Toshiba India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 1357/DEL/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4519 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 15-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 06-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-2 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO.1357/DEL/2017 ASSESSMENT YEAR : 2012-13 TOSHIBA INDIA PVT. LTD., 3 RD FLOOR, BUILDING NO.10, TOWER B, PHASE II, DLF CYBER CITY, GURGAON. PAN: AABCT4829N VS. DCIT, CIRCLE-25(2), CR BUILDING, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESHWAR RAO, ADVOCATE DEPARTMENT BY : SHRI H.K. CHOUDHARY, CIT, DR DATE OF HEARING : 31.08.2017 DATE OF PRONOUNCEMENT : 01.09.2017 ORDER PER R.S. SYAL, VP: THIS APPEAL FILED BY THE ASSESSEE EMANATES FROM TH E FINAL ASSESSMENT ORDER DATED 30.01.2017 PASSED BY THE ASS ESSING OFFICER ITA NO.1357/DEL/2017 2 (ASSESSING OFFICER) U/S 143(3) READ WITH SECTION 14 4C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RE LATION TO THE ASSESSMENT YEAR 2012-13. 2. THE FIRST ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION OF RS.38,60,51,832/- MADE BY THE ASSESSING OFFICER TOW ARDS TRANSFER PRICING ADJUSTMENT ON ADVERTISEMENT, MARKETING AND PROMOTION (AMP) EXPENSES. 3. SUCCINCTLY, THE FACTS OF THE CASE ARE THAT THE A SSESSEE, AN INDIAN COMPANY, IS A WHOLLY OWNED SUBSIDIARY OF TOSHIBA CO RPORATION, JAPAN. IT IS ENGAGED IN THE TRADING OF CONSUMER DURABLES, I.T. PRODUCTS AND ALSO PROVIDING REPRESENTATIVE AND MARKETING SUPPORT SERVICES TO TOSHIBA GROUP COMPANIES WORLDWIDE. 99.99% OF THE ASSESSEE S SHARE CAPITAL IS HELD BY TOSHIBA CORPORATION, JAPAN AND ONLY 0.01% I S HELD BY OTHERS. THE ASSESSEE FILED RETURN DECLARING TOTAL INCOME OF RS.31.99 CRORE. CERTAIN INTERNATIONAL TRANSACTIONS WERE REPORTED IN FORM NO.3CEB. THE ASSESSING OFFICER MADE REFERENCE TO THE TRANSFER PR ICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTER NATIONAL TRANSACTIONS. ITA NO.1357/DEL/2017 3 THE TPO DID NOT DISPUTE ANY OTHER INTERNATIONAL TRA NSACTION EXCEPT FINDING THAT THE ASSESSEE INCURRED AMP EXPENSES FOR PROMOTING THE BRAND OWNED BY ITS AE. AFTER CARRYING OUT A DETAIL ED EXERCISE AND DEALING WITH THE OBJECTIONS RAISED BY THE ASSESSEE, THE TPO HELD THAT THERE WAS AN INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS AE FOR PROMOTION OF BRAND. APPLYING THE BRIGHT LINE AP PROACH, THE TPO WORKED OUT TRANSFER PRICING ADJUSTMENT AT RS.77.46 CRORE ON PROTECTIVE BASIS. THEN, THE TPO PROCEEDED TO DETERMINE THE AL P OF THE INTERNATIONAL TRANSACTION OF AMP EXPENSES ON SUBSTA NTIVE BASIS. IN DOING SO, HE NOTED THAT THE ASSESSEE INCURRED TOTAL AMP EXPENSES TO THE TUNE OF RS.148.77 CRORE. NON-ROUTINE AMP EXPENSES W ERE WORKED OUT AT RS.89.66 CRORE AND THE REMAINING AMOUNT OF ROUTINE EXPENSES WAS NOT CONSIDERED FURTHER FOR BENCHMARKING. AFTER APPLYIN G 5% MARK-UP AS PER INTERNATIONAL GUIDELINES ON SUCH NON-ROUTINE EXPE NSES, THE TPO CAME TO HOLD THAT THE ASSESSEE OUGHT TO HAVE RECOVERED A SUM OF RS.94.14 CRORE (RS.89.66 CRORE PLUS RS. 4.48 CRORE MARK-UP ) FROM ITS AE FOR BRAND BUILDING. AS ONLY A SUM OF RS.52.38 CRORE WA S ACTUALLY RECOVERED, THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT AMOUNT ING TO RS.41.75 ITA NO.1357/DEL/2017 4 CRORE (RS.94.14 CRORE MINUS RS.52.38 CRORE) ON THIS INTERNATIONAL TRANSACTION. THE DRP REDUCED THE AMOUNT OF TRANSFE R PRICING ADJUSTMENT TO RS.38,60,51,832/- BY APPROVING THE STAND OF THE TPO IN PRINCIPLE. THAT IS HOW, THE ASSESSING OFFICER MADE ADDITION OF