Reebok India Co., New Delhi V. Addl. CIT, New Delhi

ITA 5857/DEL/2012

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1724 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 30-07-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 21-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y KAKKAR; AMRENDRA KUMAR
• Keywords: Transfer pricing; International transaction; Retrospective amendment; Question of law
• Section: 143(3); 92B; 260A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I : NEW DELHI BEFORE SHRI S.V. MEHROTRA , ACCOUNTANT MEMBER AND SMT. DIVA SINGH , JUDICIAL MEMBER ITA NO.5857/DEL/2012 ASSESSMENT YEAR : 200 8 - 200 9 REEBOK INDIA CO., VS. ACIT, RANGE - 15, 530/1, 3&4, VILLAGE BUJWASAN, NEW DELHI NEW DELHI 110 061 (PAN AAACR 3007 K ) (APPELLANT) (RESPONDENT) DATE OF HEARING : 30 .0 7 .2015 DATE OF PRONOUNCEMENT : 09 . 1 0 . 2015 ASSESSEE BY:SH.AJAY VOHRA, SR.ADV, SH. NEERAJ JAIN, ADV., SH.RAMIT KATYAL, C.A, SH. PUNEET CHUGH, C.A RESPONDENT BY: SH.AMRENDRA KUMAR, CIT DR & MS.Y.KAKKAR, SR.DR. ORDER PER DIVA SINGH, JM TH E PRESENT APPEAL ARISES FROM THE COMMON JUDGMENT DATED 16 TH MARCH ,2015 OF THE HON BLE HIGH COURT OF DELHI IN SONY ERICSSON MOBILE COMMUNI CATION INDIA PVT. LTD. ( NOW KNOWN AS SONY INDIA LTD.) REPORTED IN [2015] 374 ITR 118 (DELHI) WHEREIN THE APPEAL FILED BY THE ASSESSEE ASSAILING THE CORRECTNESS OF THE ORDER DATED 14.06.2013 IN ITA NO.5857/DEL/2012 IN ITA NO. 109/2014 ALONGWITH CROSS APPEA L OF THE REVENUE IN ITA NO. 213/2014 FOR ASSESSMENT YEAR 2008 - 09, FILED UNDER SECTION 260A OF THE ITA NO. 5857/DEL/2012 PAGE 2 OF 21 INCOME - TAX ACT, 1961(FOR SHORT THE ACT ) ALONGWITH OTHER ASSESSEES & REVENUE STOOD DECIDED BY THEIR LORDSHIPS. THE HON BLE COURT HAS LAID DOWN IN THE AFORES AID JUDGEMENT THE LEGAL RATIOS FOR DETERMINING THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF ADVERTISING, MARKETING AND PROMOTION (AMP) SPENT AND ROYALTY PAYMENT AND IN THE FACTS OF THE PRESENT CASE HAVE ORDERED A REMAND FOR DE NOVO CONSIDERA TION OF THE ISSUES TO THE TRIBUNAL. 2 BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A DOMESTIC COMPANY AND WAS INCORPORATED IN 1995. IT IS A JOINT VENTURE BETWEEN M/S REEBOK MAURITIUS COMPANY LTD AND FOCUS ENERGY INDIA LTD. IT IS ENGAGED IN THE BUSINESS OF DISTRIBUTION OF FOOTWEAR, APPAREL, ACCESSORIES, SPORTS EQUIPMENTS ETC. THE ASSESSEE FILED ITS RETURN OF INCOME ON 26 TH SEPTEMBER, 2008, DECLARING TOTAL INCOME OF RS.39,49,36,968/ - . IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS : - S.NO. TYPE OF INTERNATIONAL TRANSACTION METHOD USED BY THE ASSESSEE VALUE OF TRANSACTION (AMOUNT IN RS.) RECEIPT PAID 1. IMP O RT OF FINISHED PRODUCTS/APPARELS RESALE PRICE METHOD ( RPM) --- 34,75,63,922 2. RECEIPT OF COMMISSION CUP 73,87,878 ---- 3. PAYMENT OF ROYALTY TNMM ----- 15,28,77,527 ITA NO. 5857/DEL/2012 PAGE 3 OF 21 4. REIMBURSEMENT OF EXPENSES BY ASSOCIATED ENTERPRISES NOT BENCHMARKED 44,67,723 2.1 THE CASE WAS SELECTED FOR SCRUTINY BY THE ASSESSING OFFICER AND HE MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (IN SHORT TPO ) FOR DETERMINATION OF ARM S LENGTH PRIC E OF INTERNATIONAL TRANSACTIONS U/S 92CA(1) WITH PRIOR APPROVAL OF THE COMMISSIONER OF THE INCOME TAX. THE TPO NOTICED THAT THE ASSE S SEE INCURRED ADVERTISING, MARKETING, PROMOTION ( IN SHORT AMP ) EXPENSES OF RS. 40,62,36,980/ - CONSISTING OF RS. 39,01,2 4,915/ - ON A DVERTISING & PUBLICITY AND RS. 16,61,12,065 / - ON SELLING AND DISTRIBUTION. HOWEVER, THE ASSESSEE WAS REIMBURSED BY THE ASSOCIATED ENTERPRISES (IN SHORT AE ) TO THE EXTENT OF RS. 11,43,021 / - ONLY. THE TPO WAS OF THE VIEW THAT A SIGNIFICANT PRO PORTION OF THE AMP EXPENSES WERE ATTRIBUTABLE TOWARDS PROMOTION OF REEBOK BRAND AND OTHER MARKETING INTANGIBLES AND THEREFORE HE APPLIED BRIGHT LINE TEST , AND USING COMPARABLES COMPANIES IN SIMILAR PRODUCT , DETERMINED THE AVERAGE RATE OF MARKETING AND DISTRIBUTION EXPENSES @ 2.51% OF SALES AND WORKED OUT THE EXCESS AMP EXPENSES INCURRED BY THE ASSESSEE COMPANY AT RS.44,29,77,019. HE CONSIDERED THIS EXCESS AMP EXPENSES AS EXPENDITURE ATTRIBUTABLE TO THE PROMOTION OF REEBOK BRAND AND OTHER MARKETI NG INTANGIBLE AND HELD IT AS A INTERNATIONAL TRANSACTION. HE FURTHER ADDED A MARKUP OF 15% ,BEING PREVALENT BANK INTEREST RATE, ON THE EXCESS AMP EXPENSES. IN THIS MANNER, HE WORKED OUT TOTAL REIMBURSEMENT AT ITA NO. 5857/DEL/2012 PAGE 4 OF 21 RS. 50,94,23,572/ - WHICH THE ASSESSEE OUGHT T O HAVE RECEIVED FROM ITS AE. AGAINST THE SAID REIMBURSEMENT, THE ASSESSEE COMPANY ONLY RECEIVED ACTUAL REIMBURSEMENT OF RS. 11,43,021/ - AND THEREFORE HE COMPUTED ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF ADVERTISING, MARKETING AND PRIME EXPE NSES AT RS. 50,82,80,551/ - . FURTHER, IN RESPECT OF INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT OF RS. 15,28,77,527/ - REPORTED BY THE ASSESSEE COMPANY, THE TPO URGED THE ASSESSEE COMPANY TO PROVIDE DETAILS OF TECHNICAL KNOW HOW, SERVICES RENDERED AND BENEF IT DERIVED BY THE ASSE S SEE IN LIEU OF THE PAYMENT OF ROYALTY, HOWEVER, THE ASSESSEE COMPANY EXPRESSED INABILITY IN PROVIDING DETAILS AS WELL AS ANY INDEPENDENT COMPARABLE COMPANIES AND THEREFORE THE TPO PROPOSED THE ARMS LENGTH PRICE ( IN SHORT ALP ) O F ROYALTY TRANSACTION AS NIL. THE TPO AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE PROPOSED THE FOLLOWING TRANSFER PRICING ADDITIONS VIDE HIS ORDER DATED 28.10.2011AND FORWARDED HIS REPORT TO THE ASSE S SING OFFICER : - (I) ADJUSTMENT FOR ARM S LENGTH PRICE OF AMP EXPENSES: RS. 50,82,80,551/ - (II) UPWARD ADJUSTMENT IN RESPECT OF INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT: RS. 15,28,77,527/ - TOTAL: RS. 66,11,58,078 2.2. PURSUANT TO THIS THE AO PASSED A DRAFT ASSESSMENT ORDER U/S 144C R.W.S.143(3) PROPOSING AN ADDITION OF RS.66,11,58,078/ - ON ACCOUNT OF ITA NO. 5857/DEL/2012 PAGE 5 OF 21 ADJUSTMENT OF TRANSFER PRICING BESIDES ADDITION OF RS. 36,69,882/ - UNDER SECTION 40(A)(IA) OF THE ACT. 3. AGGRIEVED BY THE DRAFT ASSESSMENT OR DER OF THE ASSESSING OFFICER, THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL ( IN SHORT DRP ). THE DRP IN ITS DIRECTION DATED 29.09.2012 CONFIRMED THE ACTION OF THE TPO IN PROPOSING THE ADJUSTMENT OF RS. RS.44,29,77,019/ - TO THE AMP EXPENSES , HOWEVER A MARKUP OF 12.5% ON AMP EXPENSES WAS DIRECTED TO COMPENSATE FOR THE INTEREST COST. AS REGARDS T HE ADJUSTMENT MADE ON ACCOUNT OF ROYALTY, THE DRP CONFIRMED THE ACTION OF THE TPO. PURSUANT TO THIS THE IMPUGNED ORDER WAS PASSED BY THE AO U /S 144C R.W.S. 143(3) . 