M/s. Perfetti Van Melle India Pvt. Ltd., Gurgaon V. DCIT, Gurgaon

ITA 407/DEL/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91175 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 01-06-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 20-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A VASANTHAN
• Assessee Lawyers: KARAN BHATIA
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 92B; 10B; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM ITA NO.407/DEL/2015 ASSESSMENT YEAR : 2010-11 PERFETTI VAN MELLE INDIA PVT. LTD., 47 TH MILESTONE, DELHI-JAIPUR HIGHWAY, MANESAR, GURGAON. PAN: AAACP2626A VS. DCIT, CIRCLE-3, GURGAON. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIJAY IYER, CA, SHRI GAGANDEEP NAGPAL, SHRI NITIN JAIN & SHRI KARAN BHATIA DEPARTMENT BY : SHRI A. VASANTHAN, SR. DR DATE OF HEARING : 01.06.2015 DATE OF PRONOUNCEMENT : 02.06.2015 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E FINAL ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 5.1.2015 U/ S 143(3) READ WITH ITA NO.407/DEL/2015 2 SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFT ER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2010-11. 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION OF RS.180,63,50,055/- MADE BY THE AO ON ACCOUNT OF TRA NSFER PRICING ADJUSTMENT TOWARDS ADVERTISING, MARKETING AND PROMO TION (AMP) EXPENSES. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE, AN INDIAN COMPANY, IS A SUBSIDIARY OF PVM. IT IS ENGAGED IN MANUFACTURING A VARIETY OF CONFECTIONARY PRODUCTS FROM ITS FACTORIE S IN TAMIL NADU, HARYANA AND UTTARAKHAND. THE PRODUCT BRANDS OF THE ASSESSEE INCLUDE BIG BABOOL, ALPENLIBE, CENTER FRESH, CENTER FRUIT, CENTER SHOK, CHATER PATAR, CHLOR-MINT, CHOCO-TELLA, COFITOS, HAPPYDENT WHITE, PROTEX HAPPYDENT, MARBELS, MENTOS, ETC. THE ASSESSEE REPO RTED 14 INTERNATIONAL TRANSACTIONS, WHICH HAVE BEEN ENLISTE D ON PAGE 2 OF THE ORDER PASSED BY THE TRANSFER PRICING OFFICER (TPO). THE ASSESSEE EMPLOYED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) IN RESPECT OF SIX INTERNATIONAL TRANSACTIONS; THE COMPARABLE UNC ONTROLLED PRICE ITA NO.407/DEL/2015 3 (CUP) METHOD IN RESPECT OF THREE TRANSACTIONS; C OST PLUS METHOD IN RESPECT OF ONE INTERNATIONAL TRANSACTION; AND NO ME THOD FOR FOUR INTERNATIONAL TRANSACTIONS OF REIMBURSEMENT OF EXPE NSES BY AES, REIMBURSEMENT OF SAP LICENCE, REIMBURSEMENT OF IT S UPPORT SERVICES AND REIMBURSEMENT PAID TO AES. ON A REFERENCE MAD E BY THE AO FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INT ERNATIONAL TRANSACTIONS, THE TPO ACCEPTED ALL THE REPORTED INT ERNATIONAL TRANSACTIONS AT ALP. HE, HOWEVER, NOTICED THAT THE ASSESSEE INC URRED ADVERTISEMENT, MARKETING AND PROMOTION (AMP) EXPENSES TO THE TUNE OF RS.183,73,82,000/-. TO DETERMINE THE ALP OF THE IN TERNATIONAL TRANSACTION OF AMP EXPENSES, THE TPO CHOSE CERTAIN COMPARABLE COMPANIES. BY APPLYING THE BRIGHT LINE TEST, HE WO RKED OUT THE NON- ROUTINE AMP EXPENSES IN EXCESS OF BRIGHT LINE AT RS .152.61 CRORE. ADDING MARK-UP OF 18.36%, HE WORKED OUT A TRANSFER PRICING ADJUSTMENT OF RS.180,63,50,055. THE ASSESSEE REMAINED UNSUCCE SSFUL BEFORE THE DISPUTE RESOLUTION PANEL (DRP). EVENTUALLY, THE AO , VIDE HIS FINAL ORDER, MADE AN ADDITION FOR A SUM OF RS.180.63 CROR E AND ODD ON THIS ISSUE. THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THIS ADDITION. ITA NO.407/DEL/2015 4 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS AN ADMITTED POSITION THA T THE ASSESSEE UNDER CONSIDERATION IS A `MANUFACTURER AND NOT A `DISTRI BUTOR (HIGH OR LOW/NO RISK). THE SPECIAL BENCH OF THE TRIBUNAL IN THE CAS E OF LG ELECTRONICS INDIA PVT. LTD. VS. ACIT (2013) 152 TTJ (DEL) 273 ( SB), BY ITS MAJORITY DECISION, WITHOUT DRAWING ANY DISTINCTION BETWEEN M ANUFACTURERS AND DISTRIBUTORS, HAS HELD, INTER ALIA , THAT AMP IS A TRANSACTION AND ALSO AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SEC TION 92B OF THE ACT AND THAT THE TPO HAS JURISDICTION TO COMPUTE THE AL P OF THIS INTERNATIONAL TRANSACTION DESPITE THE SAME NOT HAVI NG BEEN SPECIFICALLY REFERRED BY THE AO. ON THE QUESTION OF DETERMINATI ON OF THE ALP OF THIS INTERNATIONAL TRANSACTION, THE SPECIAL BENCH APPROV ED THE APPLICATION OF BRIGHT LINE TEST FOR WORKING OUT THE AMOUNT OF NON- ROUTINE AMP EXPENSES AND HELD THAT THE ALP OF AMP EXPENSES SHOU LD BE DETERMINED ON COST PLUS METHOD BY TREATING AMP TRANSACTION AS A SEPARATE AND DISTINCT FROM OTHER INTERNATIONAL TRANSACTIONS. IT FURTHER HELD THAT THE SELLING EXPENSES DIRECTLY INCURRED IN CONNECTION WI TH THE SALES DO NOT LEAD TO BRAND PROMOTION AND HENCE SHOULD NOT BE BRO UGHT WITHIN THE ITA NO.407/DEL/2015 5 OVERALL AMBIT OF AMP EXPENSES. THE SPECIAL BENCH LA ID DOWN CERTAIN PARAMETERS TO BE TAKEN INTO CONSIDERATION FOR DETER MINING THE ALP OF AMP EXPENSES. IN THE ULTIMATE ANALYSIS, THE MATTER WAS SENT BACK TO THE TPO/AO FOR UNDERTAKING THE EXERCISE AFRESH IN THE L IGHT OF ITS DIRECTIONS. 5. FOLLOWING THE SAID SPECIAL BENCH ORDER, VARI OUS BENCHES OF THE TRIBUNAL DECIDED SEVERAL CASES INVOLVING AMP EXPENS ES, RESTORING THE MATTER TO THE FILE OF AO/TPO FOR DECIDING THIS ISSU E IN CONFORMITY WITH THE DIRECTIONS GIVEN BY THE SPECIAL BENCH IN LG ELECTRONICS (SUPRA) . SEVERAL ASSESSEES AS WELL AS THE REVENUE PREFERRED THEIR RESPECTIVE APPEALS BEFORE THE HONBLE HIGH COURTS AGAINST THE TRIBUNAL ORDERS FOLLOWING THE SPECIAL BENCH ORDER. A BATCH OF APPE ALS IN RELATION TO `DISTRIBUTORS (NOT MANUFACTURERS) LED BY SONY ERICSON MOBILE COMMUNICATIONS INDIA PVT. LTD. VS. CIT HAS BEEN DISPOSED OF BY THEIR LORDSHIPS OF THE HONBLE DELHI HIGH COURT, DELIVERI NG JUDGMENT ON 16 TH MARCH, 2015, UPHOLDING THE MAJORITY VIEW OF SPECIAL BENCH IN LG ELECTRONICS (SUPRA) TREATING AMP AS AN INTERNATIONAL TRANSACTION AND A LSO CONFERRING JURISDICTION IN THE TPO TO DETERMINE THE ALP OF THE ITA NO.407/DEL/2015 6 INTERNATIONAL TRANSACTION OF AMP EXPENSES. DEALING WITH THE COMPUTATION OF ALP OF SUCH TRANSACTIONS BY A DISTRI BUTOR, THE HONBLE HIGH COURT HAS HELD, INTER ALIA , THAT THE INTERNATIONAL TRANSACTION OF AMP EXPENSES SHOULD BE BUNDLED/AGGREGATED WITH OTHER IN TERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE AS A DISTRI BUTOR, WHO EITHER SIMPLY ACTS AN AGENT OF MANUFACTURER OR PURCHASES GOODS FR OM THE MANUFACTURER FOR RESALE AT HIS OWN ACCOUNT. THE HONBLE HIGH CO URT HELD THAT WHERE THE TNMM HAS