the analysis requires an assessment of the obligati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he production or revenue, and to what degree. It is also possible that a new trademark or one newly introduced into a particular market may have no value or little value in that market and its value may change over the years as it makes an impression on the market (or perhaps loses its impact). A dominant market share may to some extent be attributable to marketing efforts of a distributor. The value and any changes will depend to an extent on how effectively the trademark is promoted in the particular market. More fundamentally, in many cases higher returns derived from the sale of trademarked products may be due as much to the unique characteristics of the product or its high quality as to the success of advertising and other promotional expenditures. The actual conduct of the parties over a period of years should be given significant weight in evaluating the return attributable to marketing activities. See paragraphs 3.75-3.79 (multiple year data)." 134. The aforesaid paragraphs do not support the Revenue's submission, but stipulate the requirement that the owner of the marketing intangible should adequately compensate the domestic AE incurring costs towards marketing activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on the transaction actually undertaken by the AEs as has been struck by them. We should not be considered as advocating a broad-brush approach but, a detailed scrutinized ascertainment and determination whether or not the aggregation or segregation of transactions would be appropriate and proper while applying the particular Method, is necessary. 138. The OECD Commentary in this regard is relevant and reproduced below: "3.13 An-intentional set-off is one that associated enterprises incorporate knowingly into the terms of the controlled transactions. It occurs when one associated enterprise has provided a benefit to another associated enterprise within the group that is balanced to some degree by different benefits received from that enterprise in return. These enterprises may indicate that the benefit each has received should be set-off against the benefit each has provided as full or part payment for those benefits so that only the net gain or loss (if any) on the transactions needs to be considered. for purposes of assessing tax liabilities. For example, an enterprise may license another enterprise to use a patent in return for the provision of know-how in another conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a bilateral tax treaty. For example, withholding tax would complicate a set-off of royalties against sales receipts. 3.17 A taxpayer may seek on examination a reduction in a transfer pricing adjustment based on an unintentional. over-reporting of taxable income. Tax administrations in their discretion may or may not grant this request. Tax administrations may also consider such-requests in the context of mutual agreement procedures and corresponding adjustments (see Chapter V)." 139. The majority judgment in the case of L.G. Electronics India Pvt. Ltd. (supra) opines that the Act, i.e. Chapter X of the Act, prohibits and does not permit set off or adjustment. Reference stands made to sub-section (3) to Section 92 of the Act. We would like to reproduce the said Section and understand the object and purpose behind the said provision. "(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may be, contrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of the tax. In Billings v. U. S, the Supreme Court clearly acknowledged this basic and long-standing rule of statutory construction: "Tax Statutes ... should be construed, and, if any ambiguity be found to exist, it must be resolved in favour of the citizen. Eidman v. Martinez 184 U.S. 578, 583; ... Again in Unites States v. Merriam, the Supreme Court clearly stated at pages 187-88: "On behalf of the Government it is urged that taxation is a practical matter and concerns itself with the substance of the thing upon which the tax is imposed, rather than with legal forms or expressions. But, in statutes levying taxes, the literal meaning of the words employed is most important, for such statutes are not to be extended by implication beyond the clear import of the language used. If the words are doubtful, the doubt must be resolved against the Government and in favour of the taxpayer. Gould v. Gould 245 U.S. 151, 153." ASN 51/53 WP-871-14 As Lord Cairns said many years ago in Partington v. Attorney-General: As I understand the principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the revenue by applying some mathematical tool is not correct." It should not be understood that we are holding or pronouncing our verdict on the basis of the said written submissions but we have quoted the aforesaid portion to show that the Revenue is conscience and aware of commercial business realities and the need to account for set offs. It is commonly recognized and accepted. The object and purpose behind arm length principle is to tax the actual and commercial income which could have been earned by the AE in India. 