4. AGGRIEVED BY THIS, THE ASSESSEE FILED THE APPEAL WHEREIN THE CO - ORDINATE BENCH VIDE ORDER DATED 14.06.2013 FOLLOW ING THE DECISION OF THE SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. , NOIDA VS. ACIT, CIRCLE - 3, NOIDA BEARING ITA NO.5140/DEL/2011 AND REMITTED THE MATTER BACK TO THE FILE OF THE TPO . QUA THE UPWARD ADJUSTMENT MADE IN REGARD TO ROYALTY THE CO - ORDINATE BENCH HELD THAT THE ADJUSTMENT MADE BY THE TPO WAS LIABLE TO BE DELETED. FURTHER, THE DISALLOWANCE OF A SUM OF RS.36,69,882/ - U/S 40(A)(IA) OF THE ACT , WAS RESTORED BACK BY THE TRIBUNAL TO THE ASSESSING OFFICER. 5 . AGGRIEVED BY THIS, BOTH THE ASSESSEE AS WELL AS THE REVENUE FILED APPEALS U/S 260A OF THE ACT BEFORE THE HON BLE JURISDICTIONAL HIGH COURT OF ITA NO. 5857/DEL/2012 PAGE 6 OF 21 DELHI BEARING ITA NO. 109/2014 AND ITA NO. 213/2014. THESE APPEALS WERE HEARD BY THE HON BLE COURT TOGETHER WITH THE APPEALS OF OTHER ASSESSES AND CROSS APPEALS OF REVENUE LED BY SONY ERICSSON MOBILE COMMUNICATION INDIA PVT. LTD. (SUPRA) INVOLVING IDENTIC AL SUBSTANTIAL QUESTION OF LAW. THE COMMON SUBSTANTIAL QUESTIONS OF LAW PREFERRED IN THE APPEALS OF THE ASSESSES WERE AS UNDER: - 1. WHETHER THE ADDITIONS SUGGESTED BY THE TRANSFER PRICING OFFICER ON ACCOUNT OF ADVERTISING/MARKETING AND PROMOTION EXPENS ES (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 SECTION 92CA OF THE INCOME TAX ACT, 1961 BY FINANCE ACT, 2012. 2. WHETHER AMP EXPEN SES INCURRED BY THE ASSESSEE IN INDIA CAN BE TREATED AND CATEGORIZED AS AN INTERNATIONAL TRANSACTION UNDER SECTION 92B OF THE INCOME TAX ACT, 1961. 3. WHETHER UNDER CHAPTER X OF THE INCOME TAX ACT, 1961, A TRANSFER PRICING ADJUSTMENT CAN BE MADE BY THE TR ANSFER PRICING OFFICER/ ASSESSING OFFICER IN RESPECT OF EXPENDITURE TREATED AS AMP EXPENSES AND IF SO IN WHICH CIRCUMSTANCES? 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. 5. WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS RIGHT IN DIRECTING THAT FRESH BENCH MARKING/COMPARABILITY ANALYSIS SHOULD BE UNDERTAKEN BY THE TR ANSFER PRICING OFFICER BY APPLYING THE PARAMETERS SPECIFIED IN PARAGRAPH 17.4 OF THE ORDER DATED 23.01.2013 PASSED BY THE SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA (P) LTD.? 6 . THE COMMON SUBSTANTIAL QUESTION OF LAW RAISED BY THE R EVENUE IN ALL THE APPEALS WAS AS UNDER: - ITA NO. 5857/DEL/2012 PAGE 7 OF 21 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 RETAILERS/DEALERS ETC. CANNOT BE INCLUDED I N THE AMP EXPENSES? 7 . AN A DDITIONAL SUBSTANTIAL QUESTION OF LAW WAS RAISED BY THE REVENUE IN THE CASE OF APPEAL BEARING ITA NO.213/2014 FILED AGAINST THE ASSESSEE, WHICH READS AS UNDER : - WHETHER INCOME TAX APPELLATE TRIBUNAL WAS RIGHT IN SETTING ASIDE/ DELETING TRANSFER PRICING ADJUSTMENT MADE ON ACCOUNT OF PAYMENT OF ROYALTY TO AN ASSOCIATED ENTERPRISE? 8 . THE HON BLE COURT DECIDED ALL THE APPEALS LED BY SONY ERICSSON MOBILE COMMUNICATION INDIA PVT. LTD. IN A CONSOLIDATED JUDGMENT DATED 16.03.2015(SU PRA) INCLUDING THE IMPUGNED APPEALS OF THE ASSESSEE AND THE REVENUE. THE HON BLE COURT PROPOUNDED LEGAL FINDING ON THE RELEVANT ISSUES IN HEADING D TO P OF THE JUDGMENT AND SUMMED UP THE VIEW TAKEN ON THE SUBSTANTIAL QUESTIONS OF LAW IN THEIR JUDGMENT IN THE FOLLOWING PARAS: ANSWER TO SUBSTANTIAL QUESTIONS OF LAW PARA 194. IN VIEW OF THE AFORESAID DISCUSSION, SUBSTANTIAL QUESTIONS OF LAW IN THE APPEALS FILED BY THE ASSESSEE ARE ANSWERED AS UNDER: 'Q.I. 