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TMI Blog2015 (6) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable to a `Manufacturer’; and ignore the parts of the judgment which pertain exclusively to a `Distributor’. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. - Decided in favour of assessee for statistical purposes. - ITA No.407/Del/2015 - - - Dated:- 2-6-2015 - SHRI R.S. SYAL AND SHRI C.M. GARG, JJ. For the Appellant : Shri Vijay Iyer, CA, Shri Gagandeep Nagpal, Shri Nitin Jain Shri Karan Bhatia For the Respondent : Shri A. Vasanthan, Sr. 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 5.1.2015 u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2010-11. 2. The only issue raised in this appeal is against the addition of ₹ 180,63,50,055/- made by the AO on account of transfer pricing adjustment towards Advertising, Marketing and Promotion (AMP) expenses. 3. Briefly stated, the facts of the case are that the assessee, an Indian company, is a subsidiary of PVM. It is engaged in manufacturing a variety of confect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ALP of this international transaction despite the same not having been specifically referred by the AO. On the question of determination 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 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 overall 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/AO for undertaking the exercise afresh in the light of its directions. 5. Following the said special bench 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). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Tribunal in segregating routine and non-routine expenses on the basis of bright line test has been set aside by the Hon ble High Court. Further, the decision taken by the Special Bench to the effect 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 transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference between the AMP expenses and AMP functions. Whereas the AMP functions are the means by which the AMP activity is performed, the AMP expenses are the amount spent on the performance of such means (functions). To put it simply, an examination of AMP functions carried out by the assessee and the probable comparables is sine qua non in the process of determination of the ALP of the international transaction of AMP spend, either in a segregate or an aggregate manner. What Their Lordships have held is to bundle the distribution activity with the AMP activity, being two separate but connected international transactions, for the purposes of determination of the ALP of both these international transactions in a combined manner. 8. The ld. AR argued that the assessee applied TNMM in respect of export of raw materials/finished goods and import of raw material from manufactured stock/finished goods. He submitted that since the profit margin declared by the assessee from such international transactions favourably compared with the average margin of the comparables, which fact has not been disputed by the TPO, no adjustment should be made on account of AMP expenses because such exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 entities are found to be different, then adjustment is required to be made in the case of a probable comparable, so as to make it uniform with the assessee. The assessee may have possibly done, say, four different AMP functions as against the probable comparable having done, say, only three. In such a scenario, again the adjustment will be warranted. In another situation, the AMP functions performed by the assessee and probable comparable may be similar but with varying standards, which will also call for an adjustment. Crux of the matter is that the AMP functions performed by the assessee must be similar to those done by the comparable, in the same manner as such functions are compared in any other international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions with those performed by comparable entities. This can be done only by mandatorily making a comparison of the AMP functions performed by the assessee and comparables and then making an adjustment, if any, due to differences between the two, so that the AMP functions performed by the assessee and comparable are brought to a similar platform. In fact, this is also the prescription of Rule 10B(1)(e), which provides as under :- ` (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market ; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 11. A comparative study of sub-rules (1), (2) and (3) of Rule 10B makes it palpable that the international transaction and the uncontrolled transaction with which comparison is sought to be made for determining the ALP, in the first instance, must have overall similar characteristics. It is vivid that if the goods/services are different, then no effective comparison can be made. Once the goods/services under both the transactions are broadly similar but there is a difference in them because of certain specific characteristics; and/or the products/services in both the transactions are identical, but still there are certain differences due to the contractual terms or the geographical location etc., then, a reasonably accurate adjustment should be made for eliminating the material effects of such differences so as to bring the international transaction and the comparable uncontrolled transaction on the same podium. If due to one reason or the other, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit margins can be affected by variation of operating expenses. Thus, the requirement to select appropriate comparable and adjustment. It would be inappropriate and unsound to accept comparables, with or without adjustment and apply TNM Method, and yet conjecturise and mistrust the arm's length price. TNM Method would not be the most appropriate method when there are considerable 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 situatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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