Appeal Details
Counselvise Citation
[2013] 140 COUNSELVISE.COM (IT) 69260 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
8 month(s) 3 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
30-08-2013
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I2
Next Hearing Date
17-11-2016
Assessment Year
2008-2009
Appeal Filed On
27-12-2012
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER A ND SHRI B.C.MEENA , ACCOUNTANT MEMBER I.T.A .NO. - 6410 /DEL/ 2012 ( A SSESSMENT Y EAR - 2008 - 09) M/S SONY MOBILE COMMUNICATIONS INDIA PVT. LTD. VS ACI T, [FORMERLY KNOWN AS SONY ERICSON MOBILE RANGE - 9, COMMUNICATION (INDIA) PVT. LTD.] NEW DELHI 4 TH FLOOR, DAKHA HOUSE, 18/17 WEA KAROL BAGH, NEW DELHI - 110005. (APPELLANT) (RESPONDENT) APPELLANT BY: SH. DEEPAK CHOPRA, ADV. & SH. MANOMEET DALAL, ADV. RESPONDENT BY: SH. PEEYUSH JAIN, CIT DR TP ORDER PER DIVA SINGH, JM TH IS IS AN APPEAL ARISING FROM THE ASSESSMENT ORDER DATED 26.11.2012 U/S 143(3) READ WITH SECTION 144(C) OF THE INCOME TAX ACT (HEREINAFTER REFERRED TO AS TH E ACT OR THE I.T.ACT ). 2. THE RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE WHO IS STATED TO BE PRIMARILY ENGAGED IN THE BUSINESS OF IMPORTING, BUYING AND SELLING AND DISTRIBUTING WIDE RANGE OF MOBILE PHONES IN INDIA, RETURNED AN INCOME OF INR 53,95 ,06,079/ - FOR THE YEAR UNDER CONSIDERATION ON 30.09.2008. THE SAID RETURN WAS REFERRED BY THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS THE AO ) TO THE ADIT, TRANSFER PRICING OFFICER II (HEREINAFTER REFERRED TO AS THE TPO ) FOR DETERMINATION OF ARMS LENGTH PRICES (HEREINAFTER REFERRED TO AS THE ALP ) FOR THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (HEREINAFTER REFERRED TO AS THE AES ). 2.1. THE TPO COMPLETED THE TRANSFER PRICING ASSESSMENT U/S 92CA(3) OF THE ACT THEREBY MAKING A TRANSFER PRICING ADJUSTMENT OF INR 69,94,95,650/ - VIDE HIS ORDER I.T.A .NO. - 6410/DEL/2012 2 DATED 20.10.2011. AS A RESULT OF THIS, THE ASSESSMENT WAS PROPOSED AT AN INCOME OF 1,35,48,98,720/ - VIDE DRAFT ASSESSMENT ORDER DATED 07.12.2011 U/S 144C OF THE ACT. 3. AGGRIEVED BY THIS DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED ITS OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL ((HEREINAFTER REFERRED TO AS THE DRP ). THE DRP VIDE ITS ORDER DTD. 27.09.2012 DID NOT CONCUR WITH THE MAIN ARGUMENTS OF THE ASSESSEE H OWEVER GRANTED A PARTIAL RELIEF. PURSUANT TO THE DRP S ORDER DTD. 26.11.2012 WAS PASSED U/S 143(3) READ WITH SECTION 144C OF THE I.T.ACT. AGGRIEVED BY THIS, THE ASSESSEE HAS FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL ON THE FOLLOWING GROUNDS : - 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSMENT ORDER/DIRECTIONS PASSED BY THE ASSESSING OFFICE (AO)/ TRANSFER PRICING OFFICER (TPO)/ DISPUTE RESOLUTION PANEL (DRP) ARE BAD IN LAW. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, T HE ASSESSMENT ORDER/DIRECTIONS PASSED BY THE AO/ TPO/ DRP ARE VOID AB - INITIO AS THE ORDER HAS VITIATED JUDICIAL DISCIPLINE BY NOT FOLLOWING THE DECISION OF HON BLE INCOME TAX APPELLATE TRIBUNAL AND HON BLE DELHI HIGH COURT ON SIMILAR ISSUES AND FACTS. 3. THAT THE TPO ERRED IN ASSUMING JURISDICTION IN RESPECT OF THE ADVERTISING, MARKETING AND PROMOTION ( AMP ) EXPENDITURE WHEN SUCH EXPENDITURE DID NOT SATISFY THE REQUISITES OF BEING AN INTERNATIONAL TRANSACTION UNDER SECTION 92B OF THE INCOME TAX ACT ( ACT ). 4. T HAT THE TPO ALSO ERRED IN NOT APPRECIATING THAT EVEN POST THE AMENDMENTS BY THE FINANCE ACT 2012, HE HAS NOT BEEN EMPOWERED TO DEEM A TRANSACTION TO BE AN INTERNATIONAL TRANSACTION. 5. THAT THE HON BLE DISPUTE RESOLUTION PANEL (HEREAFTER, DRP )/ LEARNED AO E RRED IN MAKING AN ADJUSTMENT AGGREGATING TO RS.697,193,835/ - OUT OF THE PROPOSED ADJUSTMENTS MADE BY THE TPO U/S 92CA AGGREGATING TO INR 699,495,650/ - AND ONLY GRANTING A PARTIAL RELIEF OF INR 2,301,815/ - . 6. THAT THE LEARNED DRP HAS COMPLETELY MISCONCEIVED T HE FACTS AND HAS GROSSLY ERRED IN ENDORSING THE FINDINGS OF THE TPO THAT THE APPELLANT WAS PROMOTING SONY BRAND INSTEAD OF APPRECIATING THAT THE ASSESSEE COMPANY 7. WAS ONLY CARRYING OUT ITS BUSINESS BY USING THE WELL ESTABLISHED BRAND NAME OF SONY. 8. THAT TH E LEARNED DRP HAS FURTHER FAILED TO COMPREHEND THAT, THE APPELLANT HAD NOT INCURRED ANY EXPENDITURE TO PROMOTE THE BRAND NAME OF SONY , AND THAT THE ENTIRE EXPENDITURE AS HAD BEEN INCURRED BY IT, ON ADVERTISEMENT AND MARKETING, HAD BEEN INCURRED, SOLELY FOR THE PURPOSE OF ITS OWN BUSINESS, IN INDIA, AND ANY INCIDENTAL BENEFIT ARISING TO ITS PARENT COULD NOT RESULT IN AN ADJUSTMENT IN THE HANDS OF THE APPELLANT. 9. THAT ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO/HON BLE DRP HA S ERRED IN IGNORING THAT THE ADVERTISEMENT AND MARKETING EXPENSES INCURRED BY THE APPELLANT REPRESENTS ONLY DOMESTIC I.T.A .NO. - 6410/DEL/2012 3 TRANSACTION(S) UNDERTAKEN WITH THIRD PARTIES, WHICH UNDER THE AMENDED LAW (FINANCE ACT 2012) WERE ALSO OUTSIDE THE PURVIEW OF SECTION 92BA OF THE ACT AND HENCE NO ADJUSTMENT COULD BE MADE IN RESPECT OF THE SAME. 10. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO HAS GROSSLY ERRED IN APPLYING THE BRIGHT LINE METHOD FOR DETERMINING THE ARM S LENGTH ADVERTISEMENT AND M ARKETING EXPENDITURE INCURRED BY THE ASSESSEE AS THE SAME IS NOT A PRESCRIBED METHOD UNDER THE PROVISIONS OF SECTION 92C OF THE ACT NOR IS THE SAME NOTIFIED BY THE CENTRAL BOARD OF DIRECT TAXES UNDER SECTION 92C(1)(F) OF THE ACT. 11. THE LEARNED DRP HAS FAILED TO APPRECIATE THAT ONCE THE TPO HAS ACCEPTED THAT THE TRANSACTIONAL NET MARGIN METHOD (TNMM) WAS THE MOST APPROPRIATE METHOD, HE WOULD NOT AND CANNOT UNDERTAKE AN ANALYSIS OF THE INDIVIDUAL ELEMENTS OF COST AS THE APPROACH IS INCONSISTENT WITH THE TENETS OF APPLICATION OF THE TNMM. 12. THAT THE LEARNED TPO HAS INCORRECTLY HELD BOTH ON FACTS AND IN LAW THAT, THE AMP EXPENSES INCURRED BY THE APPELLANT TO EXCESSIVE ON THE BASIS OF A BRIGHT LINE LIMIT ARRIVED AT BY CONSIDERING INAPPROPRIATE COMPARABLES NOT HA VING SIMILAR PRODUCT, BRAND PROFILE AND MARKET CIRCUMSTANCES AS THE APPELLANT. 