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, H AVING REGARD TO RETROSPECTIVE AMENDMENT TO SECTION 92CA OF THE INCOME TAX ACT, 1961 BY FINANCE ACT, 2012. ITA NO. 5857/DEL/2012 PAGE 8 OF 21 IN TERMS OF AND SUBJECT TO DISCUSSION UNDER THE HEADING C, PARAGRAPH NAS.41 TO 50, THE SUBSTANTIAL 8UESTION OF LAW NO.1 IS ANSWERED IN FAVOUR OF TH E REVENUE AND AGAINST THE ASSESSEE. 'Q.2. WHETHER 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 TH E HEADING C, PARAGRAPH NOS.51 TO 57, THE 'SUBSTANTIAL QUESTION OF LAW NO.2 IS ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. '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 THE INCOME TAX APPELLATE TRIBUNAL WAS RIGHT IN DIRECTING THAT FRESH BENCH MARKING/COMPARABILITY ANALYSIS SHOULD BE UNDERTAKEN BY THE TRANS FER PRICING OFFICER BY APPLYING THE PARAMETERS SPECIFIED IN PARAGRAPH 17.4 OF THE ORDER DATED 23.01.2013 PASSED BY THE SPECIAL 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 TH AT 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 AB, THE FIRST STEP IN TRANSFER PRICING IS TO ASCERTAIN AND CONDUCT DETAILED FU NCTIONAL ANALYSIS, WHICH WOULD INCLUDE AMP FUNCTION/EXPENSES. (II) THE SECOND STEP MANDATES ASCERTAINMENT OF COMPARABLES OR COMPARABLE ANALYSIS. THIS WOULD HAVE REFERENCE TO THE METHOD ITA 16/2014 & CONNECTED MATTERS ADOPTED WHICH MATCHES THE ITA NO. 5857/DEL/2012 PAGE 9 OF 21 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 O N 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 CHOICE OF THE MOST APPROPRIATE METHOD WOULD BE DEPENDENT UPON AVAILABILITY OF POTENTIAL COMPARABLE KEEP ING IN MIND THE COMPARABILITY ANALYSIS INCLUDING BEFITTING ADJUSTMENTS WHICH MAY BE REQUIRED. AS THE DEGREE OF THE COMPARABILITY INCREASES, EXTENT OF POTENTIAL DIFFERENCES WHICH WOULD RENDER THE ANALYSIS INACCURATE NECESSARILY DECREASES. (IV) THE ASSESSE D, 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 NOT 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 COMPARABLES 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 SEPARATE INTERNATIONAL TRANSACTION, FOR ITA NO. 5857/DEL/2012 PAGE 10 OF 21 THE SIMPLE REASON THAT IF THE FUNCTIONS PERFORMED BY THE TESTED PARTIES AND THE COMPARABLES MATCH, WITH OR WITHOUT ADJUSTMENTS, AMP EXPENSES ARE DULY AC COUNTED FOR. IT WOULD BE INCONGRUOUS TO ACCEPT THE COMPARABLES AND DETERMINE OR ACCEPT THE TRANSFER PRICE AND STILL SEGREGATE AMP EXPENSES AS AN INTERNATIONAL TRANSACTION. (VI) THE ASSESSING OFFICER/TPO CAN REJECT A METHOD SELECTED BY THE ASSESSED FOR SE VERAL 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 ASSESSING OFFICER/TPO REJECTS THE METHOD ADOPTED BY THE ASSESSED, HE IS ENTITLED TO SELECT THE MOS T 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 COMPARED ON AGGREGATE BASIS. THIS WOULD DEPEND ON THE METHOD ADOPTED AND COMPARABILITY ANALYSIS AN D 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 IMPA CT 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 ATTRACTION TO CUSTOMERS ARISING FROM NAME AND A REPUTATION FOR SKILL, INTEGRITY, EFFICIENT BUSI NESS MANAGEMENT OR EFFICIENT SERVICE. BRAND CREATION AND VALUE, THEREFORE, DEPENDS UPON A GREAT NUMBER OF FACTS RELEVANT FOR A PARTICULAR BUSINESS. IT REFLECTS THE REPUTATION WHICH THE PROPRIETOR OF THE BRAND HAS ITA NO. 5857/DEL/2012 PAGE 11 OF 21 GATHERED OVER A PASSAGE OR PERIOD OF TIME I N 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 SERVICES 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 