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TMI Blog2018 (7) TMI 1991X X X X Extracts X X X X X X X X Extracts X X X X ..... e excess price charged by AE which has been credited to the assessee. The business model of the assessee with its AE is such that the AE ensures that the assessee achieves an arms length return on sales made by it. Assuming, yet not accepting that the assessee should have been compensated by its AE towards AMP and such compensation as worked out by the TPO is ₹ 69.94 crores, then also no adjustment is required since the assessee has received credit notes worth 74.83 crores and has been suitably compensated. If the AMP expenses are considered as an independent transaction and combined transaction approach is not considered, then also excessive profit derived by bench marking 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 SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (NOW KNOWN AS SONY INDIA LIMITED) OTHERS VERSUS COMMISSIONER OF INCOME TAX III [ 2015 (3) TMI 580 - DELHI HIGH COURT] 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 menti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other commercial or marketing intangibles i.e., brand name, trademarks, logos, etc and are involved in complex product development, manufacturing and brand development of the products. The assessee company is primarily engaged in the business of importing, buying and selling and distribution of wide range of mobile phones in India and providing related post sale support services. 5. In its transfer pricing report, the assessee has stated that the development of ALP in this analysis recognises that the assessee company is a distributor undertaking normal risks associated with such activity and employs routine tangible assets. The international transactions entered into during the year under consideration are as under: Import of Mobile Handsets Spares ₹ 11,636,221,548 Purchase of Fixed Assets ₹ 9,347,318 Receipt of Services ₹ 19,738,690 Cost Recharge Paid ₹ 1,910,724 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received a credit note of ₹ 738,370,409/- from the AE to in order to achieve an arm s length result. 9. In its reply, the assessee stated that it has not made any payment to its AE for using brand name and there is no agreement for using the brand name between overseas AE and the assessee. It was emphasised that the advertisement and marketing expense incurred by the assessee are for furthering its sales in the Indian market and is nowhere related to brand promotion expense, therefore, such transaction does not warrant a reimbursement from AE since these costs represent transactions that are purely domestic in nature and have been undertaken by the assessee to promote its own sale and nowhere related to the international transactions entered into by the assessee with the AE. 10. Subsequently, the assessee filed details of credit notes and explained that the credit notes have been netted off against the cost of traded goods in the profit and loss account of the assessee. 11. The TPO was of the firm belief that the amount of ₹ 73.83 crores received by the assessee by way of credit notes represents excess price charged by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the onus which was on the assessee to bench mark the international transaction relating to the expenditure incurred on AMP and receipt of compensation/reimbursement has not been discharged. The AO proceeded to bench mark the impugned international transaction. 15. The TPO determined the ratio of AMP/sales at 7.06% and compared the same by adopting Brightline Test in the case of comparables, which, according to the TPO was at 1.08%. Comparing the ratio of AMP/sales in the case of the assessee with Brightline the TPO found that the assessee has incurred excess expenditure of ₹ 98.02 crores. The TPO was of the strong belief that such excess of brightline limit should have been compensated by the AE and since the assessee has not been compensated by its AE, the TPO proposed to determine the ALP of the impugned international transaction at ₹ 980,237,631/-. 16. The TPO was also of the opinion that independent entities would not incur expenditure for promoting the trade names owned by some third party and, therefore, would have been remunerated for such efforts. A mark-up of 15% on cost incurred by the independent party would be reasonable a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 be dependent upon availability of potential comparable keeping in mind the comparability analysis including befitting adjustments which may be required. As the degree of the comparability increases, extent of potential differences which would render the analysis inaccurate necessarily decreases. (iv) The assessed, i.e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis should be appropriated and reliable so as to include the AMP functions and costs. (v) Where the Assessing Officer/TPO accepts the comparables adopted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 compensation paid for AMP expenses would be NIL , or at best would mean the amount or compensation expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to treat the segregated transactional value as NIL when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to the aggregate package. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts of their own. 20. 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 hand-sets 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. 21. 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 etc. We further find that the AEs own brand rights of all the products and are responsible for core marketing and pricing decisions of the products. The AEs are also responsible for undertaking global sales and distribution function. The AEs shall also provide marketing and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uiring 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 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. 27. Based on the above guidance and facts as enunciated above, it is evident that the compensation model of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponsible for managing the finance, 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. Human Resource ( HR ) Management Function: 32. The HR function is coordinated 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. 33. Having considered the respective functions of the AE and the assessee company, we find that in so far 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% whereas the mean margin of comparable companies is at 0.4%. 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%. In addition, the assessee has als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OECD suggests that it will be sufficient to compensate the distributor 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 extra ordinary 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 ₹ 660,556,778/- business promotion and selling expenses at ₹ 496,658,381/- totaling to ₹ 1,157,215,159/-. 37. We do not find any force in the findings of the lower authorities that the above said 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and services move from concept to the customer. It includes the coordination of four elements: (i) identification, 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. 42. Items 1, 2 and 4 mentioned hereinabove 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 invariable 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see achieves an arms length return on sales made by it. 48. Assuming, yet not accepting that the assessee should have been compensated by its AE towards AMP and such compensation as worked out by the TPO is ₹ 69.94 crores, then also no adjustment is required since the assessee has received credit notes worth 74.83 crores and has been suitably compensated. 49. If the AMP expenses are considered as an independent transaction and combined transaction approach is not considered, then also excessive profit derived by bench marking 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 clause xii at page 140 in Tax Appeal No. 16/2014 at para 136 to 146. 50. But this will only be considered when the Assessing Officer/TPO has rejected the comparables adopted by the assessee as a bundled transaction. In the case in hand, and as mentioned elsewhere, the Assessing Officer/TPO has accepted the comparables adopted by the assessee as bundled transaction and, therefore, it would b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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