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TMI Blog2015 (8) TMI 1386X X X X Extracts X X X X X X X X Extracts X X X X ..... Faber Castell brad instead of appreciating that the appellant was only carrying out its business of selling products in India by sing the well established brand name of Faber Castell and any benefits derived by the AEs are purely incidental. 4. Not appreciating that once the international transactions entered by the appellant is accepted a arm's length on the basis of Transaction Net Margin Method (TNMM) as the most appropriate method, separate analysis is not required for bench marking the individual element of AMP cost, which is inconsistent with the tenets of application of TNMM. 5. Applying the bright line test to determine the arm's length price of the AMP expenses incurred by the appellant, without appreciating tht no such method has been prescribed under the Act and Rules. 6. Considering inappropriate companies as comparable for benchmarking AMP expenses. 7. Without prejudice to the above, erred in holding that items o selling expenditure such as incentives to distributors in the form of free samples, discount and other schemes.etc should be considered for making an adjustment without appreciating the fact that none of these expenses can in any way be considered as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t line test and held that the said excessive expenditure is a non-routine which the assessee has incurred for promoting the brand and developing marketing intangibles of its AE. The assessee objected the proposed transfer pricing adjustments before the DRP, but could not succeed. 5. Before us, the learned AR of the assessee has pointed out that the assessee had AMP to sales ratio of only 0.74%. However, the TPO has re-worked out the AMP as well as ratio at 6.06% by adding various selling expenses in the category of AMP. The learned AR has submitted that the assessee has given the details of the AMP expenses and submitted that the AMP expenses incurred by the assessee are Rs. 57,70,313/- whereas the TPO has added various other expenses in the nature of selling expenses including free samples to distributors, additional discount to distributors, discount allowed, trade discount, sales promotion expenses and thereby the TPO took a total AMP expenses at Rs. 4,72,78,948/- as against the claim of AMP expenses of the assessee at Rs. 57,70,313/-. The TPO compared the AMP ratio of the comparables at 4.99% with the AMP ratio of the assessee adopted at 6.06% and observed that the excess AMP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the adjustment is required on this account. 7. Alternatively, the learned AR submitted that when the international transactions of the assessee are benchmarked by applying TNMM method and the operative margin of the assessee company at 6.25% is higher than that of those comparable companies at 0.13%, than separate adjustment on account of AMP is not required. He has contended that the TNMM method subsumes all requisite operating income and expenses including AMP which forms part of operating expenses for the purpose of computing the operating margin and once the international transactions of the assessee is found at arm's length, than no further adjustment on account of AMP expenses is warranted. In support of his contention he has relied upon the judgment of the Hon'ble Delhi High Court in case of M/s Sony India (Supra) and submitted that the Hon'ble High Court has observed that the bundled transaction approach has been endorsed and it would be illogical to treat AMP as a separate transaction, where TPO/AO has accepted the comparables under TNM Method. He has referred the relevant finding/observations of the Hon'ble Delhi High Court in para-Nos.101 & 193 of the said judgment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the TPO has jurisdiction to make the adjustment on account of AMP, having regard to the retrospective amendment to Sec.92CA of the Act. Therefore, each case has to be decided as per the peculiar facts for the purpose of determination of arm's length price on account of AMP expenses. The TPO adopted separate transaction approach following bright line test, though the Hon'ble High Court in the case of M/s Sony Ericsson (Supra) has not approved the approach of the TPO and gave the emphasis on the building of the transaction approach and conduct a detailed functional analysis which would include AMP function/expenses. 10. The learned DR has submitted that a fresh analysis comparables would be required for testing transaction on aggregate basis for treating them as bundled transaction in view of the judgment of the Hon'ble High Court in the case of M/s Sony Ericsson (Supra). He has relied upon the decision of Delhi Bench of the Tribunal in case of M/s Reebok India Co. Vs DCIT in ITA No.1246/D/2015 for AY: 2010-11 and submitted that this Tribunal has restored the matter to the file of the TPO/AO for fresh analysis of the comparables. In rejoinder, the learned AR of the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the brand value of the associated enterprise. The dispute before us is regarding the items of expenditure which can be part of the AMP expenses. The assessee has shown AMP expenses at Rs. 57,70,313/- and arrived AMP to sales ratio at 0.74%. The TPO recomputed the AMP sales ratio by including certain other expenses on account of free samples to distributors, discount to distributors, trade discount, sales promotion expenses etc. and arrived at AMP to sales ratio at 6.06% as under; Sl.No. Nature of expenses Amount(INR) 1 Total income 78,05,61,766 2 AMP expenses incurred by FC India (as submitted by assessee vide reply dated 20 Jan 2013.) 57,70,313 3 Free samples to distributors 2,76,94,697 4 Additional discount to distributors 1,08,54,797 5 Discount allowed 7,33,824 6 Trade discount 98,808 7 Trade discount 9,20,523 8 Sales promotion expenses(incentive to the distributor) 7,39,613 9 Sales promotion-Misc (incentive to the distributor) 4,66,373 10 Total AMP (as per TPO) 4,72,78,948 11 AMP to sales ratio (as per learned TPO) 6.06% 13. The TPO has also added a mark up at the rate of 17.15% on the AMP expenses. Thus, the TPO made an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e would be contrary to common sense. Thus, the Hon'ble High Court has held that the direct selling and marketing expenses or discount concession would not form part of AMP expenses. As similar view has been taken by this Tribunal in the series of decisions, as relied upon by the learned AR of the assessee. The TPO has not disputed the sales ratio of the comparable companies at 4.99%. Thus, if the expenses which are included by the TPO as part of AMP are excluded from the AMP expenses being the expenses directly linked with the sales and marketing as well as trade discounts allowed by the assessee as incentive to the distributors than, the AMP to sales ratio of the assessee comes to 0.74%. There is no ambiguity, a it is manifest from the items of expenditure included by the TPO in the category of AMP expenses that the same are directly related with the sales, marketing and other sales promotion expenses in the shape of trade discounts allowed to the distributors. Therefore, these expenses cannot be included as part of the AMP expenses for the purpose of determining the arm's length price. The TPO has not disputed the operating margin of the assessee at 6.25% in comparison to the mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparable companies engaged in the similar activities. He has relied upon the decision of the Hon'ble jurisdictional High Court in case of CA Computer Associates Pvt.Ltd 351 ITR 69 as well as the decision of the Co-ordinate Bench of this Tribunal in case of M/s Kotak India Pvt.Ltd Vs Addl.CIT in ITA No.7349/Mum/2012. 17. On the other hand, learned DR contended that the approval of FIBP regarding payment of royalty cannot be taken as the arm's length price for the purpose of IT Act, 1961. He has relied upon the orders of the authorities below. 18. We have considered the rival submissions as well as the material available on record. Though, the assessee can support its claim by the approval of the FIBP rate of payment of royalty however, the said approval cannot substitute the determination of arm' length price under the provisions of the IT Act, 1961. It is pertinent to note that the approval granted by the FIBP for payment of royalty is not in context of the arm's length price under the provisions of the IT Act, 1961. Therefore, even if the royalty paid by the assessee is less than the rate approved by the FIBP the same has to be tested as per provisions of the IT Act for t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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