M/s. Reebok India Company, Gurgaon V. DCIT, New Delhi

ITA 1246/DEL/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90919 (ITAT-DELHI)
• Duration Of Justice: 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 19-03-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 04-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJIT KUMAR SINGH
• Assessee Lawyers: PUNEET CHUGH
• Keywords: Transfer pricing; Business expenditure; Opportunity of being heard; Principle of natural justice; International transaction; Retrospective amendment; Permanent establishment; Question of law; Wholly owned subsidiary
• Section: 92C; 143(3); 92B; 37(1); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I NEW DELHI BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI N.K.SAINI , ACCOUNTANT MEMBER ITA NO.12 46 /DEL/ 2015 & SA NO. - 158/DEL/201 5 ASSESSMENT YEAR : 20 1 0 - 11 M/S REEBOK INDIA COMPANY, 5 TH FLOOR, UNITECH COMMERCIAL TOWER - II, SECTOR - 45, BLOCK - B, GREENWOODS CITY, GURGAON, HARYANA - 122001 PAN - AAACR3007K (APPELLANT) VS DCIT, CIRCLE - 21(1), NEW DELHI (R ESPONDENT ) APPELLANT BY SH. AJAY VOHRA, SR. ADV, SH. NEERAJ JAIN, ADV. & SH. PUNEET CHUGH, CA RESPONDENT BY SH. AJIT KUMAR SINGH, CIT DR O R D E R PER DIVA SINGH, JUDICIAL MEMBER BY THE PRESENT APPEAL THE ASSESSEE ASSAILS THE CORRECTNESS OF THE ORDER PASSED BY THE A SSESSING O FFICER (HEREINAFTER REFERRED TO AS AO ) U/S 143(3) R.W.S 144C OF THE I NCOME TAX ACT, 1961 IN 2010 - 11 ASSESSMENT YEAR PASSED IN PURSUANT TO THE DIRECTION OF THE DRP (HEREINAFTER REFERRED TO AS 'DRP') DATED 18.12.2014 ON THE FOLLOWING GROUNDS: - 1 . THAT THE IMPUGNED ORDER OF ASSESSMENT FRAMED BY THE ASSESSING OFFICER IN PURSUANCE OF THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS 'DRP') UN DER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME - TAX ACT, 1961 ( 'ACT'), IS BAD IN LAW, VIOLATIVE OF PRINCIPLES OF NATURAL JUSTICE AND VOID AB - INITIO. 1.1 THAT ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPUTING THE INCOME OF THE APPELLANT A T RS. 72,76,13,235 AGAINST THE RETURNED INCOME OF RS.19,66,32,480. 2. THAT THE DRP/ TRANSFER PRICING OFFICER ('TPO') ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 52,98,12,391 IN RELATION TO THE ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENSES (HEREINAFTER REFERRED TO AS 'THE AMP EXPENSES') INCURRED BY THE APPELLANT. TRANSFER PRICING ADJUSTMENT ON AMP EXPENSES: DATE OF HEARING 19 .03.2015 DATE OF PRONOUNCEMENT 22 .0 4 .2015 ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 2 2.1 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION, UNILATERALLY INCURRED BY THE APPELLANT, COULD NOT BE REGARDED AS A 'TRANSACTION' IN THE ABSENCE OF ANY UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE. 2.2 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AMP EXPENSES, ETC., INCURRED BY THE APPELLANT IN INDIA CANNOT BE CHARACTERIZED AS AN INTERNATIONAL TRANSACTION AS PER SECTION 928, SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 2.3 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN THE ABSENCE OF ANY UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE, THE ASSOCIATED ENTERPRISE WAS UNDER NO OBLIGATION TO REIMBURSE THE AMP EXPENSES INCURRED BY THE APPELLANT FOR SALE OF ITS PRODUCTS. 2.4 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT AMP EXPENSES INCURRED BY THE APPELLANT RESULTED IN PROMOTION OF BRAND OWNED BY THE ASSOCIATED ENTERPRISE, THEREBY CREATING MARKETING INTANGIBLES WHOSE ULTIMATE BENEFIT INURED TO TH E ASSOCIATED ENTERPRISE. 2.5 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT HAD DEVELOPED MARKETING INTANGIBLES FOR THE ASSOCIATED ENTERPRISE IN INDIA BY PERFORMING ALL FUNCTIONS AND BY BEARING ALL ECONOMIC COSTS AND RISKS. 2.6 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT ADVERTISEMENT AND MARKETING EXPENSES WAS NOT INCURRED BY THE APPELLANT ON BEHALF OF OR FOR THE BENEFIT OF THE AE, AND THE BENEFIT TO THE AE, IF ANY, IS ONLY INCIDENTAL. 2.7 THAT THE DR P/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT, DID NOT RESULT IN CREATION OF ANY MARKETING INTANGIBLES; MUCH LESS ON ACCOUNT OF THE AE. 2.8 THAT THE DRP ERRED ON FACTS AND IN LAW IN CONFIRMING THE ADJUSTMENT MADE BY THE TPO WITH REGARD TO THE AMP EXPENSES HOLDING THAT (I) NO INDEPENDENT PERSON, WOULD FOREGO THE COMPENSATION FOR THE ADDITIONAL MARKETING ACTIVITIES UNDERTAKEN BY THE APPELLANT. (II) THE AE NEEDS TO COMPENSATE THE APPELLANT AS IT HAD BE EN FOUND THAT THE APPELLANT HAD INCURRED EXCESSIVE AMP EXPENSES, AND DEVELOPMENT AND PROMOTION OF A BRAND IN INDIA DIRECTLY BENEFITTED THE AE ALSO. 2.9 THAT THE DRP/TPO ERRED IN DEEMING AN INTERNATIONAL TRANSACTION OF PROVISION OF SERVICE ALLEGEDLY ON TH E BASIS THAT THE AMP/SALES RATIO OF THE APPELLANT ALLEGEDLY EXCEEDS THE AMP/SALES RATIO OF COMPARABLE COMPANIES 2.10 THAT THE ASSESSING OFFICER / TPO ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT IN RESPECT OF AMP EXPENSES WITHOUT APPLY ING ANY OF THE METHOD PRESCRIBED UNDER SECTION 92C OF THE ACT. 2.11 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE POWER OF THE TPO IS RESTRICTED TO THE DETERMINATION OF ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS BY APPLYING ONE OF THE PRESCRIBED METHOD AS THE MOST APPROPRIATE METHOD AND NOT TO MAKE DISALLOWANCE OF BUSINESS EXPENSES INCURRED BY THE APPELLANT. 2.12 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN ABSENCE OF SPECIFI C PROVISION UNDER THE TRANSFER PRICING REGULATIONS IN INDIA, ADJUSTMENT ON ACCOUNT OF THE ARM'S LENGTH PRICE OF ADVERTISEMENT AND BRAND PROMOTION EXPENSES COULD NOT BE MADE BY COMPARING THE RATIO OF AMP EXPENSES TO SALES OF THE APPELLANT WITH THAT OF THE C OMPARABLE ENTITIES. ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 3 2.13 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING SELLING AND DISTRIBUTION EXPENSES AMOUNTING TO RS 13,21,20,439 FOR THE PURPOSE OF CALCULATING ALLEGED AMP EXPENDITURE OF THE APPELLANT 2.14 W ITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING THE FOLLOWING COMPANIES AS COMPARABLE FOR BENCHMARKING ADVERTISEMENT AND PUBLICITY EXPENSES: S.NO. NAME OF THE COMPANY AMP/SALES(%) 1. MAYUR LEATHER PRODUCTS LTD. 1.75 2. SANT RUBBERS LIMITED 0.13 3. PHOENIX INTERNATIONAL LTD. 0.14 4. SOHUM SHOPEE LTD. 1.7 5. SUPER SHOES LTD. 0.5 6. ASHAPURA INTIMATES FASHION LTD. 4.9 7. MAYFAIR LEATHER EXPORTS PVT. LTD. 0.77 8. SPENTA INTERNATIONAL LTD. 1.17 9. SUBHASH POLYTEX LTD. 3.29 10. SUPER TANNERY LTD. 1.18 11. SUPERFINE KNITTERS LTD. 3.25 12. VEEJAY LAKSHMI TEXTILES LTD. 0.97 13. HUMA POLY PLAST LTD. 7.10 14. MIRZA INTERNATIONAL LTD. 4.31 15. QUANTUM KNITS PVT. LTD. 11.43 16. SURYAKIRAN INTERNATIONAL LTD. 5.96 AVERAGE 3.03 2.15. WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT CONSIDERING THE FOLLOWING ALTERNATE SET OF COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT ON THE BASIS OF THE DIRECTIONS OF THE HON BLE SPECIAL BENCH, FOR BENCHMARKING THE ADVERTISEMENT AND BRAND PROMOTION EXPENSES: - S.NO. COMPANY NAME AMP/ SALES (%) 1. AMIN INTERNATIONAL LTD. 9.15% 2. ASHAPURA INTIMATES FASHION LTD. 4.90% 3. BODYCARE INTERNATIONAL LTD. 5.71% 4. CANTABIL RETAIL INDIA LTD. 25.40% 5. CELEBRITY FASHIONS LTD. 6.61% 6. CHEVIOT INTERNATIONAL LTD. 6.22% 7. COTTON COUNTY RETAIL LTD. 15.01% 8. DETAIL CLOTHING LTD. 9.45% 9. DOLLAR INDUSTRIES LTD. 19.70% 10. EURO FASHION INNERS LNTL, PVT. LTD. 20.50% 11. HUMA POLY PLAST LTD. 7.40% 12. INDUS - LEAGUE CLOTHING LTD. 8.50% 13. LOCEE EXPORTS LTD 10.34% 14. KEWAL KIRAN CLOTHING LTD. 12.59% 15. KOUTONS RETAIL INDIA LTD. 21.97% 16. LAKHANI INDIA LTD. 3.37% 17. LAWRESHWAR POLYMERS LTD. 7.54% 18. LIBERTY SHOES LTD. 6.81% 19. LUX INDUSTRIES LTD. 13.44% 20. MAYFAIR LEATHER EXPORTS PVT LTD. 0.77% ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 4 21. MIRZA INTERNATIONAL LTD. 4.31% 22. OSCAR GLOBAL LTD. 4.60% 23. QUANTUM KNITS PVT.LTD. 11.43 % 24. RAYMOND APPAREL LTD. (MERGED) 12.77% 25. RELAXO FOOTWEARS LTD. 15.79% 26. RUPA & CO. LTD. 1.93% 27. SPENTA INTERNATIONAL LTD. 1.17% 28. SPICE ISLANDS APPARELS LTD. 23.60% 29. SUBHASH POLYTEX LTD. 3.29% 30. SUPER TANNERY LTD. 1.18% 31. SUPERFINE KNITTERS LTD. 3.25% 32. SURYAKIRAN INTERNATIONAL LTD. 5.96% 33. VEEJAY LAKSHMI TEXTILES LTD. 0.97% 34. ZODIAC CLOTHINQ CO. LTD. 13.02% AVERAGE 9.37% 2.16. WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW, IN NOT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT WAS APPROPRIATELY ESTABLISHED TO BE AT ARM'S LENGTH APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM) ON ENTITY - WIDE B ASIS. 2.17. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT SINCE THE OPERATING PROFIT MARGINS OF THE APPELLANT WERE HIGHER THAN MARGINS OF THE COMPARABLE COMPANIES, THE APPELLANT WAS ADEQUATELY COMPENSATED FOR THE ALLEGEDLY EXCESS AMP EXPENSES INCURRED BY THE APPELLANT. 2.18 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN NOT RESTRICTING THE ADJUSTMENT TO THE PURCHASES MADE FROM THE ASSOCIATED ENTERPRISES. 2.19 THAT THE ASSESSING OFFICER I ORP ERRED O N FACTS AND IN LAW IN HOLDING THAT THE APPELLANT HAS RENDERED SERVICE TO THE AES BY INCURRING THE AMP EXPENSE AND BY HOLDING THAT MARKUP HAS TO BE EARNED BY THE APPELLANT IN RESPECT OF THE AMP EXPENSES, ALLEGED TO HAVE INCURRED FOR AND ON BEHALF OF THE AE. 2.20. THAT THE DRP/ TPO ERRED ON FACTS AND IN LAW IN APPLYING A MARKUP OF 12.50% ON THE ALLEGED EXCESS AMP EXPENDITURE INCURRED BY THE APPELLANT, WHILE COMPUTING THE VALUE OF COMPENSATION TO BE RECEIVED BY THE APPELLANT ON ACCOUNT OF PROMOTION OF 'REEBOK' BRAND. 2.21 WITHOUT PREJUDICE, THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT MARKUP , 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. CORPORATE TAX ADDITION: 3. THAT THE ASSESSING OFFICER/ DRP ERRED ON FACTS AND IN LAW IN DISALLOWING AN AMOUNT OF RS.11,68,364, INCURRED BY APPELLANT ON ACCOUNT OF LEGAL AND PROFESSIONAL EXPENSES ON AN AD - HOC BASIS, WITHOUT PROVIDING ANY COGENT REASONS FOR DOING SO. 3.1 THAT THE DR P ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT HAD NOT PROVIDED ANY EVIDENCES FOR ESTABLISHING THAT THE EXPENSES PERTAIN TO LEGAL AND PROFESSIONAL CHARGES. 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTIO N 2348 AND SECTION 234C OF THE ACT. ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 5 THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR VARY, ANY OF THE AFORE SAID GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING OF THE APPEAL AND CONSIDER EACH OF THE GROUNDS AS WITHOUT PREJUDICE TO THE OTHER GROUNDS OF APPEAL. 2. THE PRESENT APPEAL FILED BY THE ASSESSEE ARGUED BY SR. ADV., SH.AJAY VOHRA ALONGWITH SH.NEERAJ JAIN ON 17 TH MARCH 2015 WAS REQUIRED TO BE ARGUED AFRESH ON 19.03.2015 AS THE LD. STANDING COUNSEL FOR THE REVENUE PRESENT DURING THE HEARING ON 17 TH MARCH 2015 HAD WALKED OUT FROM THE COURT ON 19 TH MARCH 2015 ON BEING QUESTIONED ABOUT HIS AUTHORITY TO APPEAR AS PER THE RESPECTIVE JUDICIAL NOTINGS OF THE SAID DATE. THE QUERY SO RAISED QUA HIS AUTHORITY WAS RAISED AS A RESULT OF HIS OWN PLEADINGS T HAT HE DOES NOT HAVE THE AUTHORITY TO ARGUE ALL APPEALS. DUE TO HIS LEAVING THE COURT, T HE BENCH RE - ASSEMBLED AND THE HEARINGS COULD RESUME ONLY AFTERWARDS WHEN CIT DR (TRANSFER PRICING), MR. A. K. SINGH WAS AVAILABLE. CONSEQUENTLY THE LD. AR WAS R EQUIRED TO ADDRESS THE ISSUES AGAIN QUA THE GROUNDS RAISED. 3. ON BEHALF OF THE ASSESSEE COPY O F THE JUDGEMENT OF THE HON BLE HIGH COURT DATED 16.03.2015 IN THE CASE OF SONY ERICSON & OTHERS HAD BEEN FILED. LD. AR INVITING ATTENTION TO GROUND NO. - 2 TO 2 .21 HAD SUBMITTED THAT THE APPEAL ON THE SAID ISSUE WILL NEED TO BE RESTORED AS RELEVANT FACTS FOR DECIDING THE ISSUE ARE NOT AVAILABLE ON RECORD. INVITING ATTENTION TO THE AO/TPO (HEREINAFTER REFERRED TO AS ' TPO ') AND THE DRP IT WAS SUBMITTED THAT THE D ECISION ON FACTS BY THE TAX AUTHORITIES HAS BEEN TAKEN FOLLOWING THE ORDER OF THE SPECIAL BENCH IN THE CASE OF L.G. ELECTRONICS CASE AND THE HON BLE HIGH COURT IN THE AFORESAID DECISION HAS NOT APPROVED OF THE MAJORITY DECISION OF THE SPECIAL BENCH AND CON SIDERING PARA 17.4 OF THE SPECIAL BENCH AND THE FINDINGS OF THE TRIBUNAL HAS DEPRECATED THE BROAD BRUSH APPROACH UPHELD BY THE TRIBUNAL AS UNWARRANTED AND AMOUNTING TO JUDICIAL LEGISLATION. FOR THE SAID PURPOSE SPECIFIC ATTENTION WAS INVITED TO PARA 120 O F THE JUDGEMENT OF THE HON BLE HIGH COURT. 3.1. ACCORDINGLY IT WAS HIS PRAYER THAT SINCE THE HON BLE HIGH COURT HAS NOT APPROVED OF THE DECISION OF THE SPECIAL BENCH THE ISSUE NEEDS TO BE RESTORED TO THE AO/TPO AS THE FACTS WILL NEED TO BE ADDRESSED AFRES H IN THE LIGHT OF THE DIRECTIONS OF THE HON BLE HIGH COURT. ATTENTION WAS INVITED TO THE RELEVANT FINDINGS IN THE DRP S ORDER AND THE AO/TPO AND PAGE 7 OF THE JUDGEMENT FILED WHEREIN IT HAS BEEN BROUGHT OUT THAT AGAINST THE FINDINGS OF THE ITAT IN 2008 - 09 ASSESSMENT YEAR BOTH THE REVENUE AND THE ASSESSEE WERE IN APPEAL BEFORE THE ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 6 HON BLE HIGH COURT. IT WAS SUBMITTED THAT THE SAID ORDER HAS BEEN CONSIDERED BY THE DRP WHICH STANDS RESTORED BY THE HON BLE HIGH COURT AS THE MAJORITY DECISION OF THE SPECIAL BE NCH IN THE L. G. ELECTRONICS CASE WAS HELD TO BE ERRONEOUS AND UNACCEPTABLE IN TERMS OF THE DISCUSSION HELD IN THE JUDGEMENT WHICH HAD BEEN SUMMED UP AT PAGES 135 - 141 IN PARAS 194 - 196 BY THEIR LORDSHIPS. 4. ADDRESSING GROUND NO.3 IT WAS HIS SUBMISSION T HAT THE NATURE OF EXPENSES DEMONSTRATE THAT THEY WERE FOR THE BUSINESS PURPOSE OF THE ASSESSEE AND MAY BE EXAMINED AFRESH AS THE RELEVANT FACTS AND EVIDENCES WERE ON RECORD ACCORDINGLY IT WAS SUBMITTED GROUND NO. - 3 MAY ALSO BE RESTORED SUBJECT TO THE ARGUM ENTS OF THE DEPARTMENT AND GROUND NO. - 4 IT WAS ACCEPTED WAS CONSEQUENTIAL. 5. O N 17 TH MARCH 2015, THE REVENUE REPRESENTED BY STANDING COUNSEL FOR THE REVENUE, MR. J. JAMES, ADV. SOUGHT AN ADJOURNMENT WHICH WAS GRANTED AND THE HEARING WAS ADJOURNED TO 19 .03.2015. ON 19.03.2015 THE REVENUE WAS REPRESENTED ONLY BY THE STANDING COUNSEL AS PER THE COURT PROCEEDINGS IN THE RESPECTIVE APPEALS AND PETITIONS IN THE CAUSE LIST. ON THE SAID DATE THE COURT WAS FORCED TO RISE AS THE STANDING COUNSEL FOR THE REVENUE LEFT THE COURT THEREBY LEAVING THE REVENUE UN REPRESENTED . SUBSEQUENTLY THE COURT RE - ASSEMBLED IN ORDER TO AFFORD THE REVENUE TO REPRESENT ITS CASE BY SOME RESPONSIBLE PERSON AND AS OBSERVED ON THE ARRIVAL OF CIT DR (TRANSFER PRICING), SH. AJIT KUMAR SIN GH THE LD. AR WAS REQUIRED TO RE - ARGUE AFRESH FOR THE BENEFIT OF THE REVENUE. 6. THE LD. AR REITERATED HIS SUBMISSION AGAIN. REFERRING TO THE FINDINGS OF THE DRP AND THE JUDGEMENT OF THE HON BLE HIGH COURT IN THE CASE OF SONY ERICSON HE MADE OUT A CASE, A GAIN STATING THAT THE ISSUE NEEDS TO BE RESTORED. 7. THE LD. CIT DR THOUGH PLACED RELIANCE ON THE FINAL ASSESSMENT ORDER SUBMITTED THAT THE ISSUES CAN BE DECIDED BY THE ITAT AND NEED NOT BE RESTORED. THE SAID SUBMISSION WAS WELCOMED BY THE LD. AR WHO, HO WEVER, STATED THAT FULL FACTS ARE NOT AVAILABLE AS THE ISSUE HAS NOT BEEN LOOKED INTO BY THE TAX AUTHORITIES FROM THE PERSPECTIVE OF THE DECISION OF THE HON BLE HIGH COURT AS THE SAME WAS NOT AVAILABLE. ACCORDINGLY IT WAS HIS STAND THAT IF THE REVENUE WA S OF THE VIEW THAT THE ISSUE HAS TO BE DECIDED BY THE ITAT HE WOULD ARGUE ON THOSE LINES. THEREUPON THE LD. CIT DR IN THE CIRCUMSTANCES ON CONSIDERING THE SPECIFIC AND SPEAKING OBSERVATIONS OF THE HON BLE DELHI HIGH COURT STATED THAT HE HAS NO ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 7 OBJECTION IF THE FACTS ARE LOOKED INTO BY THE AO/TPO, HOWEVER FOR THE RECORD HE WAS RELYING UPON THE DECISION OF THE SPECIAL BENCH. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. A PERUSAL OF THE SAME SHOWS THAT THE REEBOK GROU P IS CLAIMED TO BE A US BASED GLOBAL COMPANY IN THE DESIGN AND MARKETING OF SPORTS AND FITNESS PRODUCTS, INCLUDING FOOTWEAR, APPAREL AND ACCESSORIES, AS WELL AS THE DESIGN AND MARKETING OF THE SAME. AS PER THE TRANSFER PRICING REPORT ON RECORD CONSIDERED BY THE TAX AUTHORITIES IT IS CLAIMED TO BE A GERMAN ATHLETIC GIANT AS ADIDAS AG HAD ACQUIRED REEBOK FOR ABOUT 3.8 BILLION USD. ADIDAS GROUP IS CONSIDERED TO BE A GLOBAL LEADER IN THE SPORTSWEAR GOODS INDUSTRY AND IS CONSIDERED TO HAVE THE BROADEST PORTFO LIO OF PRODUCTS. THE ASSESSEE COMPANY AS PER RECORD IS INCORPORATED ON 01.03.1995 AS A JOINT VENTURE BETWEEN THE REEBOK MAURITIUS LTD. AND FOCUS ENERGY LTD. (FORMERLY KNOWN AS PHOENIX OVERSEAS). THE ASSESSEE IS STATED TO BE ENGAGED IN THE BUSINESS OF DIS TRIBUTION OF FOOTWEAR, APPAREL, FITNESS EQUIPMENT AND SPORTSWEAR. IT PROCURES FINISHED GOODS (MOSTLY FROM LOCAL SUPPLIERS) AND RESELLS THROUGH DISTRIBUTORS AND FRANCHISE STORES. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION HAD DECLARED TAXABLE INCOME OF RS.19.66 CRORE ODD. IN VIEW OF THE TPO S ORDER PROPOSING AN ADJUSTMENT OF RS.67,17,86,981/ - N WHICH WAS OBJECTED TO BEFORE THE DRP, AN ADDITION OF RS.52,98,12,391/ - WAS MADE ALONGWITH AN ADDITION OF RS.11,68,364/ - ON ACCOUNT OF LEGAL AND PROFESSIONAL EXPEN SES RESULTING IN THE ASSESSMENT BEING CONCLUDED AT A TOTAL INCOME OF RS.72,76,13,240/ - . 9. THE ASSESSEE IS IN APPEAL AGAINST THE SAID ACTION ON THE AFORE - MENTIONED GROUNDS. A PERUSAL OF THE RECORD SHOWS THAT THE ASSESSEE DISCLOSED THE FOLLOWING INTERNATI ONAL TRANSACTION IN THE YEAR UNDER CONSIDERATION: - 2.1. INTERNATIONAL TRANSACTIONS NATURE OF TRANSACTION METHOD SELECTED AMOUNT (IN RS.) PAYMENT OF ROYALTY CUP/TNMM 261,930,480 PURCHASE OF LAPTOP CUP/TNMM 14,559 PURCHASE OF OFFICE EQUIPMENT CUP/TNMM 285,415 IMPORT OF FINISHED PRODUCTS FOR RESALE RPM/TNMM 188,115,090 RECEIPT OF SERVICES TNMM 7,928,026 REIMBURSEMENT OF EXPENSES BY/TO ASSOCIATED ENTERPRISES - 6,27,837 ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 8 3. TRANSFER PRICING APPROACH OF THE ASSESSEE: - THE INTERNATIONAL TRANSACTIONS RELATING TO IMPORT OF FINISHED PRODUCTS FOR RESALE HAS BEEN BENCHMARKED TNMM WHEREIN IT HAS BEEN SHOWN THAT THE OP/SALES MARGIN EARNED BY RIC IS 6.40% AS COMPARED TO 6.35% EARNED BY THE 4 COMPARABLES SELECTED AND TRANSACTION HAS BEEN SHOWN TO BE AT ARM S L ENGTH. ROYALTY HAS BEEN BENCHMARKED USING CUP AND ROYALTY PAYMENT BY SIERRA INDUSTRIAL ENTERPRISES LTD. OF 5% TO NIKE INTERNATIONAL LTD. FOR MARKETING AND SALE OF NIKE BRAND ATHLETIC FOOTWEAR, APPARELS, BAGS AND ACCESSORIES WAS TAKEN AS RELEVANT CUP. THE ASSESSEE HAS ALSO COMPARED THIS TRANSACTION TO REEBOK SOUTH AFRICA (PTY) LTD. (RSA) ROYALTY PAYMENT TO REEBOK UK (RUK) AT 6% FOR TRANSFER OF TECHNICAL KNOW - HOW. 9.1. THE TPO CONSIDERING THE AUDITED ACCOUNT OF THE ASSESSEE CONCLUDED THAT THE FOLLOWING EX PENDITURE INCURRED ON ADVERTISEMENT AND MARKETING PROMOTION GOODS WAS INCURRED FOR EXTENDING THE REACH OF THE BRANDS OWNED BY THE AE S WHO IS THE FINANCIAL BENEFICIARY AND THE FOLLOWING EXPENDITURE INCURRED FOR BUILDING THE BRAND OWNED BY THE AE ACCORDING LY WAS QUESTIONED: - ADVERTISEMENT & PUBLICITY : RS.58,01,81,275 SELLING & DISTRIBUTION : RS.12,61,99,636 COMMISSION ON SALES : RS.13,21,20,439 TOTAL : RS.83,85,01,350 9.2. ACCORDINGLY AFTER SHOW CAUSING THE ASSESSEE AND CONSIDERING THE 3 COMPARABLES OF THE ASSESSEE THE TPO REJECTED ONE OF THOSE AND INSTEAD INTRODUCED 5 NEW COMPARABLES WHICH WERE CONSIDERED TO BE ENGAGED IN SIMILAR DISTRIBUTION AND SALES ACTIVITIES OF SIMILAR PRODUCTS AND THE REBY HE ARRIVED AT THE ARITHMETIC MEAN OF 0.85% AND CONCLUDED THAT THE ASSESSEE HAD INCURRED EXPENDITURE IN EXCESS OF THE BRIGHT LINE TO THE FOLLOWING EXTENT: - AMOUNT IN INR VALUE OF GROSS SALES 7,78,15,09,376 AMP/SALES OF THE COMPARABLES 0.85% AMOUNT THAT REPRESENT BRIGHT LINE 6,61,42,829 EXPENDITURE ON AMP BY ASSESSEE 83,85,01,350 EXPENDITURE IN EXCESS OF BRIGHT LINE 77,23,58,521 9.3. AS A RESULT OF THIS, HE PROPOSED AN ADJUSTMENT OF RS.86.89 CRORES ODD IN THE FOLLOWING MANNER: - AMOUNT IN INR VALUE OF GROSS SALES 7,78,15,09,376 AMP/SALES OF THE COMPARABLES 0.85% AMOUNT THAT REPRESENT BRIGHT LINE 6,61,42,829 ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 9 EXPENDITURE ON AMP BY ASSESSEE 83 ,85,01,350 EXPENDITURE IN EXCESS OF BRIGHT LINE 77,23,58,521 MARKUP @ 12.50% 9,65,44,815 ADJUSTMENT REQUIRED TO BE MADE 86,89,03,336 9.4. THE ASSESSEE THEREAFTER IS FOUND TO HAVE SUBMITTED A LIST OF 34 COMPARABLES FOR BENCHMA RKING THE AMP/SALES AS THE AVERAGE MEAN OF 9.37%. CONSIDERING THE SAME THE TPO ACCEPTED 7 OF THESE AND ULTIMATELY ARRIVING AT A LIST OF 16 COMPARABLES. AS A RESULT THEREOF THE AMP SALES PERCENTAGE OF THE COMPARABLES WAS TAKEN AT 3.03% RESULTING IN COMPUT ING THE EXPENDITURE IN EXCESS OF THE BRIGHT LINE AT RS.60.27 CRORE ODD. APPLYING A MARK - UP OF 12.15% (SBI PLR) ADJUSTMENT OF RS.67,17,86,981/ - WAS PROPOSED. 10. THE ASSESSEE AVAILING OF THE STATUTORY REMEDY FILED OBJECTION BEFORE THE DRP. 10.1. A PERUSAL OF THE DRP S ORDER SHOWS THAT THE OBJECTIONS NO. - 1, 1.1, 1.3 - 1.8, 1.11 & 1.12 WERE NOT CONSIDERED IN VIEW OF THE DECISION OF THE SPECIAL BENCH IN L.G. ELECTRONICS INDIA PVT. LTD. THE DRP WAS OF THE VIEW THAT THE SPECIAL BENCH IN THE AFORESAID DECISION HA D ELABORATELY DISCUSSED THE INTERPLAY BETWEEN SECTION 37(1) I.E FOR THE PURPOSE OF BUSINESS AND SECTION 92 AND THEREAFTER HAD DECIDED THE ISSUE IN FAVOUR OF THE REVENUE. THE DRP FURTHER TOOK OF THE FACT THAT THE ITAT VIDE ITS ORDER DATED 31.05.2014 IN T HE CASE OF THE ASSESSEE IN 2008 - 09 ASSESSMENT YEAR HAS HELD THAT IT IS AN INTERNATIONAL TRANSACTION WHICH NEEDS TO BE BENCH - MARKED IN LINE WITH THE DECISION OF THE AFORESAID SPECIAL BENCH. 10.2. IT IS SEEN THAT THE OBJECTION NO. - 1.2, 1.21 & 1.26 OF THE ASS ESSEE WAS NOT ACCEPTED BY THE DRP. FOR THE SAID CONCLUSION RELIANCE WAS PLACED UPON THE TWO DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL NAMELY FROM STAR INDIA PVT. LTD. VS ACIT (2008 - TIOL - 426 - ITAT - MUM) AND UCB INDIA PVT. LTD. 317 ITR 292 (AT) (MUMBAI), W HEREIN IT HAD BEEN HELD THAT EACH TRANSACTION NEEDS TO BE SEPARATELY BENCH - MARKED AS CLUBBING OF TRANSACTIONS IS ALLOWED ONLY AS AN EXCEPTION AND NOT AS A RULE AND IT IS POSSIBLE ONLY WHEN THE UNDERLYING INTERNATIONAL TRANSACTIONS ARE HOMOGENEOUS IN NATUR E. IT IS FURTHER SEEN THAT THE DECISION OF BMW INDIA PVT. LTD. WAS ALSO REFERRED TO BEFORE THE DRP WHO DISTINGUISHED THE SAME AS A CASE OF PURE DISTRIBUTOR AS OPPOSED TO THE ASSESSEE WHO WAS A MANUFACTURER AND A DISTRIBUTOR. FURTHER RELYING UPON THE DECI SION OF SPECIAL ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 10 BENCH SPECIFIC PARA 21.8 & 21.10, IT IS SEEN THAT THESE AFORESAID OBJECTIONS OF THE ASSESSEE WERE NOT ACCEPTED. 10.3. IT IS FURTHER SEEN THAT OBJECTION NOS. - 1.9 & 1.10 WERE ALSO DISMISSED PRIMARILY RELYING AGAIN UPON THE DECISION OF THE SPE CIAL BENCH IN L. G. ELECTRONICS CASE IN VIEW OF THE FINDINGS THEREIN ON THE CREATION OF MARKETING INTANGIBLES AND ALSO ON THE DECISION OF THE ITAT IN ASSESSEE S OWN CASE FOR 2008 - 09 ASSESSMENT YEAR WHICH HAD ALSO RELIED UPON THE AFORESAID DECISION OF THE SPECIAL BENCH. 10.4. SIMILARLY OBJECTIONS NO. - 1.13 AND 1.16 TO 1.19 CHALLENGING THE USE OF BRIGHT LINE TEST ; USE OF ROUTINE RISK DISTRIBUTOR AS A COMPARABLE, CONSIDERING THE METHODOLOGY APPROVED BY THE SPECIAL BENCH IN L. G. ELECTRONICS CASE WERE ALSO REJECTED. 10.5. THE REMAINING OBJECTIONS NO. - 1.14, 1.20 WERE ALSO DISMISSED RELYING UPON THE AFORESAID DECISION OF THE SPECIAL BENCH. SIMILAR FATE WAS MET BY OBJECTION NO.1.15 WHERE THE WITHOUT PREJUDICE ARGUMENT PUT FORTH BY THE ASSESSEE BEING AN ECO NOMIC OWNER OF THE MARKETING INTANGIBLES WAS ALSO NOT ACCEPTED AS THE CONCEPT FOLLOWING THE VIEW OF THE SPECIAL BENCH. 10.6. OBJECTION NO. - 1.22 ADDRESSING THE ISSUE OF SELLING AND DISTRIBUTION EXPENSES FOLLOWING THE DECISION OF ITAT IN ASSESSEE S OWN CAS E IN 2008 - 09 ASSESSMENT YEAR WAS RESTORED BACK TO THE AO. THE OBJECTIONS POSED TO THE 4 COMPARABLES BY THE ASSESSEE VIDE OBJECTION NO. - 1.23 - 1.25 WAS ALSO NOT ACCEPTED. SIMILARLY THE OBJECTION NO. - 1.27, 1.28 CHALLENGING THE MARK - UP OF 2.15% WAS ALSO DISM ISSED. 