SEPARATE 'ROUTINE' AND 'NON - ROUTINE' AMP OR BRAND BUILDING EXERCISE BY APPLYING 'BRIGHT LI NE 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 COMPENSATION EXPRESSLY PAID FOR AMP EXPENSES. IT WOULD BE CONSPICUOUSLY WRONG AND INCORRECT T O 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 THI S 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. ELECTRONICS INDIA PVT. LTD. (SUPRA). THIS WOULD BE NECESSARY WHEN THE ARM'S LENGTH PRICE OF THE CONTROLLED TRANSACTION CANNOT BE ADEQUATELY OR RELIABLY DETERMINED WITHOUT SEGMENTATION OF AMP EXPENSES. (XI) THE ASSESSING OFFICER/TL'O FOR GOOD AND SUFFICIENT REASONS CAN DE - BUNDLE INTERCONNECTED TRANSACTIONS, I.E. SEGREGATE DISTRIBUTION, MARKETIN G OR AMP TRANSACTIONS. THIS MAY BE NECESSARY WHEN BUNDLED TRANSACTIONS CANNOT BE ADEQUATELY COMPARED ON AGGREGATE BASIS. ITA NO. 5857/DEL/2012 PAGE 12 OF 21 (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 IN TERNATIONAL TRANSACTION, BUT ONLY AFTER ELUCIDATING 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 RECOGNIZED AND ACCEPTED METHOD UNDER INDIAN TRANSFER PRICING 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 DETERMIN ING 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 I NTERNATIONAL TRANSACTION AND SUBJECTED TO ARM S LENGTH 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 DETA ILED 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 ITA NO. 5857/DEL/2012 PAGE 13 OF 21 NATURE OF TRADE/VOLUME DISCOUNTS, REBATES AND COMMISSION PAID TO RETAILERS/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 F AVOUR OF THE ASSESSEE. SUBSTANTIAL QUESTION OF RAW IN CIT VERSUS REEBOK, ITA 213/2014 197. THE FOLLOWING SUBSTANTIAL QUESTION OF LAW IS RAISED: 'WHETHER INCOME TAX APPELLATE TRIBUNAL WAS RIGHT IN SETTING ASIDE/DELETING TRANSFER PRICING ADJUSTMENT MADE ON ACCOUNT OF PAYMENT OF ROYALTY TO AN ASSOCIATED ENTERPRISE?' IN VIEW THE DISCUSSION UNDER THE HEADING Q, THE SUBSTANTIAL QUESTION OF LAW IS ANSWE RED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 9. FURTHER, IN PARA 193 OF THE CONSOLIDATED JUDGMENT, THE HON BLE COURT FURTHER HELD AS UNDER: - PARA 193. WE WOULD NOT LIKE TO GO INTO SEVERAL FACTUAL ASPECTS FOR THE FIRST TIME, FOR THE FACTUAL MATRIX HAS NOT BEEN EXAMINED AND ASCERTAINED BY THE TRIBUNAL. MOREOVER, IN TERMS WITH OUR LEGAL FINDING, FACTUAL FINDINGS WILL HAVE TO BE EXAMINED. AN ORDER OF REMAND FOR DE NOVO CONSIDERATION TO THE TRIBUNAL WOULD BE APPROPRIATE BECAUSE THE LEGAL STANDARD S OR RATIO ACCEPTED AND APPLIED BY THE TRIBUNAL WAS ERRONEOUS. ON THE BASIS OF THE LEGAL RATIO EXPOUNDED IN THIS DECISION, FACTS HAVE TO BE ASCERTAINED AND APPLIED. IF REQUIRED AND NECESSARY, THE ASSESSED AND THE REVENUE SHOULD BE ASKED TO FURNISH DETAILS OR TABLES. THE TRIBUNAL, AT THE FIRST INSTANCE, WOULD TRY AND DISPOSE OF THE APPEALS, RATHER THAN PASSING AN ORDER OF REMAND TO THE ASSESSING OFFICER/TPO. THE ENDEAVOUR SHOULD BE TO ASCERTAIN AND SATISFY WHETHER THE GROSS/NET PROFIT MARGIN WOULD DULY ACCOU NT FOR AMP EXPENSES. WHEN FIGURES AND CALCULATIONS AS PER THE TNM OR RP METHOD ADOPTED AND APPLIED SHOW THAT THE NET/GROSS MARGINS ARE ADEQUATE AND ACCEPTABLE, THE APPEAL OF THE ASSESSED SHOULD BE ACCEPTED. WHERE THERE IS A DOUBT OR THE OTHER VIEW IS PLAUS IBLE, AN ORDER OF REMAND FOR RE - EXAMINATION BY THE ASSESSING OFFICER/TPO WOULD BE JUSTIFIED. A PRACTICAL APPROACH IS REQUIRED AND THE TRIBUNAL HAS SUFFICIENT DISCRETION AND FLEXIBILITY TO REACH A FAIR AND JUST CONCLUSION ON THE ARM S LENGTH PRICE. ITA NO. 5857/DEL/2012 PAGE 14 OF 21 1 0 . IN THE ABOVE BACKGROUND, THE APPEAL OF THE ASSESSEE HA S BEEN REFIXED BY THE R EGISTRY AND HEARD. 