RS.38.60 CRORE IN THE FINAL ASSESSMENT ORDER, AGAINST WHICH THE ASSES SEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE LD. AR CONTENDED WITH VEHE MENCE THAT THE INCURRING OF AMP EXPENSES IS NOT AN INTERNATIONAL T RANSACTION AT ALL AND, HENCE, THERE CAN BE NO QUESTION OF DETERMINING ITS ARMS LENGTH PRICE OR MAKING ANY ADDITION THEREON. HE RELIED ON THE JUDG MENTS OF THE HONBLE DELHI HIGH COURT IN MARUTI SUZUKI INDIA LTD. & ANOTHER VS. CIT (2015) 129 DTR 25 (DEL) AND CIT VS. WHIRLPOOL OF INDIA LTD. (2015) 94 CCH 156 DEL-HC TO CONTEND THAT THE AMP EXPENSES CANNOT BE CONSIDER ED AS AN INTERNATIONAL TRANSACTION. HE ACCENTUATED THAT THERE WAS NO INTERNATIONAL TRANSACTION OF AMP EXPENSES ON THE BA SIS OF THE PRINCIPLES LAID DOWN IN THESE JUDGMENTS AND, HENCE, THE ENTIRE EXERCISE OF ITA NO.1357/DEL/2017 5 DETERMINING ITS ALP AND, EX CONSEQUENTI , MAKING THE TRANSFER PRICING ADJUSTMENT, BE SET ASIDE. 5. IN THE OPPUGNATION, THE LD. DR RELIED ON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN SONY ERICSON MOBILE COMMUNICATIONS (INDIA) PVT. LTD. VS. CIT (2015) 374 ITR 118 (DEL) IN WHICH AMP EXPENSES HAVE BEEN HELD TO BE AN INTERNATIONAL TRAN SACTION AND THE MATTER OF DETERMINATION OF ITS ALP HAS BEEN RESTORED. HE A LSO RELIED ON A LATER JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N YUM RESTAURANTS (INDIA) P. LTD. VS. ITO (2016) 380 ITR 637 (DEL) AND STILL ANOTHER JUDGMENT DATED 28.1.2016 OF THE HONBLE DELHI HIGH COURT IN SONY ERICSON MOBILE COMMUNICATIONS (INDIA) PVT. LTD. (FOR THE AY 2010-11) IN WHICH THE QUESTION AS TO WHETHER AMP EXPENSE IS AN INTERNATIONAL TRANSACTION HAS BEEN RESTORED FOR A FRESH DETERMINA TION. IT WAS ARGUED, THAT THE JUDGMENT IN THE CASE OF YUM RESTAURANTS AND SONY ERICSON (FOR AY 2010-11) DELIVERED IN JANUARY, 2016 IS LATER IN POINT OF TI ME TO THE EARLIER JUDGMENTS IN THE CASE OF MARUTI SUZUKI AND WHIRLPOOL, ETC. RELIED BY THE LD. AR AND, HENCE, THE MATTER OF DETERMINATI ON OF THE ALP OF THE ITA NO.1357/DEL/2017 6 INTERNATIONAL TRANSACTION SHOULD BE RESTORED FOR A FRESH DETERMINATION, AFTER PRIMARILY HOLDING THE INCURRING OF AMP EXPENS ES AS AN INTERNATIONAL TRANSACTION. IT WAS ARGUED THAT THE TRIBUNAL IN SEVERAL CASES, INCLUDING THE ASSESSEES OWN CASE FOR THE A. Y. 2010-11 HAS HELD THAT THE AMP EXPENSES IS AN INTERNATIONAL TRANSACTI ON. HE FURTHER RELIED ON THE ORDER OF THE TRIBUNAL FOR THE IMMEDIATELY PR ECEDING YEAR, THAT IS, A.Y. 2011-12, IN WHICH THE QUESTION OF DETERMINATI ON OF THE ALP OF THE AMP EXPENSES HAS BEEN RESTORED TO THE FILE OF TPO T O BE DECIDED AFRESH IN THE LIGHT OF VARIOUS JUDGMENTS OF THE HONBLE DE LHI HIGH COURT. 6. THE FIRST MOOT QUESTION WHICH, ERGO, LOOMS LARG E BEFORE US IS THE DETERMINATION OF THE EXISTENCE OR OTHERWISE OF AN I NTERNATIONAL TRANSACTION ON ACCOUNT OF AMP EXPENSES INCURRED BY THE ASSESSEE. IN ORDER TO DECIDE IT, WE NEED TO HIGHLIGHT CERTAIN RE LEVANT FACTS OF THE CASE. THE ASSESSEE (TIPL) STARTED THE DISTRIBUTION ACTIVI TY PURSUANT TO THE `EXCLUSIVE DISTRIBUTION AGREEMENT DATED 21.9.2007 ENTERED INTO WITH TOSHIBA SINGAPORE PTE LTD. (TSP), ITS AE, WHOSE CO PY IS PLACED AT PAGE 367 ONWARDS OF THE PAPER BOOK. THE PREAMBLE OF THE AGREEMENT ITA NO.1357/DEL/2017 7 PROVIDES THAT TSP IS ENGAGED IN THE SALE AND MARKET ING OF TOSHIBA BRAND ELECTRONIC PRODUCTS, ACCESSORIES AND CONSUMABLES, W HICH APPOINTED THE TIPL ( THE ASSESSEE) TO ACT AS ITS DISTRIBUTOR OF C ERTAIN TOSHIBA BRAND ELECTRONIC PRODUCTS AND TO PROMOTE THE SALE OF SUCH PRODUCTS, ACCESSORIES AND CONSUMABLES AND THE TOSHIBA BRAND NAME IN THE TERRITORY. CLAUSE 3 OF THE AGREEMENT PROVIDES FOR PURCHASE AND SALE. LATER PART OF THIS CLAUSE READS AS UNDER :- TIPL SHALL USE ITS BEST EFFORTS TO PROMOTE AND SEL L PRODUCTS AND TO PROMOTE THE TOSHIBA BRAND NAME GENERALLY IN THE TERRITORY DURING THE TERM OF THIS AGREEMENT. 