11. IN THE AFORESAID BACKGROUND THE ARGUMENTS OF THE LD. AR THAT THE ISSUES NEED TO BE CONSIDERED AFRESH ON FACTS CANNOT BE OUTRIGHTLY DISCARDED. THEIR LORDSHIPS IN PAGE 72 AND SPECIFIC PARAS 102 & PARA 104 OF THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IT IS SEEN HAVE DISCUSSED AT LENGTH THE TERMS BRAND AND BRAND BUILDING REFERRING TO THE MINORITY VIEW OF THE DECISION OF THE SPECIAL BENCH IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD. (SUPRA) AND IN PARA 105 OF THE SAID JUDGEMENT HAVE OBS ERVED THAT THERE IS A LINE OF DEMARCATION BETWEEN DEVELOPMENT AND EXPLOITATION . HOLDING THAT DEVELOPMENT OF A TRADEMARK OR GOODWILL IS A SLOW ONGOING PROCESS WHICH TAKES PLACE OVER A PASSAGE OF TIME AND ALSO TAKING NOTE OF THE FACT THAT EXPENDITURE I NCURRED FOR PROMOTING PRODUCTS OF ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 11 THE TRADE - MARK WHICH COMES ALONGWITH THE GOODWILL CREATES A SITUATION WHERE THERE IS A LIKELIHOOD THAT THE CONSUMERS WILL MAKE FUTURE PURCHASES OF THE SAME GOODS OR SERVICES WHICH ALL WOULD IMPACT THE VALUE OF THE BRAND. THUS THE VALUE IT HAS BEEN HELD WOULD DEPEND UPON INTANGIBLES OTHER THAN TRADEMARK SO AS TO FINALLY CONCLUDE THAT PURELY AMP EXPENSES CANNOT BE SAID TO ONLY CONTRIBUTE TO THEIR INTRINSIC VALUE. OUR ATTENTION HAS ALSO BEEN INVITED TO PARA 106 IN SUPPORT O F THE ARGUMENT THAT THE ISSUE WILL NEED TO BE LOOKED AT AFRESH BOTH BY THE TAXPAYER AS WELL AS THE TAX AUTHORITY: - 106. THEREFORE, TO ASSERT AND PROFESS THAT BRAND BUILDING AS EQUIVALENT OR SUBSTANTIAL ATTRIBUTE OF ADVERTISEMENT AND SALE PROMOTION WOULD BE LARGELY INCORRECT. IT REPRESENTS A COORDINATED SYNERGETIC IMPACT CREATED BY ASSORTMENT LARGELY REPRESENTING REPUTATION AND QUALITY. THERE ARE A GOOD NUMBER OF EXAMPLES WHERE BRANDS HAVE BEEN BUILT WITHOUT INCURRING SUBSTANTIAL ADVERTISEMENT OR PROMOTION EXPENSES AND ALSO CASES WHERE IN SPITE OF EXTENSIVE AND LARGE SCALE ADVERTISEMENTS, BRAND VALUES HAVE NOT BEEN CREATED. THEREFORE, IT WOULD BE ERRONEOUS AND FALLACIOUS TO TREAT BRAND BUILDING AS COUNTERPART OR TO COMMENSURATE BRAND WITH ADVERTISEMENT EXPE NSES. BRAND BUILDING OR CREATION IS A VEXED AND COMPLEXED ISSUE, SURELY NOT JUST RELATED TO ADVERTISEMENT. ADVERTISEMENTS MAY BE THE QUICKEST AND EFFECTIVE WAY TO TELL A BRAND STORY TO A LARGE AUDIENCE, BUT JUST THAT IS NOT ENOUGH TO CREATE OR BUILD A BRAN D. MARKET VALUE OF A BRAND WOULD DEPEND UPON HOW MANY CUSTOMERS YOU HAVE, WHICH HAS REFERENCE TO BRAND GOODWILL, COMPARED TO A BASELINE OF AN UNKNOWN BRAND. IT IS IN THIS MANNER THAT VALUE OF THE BRAND OR BRAND EQUITY IS CALCULATED. SUCH CALCULATIONS WOULD BE RELEVANT WHEN THERE IS AN ATTEMPT TO SELL OR TRANSFER THE BRAND NAME. REPUTED BRANDS DO NOT GO IN FOR ADVERTISEMENT WITH THE INTENTION TO INCREASE THE BRAND VALUE, BUT TO INCREASE THE SALES AND THEREBY EARN LARGER AND GREATER PROFITS. IT IS NOT THE CAS E OF THE REVENUE THAT THE FOREIGN AES ARE IN THE BUSINESS OF SALE/TRANSFER OF BRANDS. 11.1. REFERENCE HAS BEEN MADE TO PARAS 111 AND 112 OF THE SAID JUDGEMENT SO AS TO POINT OUT THAT THE ISSUES CONSIDERED IN THE LIGHT OF THE PARAMETERS OF THE MAJORITY J UDGEMENT IN L.G. ELECTRONICS INDIA PVT. LTD. (SUPRA) AS SET OUT IN PARA 17.4 ARE NO LONGER GOOD LAW AS THEY HAVE BEEN HELD TO BE UNREALISTIC AND IMPRACTICABLE, IF NOT DELUSIVE AND MISLEADING . THE BRANDED PRODUCTS DUE TO CONSUMERISM AND COMMERCIAL REALI TY HAVE BEEN HELD TO OWN AND HAVE A REPUTATION AND INTRINSIC BELIEVABILITY AND ACCEPTANCE WHICH ALSO RESULTS IN HIGHER PRICE AND MARGINS CONTRARY TO THE CONCLUSIONS OF THE MAJORITY VIEW IN THE DECISION OF THE SPECIAL BENCH CONSEQUENTLY BOTH THE TAX AUTHORITY AND THE TAX PAYER WILL NEED TO ADDRESS THE ISSUES AFRESH. FOR READY - REFERENCE, WE REPRODUCE THE SAME: - ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 12 111. ACCEPTING THE PARAMETERS OF THE BRIGHT LINE TEST AND IF THE SAID PARAMETERS AND TESTS ARE APPLIED TO INDIAN COMPANIES WITH REPUTED BRA NDS AND SUBSTANTIAL AMP EXPENSES, WOULD LEAD TO DIFFICULTY AND UNFORESEEN TAX IMPLICATIONS AND COMPLICATIONS. TATA, HERO, MAHINDRA, TVS, BAJAJ, GODREJ, VIDEOCON GROUP AND SEVERAL OTHERS ARE BOTH MANUFACTURERS AND OWNERS OF INTANGIBLE PROPERTY IN THE FORM O F BRAND NAMES. THEY INCUR SUBSTANTIAL AMP EXPENDITURE. IF WE APPLY THE BRIGHT LINE TEST WITH REFERENCE TO INDICATORS MENTIONED IN PARAGRAPH 17.4 AS WELL AS THE RATIO EXPOUNDED BY THE MAJORITY JUDGMENT IN L.G. ELECTRONICS INDIA PVT LTD CASE (SUPRA) IN PAR AGRAPH 17.6 TO BIFURCATE AND SEGREGATE AMP EXPENSES TOWARDS BRAND BUILDING AND CREATION, THE RESULTS WOULD BE STARTLING AND UNACCEPTABLE. THE SAME IS THE SITUATION IN CASE WE APPLY THE PARAMETERS AND THE BRIGHT LINE TEST IN TERMS OF PARAGRAPH 17.4 OR AS PER THE CONTENTION OF THE REVENUE, I.E. AMP EXPENSES INCURRED BY A DISTRIBUTOR WHO DOES NOT HAVE ANY RIGHT IN THE INTANGIBLE BRAND VALUE AND THE PRODUCT BEING MARKETED BY HIM. THIS WOULD BE UNREALISTIC AND IMPRACTICABLE, IF NOT DELUSIVE AND MISLEADING. (AF ORESAID REPUTED INDIAN COMPANIES, IT IS PATENT, ARE NOT TO BE TREATED AS COMPARABLES WITH THE ASSESSED, I.E. THE TESTED PARTIES IN THESE APPEALS, FOR THE LATTER ARE NOT LEGAL OWNERS OF THE BRAND NAME/TRADEMARK.) 112. BRANDED PRODUCTS AND BRAND IMAGE IS A RESULT OF CONSUMERISM AND A COMMERCIAL REALITY, AS BRANDED PRODUCTS OWN AND HAVE A REPUTATION OF INTRINSIC BELIEVABILITY AND ACCEPTANCE WHICH RESULTS IN HIGHER PRICE AND MARGINS. TRANS - BORDER BRAND REPUTATION IS RECOGNIZED JUDICIALLY AND IN THE COMMERCIAL WORLD. WELL KNOWN AND RENOWNED BRANDS HAD EXTENSIVE GOODWILL AND IMAGE, EVEN BEFORE THEY BECAME FREELY AND READILY AVAILABLE IN INDIA THROUGH THE SUBSIDIARY AES, WHO ARE ASSESSEES BEFORE US. IT CANNOT BE DENIED THAT THE REPUTED AND ESTABLISHED BRANDS HAD VALUE AND GOODWILL. BUT A NEW BRAND/ TRADE - MARK/ TRADE - NAME WOULD BE RELATIVELY UNKNOWN. WE HAVE REFERRED TO THE SAID POSITION NOT TO MAKE A COMPARISON BETWEEN DIFFERENT BRANDS BUT TO HIGHLIGHT THAT THESE ARE REL EVANT FACTORS AND COULD AFFECT THE FUNCTION UNDERTAKEN WHICH MUST BE DULY TAKEN INTO CONSIDERATION IN SELECTION OF THE COMPARABLES OR WHEN MAKING SUBJECTIVE ADJUSTMENT, AND THUS, FOR COMPUTING THE ARM S LENGTH PRICE. THE AFORESAID DISCUSSION SUBSTANTIALLY NEGATES AND REJECTS THE REVENUE S CASE. BUT THERE ARE ASPECTS AND CONTENTIONS IN FAVOUR OF THE REVENUE WHICH REQUIRES ELUCIDATION. (EMPHASIS PROVIDED) 11.2. REFERRING TO PARA 113 IT HAS BEEN SUBMITTED THAT CONSIDERING THE APPLICABILITY OF BRIGHT LINE TE ST, THE MINORITY AND THE MAJORITY VIEW IN THE CONTEXT OF PARA 17.4 AND 17.6, AND THE STAND OF THE REVENUE; AND THE VARIED NUANCES OF THE BRAND AND BRAND BUILDING IN PARA 117 THEIR LORDSHIPS FOUND THE ARGUMENT OF THE REVENUE AS SCEPTICAL AND CONJECTURA L. THEIR LORDSHIPS HELD THAT THE REVENUE HAS GENERALISED AND THE ARGUMENT ADOPTS A UNIVERSAL AND UBIQUITOUS APPROACH IN THE CONTENTION THAT INCREASED TURNOVER WOULD NOT BENEFIT THE INDIAN AE. ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 13 11.3. INVITING ATTENTION TO PARA 118 IT WAS SUBMITTED THAT THE INDIAN SUBSIDIARIES IN THE PRESENT CASE ARE ENGAGED IN DISTRIBUTION AND MARKETING FUNCTIONS OF THE PRODUCTS MANUFACTURED BY FOREIGN AES AND IN SOME CASES, PRODUCTS ARE ALSO MANUFACTURED BY THEM UNDER LICENSE IN INDIA. THE FACTS CONSEQUENTLY NEED TO BE CO NSIDERED AFRESH. 11.4. REFERRING TO THE SAID PARA IT WAS SUBMITTED THAT THEIR LORDSHIPS HAVE HELD THAT EVEN THOUGH THE FUNCTIONS PERFORMED OF MARKETING AND DISTRIBUTION COME UNDER TWO DISTINCT HEADINGS BUT IT CANNOT BE SAID THAT THEY CANNOT BE COMBINED AS ONE PACKAGE OR A BUNDLE AND CONSEQUENTLY THE FAR ANALYSIS OF THE ASSESSEE AS WELL AS THE COMPARABLES WILL NECESSARILY BE REQUIRED TO BE DONE AFRESH. 11.5. ADDRESSING PARA 119 IT WAS SUBMITTED THEIR LORDSHIPS CONSIDERING THE POSITION OF MARKETING AND DISTRIBUTION COMPANIES HAVE HELD THAT IT CANNOT BE SAID THAT BRAND BUILDING IS TAKEN AS AN INDEPENDENT ACTIVITY AS FROM THE AMP EXPENDITURE INDIAN ASSESSEE IS ALSO BENEFITED ALONGWITH THE FOREIGN AE. THE SAID APPROACH IT WAS SUBMITTED IS CONTRARY TO THE V IEW OF THE SPECIAL BENCH. THE VIEW OF THE SPECIAL BENCH IT WAS SUBMITTED IN UPHOLDING THE BRIGHT LINE TEST APPLYING THE TESTS SET OUT IN PARA 17.4 HAVE BEEN HELD TO GO BEYOND ADEQUATE AND FAIR COMPENSATION AND HAS BEEN CRITICISED ON THE GROUND THAT IT A MOUNTS TO JUDICIAL LEGISLATION. FOR READY - REFERENCE, WE REPRODUCE THE AFORESAID, PARAS 117 - 120 FROM THE SAID JUDGEMENT: - 117. WE HAVE ALREADY DEALT WITH AND EXAMINED THE CONCEPT OF BRAND AS AN INTANGIBLE ASSET. ROUTINE OR DAY - TO - DAY MARKETING OR SALE PR OMOTION EXPENSES EVEN, WHEN EXCESSIVE AND EXORBITANT, WOULD NOT AMOUNT PER SE TO BRAND BUILDING EXPENSES. THE REVENUE IN THE WRITTEN SUBMISSIONS IN FACT HAVE ACCEPTED IN PARAGRAPH 8.8 THAT PROMOTION OF PRODUCTS GO HAND IN HAND AND AT MOST OF THE TIMES BR AND IS DISTINGUISHABLE FROM PRODUCTS AS ONLY BY DISPLAY OF PRODUCTS IN A PARTICULAR MANNER OR EMPHASIS ON A PARTICULAR FEATURE OF THE PRODUCT, THE CONSUMER IS GIVEN THE MESSAGE OF WHAT TO EXPECT FROM A GIVEN BRAND (SIC, PRODUCT). HENCE, IT IS DIFFICULT T O COMPARTMENTALISE PROMOTION OF PRODUCT OR PROMOTION OF BRAND EXPENSES AND RECORD THEM