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TMI Blog2020 (3) TMI 426X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, vide order dated 25-09-2019 passed in M.P No.102/Bang/2019, the Tribunal recalled the order of AY 2013-14 for the limited purpose of adjudicating the ground nos.32 to 41. These grounds relate to the Transfer pricing adjustment of Rs. 58.35 crores made by the AO/TPO in respect of AMP expenditure as an alternative proposition. It may be noticed that the TPO had made Transfer pricing adjustment of AMP expenditure to the tune of Rs. 207.42 crores in AY 2013-14. The assessee is also engaged in the business of distribution of laptops, monitors, projectors and peripheral products imported from its AE. This division was named as "trading segment". The assessee had benchmarked its trading segment transactions under "Resale Price Method". The TPO, however, adopted TNMM method as most appropriate method and computed transfer pricing adjustment of Rs. 58.35 crores. It is pertinent to note that the TPO had computed the operating margin of the assessee by considering the AMP expenses as part of operating cost. Since the TPO has already made T.P Adjustment of Rs. 207.42 crores under AMP expenses, he did not make separate addition of Rs. 58.35 crores with the rider that if the AMP adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the gross margin as they are captured below the line. Therefore, the gross margin analysis carried out by the assessee is flawed. 6.1.3. Perusal of the profit and loss account of the taxpayer it is seen that, the taxpayer has incurred huge expenditure towards advertisement, marketing and sales promotion as below: Particular AY 2012-13 AY 2013-14 Sales promotion and advertisement expenses 114,936,702 399,428,670 Sales and Trade Discounts 336,929,815 382,032,185 Sales Commission 114,425,734 101,289,783 Scheme Discounts 1,332,035,307 1,64,310,673 Total 1,898,327,558 2,04,061,311 6.14. The taxpayer has performed certain value added functions which a routine trader/ manufacturer would not have performed, if the taxpayer had been a routine trader/ manufacturer, like any other routine trader / manufacturer considered as a comparable in the TP study, the assessee should have made profit on sale of goods. But in case of the assessee, it is observed that there is net loss in the trading business. The Net operating loss during the year as shown in the P&L a/c is Rs.(300,200,451).The tax payer been making losses or opearating on a wafer-thin over a period of time. Dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrolled comparables for comparability analysis under RPM. It is seen that the ratio of AMP expenditure to Sales incurred by the comparable companies selected by the taxpayer, is much lower than the ratio of AMP expenditure to Sales, incurred by the taxpayer. Intensity of AMP expenditure: Taxpayer Particulars Sales AMP % of AMP on Sales Acer India 28,916,961,317 2,04,061,311 7.08% Comparable companies: Sl. No. Particulars Sales AMP % of AMP on Sales 1 Compuagelnfocom Ltd. 19,050,505,000 - 0.00% 2 Computer Point Ltd. 345,367,000 165,000 0.05% 3 Techpecific (India) Ltd. (Ingram Micro India. Ltd,) 121,489,555,860 316,134,889 0.26% 4 Iris Computers Ltd. 16,239,988,383 3,330,337 0.02% 5 Savex Computers Ltd. 43,992,366,000 52,092,000 0.12% 6 Priva Ltd. 2,132,334,900 4,275,455 0.20% Average 0.11% Following the decision of the Hon'ble Delhi High Court in the case of MIs. Sony Ericsson (Supra), since the comparables used by the taxpayer have much lower "AMP" spend than the taxpayer, RPM as a method for benchmarking analysis is not suitable. 6.1.7. It is clear that in this case, the taxpayer has take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l revive. The Ld DRP also confirmed the addition. 6. The dispute here is about the method to be adopted for benchmarking the trading transactions. According to the assessee the Resale Price Method is the most appropriate method, while the TPO has held that the TNMM is the most appropriate method. 7. The Ld A.R submitted that the assessee is importing the computer and other items and sells them in India. He submitted that the TPO has taken the view that the AMP expenses incurred by the assessee constitutes value addition, which is misconceived. He submitted that the assessee is incurring AMP expenses for its own purposes for the purpose of increasing expenses and major portion of AMP expenses consists of trade discounts, sales commission and scheme discounts. Accordingly he submitted that the TPO was not justified in holding those expenses as representing value addition items. Accordingly he submitted that the "Resale Price Method" is most appropriate method for the trading operations undertaken by the assessee. In support of his contentions, he placed reliance on the following case law:- (a) M/s Celio Future Fashion P Ltd (ITA No.1928/Mum/2016) (b) M/s Videojet Technologies ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/s A.O.Smith India Water Heating P Ltd (supra), wherein the Tribunal, after considering various case laws on the matter, held that the RPM is the most appropriate method in case of a distributor of products. For the sake of convenience, we extract below the relevant observations made by the Tribunal in the case of A.O Smith India Water Heating P Ltd (supra):- 14. Now the assessee is before us with the submission that it is an accepted principle that the computation of ALP based on a direct method like RPM, which tests the results at gross level unlike the TNMM which tests the results at net level, extinguishes the requirement o making adjustment in relation to the difference in operating expenses, which could be different from enterprise to enterprise. It was further contended that as provided in Rule l0B, under RPM price of international transaction needs to be computed on the basis of gross profit margin earned in uncontrolled transactions, while under TNMM price of international transaction is computed on the basis of net profit margin of uncontrolled transactions. As per Rule 100(1), the most appropriate method for determining the ALP depends upon the facts and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2008. The Id. DR placed reliance upon the order of the AO and the DRP. 16. Having heard the rival submissions and from a careful