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TMI Blog2019 (2) TMI 1643X X X X Extracts X X X X X X X X Extracts X X X X ..... e issued on 02.08.2010 and duly served upon assessee, fixing the case for 25.08.2010. During the course of assessment proceeding, the case was referred to TPO under Section 92CA for computation of the Arm's Length Price (hereafter referred as "ALP"). In the order dated 20.10.2011, under Section 92CA(3), the TPO proposed the ALP adjustments amounting to Rs. 69,94,95,650/-. The total income assessed was Rs. 1,35,25,96,901/-. The assessee filed an appeal before the ld. ITAT against the order passed by AO under Section 143(3)/144C of the Act who by order dated 30.08.2013 had decided the main issue of transfer pricing adjustment in relation to AMP expenses by setting it aside to the AO/TPO with specific directions based on the decision of the Special Bench of the Tribunal in the case of LG Electronics. 3. On the AMP issue, both the department and the assessee had preferred appeals before this court by ITA No. 155/ 2014 and 16/ 2014 respectively. This court's decision dated 16.03.2015 had set aside the matter of AMP to the ITAT to be decided on the principles outlined in the said order of the Court. As the matter of TP adjustment was pending before the ITAT, therefore, an order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... huge sum of Rs. 115.72 crores, drawing support from the provisions of Section 92F(v) of the Act, the TPO proceeded by treating this to be international transaction. 6. Learned counsel cited Sony Ericsson Mobile Communications India (P) Ltd v Commissioner of Income Tax, (2015) 374 ITR 118 (Del) and urged that this court had expressly disapproved the BLT and as a consequence, the ITAT should have not accepted the TPO's analysis and the filters applied to determine comparable transactions of third party entities. 7. To determine the ALP of the international transaction of promoting the trade name/trade mark which is beneficially owned by the AE, the TPO issued show-cause notice to the assessee. The assessee filed detailed reply to the show-cause notice issued by the TPO. After considering the reply of the assessee, the TPO was of the opinion that the onus which was on the assessee to benchmark the international transaction relating to the expenditure incurred on AMP and receipt of compensation/reimbursement has not been discharged. The AO proceeded to benchmark the impugned international transaction. 8. The TPO determined the ratio of AMP/sales at 7.06 per cent and compare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... step mandates ascertainment of comparables or comparable analysis. This would have reference to the method 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 TP analysis. As a sequitur, it follows that the choice of the most appropriate method would be dependent upon availability of potential comparable keeping in mind the comparability analysis includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 para 17.4 of the order dt. 23rd Jan., 2013 in the case of L.G. Electronics India (P) Ltd. (supra) are not binding on the assessee 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' and 'non-routine' AMP or brand building exercise by applying 'Bright Line Test' of non-comparables should be sanctioned and in all cases, costs or comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter of ALP by applying CPM, cannot be again factored or included as a part of interconnected international transaction and subjected to arm's length pricing." 10. The ITAT held that the directions of this court have to be complied with on a factual analysis of each case, and held as follows, in the impugned order: "19. Keeping in mind the aforesaid findings of the Hon'ble High Court of Delhi, we find that the assessee-company is engaged in the distribution of mobile handsets in India. As part of this activity the company undertakes marketing and post-sales support for the mobile handsets. The AEs, on the other hand, are engaged in new product development, complex manufacturing and core marketing assuming all the businesses and entrepreneurial risks. 20. The AEs undertake complex R&D operations relating to the products. They are responsible for ensuring that the products are technologically in line with the market requirements and trends. The AEs are responsible for manufacturing the products that are sold across the globe. They are responsible for quality control, production scheduling, vendor development, inventory management, supply chain management, packaging et ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r promotion and sale of products in India. It also looks into maximizing its customer base by acquiring more customers and retaining its old customers. The Indian entity purchases high-end mobile phones from its AEs. For low-end mobile phones, the AEs have appointed a contract manufacturer in India for manufacturing low-end mobile phones and selling the same to SEIN at negotiated rates. Further, as per the transfer pricing model, pricing of products between SEIN and its AEs contract manufacturer is regulated in a manner that ensures that SEIN earns an arm's length return with respect to the distribution activity. The price is adjusted according to the price level development in the market, and operating cost changes in SEIN. Therefore, based on the price