7. IT IS APPARENT FROM THE ABOVE EXCLUSIVE DISTRIB UTION AGREEMENT THAT THERE WAS AN EXPRESS UNDERSTANDING BETWEEN THE ASSESSEE AND TSP TO PROMOTE TOSHIBA BRAND NAME IN INDIA AND THAT THE ASSESSEE UNDERTOOK TO PROMOTE TOSHIBA BRAND IN INDIA ON BEHALF OF ITS AE. THE MATTER DOES NOT END HERE ONLY. AS AGAINST THE TOTAL AMP EXPENS ES INCURRED BY THE ASSESSEE AMOUNTING TO RS.148 CRORE, OUT OF WHICH TP O HAS CONSIDERED ONLY RS. 89 CRORE AS LEADING TO BRAND PROMOTION, TH E ASSESSEES AES HAVE REIMBURSED A SUM OF RS.52.38 CRORE WHICH IS AP PARENT FROM PAGE ITA NO.1357/DEL/2017 8 157 OF THE TPOS ORDER. SUCH REIMBURSEMENT FOR AMP EXPENSES HAS BEEN DULY ACCEPTED BY THE LD. AR DURING THE COURSE OF INSTANT PROCEEDINGS BEFORE US. WE FAIL TO COMPREHEND AS TO WHY THE AES OF THE ASSESSEE WILL REIMBURSE RS.52.38 CRORE TOWARDS AMP EXPENSES IF THE ASSESSEE WAS ONLY TO MAKE ADVERTISEMENT FOR SELLING ITS PRODUCTS IN INDIA WITHOUT THE PRIOR UNDERSTANDING OF PROMOTION OF THE BRAND. THE VERY FACT THAT THE ASSESSEE EXPRESSLY UNDERTOOK TO PROMO TE TOSHIBA BRAND IN INDIA AND THE AES REIMBURSED A SUBSTANTIAL SUM, THE RE REMAINS NOT EVEN AN IOTA OF DOUBT THAT THE ASSESSEE UNDERTOOK BRAND PROMOTION OF TOSHIBA BRAND IN INDIA ON THE UNDERSTANDING WITH ITS AE, WH ICH CLEARLY AMOUNTS TO AN INTERNATIONAL TRANSACTION. THUS, THE CONTENT ION OF THE LD. AR THAT THERE WAS NO INTERNATIONAL TRANSACTION FOR BRAND PR OMOTION, FAILS. 8. NOW COMES THE QUESTION OF DETERMINATION OF ALP O F THIS INTERNATIONAL TRANSACTION. IN THIS REGARD, IT IS OB SERVED THAT THE TPO MADE SUBSTANTIVE ADDITION BY CONSIDERING THE NON-ROUTINE AMP EXPENSES AS INCURRED ON BEHALF OF ITS AE FOR BRAND PROMOTION AN D THEN ADDED 5% ITA NO.1357/DEL/2017 9 MARK UP. IMPLIEDLY, THE TPO APPLIED COST PLUS METH OD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION. 9. AT THIS JUNCTURE, IT IS RELEVANT TO NOTE THAT THE HON'BLE DELHI HIGH COURT IN SONY ERICSON MOBILE COMMUNICATIONS (INDIA) PVT. LTD . (SUPRA) HAS ELABORATELY EXAMINED THIS ISSUE. IT CONSIDERED THE DISTRIBUTION AND THE BRAND PROMOTION ACTIVITIES AS INTER-CONNECTED TRANSACTIONS AND HARPED ON THEIR AGGREGATION. CRUX OF THE RELEVANT O BSERVATIONS OF THE HONBLE HIGH COURT, WHICH IS CRUCIAL FOR OUR PURPOS E, CAN BE SUMMARIZED AS UNDER:- INTER-CONNECTED INTERNATIONAL TRANSACTIONS CAN BE A GGREGATED AND SECTION 92(3) DOES NOT PROHIBIT THE SET-OFF [PARAS 80 & 81]; AMP IS A SEPARATE FUNCTION. AN EXTERNAL COMPARABLE SHOULD PERFORM SIMILAR AMP FUNCTIONS. [PARAS 165 &166] ; BRIGHT LINE TEST CANNOT BE APPLIED TO WORK OUT NON- ROUTINE AMP EXPENSES FOR BENCHMARKING [PARA 194(X)]; ITA NO.1357/DEL/2017 10 ALP OF AMP EXPENSES SHOULD BE DETERMINED PREFERABLY IN A BUNDLED MANNER WITH THE DISTRIBUTION ACTIVITY [PARA S 91, 121 & OTHERS] ; FOR DETERMINING THE ALP OF THESE TRANSACTIONS IN A BUNDLED MANNER, SUITABLE COMPARABLES HAVING UNDERTAKEN SIMI LAR ACTIVITIES OF DISTRIBUTION OF THE PRODUCTS AND ALSO INCURRING OF AMP EXPENSES, SHOULD BE CHOSEN [PARAS 194(I), (II), (VI II) & OTHERS]; IF NO COMPARABLES HAVING PERFORMED BOTH THE FUNCTI ONS IN A SIMILAR MANNER ARE AVAILABLE, THEN, SUITABLE ADJU STMENT SHOULD BE MADE TO BRING INTERNATIONAL TRANSACTIONS AND COMPAR ABLE TRANSACTIONS AT PAR [PARA 194 (III)] ; IF