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TMI Blog2015 (5) TMI 821X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in Sony Ericson Mobile (2015 (3) TMI 580 - DELHI HIGH COURT). Ex consequenti, the ground raised about the TPO having no jurisdiction to determine the ALP of AMP expenses, is dismissed following the judgment in the case of Sony Ericsson Mobile (supra). Disallowance of Advances written off - Held that:- Succinctly, the assessee claimed the above deduction by treating it as bad debts written off. On being called upon to justify the deductibility of the amount, the assessee submitted that it imported certain goods during the financial year under consideration paying Special Additional Duty (SAD). Since the goods in respect of which such amount of SAD was paid became obsolete, the amount of SAD was written off and claimed as deduction. It was stated that the nomenclature of bad debt was inadvertently given, whereas, in fact, this amount was payment of irrecoverable/unadjustable SAD. It was also stated before the DRP that the payment of SAD by any importer is refunded when the goods are further sold. Since the goods in respect of which this SAD was paid, became obsolete and written off in the accounts of subsequent years, the amount of SAD was claimed as deduction in this ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trols India (P) Ltd. Vs. CIT (2009 (5) TMI 16 - SUPREME COURT OF INDIA) has held that a warranty provision made by the assessee on the basis of the past experience is allowable as deduction u/s 37. It has further been held that the deduction can be allowed if the provision is made on some rational basis. Since the necessary facts in this regard are not available before us, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of AO for deciding it afresh as per law, after allowing a reasonable opportunity of being heard to the assessee. - Decided partly in favour of assesse for statistical purposes - ITA No.1101/Del/2015 - - - Dated:- 25-5-2015 - SHRI R.S. SYAL AND SHRI C.M. GARG, JJ. For the Appellant : Ms Rashmi Chopra, Advocate For the Respondent : Shri Sanjay Prasad, CIT, DR ORDER PER R.S. SYAL, AM: This appeal by the assessee is directed against the final order passed by the Assessing Officer (AO) on 6.1.2015 u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ALP of this international transaction, the Special bench approved the application of bright line test for working out the amount of non-routine AMP expenses and held that the ALP of AMP expenses should be determined on Cost plus method by treating AMP transaction as a separate and distinct from other international transactions. It was further held that the selling expenses directly incurred in connection with the sales do not lead to brand promotion and hence should not be brought within the ambit of AMP expenses. The Special bench laid down certain parameters to be taken into consideration for determining the ALP of AMP expenses. In the ultimate analysis, the matter was sent back to the TPO for undertaking the exercise afresh in the light of its directions. 5. Following the said order, various benches of the Tribunal decided several cases involving AMP expenses, restoring the matter to the file of AO/TPO for deciding this issue in conformity with the directions given by the Special Bench in LG Electronics (supra). Several assessees as well as the Revenue preferred their respective appeals before the Hon ble High Courts against the tribunal orders following the Special b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view taken by the Special Bench that the expenses concerned with the sales, such as, rebates and discounts etc., should be excluded from the ambit of AMP expenses, has been upheld. 6. We can summarize the relevant position emanating from the judgment of the Hon ble High Court, as under : - AMP expense is an international transaction [Paras 52 53 of the judgment] ; The TPO has jurisdiction to determine the ALP of the international transaction of AMP expenses [Para 50 of the judgment]; Inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set-off [Paras 80 81]; AMP is a separate function. An external comparable should perform similar AMP functions. [Paras 165 166] ; Bright line test cannot be applied to work out non-routine AMP expenses for benchmarking [Para 194(x)]; ALP of AMP expenses should be determined preferably in a bundled manner with the distribution activity [Paras 91, 121 others] ; For determining the ALP of these transactions in a bundled manner, suitable comparables having undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess simply compared the quantitative figures of AMP expenses incurred by the assessee and comparables for working out the non-routine expenses. He did not examine the AMP functions carried out by the assessee and the comparables. As the bright line test primarily concentrates on the quantitative aspects of the AMP expenses alone, it overlooks the examination of the AMP functions carried out by the assessee on one hand and the comparables on the other. Now, the Hon ble High Court in Sony Ericson Mobile (supra) has held that AMP expense is a separate international transaction and also bright line test is not applicable for determining the ALP of AMP expenses. The manner for the determination of the ALP of the distribution activity and AMP activity has also been set out by the Hon ble High Court to be conducted, firstly, in a bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables, and if probable comparables having performed both the functions are not available, then to determine the ALP of AMP expenses in a segregated manner. As such, it becomes immensely important to separately