1 1 . THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE REFERRING TO THE FACTS AND THE ORDER DATED 22 - 04 - 1025 OF THE ITAT DELHI I BENCH IN THE CASE OF ASSESS EE ITSELF IN ITA NO. 1246/DEL/2015 FOR AY 2010 - 11 SUBMITTED THAT THE ISSUES MAY BE REMITTED TO THE FILE OF THE AO. REFERRING TO THE AFORESAID ORDER OF THE ITAT (COPY FILED IN THE COURT). IT WAS SUBMITTED THAT CONSIDERING THE IDENTICAL ISSUE OF ADJUSTMENT TO AMP EXPENSES THE TRIBUNAL HAS REMITTED THE MATTER BACK TO THE ASSESSING OFFICER FOR DETERMINATION OF ARM S LENGTH IN THE LIGHT OF RATIOS LAID DOWN BY THE HON BLE DELHI HIGH COURT IN THE CASE OF THE ASSESSEE ITSELF. THE LD. SR. DEPARTMENTAL REPRESENTATI VE DID NOT OBJECT TO THE SUBMISSIONS OF LD. AR 1 2 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THE LIGHT OF THE SUBMISSION OF THE PARTIES BEFORE THE BENCH WHERE WE FIND THAT AS CANVASSED BY THE PARTIES THE FACTS NE ED TO BE CONSIDERED AFRESH APPLYING THE RATIO OF THE HON BLE HIGH COURT ON THE FACTUAL MATRIX OF THE ASSESSEE . THUS THE ISSUES NEED TO BE REFERRED BACK TO THE ASSESSING OFFICER/ TPO. WHILE SO HOLDING, WE NOTE THAT I N SO FAR AS DETERMINATION OF ARM S LENG TH PRICE OF AMP EXPENSES IS CONCERNED THE HON BLE COURT IN THE AFORESAID JUDGMENT DATED 16.03.2015 HA S HELD THAT IF SUITABLE COMPARABLE ENGAGED IN ITA NO. 5857/DEL/2012 PAGE 15 OF 21 BOTH DISTRIBUTION AND ADVERTISING, MARKETING AND PROMOTION (AMP) FUNCTIONS ARE FOUND, THAN, ARM S LENGTH PRICE OF THE TRANSACTION SHOULD BE DETERMINED ON AGGREGATE BASIS. IF, HOWEVER, THERE IS SOME DIFFERENCE IN THE FUNCTION OF DISTRIBUTION OR ADVERTISING, MARKETING AND PROMOTION PERFORMED BY THE ASSESSEE AS COMPARED TO THE COMPARABLES, THEN ATTEMPT SHOULD BE MADE TO BRIDGE THE DIFFERENCE BY MAKING A SUITABLE ADJUSTMENT TO THE PROFIT MARGIN OF THE COMPARABLES. THE HON BLE COURT HAS GONE ON TO HOLD THAT I F S UCH ADJUSTMENT IS NOT POSSIBLE, THEN, THE CHOSEN C OMPARABLE SHOULD BE ELIMINATED AND I F IN THE PROCESS OF COMPARING , NO COMPARABLES ARE LEFT WHO ARE ENGAGED IN PERFORMING SUCH DISTRIBUTION AND ADVERTISING, MARKETING AND PROMOTION FUNCTIONS, THEN THE INTERN ATIONAL TRANSACTION OF AMP SHOULD BE SEGREGATED AND ITS ARM S LENGTH PRICE SHOULD BE DETERMINED APPLYING A SUITABLE METHOD, HOWEVER, IN DETERMINING SO, A PROPER SET OFF, IF ANY AVAILABLE FROM THE DISTRIBUTION ACTIVITY SHOULD BE ALLOWED. WE FIND THAT IN THE PRESENT CASE DETAILS OF THE ADVERTISING, MARKETING AND PROMOTION FUNCTION PERFORMED BY THE ASSESSEE ARE NOT AVAILABLE ON RECORD. FURTHER ADVERTISING, MARKETING AND PROMOTION FUNCTIONS OF THE COMPARABLES HAVE ALSO NOT ANALYZED BY THE TPO AS HE APPLIED THE BRIGHT LINE TEST FOR DETERMINING THE VALUE OF INTERNATIONAL TRANSACTION OF ADVERTISING, MARKETING AND PROMOTION EXPENSES WHICH APPROACH HAS NOT BEEN APPROVED OF BY THE HON BLE HIGH COURT. THUS SINCE THE LD. A .R FAIRLY STATED THAT FACTS NEED TO BE ADDRESSE D AFRESH AS AT THIS STAGE WITHOUT A ITA NO. 5857/DEL/2012 PAGE 16 OF 21 DETAILED DISCUSSION ON FACTS, AGREEMENTS, CONDUCT ETC. OF THE ASSESSEE IT WAS NOT