perusal of the record, we find that undisputedly the assessee is a trading company and carries out distribution and marketing of products of AOS group in India. It imports water filters from AO Smith China and sells them in India. AO Smith India is, according to the TP document, a distributor of AOS Water Heaters in India. The Tribunal has examined the most appropriate method in the case of distributor to determine the ALP for the international transactions. In the case of Horiba India Pvt. Ltd. (supra), the Tribunal has held that in the case of a distributor where the goods are purchased from the AE and resold to other independent entities without any value addition, then the resale price method should be reckoned as most appropriate method. One of the main reason given by the TPO as well as the DRP is that the assessee is full fledged/full risk distributor and performing host of functions, therefore RPM should not be taken as the most appropriate method, because all these functions require huge cost which may not represent the gross profit mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length in relation to the international transaction." Sub-rule (2) of Rule 10C lists certain factors which should be taken into account in selecting the most appropriate method as specified in sub-rule (1). These factors, inter olio, include (c), the availability coverage and reliability of data necessary application of the method'; and (d) the degree of comparability existing between the international transaction and the uncontrolled transaction...........' 8.2 An overview of the factors prescribed for choosing the most appropriate method indicates that firstly, the data necessary for application of the given method should be available and secondly, the uncontrolled transactions should be functionally similar, if not identical. A company, in order to be ranked as comparable under the RPM, should preferably be engaged in doing similar activity as that of the assessee or at least of the some genus of the activity, with a different product. The Ld. TPO himself has categorized the corn parables chosen by the assessee as trader ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessee's Appeal. Such findings do not raise any substantial question of law. The Appeal is devoid of merits and is, therefore, dismissed. There would be no orders as to costs." 19. Copy of the order of the Tribunal in the case of L'Oreal India Pvt. Ltd., is also placed on record to demonstrate as to under what circumstances the RPM was considered to be most appropriate method. Similarly, in the case of Mettal Toys India Pvt. Ltd., v. DCIT (supra), the Tribunal again reaffirmed its view that in the case of distributor, the RPM is the most appropriate method by holding that ultimate aim of the transfer pricing is to examine whether price of the margin arising from the international transactions with a related party is at ALP or not. The determination of the approximate ALP is a key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed method other than choosing earlier, the most appropriate ALP can be determined, the assessng authorities as well as the appellate authorities should take into consideration such a plea raised before them provided it is demonstrated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer Pricing adjustment made in respect of trading segment. As in AY 2013-14, the TPO rejected the "Resale Price Method" (RPM) adopted by the assessee to bench mark its trading segment on the reasoning that the AMP expenses should also be included in the cost, as the assessee is, in effect, making value addition to the brand of its AE by incurring AMP expenses. Accordingly the TPO adopted TNMM method as most appropriate method and made an adjustment of Rs. 42.96 crores. However, he did not make any addition in this regard by holding that this addition is not warranted, since T.P adjustment has been made in respect of AMP expenses. The TPO also observed that, if the TP adjustments made in respect of AMP expenses is deleted or reduced in the appeal at a later stage, the T.P adjustment of Rs. 42.96 crores made in respect of trading/distribution segment requires to be revived. 15. The Ld A.R submitted that the first issue relating to Transfer Pricing adjustment in respect of AMP expenses was considered by this bench in AY 2012-13 in the assessee's own case in IT(TP)A No.502/Bang/2017, wherein, following the decision rendered by Hon'ble Delhi High Court in the case of Maruti Suz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk-up at 12.5% on excessive AMP as per DRP direction 33,16,85,139 Reimbursement that appellant should have received. 298,51,66,260 Reimbursement that appellant has received. 33,55,48,510 Adjustment to assessee's income 264,96,17,750 9. Before us, the ld. AR has vehemently stated that the TPO has proceeded by inferring the expenses of international transaction by applying BLT by drawing support from the judgment of the Special Bench of the Tribunal in the case of assessee in ITA No. 5140/DEL/2011. 10. At the outset, we have to state that the Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT 374 ITR 118 has discarded the BLT. The Hon'ble High Court, at para 120 held as under: "120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be subjected to the bright line test on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated. XXX 51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. XXX 68....................In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT." 14. In the light of the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses. XXX 39. It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO. XXX 47. For the aforemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idental but significant. Once, it is established that the act of incurring of AMP expenditure is not a unilateral act of the assessee; the AE needs to compensate the assessee for AMP expenses. iv) It is a fact that brands are valuable and even loss making enterprises having no real assets are purchased for substantial value for their brand and marketing intangibles. v) The issue is not that of transfer of marketing intangibles to AE as the brands and marketing intangibles are already owned by the AE. The issue is that of addition in the value of marketing intangibles owned by the AE owing to the services of development of brand and markets by the assessee for the AE and that of compensation for rendering these services not provided unilaterally by the assessee. 