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TMI Blog2020 (12) TMI 1111X X X X Extracts X X X X X X X X Extracts X X X X ..... r/re-seller of home appliances and does not own any brand. But since, the bright line test is not appropriate as held by the Hon ble Delhi High Court [ 2015 (3) TMI 580 - DELHI HIGH COURT] we further examine that the element of adding value to the goods by incurring AMP expenditure creating market intangibles and enhancing brand value of the product is missing in present assessee s case. From the perusal of the records it is found that after excluding selling and distribution expense of ₹ 10,18,50,415, the adjustment works out to ₹ 2,85,10,127/- - From the perusal of the records it is found that after excluding selling and distribution expense of ₹ 10,18,50,415, the adjustment works out to ₹ 2,85,10,127. - Appeal of the assessee is partly allowed. - I.T.A. No. 2279/DEL/2018 - - - Dated:- 21-9-2020 - Shri N. K. Billaiya, Accountant Member And Ms Suchitra Kamble, Judicial Member For the Appellant : Sh. Ajay Vohra, Sr. Adv, Sh. Neeraj Jain, Adv, Sh. Abhishek Agarwal, Adv For the Respondent : Sh. Surender Pal, CIT(DR) ORDER PER SUCHITRA KAMBLE, JM This appeal is filed by the assessee against the order dated 31/1/2018 passed unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iving effect to the direction of ITAT, the TPO erred on facts and in law in including sales promotion expenses within the ambit of AMP expenses. 1.6 Without prejudice, the TPO erred on facts and in law in not appreciating that mark-up, if at all, had to be restricted to the value added expenses incurred by the appellant for providing the alleged service in the nature of brand promotion. 3. The assessee company is a wholly owned subsidiary company of Haier Electrical and Appliances Corporation Ltd. China and is engaged in the business of distribution of consumer durable products, for example Air Conditioner, Washing Machine, refrigerator, television etc., purchased from foreign associated enterprises. The intangible rights contained in brand name or trademark/trade name in respect of goods so purchased and distributed were owned by the foreign AE only. In the Assessment Year preceeding to the two relevant Assessment Year, the assessee reported following international transaction with the AE in the Transfer Pricing Audit Report submitted to the Assessing Officer: (a) Purchase of finished products from the foreign AE i.e. HAH (HK) Company Ltd., Hong Kong, amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted the synopsis and submissions during the hearing as follows: 1. Break up of advertisement and selling and distribution expenses: Particulars Advertisement Expenses Selling and distribution expenses 0% Finance Scheme 4,159,124 Dealer Entertainment 2,095,593 Dealer Expenses 28,560,510 Electronic Print Media 148,456,009 Hoarding/Banner 23,295,678 ISD Salary 30,447,435 Others 3,381,781 Printing of Materials 7,523,569 Sales Counter Expenses 25,682,403 Total 171,751,687 101,850,415 273,602,101 Grand To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 497,423 3,634,123,511 Cost of Goods Sold B 1,702,366,577 3,177,456,936 Gross Profit ('GP') C=A-B 574,130,846 456,666,575 GP/ Sales 25.22% 12.57% AMP Expenses D 273,602,101 161,113,130 Less: Selling and Distribution Expenses 101,850,415 24,150,350 Less: Grant received from AE E 151,210,838 - Net AMP Expense F=D-E 20,540,848 136,962,780 Adjusted Gross profit G=C-F 553,589,998 319,703,795 Adjusted GP/Sales G/A 24.32% 8.80% The TPO himself in order dated 21.10.2011 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of products, the assessee entered into agreements with various bankers and finance companies wherein the assessee agreed to buyer the cost of interest of credit period allowed to the end customers on purchase of Haier Products. But the interest costs on the installment given by the customer are directly paid by the assessee company to the banker s finance companies. Therefore, the contention of the assessee that it has the zero percent finance pays, as regards second contention dealer expenses are monthly payment made by the assessee to its dealers for the exclusive area demarcated by the dealer at its show room for its play and sale of its product and the same expenses are agreed between the assessee and its dealers on the basis of the area allotted for sale of products to the assessee the location of the show room etc. This submission is factually correct. ISD salary and expenditure on this is in the nature of monthly payment made by the assessee to 3rd party agency for providing sales representative for sale of the products from the premises of its dealers on contract basis. The sale representatives are trade to actively interacted with the prospective customer for promotin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO. Having regard to the peculiarity of the assessee business module adopted by the assessee. The remit by the Tribunal shall be therefore, decided in the light of the Hon ble Court s observation in the preceding paragraph. From the submissions of the Ld. AR as well as the reliance of the Hon ble Delhi High Court decision in case of Sony Ericsson Ltd. (supra) it can be seen that in the present case assessee is not conducting any band promotion, but in fact is engaged in the business of distribution of consumer durable products. The Hon ble High Court quoted OECD Transfer Pricing Guidelines in para 133 of the said decision as follows: 133. Transfer Pricing Officers have referred to paragraphs 6.36 to 6.39. For the sake of completeness, we would quote the said paragraphs from the OECD Transfer Pricing Guidelines, which read:- 6.36 Difficult transfer pricing problems can arise when marketing activities are undertaken by enterprises that do not own the trademarks or tradenames that they are promoting (such as a distributor of branded goods). In such a case, it is necessary to determine how the marketer should be compensated for those activities. The issue is whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price of the product or a reduction in royalty rate. 6.39 The other question is how the return attributable to marketing activities can be identified. A marketing intangible may obtain value as a consequence of advertising and other promotional expenditures, which can be important to maintain the value of the trademark. However, it can be difficult to determine what these expenditures have contributed to the success of a product. For instance, it can be difficult to determine what advertising and marketing expenditures have contributed to the production or revenue, and to what degree. It is also possible that a new trademark or one newly introduced into a particular market may have no value or little value in that market and its value may change over the years as it makes an impression on the market (or perhaps loses its impact). A dominant market share may to some extent be attributable to marketing efforts of a distributor. The value and any changes will depend to an extent on how effectively the trademark is promoted in the particular market. More fundamentally, in many cases higher returns derived from the sale of trademarked products may be due as much to the unique chara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the assessed. A finding on the said aspect would require detailed verification and ascertainment. 165. An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. 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. If on comparable analysis, including AMP expenses, gross profit margins match or are within the specified range, no transfer pricing adjustment is required. In such cases, the gross profit margin would include the margin or compensation for the AMP expenses incurred. Routine or non-routine AMP expenses would not materially and substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions. 166. On behalf of the assessee, it was initially argued that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Revenue should be asked to furnish details or tables. The Tribunal, at the first instance, would try and dispose of the appeals, rather than passing an order of remand to the Assessing Officer/TPO. The endeavour should be to ascertain and satisfy whether the gross/net profit margin would duly account for AMP expenses. When figures and calculations as per the TNM or RP Method adopted and applied show that the net/gross margins are adequate and acceptable, the appeal of the assessed should be accepted. Where there is a doubt or the other view is plausible, an order of remand for re- examination by the Assessing Officer/TPO would be justified. A practical approach is required and the tribunal has sufficient discretion and flexibility to reach a fair and just conclusion on the arm's length price. In this context, we hereby held that in present case the Revenue has not pointed out as to how the Resale Price Method will not be applicable. Benchmarking AMP expenses applying RPM is as under: Sales A 2,276,497,423 3,634,12 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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