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TMI Blog2017 (5) TMI 1367X X X X Extracts X X X X X X X X Extracts X X X X ..... velling beyond the impugned order. As the TPO has considered AMP as a separate international transaction and determined its ALP; and further that the tribunal in assessee’s own case for the immediately preceding A.Y. 2009-10 has dealt with the determination of the AMP as a separate international transaction, we cannot now concur with the request of the assessee in allowing the setting up of an altogether different case. This contention, ergo, fails. To sum up, since the facts and circumstances of the instant appeals are mutatis mutandis similar to the immediately preceding year, respectfully following the precedent, we set aside the impugned order and send the matter back to the A.O./TPO for deciding this issue afresh in light of the foregoing discussion and the directions given by the Tribunal in its order for the immediately preceding year in the second round. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in the resulting fresh proceedings. Transfer pricing adjustment AMP expenses - Assessment Year 2012-13 - Held that:- Respectfully following the decision taken for the A.Y. 2009-10, we hold that, firstly, the RPM should be applied as the most a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture and distribution of sun glasses and prescription frames in mid and premium price categories. The assessee was incorporated in India on 15.11.2007 and commenced its actual operations from February, 2008. The assessee reported four international transactions, namely, Purchase of finished goods and Advertising Material and also reimbursement of expenses to and from AEs for the A.Y. 2010-11; and three international transactions, namely, import of finished goods and reimbursement of expenses to and from AEs for the A.Y. 2011-12. On a reference made by the AO to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions, the TPO noticed that the assessee incurred AMP expenses amounting to ₹ 19,31,44,379/- for the A.Y. 2011-12. Applying the bright line test, he proposed transfer pricing adjustment amounting to ₹ 13,40,31,274/- for the A.Y. 2011- 12. Transfer pricing adjustment was made in the same way for the A.Y. 2010-11. The Dispute Resolution Panel (DRP) largely approved the action of the Assessing Officer/TPO but subject to certain modifications. The Assessing Officer, in his final orders, made transfer pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) has made certain observations, which should be properly weighed for ascertaining if an international transaction of AMP expense, exists. It was argued that the Tribunal in several cases, including the assessee's own case for the preceding year, has restored this issue to the file of TPO to be decided afresh in the light of the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del). He also relied on another judgment dated 28.1.2016 of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expense is an international transaction, has been restored for a fresh determination. He still further referred to three later judgments of the Hon'ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). The ld. DR argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase for the immediately preceding assessment year that the matter has been sent back to the A.O./TPO for deciding it afresh in the light of the judgment of the Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. 8. The ld. AR contended that the TPO for the A.Y. 2012-13 in assesse's own case has not made any transfer pricing adjustment on account of AMP expenses but has factored in the AMP intensity adjustment in the profit margin of the comparables and made transfer pricing addition on account of the international transaction of `Import of finished goods'. It was urged that instead of restoring the matter to the A.O./TPO for deciding the existence of an international transaction and determining the ALP of this transaction, if any, the matter should be restored with a direction to carry out AMP intensity adjustment in conformity with the view taken by the TPO for the A.Y. 2012-13. This was objected to by the ld. DR. 9. We are not convinced with the proposition put forth on behalf of the assessee because the entire proceedings before the TPO/DRP/AO have proceeded on the basis of a separate international transaction of AMP and its independent benchma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the grounds are aimed at challenging the addition of transfer pricing adjustment on AMP transaction treated as an international transaction, we notice that the TPO has not made any separate transfer pricing adjustment for AMP expenses. In fact, the transfer pricing adjustment is only for the international transaction of `Import of finished goods', albeit, factoring in the AMP intensity adjustment in the profit rates of comparables. The ld. AR fairly accepted this position and requested for proceeding with the issue actually arising from the impugned order. The ld. DR did not raise any serious objection to it. We are, therefore, espousing the issue in the appeal de hors the language of separate grounds taken in the memorandum of appeal. 