AS SEPARATE FROM EACH OTHER. THE AFORE SAID ASSERTIONS REFLECT THE THIN EDGE AND THE DIFFICULT PATH REVENUE HAS ADOPTED IN BIFURCATING AMP EXPENSES INTO MARKETING OR SALE PROMOTIONS AND BRAND BUILDING BY CREATING AND ADOPTING THE BRIGHT LINE TEST . WE HAVE ELABORATELY DISCUSSED THE CONCEPT O F TERM BRAND AND BRAND BUILDING AND OBSERVE THAT IT WOULD BE INCORRECT TO TREAT ADVERTISEMENT AS EQUIVALENT OR SYNONYMOUS WITH BRAND BUILDING FOR THE LATTER IN COMMERCIAL SENSE REFERS TO SEVERAL FACETS AND COMPONENTS. THE PRIMARY BEING THE QUALITY AN D REPUTATION O F THE PRODUCT OR NAME, WHICH IS ACQUIRED GRADUALLY AND SILENTLY OVER A PASSAGE OF TIME. THE AFORESAID ARGUMENTS FAILS TO NOTICE THE FUNDAMENTAL PRINCIPLE OF INTERNATIONAL ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 14 TAXATION AND CHAPTER X OF THE ACT THAT THE FOREIGN AE AND THE INDIAN AE ARE TWO SEPAR ATE TAX CENTRES AND TAXABLE ENTITIES. PROFITS OR ENHANCED PROFITS CONSEQUENT TO HIGHER MANUFACTURING TURNOVER WOULD BE TAXED IN THE HANDS OF THE FOREIGN AE, WHEREAS HIGHER PROFITS AS A RESULT OF INCREASED TURNOVER RELATABLE TO DISTRIBUTION AND MARKETING FU NCTIONS WOULD BE TAXED IN THE HANDS OF THE INDIAN SUBSIDIARY, I.E. THE AE. THE POSITION WOULD BE DIFFERENT IF THE FOREIGN AE HAS PERMANENT ESTABLISHMENT IN INDIA. THE REVENUE HAS GENERALISED AND THE ARGUMENT ADOPTS A UNIVERSAL AND UBIQUITOUS APPROACH IN TH E CONTENTION THAT INCREASED TURNOVER WOULD NOT BENEFIT THE INDIAN AE. THE ARGUMENT IS SCEPTICAL AND CONJECTURAL. MOREOVER, TRANSFER PRICING CAN ALWAYS CORRECT PROFIT SHIFTING, ALBEIT, BY REDUCING/INCREASING PRICE/CONSIDERATION PAYABLE TO THE INDIAN AE. 11 8. THE INDIAN SUBSIDIARIES IN THE PRESENT CASE ARE ENGAGED IN DISTRIBUTION AND MARKETING FUNCTIONS OF THE PRODUCTS MANUFACTURED BY FOREIGN AES AND IN SOME CASES, PRODUCTS ARE ALSO MANUFACTURED BY THEM UNDER LICENSE IN INDIA. FIGURE 2.1 REFERS TO THE VALUE CHAIN ANALYSIS, AND TREATS MARKETING AND DISTRIBUTION AS TWO HEADINGS, BUT THIS DOES NOT MEAN THAT MARKETING AND DISTRIBUTION FUNCTIONS CANNOT BE COMBINED AND TREATED AS ONE PACKAGE OR A BUNDLE. THE FUNCTIONS PERFORMED COULD BE BOTH MARKETING AND DISTRI BUTION. MARKETING IN THE FORM OF SALE PROMOTION, ADVERTISEMENTS, ETC. WOULD NECESSARILY INVOLVE EXPENDITURE BOTH IN TERMS OF THIRD PARTY EXPENDITURE WHICH THE INDIAN ASSESSEE WOULD LIABLE TO INCUR, AS ALSO TOWARDS THE OFFICE MAINTENANCE AND OTHER OVERHEAD EXPENSES. EVEN AS ONE PACKAGE OR A BUNDLE, THE INDIAN SUBSIDIARY, I.E. AN ASSESSEE, MUST BE ADEQUATELY COMPENSATED BY ADHERING TO THE ARM S LENGTH PRICE. THIS IS THE CORE OF THE TRANSFER PRICING ADJUDICATION. PRICE PAID BY OR COMPENSATION PAID TO THE DOMES TIC AE MUST COMPLEMENT AND RECIPROCATE FOR THE FUNCTIONS PERFORMED. 119. A PURE DISTRIBUTION COMPANY WOULD BE A COMPARATIVELY LOW RISK COMPANY AS COMPARED TO A MARKETING AND DISTRIBUTION COMPANY. THE PROFITS AND EARNINGS OR ARM S LENGTH PRICE WOULD ACCORD INGLY VARY. THE ARM S LENGTH PRICE IN CASE OF A PURE DISTRIBUTION COMPANY WOULD ENURE LOWER PRICE/PROFIT AS COMPARED TO A COMPANY ENGAGED IN DISTRIBUTION AND MARKETING. IN MOST OF THE CASES, DISTRIBUTION AND MARKETING OPERATIONS WOULD GO HAND IN HAND. MARK ETING ITSELF IS A TERM OF WIDE IMPORT AND CONNOTATION, WHICH INCLUDES DEVELOPMENT OF MARKETING STRATEGY WHICH MAY HAVE CERTAIN COMMON WORLDWIDE ELEMENTS AND WOULD NORMALLY BE THE CREATION AND PREMISED BY THE PARENT FOREIGN AE BUT THE INDIAN ASSESSEE ENGAGE D IN MARKETING OPERATIONS COULD DEVISE ITS OWN MARKETING STRATEGIES, DETERMINE AS TO THE NATURE AND TYPE OF ADVERTISEMENTS, MEDIA SELECTION, TIMINGS, ETC. EVEN THE CHOICE OF PRODUCTS COULD DEPEND UPON LOCAL/NATIONAL CONDITIONS. WHILE DETERMINING THE ARM S LENGTH PRICE, THE ISSUE WOULD BE WHETHER OR NOT THE INDIAN ASSESSEE IS ADEQUATELY COMPENSATED BY THE FOREIGN AE. THE INDIAN ASSESSEE ALSO BENEFITS FROM THE INCREASED SALES WHICH RESULTS IN HIGHER PROFITS AND MORE TAXABLE INCOME IN INDIA. AMP, I.E. ADVERTIS EMENTS, MARKETING AND SALE PROMOTIONS, THEREFORE, BENEFIT BOTH THE INDIAN AE, I.E. THE ASSESSEE AND THE FOREIGN AE RESIDENT ABROAD. SAME IS TRUE AND CORRECT POSITION EVEN IN CASE OF A DISTRIBUTION COMPANY, THOUGH IN THE SAID CASE SALES WOULD INCREASE AND T HERE WOULD NOT BE ANY ELEMENT OF AMP. THE FACT THAT INCREASED SALES BENEFIT THE FOREIGN MANUFACTURER IS THE REASON WHY ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 15 SERVICES OF INDIAN ASSESSEES HAVE BEEN ENGAGED BY THE AES RESIDENT ABROAD. THIS ARGUMENT ITSELF DOES NOT SHOW THAT BRAND BUILDING IS BEIN G INDEPENDENTLY UNDERTAKEN AND, THEREFORE, SHOULD BE TREATED AS A SEPARATE INTERNATIONAL TRANSACTION. HOWEVER, THE ARM S LENGTH COMPUTATION MADE BOTH BY THE ASSESSEE AS WELL AS THE TPO MUST TAKE INTO ACCOUNT THE AMP EXPENSES. 120. NOTWITHSTANDING THE ABOV E 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 T EST ON THE BASIS OF COMPARABLES MENTIONED IN PARAGRAPH 17.4. ANY EXCESS EXPENDITURE BEYOND THE BRIGHT LINE SHOULD BE REGARDED AS A SEPARATE INTERNATIONAL TRANSACTION OF BRAND BUILDING. SUCH A BROAD - BRUSH UNIVERSAL APPROACH IS UNWARRANTED AND WOULD AMOUNT TO JUDICIAL LEGISLATION. DURING THE COURSE OF ARGUMENTS, IT WAS ACCEPTED BY THE REVENUE THAT THE TPOS/ASSESSING OFFICERS HAVE UNIVERSALLY APPLIED BRIGHT LINE TEST TO DECIPHER AND COMPUTE VALUE OF INTERNATIONAL TRANSACTION AND THEREAFTER APPLIED COST PLU S METHOD OR COST METHOD TO COMPUTE THE ARM S LENGTH PRICE. THE SAID APPROACH IS NOT MANDATED AND STIPULATED IN THE ACT OR THE RULES. THE LIST OF PARAMETERS FOR ASCERTAINING THE COMPARABLES FOR APPLYING BRIGHT LINE TEST IN PARAGRAPH 17.4 AND, THEREAFTER, THE ASSERTION IN PARAGRAPH 17.6 THAT COMPARISON CAN BE ONLY MADE BY CHOOSING COMPARABLE OF DOMESTIC CASES NOT USING ANY FOREIGN BRAND, IS CONTRARY TO THE RULES. IT AMOUNTS TO WRITING AND PRESCRIBING A MANDATORY PROCEDURE OR TEST WHICH IS NOT STIPULATED IN THE ACT OR THE RULES. THIS IS BEYOND WHAT THE STATUTE IN CHAPTER X POSTULATES. RULES ALSO DO NOT SO STIPULATE. THE ARGUMENT AND REASONING IN PARAGRAPH 17.6 IN A WAY LOSES FOCUS ON THE MAIN ISSUE AND CONTROVERSY; WHETHER THE ARM S LENGTH PRICE FIXED BETWEE N THE TWO AES IS ADEQUATE AND JUSTIFIED AND WOULD HAVE BEEN PAID IF THE TRANSACTION WAS BETWEEN TWO INDEPENDENT ENTERPRISES. THE TWO INDEPENDENT ENTERPRISES MUST BE TWO UNRELATED PARTIES HAVING NO CONNECTION. IT DOES NOT MATTER WHETHER THE COMPARABLES ARE DOMESTIC ENTERPRISES OR NOT. HOWEVER, AND IT IS MANIFEST THAT THE COMPARABLE SHOULD HAVE SIMILAR RIGHTS, IF ANY, AS THE TESTED PARTY IN THE BRAND NAME, TRADEMARK, ETC. 11.6. A PERUSAL OF PARA 150 TO 154 OF THE AFORESAID JUDGEMENT SHOWS THAT THE VIEW OF T HE SPECIAL BENCH (PARA 10.2 OF THE SPECIAL BENCH) REFERRED TO AND EXTRACTED IN PARA 113 BY THEIR LORDSHIPS AT PAGE 83 OF THIS 142 PAGED JUDGEMENT WAS NOT APPROVED. REFERENCE MAY ALSO SPECIFICALLY BE MADE TO PARA 153 & 154 WHERE THE PLEA MADE BY THE REVENU E IN THE CONTEXT OF THE ASSESSEE HAS BEEN ADDRESSED: - 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 REQU IRED 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. TRANSFER ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 16 PRICING VALUATION, THEREFORE, WOUL D BE MANDATED AT THAT TIME. THE INTERNATIONAL TRANSACTION COULD THEN BE MADE A SUBJECT MATTER OF TRANSFER PRICING AND SUBJECTED TO TAX. 154. BRAND OR TRADEMARK VALUE IS PAID FOR, IN CASE OF SALE OF THE BRAND OR OTHERWISE BY WAY OF MERGER OR ACQUISITION WITH THIRD PARTIES. REVENUE IN PARAGRAPH 8.9 OF THE WRITTEN SUBMISSIONS HAVE REFERRED TO ACQUISITION OF BRAND NAME REEBOK BY ADIDAS AND ASSERTED THAT THE ENTIRE BENEFIT WAS REAPED BY THE PARENT ENTITY AND NOT BY REEBOK INDIA COMPANY LTD.. RE - ORGANISATION, SALE AND TRANSFER OF A BRAND AS A RESULT OF MERGER AND ACQUISITION OR SALE IS NOT DIRECTLY A SUBJECT MATTER OF THESE APPEALS. AS NOTED ABOVE, IN A GIVEN CASE WHERE THE INDIAN AE CLAIMS ECONOMIC OWNERSHIP OF THE BRAND AND IS DEPRIVED OR TRANSFERS THE SAID ECONOMIC OWNERSHIP, CONSEQUENCES WOULD FLOW AND IT MAY REQUIRE TRANSFER PRICING ASSESSMENT. IN THE WRITTEN SUBMISSIONS FILED BY SONY IND IA PRIVATE LIMITED, THEY HAVE ACCEPTED THE SAID POSITION AND STATED AS UNDER: - 7.8. TWO INFERENCES ARE THEREFORE INEVITABLE - TILL A BRAND GETS TERMINATED, TRANSFERRED OR SOLD, ITS VALUE IS MEASURED ONLY IN TERMS OF THE MARKET SHARE OR SALES TURNOVER. AT THE TIME OF THE SALE, IN CERTAIN CIRCUMSTANCES IT BECOMES AN INDEPENDENT STANDALONE TRANSFER OF AN INTANGIBLE RIGHT COMMANDING A SEPARATE VALUE OR CONSIDERATION. AS A RESULT OF WHICH: 7.8.1 THE COMMERCIAL BENEFIT OF ADVERTISEMENT OR MARKETING ACCRUES TO TH E APPELLANT/THE TESTED PARTY IN INDIA FOR HAVING PROMOTED THE SALE OF THE PRODUCTS IN INDIA. INCOME - TAX ACT RECOGNISES THIS AND THEREFORE ALLOWS IT AS A REVENUE EXPENSE WHOLLY AND EXCLUSIVELY EXPENDED FOR THE PURPOSES OF THE BUSINESS, THE SAID ISSUE HAS AL SO BEEN UPHELD BY THIS COURT IN THE CASE OF AGRA BEVERAGES CORPORATION (P) LTD VS. CIT [2011] 11 TAXMANN.COM 350 (REFER PAGE NO. 284 OF THE PAPERBOOK). 