ADJUSTMENT IS NOT POSSIBLE OR COMPARABLE IS NOT AVAILABLE, THEN, THE TNMM ON ENTITY LEVEL SHOULD NOT BE APPLIED [P ARAS 100, 121, 194(III) & (VI)] ; IN THE ABOVE EVENTUALITY, INTERNATIONAL TRANSACTION OF AMP SHOULD BE VIEWED IN A DE-BUNDLED MANNER OR SEPARATELY [PAR AS 121& 194(XI)] ; ITA NO.1357/DEL/2017 11 IN SEPARATELY DETERMINING THE ALP OF AMP EXPENSES, THE TPO IS FREE TO CHOOSE ANY OTHER SUITABLE METHOD INCLUDING COST PLUS METHOD [PARA 194(XIII)]; IN SO MAKING A TP ADJUSTMENT ON ACCOUNT OF AMP EXPE NSES, A PROPER SET OFF/PURCHASE PRICE ADJUSTMENT SHOULD BE ALLOWED FROM THE OTHER TRANSACTION OF DISTRIBUTION OF THE PRODUC TS [PARA 93] ; SELLING EXPENSES CANNOT BE CONSIDERED AS PART OF AM P EXPENSES [PARAS 175 & 176 OF THE JUDGMENT]. 10. WITH THE FOREGOING UNDERSTANDING OF THE RATIO DECIDENDI OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF SONY ERICSSON (SUPRA) , LET US EXAMINE THE CONTENTION PUT FORTH BY THE L D. AR IN SUPPORT OF THE DELETION OF ADDITION. HE SUBMITTE D THAT THE ASSESSEE APPLIED TNMM AS THE MOST APPROPRIATE METHOD. SINCE THE PROFIT MARGIN DECLARED BY THE ASSESSEE IS FAVOURABLY COMPARABLE W ITH THE AVERAGE MARGIN OF THE COMPARABLES, WHICH FACT HAS NOT BEEN DISPUTED BY THE TPO, THEN, NO ADJUSTMENT SHOULD BE MADE ON ACCOUNT OF AMP EXPENSES BECAUSE SUCH EXPENSES STAND SUBSUMED IN THE OVERALL OPERATING PROFIT. ITA NO.1357/DEL/2017 12 11. WE ARE UNABLE TO COUNTENANCE THE ARGUMENT A DVANCED ON BEHALF OF THE ASSESSEE FOR DELETION OF THE ADDITION TOWARDS A MP EXPENSES ON THE PLAIN LOGIC OF THE ASSESSEES PROFIT MARGIN BEING H IGHER THAN THAT OF COMPARABLES. THIS IS A FALLACIOUS ARGUMENT. IT IS PERTINENT TO NOTE THAT THE TPO EXAMINED AND GOT SATISFIED WITH THE ASSESSE ES PROFIT MARGIN VIS- -VIS THE COMPARABLES ONLY QUA THE INTERNATIONAL TRANSACTIONS OF DISTRIBUTION FUNCTION. HE SEPARATELY DETERMINED THE ALP OF AMP EXPENSES, ALBEIT WITHOUT EXAMINING THE AMP FUNCTION S CARRIED OUT BY THE ASSESSEE AND THE COMPARABLES. MANNER OF DETERMINATI ON OF THE ALP OF THE DISTRIBUTION ACTIVITY AND AMP ACTIVITY HAS BEEN SET OUT BY THE HONBLE HIGH COURT TO BE CONDUCTED, FIRSTLY, IN A B UNDLED MANNER BY CONSIDERING THE DISTRIBUTION AND AMP FUNCTIONS PERFORMED BY THE ASSESSEE AS WELL AS THE PROBABLE COMPARABLES. IF PR OBABLE COMPARABLES HAVING PERFORMED BOTH THE FUNCTIONS ARE NOT AVAILAB LE, THEN TO DETERMINE THE ALP OF AMP EXPENSES IN A SEGREGATED MANNER. AS SUCH, IT BECOMES IMMENSELY IMPORTANT TO SEPARATELY EXAMINE THE DISTR IBUTION AND AMP FUNCTIONS UNDERTAKEN BY THE ASSESSEE AS WELL AS PROBABLE COMP ARABLES. IT IS VITAL TO HIGHLIGHT THE DIFFERENCE BETWEEN THE AM P EXPENSES AND AMP ITA NO.1357/DEL/2017 13 FUNCTIONS. WHEREAS THE AMP FUNCTIONS ARE THE MEANS BY WHICH THE AMP ACTIVITY IS PERFORMED, THE AMP EXPENSES ARE THE AMO UNT SPENT ON THE PERFORMANCE OF SUCH MEANS (FUNCTIONS). TO PUT IT SI MPLY, AN EXAMINATION OF AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE AND THE PROBABLE COMPARABLES IS SINE QUA NON IN THE PROCESS OF DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION OF AMP SPEND, EITH ER IN A SEGREGATE OR AN AGGREGATE MANNER. WHAT THEIR LORDSHIPS HAVE HELD IS TO BUNDLE THE DISTRIBUTION ACTIVITY WITH THE AMP ACTIVITY, BEING TWO SEPARATE BUT CONNECTED INTERNATIONAL TRANSACTIONS, FOR THE PURPO SES OF DETERMINATION OF THE ALP OF BOTH THESE INTERNATIONAL TRANSACTIONS IN A COMBINED MANNER. THE ARGUMENT OF THE LD. AR THAT SINCE THE PROFIT MA RGIN OF THE COMPARABLES IS MUCH LESS THAN THE ASSESSEE AND HENC E NO SEPARATE ADDITION SHOULD BE