13. THAT THE LEARNED TPO/DRP HAS COMMITTED GROSS ERROR IN CONSIDERING SELLING AND DISTRIBUTION EXPENSES AS A PART OF THE ADVERTISEMENT AND MARKETING EXPENSES FOR COMPUTATION OF TRAN SFER PRICING ADJUSTMENT. 14. THAT THE LEARNED AO/TPO/HON BLE DRP HAVE FAILED TO COMPREHEND THAT TO THE EXTENT OF EXPENDITURE OF INR 115,721,515/ - INCURRED ON ADVERTISING AND SALES PROMOTION, THERE HAS BEEN DOUBLE DISALLOWANCE/ADDITION AS THIS EXPENDITURE HAS B EEN TREATED AS CAPITAL BY THE LEARNED AO, AND HENCE ENTIRELY DISALLOWED UNDER SECTION 37(A)IN COMPUTING THE TAXABLE INCOME WHEREAS THE SAID AMOUNT HAS BEEN INCLUDED BY THE LEARNED TPO WHILE COMPUTING THE ALLEGED EXCESSIVE AMP EXPENDITURE. 15. THAT THE LEARNE D DRP HAS ERRED IN ENDORSING THE APPROACH ADOPTED BY THE TPO WHO ERRONEOUSLY HELD THAT THE APPELLANT HAS RENDERED A SERVICE TO ITS AES BY INCURRING THE ADVERTISEMENT AND MARKETING EXPENSE AND BY HOLDING THAT A MARKUP OF 12.5% HAS TO BE EARNED BY THE APPELL ANT IN RESPECT OF THE ALLEGED EXCESSIVE AMP EXPENSES. 16. THAT THE LEARNED TPO HAS ERRED IN LAW, BY ASSUMING THAT NO BENEFIT HAS ACCRUED TO THE ASSESSEE FROM THE AMP EXPENDITURE INCURRED BY IT WITHOUT HAVING REGARD TO THE FUNCTIONS, ASSETS AND RISKS PROFILE OF THE AES AND THE ASSESSEE. 17. THE LEARNED DRP ERRED IN LAW IN NOT APPLYING THE PROVISO TO SECTION 92C OF THE ACT AND HAS FAILED TO ALLOW THE APPELLANT THE BENEFIT OF UPWARD VARIATION OF 5 PERCENT IN DETERMINING THE ARM S LENGTH PRICE. DEPRECIATION ON UPS 18. TH AT ON FACTS AND IN LAW, THE AO/DRP ERRED IN RESTRICTING THE DEPRECIATION ON UPS WHICH IS PART OF COMPUTER ELIGIBLE TO CLAIM DEPRECIATION AT 60%, TO 15% OF WRITTEN DOWN VALUE THEREBY REDUCING THE DEPRECIATION ALLOWANCE BY RS.1,75,472. ADVERTISEMENT AND SE LLING EXPENSES 19. THAT ON FACTS AND IN LAW, THE AO/DRP ERRED IN MAKING A DISALLOWANCE OF RS.11,57,21,515, BEING 10 PERCENT OF ADVERTISEMENT AND SELLING EXPENSES, ON I.T.A .NO. - 6410/DEL/2012 4 THE GROUND THAT IT RESULTED IN ENDURING BENEFIT TO THE APPELLANT, AND WAS, THUS, CAPITAL IN NA TURE. 20. THAT THE AO/DRP ERRED IN MAKING THE ABOVE DISALLOWANCE OUT OF ADVERTISEMENT AND SELLING EXPENSES AND IN NOT FOLLOWING THE DECISION OF THE ITAT IN THE CASE OF SONY INDIA PRIVATE LIMITED (315 ITR 150). 21. THAT THE AO/DRP ERRED IN LAW AND IN FACTS AND CIRC UMSTANCES OF THE CASE IN MAKING DISALLOWANCE OF THE 10% OF ADVERTISEMENT AND SELLING EXPENSES, AS SUCH EXPENDITURE HAS BEEN ADJUSTED BY THE TPO WHILE MAKING THE TRANSFER PRICING ADJUSTMENT, THEREBY RESULTING IN DOUBLE DISALLOWANCE TO THE EXTENT THE SAME HA S BEEN DISALLOWED IN VIEW OF THE TPO S ORDER. 22. THAT THE AO/DRP ERRED IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE CASE IN MAKING ARBITRARY DISALLOWANCE OF 10% OF ADVERTISEMENT AND SELLING EXPENSES HOLDING THE SAME AS CAPITAL IN NATURE WHICH IS NOT SUPPLEMEN TED BY PROPER EXAMINATION OF FACTS. PENALTY FOR CONCEALMENT OF INCOME 23. THAT ON FACTS AND IN LAW, THE AO/DRP ERRED IN HOLDING THAT THE APPELLANT HAS FURNISHED INACCURATE PARTICULARS OF INCOME IN RESPECT OF EACH ITEM OF DISALLOWANCE/ADDITIONS AND IN INITIATIN G PENALTY PROCEEDINGS UNDER SECTION 274 READ WITH SECTION 271 OF THE ACT WHICH ARE NOT ESTABLISHED ON FACTS. 4. THE STAND OF THE LD. AR RELYING ON THE WRITTEN SUBMISSION WAS THAT THE ISSUE HAS TO BE GO BACK TO THE TPO FOR RE - COMPUTING, THE AMP ON THE B ASIS OF THE GUIDELINES GIVEN IN L.G. ELECTRONICS LTD. CASE RENDERED BY THE SPECIAL BENCH. THE LD. CIT DR IN RESPONSE STATED THAT HE WOULD OPPOSE THE SAID PRAYER AS BEFORE THE HON BLE HIGH COURT THE REVENUE S COUNSEL HAS CATEGORICALLY TAKEN A STAND THAT A REMAND MAY NOT BE WARRANTED AS SUCH HE WOULD BE OPPOSING THE STAND OF THE ASSESSEE AND IT WOULD BE HIS ENDEAVOUR TO ARGUE THAT THE IMPUGNED ORDER HAS TO BE CONFIRMED. ATTENTION WAS INVITED BY THE LD. CIT DR TO THE FOLLOWING PORTION OF THE ORDER DATED 28 .02.213 OF THE HON BLE JURISDICTIONAL HIGH COURT IN WP(C) 1215/2013 IN THE CASE OF THE ASSESSEE : - IN THE PRESENT CASE THE APPEAL BEFORE THE TRIBUNAL IS LISTED ON 25.02.2013. IN THAT CASE, THE HEARING BEFORE THE TRIBUNAL WAS TO TAKE PLACE ON 27.02.2013. AS IN THAT CASE, IN THE PRESENT CASE ALSO, IT HAS BEEN CONTENDED BY THE LEARNED COUNSEL FOR THE PETITIONER THAT THE TRIBUNAL HAS BEEN REMANDING MATTERS TO THE TRANSFER PRICING OFFICER FOR RE - COMPUTATION ON THE BASIS OF GUIDELINES GIVEN BY A SPECIAL BENCH OF THE INCOME TAX APPELLATE TRIBUNAL IN THE CASE OF LG ELECTRONICS INDIA LTD. THE LEARNED COUNSEL FOR THE RESPONDENT, HOWEVER, CONTENDED THAT A REMAND MIGHT NOT BE WARRANTED. HOWEVER, AS IN THAT CASE, IN THE PRESENT CASE ALSO, WE ARE OF THE VIEW THAT THE SAID ISSUE IS FOR THE TRIBUNAL TO DECIDE AND WE WOULD REFRAIN FROM MAKING ANY COMMENTS THEREON. (EMPHASIS BY BOLD TEXTING PROVIDED BY THE BENCH) I.T.A .NO. - 6410/DEL/2012 5 4.1. IN THE ABOVE BACKGROUND, THE LD. AR SUBMITTED THAT THE MAJOR ISSUE IN THE PRESENT APPEAL HAS TO GO BACK I N LINE WITH THE DIRECTIONS OF THE SPECIAL BENCH IN THE CASE OF L.G. ELECTRONIC S CASE WHICH HAS BEEN THE CONSISTENT STAND OF THE ASSESSEE WHILE ARGUING THE STAY BEFORE THE ITAT AS WELL AS THE HON BLE HIGH