POSSIBLE TO ADDRESS THE ADVERTISING, MARKETING AND PROMOTION FUNCTION OF THE ASSESSEE AS WELL AS COMPARABLES, THUS REQUEST FOR REMITTING THE MATTER BACK TO THE AO ON FACTS AND CIRCUMSTANCES OF THE CASE IS FOUND TO BE JUSTIFIED. THUS IN THESE PECULIAR FACTS, WE ALSO FIND OURSELVES HANDICAP PED IN DETERMINING THE ARM S LENGTH PRICE OF ADVERTISING, MARKETING AND PROMOTION EXPENSES. THE COORDIN ATED BENCH OF TRIBUNAL IN ITS ORDER DATED 22.04.2015 IN ITA NO. 1246/DEL/ 2015 IN THE CASE OF THE ASSESSEE IT IS SEEN HAS ALSO RESTORED THE MATTER TO THE FILE OF THE ASSESSING OFFICER/TPO TO DECIDE THE MATTER DE NOVO IN THE LIGHT OF THE JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT OF DELHI AFTER PROVIDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. RELEVANT FINDINGS IN PARA S 14 & 15 ARE REPRODUCED BELOW: - 14. ACCORDINGLY ON A CONSIDERATION OF THE ENTIRETY OF THE FACTS AND SUBMISSION OF THE PARTI ES, 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 THIS ORDER WHERE IT IS EMINENTLY CLEAR THAT THE TAX PAYER AND THE TAX AUTHORI TY HAVE PROCEEDED TO CONSIDER THE ISSUE IN THE LIGHT OF THE DECISION OF THE SPECIAL BENCH. REFERENCE MAY ALSO BE MADE TO PARAS 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 WERE HELD TO BE FLAWED AND FALLACIOUS 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 PRONOUNCEMENT WAS BEING MADE. A PERUSAL OF THE PARA 168 SHOWS THAT THE TRIBUNAL HAD UPHELD ADOPTION ITA NO. 5857/DEL/2012 PAGE 17 OF 21 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 PRICE UNDER THE RESALE PRICE METHOD IS DIFFERENT. THE DISCUSSION ON THE MOS T 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 REPRODUCE THE AFORESAID HEREUNDER: - 162. IN THE CASE OF REEBOK INDIA CO. LTD., TH E 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 CONSIDERABLE (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 TRANSACTION AND UNCONTROLLED INTERNAL PARTY TRANSACTION ON ACCOUNT OF AMP EX PENSES. 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 MANUFACTURER AND THUS, THE SAID FUNCTION IS COMPARED. AMP EXPENSES DO NOT G ET 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 APPLIED. THIS WOULD LIKELY HAPPEN, WHEN AMP EXPENSES ARE INSIGNIFICANT IN QU ANTUM. 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 WO ULD 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 WITHOUT ANY ASSUMPTION AGAINST THE ASSESSED. A FINDING ON THE SAID ASPECT WOULD R EQUIRE DETAILED VERIFICATION AND ASCERTAINMENT. 165. AN EXTERNAL COMPARABLE SHOULD PERFORM SIMILAR AMP FUNCTIONS. SIMILARLY THE COMPARABLE SHOULD NOT BE THE LEGAL OWNER OF THE BRAND NAME, TRADE MARK ETC. IN CASE A COMPARABLE DOES NOT PERFORM AMP FUNCTIONS IN THE MARKETING ITA NO. 5857/DEL/2012 PAGE 18 OF 21 OPERATIONS, A FUNCTION WHICH IS PERFORMED BY THE TESTED PARTY, THE COMPARABLE MAY HAVE TO BE DISCARDED. COMPARABLE ANALYSIS OF THE TESTED PARTY AND THE COMPARABLE WOULD INCLUDE REFERENCE TO AMP EXPENSES. IN CASE OF A MISMATCH, ADJUSTMENT COULD BE MADE WHEN THE RESULT WOULD BE RELIABLE AND ACCURATE. OTHERWISE, RP METHOD SHOULD NOT BE ADOPTED. IF ON COMPARABLE ANALYSIS, INCLUDING AMP EXPENSES, GROSS PROFIT MARGINS MATCH OR ARE WITHIN THE SPECIFIED RANGE, NO TRANSFER PRICING ADJUSTMENT IS REQ UIRED. 