MADE FOR AMP FUNCTIONS, IF TAKE N TO A LOGICAL CONCLUSION, WILL MAKE THE AMP SPEND AS A NON-INTERN ATIONAL TRANSACTION, WHICH, IN OUR CONSIDERED OPINION, IS NOT APPROPRIAT E IN THE GIVEN FACTS. ONCE AMP EXPENSE HAS BEEN HELD TO BE AN INTERNATION AL TRANSACTION, IT IS, BUT, NATURAL THAT THE FUNCTIONS PERFORMED BY THE AS SESSEE UNDER SUCH A TRANSACTION NEED TO BE COMPARED WITH SIMILAR FUNCTI ONS PERFORMED BY A ITA NO.1357/DEL/2017 14 COMPARABLE CASE. IF AMP FUNCTIONS PERFORMED BY THE ASSESSEE TURN OUT TO BE DIFFERENT FROM THOSE PERFORMED BY A PROBABLE COMPARABLE COMPANY, THEN, AN ADJUSTMENT IS REQUIRED TO BE MADE SO AS TO BRING THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AS WELL AS THE COMPARABLE, AT THE SAME PEDESTAL. IF WE CONCUR WITH THE CONTENTION OF THE LD. AR THAT THE ADDITION ON ACCOUNT TRANSFER PRICING ADJUSTMENT OF AMP EXPENSES BE DELETED WITHOUT ANY EXAMINATION OF THE AMP FUNCTION S CARRIED OUT BY THE ASSESSEE AS WELL AS COMPARABLES, THIS WILL AMOUNT T O SNATCHING THE TAG OF INTERNATIONAL TRANSACTION FROM AMP EXPENSES, WHICH ADMITTEDLY EXISTS IN FACTS AND CIRCUMSTANCES OF THE INSTANT CASE. WHAT T HEIR LORDSHIPS IN SONY ERICSSON (SUPRA) HAVE HELD IS THAT THE DISTRIBUTION ACTIVITY AND AM P EXPENSES ARE TWO SEPARATE BUT RELATED INTERNATIONAL TRANSACTIONS. IT IS ONLY FOR THE PURPOSES OF DETERMINING THEIR ALP THAT THES E TWO SHOULD BE AGGREGATED. THE PROCESS OF SUCH AGGREGATION DOES NO T TAKE AWAY THE SEPARATE CHARACTER OF THE AMP EXPENSES AS AN INTERN ATIONAL TRANSACTION. AN ANALYSIS AND EXAMINATION OF THE DISTRIBUTION AND AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE MUST BE NECESSARILY DON E IN THE FIRST INSTANCE, WHICH SHOULD BE THEN COMPARED WITH SIMILAR FUNCTION S PERFORMED BY ITA NO.1357/DEL/2017 15 SOME PROBABLE COMPARABLES. IF THE DISTRIBUTION AND AMP FUNCTIONS PERFORMED BY THE ASSESSEE TURN OUT TO BE DIFFERENT FROM THOSE PERFORMED BY PROBABLE COMPARABLES, THEN, A SUITABLE ADJUSTM ENT SHOULD BE MADE TO THE PROFITS OF THE COMPARABLE SO AS TO COUNTERBALAN CE THE EFFECT OF SUCH DIFFERENCES. IF HOWEVER DIFFERENCES EXIST IN SUCH FUNCTIONS, BUT NO ADJUSTMENT CAN BE MADE, THEN, SUCH PROBABLE COMPARA BLE SHOULD BE DROPPED FROM THE LIST OF COMPARABLES. IF, IN DOING THIS EXERCISE, THERE REMAINS NO COMPANY DOING COMPARABLE DISTRIBUTION AN D AMP FUNCTIONS, THEN, BOTH THE INTERNATIONAL TRANSACTIONS ARE REQUI RED TO BE SEGREGATED AND THEN EXAMINED ON INDIVIDUAL BASIS BY FINDING OUT PR OBABLE COMPARABLES DOING SUCH SEPARATE FUNCTIONS SIMILARLY. FOR THE IN TERNATIONAL TRANSACTION OF AMP SPEND, THIS CAN BE DONE BY, FIRSTLY, SEEING THE AMP FUNCTIONS ACTUALLY PERFORMED BY THE ASSESSEE AND THEN COMPARI NG IT WITH THE AMP FUNCTIONS PERFORMED BY A PROBABLE COMPARABLE. IF BO TH ARE FOUND OUT TO BE SIMILAR, THEN THE MATTER ENDS AND A COMPARABLE I S FOUND AND ONE CAN GO AHEAD WITH DETERMINING THE ALP OF SUCH A TRANSAC TION. IF THE AMP FUNCTIONS PERFORMED BY THE TWO ENTITIES ARE FOUND T O BE DIFFERENT, THEN ADJUSTMENT IS REQUIRED TO BE MADE IN THE CASE OF A PROBABLE COMPARABLE, ITA NO.1357/DEL/2017 16 SO AS TO MAKE IT UNIFORM WITH THE ASSESSEE. THE ASS ESSEE MAY HAVE POSSIBLY DONE, SAY, FOUR DIFFERENT AMP FUNCTIONS AS AGAINST THE PROBABLE COMPARABLE HAVING DONE, SAY, ONLY THREE. IN SUCH A SCENARIO, AGAIN THE ADJUSTMENT WILL BE WARRANTED. IN ANOTHER SITUATION, THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AND PROBABLE COMPARABLE M AY BE SIMILAR BUT WITH VARYING STANDARDS, WHICH WILL ALSO CALL FOR AN ADJUSTMENT. CRUX OF THE MATTER IS THAT THE AMP FUNCTIONS PERFORMED BY T HE ASSESSEE MUST BE SIMILAR TO THOSE DONE BY THE COMPARABLES, IN THE S AME MANNER AS SUCH FUNCTIONS ARE COMPARED IN ANY OTHER INTERNATIONAL T RANSACTION. HOWEVER, IN COMPUTING ALP OF AMP SPEND, THE ADJUSTMENT OR SE T OFF, IF ANY, AVAILABLE FROM THE DISTRIBUTION FUNCTION, SHOULD BE MADE. THE ESSENCE OF THE JUDGMENT IN THE CASE OF SONY ERICSON MOBILE (SUPRA) IS THAT THE TWO INTERNATIONAL TRANSACTIONS OF DISTRIBUTION AND AMP SHOULD BE EXAMINED ON THE TOUCHSTONE OF TRANSFER PRICING PROVISIONS, B UT ON AN AGGREGATE BASIS. DETERMINING THE ALP OF TWO TRANSACTIONS IN A N AGGREGATE MANNER POSTULATES MAKING A COMPARISON OF BOTH THE FUNCTION S OF DISTRIBUTION AND AMP CARRIED OUT BY THE ASSESSEE WITH THE COMPARABLE S, SO THAT SURPLUS FROM THE DISTRIBUTION ACTIVITY COULD BE ADJUSTED AG AINST THE DEFICIT IN THE ITA NO.1357/DEL/2017 17 AMP ACTIVITY. THE HONBLE HIGH COURT HAS NO WHERE L AID DOWN THAT THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE SHOULD NOT BE COMPARED WITH THOSE PERFORMED BY THE COMPARABLE PARTIES. ON THE CONTRARY, IT TURNED DOWN THE CONTENTION RAISED BY THE LD. AR URGING FOR NOT TREATING AMP AS A SEPARATE FUNCTION, WHICH IS APPARENT FROM THE EXT RACTION FROM PARA 165 OF THE JUDGMENT : `ON BEHALF OF THE ASSESSEE, IT WA S INITIALLY ARGUED THAT THE TPO CANNOT ACCOUNT FOR OR TREAT AMP AS A FUNCTI ON. THIS ARGUMENT ON BEHALF OF THE ASSESSEE IS FLAWED AND FALLACIOUS FOR SEVERAL REASONS. THERE ARE INHERENT FLAWS IN THE SAID ARGUMENT. IT HELD VIDE PARA 165 OF THE JUDGMENT THAT : ` AN EXTERNAL COMPARABLE SHOULD PERFORM SIMILAR AMP FUNCTIONS. THUS IT IS MANIFEST THAT COMPARISON OF AMP FUNCTI ONS IS VITAL WHICH CANNOT BE DISPENSED WITH. THE ALTERNAT IVE PRESCRIPTION OF THE JUDGMENT IS THAT IF ALP OF BOTH THE TRANSACTIONS OF DISTRIBUTION AND AMP CANNOT BE DETERMINED IN A COMBINED MANNER, THEN THE ALP OF AMP FUNCTIONS SHOULD BE SEPARATELY DONE. THE SUBMISSION ADVANCED BY THE ASSESSEE OF CONSIDERING THE PROFIT ON AN ENTITY LE VEL WITHOUT MAKING COMPARISON OF AMP FUNCTIONS DONE BY THE ASSESSEE AS WELL AS THE COMPARABLE, WILL RENDER THIS ALTERNATIVE APPROACH I NCAPABLE OF ITA NO.1357/DEL/2017 18 COMPLIANCE. CANVASSING SUCH A VIEW AMOUNTS TO TREA TING AMP SPEND AS A NON-INTERNATIONAL TRANSACTION, WHICH IS PATENTLY INCAPABLE OF ACCEPTANCE. 12. WE SUMMARIZE THE LEGAL POSITION FROM THE JUDGME NT IN SONY ERICSSON (SUPRA) THAT THE DISTRIBUTION AND AMP FUNCTIONS ARE TWO SEPARATE INTERNATIONAL ACTIVITIES, WHICH NEED TO BE COMPARED WITH UNCONTROLLED TRANSACTIONS. BECAUSE OF THEIR INTER- TWINNING, IT IS ONLY FOR THE PURPOSES OF DETERMINING THEIR ALP THAT BOTH THE SE TRANSACTIONS CAN BE AGGREGATED IN THE FIRST INSTANCE, SO THAT THE SU RPLUS FROM ONE COULD BE ADJUSTED AGAINST THE DEFICIT FROM THE OTHER IN AN O VERALL APPROACH. IT DOES NOT MEAN THAT BECAUSE OF AGGREGATION, THE AMP EXPENSE TRANSACTION SHEDS ITS CHARACTER OF A SEPARATE INTERNATIONAL TRA NSACTION AND HENCE THE AMP FUNCTIONS SHOULD NOT BE MATCHED WITH THE AMP FU NCTIONS CARRIED OUT BY PROBABLE COMPARABLES. IF SUITABLE COMPARABL ES CAN BE FOUND HAVING PERFORMED BOTH DISTRIBUTION AND AMP FUNCTION S, THEN, THEIR ALP SHOULD BE DETERMINED ON AGGREGATE BASIS. IF, HOWEV ER, THERE IS SOME DIFFERENCE IN THE DISTRIBUTION OR AMP FUNCTIONS PER FORMED BY THE ITA NO.1357/DEL/2017 19 ASSESSEE VIS--VIS THE PROBABLE COMPARABLES, THEN AN ATTEMPT SHOULD F IRST BE MADE TO IRON OUT SUCH DIFFERENCE BY MAKING A SUI TABLE ADJUSTMENT TO THE PROFIT MARGIN OF COMPARABLES. IF SUCH AN ADJUST MENT IS NOT