level development in the market, if at the year-end SEIN is not able to achieve arm's length return with respect to its distribution activity, then as per the transfer pricing model receives credit notes from its AEs to achieve an arm's length return on sales. Based on the above model followed by SEIN, it is able to achieve an arm's length margin after considering all total operating cost. 26. Based on the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance, treasury, legal and accounting functions. In certain areas, wherever necessary, SEIN is guided by the group policies. SEIN is also responsible for all local statutory compliance's. Human resource ('HR') management function: 31. The HR function is co-ordinated by its management, which is responsible for recruitment, development and training of the personnel including the emolument structure. In this respect, where appropriate, this function is guided by the group policies. However, AEs take all long-term strategic decisions relating to the Sony Ericsson products. 32. Having considered the respective functions of the AE and the assessee-company, we find that insofar as comparables are considered, there is no quarrel. There is no dispute that TNMM is the most appropriate method and the assessee's net margin is at 2.5 per cent whereas the mean margin of comparable companies is at 0.4 per cent. As mentioned elsewhere, during the course of assessment proceedings, the assessee has undertaken a fresh search for comparables indentifying a set of 19 comparable with average margin of 0.48 per cent. In addition, the assessee has also furnished a margin of 12 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibutor with a service fee and not provide it with a return on marketing intangibles. It is further suggested that where the distributor bears the cost of marketing activity, whether it should be compensated with, a return on any intangible created through such expenditures will turn on the contractual rights of the parties. Elsewhere we have mentioned the functions of the assessee-company and the AE. In our considered opinion, it is merely a presumption that the assessee has incurred some extraordinary expense in excess of the normal routine expenses and should have been compensated by the AE. As mentioned elsewhere, the assessee has spent advertisement expenses at Rs. 66,05,56,778 business promotion and selling expenses at Rs. 49,66,58,381 totalling to Rs. 1,15,72,15,159. 36. We do not find any force in the findings of the lower authorities that the abovesaid expenditure on AMP has been incurred exclusively to promote the brand/trade name 'Sony Ericsson' and such expenditure has resulted into brand building and increased awareness of the products bearing brand/trade name 'Sony Ericsson' and also that such expenditure incurred by the assessee-company is for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , selection and development of a product, (ii) determination of its price, (iii) selection of a distribution channel to reach the customer's place, and (iv) development and implementation of a promotional strategy. 41. Items 1, 2 and 4 mentioned here-in-above are not applicable in the case of the assessee-company. Further, marketing is based on thinking about the business in terms of customer needs and their satisfaction. Marketing differs from selling because "selling concerns itself with the tricks and techniques of getting people to exchange their cash for your product. It is not concerned with the values that the exchange is all about. And it does not, as marketing invariably does, view the entire business process as consisting of a tightly integrated effort to discover, create, arouse and satisfy customer needs." In other words, marketing has less to do with getting customers to pay for your product as it does developing a demand for that product and fulfilling the customer's needs. 42. In the light of the aforesaid definition, the assessee has employed a team of employees for carrying out local marketing of mobile phones in India. Global recognition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed since the assessee has received credit notes worth Rs. 74.83 crores and has been suitably compensated. 48. If the AMP expenses are considered as an independent transaction and combined transaction approach is not considered, then also excessive profit derived by benchmarking of distribution segment should be adjusted with alleged excessive AMP expenditure thereby providing benefit of set off. This view finds support from the judgment of the Hon'ble High Court of Delhi in its findings at cl. xii at p. 140 in Tax Appeal Nos. 16 of 2014 at paras 136 to 146. 49. But this will only be considered when the AO/TPO has rejected the comparables adopted by the assessee as a bundled transaction. In the case in hand, and as mentioned elsewhere, the AO/TPO has accepted the comparables adopted by the assessee as bundled transaction and, therefore, it would be illogical and improper to treat the AMP expenses as separate international transaction as mentioned by the Hon'ble High Court in its list of findings at cl. (v) at p. 138 of its order. 50. To sum up, considering the guidelines/findings of the Hon'ble High Court of Delhi (supra) and considering the facts of the case in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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