BEEN APPLIED AS THE MOST APPROPRIATE M ETHOD BY A DISTRIBUTOR, WHICH METHOD HAS NOT BEEN DISTURBED B Y THE TPO, THEN, THE INTERNATIONAL TRANSACTION OF AMP AND DISTRIBUTION A CTIVITIES SHOULD BE CLUBBED. IT FURTHER HELD THAT FOR DETERMINING THE A LP OF SUCH TRANSACTIONS UNDER A COMBINED APPROACH, ONLY SUCH C OMPARABLES SHOULD BE CHOSEN WHICH CONFORM TO THE AMP FUNCTIONS AND OT HER DISTRIBUTION FUNCTIONS CONDUCTED BY THE ASSESSEE. IF THERE IS S OME DIFFERENCE IN THE FUNCTIONS UNDER THESE INTERNATIONAL TRANSACTIONS, I NCLUDING THAT OF AMP, BETWEEN THE ASSESSEE AND THE COMPARABLES, THEN, SUI TABLE ADJUSTMENT SHOULD BE MADE TO BRING BOTH THE TRANSACTIONS AT PA R. IF PROBABLE COMPARABLES ARE NOT PERFORMING SIMILAR FUNCTIONS AS DONE BY THE ITA NO.407/DEL/2015 7 ASSESSEE AND NO ADJUSTMENT IS POSSIBLE FOR BRINGING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN AN AGGREGATE MANNER AT PAR WITH THOSE UNDERTAKEN BY THE COMPARABLES, THEN, SEGREGATION SH OULD BE DONE AND THE INTERNATIONAL TRANSACTION OF AMP SPEND SHOULD B E SEPARATELY PROCESSED UNDER THE TRANSFER PRICING PROVISIONS FOR THE PURPOSES OF DETERMINING ITS ALP SEPARATELY. IN SUCH A DETERMIN ATION OF ALP OF AMP EXPENSES IN A SEGREGATED MANNER, PROPER SET OFF ON ACCOUNT OF EXCESS PURCHASE PRICE ADJUSTMENT SHOULD BE ALLOWED. THE VIEW TAKEN BY THE SPECIAL BENCH OF THE TRIBUNAL IN SEGREGATING RO UTINE AND NON-ROUTINE EXPENSES ON THE BASIS OF BRIGHT LINE TEST HAS BEEN SET ASIDE BY THE HONBLE HIGH COURT. FURTHER, THE DECISION TAKEN BY THE SPECIAL BENCH TO THE EFFECT THAT THE EXPENSES CONCERNED WITH THE SAL ES, SUCH AS, REBATES AND DISCOUNTS ETC., SHOULD BE EXCLUDED FROM THE AMB IT OF AMP EXPENSES, HAS BEEN UPHELD. 6. WE CAN SUMMARIZE THE RELEVANT POSITION EMANA TING FROM THE JUDGMENT OF THE HONBLE HIGH COURT, AS UNDER : - ITA NO.407/DEL/2015 8 AMP EXPENSE IS AN INTERNATIONAL TRANSACTION [PARAS 52 & 53 OF THE JUDGMENT] ; THE TPO HAS JURISDICTION TO DETERMINE THE ALP OF TH E INTERNATIONAL TRANSACTION OF AMP EXPENSES [PARA 50 OF THE JUDGMENT]; 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)]; 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]; ITA NO.407/DEL/2015 9 THE CHOICE OF COMPARABLES CANNOT BE RESTRICTED ONLY TO DOMESTIC COMPANIES USING ANY FOREIGN BRAND [PARA 120] ; 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)] ; 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] ; ITA NO.407/DEL/2015 10 SELLING EXPENSES CANNOT BE CONSIDERED AS PART OF AM P EXPENSES [PARAS 175 & 176 OF THE JUDGMENT]. 7. THE BRIGHT LINE TEST, DISAPPROVED BY THE HON BLE HIGH COURT, PRIMARILY CONCENTRATES ON THE QUANTITATIVE ASPECTS OF THE AMP EXPENSES ALONE. IT OVERLOOKS THE EXAMINATION OF THE AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE ON ONE HAND AND THE COMPARABLES ON THE OTHER. THE HONBLE HIGH COURT IN SONY ERICSON MOBILE (SUPRA), HAS HELD THAT AMP EXPENSE IS A SEPARATE INTERNATIONAL TRANSACTION AND ALSO BRIGHT LINE TEST IS NOT APPLICABLE FOR DETERMINING THE ALP OF AMP EXPEN SES. THE MANNER FOR THE DETERMINATION OF THE ALP OF THE DISTRIBUTIO N ACTIVITY AND AMP ACTIVITY HAS ALSO BEEN SET OUT BY THE HONBLE HIGH COURT TO BE CONDUCTED, FIRSTLY, IN A BUNDLED