12. ACCORDINGLY ON A CAREFUL CONSIDERATION OF THE DECISIONS CITED; THE FINDINGS RECORDED IN THE ORDER UNDER CHALLENGE AND THE MATERIAL AVAILABLE ON RECORD WE FIND ON FACTS THAT THE PRAYER OF THE ASSESSEE IS BORNE OUT FROM THE RECORD. REFERENCE MAY ALSO BE MADE TO PARA 124 OF THE JUDGEMENT OF THE HON BLE HIGH COURT WHICH WAS ALSO CITED TO JUSTIFY THE STAND TAKEN THAT THE ISSUE HAS TO BE RESTORED AS IN THE FACTS OF THE PRESENT CASE THE FAR ANALYSIS HAS TO BE DONE CONSIDERING THE AGREEMENTS AND THE CONDUCT OF THE ASSESSEE ALONGWITH RISKS, FUNCTIONALITY AND THE ASSETS IN THE LIGHT OF THE JUDICIAL PRECEDENT AS SETTLED BY THE HON BLE HIGH COURT. FOR READY - REFERENCE, WE REPRODUCE PARA 124 OF THE SAID ORDER: - 124. THERE IS A DIFFERENCE BETWEEN A PURE AND A SIMPLE INDEPENDENT DISTRIBUTOR AND A DISTRIBUTOR WITH MARKETING RIGHTS. AN INDEPENDENT DISTRIBUTOR WITH A FU LL MARKETING RIGHT IS A PERSON OR AN ENTITY LEGALLY INDEPENDENT OF THE MANUFACTURER, WHO PURCHASES GOODS FROM THE MANUFACTURER FOR RE - SALE ON ITS OWN ACCOUNTS. THE TRANSACTION BETWEEN ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 17 THE TWO IS A STRAIGHTFORWARD SALE IN WHICH THE DISTRIBUTOR TAKES ALL ECO NOMIC RISK OF PRODUCT DISTRIBUTION AND ULTIMATELY GAINS OR MAKES LOSS DEPENDING UPON MARKET AND OTHER CONDITIONS. THE MANUFACTURER IS NOT CONCERNED. IN CASE OF A LOW OR NO RISK DISTRIBUTOR AND HE VIRTUALLY ACTS AS AN AGENT FOR THE LOSS AND GAIN IS THAT OF THE MANUFACTURER. THERE IS NO ECONOMIC RISK ON DISTRIBUTION OF PROFITS. HE IS, THEREFORE, ENTITLED TO FIXED REMUNERATION FOR THE SELF EFFORTS, I.E., RELATING TO THE TASK OR FUNCTION OF DISTRIBUTION. SIMILAR WILL BE THE POSITION OF A LOW RISK DISTRIBUTOR WI TH MARKETING FUNCTIONS, EXCEPT THAT THE SAID DISTRIBUTOR SHOULD BE COMPENSATED FOR THE MARKETING, INCLUDING AMP FUNCTION. A DISTRIBUTOR WITH MARKETING FUNCTION CAN BE NORMAL OR A HIGH RISK DISTRIBUTOR. SUCH DISTRIBUTORS SHOULD BE COMPENSATED BUT THE QUANTU M OF COMPENSATION WOULD BE HIGHER. SUCH CASES HAVE TO BE DISTINGUISHED FROM CASES OF A TRUE DISTRIBUTOR, WHO IS IN AN INDEPENDENT BUSINESS, USES HIS OWN MONEY FOR PURCHASING AT A LOW PRICE AND SELLING AT A HIGH PRICE AND ACCORDINGLY SHOULDERS THE BURDEN IN CASE OF A BAD JUDGMENT. PROFITS OR LOSSES, THEREFORE, CORRESPOND TO THE RISK AND MARKET CONSIDERATION. THERE IS ALSO FUNCTIONAL INCOMPATIBILITY BETWEEN A DISTRIBUTOR AND A RETAILER. RETAILERS CANNOT BE COMPARED WITH DISTRIBUTOR ALSO PERFORMING MARKETING F UNCTIONS. FOREIGN GLOBAL ENTERPRISES FREQUENTLY ADOPT A SUBSIDIARY MODEL, I.E. THE PRODUCTS ARE DISTRIBUTED AND MARKETED IN A TARGETED COUNTRY THROUGH A WHOLLY OWNED SUBSIDIARY OR A SALES SUBSIDIARY. A COMPARABLE WOULD BE AN UNRELATED IDENTITY WITH SIMILAR DISTRIBUTION AND MARKETING FUNCTIONS. 1 3 . GIVING OUR UTMOST CONSIDERATION TO THE INITIAL PRAYER OF THE REVENUE, WE FIND ON FACTS THAT THE PRAYER OF THE LD. AR THAT THE ISSUE NEEDS TO BE CONSIDERED AFRESH HAS TO BE ACCEPTED AS FULL AND NECESSARY FACTS A RE NOT AVAILABLE AS BOTH THE TAX PAYER AND THE TAX AUTHORITIES HAVE NECESSARILY PROCEEDED AT THE RELEVANT POINT OF TIME AS PER THE PREVALENT LEGAL PRECEDENT WHICH UNDISPUTABLY HAS BEEN UPSET BY THE JURISDICTIONAL HIGH COURT AS WOULD BE FURTHER EVIDENT FRO M THE AFORESAID PARAS WHERE THEIR LORDSHIPS HAVE SUMMED UP THE VIEW TAKEN: - 194. IN VIEW OF THE AFORESAID DISCUSSION, SUBSTANTIAL QUESTIONS OF LAW IN THE APPEALS FILED BY THE ASSESSEE ARE ANSWERED AS UNDER: Q.1. WHETHER THE ADDITIONS SUGGESTED BY THE TRANSFER PRICING OFFICER ON ACCOUNT OF ADVERTISING/MARKETING AND PROMOTION EXPENSES ( AMP EXPENSES FOR SHORT) WAS BEYOND JURISDICTION AND BAD IN LAW AS NO SPECIFIC REFERENCE WAS MADE BY THE ASSESSING OFFICER, HAVING REGARD TO RETROSPECTIVE AMENDMENT TO SE CTION 92CA OF THE INCOME TAX ACT, 1961 BY FINANCE ACT, 2012. IN TERMS OF AND SUBJECT TO DISCUSSION UNDER THE HEADING C, PARAGRAPH NOS.41 TO 50, THE SUBSTANTIAL QUESTION OF LAW NO.1 IS ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. Q.2. WHET HER AMP EXPENSES INCURRED BY THE ASSESSEE IN INDIA CAN BE TREATED AND CATEGORIZED AS AN INTERNATIONAL TRANSACTION UNDER SECTION 92B OF THE INCOME TAX ACT, 1961. IN TERMS OF AND SUBJECT TO DISCUSSION UNDER THE HEADING C, PARAGRAPH NOS.51 TO 57, THE SUBSTAN TIAL QUESTION OF LAW NO.2 IS ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 18 Q.3. WHETHER UNDER CHAPTER X OF THE INCOME TAX ACT, 1961, A TRANSFER PRICING ADJUSTMENT CAN BE MADE BY THE TRANSFER PRICING OFFICER/ ASSESSING OFFICER IN RESPECT OF EXPENDITURE TREATED AS AMP EXPENSES AND IF SO IN WHICH CIRCUMSTANCES? Q.4. IF ANSWER TO QUESTION NOS.2 AND 3 IS IN FAVOUR OF THE REVENUE, WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS RIGHT IN HOLDING THAT TRANSFER PRICING ADJUSTMENT IN RESPECT OF AMP EXPENSES SHOULD BE COMPUTED BY APPLYING COST PLUS METHOD. Q.5. WHETHER TH E INCOME TAX APPELLATE TRIBUNAL WAS RIGHT IN DIRECTING THAT FRESH BENCH MARKING/COMPARABILITY ANALYSIS SHOULD BE UNDERTAKEN BY THE TRANSFER PRICING OFFICER BY APPLYING THE PARAMETERS SPECIFIED IN PARAGRAPH 17.4 OF THE ORDER DATED 23.01.2013 PASSED BY THE S PECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA (P) LTD.?. IN TERMS OF AND SUBJECT TO DISCUSSION UNDER THE HEADINGS D TO P, WE HOLD THAT THE LEGAL RATIO ACCEPTED AND APPLIED BY THE TRIBUNAL RELYING UPON THE MAJORITY DECISION IN L.G. ELECTRONICS INDIA PVT. LTD (SUPRA) IS ERRONEOUS AND UNACCEPTABLE. FOR REASONS SET OUT ABOVE, WE HAVE PASSED AN ORDER OF REMAND TO THE TRIBUNAL TO EXAMINE AND ASCERTAIN FACTS AND APPLY THE RATIO ENUNCIATED IN THIS DECISION. FOR THE PURPOSE OF CLARITY, WE WOULD LIKE TO ENLIST OUR FINDINGS: - (I) IN CASE OF A DISTRIBUTOR AND MARKETING AE, THE FIRST STEP IN TRANSFER PRICING IS TO ASCERTAIN AND CONDUCT DETAILED FUNCTIONAL ANALYSIS, WHICH WOULD INCLUDE AMP FUNCTION/EXPENSES. (II) THE SECOND STEP MANDATES ASCERTAINMENT OF COMPARABLES O R 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 TRANSFER PRICING ANALYSIS. AS A SEQUITUR, IT FOLLOWS THAT THE CHOIC E 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 POTENTIA L 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 NO T 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 COM PARABLES ADOPTED BY THE ASSESSED, WITH OR WITHOUT MAKING ADJUSTMENTS, AS A BUNDLED TRANSACTION, IT WOULD BE ILLOGICAL AND IMPROPER TO TREAT AMP EXPENSES AS A ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 19 SEPARATE INTERNATIONAL TRANSACTION, FOR THE SIMPLE REASON THAT IF THE FUNCTIONS PERFORMED BY THE T ESTED PARTIES AND THE COMPARABLES MATCH, WITH OR WITHOUT ADJUSTMENTS, AMP EXPENSES ARE DULY ACCOUNTED FOR. IT WOULD BE INCONGRUOUS TO ACCEPT THE COMPARABLES AND DETERMINE OR ACCEPT THE TRANSFER PRICE AND STILL SEGREGATE AMP EXPENSES AS AN INTERNATIONAL TRA NSACTION. (VI) THE ASSESSING OFFICER/TPO CAN REJECT A METHOD SELECTED BY THE ASSESSED FOR SEVERAL REASONS INCLUDING WANT OF RELIABILITY IN THE FACTUAL MATRIX OR LACK / NON - AVAILABILITY OF COMPARABLES. (SEE SECTION 92C(3) OF THE ACT). (VII) WHEN THE ASSESS ING OFFICER/TPO REJECTS THE METHOD ADOPTED BY THE ASSESSED, HE IS ENTITLED TO SELECT THE MOST APPROPRIATE METHOD, AND UNDERTAKE COMPARABILITY ANALYSIS. SELECTION OF THE METHOD AND COMPARABLES SHOULD BE AS PER THE COMMAND AND DIRECTIVE OF THE ACT AND RULES AND JUSTIFIED BY GIVING REASONS. (VIII) DISTRIBUTION AND MARKETING ARE INTER - CONNECTED AND INTERTWINED FUNCTIONS. BUNCHING OF INTER - CONNECTED AND CONTINUOUS TRANSACTIONS IS PERMISSIBLE, PROVIDED THE SAID TRANSACTIONS CAN BE EVALUATED AND ADEQUATELY COMPARE D ON AGGREGATE