19. We do not find any force in the aforesaid contentions of the ld. DR. As mentioned elsewhere, the Revenue needs to establish on the basis of some tangible material or evidence that there exists an international transaction of provisions of brand building service between the assessee and the AE. We find support from the decision of the Hon'ble Delhi High Court in the case of Honda Seil Power Products Ltd vs DC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and unrelated third parties in India, where there is no income arising to the Indian enterprise from the foreign payee or there is no payment of expense by the Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not seek to benchmark transactions between two Indian enterprises. 23. The Revenue further contends that the assessee is not an independent manufacturer but is manufacturing for the benefit of the group entities and his status is akin to that of a contract manufacturer. Hence AMP activity is not for the sole benefit of the assessee but for the group as a whole. 24. It is the say of the ld. DR that pricing regulations are to applied keeping in mind the overall scheme of the tax payer's business arrangement. The contention of the ld. DR can be summarized as under: a) The assessee being part of a group is not completely independent in its pricing policies including price of raw material purchased from AE, payments in respect of copyrights and patents payable to the AE. Even their product pricing is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were contested by the Assessees who appeals were decided in the Sony Ericsson case, it cannot be said that the decision in Sony Ericsson, to the extent it affirms the existence of an international transaction on account of the incurring of the AMP expenses, decided that issue in the appeals of MSIL as well." 27. At this stage, it would not be out of place to refer to para 6.38 of the OECD Transfer Pricing Guidelines which apply only to limited risk distributors and not to full risk manufacturers like the assessee. The said para from OECD TP Guidelines read as under: "6.38 Where the distributor actually bears the cost of its marketing activities (i.e. there is no arrangement for the owner to reimburse the expenditures), the issue is the extent to which the distributor is able to share in the potential benefits from those activities. In general, in arm's length transactions the ability of a party that is not the legal owner of a marketing intangible to obtain the future benefits of marketing activities that increase the value of that intangible will depend principally on the substance of the rights of that party. For example, a distributor may have the ability to obtain be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no negative stipulation denying economic ownership. Economic ownership when pleaded can be accepted if it is proved by the assessed. The burden is on the assessed. It cannot be assumed. It would affect and have consequences, when there is transfer or termination of economic ownership of the brand or trademark. 152. Determination whether the arrangement is long-term with economic ownership or short-term should be ordinarily based upon the conditions existing at the start of the arrangement and not whether the contract is subsequently renewed. However, it is open to the party, i.e. the assessed, to place evidence including affirmation from the brand owner AE that at the start of the arrangement it was accepted and agreed that the contract would be renewed. 153. Economic ownership of a brand is an intangible asset, just as legal ownership. Undifferentiated, economic ownership brand valuation is not done from moment to moment but would be mandated and required if the assessed is deprived, denied or transfers economic ownership. This can happen upon termination of the distribution-cum-marketing agreement or when economic ownership gets transferred to a third party. Transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bution activity are inter-dependent, the clubbing of transactions cannot be allowed. According to the Revenue, bench marking of AMP transaction is to be carried out using segregated approach and for determination of ALP of such transactions, Bright Line is used as the tool. 32. This contention of the Revenue is no more good as BLT has been discarded by the Hon'ble High Court of Delhi as mentioned elsewhere. The Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd in Tax Appeal NO. 16 of 2014 has held that if the Indian entity has satisfied Transactional Net Margin Method (TNMM), i.e., as long as the operating margins of the Indian enterprise are higher than the operating margins of comparable companies, no further separate compensation for AMP expenses is warranted. The Hon'ble Court held as under: "101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing the above said decision, we hold that the AO/TPO was not justified in making T.P adjustment on account of AMP expenses. Accordingly we hold that no adjustment needs to be done in respect of AMP expenses and accordingly delete the addition made by the AO in this regard." 17. Since the facts are identical, following the decision rendered in AY 2012-13 in the assessee's own case, we hold that no adjustment needs to be done in respect of AMP expenses and accordingly direct the AO to delete the impugned addition. 18. The second issue relates to the T.P adjustment made by the TPO in respect of trading/distribution segment. Identical issue was considered by us in AY 2013-14 in the preceding paragraphs and we have held that the RPM is the appropriate method in the facts of the present case. Following the said decision, we hold that the Resale Price Method is most appropriate method in the facts and circumstances of the present case. Accordingly we direct the AO/TPO to adopt Resale Price Method as most appropriate method and determine the ALP of the transactions accordingly. 19. In the result, the grounds relating to T.P adjustment of trading segment in AY 2013-14 are allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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