MANNER BY CONSIDER ING THE DISTRIBUTION AND AMP FUNCTIONS PERFORMED BY THE ASSESSEE AS WELL AS THE PROBABLE COMPARABLES, AND IF PROBABLE COMPARABLES HAVING PER FORMED BOTH THE FUNCTIONS ARE NOT AVAILABLE, THEN TO DETERMINE THE ALP OF AMP EXPENSES IN A SEGREGATED MANNER. AS SUCH, IT BECOMES IMMENSE LY IMPORTANT TO SEPARATELY EXAMINE THE DISTRIBUTION ACTIVITY AND AM P FUNCTIONS ITA NO.407/DEL/2015 11 UNDERTAKEN BY THE ASSESSEE AS WELL AS PROBABLE COMP ARABLES. IT IS VITAL TO HIGHLIGHT THE DIFFERENCE BETWEEN THE AMP EXPENSES A ND AMP FUNCTIONS. WHEREAS THE AMP FUNCTIONS ARE THE MEANS BY WHICH TH E AMP ACTIVITY IS PERFORMED, THE AMP EXPENSES ARE THE AMOUNT SPENT ON THE PERFORMANCE OF SUCH MEANS (FUNCTIONS). TO PUT IT SIMPLY, AN EXA MINATION OF AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE AND THE PROBABLE COMPA RABLES IS SINE QUA NON IN THE PROCESS OF DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION OF AMP SPEND, EITHER 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. 8. THE LD. AR ARGUED THAT THE ASSESSEE APPLIED T NMM IN RESPECT OF EXPORT OF RAW MATERIALS/FINISHED GOODS AND IMPORT O F RAW MATERIAL FROM MANUFACTURED STOCK/FINISHED GOODS. HE SUBMITTED TH AT SINCE THE PROFIT MARGIN DECLARED BY THE ASSESSEE FROM SUCH INTERNATI ONAL TRANSACTIONS ITA NO.407/DEL/2015 12 FAVOURABLY COMPARED WITH THE AVERAGE MARGIN OF THE COMPARABLES, WHICH FACT HAS NOT BEEN DISPUTED BY THE TPO, NO ADJ USTMENT SHOULD BE MADE ON ACCOUNT OF AMP EXPENSES BECAUSE SUCH EXPENS ES STAND SUBSUMED IN THE OVERALL OPERATING PROFIT. THE ARGU MENT OF THE LD. AR, IF TAKEN TO A LOGICAL CONCLUSION, WILL MAKE THE AMP SP END A NON- INTERNATIONAL TRANSACTION, WHICH, IN OUR CONSIDERED OPINION, IS CONTRARY TO THE VERDICT OF THE HONBLE DELHI HIGH COURT IN SONY ERICSSON (SUPRA). ONCE AMP EXPENSE HAS BEEN HELD TO BE AN INTERNATION AL TRANSACTION, IT IS, BUT, NATURAL THAT THE FUNCTIONS PERFORMED BY TH E ASSESSEE UNDER SUCH A TRANSACTION NEED TO BE COMPARED WITH SIMILAR FUNCTI ONS PERFORMED BY A 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 CONTENTIO N 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 AMOU NT TO SNATCHING AWAY ITA NO.407/DEL/2015 13 THE TAG OF INTERNATIONAL TRANSACTION FROM AMP EXPE NSES, ASSIGNED BY THE HONBLE HIGH COURT. WHAT THEIR LORDSHIPS HAVE HELD IN THE JUDGMENT IS THAT THE DISTRIBUTION ACTIVITY AND AMP EXPENSES ARE TWO SEPARATE BUT RELATED INTERNATIONAL TRANSACTIONS. IT IS ONLY FOR THE PURPOSES OF DETERMINING THEIR ALP THAT THESE TWO SHOULD BE AGGR EGATED. THE PROCESS OF SUCH AGGREGATION DOES NOT TAKE AWAY THE SEPARATE CHARACTER OF THE AMP TRANSACTION, ALBEIT RELATED. AN ANALYSIS AND EXAMINATION OF THE DISTRIBUTION AND AMP FUNCTIONS CARRIED OUT BY THE A SSESSEE MUST BE NECESSARILY DONE IN THE FIRST INSTANCE, WHICH SHOUL D BE THEN COMPARED WITH SIMILAR FUNCTIONS PERFORMED BY SOME PROBABLE C OMPARABLES. IF THE DISTRIBUTION AND AMP FUNCTIONS PERFORMED BY THE ASS ESSEE TURN OUT TO BE DIFFERENT FROM THOSE PERFORMED BY PROBABLE COMPARAB LES, THEN, A SUITABLE ADJUSTMENT SHOULD BE MADE TO THE PROFITS OF THE COM PARABLE SO AS TO COUNTERBALANCE THE EFFECT OF SUCH DIFFERENCES. IF HOWEVER DIFFERENCES EXIST IN SUCH