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TMI Blog2015 (7) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... rit. However, at the same time we find that Hon’ble Delhi High Court in the case of Soni Erection has rejected the applicability of bright line test and as noted earlier, ld. TPO and ld. DRP have not pointed out the AMP functions being carried out by the assessee, vis a vis the comparables and applied the bright line test. Therefore, in view of the observations it would be proper to restore this issue to the file of Ld. TPO for bench marking the AMP functions, keeping in view the decision of Sony Ericson Mobile (2015 (3) TMI 580 - DELHI HIGH COURT). We may point out that assessee would be free to demonstrate its claim regarding aggregation of AMP functions with other international transactions, particularly in view of the observations of Hon’ble Delhi High Court in para 101 of the order. We may further clarify that while computing the components of AMP expenditure, direct selling and distribution have to be excluded in view of the decision in the case of Sony Ericson (supra). AS regards the objections of ld. counsel on selection of comparables, we are of the opinion that whole exercise has to be carried out de novo - Decided partly in favour of assessee for statistical purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursement No benchmarking 1,95,668 2.1. The assessee in its transfer pricing study had divided the entire business in two categories which were- (i) Vision care; (ii) Surgical equipment. 2.2. The AO noted that for vision care segment the assessee had used transactional net margin method ( TNMM ) as the most appropriate method with adjusted operating profit/ sales as the profit level indicator. 2.3. The assessee s contention was that for Vision Care Segment the PLI being operating profit/ sales of comparable on single year data basis was 6.19% as compared to 21.23% of assessee and for surgical equipment segment it was 5.97% as compared to 13.81% of the assessee. The filters used by the assessee were as under:- (a) Data older than two years was excluded (b) Companies having sales from distribution activity/ net sales less than 25% were eliminated. (c) Companies with a negative net worth were eliminated from the set (d) Persistent loss making companies were eliminated (e) Companies with significant related party transactions were rejected. 2.4. Therefore, it was contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected. 2.7. Thus, in final analysis TPO accepted only two comparables for distribution segment viz. Aditya Medisales Ltd. and Abbott India Ltd. No new comparables was taken by TPO. The TPO has not made any adjustment in the profit margin of the taxpayer arising in the distribution segment. However, the ld. TPO after considering the TP documentation, also examined the advertisement, marketing and promotional expenses incurred by assessee and observed that the assessee being distributor of Bausch Lomb products, manufactured by its group companies i.e. the AE and other subsidiaries, by incurring expenditure on advertisement marketing and promotional activities (AMP), was developing marketing intangible for Bausch Lomb products. The AO noted from the P L A/c, that during the given year the assessee had undertaken AMP expenditure to the tune of ₹ 10,98,24,331/-. He noted that the ratio of AMP/ total revenue was 9.14%. He further observed that after including the expenditure like commission on sale etc., the total expenditure worked out to 11.84 crores. The TPO considered the expenditure incurred by comparables selected by him (after considering the compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout prejudice, even if it was assumed that the assessee incurred AMP expenses on behalf of its AEs, it had been duly compensated for its AMP activities; - The nature of assessee industry warrants heavy expenditure on AMP. - The TPO ignored the fact that the assessee s AE had not charged any royalty from the assessee. - The TPO incorrectly considered selling and distribution expenses and sales promotion expenses incurred by B L India as part of brand building expenses while benchmarking the AMP expenses. - The TPO erred in making selection of inappropriate companies as comparables for computation of the bright line. - The TPO erred in concluding that the assessee had rendered brand building services to its AE and it should have charged mark up on cost incurred for rendering such services. 2.11. Ld. DRP, after considering the assessee s objections, concluded as under: (i) AMP expenditure incurred by the taxpayer can be regarded as international transaction; (ii) The AEs of the taxpayers were the guiding factors in deciding the strategy of AMP function discharged by the taxpayer and, therefore, the expenditure on advertising and marketing activity was not s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F 73,05,997 Arm s length return for AMP expenditure (G=E+F) 6,23,45,595 2.14. Being aggrieved with the order of AO, the assessee is in appeal before us and has taken following grounds of appeal: 1. The ld. Dispute Resolution Panel ( DRP ) erred in confirming/upholding adjustment to returned income, as proposed by learned Transfer Pricing Officer( TPO ), / AO of INR 6,24,45,595/- contrary to provisions of the Act and Income-tax Rules, 1962 ( the Rules ). 2. Impugned order, to the extent it confirms adjustment under Transfer Pricing Regulations with reference to imaginary and non-existent international transactions, is bad in law as it is not in accordance with provisions of law. Further, without prejudice, the decisions of Hon'ble Courts (including of this Hon'ble Tribunal) relied upon are distinguishable and have no application in the facts and circumstances of Appellant's case. 3. On the facts and in circumstances of the case and in law, ld. AO/DRP/TPO have erred in holding that the Advertisement, Marketing and Promotion ( AMP ) expenditure incurred by the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw, learned AO/DRP/TPO failed to appreciate that the nature of industry and business realities of the Appellant require and demand the incurrence of such AMP expenditure for maintaining and enhancing the sale of its products in the relevant market. 