BASIS. THIS WOULD DEPEND ON THE METHOD ADOPTED AND COMPARABILITY ANALYSIS AND THE MOST RELIABLE MEANS OF DETERMINING ARM S LENGTH PRICE. (IX) TO ASSERT AND PROFESS THAT BRAND BUILDING AS EQUIVALENT OR SUBSTANTIAL ATTRIBUTE OF ADVERTISEMENT AND SALE PROMOTION WOULD BE LARGELY INCORRECT. IT REPRESENTS A COORDINATED SYNERGETIC IMPACT CREATED BY ASSORTMENT LARGELY REPRESENTING REPUTATION AND QUALITY. BRAND HAS REFERENCE TO A NAME, TRADEMARK OR TRADE NAME AND LIKE GOODWILL IS A VALUE OF ATTRA CTION TO CUSTOMERS 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 RE PUTATION 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 SE RVICES SOLD OR DEALT WITH. QUALITY CONTROL 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 SEP ARATE 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 COMPEN SATION 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 WOULD DISAGREE WITH THE MAJORITY DECISION IN L.G. ELEC TRONICS INDIA PVT. LTD. (SUPRA). THIS WOULD BE NECESSARY WHEN THE ARM S LENGTH PRICE OF THE ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 20 CONTROLLED TRANSACTION CANNOT BE ADEQUATELY OR RELIABLY DETERMINED WITHOUT SEGMENTATION OF AMP EXPENSES. (XI) THE ASSESSING OFFICER/TPO FOR GOOD AND SUFFICIENT REAS ONS CAN DE - BUNDLE INTERCONNECTED TRANSACTIONS, I.E. SEGREGATE DISTRIBUTION, MARKETING OR AMP TRANSACTIONS. THIS MAY BE NECESSARY WHEN BUNDLED TRANSACTIONS CANNOT BE ADEQUATELY COMPARED ON AGGREGATE BASIS. (XII) WHEN SEGMENTATION OR SEGREGATION OF A BUNDLED TRANSACTION IS REQUIRED, THE QUESTION OF SET OFF AND APPORTIONMENT MUST BE EXAMINED REALISTICALLY AND WITH A PRAGMATIC APPROACH. TRANSFER PRICING IS AN INCOME ALLOCATING EXERCISE TO PREVENT ARTIFICIAL SHIFTING OF NET INCOMES OF CONTROLLED TAXPAYERS AND TO PLACE THEM ON PARITY WITH UNCONTROLLED, UNRELATED TAXPAYERS. THE EXERCISE UNDERTAKEN SHOULD NOT RESULT IN OVER OR DOUBLE TAXATION. THUS, THE ASSESSING OFFICER/TPO CAN SEGREGATE AMP EXPENSES AS AN INDEPENDENT INTERNATIONAL TRANSACTION, BUT ONLY AFTER ELUCI DATING GROUNDS AND REASONS FOR NOT ACCEPTING THE BUNCHING ADOPTED BY THE ASSESSED, AND EXAMINING AND GIVING BENEFIT OF SET OFF. SECTION 92(3) DOES NOT BAR OR PROHIBIT SET OFF. (XIII) CP METHOD IS A RECOGNISED AND ACCEPTED METHOD UNDER INDIAN TRANSFER PRICI NG REGULATION. IT CAN BE APPLIED BY THE ASSESSING OFFICER/TPO IN CASE AMP EXPENSES ARE TREATED AS A SEPARATE INTERNATIONAL TRANSACTION, PROVIDED CP METHOD IS THE MOST APPROPRIATE AND RELIABLE METHOD. ADOPTION OF CP METHOD AND COMPUTATION OF COST AND GROSS PROFIT MARGIN COMPARABLE MUST BE JUSTIFIED. (XIV) THE OBJECT AND PURPOSE OF TRANSFER PRICING ADJUSTMENT IS TO ENSURE THAT THE CONTROLLED TAXPAYERS ARE GIVEN TAX PARITY WITH UNCONTROLLED TAXPAYERS BY DETERMINING THEIR TRUE TAXABLE INCOME. COSTS OR EXPENSES INCURRED FOR SERVICES PROVIDED OR IN RESPECT OF PROPERTY TRANSFERRED, WHEN MADE SUBJECT MATTER OF ARM S LENGTH PRICE BY APPLYING CP METHOD, CANNOT BE AGAIN FACTORED OR INCLUDED AS A PART OF INTER - CONNECTED INTERNATIONAL TRANSACTION AND SUBJECTED TO ARM S L ENGTH PRICING. 195. THE ABOVE NOTED POINTERS HAVE TO BE READ ALONG WITH OUR DISCUSSION UNDER THE HEADINGS D TO P. IN CASE OF ANY DOUBT, DEBATE OR PURPORTED CONFLICT, IT WOULD BE PREFERABLE TO RELY UPON DETAILED ELUCIDATION MADE UNDER THE HEADINGS, D TO P. 196. COMMON QUESTIONS RAISED BY THE REVENUE IN THEIR APPEALS: - 1. WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS RIGHT IN DISTINGUISHING AND DIRECTING THAT SELLING EXPENSES IN THE NATURE OF TRADE/VOLUME DISCOUNTS, REBATES AND COMMISSION PAID TO RETAILE RS/DEALERS ETC. CANNOT BE INCLUDED IN THE AMP EXPENSES? IN TERMS OF AND SUBJECT TO OUR DISCUSSION UNDER THE HEADINGS O AND P, THE SUBSTANTIAL QUESTION OF LAW HAS TO BE ANSWERED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 14. ACCORDINGLY O N A CONSIDERATION OF THE ENTIRETY OF THE FACTS AND SUBMISSION OF THE PARTIES, WE FIND THAT THE INITIAL DEPARTMENTAL STAND THAT THE ISSUE DOES NOT REQUIRE TO BE RESTORED CANNOT BE ACCEPTED. AS HAS BEEN BROUGHT OUT IN GREAT DETAIL IN THE EARLIER PART OF THI S ORDER WHERE IT IS EMINENTLY CLEAR THAT THE TAX PAYER AND THE TAX AUTHORITY HAVE PROCEEDED TO CONSIDER THE ISSUE IN THE LIGHT OF ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 21 THE DECISION OF THE SPECIAL BENCH. REFERENCE MAY ALSO BE MADE TO PARA S 162 AND 168 OF THE SAID JUDGEMENT WHERE REFERENCE HAS BEEN MADE TO THE POSITION IN 2008 - 09 ASSESSMENT YEAR WHERE THE ASSESSEE IS FOUND TO HAVE APPLIED RESALE PRICE METHOD USING INTERNAL COMPARABLES. IN PARA 166 OF THE SAID JUDGEMENT IT IS SEEN THAT THE ARGUMENTS OF THE ASSESSEE W ERE HELD TO BE FLAWED AND FA LLACIOUS FOR SEVERAL REASONS. HOWEVER THEIR LORDSHIPS FURTHER IN PARA 167 OBSERVED THAT THE REVENUE BEFORE THE HON BLE HIGH COURT DID NOT PLEAD THAT THE R.P.METHOD SHOULD NOT HAVE BEEN ADOPTED. QUA THE SAME THEIR LORDSHIPS OBSERVED THAT NO FINAL PRONOUN CEMENT WAS BEING MADE. A PERUSAL OF THE PARA 168 SHOWS THAT THE TRIBUNAL HAD UPHELD ADOPTION OF CP METHOD AFTER APPLYING THE BRIGHT - LINE TEST. THE FINDING WAS FOUND TO BE NOT CORRECT AS APPROACH AND PROCEDURE FOR ASCERTAINING/DETERMINING ARM S LENGTH PR ICE UNDER THE RESALE PRICE METHOD IS DIFFERENT. THE DISCUSSION ON THE MOST APPROPRIATE METHOD BY THEIR LORDSHIPS WOULD FURTHER SUPPORT THE VIEW TAKEN AS THE SAID EXERCISE NEEDS TO BE DONE IN THE FACTS OF THE PRESENT CASE. FOR READY - REFERENCE, WE REPRODUC E THE AFORESAID HEREUNDER: - 162. IN THE CASE OF REEBOK INDIA CO. LTD., THE ASSESSEE HAS APPLIED RS METHOD USING INTERNAL COMPARABLE. CONTRARY TO THE GENERAL RULE, THE INTERNAL COMPARABLE POSSIBLY MAY NOT BE APPROPRIATE WHEN THE ASSESSED HAS INCURRED CONSI DERABLE (NOT NECESSARILY EXTRA - ORDINARY OR NON - ROUTINE) AMP EXPENSES. THE REASON IS OBVIOUS; THERE IS NO COMPARABILITY ANALYSIS POSSIBLE. IN SUCH CASES, IT IS NOT POSSIBLE TO EXAMINE AND COMPARE THE FUNCTIONAL COMPARABILITY BETWEEN THE CONTROLLED TESTED TR ANSACTION AND UNCONTROLLED INTERNAL PARTY TRANSACTION ON ACCOUNT OF AMP EXPENSES. INTERNAL COMPARABLE WOULD NOT ACCOUNT FOR THE CREDIBLE GROSS PROFIT RATE, WHICH AN AE SHOULD BE ENSURED WHEN IT INCURS AMP EXPENSES. FUNCTIONALLY THE COMPARABLE IS MERELY A M ANUFACTURER AND THUS, THE SAID FUNCTION IS COMPARED. AMP EXPENSES DO NOT GET FACTORED AND COMPARED. AS AN ABUNDANT CAUTION, WE WOULD STILL ADD THAT WHERE ADJUSTMENTS CLAUSE (IV) CAN GIVE RELIABLE AND ACCURATE RESULTS, INTERNAL COMPARABLES COULD STILL BE AP PLIED. THIS WOULD LIKELY HAPPEN, WHEN AMP EXPENSES ARE INSIGNIFICANT IN QUANTUM. 163. THUS, IN SUCH CASES, EXTERNAL COMPARABLES WHERE SAID PARTIES ARE PERFORMING SIMILAR FUNCTIONS INCLUDING AMP EXPENSES WOULD GIVE MORE ACCURATE AND PRECISE RESULTS. 164. HOWEVER, IT WOULD BE WRONG TO ASSERT AND ACCEPT THAT GROSS PROFIT MARGINS WOULD NOT INEVITABLY INCLUDE COST OF AMP EXPENSES. THE GROSS PROFIT MARGINS COULD REMUNERATE AN AE PERFORMING MARKETING AND SELLING FUNCTION. THIS HAS TO BE TESTED AND EXAMINED WITHO UT ANY ASSUMPTION AGAINST THE ASSESSED. A FINDING ON THE SAID ASPECT WOULD REQUIRE DETAILED VERIFICATION AND ASCERTAINMENT. ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 22 165. AN EXTERNAL COMPARABLE SHOULD PERFORM SIMILAR AMP FUNCTIONS. SIMILARLY THE COMPARABLE SHOULD NOT BE THE LEGAL OWNER OF THE BR AND 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 COMPARABL E 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 M ATCH 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 TPO CANNOT ACCOUNT FOR OR TREAT AMP AS A FUNCTION. THIS ARGUMENT ON BE HALF OF THE ASSESSEE IS FLAWED AND FALLACIOUS FOR SEVERAL REASONS. THERE ARE INHERENT FLAWS IN THE SAID ARGUMENT. MOREOVER, THE CONTENTION OF THE ASSESSED IN THESE APPEALS WOULD MANDATE REJECTION OF THE RP METHOD, AS AN APPROPRIATE OR MOST APPROPRIATE METH OD. COMPARISON OR COMPARATIVE ANALYSIS IS UNDERTAKEN AT STAGE (II) ADJUSTMENTS ARE PERMISSIBLE AND UNDERTAKEN AT STAGE (IV). UNDER CLAUSE (III), I.E. AT STAGE (III), FROM THE PRICE ASCERTAINED AT STAGE (II), EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTIO N WITH THE PURCHASE OF PROPERTY OR OBTAINING OF SERVICES IS REDUCED. UNDER CLAUSE (IV), ADJUSTMENTS HAVE TO BE MADE ON ACCOUNT OF FUNCTIONAL DIFFERENCE WHICH WOULD INCLUDE ASSETS USED AND RISK ASSUMED. IT IS AT STAGE (IV) OF THE RP METHOD THAT THE ASSESSIN G OFFICER/TPO CAN MAKE ADJUSTMENTS IF HE FINDS THAT AN ASSESSEE HAS INCURRED SUBSTANTIAL AMP EXPENSES IN COMPARISON TO THE COMPARABLES. ONCE ADJUSTMENTS ARE MADE, THEN THE APPROPRIATE ARM S LENGTH PRICE CAN BE DETERMINED. IN CASE, IT IS NOT POSSIBLE TO MAK E ADJUSTMENTS, THEN RP METHOD MAY NOT BE THE MOST APPROPRIATE AND BEST METHOD TO BE ADOPTED. 