14. Succinctly, the facts for the year under consideration are that the assessee reported three international transactions, viz., `Import of finished goods' amounting to ₹ 81,78,20,743 and two other transactions of reimbursement to and by AEs. The Assessing Officer referred the determination of ALP of the international transactions to the TPO, who observed that the assessee benchmarked its international transaction of `Import of finished goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntensity of expenses incurred by comparable companies • The intensity of expenses of taxpayer was compared with the intensity of expenses of comparable. • The excess intensity of expenses in taxpayer's expenses as compared to the intensity of comparable was considered as excessive AMP expenditure considered by the taxpayer. " 15. The assessee claimed before the TPO that out of total AMP expenses incurred by it to the tune of ₹ 13.01 crore, only the AMP expenditure incurred on in-house brands of Luxottica Group i.e. ₹ 11.55 crore, should be considered for the purposes of benchmarking. This contention was accepted and the TPO carried out the excess AMP intensity adjustment in the profit margins of the comparables and computed their average reselling margin at 6.03%. By applying such average adjusted margin, the TPO proposed transfer pricing adjustment amounting to ₹ 4,25,51,845/-. The assessee's contention for allowing (+)/(-) 5% was accepted in principle, but, found, on the factual application, to be not sending the case out of the transfer pricing addition. The assessee unsuccessfully challenged the TPO's order before the DRP. In the final order pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fra that his objection is confined only to the computation of the amount of transfer pricing adjusting by using the ratio for apportionment of the excess cost incurred by the assessee over and above the arm's length cost. Coming back, the TPO carried out the AMP intensity adjustment in the profit rates of the comparables as under :- TABLE-A 17. It can be seen from the above Table that the TPO has carried out AMP intensity adjustment in the profit margins of the comparables and that is how the adjusted average margin of the comparables has been computed at 6.03%. This exercise done by the TPO has not been disputed by the assessee. The ld. AR challenged the computation of ALP of the international transaction of import of finished goods determined by the TPO as under:- TABLE-B 18. The above computation of ALP shows that the total revenue of the assessee is ₹ 214.01 crore. Arm's length margin of 6.03% has been applied on this figure of the revenue for computing the arm's length cost at entity level, in backward manner, at ₹ 201.10 crore. As against such arm's length cost, the assessee actually incurred cost of ₹ 209.48 crore, leading to the payment of excess diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial from the AE, which is not disputed by the assessee, then as a natural corollary, the denominator cannot be any figure other than the purchase cost of Material consumed purchased from AEs and non-AEs. If we accept the view buttressed by the ld. AR and proceed with restricting the numerator as the purchase cost of Material from the AEs and extend the denominator also to other indirect costs, the result will obviously be distorted. Such a contention advanced on behalf of the assessee is aimed at expanding the denominator to the maximum possible extent so that the amount of the resulting transfer pricing addition, from the total excess cost over the arm's length cost attributable to international transaction of purchase of Material, could be reduced. We cannot countenance it. As such, we hold that the TPO has taken an unimpeachable view in making apportionment of the excess cost incurred on entity level to the international transaction. 19. The ld. AR next contended that the assessee applied Resale Price Method (RPM) as the most appropriate method in its Transfer pricing study report and the TPO used the Transactional Net Margin Method (TNMM) as the most appropriate method for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO in the international transaction of purchase of Material from the AE and the transfer pricing adjustment has been made for such an international transaction alone, though by factoring in the effect of higher intensity AMP functions carried out by the assessee. Respectfully following the decision taken for the A.Y. 2009-10, we hold that, firstly, the RPM should be applied as the most appropriate method for determining the ALP of the international transaction of purchase of material from the AE, but, by carrying out the AMP intensity adjustment in the profit rate of comparables. If, however, it turns out that such an adjustment cannot be done due to one reason or the other, then the RPM should be discarded and another suitable method be adopted, which encompasses the effect of AMP intensity adjustment. Our view is fortified by the judgment in the case of Sony Ericsson (supra), in which it has been held in para 165 that : `Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made when the result would be reliable and accurate. Otherwise, RP Method should not be adopted'. 21. We, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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