FUNCTIONS, BUT NO ADJUSTMENT CAN BE M ADE, THEN, SUCH PROBABLE COMPARABLE SHOULD BE DROPPED FROM THE LIST OF COMPARABLES. IF, IN DOING THIS EXERCISE, THERE REMAINS NO COMPANY DO ING COMPARABLE DISTRIBUTION AND AMP FUNCTIONS, THEN, BOTH THE INTE RNATIONAL TRANSACTIONS ITA NO.407/DEL/2015 14 ARE REQUIRED TO BE SEGREGATED AND THEN EXAMINED ON INDIVIDUAL BASIS BY FINDING OUT PROBABLE COMPARABLES DOING SUCH SEPARAT E FUNCTIONS SIMILARLY. FOR THE INTERNATIONAL TRANSACTION OF AMP SPEND, THIS CAN BE DONE BY, FIRSTLY, SEEING THE AMP FUNCTIONS ACTUALLY PERFORMED BY THE ASSESSEE AND THEN COMPARING IT WITH THE AMP FUNCTIO NS PERFORMED BY A PROBABLE COMPARABLE. IF BOTH ARE FOUND OUT TO BE SI MILAR, THEN THE MATTER ENDS AND A COMPARABLE IS FOUND AND ONE CAN GO AHEAD WITH DETERMINING THE ALP OF SUCH A TRANSACTION. IF THE AMP FUNCTIONS PERFORMED BY THE TWO ENTITIES ARE FOUND TO BE DIFFERENT, THEN ADJUST MENT IS REQUIRED TO BE MADE IN THE CASE OF A PROBABLE COMPARABLE, SO AS TO MAKE IT UNIFORM WITH THE ASSESSEE. THE ASSESSEE MAY HAVE POSSIBLY D ONE, SAY, FOUR DIFFERENT AMP FUNCTIONS AS AGAINST THE PROBABLE COM PARABLE HAVING DONE, SAY, ONLY THREE. IN SUCH A SCENARIO, AGAIN TH E ADJUSTMENT WILL BE WARRANTED. IN ANOTHER SITUATION, THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AND PROBABLE COMPARABLE MAY BE SIMILAR BUT WITH VARYING STANDARDS, WHICH WILL ALSO CALL FOR AN ADJUSTMENT. CRUX OF THE MATTER IS THAT THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE MU ST BE SIMILAR TO THOSE DONE BY THE COMPARABLE, IN THE SAME MANNER AS SUCH FUNCTIONS ARE ITA NO.407/DEL/2015 15 COMPARED IN ANY OTHER INTERNATIONAL TRANSACTION. HO WEVER, IN COMPUTING ALP OF AMP SPEND, THE ADJUSTMENT OR SET OFF, IF ANY , AVAILABLE FROM THE DISTRIBUTION FUNCTION, SHOULD BE ALLOWED. 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 EXAM INED ON THE TOUCHSTONE OF TRANSFER PRICING PROVISIONS, BUT ON A N AGGREGATE BASIS. DETERMINING THE ALP OF TWO TRANSACTIONS IN AN AGGRE GATE 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 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. ITA NO.407/DEL/2015 16 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. LET US WE GO A STEP FURTHER WITH THE ALTERNATIVE PRESCRIPTION OF THE JUDGMENT THAT I F ALP OF BOTH THE TRANSACTIONS OF DISTRIBUTION AND AMP CANNOT BE DET ERMINED IN A COMBINED MANNER, THEN THE ALP OF AMP FUNCTION SHOUL D BE SEPARATELY DONE. THE SUBMISSION ADVANCED BY THE ASSESSEE OF C ONSIDERING THE PROFIT ON AN ENTITY LEVEL WITHOUT MAKING COMPARISON OF AMP FUNCTIONS DONE BY THE ASSESSEE AS WELL AS THE COMPARABLE, WIL L RENDER THIS ALTERNATIVE APPROACH INCAPABLE OF COMPLIANCE. CANV ASSING SUCH A VIEW AS ARGUED ON BEHALF OF THE ASSESSEE AMOUNTS TO TREA TING AMP SPEND AS A NON-INTERNATIONAL TRANSACTION, WHICH IS PATENTLY IN CAPABLE OF ACCEPTANCE. THE FACT REMAINS THAT AS PER THE VERDICT OF THE HON BLE HIGH COURT, THE AMP SPEND IS AN INTERNATIONAL TRANSACTION, WHICH IS REQUIRED TO BE PROCESSED UNDER CHAPTER X OF THE ACT BY TAKING INTO ACCOUNT THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AND THEN COMPAR ING SUCH FUNCTIONS WITH THOSE PERFORMED BY COMPARABLE ENTITIES. THIS CAN BE