167. BEFORE US, THE REVENUE HAS NOT PLEADED OR SUBMITTED THAT THE RP METHOD SHOULD NOT HAVE BEEN ADOPTED. THE TPO AND THE ASSESSING OFFICER DID NOT REJECT THE RP METHOD ADOPTED BY THE ASSESSEE. THE ASSESSED SUBMIT THAT THE REVENUE ACCEPTS FUNCTIONAL PARITY AND IN FACT, WITHOUT ADJUSTMENT. CONTRA, REVENUE WOULD ARGUE THAT THE ASSESSING OFFICER/TPO AND THE TRIBUNAL HAVE ADOPTED AND APPLIED THE CUP METHOD FOR DETERMI NING ARM S LENGTH PRICE OF AMP EXPENSES. WE DO NOT PRONOUNCE A FIRM AND FINAL OPINION ON THE SAID LIS AS IT SHOULD BE AT FIRST EXAMINED BY THE TRIBUNAL. 168. THE TRIBUNAL HAS UPHELD ADOPTION OF CP METHOD AFTER APPLYING BRIGHT LINE TEST IN THE CASE OF R EEBOK INDIA CO. LTD. AND CANON INDIA PVT. LTD. THE BRIGHT LINE TEST ADOPTED TO DEMARCATE THE ROUTINE AND NON - ROUTINE AMP EXPENDITURE IS PREDICATED ON SELECTION OF A DOMESTIC DISTRIBUTOR AND MARKETING COMPANY THAT DOES NOT OWN INTANGIBLE BRAND RIGHTS. CON TRACT VALUE WOULD BE TREATED AS NIL. IN TERMS OF OUR FINDING RECORDED ABOVE, THE SAID FINDING WOULD NOT BE CORRECT. THE APPROACH AND PROCEDURE FOR ASCERTAINING /DETERMINING ARM S LENGTH PRICE UNDER THE RP METHOD IS DIFFERENT. FOR THIS REASON, AND OTHER GRO UNDS RECORDED, WE HAVE ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 23 PASSED AN ORDER OF REMIT TO THE TRIBUNAL FOR EXAMINATION OF THE FACTUAL MATRIX. 15. A PERUSAL OF PARAS 179 - 183 OF THE SAID JUDGEMENT FURTHER SHOWS THAT THE ROYALTY PAID TO REEBOK INTERNATIONAL LTD., U.K. WAS BENCH - MARKED BY THE AS SESSEE USING CUP METHOD AS THE MOST APPROPRIATE METHOD WHICH WAS NOT ACCEPTED BY THE TPO. HOWEVER THE TRIBUNAL DID NOT UPHOLD THE FINDING OF THE TPO WHO HAD CONCLUDED THAT THE ASSESSEE HAD NOT DERIVED ANY COMMERCIAL BENEFIT AS TECHNOLOGY AND KNOW - HOW HAD NOT RESULTED IN ANY SUBSTANTIAL PROFIT INCREASE. THE FINDING OF THE TRIBUNAL THAT THE QUESTION OF PAYMENT OF ROYALTY CANNOT BE DETERMINED ON THE BASIS OF PROFITABILITY OR EARNINGS WAS UPHELD AS ONCE IT IS ACCEPTED THAT KNOWHOW WAS PROVIDED THE SAME CANNO T BE QUESTIONED. SUITABLE PROFITS RELATABLE IT WAS NOT HELD TO RELEVANT BY APPROVING THE FINDING OF THE TRIBUNAL. THE JUSTIFICATION GIVEN BY THE ASSESSEE FOR EXPLAINING LOWER PROFITS CLAIMED TO BE ON ACCOUNT OF BAD DEBT, HIGH RENT, INCREASE IN LEGAL COS TS ETC. ACCEPTED BY THE TRIBUNAL WAS ALSO NOT INTERFERED BY THE HON BLE HIGH COURT. THE SAID ISSUE IN PARA 197 HAS BEEN ANSWERED AGAINST THE REVENUE. ACCORDINGLY WE FIND THAT THE STAND OF THE REVENUE THAT THE ISSUE CAN BE DECIDED AT THIS STAGE CANNOT BE ACCEPTED WHEN EXAMINED FROM ANY ANGLE AS THE FACTS WILL NEED TO BE CONSIDERED AFRESH AT LENGTH BY THE TPO ON THE BASIS OF AGREEMENTS AND FACTS AND EVIDENCES ON THE RECORD IN THE LIGHT OF THE DIRECTION OF THE HON BLE HIGH COURT. 16. IT IS UNFORTUNATE T HAT NONE OF THESE FACTS WERE ADDRESSED BY THE REVENUE. EVEN THE OPPORTUNITY SO PROVIDED AFTER THE INAPPROPRIATE BEHAVIOUR OF A DULY APPOINT STANDING COUNSEL WHO OBDURATELY ABDICATED HIS ONEROUS RESPONSIBILITY WAS FOLLOWED BY ILL PREPARED REPRESENTATION BY THE REVENUE AS ADDRESSED IN PARA 7 ABOVE WHERE THE ENTIRE RESPONSIBILITY TO ADDRESS THE COURT MEANINGFULLY WAS EVIDENTLY SHIRKED BY THE REVENUE. SERIOUS NOTE OF THE CASUAL MANNER OF REPRESENTATION BY THE REVENUE NEEDS TO BE TAKEN NOTE OF AND ADDRESSED . COURTS FUNCTIONING CANNOT BE ALLOWED TO BE CURTAILED AT WHIMS AND FANCIES OF THE OFFICERS RELUCTANT TO ASSIST THE COURT. ACCOUNTABILITY FOR THE UNSEEMLY AND IN APPROPRIATE REPRESENTATION MAY NEED TO BE FIXED. 17. ACCORDINGLY FOR THE DETAILED REASONS GIVEN HEREIN ABOVE THE ISSUES ADDRESSED IN GROUND NO. - 2 2.27 ARE RESTORED TO THE FILE OF THE AO/TPO TO DECIDE THE SAME DENOVO IN THE LIGHT OF THE JUDGEMENT OF THE HON BLE HIGH COURT. ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 24 NEEDLESS TO SAY THAT THE ASSESSEE SHALL BE AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD. 18. THE FACTS RELATABLE TO GROUND NO - 3 OF THE ASSESSEE ARE FOUND DISCUSSED IN PARAS 4 TO 4.3 OF THE ASSESSMENT ORDER WHEREIN OUT OF THE TOTAL LEGAL AND PROFESSIONAL EXPENSES DEBITED TO THE DUNE OF RS.4,93,05,419/ - A DISALLOWANCE OF RS.11, 68,364/ - WAS MADE. THE SPECIFIC BREAKUP OF THIS IS SET OUT IN PARA 15.3 OF THE DRP S ORDER AND EXTRACTED HEREUNDER FOR READY - REFERENCE: - 15.3. THE DRP EXAMINED THE DETAILS/VOUCHERS FILED BY THE TAXPAYER. EXAMINATION OF DETAILS REVEALED THAT FOLLOWING EXPENSES WERE NOT IN THE NATURE OF LEGAL AND PROFESSIONAL AND COULD NOT BE SAID TO HAVE BEEN INCURRED IN THE NORMAL COURSE OF BUSINESS: - 05.04.2009 GYM MAINTENANCE CHARGES RS.17,000 09.04.2009 BONUS PAYOUT RS.42,250 30.04.2009 MOBILE BILL RS.3,000 30.04.2009 RENT ON CLUB INTO CELL RS.40,000 05.05.2009 GYM MAINTENANCE CHARGES - J.K.SHARMA RS.17,000 05.06.2009 GYM MAINTENANCE CHARGES - J.K.SHARMA RS.17,000 17.06.2009 DLF GOLF EXPENSES OF HARPREET RS.45,000 06.07.2009 GYM MAINTENANCE CHARGES - J.K.SHARMA RS.17,000 17.07.2009 CONVEYANCE EXPENSES TO NISHA VERMA & VINITA SHARMA RS.6,244 29.07.2009 REIMBURSEMENT OF EXPENSES VINITA SHETTY RS.11,000 29.07.2009 RENT CLUB INTO CELL RS.40,000 07.08.2009 GYM MAINTENANCE CHARGES - J.K.SHARMA RS.17,000 07.09.2009 GYM MAINTENANCE CHARGES - J.K.SHARMA RS.17,000 07.10.2009 GYM MAINTENANCE CHARGES - J.K.SHARMA RS.17,000 19.11.2009 RENT TO CLUB INTO CELL RS.40,000 04.12.2009 GYM MAINTENANCE CHARGES - J.K.SHARMA RS.17,000 07.01.2010 GYM MAINTENANCE CHARGES - J.K.SHARMA RS.17,000 05.03.2009 GYM MAINTENANCE CHARGES - J.K.SHARMA RS.17,000 31.03.2010 STALL SPACE FOR MUMBAI HALF MARATHON RS.319,870 25.08.2009 LEAVE ENCASHMENT & GRATUITY LIABILITIES RS.25,000 01.09.2009 CONTRACT FOR SUMMER CARNIVAL PROMO RS.11,000 31.01.2010 EXGRATIA PROVISION FOR RKS RS.4,00,000 18.04.2009 PROVISION FOR SAHIJPAL BILLS FOR APRIL 09 RS.15,000 TOTAL RS.1168364 19. ADDRESSING THE SAME THE LD. AR SUBMITTED THAT LOOKING AT THE NATURE OF EXPENSES IT IS EVIDENTLY DEMONSTRATED THAT THESE WERE BUSINESS RELATED EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS OF THE ASSESSEE AND CANNOT BE TERMED TO BE LEGAL AND PROFESSIONAL CHARGES. IN THESE CIRCUMSTANCES IT WAS HIS LIMITED PRAYER THAT THE ISSUE MAY GO BACK AND THE AO MAY BE DIRECTED TO LOOK INTO THE ALLOWABILITY OF ASSESSEE S CLAIM. THE LD. CIT DR RELYING UPON THE ASSESSMENT ORDER HOWEVER DID NOT CONTROVERT TH E REQUEST MADE. ITA NO. 1246/DEL/2015 & SA NO. - 158/DEL/2015 25 20. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON A CONSIDERATION OF THE SAME IT CAN BE SEEN FROM THE DETAIL OF THE EXPENDITURE EXTRACTED HEREIN ABOVE FROM THE DRP S ORDER THAT THE SAID EXPENDITURE CA NNOT BE CONSIDERED TO BE LEGAL AND PROFESSIONAL CHARGES AND THE ARGUMENT THAT IT IS RELATED TO THE BUSINESS OF THE ASSESSEE APPEARS TO BE CORRECT AS PER THE NARRATIONS EXTRACTED IN THE ORDER. HOWEVER THE CLAIM CANNOT BE DECIDED IN TERMS OF THE NARRATIONS GIVEN BY THE ASSESSEE AND SINCE THE PRIMARY VOUCHERS IN SUPPORT OF THE NARRATIONS GIVEN ARE CLAIMED TO BE AVAILABLE AND INFACT WERE MADE AVAILABLE IN THE ASSESSMENT PROCEEDINGS THE ISSUE IS RESTORED BACK TO THE FILE TO THE TPO WHO MAY CONSIDER THE ALLOWABI LITY OF THE SAME IN ACCORDANCE WITH LAW AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. 21. GROUND NO. - 4 IS CONSEQUENTIAL AS SUCH REQUIRE NO SPECIFIC ADJUDICATION. GROUND NO. - 1 IS GENERAL AND IS ADDRESSED BY WAY OF SPECIFIC GROUNDS AS SAID REQUIRES NO ADJUDICATION. 22. FOR THE REASONS SET OUT HEREINABOVE, THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES AS PER THE PRONOUNCEMENTS MADE IN THE OPEN COURT AT THE TIME OF HEARING. 23. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 24. THE STAY PETITION FILED BY THE ASSESSEE ACCORDINGLY BECOMES INFRUCTUOUS. THE SAID ORDER WAS PRONOUNCED IN THE OPEN COURT ON 22 ND APRIL , 2015. SD/ - SD/ - ( N.K.SAINI ) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: THE 22 ND APRIL , 2015 *AMIT KUMAR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI