JCIT, New Delhi V. M/s. Sony Mobile Communications India Pvt. Ltd., New Delhi

ITA 2106/DEL/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 4430 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 18-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Gift; Business income; Transfer pricing; Business expenditure; International transaction; Question of law
• Section: 92C; 143(3); 201; 144C

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I - 2 BENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA , ACCOUNTANT MEMBER, AND SHRI KULDIP SINGH , JUDICIAL MEMBER SA NO. 856/DEL/2018 & ITA NO. 883 /DEL/201 6 [A.Y 20 11 - 12 ] M/S SONY MOBILE COMMUNICATIONS VS. THE J. C.I.T [INDIA] PVT. LTD SPECIAL RANGE 8 A - 31, MOHAN COOPERATIVE INDL. ESTATE NEW DELHI MAIN MATHURA ROAD , NEW DELHI PAN : AAKCS 7996 N ITA NO. 2106 /DEL/201 6 [A.Y 20 11 - 12 ] THE J. C.I.T VS. M/S SONY MOBILE COMMUNICATIONS SPECIAL RANGE 8 [INDIA] PVT. LTD NEW DELHI A - 31, MOHAN COOPERATIVE INDL. ESTATE, MAIN MATHURA ROAD , NEW DELHI PAN : AAKCS 7996 N (APPLICANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESHWAR RAO, ADV SHRI SANDEEP S. KARHAIL, ADV DEPARTMENT BY : SH RI H.K. CHOUDHARY, CIT - DR DATE OF HEARING : 0 9 . 0 5 .201 9 DATE OF PRONOUNCEMENT : 1 4 . 0 5 .201 9 2 ORDER PER N.K. BILLAIYA , ACCOUNTANT MEMBER: - THE ABOVE TWO CROSS APPEAL S BY THE ASSESSEE AND REVENUE ARE PREFERRED AGAINST THE ORDER DATED 28.01.2016 FRAMED U/S 144C R.W.S 143(3) OF THE INCOME - TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT' FOR SHORT] PERTA INING TO ASSESSMENT YEAR 2011 - 12 . 2. THE QUARREL REVOLVES AROUND THE TRANSFER PRI CING ADJUSTMENT MADE ON ACCOUNT OF ADVERTISEMENT, MARKETING AND PROMOTION [AMP] SPEND WHILE DETERMINING THE ARMS LENGTH PRICE [ALP] IN RESPECT OF INTERNATIONAL TRANSACTION. 3. THE QUARREL CAN BE UNDERSTOOD FROM THE FOLLOWING OPERATIVE PART OF THE IMPUGNED ASSESSMENT ORDER: 3.1 DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES. AS THE VALUE OF THE INTERNATIONAL TRANS ACTION WAS MORE THAN RS. 15 CRORE S , WITH THE PREVIOUS APPROVAL OF CIT, DELHI - ILL AND IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92CA OF THE I.T. ACT, THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY 3 THE ASSESSEE WITH THE ASSOCIATED ENTERPRISES WAS REFERRED TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARM'S LENGTH PRICE. 3.2 THE TPO PASSED AN ORDER U/S 92CA( 3) ON 29/01/2015, WHEREIN HE HAS DETERMINED THAT AN ADJUSTMENT OF RS. 35,75,26,343/ - SHOULD BE MADE TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY. A COPY OF THE ORDER WAS ALREADY ISSUED TO THE ASSESSEE COMPANY. THEREFORE, AS PER TPO ORDER UNDER SECTION 92CA(3) DATED 29/01/2015, A SUM OF RS. 35,75,26,343/ - WAS PROPOSED TO BE ADDED TO THE INCOME OF THE ASSESSEE IN THE DRAFT ASSESSMENT ORDER DATED 09/03/2015 ISSUED U/S 144C OF THE I.T. ACT. THE ORDER DATED 29/01/2015 OF THE TP O IS BEING MADE PART OF THIS ORDER AS PER ANNEXURE - 1. 3.3 THE ASSESSEE FILED OBJECTIONS BEFORE THE HON'BLE DISPUTE RESOLUTION PANEL - 2 AGAINST THE DRAFT ASSESSMENT ORDER U/S 144C OF THE ACT. THE DISPUTE RESOLUTION PANEL - 2, VIDE THEIR DIRECTIONS U/S 144C(5) OF THE I.T. ACT ISSUED ON 28/12/2015, RECEIVED BY THE ACIT, CIRCLE - 24(1) ON 30/12/2015 HAVE DECIDED THE OBJECTIONS OF THE ASSESSEE. THE DIRECTIONS DATED 28/12/2015 OF THE DRP IS BEING MADE PART OF THIS ORDER AS PER ANNEXURE - 2 . 4 3.4 THE DRP HAS IS SUED DIRECTIONS IN RESPECT OF COMPUTATION OF ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. THE DIRECTIONS OF THE DRP WERE FORWARDED TO THE TRANSFER PRICING OFFICER FOR MAKING REVISED COMPUTATION OF THE ADJUSTMENTS TO BE MAD E IN THE CASE OF THE ASSESSEE. THE TPO VIDE LETTER DATED 27/01/2016 HAS COMPUTED THE REVISED ADJUSTMENT TO RS.5,90,87,389/ - INSTEAD OF RS.35,75,26,343/ - AS WAS DETERMINED IN THE DRAFT ASSESSMENT ORDER. THE LETTER DATED 27/01/2016 IS MADE PART OF THIS FINAL ORDER AS ANNEXURE - 3 . 3.5 IN VIEW OF THE ABOVE, GIVING EFFECT TO THE DIRECTION OF HON'BLE DISPUTE RESOLUTION PANEL - 2, NEW DELHI AN ADDITION OF RS. 5,90,87,389/ - IS BEING MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 3.6. SINCE I AM SATISFIED THAT THE ASSESSEE HAS FURNISHED INACCURATE PARTICULARS OF ITS INCOME, PENALTY PROCEEDINGS UNDER SECTION 271(L)(C) ARE INITIATED SEPARATELY. (ADDITION OF RS.5,90,87,389/ - ) 4. T HE ASSESSABLE INCOME IS PROPOSED TO BE COMPUTED AS UNDER: TOTAL INCOME AS PER RETURN OF INCOME RS. 20,66,73,870/ - ADD : AS DISCUSSED IN PARA 3 ABOVE RS. 5,90,87,389/ - TOTAL INCOME R S. 26,57,61,259/ - ROUNDED OFF RS. 26,57,61,260/ - 5 4. BOTH THE ASSESSEE AND THE REVENUE ARE IN APPEAL BEFORE US. 5. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THE ENTIRE DISPUTE HAS BEEN SETTLED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE TRIBUNAL VIDE ORDER DATED 26.07.2018 IN ITA NO. 6410/DEL/2012. IT IS THE SAY OF THE LD. COUNSEL F OR THE ASSESSEE THAT THE MATTER TRAVELLED UPTO THE HON'BLE HIGH COURT OF DELHI AND THE HON'BLE HIGH COURT, VIDE ORDER DATED 05.02.2019 IN ITA NO. 123/2019 & CM NO. 5324 - 25/2019 DISMISSED THE APPEAL OF THE REVENUE. 6. THE LD. DR, WHILE STRONGLY SUPPORTING THE ORDER OF THE TPO, COULD NOT BRING ANY DISTINGUISHING DECISION IN FAVOUR OF REVENUE. 7 . BEFORE PROCEEDING ANY FURTHER AND CONSIDERING THE ORDER OF THE TRIBUNAL AND THE HON'BLE HIGH COURT [SUPRA] IT WOULD BE PERTINENT TO UNDERSTAND THE FACTS OF THE APPE AL UNDER CONSIDERATION. 8. THE BUSINESS PROFILE OF THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES [AES] ARE SIMILAR TO THE BUSINESS PROFILE CONSIDERED BY THE TRIBUNAL IN ITA NO. 6410/DEL/2012 FOR ASSESSMENT YEAR 2008 - 09. 6 9. DURING THE YEAR UNDER CONSIDERAT ION, THE ASSESSEE ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH THE AES: S.NO TYPE OF INTERNATIONAL TRANSACTION METHOD USED BY ASSESSEE ________________ MAM PLI TOTAL VALUE OF TRANSACTION (RS.) 1. PURCHASE OF MOBILE HANDSETS & SPARES TNMM OP/SALES 5,815,076,882 2. BUSINESS PROMOTION EXPENSES PAID 20,687,701 3. COST RECHARGES PAID/PAYABLE CUP 677,049 4. COST RECHARGE RECEIVED/RECEIVABLE 424,640,697 10. THE FUNCTIONS PERFORMED BY THE ASSESSEE ARE MARKETING AND DISTRIBUTION OF MOBILE PHONES/TECHNOLOG Y PRODUCTS AND PROVISION O F REPAIR AND MAINTENANCE SERVICES. IN CARRYING OUT ITS BUSINESS, THE ASSESSEE USED THE BRAND NAME, TRADE MARK, KNOW HOW TECHNICAL DATA, OPERATING/QUALITY STANDARDS, ETC DEVELOPED/OWNED BY THE AES. THE TRADE NAME SONY ERICSSON IS OWNED BY OVERSEAS GROUP COMPANIES. THE INDIAN ENTITY IS A DISTRIBUTOR OF BRANDED PRODUCTS, THE BRAND BEING OWNED BY THE OVERSEAS SUPPLIER. THE SALE OF A BRANDED PRODUCT S TO A DISTRIBUTOR CARRIES WITH IT THE STATED OR IMPLIED RIGHT TO USE THE SUPPLIERS TRADE MARK OR TRADE NAME ONLY FOR THE PURPOSE OF RESELLING 7 THE SUPPLIERS PRODUCTS. AS PER THE TP REPORT, THE ASSESSEE UNDERTAKES THE MARKET RISK, PRODUCT LIABILITY RISK, CREDIT RISK, MANPOWER RISK AND FOREIGN CURREN CY RISK. 11. DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT THE ASSESSEE HAD INCURRED HUGE COS TS ON AMP. IT IS SEEN FROM THE AUDITED FINANCIALS OF THE COMPANY THAT IT DOES NOT OWN ANY INTANGIBLES IN THE NATURE OF BRAND NAME OR MARKETING INTANGIBLES. IT WAS FOUND THAT THE FOLLOWING EXPENSES RELATING TO AMP WERE INCURRED: ADVERTISEMENT EXPENSES R S. 27,980,240 BUSINESS PROMOTION AND SELLING EXPENSES RS. 668,216,561 TOTAL AMP RS. 845,257,786 SALES RS. 6,812,468,061 AMP/SALES % 12.41% 12. THE TPO WAS OF THE FIRM BELIEF THAT EXPENDITURE OF AMP HAS BEEN INCURRED EXCLUSIVELY TO PROMOTE PRODUCTS OF THE AES BEARING THE BRAND /TRADE NAME SONY ERICSSON , WHICH IS BENEFICIALLY OWNED BY THE AE . ACCORDING TO THE TPO, SUCH EXPENDITURE HAS NECESSARILY RESULTED INTO BRAND BUILDING AN D INCREASED AWARENESS OF THE PRODUCTS BEARING THE BRAND/TRADE NAME SONY ERICSSON. 8 13. IN THIS CONTEXT, THE ASSESSEES SUBMISSIONS WERE AS UNDER: A) THE AES ARE THE OWNERS OF THE 'SONY ERICSSON' BRAND. B) THE ASSESSEE PURCHASES THE PRODUCTS AT RESALE PRIC E MINUS TRANSFER PRICE. THE PRICE IS ADJUSTED ACCORDING TO THE PRICE LEVEL DEVELOPMENT IN THE MARKET AND OPERATING COST CHANGES IN THE SALES SUBSIDIARY. ACCORDINGLY THE PRICING OF PRODUCTS BETWEEN THE ASSESSEE AND THE AE IS REGULATED IN A MANNER THAT ENSUR ES THAT THE ASSESSEE EARNS AN ARMS LENGTH RETURN WITH RESPECT TO ITS DISTRIBUTION ACTIVITY. THEREFORE, ON THE PRICE LEVEL DEVELOPMENT IN THE MARKET, IF AT THE YEAR END THE ASSESSEE IS NOT ABLE TO ACHIEVE ARMS LENGTH RETURN WITH RESPECT T O THE DISTRIBUTION ACTIVITY THEN AS PER THE POLICY IT RECEIVES CREDIT NOTES FROM THE AE TO ACHIEVE AN ARM'S LENGTH RETURN ON SALES . C) DURING THE R ELEVANT ASSESSMENT YEAR THE ASSESSEE RECEIVED A CREDIT NOTE OF RS. THE AE TO IN ORDER TO ACHIEVE AN ARMS L E NGTH RESULT. D) DURING THE COURSE OF PROCEEDINGS FOR FY 2009 - 10 IT WAS NOTED THAT THERE WAS AN AGREEMENT BETWEEN THE OVERSEAS AE AND THE ASSESSEE. A DISTRIBUTION AGREEMENT DATED 01.06.2007, WAS FURNISHED BY THE ASSESSEE ALONG WITH LETTER DATED 28.05.2013 DURING THE PROCEEDINGS FOR LAST YEAR. 9 E) THE ASSESSEE HAS NOT MADE ANY PAYMENT TO ITS AE FOR USING THE BRAND NAME. F) THE ADVERTISEMENT AND MARKETING ACTIVITY OF THE ASSESSEE IS THE PARTY OF ITS DISTRIBUTION ACTIVITY . 14. THE OP/OR SHOWN BY THE ASSESSEE IS AT 2.07% WHICH IS COMPARED WITH OP/OR OF THE COMPARABLES AT ( - ) 0.12%. IN DOING SO, THE ASSESSEE HAS INCLUDED THE CREDIT NOTES AMOUNTING TO RS. 42 , 46 , 40,697/ - RECEIVED WHICH REPRESENTS BUSINESS MODEL ARRANGEMENT OF THE ASSESSEE. 15. THE TPO W AS OF THE OPINION THAT THE PRICING ARRANGEMENT BETWEEN THE ASSESSEE AND ITS AES APPEARS TO BE MORE OF REIMBURSEMENT OF EXCESS PRICE CHARGED BY THE AES WHICH , LATER ON , IS CREDITED TO THE ASSESSEES ACCOUNT BY WA Y OF CREDIT. THE TPO WAS OF THE FIRM BELIEF THAT THE CREDIT NOTES AMOUNTING TO RS. 42,46,40,697/ - HAVE NO RELATION TO WITH THE EXPENDITURE THAT THE ASSESSEE HAS INCURRED ON THE AMP FOR WHICH NO COMPENSATION/REIMBURSEMENT HAS BEEN MADE BY THE AE. THE TPO CONCLUDED BY HOLDING THAT THIS IS AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SEC . 92B(1) R.W.S 92F(V) OF THE ACT. 10 16. ACCORDINGLY, SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE VIDE LETTER DATED 12.12.2014. WE FIND THAT THE ENTIRE EXERCISE IS IN SYNC WITH TH E EXERCISE DONE IN ASSESSMENT YEAR 2008 - 09. 17. THE LIST OF 23 COMPANIES WHICH WERE QUALITATIVELY ANALYSED FOR USING THEM AS COMPARABLE, ARE AS UNDER: S. NO. COMPANY NAME SALES SELLING & DISTRIBUTION EXPENSES AMP/SALES RATIO 1 COMPUAGE LNFOCOM LID. 1314.7 0 0.00% 2 COMPUTER POINT LTD. 109.92 0.03 0.03% 3 DYNALOG ( INDIA) LTD. 37,82 1.68 4.44% 4 KANDIONERS SALES PVT LTD. 15.46 0.04 0.26% 5 LALANI COMPUTECH LTD. 17.54 0.14 0.80% 6 REDIN QTON LNDIA) LTD. 7905.3 16.97 0.21% 7 SAVEX COMPUTERS LTD. 1867 11.33 0.61% 8 VIVEK LTD. 335.06 13.91 4.15% AVERAGE 1.31% COMPANIES IDENTIFIED AS COMPARABLES BY THE ASSESSEE AFTER UPDATION OF MARGINS ARE ALSO ANALYSED AS BELOW : 1. SPICE MOBILITY LIMITED DISCUSSED BELOW IN ANNEXURE 1 2. COMPUNICS INFORMATION SYSTEMS LTD NO DATA FOR F.Y. 20110 - 11 3. GENERAL SALES LIMITED NO DATA FOR F.Y. 20110 - 11 4 MUNOTH INDUSTRIES LTD IT IS ACCEPTED AS COMPARABLE 11 5. WEP PERIPHERALS LIMITED AS PER THE ANNUAL REPORT, THE ENTIRE SALES IS ON ACCOUNT OF MANUFACTURED GOODS EVEN THOUGH THE EXPENDITURE SHOWS THE PURCHASE OF TRADED GOODS .IN THE ABSENCE OF ACCURATE DATA, THIS COMPANY IS NOT BEING CONSIDERED AS COMPARABLE. 6 AANCHAL COMPUTERS LIMITED IT IS ACCEPTED AS COMPARABLE. 7 COMPUAGE LNFOCOM LIMITED DISCUSSED BELOW IN ANNEXURE 1 8 REDINGTON (INDIA) LIMITED DISCUSSED BELOW IN ANNEXURE 1 9 SREEBIHARIJI MILLS LIMITED NO DATA FOR FY2010 - 11, 10 BEETEL TELETECH LTD DISCUSSED BELOW IN ANNEXURE 1 11 CEREBRA INTEGRATED TECHNOLOGIES LTD DATA AVAILABILITY IS FOR SEPTEMBER 2010 ENDING. SINCE THE DATA FOR MARCH ENDING IS NOT AVAILABLE, THIS COMPANY IS REJECTED. 12 HCL INFOSYSTEM LIMITED DISCUSSED BELOW IN ANNEXURE 1 13 JUPITER INTERNATIONAL LIMITED THE DATA OF AMP FOR TRADING SEGMENT IS NOT AVAILABLE AND THUS IT IS NOT BEING CONSIDERED AS COMPARABLE.. 14 PRIYA LIMITED DISCUSSED BELOW IN ANNEXURE 1 15 SALORA INTERNATIONAL LIMITED DISCUSSED BELOW IN ANNEXURE 1 18. THE LIST OF COMPANIES FINALLY SELECTED AS COMPARABLES ALONGWITH CALCULATION OF AMP/SALES RATIO IS AS UNDER: 12 S. NO. COMPANY NAME SALES SELLING & DISTRIBUTION EXPENSES AMP/SALES RATIO 1 COMPUAGE LNFOCOM LTD. 1314.7 0 0.00% 2 COMPUTER POINT LTD. 109.92 0.03 0.03% 3 DYNALOG (INDIA) LTD. 37.82 1.68 4.44% 4 KAND T IONERS SALES PVT LTD. 15.46 0.04 0.26% 5 LALANICOMPUTECH LTD. 17.54 0.14 0.80% 6 REDINGTON (INDIA) LTD. 7905.3 16.97 0.21% 7 SAVEX COMPUTERS LTD. 1867 11.33 0.61% 8 VIVEK LTD. 335.06 13.91 4.15% 9 MUNOTH INDUSTRIES LIMITED 12.84 0.11 0.86% AANGHA! COMPUTERS LIMITED 8.60 0.03 0.35% AVERAGE UFR - A .. .............. . ....... ........... ...... .................... ................................ .... 1.17% 19. IN ITS SUBMISSIONS, THE LD. COUNSEL FOR THE ASSESSEE STRONGLY ARGUED THAT AS PER THE BUSINESS MODEL FOLLOWED BY IT , AN OP/SALES MARGIN OF 2.07% HAS BEEN EARNED WHICH WAS HIGHER THAN THE ARMS LENGTH MARGIN OF ( - )0.12% ACCEPTED BY THE TPO. IT WAS FURTHER CONTENDED THAT THE ASSESSEE HAS BEEN REMUNERATED FOR ALL ITS FUNCTIONS TOGETHER BY WAY OF GROSS MARGIN AND CREDIT NO TES INSTEAD OF THE AMP FUNCTION BEING ISOLATED AND REMUNERATED AS A SERVICE FEE. 20. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE TPO OBSERVED AS UNDER: 13 10. 3 THE ARGUMENTS OF THE ASSESSEE HAVE BEEN EXAMINED ON THE AGGREGATED BENCHMARKING ANALYSIS FOR AMP. IT WOULD BE - IN ORDER TO FIRST BRIEFLY SET OUT THE LAW ON AGGREGATION OF TRANSACTIONS. SECTION 92C(1) REFER TO ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION . RULE 10B(L}(E) READ WITH SECTION 92C DEALS WITH TNMM AND IT REFERS TO ONLY NET PROFIT MARGIN REALIZED BY ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR A CLASS OF SUCH . TRANSACTION . HONBLE ITAT IN CASE OF UCB INDIA (P) LTD. V ACIT (2009} 30SOT 95 (MUMB AI) AFTER REFERRING TO THE OECD GUIDELINES AND THE PROVISIONS OF LAW, WHILE EXAMINING APPLICABILITY OF TNMM AT ENTITY LEVEL OR AT TRANSACTION BY TRANSACTION BASIS HAS HELD THAT UNDER TNMM AN INTERNATIONAL TRANSACTION OR A CLASS OF SUCH TRANSACTIONS SHOULD BE EVALUATED ON STANDALONE BASIS. 10.4 IT WAS WAS ALSO HELD IN THE CASE OF STAR INDIA P. LIMITE D 2008 - TIOPL - 426 - ITAT - MUM THAT INTERN ATIONAL TRANSACTION IS TO BE EXAMINED SEPARATELY AND ALP SHOULD BE DETERMINED ( IT WAS HELD IN THE CASE OF TWINKLE DIAMOND (2010 - TII - 09 - ITAT - MUM - TP) 20 09 - TII - 02 - ITAT - MUM - TP) THAT TNMM DOES NOT PERMIT THE AO TO COMPARE LEVEL PROFITS AND MAKE ADJUSTMENTS UNDER CHAPTER X. IT WAS FURTHER HELD THAT IT COMPARISON OF NET PROFIT MARGIN REALIZED FROM AN INTERNATIONAL TRANSACTION OR AG GREGATE OF CLASS OF INTERNATIONAL TRANSACTIONS. 14 10.5 HERE, ON THE ISSUE OF EVALUATING THE TRANSACTIONS ON TRANSACTION TO TRANSACTION BASIS, THE REVISED OECD GUIDELINES MAY BE REFERRED TO. RELEVANT PART OF THE GUIDELINES IS REPRODUCED BELOW: 3.9 IDEAL LY, IN ORDER TO ARRIVE AT THE MOST PRECISE APPROXIMATION OF ARM'S LENGTH CONDITIONS, THE ARM'S LENGTH PRINCIPLE SHOULD BE APPLIED ON A TRANSACTION - BY - TRANSACTION BASIS. HOWEVER, THERE ARE OFTEN SITUATIONS WHERE SEPARATE TRANSACTIONS ARE SO CLOSELY LINKED OR CONTINUOUS THAT THEY CANNOT HE EVALUATED ADEQUATELY ON A SEPARAT E BASIS. EXAMPLES MAY INCLUDE SOME LONG - TERM CONTRACTS FOR THE SUPPLY OF COMMODITIES OR SERVICES, 2. RIGHTS TO USE INTANGIBLE PROPERTY, AND 3. PRICING A RANGE OF CLOSELY - LINKED PRODUCTS (E.G. IN A PRODUCT LINE] WHEN IT IS IMPRACTICAL TO DETERMINE PRICING FOR EACH INDIVIDUAL PRODUCT OR TRANSACTION. ANOTHER EXAMPLE WOULD BE THE LICENSING OF MANUFACTURING KNOW - HOW AND THE SUPPLY OF VITAL COMPONENTS TO AN A SSOCIATED MANUFACTURER; IT MAY BE MORE REASONABLE TO ASSESS THE ARM'S LENGTH TERMS FOR THE TWO ITEMS TOGETHER RATHER THAN INDIVIDUALLY. SUCH TRANSACTIONS SHOULD BE EVALUATED TOGETHER USING THE MOST APPROPRIATE ARM'S LENGTH METHOD. A FURTHER EXAMPLE WOULD BE THE ROUTING OF A TRANSACTION THROUGH ANOTHER ASSOCIATED ENTERPRISE; IT MAY BE MORE 15 APPROPRIATE TO CONSIDER THE TRANSACTION OF WHICH THE ROUTING IS A PART IN ITS ENTIRETY, RATHER THAN CONSIDER THE INDIVIDUAL TRANSACTIONS ON A SEPARATE BASIS. THE ABOVE GUIDELINES IN VERY CLEAR TERMS POINT OUT THAT IDEALLY THE TRANSACTIONS SHOULD BE BENCHMARKED USING TRANSACTION BY TRANSACTION APPROACH. 10.6 THE FUNDAMENTAL RULE FOR BENCHMARKING UNDER INDIAN TRANSFER PRICING REGULATIONS IS TO BENCHMARK BASED ON A TRANSACTIONAL APPROACH. THERE SHOULD BE SOME PRIOR UNDERSTANDING, DESIGN OR COMMERCIAL LOGIC AS TO WHY TWO TRANSACTIONS CAN BE CLUBBED OR SET OFF AGAINST EACH OTHER. SINCE THE ASSESSEE COMPANY HAS NOT BEEN ABLE TO DEMONSTRATE THAT THERE IS ANY LOGIC OR RAT IONALE FOR AGGREGATION OR THAT THE TRANSACTIONS OF THE ADVERTISEMENT EXPENDITURE AND THE OTHER TRANSACTIONS IN THE DISTRIBUTION ACTIVITY ARE INTER - DEPENDENT, THE CLUBBING OF TRANSACTIONS CANNOT BE A LLO WED. IT IS THEREFORE HELD THAT THE INTERNATIONAL TRANSA CTION OF 'CREATION AND DEVELOPMENT OF LOCAL MARKETING INTANGIBLE' SHALL BE BENCHMARKED SEPARATELY. 10.7 THE CONTENTION ON BEHALF OF THE ASSESSEE THAT IF THE OVERALL PROFIT OF THE INDIAN ENTITY IS THAN THE COMPARABLE CASES THEN IT SHOULD BE PRESUMED THAT THE FOREIGN ENTERPRISE 'SUPPLIED GOODS AT RELATIVELY LOW PRICE TO MAKE UP FOR THE AMP EXPENSES INCURRED IN INDIA TOWARDS BRAND PROMOTION. THERE ARE NO ROOTS 16 FOR SUCH A PRESUMPTION. IN ORDER TO TAKE BENEFIT OF SUCH A CONTENTION THE ASSESSEE IS REQUIRED TO D IRECTLY PROVE THE FACT OF CHEAP PURCHASES FOR THE OVERALL HIGHER NET PROFIT RATE. THIS FACT CAN BE ESTABLISHED BY DEMONSTRATING THAT THE FOREIGN AE CHARGED A SPECIALLY LOW PRICE FROM THE ASSESSEE IN COMPARISON WITH THAT CHARGED FOR THE SIMILAR GOODS SUPPLI ED TO OTHER INDEPENDENT ENTITIES DEALING WITH IT IN INDIA OR IN CASE THERE IS NO OTHER INDEPENDENT ENTITY IN IN DIA, THEN THE PRICE CHARGED FOR SIMILAR GOODS FROM OTHER FOREIGN PARTIES. IT CAN ALSO BE PROVED BY SHOWING THAT GOODS WITH IDENTICAL FEATURES ARE AVAILABLE IN THE INDIAN MARKET AT A - HIGHER PRICE . THE FACT THAT THE ASSESSEE HAS A BETTER GROSS/NET PROFIT RATE IN COMPARISON WITH HER COMPARABLE ENTITIES IS NOT DECISIVE IN ITSELF OF THE ASSESSEE HAVING PURCHASED THE GO ODS AT A CONCESSIONAL RATE FROM ITS FOREIGN AE AS A COMPENSATION FOR ITS IN C URRING AMP EXPEN SES TOWARDS THE PROMOTION OF THEIR BRAND. 21. WITH THE ABOVE OBSERVATIONS, THE TPO DISMISSED THE CLAIM OF THE ASSESSEE BY STATING THAT THE CREDIT NOTES ISSUED BY THE AES HAVE NO RELATION WITH THE EXPENDITURE THAT THE ASSESSEE HAS INCURRED ON THE AMP FOR WHICH NO COMPENSATION HAS BEEN RECEIVED BY THE ASSESSEE AND FURTHER REJECTED THE ARGUMENTS OF THE ASSESSEE THAT BY WAY FOLLOWING TRADE BUSINESS MODEL, THE ASSESSEE HAS BEEN SUITABLY COMPENSATED FOR ITS EFFORTS IN CREATING AND DEVELOPING MARKETING INTANGIBLES. 17 22. APPLYING THE BRIGHT LINE TEST, THE TPO SELECTED THE FOLLOWING COMPARABLES FOR AMP ANALYSIS AND THEREAFTER DETERMINED THE ALP IN RESPECT OF AMP EXPENSES: 19 . COMPUTATION OF ALP I.R.O AMP EXPENSES: 20.1 THUS, IN VIEW OF THE ABOVE DISCUSSION, THE AMOUNT WHICH R E PRESENTS THE BRIGHT LINE AND THE AMOUNT THAT SHOULD HAVE BEEN COMPENSATED TO THE ASSESSEE COMPANY ARE COMPUTED HEREUNDER: S.NO PARTICULARS AMP/SALES I, DYNAL OG (INDIA] LTD. 4.44 II . LALANI COMP UTECH LTD. 0.80 III . SAVEX COMP UTERS LTD. 0.61 IV. VIVEK LTD. 4.22 V, MUNOTH INDUSTRIES LIMITED 0.86 VI, INFI NITI RETAIL LTD. 2.17 AVERAGE 2.18% PARTICULARS AMOUNT IN INR TOTAL SALES 6,812,468,061 ARMS LENGTH LEVEL OF AMP EXP. {% OF SALE} 2.18% ARMS LENGTH AMP 148,511,804 AMOUNT ACTUALLY SPENT ON AMP EXP. 845,257,786 AMOUNT SPENT IN EXCESS OF BRIGHT - LINE' AND ON CREATION OF MARKETING INTANGIBLE 696,745,982 MARK - UP @ 12.26% 85,421,057 TOTAL ALP REIMBURSEMENT 782,167,040 AMOUNT OF REIMBURSEMENT RECEIVED 424,640,697 THE AMOUNT BY WHICH THE ASSESSEE COMPANY SHOULD HAVE BEEN REIMBURSED BY A.E, AND FOR WHICH THE ADJUSTMENT I S PROPOSED TO BE MADE 357,526,343 18 23. OBJECTIONS WERE RAISED BEFORE THE DRP AND AFTER CONSIDERING THE FACTS AND SUBMISSIONS AND AFTER ANALYSING THE COMPARABLES, THE DRP CONCLUDED AS UNDER: BASED ON THESE FIGURES, THE CALCULATION OF SEGMENTAL MARGIN WITH AMP AS SEPARATE SEGMENT IN HE CUSP OF THE ASS