examine the distribution and AMP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpared with similar functions performed by some probable comparables. If the distribution and AMP functions performed by the assessee turn out to be different from those performed by probable comparables, then, a suitable adjustment should be made to the profits of the comparable so as to counterbalance the effect of such differences. If however differences exist in such functions, but no adjustment can be made, then, such probable comparable should be dropped from the list of comparables. If, in doing this exercise, there remains no company doing comparable distribution and AMP functions, then, both the international transactions are required to be segregated and then examined on individual basis by finding out probable comparables doing such separate functions similarly. For the international transaction of AMP spend, this can be done by, firstly, seeing the AMP functions actually performed by the assessee and then comparing it with the AMP functions performed by a probable comparable. If both are found out to be similar, then the matter ends and a comparable is found and one can go ahead with determining the ALP of such a transaction. If the AMP functions performed by the two en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... combined manner, then the ALP of AMP function should be separately done. The submission advanced by the assessee of considering the profit on an entity level without making comparison of AMP functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view amounts to treating AMP spend as a non-international transaction, which is patently incapable of acceptance. 9. Adverting to the facts of the instant case, we find that the TPO accepted TNMM as the most appropriate method and did not make any TP adjustment on account of the distribution activity carried out by the assessee. He, however, espoused the AMP expense as a separate and distinct. Treating the AMP spend as a separate international transaction, he applied the Cost plus method and proposed the extant adjustment. In doing so, he segregated routine AMP expenses incurred by the assessee for his business from the non-routine AMP expenses by treating such non-routine AMP expenses leading to the creation of marketing intangible for its AE. This bifurcation of total AMP expenses was done by applying bright line test. It is obvious that in the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit 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. 10. A perusal of the sub-clause (iii) of this Rule divulges that net profit margin under a comparable uncontrolled transaction as determined under sub-clause (ii) should be: adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions. It is only such adjusted net profit margin in sub-clause (iii) of Rule 10B(1)(e) which is compared with the net profit margin realized by the assessee as per the mandate of sub-clause (iv) of Rule 10B(1)(e). 11. Sub-rule (2) of Rule 10B provides that for the purposes of sub rule (1) , the comparability of an international transaction with an uncontro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um. If due to one reason or the other, no reasonable accurate adjustment can be made due to such differences, then, such uncontrolled transaction should not be considered as a comparable transaction. 13. It is discernible that the prescription of Rule 10B is in complete harmony with the ratio of the judgment in the case of Sony Ericson Mobile (supra), to the effect that the AMP functions carried out by the assessee are required to be necessarily compared with the AMP functions carried out by a comparable entity in determining the AMP of ALP expenses. Difference between the functions, if capable of adjustment, should be given effect to in the profit rate of the comparable and if such difference cannot be given effect to, then, the probable comparable should be eliminated from the list of comparables. Going further, if no proper comparable survives, then the TNMM should be discarded and an alternative method, may be, Cost plus or any other suitable method be applied for determining the ALP of AMP expenses. 14. At the cost of repetition, we summarize that the distribution and AMP functions are two separate international activities, which need to be compared with uncontrolled tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for determining the ALP of the international transaction of AMP spend afresh in accordance with the manner laid down by the Hon ble High Court in Sony Ericson Mobile (supra). Ex consequenti, the ground raised about the TPO having no jurisdiction to determine the ALP of AMP expenses, is dismissed following the judgment in the case of Sony Ericsson Mobile (supra). 16. Another issue raised in this appeal is against the disallowance of Advances written off amounting to ₹ 8,92,981/-. Succinctly, the assessee claimed the above deduction by treating it as bad debts written off. On being called upon to justify the deductibility of the amount, the assessee submitted that it imported certain goods during the financial year under consideration paying Special Additional Duty (SAD). Since the goods in respect of which such amount of SAD was paid became obsolete, the amount of SAD was written off and claimed as deduction. It was stated that the nomenclature of bad debt was inadvertently given, whereas, in fact, this amount was payment of irrecoverable/unadjustable SAD. It was also stated before the DRP that the payment of SAD by any importer is refunded when the goods are further sold. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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