144. Question of set off would only arise in case two transactions are separate and arm's length price should be computed separately. It would not arise for consideration in cases where there are closely linked or continuous international transactions. Yet, there may be a third category of cases, where the assessee perceives and files his report in form 92E treating the international transaction as one or as continuous or an interconnected package, but the Revenue perceives and believes that the transaction is not one, but should be segregated for the purpose of computation of arm's length price. For the present reasoning, we will assume and accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is a question of fact and not law. Subsidy paid could account for the bundled transaction, including the entire set of transactions included. The final finding should be reasoned and analytical. It should be sound as per mathematical and accountancy principles. In case of a package or bunched transaction, this would require forthright and rigorous examination. If bifurcation is legitimate and mandated, apportionment should proceed on accurate and punctilious manner which is fair and reasonable. When the Assessing Officer / the TPO bifurcates or segregates the packaged transaction as declared by the assessed, he must conduct the exercise, rationally and objectively. CIT versus EKL Appliances Ltd - Disregarding actual transaction 147. Tax authorities examine a related and associated parties' transaction as actually undertaken and structured by the parties. Normally, tax authorities cannot disregard the actual transaction or substitute the same for another transaction as per their perception. Restructuring of legitimate business transaction would be an arbitrary exercise. This legal position stands affirmed in EKL Appliances Ltd. (supra). The decision accepts two exceptions to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international or worldwide brand value of the intangibles by the third party. 148. There is no material or data on record to show that an independent enterprise acting in a commercially rational manner would not enter into an agreement for distribution and marketing as has been entered into by the Indian assessee, a subsidiary of the foreign AE. It would be incongruous and presumptuous to hold, without any data or good reason, that the transactions for distribution and marketing as a package are not executed between a foreign enterprise and an independent enterprise. The "bright line test" we hasten to reiterate is not and cannot be the criteria, reason or data. Commercial men would seek appropriate margins to incur AMP expenses and yet earn net profit as per market conditions. 149. The concept of re-categorisation of transaction is not identical or similar to aggregation or segregation of transactions. Re-categorisation of transaction is a different exercise and would result in re-categorisation of the functions and, therefore, accordingly the comparables. A simple example of re-categorisation would be cases of "thin capitalisation". Aggregation or segregation of transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement or when economic ownership gets transferred to a third party. Transfer Pricing valuation, therefore, would be mandated at that time. The international transaction could then be made a subject matter of transfer pricing and subjected to tax. 154. Brand or trademark value is paid for, in case of sale of the brand or otherwise by way of merger or acquisition with third parties. Revenue in paragraph 8.9 of the written submissions have referred to acquisition of brand name 'Reebok' by 'Adidas' and asserted that the entire benefit was reaped by the parent entity and not by Reebok India Company Ltd.. Re-organisation, sale and transfer of a brand as a result of merger and acquisition or sale is not directly a subject matter of these appeals. As noted above, in a given case where the Indian AE claims economic ownership of the brand and is deprived or transfers the said economic ownership, consequences would flow and it may require transfer pricing assessment. In the written submissions filed by Sony India Private Limited, they have accepted the said position and stated as under:- "7.8 Two inferences are therefore inevitable- till a brand gets terminated, transferred or sold, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, an order of remand to the TPO to compute the arm's length price on the basis of said principles was passed. It would not be correct to hold that the Supreme Court had accepted and had given seal of approval and not interfered with the principles/ratio enunciated in the judgment by the Delhi High Court. The Supreme Court as is lucid did not want to examine the principles or ratio as enunciated and express their opinion on merits, though the directions issued by the High Court, it was observed, "conclude the matter". The Supreme Court perceived and accepted that the 'issue' of arm's length price should be re-examined by the TPO without being curtailed or restrained by the legal principles/ratio delineated. As the Supreme Court itself was not examining the principles/ratio on merits, it did not pass any order in favour or against the assessee or the Revenue. Accordingly, the aforesaid observations. The effect thereof was that the judgment of the Delhi High Court would not operate as res judicata between the parties and merits, if required, would be examined and gone into in the appellate proceedings. The majority judgment has incorrectly inferred that the legal principles and dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; xxx" 158. RP Method as an axiom, the United Nations' Manual exposits: "6.2.6.3. Consequently, under the RPM the starting point of the analysis for using the method is the sales company. Under this method the transfer price for the sale of products between the sales company (i.e. Associated Enterprise 2) and a related company (i.e. Associated Enterprise 1) can be described in the following formula: TP = RSP x (1-GPM), where: * TP = the Transfer Price of a product sold between a sales company and a related company; * RSP = the Resale Price at which a product is sold by a sales company to unrelated customers; and * GPM = the Gross Profit Margin that a specific sales company should earn, defined as the ratio of gross profit to net sales. Gross profit is defined as Net Sales minus Cost of Goods Sold." 159. RP Method, i.e. the Resale Price Method computes the arm's length price by ascertaining or identifying the price at which the product is resold by the AE to an independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... controlled and uncontrolled transactions are comparable in all characteristic, other than the product itself. In some cases, it may be a preferable and more reliable method in comparison to the CUP Method or CP Method. However, RP Method has its weaknesses. It loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed. In the OECD Commentary on Transfer Pricing Guidelines it has been observed: " ... Another example where the resale price margin requires particular care is where the reseller contributes substantially to the creation or maintenance of intangible property associated with the product (e.g. trademarks or trade names) which are owned by an associated enterprise. In such cases, the contribution of the goods originally transferred to the value of the final product cannot be easily evaluated. 