DONE ONLY BY ITA NO.407/DEL/2015 17 MANDATORILY MAKING A COMPARISON OF THE AMP FUNCTI ONS PERFORMED BY THE ASSESSEE AND COMPARABLES AND THEN MAKING AN ADJ USTMENT, IF ANY, DUE TO DIFFERENCES BETWEEN THE TWO, SO THAT THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AND COMPARABLE ARE BROUGH T TO A SIMILAR PLATFORM. IN FACT, THIS IS ALSO THE PRESCRIPTION O F RULE 10B(1)(E), WHICH PROVIDES AS UNDER :- ` (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGA RD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS , OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III) ; ITA NO.407/DEL/2015 18 (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. 9. A PERUSAL OF THE SUB-CLAUSE (III) OF THIS RUL E DIVULGES THAT NET PROFIT MARGIN UNDER A COMPARABLE UNCONTROLLED TRANSACTION AS DETERMINED UNDER SUB-CLAUSE (II) SHOULD BE: ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. IT IS ONLY SUCH ADJUSTED NET PROFIT MARGIN IN SUB-CLAUSE (III) OF RULE 10B(1)(E) WHICH IS COMPARED WITH THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE AS PER THE MANDATE OF SUB-CLAUSE (IV) OF RULE 10B(1)(E). 10. SUB-RULE (2) OF RULE 10B PROVIDES THAT FOR THE PURPOSES OF SUB- RULE (1), THE COMPARABILITY OF AN INTERNATIONAL TR ANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFER ENCE TO THE FOLLOWING, NAMELY (A) THE SPECIFIC CHARACTERISTICS OF THE PR OPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION ; (B) THE F UNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOY ED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTI ONS ; (C) THE CONTRACTUAL ITA NO.407/DEL/2015 19 TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN W RITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITL Y HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVI DED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS ; (D) CONDI TIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRAN SACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAP ITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. SUB-RULE (3) OF R ULE 10B STIPULATES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY , BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPR ISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT T HE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSA CTIONS IN THE OPEN MARKET ; OR (II) REASONABLY ACCURATE ADJUSTMENTS CA N BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. ITA NO.407/DEL/2015 20 11. A COMPARATIVE STUDY OF SUB-RULES (1), (2) A ND (3) OF RULE 10B MAKES IT PALPABLE THAT THE INTERNATIONAL TRANSACTIO N AND THE UNCONTROLLED TRANSACTION WITH WHICH COMPARISON IS SOUGHT TO BE M ADE FOR DETERMINING THE ALP, IN THE FIRST INSTANCE, MUST HAVE OVERALL SIMILAR CHARACTERISTICS. IT IS VIVID THAT IF THE GOODS/SERVICES ARE DIFFEREN T, THEN NO EFFECTIVE COMPARISON CAN BE MADE. ONCE THE GOODS/SERVICES UND ER BOTH THE TRANSACTIONS ARE BROADLY SIMILAR BUT THERE IS A DIF FERENCE IN THEM BECAUSE OF CERTAIN SPECIFIC CHARACTERISTICS; AND/OR THE PR ODUCTS/SERVICES IN BOTH THE TRANSACTIONS ARE IDENTICAL, BUT STILL THERE ARE CERTAIN DIFFERENCES DUE TO THE CONTRACTUAL TERMS OR THE GEOGRAPHICAL LOCATION ETC., THEN, A