POSSIBLE, THEN SUCH PROBABLE COMPARABLE SHOULD BE ELIMINATED. IF, BY MAKING A COMPARATIVE ANALYSIS OF THE DISTRIBUTION AND AMP FU NCTIONS JOINTLY, THERE REMAINS NO COMPARABLE CASE PERFORMING SUCH DI STRIBUTION AND AMP FUNCTIONS, THEN, THE INTERNATIONAL TRANSACTION OF AMP SHOULD BE SEGREGATED AND ITS ALP BE DETERMINED SEPARATELY BY APPLYING A SUITABLE METHOD. HOWEVER, IN SO DETERMINING THE ALP OF SUCH AN INTERNATIONAL TRANSACTION OF AMP EXPENSES ON SEPARATE BASIS, A PR OPER SET OFF, IF ANY, AVAILABLE FROM THE DISTRIBUTION ACTIVITY, SHOULD BE ALLOWED. 13. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THOUGH THE ASSESSEE SEPARATELY REPORTED THE INTERNATIONAL TRAN SACTION OF `REIMBURSEMENT OF EXPENSES TO AES (RECEIVED) WITH VALUE OF RS.49,96,34,639, BUT DID NOT DETERMINE ITS ALP. UND ER THE COLUMN `METHOD, IT HAS BEEN MENTIONED AS `NA. THUS EVEN THOUGH ADMITTING THE `REIMBURSEMENT OF AMP EXPENSES AS AN INTERNATI ONAL TRANSACTION, ITA NO.1357/DEL/2017 20 THE ASSESSEE DID NOT CARRY OUT ITS BENCHMARKING AND SKIPPED THE DETERMINATION OF ITS ALP. EVEN WHILE MAKING COMPAR ISON IN THE DISTRIBUTION ACTIVITY, THERE IS NO ANALYSIS OF THE AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE VIS--VIS THE COMPARABLES. THE TPO TREATED THE AMP SPEND AS A SEPARATE INTERNATIONAL TRANSACTION. HE APPLIED THE COST PLUS METHOD. IN DOING SO, HE SEGREGATED ROUTINE AM P EXPENSES INCURRED BY THE ASSESSEE FOR HIS BUSINESS FROM THE NON-ROUTI NE AMP EXPENSES BY TREATING SUCH NON-ROUTINE AMP EXPENSES LEADING TO T HE CREATION OF MARKETING INTANGIBLE FOR ITS AE. THEN HE APPLIED A MARK-UP OF 5% TO DETERMINE THE ALP OF THIS TRANSACTION. WE DO NOT FI ND ANY LOGIC IN APPLYING 5% AS A BENCHMARK MARK-UP, WHICH IS NOT EM ERGING FROM ANY DISCUSSION IN THE ORDER. IN OTHER WORDS, THERE IS N O ATTEMPT TO FIND OUT THE MARK-UP OF COMPARABLES BY ANALYZING THE AMP FUNCTIO NS CARRIED OUT BY THE ASSESSEE VIS--VIS THE COMPARABLES. TO PUT IT STRAIGHT, NEITHER THE ASSESSEE NOR THE TPO HAVE FOLLOWED THE PRESCRIPTION OF THE JUDGMENT IN THE CASE OF SONY ERICSSON (SUPRA) FOR BENCHMARKING. ITA NO.1357/DEL/2017 21 14. FURTHER, WE NOTE THAT NO DETAIL OF THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE IS AVAILABLE ON RECORD. SIMILARLY, THERE IS NO REFERENCE IN THE ORDER OF THE TPO TO ANY AMP FUNCTIONS PERFORMED BY COMPARABLES. IN FACT, NO SUCH ANALYSIS OR COMPARISON HAS BEEN UN DERTAKEN BY THE TPO. THE LD. AR ALSO FAILED TO DRAW OUR ATTENTION TOWARD S ANY MATERIAL DIVULGING THE AMP FUNCTIONS PERFORMED BY THE ASSESS EE AS WELL AS COMPARABLES. AS SUCH, WE ARE HANDICAPPED TO DETERMI NE THE ALP OF AMP EXPENSES AT OUR END, EITHER IN A COMBINED OR A SEPARATE APPROACH. 15. SINCE THE ORDERS OF THE AUTHORITIES BELOW A RE NOT IN CONFORMITY WITH THE RATIO LAID DOWN IN SONY ERICSSON (SUPRA) AS DISCUSSED ABOVE AND FURTHER NECESSARY DETAILS FOR DOING THIS EXERCI SE AT OUR END ARE ALSO NOT AVAILABLE, WE SET ASIDE THE IMPUGNED ORDER AND SEND THE MATTER BACK TO THE FILE OF THE TPO/AO FOR DETERMINING THE ALP O F THE INTERNATIONAL TRANSACTION OF AMP SPEND AFRESH IN ACCORDANCE WITH THE MANNER LAID DOWN BY THE HONBLE HIGH COURT IN SONY ERICSON MOBILE (SUPRA). BEFORE PARTING, WE CONSIDER IT RELEVANT TO RECORD T HAT SIMILAR ISSUE WAS RAISED BY THE ASSESSEE BEFORE THE TRIBUNAL FOR THE IMMEDIATELY PRECEDING ITA NO.1357/DEL/2017 22 TWO ASSESSMENT YEARS. THE TRIBUNAL IN BOTH THE YEA RS, BY ITS SEPARATE ORDERS, HAS RESTORED THE MATTER TO THE ASSESSING OF FICER/TPO FOR A FRESH ADJUDICATION. 