2.30 A resale price margin is more accurate where it is realised within a short time of the reseller's purchase of the goods. The more time that elapses between the original purchase and resale, the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erformed can be simple and cover a limited field of sales, general or administrative expenses; to more complex one, adding substantially to the gross profit margins. The latter may happen if the reseller adds substantially to the value of the product by assisting considerably in creation and maintenance of intangible products or where the goods are further processed into a more valuable or complicated product. Referring to the weaknesses of the said method, the commentary states:- "The method can be used without forcing distributors to inappropriately "make profits". The distributor earns an arm's length gross profit margin, however, but could have operating losses due, for example, to high selling expenses caused by business strategies such as a market penetration strategy. By comparison, the application of the Transactional Net Margin Method, which analyses a financial ratio based on operating profits, will generally result in an arm's length range of positive operating profits. The tested party in the analysis would then probably also earn a positive operating profit within the range. However, the Resale Price Method does not necessarily result in positive operating profits to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable 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 be 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 or 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. 166. On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument. Moreover, the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses of sub-section (2) of section 92C, the arms length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely : Xxx (c) cost plus method, by which, (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or determining arm's length price by applying CP Method. 172. The United Nations' Manual discourages application of CP Method in transactions involving full-fledged manufacturer who owns valuable product intangibles i.e. a manufacturer who has incurred considerable cost on Research & Development, patent, technology etc. for the reason that it is difficult to locate a similar independent manufacturer owning comparable. There is no finding or examination on this aspect by the Tribunal. We caution, the reference above is to valuable product intangibles and not marketing intangibles. The assessed rely upon AEs valuable product intangibles. The issue can be answered after ascertaining facts and whether similar comparables are available. We have not pronounced a firm opinion. Obviously, the aforesaid caveat would not arise if and when, AMP as a transaction is separately benchmarked and tested. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is built up among the dealers, the entire circle of AMP activities will be complete. The discounts and incentives that the assessing is passing on to the dealers is the tool that it employs to create this brand loyalty among them. Once they are convinced that this company is passing on a greater benefit to them only then will they push the products of this company towards the ultimate customer, over other brands. 3. The dealer incentives and other selling expenses form part of the market penetration strategy of the assessee. Incentives given to dealers help the assessee in enhancing the market share of the assessee and create loyalty for the brand of the AE among the dealers. Since, these dealer incentives lead to creation of marketing intangible, the same need to be also considered as part of AMP expenses. 4. In this connection, it may be mentioned that normal discounts are factored into the sales that are taken for calculation of the AMP expenses. 5. As regards the other selling expenses, over and above the normal discounts, if they are being incurred at the behest of the AE, as part of the market penetration strategy, they will qualify as AMP expenses. These exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, when we continue to treat the said expenses as a component of a packaged international transaction, which is separately benchmarked. This would not lead us to accurate and reliable results. There is need and requirement to check over or double taxation. 178. The prime lending rate cannot be the basis for computing mark-up under Rule 10B(1)(c) of the Rules, as the case set up by the Revenue pertains to mark-up on AMP expenses as an international transaction. Mark up as per sub-clause (ii) to Rule 10B(1)(c) would be comparable gross profit on the cost or expenses incurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. The Revenue's stand in some cases applying the prime lending rate fixed by the Reserve Bank of India with a further mark-up, is mistaken and unfounded. Interest rate mark-up would apply to international transactions granting/ availing loans, advances, etc. Q. Arm's Length Price of royalty paid by Reebok India Company Ltd (ITA No.213/2014 179. We now proceed to examine and answer, the question raised by the Revenue in the appeal filed against Reebok India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in Canton, USA. These patented technologies were used in local development and manufacturing process for footwear and apparels. The entire business of the assessee in India was dependent upon the patented technology provided by the AE which could not have been used without licence/permission. Total revenue of the assessed had increased to Rs. 451.97 crores from Rs. 360.95 crores in the previous year, registering a growth of 25.21%. The technology was required to survive and grow in a competitive industry where continuous innovation was a pre-requisite. The Tribunal observed that payment of royalty was treated as a bona fide expenditure in the earlier years and it was an undisputed position that know-how or technical information had been provided under the licence agreement. 183. On the question whether the royalty should have been paid or not, we are in agreement with the finding of the Tribunal that question of payment of royalty cannot be determined on the basis of profitability or earnings of the assessed, once it is accepted that know-how and technical information was provided. It is not alleged or the case of the Revenue that the technology or know-how was hopeless and usel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessed matters. The transfer pricing regulations permit examination of the international transaction and suitable adjustments. It would be a different matter if it is established that an independent entity, in the given prevailing circumstances, would not have entered into the said transaction with the AE. This is not the case set up by the Revenue. The assessed in the present case has made profits. 187. The Tribunal in the impugned order, therefore, had rightly applied the test of commercial expediency and has recorded that the assessed was free to conduct business in the manner it deems fit. We hasten to add that two exceptions have been carved out in the case of EKL Appliances Limited (supra), but the exceptions have not been invoked, nor are the conditions satisfied. 188. Importantly, the assessee had benchmarked royalty with instances of royalty paid by third party licensee/distributors and had relied upon the three agreements, which were quoted as comparables. As per the comparables, the royalty paid was between 10-12% and they are:- "(ii) Agreement between Double D'Import S.A.R.I (France) with Adidas International for payment of royalty @ 12%. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by filing their own charts/tables. 193. We would not like to go into several factual aspects for the first time, for the factual matrix has not been examined and ascertained by the Tribunal. Moreover, in terms with our legal finding, factual findings will have to be examined. An order of remand for de novo consideration to the Tribunal would be appropriate because the legal standards or ratio accepted and applied by the Tribunal was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. The Tribunal, at the first instance, would try and dispose of the appeals, rather than passing an order of remand to the Assessing Officer/TPO. The endeavour should be to ascertain and satisfy whether the gross/net profit margin would duly account for AMP expenses. When figures and calculations as per the TNM or RP Method adopted and applied show that the net/gross margins are adequate and acceptable, the appeal of the assessed should be accepted. Where there is a doubt or the other view is plausible, an order of remand for re-examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons set out above, we have passed an order of remand to the Tribunal to examine and ascertain facts and apply the ratio enunciated in this decision. For the purpose of clarity, we would like to enlist our findings:- (i) In case of a distributor and marketing AE, the first step in transfer pricing is to ascertain and conduct detailed functional analysis, which would include AMP function/expenses. (ii) The second step mandates ascertainment of comparables or comparable analysis. This would have reference to the method adopted which matches the functions and obligations performed by the tested party including AMP expenses. (iii) A comparable is acceptable, if based upon comparison of conditions a controlled transaction is similar with the conditions in the transactions between independent enterprises. In other words, the economically relevant characteristics of the two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted and comparability analysis and the most reliable means of determining arm's length price. (ix) To assert and profess that brand building as equivalent or substantial attribute of advertisement and sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. "Brand" has reference to a name, trademark or trade name and like 'goodwill' is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. (x) Parameters specified in paragraph 17.4 of the order dated 23rd January, 2013 in the case of L.G. Electronics Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase AMP expenses are treated as a separate international transaction, provided CP Method is the most appropriate and reliable method. Adoption of CP Method and computation of cost and gross profit margin comparable must be justified. (xiv) The object and purpose of Transfer Pricing adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. Costs or expenses incurred for services provided or in respect of property transferred, when made subject matter of arm's length price by applying CP Method, cannot be again factored or included as a part of inter-connected international transaction and subjected to arm's length pricing. 195. The above noted pointers have to be read along with our discussion under the headings D to P. In case of any doubt, debate or purported conflict, it would be preferable to rely upon detailed elucidation made under the headings, D to P. 196. Common questions raised by the Revenue in their appeals:- "1. Whether the Income Tax Appellate Tribunal was right in distinguishing and directing that selling expenses in the nature of trade/volume discounts, rebates and commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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