REASONABLY ACCURATE ADJUSTMENT SHOULD BE MADE FOR E LIMINATING THE MATERIAL EFFECTS OF SUCH DIFFERENCES SO AS TO BRING THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TION ON THE SAME PODIUM. IF DUE TO ONE REASON OR THE OTHER, NO REASO NABLE ACCURATE ADJUSTMENT CAN BE MADE DUE TO SUCH DIFFERENCES, THE N, SUCH UNCONTROLLED TRANSACTION SHOULD NOT BE CONSIDERED AS A COMPARABL E TRANSACTION. ITA NO.407/DEL/2015 21 12. IT IS DISCERNIBLE THAT THE PRESCRIPTION OF RULE 10B IS IN COMPLETE HARMONY WITH THE RATIO OF THE JUDGMENT IN THE CASE OF SONY ERICSON MOBILE (SUPRA) , TO THE EFFECT THAT THE AMP FUNCTIONS CARRIED OU T BY THE ASSESSEE ARE REQUIRED TO BE NECESSARILY COMPARED WI TH THE AMP FUNCTIONS CARRIED OUT BY A COMPARABLE ENTITY IN DET ERMINING THE AMP OF ALP EXPENSES. DIFFERENCE BETWEEN THE FUNCTIONS, IF CAPABLE OF ADJUSTMENT, SHOULD BE GIVEN EFFECT TO IN THE PROFIT RATE OF THE COMPARABLE AND IF SUCH DIFFERENCE CANNOT BE GIVEN ADJUSTED, TH EN, THE PROBABLE COMPARABLE SHOULD BE ELIMINATED. 13. WE HAVE NOTICED ABOVE THAT THE ASSESSEE IS A `MANUFACTURER AND NOT A `DISTRIBUTOR. THE JUDGMENT IN THE CASE OF SONY ERICSON MOBILE (SUPRA) DEALS WITH A CASE OF DISTRIBUTOR, THOUGH THE INITIA L DISCUSSION ABOUT THE CHARACTER OF AMP SPEND AS AN INTERNATIONA L TRANSACTION AND THE JURISDICTION OF THE TPO ETC. ARE COMMON TO A DISTRI BUTOR AND ALSO A MANUFACTURER. SIMILARLY THERE ARE SOME OTHER OBSER VATIONS IN THIS JUDGMENT, WHICH ARE COMMON TO BOTH. THOUGH THIS JUD GMENT LAYS DOWN AT LENGTH SOME BROADER PRINCIPLES FOR THE DETERMINA TION OF ALP OF AMP ITA NO.407/DEL/2015 22 EXPENSES IN THE CASE OF A `DISTRIBUTOR, STILL CER TAIN PRINCIPLES DEALING EXCLUSIVELY WITH THE DETERMINATION OF THE ALP OF A MP EXPENSES IN THE CASE OF A `MANUFACTURER, HAVE ALSO BEEN LAID DOWN . SUCH DISCUSSION HAS BEEN MADE IN PARA 92 OF THE JUDGMENT, THE RELEVANT PART OF WHICH IS REPRODUCED HERE AS UNDER : - `92. THE MAJORITY JUDGMENT REFERS TO AN EXAMPLE WHE RE THE INDIAN AE MAY HAVE EARNED ACTUAL PROFIT OF RS.140/-, BUT R ETURNED REDUCED NET PROFIT OF RS.120/- AS THE INDIAN AE HAD INCURRE D BRAND BUILDING EXPENSES TO THE TUNE OF RS.20/- FOR THE FOREIGN AE, WHEREAS THE NET PROFIT ON SALES DECLARED BY COMPARABLE UNCONTROLLED TRANSACTIONS WAS RS.100/- ONLY. THUS, IT WAS OBSERVED THAT THE C OSTS INCLUDING AMP EXPENSES ARE INDEPENDENT OF COST OF IMPORTED RA W MATERIAL/FINISHED PRODUCTS HAVING SOME CORRELATION WITH OVERALL PROFIT. THE EXAMPLE HIGHLIGHTS THE WEAKNESS OF THE TNM METHOD. THE REASONING WOULD BE EQUALLY VALID, WHERE NO AMP OR BRAND BUILDING' EXPENSES ARE INCURRED. (SEE PARAGRAPH 21. 8 TO 22.10 OF THE MAJORITY DECISION). THE NET PROFIT MARGINS CAN BE A FFECTED BY VARIATION OF OPERATING EXPENSES. THUS, THE REQUIREM ENT TO SELECT APPROPRIATE COMPARABLE AND ADJUSTMENT. IT WOULD BE INAPPROPRIATE AND UNSOUND TO ACCEPT COMPARABLES, WITH OR WITHOUT ADJUSTMENT AND APPLY TNM METHOD, AND YET CONJECTURISE AND MISTRUST THE ARM'S LENGTH PRICE. TNM METHOD WOULD NOT BE THE MOST APP ROPRIATE METHOD WHEN THERE ARE CONSIDERABLE VALUE ADDITIONS BY THE SUBSIDIARY AES. IN PARAGRAPH 22.9, THE MAJORITY DEC ISION HAS OBSERVED THAT ALL COSTS INCLUDING THE AMP EXPENSES ARE