16. THE NEXT ISSUE RAISED BY THE ASSESSEE THROUGH G ROUND NOS.11 AND 12 IS THAT THE ASSESSING OFFICER HAS ERRED IN NOT FOLL OWING THE DIRECTIONS OF DRP AND NOT ALLOWING DEDUCTION FOR ADDITIONAL CLAIM OF EMPLOYEES CONTRIBUTION OF PF WHILE COMPUTING THE TAXABLE PROF ITS DURING THE FINANCIAL YEAR. 17. THE LD. AR CONTENDED THAT THE DRP GAVE DIRECTIO N ON PAGE 11 OF ITS ORDER TO THE ASSESSING OFFICER FOR ALLOWING DED UCTION SUBJECT TO VERIFICATION OF THE DEPOSIT OF DUES IN THE GOVERNME NT ACCOUNT BY THE ASSESSEE. THIS WAS COUNTERED BY THE LD. DR WHO SUB MITTED THAT THE ASSESSING OFFICER HAS MADE ONLY ADDITION ON ACCOUNT OF AMP EXPENSES AND SUCH ISSUE OF ALLOWING EMPLOYEES CONTRIBUTION TO PF/ESIC ETC. WAS NOT THERE. ITA NO.1357/DEL/2017 23 18. HAVING HEARD BOTH THE SIDES AND GONE THROUGH TH E RELEVANT PART OF THE ORDER OF THE DRP, IT IS OBSERVED THAT THE ASSES SEE RAISED 8 TH GROUND OF OBJECTION READING AS UNDER:- 1. EIGHTH GROUND OF OBJECTION A) THE LD. A.O. HAS ERRED ON FACTS AND IN LAW IN NOT A LLOWING THE ADDITIONAL CLAIM OF EMPLOYEES CONTRIBUTION TO PF/E SIC MADE BY THE ASSESSEE FOLLOWING THE JUDGMENT OF THE JURISDIC TIONAL DELHI HIGH COURT IN CASE OF CIT VS. AIMIL LIMITED (2009) (321 ITR 508). B) THAT THE LD. A.O. ERRED IN NOT PASSING A SPEAKING O RDER IN THIS REGARD EVEN THOUGH SUCH ALLOWANCE WAS GRANTED BY HO N'BLE DRP IN ASSESSEES CASE FOR A.Y. 2011-12 AND SUBSEQUENTL Y ALSO ALLOWED BY THE LD. A.O. IN HIS ASSESSMENT ORDER. C) WITHOUT PREJUDICE TO ABOVE, THE HON'BLE DRP HAS THE POWER TO CORRECT THE CLAIM. 19. THE DRP DIRECTED AS UNDER: THE A.O. IS DIRECTED TO ALLOW THE DEDUCTION SUBJEC T TO VERIFICATION OF DEPOSIT OF THE DUES IN GOVERNMENT ACCOUNTS BY THE A SSESSEE. 20. IN VIEW OF THE ABOVE DIRECTION OF THE DRP, WHIC H IS OTHERWISE BINDING ON THE ASSESSING OFFICER, IT WAS INCUMBENT UPON THE LATTER TO GIVE EFFECT TO THE SAME. HAVING NOT DONE SO, WE DI RECT THE ASSESSING ITA NO.1357/DEL/2017 24 OFFICER TO EXAMINE THE CLAIM OF THE ASSESSEE IN THE LIGHT OF THE DIRECTION GIVEN BY THE DRP. 21. THE LAST ISSUE RAISED BY THE ASSESSEE THROUGH G ROUND NOS.9 AND 10 IS AGAINST NOT ALLOWING DEDUCTION TOWARDS INTEREST ON CUSTOMS DUTY WHICH AROSE IN FINANCIAL YEAR 2015-16, BUT RELATES TO THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION . THE SETTLEMENT COMMISSION, VIDE ITS ORDER DATED 24.06.2016, DETERM INED INTEREST LIABILITY OF THE ASSESSEE AT RS.40.46 CRORE WHICH W AS PAID BY THE ASSESSEE. THE ASSESSEE CONTENDED BEFORE THE DRP TH AT INTEREST ON CUSTOMS DUTY AMOUNTING TO RS.1,31,81,408/- WHICH AR OSE IN THE FINANCIAL YEAR 2015-16, BUT RELATES TO THE FINANCIA L YEAR 2011-12, SHOULD BE ALLOWED AS DEDUCTION. THE DRP REJECTED SUCH A C LAIM BY OBSERVING THAT THE SAME DOES NOT PERTAIN TO THE YEAR UNDER CO NSIDERATION. 22. WE ARE CONVINCED WITH THE VIEW CANVASSED BY THE DRP AS FOLLOWED IN THE IMPUGNED ORDER. OBVIOUSLY, THE ASS ESSEE PAID INTEREST ON CUSTOMS DUTY IN THE FINANCIAL YEAR 2015-16. THE LIABILITY TOWARDS SUCH INTEREST GOT CRYSTALISED AND PAID DURING SUCH LATER YEAR ONLY. BY NO ITA NO.1357/DEL/2017 25 STANDARD, THE ASSESSEE CAN CLAIM DEDUCTION FOR A PA RT OF SUCH INTEREST IN THE YEAR UNDER CONSIDERATION. AS THE CLAIM PERTAIN S TO A SUBSEQUENT PERIOD, THE ASSESSEE MAY TAKE NECESSARY ACTION FOR GETTING THE DEDUCTION IN SUCH LATER YEAR AS PER LAW. THESE GROUNDS ARE N OT ALLOWED. 23. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 01.09.201 7. SD/- SD/- [SUCHITRA KAMBLE] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 01 ST SEPTEMBER, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.