COURT. HOWEVER, IT WAS HIS SUBMISSION THAT THE LEG AL GROUNDS RAISED BY THE ASSESSEE ARE NOT BEING GIVEN UP. THE LD. CIT DR, SH.PEEYUSH JAIN INVITING ATTENTION TO THE ORDER DATED 25.02.2013 SUBMITTED THAT THE COUNSEL FOR THE RESPONDENT THEREIN I.E THE DEPARTMENT HAD CONTENDED THAT THE REMAND MAY NOT BE WA RRANTED AS SUCH HE WOULD BE RELYING UPON THE ORDERS OF THE TPO, DRP AND THE AO. HOWEVER, QUA THE GROUNDS OF APPEALS RAISED BY THE ASSESSEE IN THE PRESENT APPEAL, IT WAS HIS SUBMISSION THAT THEY ARE MORE OR LESS COVERED IN THE DEPARTMENT S FAVOUR BY THE DE TAILED FINDINGS GIVEN BY THE SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA LTD. 4.2. IN THE ABOVE FACTUAL BACKGROUND, LD. AR INVITING ATTENTION TO THE GROUNDS RAISED SUBMITTED THAT THE GROUND NOS - 1 & 2 ARE GENERAL IN NATURE; GROUND NO - 3 - 16 ARE ADDRE SSING THE TRANSFER PRICING ADJUSTMENT IN REGARD TO THE AMP I.E THE ADVERTISEMENT, MARKETING AND PROMOTIONAL EXPENSES CONSIDERED AT THE LENGTH IN THE LG ELECTRONICS CASE. THE GROUNDS NO - 17 - 21, IT WAS STATED ARE CORPORATE ISSUES AGITATED BY THE ASSESSEE AND GROUND NO - 22 IS PREMATURE. 5. BEFORE REFERRING TO THE ARGUMENTS OF THE RESPECTIVE PARTIES IN DETAIL, WE THINK IT APPROPRIATE TO REFER TO THE FACTS ON RECORD. 5.1. THE RELEVANT FACTS OF THE CASE IN REGARD TO THE PROFILE OF THE ASSESSEE AND SONY ERICSON G ROUP AS APPEARING IN THE TPO S ORDER U/S 92CA(3) ARE AS UNDER : - 2. PROFILE OF THE ASSESSEE AND SONY ERICSON GROUP: - 2.1 THE SONY ERICSON OFFERS MOBILE MULTIMEDIA DEVICES, INCLUDING FEATURE - RICH PHONES AND ACCESSORIES, PC CARDS AND M2M SOLUTIONS FOR END USERS. THE ASSESSEE COMPANY WAS INCORPORATED IN INDIA ON APRIL 23, 2007 AND IS A SUBSIDIARY OF SONY ERICSON MOBILE COMMUNICATION AB, A COMPANY INCORPORATED UNDER THE LAWS OF SWEDEN. THE SWEDEN ENTITY IS A 50:50 JOINT VENTURE BETWEEN TELEFONAKTIE BOLAGET LM ERICSON (SWEDEN) AND SONY CORPORATION (JAPAN). AS STATED IN THE TRANSFER PRICING REPORT THE GROUP COMPANIES OWN SIGNIFICANT VALUABLE INTELLECTUAL PROPERTY RIGHTS I.T.A .NO. - 6410/DEL/2012 6 (KNOW - HOW, PATENTS, COPYRIGHTS ETC.) AND OTHER COMMERCIAL OR MARKETING INTANGIBLE S (BRAND NAMES, TRADEMARKS, LOGOS ETC.) AND ARE INVOLVED IN COMPLEX PRODUCT DEVELOPMENT, MANUFACTURING AND BRAND DEVELOPMENT OF THE PRODUCTS. GROUP COMPANIES ALSO BEAR SIGNIFICANT BUSINESS AND ENTREPRENEURIAL RISKS OF PRODUCT ACCEPTABILITY AND PERFORMANCE IN THE MARKET. THE ASSESSEE COMPANY IS PRIMARILY ENGAGED IN THE BUSINESS OF IMPORTING, BUYING AND SELLING AND DISTRIBUTING WIDE RANGE OF MOBILE PHONES IN INDIA AND PROVIDING RELATED POST SALE SUPPORT SERVICES. FINANCIAL YEAR ( FY ) 2007 - 08 IS THE FIRST YEAR OF OPERATION FOR THE COMPANY. 2.2. THE TRANSFER PRICING REPORT FURTHER STATES THAT THE DEVELOPMENT OF THE ARM S LENGTH PRICE IN THIS ANALYSIS RECOGNIZES THAT THE ASSESSEE COMPANY IS A DISTRIBUTOR, UNDERTAKING NORMAL RISKS ASSOCIATED WITH SUCH ACTIVITY AND EMPLOYS ROUTINE TANGIBLE ASSETS. THE ASSESSEE DOES NOT OWN SIGNIFICANT VALUABLE INTANGIBLES, AND DOES NOT UNDERTAKE RESEARCH AND DEVELOPMENT ON ITS ACCOUNT THAT LEADS TO THE DEVELOPMENT OF NON - ROUTINE INTANGIBLES. IN CARRYING OUT ITS BUSINESS, THE A SSESSEE USES THE BRAND NAME, TRADEMARKS, KNOW - HOW, TECHNICAL DATA, OPERATING/QUALITY STANDARDS ETC. DEVELOPED/OWNED BY AES. 2.3 BASED ON AN ANALYSIS OF THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED, IT WAS CONCLUDED IN THE TRANSFER PRICING REP ORT THAT THE ASSESSEE COMPANY HAS RELATIVELY LESS COMPLEX OPERATIONS, BEARS RELATIVELY LESSER SHARE OF RISKS AND WAS ACCORDINGLY SELECTED AS THE TESTED PARTY FOR THIS ANALYSIS. 5.2. THE TPO TOOK INTO CONSIDERATION THE FACT THAT THE COMPANY DURING THE YEA R ENDING 31.03.2008 HAD ENTERED INTO THE FOLLOWING TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES : - I. IMPORT OF MOBILE HANDSETS & SPARES RS.11,636,221,548 II. PURCHASE OF FIXED ASSETS RS. 9,347,318 III. RECEIPT OF SERVICES RS. 19,738,69 0 IV. COST RECHARGE PAID RS. 1,910,724 V. COST RECHARGE RECEIVED RS. 114,047,737 5.3. CONSIDERING THE FACTS THAT THE ASSESSEE HAD INCURRED A HUGE COST IN ADVERTISING, MARKETING AND SALES PROMOTIONS FOR PROMOTING THE BRAND NAME. THE TPO REQUIRED THE ASSESSEE TO EXPLAIN THE FOLLOWING POINTS: - 1. WHO OWNS THE BRAND NAME? 2. IS THERE ANY AGREEMENT FOR USE OF BRAND NAME? 3. WHETHER ANY PAYMENT IS BEING MADE TO THE AE FOR USE OF BRAND NAME? 4. WHETHER ANY PAYMENT IS BEING RECEIVED FROM THE AE FOR PROM OTION OF BRAND NAME IN INDIA? I.T.A .NO. - 6410/DEL/2012 7 5.4. IN RESPONSE THERETO, IT WAS STATED ON BEHALF OF THE ASSESSEE THAT THE TRADE NAME SONY ERICSON IS NOT A REGISTERED TRADEMARK AND SONY ERICSON MOBILE COMMUNICATION AB, SWEDEN IS CONSIDERED TO BE THE ECONOMIC OWNER OF TH E BRAND/ THAT THE TRADE NAME AND TRADE MARK WERE PROVIDED TO THE ASSESSEE WITHOUT ANY CHARGES/ THAT THE ASSESSEE PURCHASES THE PRODUCTS AT RESALE PRICE MINUS TRANSFER PRICE/ THAT THE PRICE IS ADJUSTED ACCORDING TO THE PRICE LEVEL DEVELOPMENT IN THE MARKETI NG 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 ENSURES THAT THE ASSESSEE EARNS AN ARMS LENGTH RETURN WITH RESPECT TO DISTRIBUTION ACTIVITY. THEREF ORE, BASED ON THE PRICE LEVEL DEVELOPMENT IN THE MARKET, IT WAS STATED THAT IF AT THE YEAR END, THE ASSESSEE IS NOT ABLE TO ACHIEVE THE ARM S LENGTH RETURN WITH RESPECT TO ITS DISTRIBUTION ACTIVITY THEN AS PER ITS DISTRIBUTION POLICY IT RECEIVES CREDIT NOT ES FROM ITS AE TO ACHIEVE AN ARMS LENGTH RETURN ON SALES. 