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TMI Blog2015 (10) TMI 2621X X X X Extracts X X X X X X X X Extracts X X X X ..... h price of the international transaction of advertising, marketing and promotion (AMP) spent and royalty payment and in the facts of the present case have ordered a remand for de novo consideration of the issues to the Tribunal. 2 Briefly stated the facts of the case are that the assessee is a domestic company and was incorporated in 1995. It is a joint venture between M/s Reebok Mauritius Company Ltd and Focus Energy India Ltd. It is engaged in the business of distribution of footwear, apparel, accessories, sports equipments etc. The assessee filed its return of income on 26th September, 2008, declaring total income of Rs. 39,49,36,968/-. In the year under consideration, the assessee company entered into the following international transactions: - S.No. Type of international transaction Method used by the assessee Value of transaction (Amount in Rs.) Receipt Paid 1. Import of finished products/apparels Resale Price Method ( RPM) --- 34,75,63,922 2. Receipt of Commission CUP 73,87,878 ---- 3. Payment of Royalty TNMM ----- 15,28,77,527 4. Reimbursement of expenses by Associated Enterprises Not benchmarked 44,67,72 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forwarded his report to the Assessing Officer:- (i) Adjustment for Arm's length price of AMP expenses: Rs. 50,82,80,551/- (ii) Upward adjustment in respect of international transaction of Royalty payment: Rs. 15,28,77,527/- Total: Rs. 66,11,58,078 2.2. Pursuant to this the AO passed a draft assessment order u/s 144C r.w.s.143(3) proposing an addition of Rs. 66,11,58,078/- on account of adjustment of transfer pricing besides addition of Rs. 36,69,882/- under section 40(a)(ia) of the Act. 3. Aggrieved by the draft assessment order of the Assessing Officer, the assessee filed objections before the Dispute Resolution Panel ( in short "DRP"). The DRP in its direction dated 29.09.2012 confirmed the action of the TPO in proposing the adjustment of Rs. Rs. 44,29,77,019/- to the AMP expenses, however a markup of 12.5% on AMP expenses was directed to compensate for the interest cost. As regards the adjustment made on account of Royalty, the DRP confirmed the action of the TPO. Pursuant to this the impugned order was passed by the AO u/s 144C r.w.s. 143(3). 4. Aggrieved by this, the assessee filed the appeal wherein the Coordinate Bench vide order dated 14.06.2013 following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue in all the appeals was as under:- 1. Whether the Income Tax Appellate Tribunal was right in distinguishing and directing that selling expenses in the nature of trade/volume discounts, rebates and commission paid to retailers/dealers etc. cannot be included in the AMP Expenses? 7. An additional substantial question of law was raised by the revenue in the case of appeal bearing ITA No.213/2014 filed against the assessee, which reads as under:- "Whether Income Tax Appellate Tribunal was right in setting aside/deleting transfer pricing adjustment made on account of payment of royalty to an associated enterprise?" 8. The Hon'ble Court decided all the appeals led by Sony Ericsson Mobile Communication India Pvt. Ltd. in a consolidated judgment dated 16.03.2015(supra) including the impugned appeals of the assessee and the Revenue. The Hon'ble Court propounded legal finding on the relevant issues in heading "D" to "P" of the judgment and summed up the view taken on the substantial questions of law in their judgment in the following paras: "Answer to Substantial Questions of Law Para 194. In view of the aforesaid discussion, substantial questions of law in the appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h would include AMP function/expenses. (ii) The second step mandates ascertainment of comparables or comparable analysis. This would have reference to the method ITA 16/2014 & connected matters adopted which matches the functions and obligations performed by the tested party including AMP expenses. (iii) A comparable is acceptable, if based upon comparison of conditions a controlled transaction is similar with the conditions in the transactions between independent enterprises. In other words, the economically relevant characteristics of the two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate the effect of such differences on the price or margin. Thus, identification of the potential comparables is the key to the transfer pricing analysis. As a sequitur, it follows that the choice of the most appropriate method would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gely representing reputation and quality. "Brand" has reference to a name, trademark or trade name and like 'goodwill' is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. (x) Parameters specified in paragraph 17.4 of the order dated 23rd January, 2013 in the case of L.G. Electronics India Pvt. Ltd (supra) are not binding on the assessed or the Revenue. The 'bright line test' has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate 'routine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... object and purpose of Transfer Pricing adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. Costs or expenses incurred for services provided or in respect of property transferred, when made subject matter of arm's length price by applying CP Method, cannot be again factored or included as a part of interconnected international transaction and subjected to arm's length pricing. 195. The above noted pointers have to be read along with our discussion under the headings D to P. In case of any doubt, debate or purported conflict, it would be preferable to rely upon detailed elucidation made under the headings, D to P. 196. Common questions raised by the Revenue in their appeals:- "1. Whether the Income Tax Appellate Tribunal was right in distinguishing and directing that selling expenses in the nature of trade/volume discounts, rebates and commission paid to retailers/dealers etc. cannot be included in the AMP Expenses?" In terms of and subject to our discussion under the headings O and P, the substantial question of law has to be answered against the Revenue and in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering the identical issue of adjustment to AMP expenses the Tribunal has remitted the matter back to the Assessing Officer for determination of arm's length in the light of ratios laid down by the Hon'ble Delhi High Court in the case of the assessee itself. The Ld. Sr. Departmental Representative did not object to the submissions of ld. AR 12. We have heard the rival submissions and perused the material available on record. In the light of the submission of the parties before the Bench where we find that as canvassed by the parties the facts need to be considered afresh applying the ratio of the Hon'ble High Court on the factual matrix of the assessee. Thus the issues need to be referred back to the Assessing Officer/ TPO. While so holding, we note that in so far as determination of arm's length price of AMP expenses is concerned the Hon'ble Court in the aforesaid judgment dated 16.03.2015 has held that if suitable comparable engaged in both distribution and advertising, marketing and promotion (AMP) functions are found, than, arm's length price of the transaction should be determined on aggregate basis. If, however, there is some difference in the function of distribution or ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estored cannot be accepted. As has been brought out in great detail in the earlier part of this order where it is eminently clear that the tax payer and the tax authority have proceeded to consider the issue in the light of the decision of the Special Bench. Reference may also be made to paras 162 and 168 of the said judgement where reference has been made to the position in 2008-09 Assessment year where the assessee is found to have applied resale price method using internal comparables. In para 166 of the said judgement it is seen that the arguments of the assessee were held to be flawed and fallacious for several reasons. However their Lordships further in para 167 observed that the Revenue before the Hon'ble High Court did not plead that the R.P.Method should not have been adopted. Qua the same their Lordships observed that no final pronouncement was being made. A perusal of the para 168 shows that the Tribunal had upheld adoption of CP method after applying the bright-line test. The finding was found to be not correct as approach and procedure for ascertaining/determining arm's length price under the resale price method is different. The discussion on the most appropriate meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If on comparable analysis, including AMP expenses, gross profit margins match or are within the specified range, no transfer pricing adjustment is required. In such cases, the gross profit margin would include the margin or compensation for the AMP expenses incurred. Routine or non-routine AMP expenses would not materially and substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions. 166. 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. Moreover, the contention of the assessed in these appeals would mandate rejection of the RP Method, as an appropriate or most appropriate method. Comparison or comparative analysis is undertaken at stage (ii) Adjustments are permissible and undertaken at stage (iv). Under clause (iii), i.e. at stage (iii), from the price ascertained at stage (ii), expenses incurred by the enterprise in connection with the purchase of property or obtaining of services is reduced. Under clause (iv), adjustments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s once it is accepted that knowhow was provided the same cannot be questioned. Suitable profits relatable it was not held to relevant by approving the finding of the Tribunal. The justification given by the assessee for explaining lower profits claimed to be on account of bad debt, high rent, increase in legal costs etc. accepted by the Tribunal was also not interfered by the Hon'ble High Court. The said issue in para 197 has been answered against the Revenue. Accordingly we find that the stand of the Revenue that the issue can be decided at this stage cannot be accepted when examined from any angle as the facts will need to be considered afresh at length by the TPO on the basis of agreements and facts and evidences on the record in the light of the direction of the Hon'ble High Court. 13. As far as determination of arm's length of royalty payment is concerned, it is seen that the Hon'ble High Court has held that payment of royalty is a relevant consideration while determining the arm's length price of international transaction of distribution and marketing, however the tax treatment of royalty being different, the Royalty transaction, may be bench marked separately. Since the de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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