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 C OMPARABLE 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 BEHALF OF THE ASSESSEE IS FLAWED AND FALLACIOUS FOR SEVERAL REASONS. THERE ARE I NHERENT 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 METHOD. 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 CONNECTION WITH THE PURCHASE OF PROPERTY OR OBTAINING OF SERVICES IS REDUCED. UNDER CLA USE (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 ASSESSING OFFICER/TPO CAN MAKE ADJUSTMENTS IF HE FINDS THAT AN ASSESSEE HAS INCURRED S UBSTANTIAL 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 MAKE 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 F UNCTIONAL PARITY AND IN FACT, WITHOUT ADJUSTMENT. CONTRA, REVENUE WOULD ARGUE THAT THE ASSESSING OFFICER/TPO AND THE ITA NO. 5857/DEL/2012 PAGE 19 OF 21 TRIBUNAL HAVE ADOPTED AND APPLIED THE CUP METHOD FOR DETERMINING ARM S LENGTH PRICE OF AMP EXPENSES. WE DO NOT PRONOUNCE A FIRM AND FINAL O PINION ON THE SAID LIS T 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 REEBOK INDIA CO. LTD. AND CANON INDIA PVT. LTD. THE BRIGHT LINE TEST ADOPTED T O 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. CONTRACT VALUE WOULD BE TREATED AS NIL. IN TERMS OF OUR FINDING RECORDED ABOVE, TH E 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 GROUNDS RECORDED, WE HAVE 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 ASSESSEE 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 TH AT 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 CANNOT BE QUESTIONED. SUITABLE PROFITS RELATABLE IT WAS NOT HELD TO RELEVANT BY APP ROVING 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 COSTS ETC. ACCEPTED BY THE TRIBUNAL WAS ALSO NOT INTERFERED BY THE HON BLE HIGH CO URT. 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. ITA NO. 5857/DEL/2012 PAGE 20 OF 21 1 3 . AS FAR AS DETERMINATION OF ARM S LENGTH OF ROYALTY PAYMENT IS CONCERNED, IT IS SEEN THAT THE HON BLE HIGH COURT HAS HELD THAT PAYMENT OF ROYALTY IS A RELEVANT CONSIDERATION WHILE DETERMINING THE ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTION OF DISTRIBUTION AND MARKETING, HOWEVER THE TAX TREATMENT OF ROYALTY BEING DIFFERENT, THE ROYALTY TRANS ACTION, MAY BE BENCH MARKED SEPARATELY. SINCE THE DETERMINATION OF ARM S LENGTH PRICE OF ROYALTY PAYMENT IS INTER CONNECTED WITH ADVERTISING, MARKETING AND PROMOTION EXPENSES AS HELD BY THE HON BLE HIGH COURT WE ARE OF THE VIEW THAT DETERMINATION OF ARM S LENGTH PRICE OF ROYALTY ALSO CANNOT BE DONE AT THIS STAGE AND NEEDS TO BE REMITTED BACK . 1 4 . ACCORDINGLY, FOLLOWING THE DECISION OF THE COORDINATE BENCH, BOTH THE MATTERS OF DETERMINATION OF ARM S LENGTH PRICE OF AMP EXPENSES AND ROYALTY PAYMENT RAISED IN GROUND NO. 3 TO 4.5 ARE RESTORED BACK TO THE FILE OF THE AO/TPO TO DECIDE THE MATTER DE NOVO IN THE LIGHT OF THE COMMON JUDGMENT DATED 16 TH MARCH, 2015 OF THE HON BLE JURISDICTIONAL HIGH COURT OF DELHI LAID DOWN IN THE APPEALS OF THE ASSESSES AND REVENUE LED BY SONY ERICSSON MOBILE COMMUNICATION INDIA PVT. LTD. (SUPRA). 1 5 . IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. THE DECISION IS PRONOUNCED IN THE OPEN COURT ON 09 TH OCTOBER OF 2015. SD/ - SD/ - ( S.V. MEHROTRA ) ( DIVA SINGH ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 09 TH OCTOBER , 2015. * AKS & AMIT KUMAR* ITA NO. 5857/DEL/2012 PAGE 21 OF 21 COPY FORWARDED TO: APPELLANT 1. RESPONDENT 2. CIT 3. CIT(A) 4. DR ASST. REGISTRAR, ITAT, NEW DELHI