5.5. ACCORDINGLY IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE IT WAS STATED RECEIVED CREDIT NOTE OF RS.73,83,70,409/ - FROM THE AE IN ORDER TO ACHIEVE AN ARMS LENGTH RESULT. IT WAS FURTHER STATE D THAT THERE IS NO AGREEMENT FOR THE USE OF BRAND NAME BETWEEN THE OVERSEAS AE AND THE ASSESSEE AND THE ASSESSEE HAS NOT MADE ANY PAYMENT TO ITS AE FOR USING THE BRAND NAME. AS SUCH IT WAS STATED THAT THE ADVERTISING AND MARKETING EXPENSES INCURRED BY TH E ASSESSEE ARE FOR FURTHERING ITS SALES IN THE INDIAN MARKET AND IS NOT RELATED TO BRAND PROMOTION EXPENSES. AS SUCH IT WAS STATED THAT THE TRANSACTION DOES NOT WARRANT A REIMBURSEMENT FROM THE AE SINCE THESE COSTS REPRESENT TRANSACTIONS THAT ARE PURELY D OMESTIC IN NATURE AND HAVE BEEN UNDERTAKEN BY THE ASSESSEE TO PROMOTE ITS OWN SALE AND NOT RELATED TO THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH THE AE. 5.6. IN RESPONSE TO THE DIRECTIONS OF THE TPO, THE ASSESSEE FURNISHED THE DETAILS OF CREDIT NOTES AS UNDER : - 1. DATED 20/12/2007 RS.477,070,409/ - 2. DATED 28/03/2008 RS.261,300,000/ - I.T.A .NO. - 6410/DEL/2012 8 5.7. THE TPO REQUIRED THE ASSESSEE TO EXPLAIN IN WHICH ACCOUNT THE CREDIT NOTES WERE CAPTURED. THE ASSESSEE WAS REQUIRED TO PROVIDE A COPY OF THE RECORD. IN RESPONSE THERETO IT WAS STATED THAT THE CREDIT NOTES HAVE BEEN NETTED OFF AGAINST THE COST OF TRADED GOODS IN THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE. AS SUCH THE ASSESSEE FURNISHED COPY OF THE PURCHASE ACCOUNT IN WHICH THESE CREDIT NOTES HA VE BEEN BOOKED. 5.8. IN THE CIRCUMSTANCES, THE TPO CAME TO THE FOLLOWING CONCLUSIONS : - 5.5. THE FACTS SUBMITTED BY THE ASSESSEE DURING THE COURSE OF PROCEEDINGS AS MENTIONED ABOVE CLEARLY SHOWS THAT THE AMOUNT OF RS.738,370,409/ - RECEIVED BY THE ASSES SEE BY WAY OF CREDIT NOTES REPRESENTS THE EXCESS PRICE CHARGED BY THE AE WHICH HAS BEEN CREDITED TO THE ASSESSEE SO AS TO ACHIEVE AN ARM S LENGTH RETURN ON SALES BY THE ASSESSEE IN ACCORDANCE WITH THE BUSINESS MODEL OF THE ASSESSEE. 5.6. ON THE BASIS OF ABOVE F ACTS IT WAS CLEAR THAT THE CREDIT NOTES AMOUNTING TO RS.738,370,409/ - HAVE NO RELATIONS WITH THE EXPENDITURE THAT THE ASSESSEE HAS INCURRED ON THE AMP FOR WHICH NO COMPENSATION/REIMBURSEMENT HAS BEEN MADE BY THE AE. 5.9. TAKING NOTE OF THE TRANSFER PRICI NG STUDY REPORT OF THE ASSESSEE COMPANY, THE TPO OBSERVED AS UNDER : - SEIN (THE ASSESSEE) HAS EMPLOYED A TEAM OF EMPLOYEES FOR CARRYING OUT LOCAL MARKETING OF MOBILE PHONES IN INDIA. THE GLOBAL RECOGNITION OF BRAND NAME OF SONY ERICSON PROVIDES GOOD BR AND EQUITY IN INDIA AS WELL AS OVERSEAS. THIS ALSO PROVIDES SUPPORT TO SEIN S MARKETING EFFORTS. SEIN ALSO UNDERTAKES VARIOUS PRODUCT PROMOTION ACTIVITIES SUCH AS CONDUCTING ROAD SHOWS, PARTICIPATION IN INDUSTRY EVENTS, ADVERTISING IN ALL FORUMS OF MEDIA CHANNEL, WHICH INCLUDES MAGAZINES, NEWSPAPER, TELEVISION, RADIO ETC. 5.10. FURTHER TAKING NOTE OF THE AUDITED FINANCIALS, HE OBSERVED THAT THE ASSESSEE COMPANY DOES NOT OWN ANY INTANGIBLES IN THE NATURE OF BRAND NAME OR MARKETING INTANGIBLES AND THE AS SESSEE HAD INCURRED THE FOLLOWING EXPENSES RELATING TO AMP, THE SAME ARE REPRODUCED HERE UNDER : - ADVERTISEMENT EXPENSES RS. 660,556,778/ - BUSINESS PROMOTION & SELLING EXPENSES RS. 496,658,381/ - TOTAL EXPENDITURE ON AMP RS.1,157,215,159/ - 5.11. IN THE ABOVE BACKGROUND, THE TPO WAS OF THE VIEW THAT HUGE EXPENDITURE ON AMP HAS BEEN DONE TO PROMOTE THE BRAND, TRADE NAME, SONY ERICSON WHICH IS I.T.A .NO. - 6410/DEL/2012 9 BENEFICIALLY OWNED BY THE AE RESULTING IN BENEFITING THE AE FOR WHICH THE ASSESSEE SHOULD HAVE BEE N COMPENSATED. HOLDING THE SAME TO BE AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92B(1) OF THE ACT READ WITH 92F(V) OF THE ACT, THE TPO PROPOSED TO DETERMINE THE ARM S LENGTH PRICE OF THE SAME. ACCORDINGLY AFTER ISSUING A SHOW CAUSE NOT ICE AND CONSIDERING THE EXPLANATION, THE TPO PROPOSED TO BENCHMARK APPLING THE BRIGHT LINE TEST. THE TPO ACCORDINGLY PROPOSED TO COMPARE THE AMP EXPENDITURE OF THE TESTED PARTY WITH THE AMP EXPENDITURE WITH OTHER COMPARABLES ENGAGED IN SIMILAR BUSINESS USI NG ADVERTISEMENT, MARKETING AND PROMOTIONAL EXPENDITURE TO SALES RATIO. AS SUCH HE PROPOSED TO USE THE CURRENT YEAR DATA OF THE COMPARABLES SELECTED BY THE ASSESSEE FOR THE COMPARABLE SEGMENT. THE RATIO OF THE AMP SALES OF THE TESTED PARTIES WAS COMPUT ED AS UNDER : - TOTAL EXPENDITURE ON AMP : RS.1,157,215,159/ - VALUE OF GROSS SALES : RS.16,386,808123/ - AMP/SALES OF THE ASSESSEE : 7.06% 5.12. THE TPO CONSIDERING THE 19 COMPARABLES SUGGESTED BY THE ASSESSEE (ACTUALLY FOUND TO BE ONLY 18) WAS OF THE VIEW THAT OUT OF THESE ONLY 12 WERE ACCEPTABLE AS THESE COMPANIES WERE NOT THE OWNERS OF BRAND NAME OR INTANGIBLES AS SUCH THEY DISCHARGED ROUTINE FUNCTIONS. THE MEAN AMP/SALES RATIO OF THESE COMPANIES WAS TAKEN AS BRIGHT LINE WHOSE AVERAGE AMP/SALES RA TIO WAS DETERMINED AT 1.08%. THE EXPENDITURE IN EXCESS OF THE BRIGHT LINE WAS CONSIDERED AS EXPENDITURE INCURRED FOR THE PROMOTION OF BRAND/TRADE NAME OWNED BY THE ASSESSEE FOR WHICH EXERCISE THE SUITABLE COMPENSATION APPLYING, THE BRIGHT LINE WAS CALCUL ATED AT RS.980,237,631/ - . ACCORDINGLY, THE PROPOSED ADJUSTMENT OF RS.1127,273,275/ - WAS PROPOSED IN THE FOLLOWING MANNER : - 4.12. THE AMOUNT OF RS.980,237,631/ - WAS SPENT BY THE ASSESSEE COMPANY OVER AND ABOVE THE BRIGHT LINE LIMIT FOR PROVISION OF SERVI CES RELATED TO AMP PURELY FOR THE AE. AN INDEPENDENT ENTERPRISE WOULD NOT INCUR EXPENDITURE FOR PROMOTING THE TRADE NAMES OWNED BY SOME THIRD PARTY. THIS INVOLVES BOTH MONETARY EXPENDITURE AND EFFORTS OF THE INDEPENDENT ENTERPRISES. SUCH INDEPENDENT ENT ERPRISES WOULD BE REMUNERATED FOR SUCH EFFORTS. A MARK UP OF 15% ON COST INCURRED BY