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TMI Blog2015 (12) TMI 561X X X X Extracts X X X X X X X X Extracts X X X X ..... group. The assessee is engaged in the distribution of Discovery Channel, Discovery Travel and Living Channel and Animal Planet Channel in India region and also sale of advertisement inventory on the channels. The assessee reported six international transactions which have been enlisted on page 2 of the order passed by the Transfer Pricing Officer (TPO). The assessee employed Transactional Net Margin Method (TNMM) as the most appropriate method for demonstrating that its first three international transactions were at arm's length price (ALP). The remaining three were `At cost' only. On a reference made by the AO for determining the ALP of the international transactions, the TPO accepted the reported international transactions at ALP. He, however, observed that the assessee incurred AMP expenses to the tune of Rs. 29,60,08,795/- which was not reported. For determining the ALP of the international transaction of AMP expenses, he chose certain companies as comparables. By applying the bright line test, he worked out non-routine expenses incurred for developing intangibles in excess of bright line at Rs. 22,85,49,990/-. Adding the mark up of 14.48%, he worked out a transfer pricing adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 bench order. A batch of such appeals, also including the case of the assessee for the year under consideration, led by Sony Ericson Mobile Communications India Pvt. Ltd. Vs. CIT (2015) 374 ITR 118 (Del) has been disposed of by Their Lordships of the Hon'ble Delhi High Court, upholding the majority view of Special Bench in LG Electronics (supra) treating AMP as an internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 [Paras 194(i), (ii), (viii) & others]; * The choice of comparables cannot be restricted only to domestic companies using any foreign brand [Para 120] ; * If no comparables having performed both the functions in a similar manner are available, then, suitable adjustment should be made to bring international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptance of such a wide proposition. 10. We are unable to accept the argument advanced on behalf of the assessee for deletion of the addition towards AMP expenses on the plain logic of the assessee's profit margin matching with those of comparables. There is a basic fallacy in the argument of the ld. AR. It is pertinent to note that the TPO examined and got satisfied with the assessee's profit margin vis-à-vis the comparables only qua the international transactions of Distribution function. He initially determined the ALP of AMP expenses by applying bright line test, which mechanism was altered due to the directions given by the DRP and in doing so, he 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 and the method suggested by the DRP primarily concentrate 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 Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out by the assessee as well as comparables, this will amount to snatching away the tag of international transaction from AMP expenses, assigned by the Hon'ble High Court. What Their Lordships have held in the judgment is that the Distribution activity and AMP expenses are two separate but related international transactions. It is only for the purposes of determining their ALP that these two should be aggregated. The process of such aggregation does not take away the separate character of the AMP transaction, albeit related. An analysis and examination of the Distribution and AMP functions carried out by the assessee must be necessarily done in the first instance, which should be then compared 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 balance 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtraction from para 165 of the judgment : `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'. It held vide para 165 of the judgment that : `An external comparable should perform similar AMP functions.' Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. Let us we go a step further with the alternative prescription of the judgment that if ALP of both the transactions of Distribution and AMP cannot be determined in a 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. 11. Adverting to the facts of the instant case, we find that the TPO accepted TNMM as the most appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected 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 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.' 12. A perusal of the sub-clause (iii) of this Rule divulges that net profit margin under a comparable uncontrolled transaction as determined under sub-cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 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, no reasonable accurate adjustment can be made due to such differences, then, such uncontrolled transaction should not be considered as a comparable transaction. 15. 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 can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pense and then applying the cost plus method for determining its ALP. The ld. AR also failed to draw our attention towards any material divulging the AMP functions performed by the assessee as well as comparables. As such, we are handicapped to determine the ALP of AMP expenses at our end, either in a combined or a separate approach. The ld. AR has also disputed the base of total AMP expenses taken by the TPO. He argued that some of expenses, which are in the nature of selling expenses directly incurred in connection with sales not leading to brand promotion in any manner, should be excluded. In principle, we agree with the contention of the ld. AR that Selling expenses incurred for making sales are distinct from AMP expenses and, hence, should not be included in the base amount for consideration. The Hon'ble jurisdictional High Court in Sony Ericson Mobile Communication India (P) Ltd. (supra) has also held so. As there is inappropriate discussion about the precise nature of expenses which have been assailed before us, we consider it expedient to direct the AO to first ascertain the correct nature of such expenses. If these expenses are found to be in the nature of Selling expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment of AMP expenses has been made and is subject matter of this appeal. It was submitted that there is a common pool of AMP expenses incurred both for the business of the assessee and the promotion of the brand of its AE. 20. We have heard the rival submissions and perused the relevant material on record. It is observed from the judgment of the Hon'ble Delhi High Court rendered in assessee's own case for the AYs 2002-03 to 2004-05 that it was engaged in the business of distribution of television channels and under the Agreement, there was obligation and the duty of the assessee to advertise and promote the channels of its AEs in lieu of 15% of gross receipts as commission. The Hon'ble High Court found expenditure incurred on advertisement on promoting channels as clearly relatable and laid out for the purpose of business of the assessee and, hence, deductible in full. That is how, the addition was deleted. On a specific query from the Bench, the ld. AR stated that in the current year, the assessee received 20% of the total subscription fees in lieu of advertising and promoting the channels of its AEs and candidly admitted that the expenses incurred on advertisement and promoti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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