INDEPENDENT OF COST OF MATERIAL. THIS INDICATES THAT THE OBSERV ATIONS HAVE BEEN MADE WITH REFERENCE TO MANUFACTURING ACTIVITIES. IT WOULD NOT BE APPROPRIATE AND PROPER TO APPLY THE TNM METHOD IN C ASE THE INDIAN ASSESSED IS ENGAGED IN MANUFACTURING ACTIVIT IES AND DISTRIBUTION AND MARKETING OF IMPORTED AND MANUFACT URED PRODUCTS, ITA NO.407/DEL/2015 23 AS INTERCONNECTED TRANSACTIONS. IMPORT OF RAW MATER IAL FOR MANUFACTURE WOULD POSSIBLY BE AN INDEPENDENT INTERN ATIONAL TRANSACTION VIZ. MARKETING AND DISTRIBUTION ACTIVIT IES OR FUNCTIONS. WE HAVE EARLIER USED THE TERM `PLAIN VANILLA DISTRI BUTOR'. WHEN WE USE THE WORDS `PLAIN VANILLA DISTRIBUTOR' WE DO NOT MEAN PLAIN VANILLA SITUATIONS, BUT VALUE ADDITIONS AND EACH PA RTY MAKING VALUABLE UNIQUE CONTRIBUTION. 14. IT IS DISCERNIBLE FROM THE ITALICIZED PART O F THE ABOVE PARA THAT THE APPLICATION OF TNM METHOD IS NOT APPROPRIATE AND PROPER IN CASE THE ASSESSEE IS ENGAGED IN MANUFACTURING ACTIVITIES. IN SUCH CIRCUMSTANCES, THE IMPORT OF RAW MATERIAL FOR MANUFACTURE WOULD BE AN INDEPENDENT INTERNATIONAL TRANSACTION VIZ. MARKETING AND DISTRI BUTION ACTIVITIES OR FUNCTIONS. THE CORE OF THE ABOVE PARA IS THAT IN THE CASE OF A `MANUFACTURER, THE INTERNATIONAL TRANSACTIONS CONC ERNED WITH THE MANUFACTURING ACTIVITY CANNOT BE AGGREGATED WITH TH E AMP ACTIVITIES AS BOTH ARE SEPARATE AND DISTINCT. ONCE BOTH ARE HELD TO BE SEPARATE AND TNMM IS NOT TO BE APPLIED, THE ONLY THING WHICH REM AINS IS THAT THE AMP TRANSACTION SHOULD BE SEPARATELY AND INDEPENDEN TLY PROCESSED UNDER THE CHAPTER X OF THE ACT AS PER ANY SUITABLE METHOD (OTHER THAN TNMM) INCLUDING COST PLUS METHOD, BUT BY EXCLUDING THE SELLING EXPENSES FROM THE OVERALL BASE OF AMP EXPENSES. ITA NO.407/DEL/2015 24 15. TURNING TO THE FACTS OF THE CASE, WE FIND TH AT THE TPO/AO HAVE FOLLOWED THE SPECIAL BENCH DECISION IN LG ELECTRONI CS (SUPRA) FOR DETERMINING THE ALP OF AMP EXPENSES. THERE IS NO D ISCUSSION ABOUT THE AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE OR CO MPARABLES. NOW SINCE THE SPECIAL BENCH ORDER HAS BEEN PARTLY MODIF IED BY THE HONBLE DELHI HIGH COURT, INCLUDING THE NON-APPLICABILITY O F THE BRIGHT LINE TEST, AND NO MATERIAL HAS BEEN PLACED ON RECORD BY THE LD . AR TO, FIRSTLY, DEMONSTRATE THE AMP FUNCTIONS CARRIED OUT BY THE AS SESSEE AND THEN, TO COMPARE SUCH FUNCTIONS WITH THOSE DONE BY COMPARABL ES, THIS ISSUE CANNOT BE DECIDED AT OUR END. UNDER SUCH CIRCUMSTAN CES, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF THE AO/TPO FOR DECIDING IT AFRESH AS PER LAW. IN THIS FRESH EXERC ISE, THE TPO WILL FOLLOW THE PARTS OF THE JUDGMENT IN SONY ERICSON (SUPRA) AS ARE COMMON TO BOTH MANUFACTURERS AND DISTRIBUTORS; APPLY THE PARTS O F THE JUDGMENT AS ARE APPLICABLE TO A `MANUFACTURER; AND IGNORE THE PA RTS OF THE JUDGMENT WHICH PERTAIN EXCLUSIVELY TO A `DISTRIBUTOR. NEED LESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY O F HEARING IN SUCH FRESH PROCEEDINGS. ITA NO.407/DEL/2015 25 16. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 02.06.201 5. SD/- SD/- [C.M. GARG] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 02 ND JUNE, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.