THE I.T.A .NO. - 6410/DEL/2012 10 INDEPENDENT PARTY WOULD BE REASONABLE AND COMMENSURATE TO THE EFFORTS PUT IN BY THE INDEPENDENT ENTERPRISES. IT WOULD ALSO REPRESENT THE LIKELY INTEREST FOREGONE BY THE ENTERPRISE. THUS THE PROPOSED ADJUSTMENT IS COMPUTED AS UNDER : - VALUE OF GROSS SALES RS.16,386,808,123/ - BRIGHT LINE 1.08% AMOUNT THAT REPRESENT BRIGHT LINE RS.176,977,527/ - EXPENDITURE ON AMP INCURRED BY ASSESSEE RS.1,157,215,159/ - EX PENDITURE IN EXCESS OF BRIGHT LINE RS.980,237,631/ - MAR - UP @ 15% RS.147,035,644/ - TOTAL RS.1,127,273,275/ - AMOUNT REIMBURSED . NIL ADJUSTMENT REQUIRED TO BE MADE RS. 1,127,273,275/ - 5.13. THE TPO REQUIRED THE ASSESSEE TO MAKE ITS SU BMISSION THEREON. THE REPLY OF THE ASSESSEE IS EXTRACTED IN PAGE 12 OF THE TPO S ORDER. THE SAME IS REPRODUCED HEREUNDER: - I. ASSESSEE S PRICING MODEL COMPENSATES THE ASSESSEE FOR THE ALLEGED EXCESS AMP EXPENSES, IF ANY; II. AMP EXPENSES INCURRED BY THE A SSESSEE REPRESENT PURELY DOMESTIC TRANSACTION(S) UNDERTAKEN BY IT TOWARDS THIRD PARTIES WHICH ARE NOT COVERED UNDER THE PURVIEW OF SECTION 92 OF THE INCOME TAX ACT, 1961 ( ACT ). III. ANALYSIS OF SUCH DOMESTIC TRANSACTIONS UNDERTAKEN WITH THIRD PARTIES, IN RESP ECT OF WHICH NO REFERENCE HAS BEEN MADE BY THE ASSESSING OFFICER ( AO ) TO THE TPO, IS BEYOND THE POWERS VESTED WITH THE TPO UNDER SECTION 92CA OF THE ACT. IV. HAVING ACCEPTED TNMM AS THE MOST APPROPRIATE METHOD TO BENCHMARK THE ASSESSEE S INTERNATIONAL RELATE D PARTY TRANSACTIONS, CHALLENGING/ANALYZING INDIVIDUAL ELEMENTS OF COSTS (LIKE AMP EXPENSES) BY THE TPO IS IN VIOLATION OF FUNDAMENTAL TP PRINCIPLES AND INCONSISTENT WITH THE TENETS OF APPLICATION OF TNMM. V. AMP EXPENSES INCURRED BY THE ASSESSEE ARE ON ITS O WN ACCORD AND FOR ITS OWN BUSINESS PURPOSES AND BENEFIT; ANY BENEFIT OF SUCH AMP EXPENSES TO AES IS NOTHING MORE THAN INDIRECT AND INCIDENTAL; VI. INDIRECT AND INCIDENTAL BENEFIT TO AES, CANNOT IN LAW, FORM THE BASIS OF DISALLOWING GENUINE BUSINESS EXPENDITURE (AMP EXPENSES) OF THE ASSESSEE; VII. ASSESSEE HAS A LONG TERM ROYALTY FREE DISTRIBUTION RIGHT; VIII. CONCLUDING THAT THE AMP EXPENSES INCURRED BY THE ASSESSEE ARE EXCESSIVE ON THE BASIS OF A BRIGHT LINE LIMIT THAT HAS BEEN ARRIVED AT BY CONSIDERING INAPPROPRIATE COM PARABLES NOT OPERATING IN THE SAME INDUSTRY, AT SAME POSITION IN THE VALUE CHAIN ETC. AS THE ASSESSEE IS ERRONEOUS. IX. APPLICATION OF A MARK - UP ON THE ASSESSEE S ALLEGED EXCESS AMP SPEND. 5.14. NOT CONVINCED WITH THE EXPLANATION OFFERED, THE TPO AFTER CO NSIDERING IN PARAS 7.1, PARAS 6.4 AND PARAS 6.36 TO 6.39 OF THE OECD OF TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS EDITION 2010 I.T.A .NO. - 6410/DEL/2012 11 WHICH DEFINED MARKETING INTANGIBLES AND AFTER DISCUSSING THE SITUATION WHERE MARKETING ACTIVITIES ARE UNDERTAKEN BY AN ENTERPRISE WHO IS NOT THE OWNER OF THE TRADE MARK OR TRADE NAMES AND ALSO CONSIDERING THE AUSTRALIA PUBLISHED GUIDANCE IN 2005 (NAT 14586 - 11.200) HELD THAT BRIGHT LINE IS AN INTERNATIONALLY ACCEPTED ECONOMIC TOOL WHICH IS A PPLIED TO DETERMINE AND ASCERTAIN THE EXPENDITURE WHICH A ROUTINE DISTRIBUTOR WOULD INCUR TO MARKET AND PROMOTE THE PRODUCTS WHICH IT IS DEALING WITH AND INCASE THE BRAND NAME IS NOT OWNED BY THE ASSESSEE THE EXPENDITURE INCURRED BEYOND THE BRIGHT LINE IS TO BE RE - IMBURSED BY THE BENEFICIAL OWNER OF THE BRAND NAME. ACCORDINGLY REJECTING THE EXPLANATION OF THE ASSESSEE, THE TPO ACCEPTED AS POINTED OUT BY THE ASSESSEE THAT THE ADVERTISEMENT, MARKETING AND DISTRIBUTION EXPENSES, SALES RATIO OF THE 12 COMPANIE S WORKED OUT AT 3.35% AND THE AMD (ADVERTISEMENT, MARKETING AND DISTRIBUTION EXPENSES), SALES RATIO OF THE ASSESSEE WAS 7.06%. AS SUCH THE AMP SALES RATIO OF COMPARABLES AT 3.35 % WAS ACCEPTED AND THE EXPENDITURE IN EXCESS OF THE BRIGHT LINE WAS COMPUTED AT RS.60,82,57,087/ - IN THE FOLLOWING MANNER : - 10.1. THUS, THE AMOUNT WHICH REPRESENTS THE BRIGHT LINE AND THE AMOUNT THAT SHOULD HAVE BEEN COMPENSATED TO THE ASSESSEE COMPANY ARE COMPUTED HEREUNDER : - VALUE OF GROSS SALES RS.16,386,808,123/ - BRI GHT LINE 3.35% AMOUNT THAT REPRESENT BRIGHT LINE RS. 548,958,072/ - EXPENDITURE ON AMP INCURRED BY ASSESSEE RS. 1,157,215,159/ - EXPENDITURE IN EXCESS OF BRIGHT LINE RS. 608,257,087/ - 5.15. THE TPO BEING OF THE VIEW THAT AN INDEPENDENT ENT ERPRISE WOULD ALSO HAVE BEEN REMUNERATED FOR ITS EFFORTS AFTER CONSIDERING THE REPLY OF THE ASSESSEE HELD THAT THE MARKUP OF 15% TO BE A REASONABLE MARK - UP OVER AND ABOVE THE REIMBURSEMENT OF THE EXPENDITURE INCURRED BY THE ASSESSEE. THE SAID MARK - UP ACCO RDING TO THE TPO WOULD TAKE CARE OF THE INTEREST COST THAT THE ASSESSEE WOULD HAVE BORNE ON THE MONEY INVESTED BY IT IN DEVELOPING, MARKETING INTANGIBLE. 5.16. CONSEQUENTLY, TP ADJUSTMENT OF RS.699,495,650/ - WAS COMPUTED AS UNDER : - COMPUTATION OF TP ADJU STMENT (IN RS.) VALUE OF GROSS SALES 16,386,808,123 I.T.A .NO. - 6410/DEL/2012 12 AMP/SALES OF THE COMPARABLES 3.35% AMOUNT THAT REPRESENTS BRIGHT LINE 548,958,072 EXPENDITURE ON AMP BY ASSESSEE 1,157,215,159 EXPENDITURE IN EXCESS OF BRIGHT LINE 608,257,087 MARK - UP AT 15% 91,238, 563 REIMBURSEMENT THAT ASSESSEE SHOULD HAVE RECEIVED 699,495,650 REIMBURSEMENT ACTUALLY RECEIVED NIL ADJUSTMENT TO ASSESSEE S INCOME 699,495,650 5.17. THE AO ACCORDINGLY PASSED A DRAFT ASSESSMENT ORDER PURSUANT TO THE TPO S ORDER. AGGRIEVED BY THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE DRP - II, NEW DELHI WHO VIDE ITS ORDER DATED 27.09.2012 AFTER CONSIDERING THE SUBMISSIONS ON BEHALF OF THE ASSESSEE ACCEPTED THE CONTENTION THAT REDINGTON INDIA LTD. AND COMPUAGE