11. That on the facts and circumstances of the case and in law, learned AO/DRP/TPO failed to appreciate that the transfer pricing bench marking study submitted by Appellant considers all the functions, assets and risks and that a separate benchmarking of some of the very same functions is unjustified and not as per law. 12. That on the facts and circumstances of the case and in law, learned AO/DRP/TPO have erred, in not appreciating that the Appellant had used Transactional Net Margin Method ( TNMM ) to benchmark its international transactions, and thus, no separate arm's length analysis was required in respect of the alleged international transaction relating to AMP. 13. That on the facts and circumstances of the case and in law, the learned AO/DRP/TPO have erred, in benchmarking presumed international transaction of the Appellant relating to AMP, without considering that the Appellant has been fully compensated for its mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case and in law, the learned AO has erred, in charging interest under Sections 234B and 234C of the Act. 23. That on the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under Section 271(1)(c) read with Section 274 of the Act. 24. That on the facts and circumstances of the case and in law, the learned AO has erred in incorrectly allowing credit shortfall of taxes deducted at source to the Appellant. 2.15. The assessee has substituted ground no. 18 vide letter dated 29-4-2015 as under: 18. Without prejudice to other contentions that Appellant may raise on search process adopted by the learned AO/TPO/DRP in any other year for which Appellant reserves its right in the facts and circumstances of the case and in law, learned AO/DRP /TPO have erred, in selection of inappropriate comparables (by wrongly applying the search parameters set out by themselves) for benchmarking the international transaction of the Appellant? 4. Ld. counsel submitted that Hon ble High Court has held that AMP is an international transaction and, therefore, ground nos. 2,3,4, 5 6 have to be dismissed. Accordingly, these grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paras 137 to 144 of the decision. 5.5. Ld. counsel further referred to para 193 of the said decision to submit that endeavour on the part of the Tribunal should be to ascertain and satisfy whether the gross/ net profit margin would duly account for AMP expenses or not. 5.6. He further referred to the conclusion of Hon ble Delhi High Court, which is, inter alia, reproduced hereunder: (v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction. viii) Distribution and marketing are inter-connected and intertwined functions. Bunching of inter-connected and continuous transactions is permissible, provided the said transactions can be evaluated and adequately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining the AMP expenditure, the components relating to selling and distribution expenses have to be excluded. In view of decision of Hon ble Delhi High Court in the case of Sony Erricson (supra), ld. counsel submitted that in order to determine the AMP: functions performed by assessee vis a vis comparables, then the matter should be restored back to the file of ld. TPO with following three directions- (a) Trading filter to be correctly applied/ mistake to be corrected by ld. TPO. In this regard he referred to page 31 of ld. DRP directions (page 42 of appeal set). (b) Selling and distribution expenses to be excluded as has been held by Hon ble Delhi High Court in Soni Erection case; and (c) whether AMP expenses have been considered by assessee while computing margins or not. 4. Ld. CIT(DR) submitted that no proposition as such has been laid down by Hon ble High Court that selling expenses in all circumstances to be excluded. In this regard he referred to page 127 of the said decision, wherein arguments of revenue have been reproduced by Hon ble Delhi High Court. He pointed out that Hon ble High Court in para 176 has given the findings with regard to assessee which was en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Ld. DRP carried out a fresh search and determined six comparables as noted at page 31 of his order and directed the TPO to verify the results of the search from the Annual Report of these comparables. The assessee in its modified ground no. 18 has assailed the search parameters set out by ld. AO/DRP/TPO. There is no finding in ld. DRP s order regarding the AMP functions performed by comparables. 5.2. In the backdrop of above factual position, now we proceed to examine the submissions of ld. counsel that since PLI at entity level is acceptable to ld. TPO which includes the AMP expenditure, therefore, no separate exercise for bench marking the AMP expenditure independently should be undertaken. On this aspect ld. counsel has relied on the decision of Hon bloe Delhi High Court in the case of Soni Erection s case (supra). 5.3. The Hon ble Delhi High Court in the case of Soni Erection s case (supra) in para 137 has observed that the aggregation and disaggregation of transactions in the TNM method or even in other methods is sought to be applied, must have reference to the strength and weakness of the TNM method or the applicable method. It was observed that aggregat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions, keeping in view the decision of Hon ble Delhi High Court in the case of Soni Erection s case. We may point out that assessee would be free to demonstrate its claim regarding aggregation of AMP functions with other international transactions, particularly in view of the observations of Hon ble Delhi High Court in para 101 of the order. We may further clarify that while computing the components of AMP expenditure, direct selling and distribution have to be excluded in view of the decision in the case of Sony Erection (supra). AS regards the objections of ld. counsel on selection of comparables, we are of the opinion that whole exercise has to be carried out de novo, particularly in view of following observations of ld. DRP:- The taxpayer was requested to substantiate that right comparable were chosen by it for benchmarking the distribution function i.e. the ones engaged in dealing with the kind of products it is distributing and also incurring AMP expenditure approximately to the tune of 10% of its revenue ( the taxpayer is incurring AMP expenditure of 9.14% of its revenue). It was observed by this Panel that even while the taxpayer was into the distribution of eye-care ..... X X X X Extracts X X X X X X X X Extracts X X X X
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