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TMI Blog2016 (3) TMI 581X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transaction of AMP spend afresh in accordance with the manner laid down by the Hon’ble High Court in Sony Ericson Mobile (supra) - Decided partly in favour of assessee for the statistical purposes. - ITA No.5490/Del/2012 - - - Dated:- 3-12-2015 - SHRI R.S. SYAL, AM SHRI KULDIP SINGH, JM For The Assessee : Shri Manoj Pardasani, CA For The Department : Shri Amrendra Kumar, 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) u/s 144C read with Section 143(3) of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2008-09. 2. The only issue raised in this appeal is against the addition of ₹ 12,15,11,974/- on account of transfer pricing adjustment of advertisement, marketing and promotion (AMP) expenses. 3. The appeal filed by the assessee was earlier disposed of by the Tribunal vide its order dated 13.9.2013 restoring the computation of ALP of AMP expenses to the TPO to be decided in accordance with the Special Bench decision in the case of LG Electronics India (P) Ltd. vs. ACIT (2013) 152 TTJ 273 (Del) (SB). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s jurisdiction to compute the ALP of this international transaction despite the same not having been specifically referred to 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 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. 6. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase price adjustment should be allowed. The view taken by 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. The 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. 7. 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 deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The ld. AR submitted that the assessee applied TNMM as the most appropriate method. Since the profit margin declared by the assessee was favourably comparable with the average margin of the comparables, which fact has not been disputed by the TPO, then, no adjustment should be made on account of AMP expenses because such expenses stand subsumed in the overall operating profit. This was countered by the ld. DR with reference to certain paras of the judgment in Sony Ericsson (supra) not permitting the acceptance of such a wide proposition. 11. 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- -vis the comparables only qua the international transactions of distribution function. He determined the ALP of AMP expenses by applying bright line test and in this process simply compared the quantitative figures of AMP expenses incurred by the assessee and comparables for wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent from those performed by a probable comparable company, then, an adjustment is required to be made so as to bring the AMP functions performed by the assessee as well as the comparable, at the same pedestal. If we concur with the contention of the ld. AR that the addition on account transfer pricing adjustment of AMP expenses be deleted without any examination of the AMP functions carried 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istribution activity could be adjusted against the deficit in the AMP activity. The Hon ble High Court has no where laid down that the AMP functions performed by the assessee should not be compared with those performed by the comparable parties. On the contrary, it turned down the contention raised by the ld. AR urging for not treating AMP as a separate function, which is apparent from the extraction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make 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 the comparable uncontrolled transactions, or between the enterprises entering into such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom, such transactions in the open market ; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 15. On a comparative reading of sub-rules (1), (2) and (3) of Rule 10B, it becomes 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, no reasonable accurate adjustment can be made due to such differences, then, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method. However, in so determining the ALP of such an international transaction of AMP expenses on separate basis, a proper set off, if any, available from the distribution activity, should be allowed. 18. Coming back to the facts of the instant case, we find that no detail of the AMP functions performed by the assessee is available on record. Similarly, there is no reference in the order of the TPO to any AMP functions performed by comparables. In fact, no such analysis or comparison has been undertaken by the TPO because of his applying the bright line test for determining the value of the international transaction of AMP expense 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 promotio ..... 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