INFOCOM SHOULD BE EXCLUDED AS THEIR AMP WAS NIL. HOWEVER THE CONTENTION THAT ONLY 2 COMPARABLES ARE APPROPRIATE NAMELY GENERAL SALES LTD. AND INTEX TECHNOLOGY WAS NOT ACCEPTED . HOWEVER SINCE NO GRIEVANCE QUA THE COMPARABLES HAS BEEN POSED BY THE ASSESSEE, ONLY THE RELEVANT FINDING UNDER CHALL ENGE IS REPRODUCED HEREUNDER : - 7.18. THE PANEL, THEREFORE, CONFIRM THE ACTION OF TPO, SUBJECT OUR DIRECTION IN PARA 7.14 AND PARA 7.16 IN REGARD TO PROPOSED ADJUSTMENT ON ACCOUNT OF AMP EXPENSES INCURRED BY THE ASSESSEE AS NO INDEPENDENT PERSON, PARTICUL ARLY IN A LONG TERM ARRANGEMENT, WOULD FOREGO THE COMPENSATION FOR THE ADDITIONAL MARKETING ACTIVITIES UNDERTAKEN BY HIM. THE TPO HAS RIGHTLY HELD THAT FOR THIS EFFORT OF THE TAXPAYER THE AE NEEDS TO COMPENSATE IT AS IT HAS BEEN FOUND THAT THE ASSESSEE HA S INCURRED EXCESSIVE AMP EXPENSES THERE IS A CASE OF RECEIVING SUITABLE COMPENSATION FROM THE AE. DEVELOPMENT AND PROMOTION OF A BRAND IN INDIA DIRECTLY BENEFITS THE AE ALSO. 7.19. THE TPO HAD CHARGED MARK UP OF 15% ON THE AMP EXPENSES FOR THE ENTREPRENEU RIAL EFFORTS INCLUDING USE OF ITS INFRASTRUCTURE ETC. THE ASSESSEE HAS OBJECTED TO THE ACTION OF THE TPO. WE HAVE CONSIDERED THE TAXPAYER S OBJECTIONS BUT ARE NOT IN AGREEMENT WITH THE SAME. NO INDEPENDENT PERSON WOULD CARRY OUT SUCH MARKETING ACTIVITY INVOLVING PROMOTION OF BRAND NAME OWNED BY OTHER PARTY WITHOUT CHARGING THE MARK UP AND WITHOUT RECOVERING THE OPPORTUNITY COST. HOWEVER, RECENTLY, IN THE CASE OF M/S XEROX INDIA LTD., THIS PANEL HAS HELD THAT A MARK - UP OF 12.5% ON THE EXCESS AMP EXPENDIT URE IS A REASONABLE MARK - UP OF 12.5% ON THE TOTAL AMOUNT OF EXPENDITURE INCURRED FOR BRAND PROMOTION IS REASONABLE BEING THE BANK RATE DURING THE PERIOD UNDER CONSIDERATION. I.T.A .NO. - 6410/DEL/2012 13 5.18. AT THE TIME OF HEARING, LD. AR FILED WRITTEN SUBMISSIONS AND ARGUED ON THE BASIS OF THE SAME THAT THE ISSUE HAS TO BE NECESSARILY RESTORED. SINCE THE SUBMISSIONS WERE FILED IN THE COURT, TIME WAS GIVEN TO THE LD. CIT DR TO ADDRESS THE SAME ON THE NEXT DATE OF HEARING. THEREAFTER ON THE NEXT DATE, THE HEARING WAS CONCLUDED AFTE R HEARING THE PARTIES. HOWEVER THE APPEAL WAS LISTING FOR CLARIFICATION ON CERTAIN ISSUES AND THE PARTIES WERE HEARD AT LENGTH AGAIN. 5.19. ON BEHALF OF THE ASSESSEE, IT WAS ARGUED THAT THE ADVERTISING, MARKETING ACTIVITY IS A FUNCTION PERFORMED BY THE ASSESSEE AS A DISTRIBUTOR AND THE PROFITS ARE EARNED ON THE SALE OF GOODS AND NOT MERELY ON THE ACTIVITY OF PURCHASE OF GOODS. ACCORDINGLY FOR THE PURPOSE OF FACILITATING SALES THE DISTRIBUTOR NEEDS TO UNDERTAKE THE ENTIRE GAMUT OF FUNCTIONS LIKES SALES B UDGETING, INVENTORY SCHEDULING, PACKAGING AND LOGISTICS, MARKETING, DISTRIBUTION CHANNEL, SALES AND WARRANTY ETC. AS SUCH IT WAS ARGUED THESE ARE PART AND PARCEL OF ITS ACTIVITIES AS A DISTRIBUTOR. IT WAS SUBMITTED THAT THE FAR ANALYSIS OF THE ASSESSEE A T PAGES 19 TO 25 OF THE FIRST PAPER BOOK HAS NOT BEEN DISTURBED BY THE TPO. AS SUCH AFTER ACCEPTING THAT ADVERTISING AND MARKETING ARE FUNCTIONS OF THE DISTRIBUTION ACTIVITY, THE TPO/DRP ARE CONTRADICTING THEMSELVES. IT WAS SUBMITTED THAT BY EXTENDING TH E REASONING, THE ARGUMENT THAT WAREHOUSING SERVICES, PACKAGING SERVICE, CARRYING AND FORWARDING SERVICES, LOGISTICS SERVICES, SALES SUPPORT SERVICE ARE ALL SEPARATE TRANSACTIONS. IF IT WAS SO IT WAS SUBMITTED THEN THE TPO SHOULD HAVE HELD THAT THE ASSESSE E IS NOT A DISTRIBUTOR BUT A SERVICE PROVIDER AND COMPARED THE ASSESSEE TO COMPANIES ENGAGED IN PROVIDING THE SAME BOUQUET OF SERVICES. IT WAS ARGUED THAT HAVING ACCEPTED THE ASSESSEE S PROFILE AS A DISTRIBUTOR, IT IS NOT OPEN TO THE REVENUE TO ISOLATE ON E OF THE FUNCTIONS PERFORMED AS A DISTRIBUTOR AND HOLD THAT A SERVICE IS BEING PROVIDED. 5.19.1. INVITING ATTENTION TO WRITTEN SUBMISSIONS DATED 17.06.2011 (PAGES 96 TO 105 OF THE PAPER BOOK) BEFORE THE TPO, IT WAS SUBMITTED THAT THE ASSESSEE HAD ARGUED THAT THE REMUNERATION OF A DISTRIBUTOR COULD BE EITHER BY WAY OF REDUCED PRICE OF GOODS PURCHASED OR A SERVICE FEE OR BY RECEIPT OF A CREDIT NOTE THAT MAY BE ADJUSTED I.T.A .NO. - 6410/DEL/2012 14 AGAINST ANY OF THE ELEMENTS OF COSTS INCURRED BY THE DISTRIBUTOR. IN THE FACTS OF THE PR ESENT CASE, IT WAS SUBMITTED THE ASSESSEE IS IN RECEIPT OF A CREDIT NOTE OF RS.73 CRORE ODD AND THIS FACT CAN BE VERIFIED AND L.G. ELECTRONICS CASE HAS SPECIFICALLY HELD THAT THIS IS A FACT TO BE EXAMINED AS SUCH THE ISSUE HAS TO BE REMANDED. SPECIFIC ATT ENTION WAS INVITED TO PARA 19 AND 21.10 OF THE DECISION OF THE SPECIAL BENCH. IT WAS HIS SUBMISSION THAT THESE FACTS WERE BEFORE THE TPO/DRP AND THEY HAVE REFUSED TO GIVE DUE CONSIDERATION TO THESE FACTS. IT WAS ARGUED THAT THE TPO CANNOT DICTATE TO THE ASSESSEE TO FOLLOW A SPECIFIC BUSINESS MODEL TO GET REMUNERATION AND INSIST THAT REMUNERATION NECESSARILY HAS TO COME BY WAY OF A SEPARATE COST PLUS MARK - UP METHOD ONLY. 5.19.2. IT WAS ARGUED THAT A MANUFACTURER MAY SEND GOODS TO TWO DIFFERENT DISTRIBUTO RS AT THE SAME PRICE AND MAY COMPENSATE THE DISTRIBUTOR WHO TAKES THE RESPONSIBILITY FOR ADVERTISING AND MARKETING FUNCTION BY PROVIDING A CREDIT NOTE OR SUBSIDY OR ALTERNATELY MAY REDUCE THE PRICE OF THE GOODS FOR THE DISTRIBUTOR WHO PERFORMS GREATER FUNC TION AS SUCH LEAVING THE DISTRIBUTION WITH HIGHER GROSS MARGINS AS WOULD BE EVIDENT FROM ASSESSEE S CASE. 5.19.3. FOR THE SAID PURPOSE, ATTENTION WAS INVITED TO THE FACTS APPEARING IN PAGES 17 & 18 OF THE WRITTEN SUBMISSIONS, THE SAME ARE REPRODUCED HERE UNDER : - DISTRIBUTOR 1 - DISTRIBUTOR WHO TAKES THE RESPONSIBILITY OF ADVERTISING AND MARKETING FUNCTION DISTRIBUTOR2 - DISTRIBUTOR WHO DOES NOT TAKES THE RESPONSIBILITY OF ADVERTISING AND MARKETING FUNCTION SALES OF 100 UNITS OF GOODS 150 SALES OF 100 UNITS O F GOODS 150 LESS: COST OF PURCHASE OF 100 UNITS OF GOODS AT THE RATE OF 1.25 PER UNIT 125 LESS: COST OF PURCHASE OF 100 UNITS OF GOODS AT THE RATE OF 1.25 PER UNIT 125 GROSS MARGIN 25 GROSS MARGIN 25 LESS: ADVERTISING AND MARKETING COST 25 LESS: ADVERTI SING AND MARKETING COST NIL LESS: OTHER OVERHEAD COSTS 15 LESS: OTHER OVERHEAD COSTS 15 NET MARGIN ( - ) 15 NET MARGIN 10 ADD: SUBSIDY FROM MANUFACTURER BY WAY OF CREDIT NOTE ADJUSTED AGAINST COGS 25 ADD: SUBSIDY FROM MANUFACTURER BY WAY OF CREDIT NOTE AD JUSTED AGAINST COGS NIL I.T.A .NO. - 6410/DEL/2012 15 ADJUSTED GROSS MARGIN 50 ADJUSTED GROSS MARGIN 25 ADJUSTED NET MARGIN 10 ADJUSTED NET MARGIN 10 THE ABOVE TABLE CLEARLY DEMONSTRATES OUR ARGUMENT THAT AS COMPARED TO A DISTRIBUTOR WHO HAS LIMITED ROLE AND RESPONSIBILITIES, A DIST RIBUTOR WHO UNDERTAKES GREATER FUNCTIONS AND RESPONSIBILITY WILL BE LEFT WITH A HIGHER GROSS MARGIN TO ACCOUNT FOR THE ADDITIONAL FUNCTIONS AND EXPENSES. THIS HIGHER GROSS MARGIN MAY COME BY WAY OF A LOWER PRICE OF GOODS AT THE TIME OF PURCHASE OR EVEN BY WAY OF A SUBSIDY AT A LATER STAGE. THE SPECIAL BENCH IN THE CASE OF LG INDIA HAS HELD THAT COMPARABLE GROSS MARGIN DOES NOT NECESSARILY MEAN THAT THE PRICE OF GOODS HAS BEEN REDUCED TO COMPENSATE FOR HIGHER AMP EXPENDITURE SINCE A HIGHER PROFIT CAN BE A FU NCTION OF MANY FACTORS. WHILE THIS MAY BE TRUE FOR AN ENTREPRENEURIAL MANUFACTURER LIKE LG, THE SAME IS NOT APPLICABLE TO A DISTRIBUTOR. A DISTRIBUTOR HAS PRIMARILY TWO TYPES OF COSTS : ONE IS THE COST OF GOODS SOLD THE OTHER IS THE OVERHEAD COSTS WHICH HAVE BEEN INCURRED FOR UNDERTAKING VARIOUS FUNCTIONS LIKE ADVERTISING AND MARKETING. IN THE CONTEXT OF THE EXAMPLE OUTLINED ABOVE, WHEN THE FIRST A DISTRIBUTOR WHO IS RESPONSIBLE FOR UNDERTAKING ADVERTISING AND MARKETING FUNCTION (THUS INCREASING THE QUA NTUM OF ITS OVERHEAD COSTS) IS SOLD PRODUCTS AT THE PRICE OF 1.25 PER UNIT, THE DISTRIBUTOR ENDS UP MAKING A LOSS TILL IT IS COMPENSATED BY THE MANUFACTURER BY WAY OF A SUBSIDY/SUBVENTION. (RE FER PAGE 349 TO 350 AND 108 OF ). 5.19.4. IT WAS SUBMITTED THA T THE FAR ANALYSIS OF COMPARABLES AND THAT OF THE ASSESSEE HAS NOT BEEN DISPUTED BY THE TPO. A PERUSAL OF THE SUBMISSION NUMBERING 60 PAGES AT PAGE 21 OF THE SAME FURTHER STATES THAT WITHOUT PREJUDICE TO THE OTHER CONTENTIONS IF THE TPO S APPROACH OF BENCH MARKING THE ASSESSEE S AMP EXPENDITURE AS COMPARED TO THIRD PARTY DISTRIBUTOR AMP EXPENDITURE IS ACCEPTED THEN DUE CONSIDERATION NEED BE GIVEN TO THE NET MARGIN OF 2.50% EARNED BY THE ASSESSEE AS COMPARED TO THE ARITHMETIC MEAN OF THE COMPARABLE OF 0.354 % . IT IS STATED THE EXTRA PROFIT EARNED SHOWS THAT THE ASSESSEE HAS BEEN COMPENSATED FOR THE AMP ACTIVITIES. 5.19.5. A PERUSAL OF PAGES 23 - 26 OF THE 60 PAGED WRITTEN SUBMISSION FURTHER SHOWS THAT RELIANCE HAS BEEN PLACED ON THE PERSPECTIVE OF THE INDIAN TAX ADMINISTRATION. RELYING ON UNITED NATIONS RECENTLY RELEASED DRAFT ON PRACTICAL MANUAL ON TRANSFER PRICING MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES AND WHICH IS STATED TO BE INCLUDING THE WORK OF MANY AUTHORS INCLUDING THE I.T.A .NO. - 6410/DEL/2012 16 REPRESENTATIVES O F THE DEPARTMENT OF REVENUE, GOVERNMENT OF INDIA, AS ACKNOWLEDGED IN THE FOREWORD TO THE MANUAL. THE SAME IS REPRODUCED FOR READY - REFERENCE: - WHILE CONSENSUS HAS BEEN SOUGHT AS FAR AS POSSIBLE, IT WAS CONSIDERED MOST IN ACCORD WITH A PRACTICAL MANUAL TO INCLUDE SOME ELEMENTS WHERE CONSENSUS COULD NOT BE REACHED, AND IT FOLLOWS THAT SPECIFIC VIEWS EXPRESSED IN THIS MANUAL SHOULD NOT BE ASCRIBED TO ANY PARTICULAR PERSONS INVOLVED IN ITS DRAFTING. CHAPTER 10 IS DIFFERENT FROM OTHER CHAPTERS IN ITS CONCEPTIO N, HOWEVER. IT REPRESENT AN OUTLINE OF PARTICULAR COUNTRY ADMINISTRATIVE PRACTICES AS DESCRIBED IN SOME DETAIL BY REPRESENTATIVES OF THOSE COUNTRIES , AND IT WAS NOT CONSIDERED FEASIBLE OR APPROPRIATE TO SEEK A CONSENSUS ON HOW SUCH COUNTRY PRACTICES WERE D ESCRIBED. CHAPTER 10 SHOULD BE READ WITH THAT DIFFERENCE IN MIND. 5.19.6. BASED ON THE ABOVE, IT IS SOUGHT TO BE CANVASSED THAT THE VIEWS EXPRESSED IN CHAPTER 10 OF THE UN TP MANUAL ARE THE VIEWS OF THE COUNTRY S TAX ADMINISTRATION. FOR THE SAID PURPOS E, RELIANCE IS FURTHER PLACED UPON THE FOLLOWING EXTRACT FROM THE PRACTICAL MANUAL ON TRANSFER PRICING MANUAL ON TRANSFER PRICING OF DEVELOPING COUNTRIES (FROM PAGE 24 VOL. - 3 OF THE PAPER BOOK) : - 10.3.8.15. THE IMPORTANT ISSUE IN THE DETERMINATION OF AL P IN THESE CASES IS TO EXAMINE WHO BENEFITS FROM THE EXTRAORDINARY AMP EXPENDITURE. TAXPAYERS GENERALLY CLAIM THAT SUCH EXTRAORDINARY EXPENDITURE HELPS THE BUSINESS OF THE INDIAN ENTITY ALSO IN ADDITION TO PARENT MNE. HOWEVER, THE TAX AUTHORITIES IN INDI A HAVE FOUND THAT INDIAN DISTRIBUTORS ARE CLAIMED TO BE NO RISK OR LOW RISK BEARING ENTITIES AND ARE GETTING FIXED AND ROUTINE RETURN ON COST PLUS BASIS. THEY DO NOT GET A SHARE IN THE EXCESS PROFIT RELATABLE TO LOCAL MARKETING INTANGIBLES. ACCORDINGLY, EXTRA - ORDINARY AMP EXPENDITURE DOES NOT ENHANCE THE PROFITABILITY OF INDIAN SUBSIDIARY OR RELATED PARTY. THIS CONCLUSION OF THE TAX AUTHORITIES IS FURTHER SUPPORTED BY THE FACT THAT THESE SO CALLED RISK - FREE OR LIMITED RISK DISTRIBUTORS HAVE DISCLOSED HUG E LOSSES EVEN WHEN THEY ARE ENTITLED FOR FIXED RETURN ON COST PLUS BASIS AND SHOULD NOT HAVE INCURRED LOSSES. 5.19.7. ACCORDINGLY IT IS ARGUED THAT EVEN IN THE INDIAN TAX ADMINISTRATION S VIEW THE MARKETING INTANGIBLES ARISE ONLY IN CASES WHERE PROFITS F OR THE DISTRIBUTION ACTIVITIES ARE NOT SUFFICIENT. IT IS FURTHER ARGUED THAT ALL INTERNATIONAL LITERATURE ON TRANSFER PRICING ALSO HOLDS THE VIEW THAT A DISTRIBUTOR CAN BE REMUNERATED FOR ITS AMP ACTIVITIES THROUGH ADEQUATE NET MARGIN SALE OF IMPORTED PRO DUCTS. I.T.A .NO. - 6410/DEL/2012 17 5.19.8. RELIANCE HAS BEEN PLACED ON PARA 6.38 OF PAGE 25 OF VOL. - 3 CONTAINS THE OECD GUIDELINES ON TRANSFER PRICING, THE SAME IS REPRODUCED HEREUNDER: - 6.38. WHERE THE DISTRIBUTOR ACTUALLY BEARS THE COST OF ITS MARKETING ACTIVITIES (I.E. THERE I S NO ARRANGEMENT FOR THE OWNER TO REIMBURSE THE EXPENDITURE), THE ISSUE IS THE EXTENT TO WHICH THE DISTRIBUTOR IS ABLE TO SHARE IN THE POTENTIAL BENEFITS FROM THOSE ACTIVITIES. IN GENERAL, IN ARM S LENGTH DEALINGS THE ABILITY OF A PARTY THAT IS NOT THE L EGAL OWNER OF A MARKETING INTANGIBLE TO OBTAIN THE FUTURE BENEFITS OF MARKETING ACTIVITIES THAT INCREASE THE VALUE OF THAT INTANGIBLE WILL DEPEND PRINCIPALLY ON THE SUBSTANCE OF THE RIGHTS OF THAT PARTY. FOR EXAMPLE, A DISTRIBUTOR MAY HAVE THE ABILITY TO OBTAIN BENEFITS FROM ITS INVESTMENTS IN DEVELOPING THE VALUE OF A TRADEMARK FROM ITS TURNOVER AND MARKET SHARE WHERE IT HAS LONG - TERM CONTRACT OF SOLE DISTRIBUTION RIGHTS FOR THE TRADEMARKED PRODUCT. IN SUCH CASES, THE DISTRIBUTOR S SHARE OF BENEFITS SHOU LD BE DETERMINED BASED ON WHAT AN INDEPENDENT DISTRIBUTOR WOULD OBTAIN IN COMPARABLE CIRCUMSTANCES. IN SOME CASES, A DISTRIBUTOR MAY BEAR EXTRAORDINARY MARKETING EXPENDITURES BEYOND WHAT AN INDEPENDENT DISTRIBUTOR WITH SIMILAR RIGHTS MIGHT INCUR FOR THE B ENEFIT OF ITS OWN DISTRIBUTION ACTIVITIES. AN INDEPENDENT DISTRIBUTOR IN SUCH A CASE MIGHT OBTAIN AN ADDITIONAL RETURN FROM THE OWNER OF THE TRADEMARK, PERHAPS THROUGH A DECREASE IN THE PURCHASE PRICE OF THE PRODUCT OR A REDUCTION IN ROYALTY RATE. 5.19 .9. SIMILARLY, IT IS STATED THAT IDENTICAL EXAMPLE HAS BEEN ILLUSTRATED BY THE AUSTRALIAN TAX OFFICE (ATO) IN ITS GUIDANCE FOR MARKETING INTANGIBLES WHEREIN THE MARKET/DISTRIBUTOR BEARS THE COSTS AND RISKS OF ITS MARKETING ACTIVITIES AND HAS A ROYALTY - FREE CONTRACTUAL ARRANGEMENT (WITH EXCLUSIVE RIGHT) WITH THE OWNER OF THE BRAND. ATTENTION IS INVITED TO EXAMPLE 3 AT PAGE 11 OF VOL. - 3 OF THE PAPER BOOK WHICH AS SIMPLIFIED AND EXPLAINED IN PAGE 27 OF THE WRITTEN SUBMISSIONS AND EXTRACTED HEREUNDER : - FACT S : DISTRIBUTOR (B) RECEIVES NO REIMBURSEMENT FROM BRAND OWNER (A) IN RESPECT OF ANY EXPENDITURE IT INCURS OR ANY OTHER INDIRECT OR IMPLIED COMPENSATION FROM A AND EXPECTS TO EARN ITS REWARD SOLELY FROM THE SALES OF BRANDED WATCHES TO THIRD PARTY CUSTOMERS IN THE AUSTRALIAN MARKET. ATO S GUIDANCE : IF A WAS COMPENSATING B FOR ITS MARKETING ACTIVITIES, IT WOULD VE CHARGED HIGHER FOR PRODUCTS SOLD TO B AND CONSEQUENTLY, THE PROFIT EARNED BY B WOULD HAVE BEEN LOWER THAN COMPARABLES WHO UNDERTAKE THEIR OWN MARK ETING. SINCE THE PROFITS EARNED BY B WERE SIMILAR AS THAT OF COMPARABLE COMPANIES, THE BENEFITS OBTAINED BY B RESULT IN PROFITS SIMILAR TO THOSE MADE BY INDEPENDENT DISTRIBUTORS AND THEREFORE THE ARRANGEMENT ARE AT ARM S LENGTH. SINCE IN THE EXAMPLE, THE PROFITS EARNED BY B WERE SAME AS THAT OF COMPARABLE COMPANIES, IT WAS CONCLUDED THAT BENEFITS OBTAINED BY B RESULT IN PROFITS SIMILAR TO THOSE MADE BY INDEPENDENT MARKETERS AND DISTRIBUTORS FROM SIMILAR MARKETING I.T.A .NO. - 6410/DEL/2012 18 AND DISTRIBUTION AGREEMENTS. HENCE, THE AR RANGEMENT WAS HELD TO BE AT ARM S LENGTH. 5.19.10. REFERENCE MAY ALSO BE MADE TO THE 3 PAGED WRITTEN SUBMISSIONS FILED ON THE DATE OF HEARING ADDRESSING TRANSFER PRICING ISSUE. PARA 2 OF THE SAME IS EXTRACTED HEREUNDER : - 2. DURING THE YEAR THE ASSESS EE AGGREGATED A PLI OF 2.5% WHERE AS THE COMPARABLES SELECTED BY APPLYING THE FAR ANALYSIS RESULTED IN A COMPARABLE OF 0.45%. BY WAY OF AN ARRANGEMENT BETWEEN THE ASSESSEE AND ITS AE, THE PROFIT MARGIN OF THE ASSESSEE IS ALWAYS MAINTAINED ABOVE 2% FOR ANY FINANCIAL YEAR, THE AE REIMBURSES THE ASSESSEE BY WAY OF CREDIT NOTES SO THAT THE PROFIT MARGIN OF THE ASSESSEE REMAINS ABOVE 2%. IN THE YEAR UNDER CONSIDERATION ALSO THE AE ISSUED CREDIT NOTES OF RS.73 CRORES WHICH RETAINED THE PROFIT MARGIN OF THE ASSE SSEE ABOVE 2% AS STATED ABOVE. 5.19.11. RELYING ON THE DECISION OF THE SPECIAL BENCH IN L.G. ELECTRONIC S CASE, IT IS SUBMITTED THAT THE TPO HAS NOT CONSIDERED THE 14 PARAMETERS AS CONSIDERED BY THE L.G. ELECTRONICS CASE. SPECIFIC ATTENTION WAS INVITED TO QUESTION 9 & 10 WHICH ARE STATED TO BE RELEVANT. NO SUCH ATTEMPT TO EXAMINE THIS, IT IS STATED HAS BEEN DONE BY THE TPO. 5.19.12. IT IS FURTHER STATED THAT IN TERMS OF THE DECISION OF THE SPECIAL BENCH, THE SALES EXPENSES AND SALES PROMOTION EXPENSES HAVE TO BE REDUCED FROM THE AMP EXPENSES AS SUCH FOR CARRYING OUT THE CORRECTIONS THE MATTER HAS TO BE RESTORED. SIMILARLY EXPENSES PERTAINS TO DEALER S INCENTIVES ETC, IT WAS SUBMITTED ARE ALSO REQUIRED TO BE EXCLUDED AS HAS BEEN HELD IN PARA 18.5 & 18. 6 BY THE SPECIAL BENCH. 5.19.13 . WITHOUT PREJUDICE ARGUMENT IS ADVANCED STATING THAT BY INCURRING OF ADVERTISING EXPENDITURE, THE ASSESSEE HAS NOT LEAD TO THE CREATION OF ANY ASSET. RELIANCE IS PLACED ON THE ORDER OF THE MUMBAI BENCH IN THE CASE OF FINE J EWELLERY INDIA LTD VS ACIT 19 ITR (TRIB) 746. IT WAS SUBMITTED THAT BENEFIT IF ANY HAS ACCRUED TO THE AE AS A RESULT OF AMP EXPENSES CANNOT BE CONSIDERED A SEPARATE TRANSACTION AND BENEFIT IF ANY HAS ACCRUED INCIDENTALLY AND DOES NOT REQUIRE ANY COMPENSAT ION. I.T.A .NO. - 6410/DEL/2012 19 5.19.14. WITHOUT PREJUDICE TO THE OTHER ARGUMENTS, IT WAS ALSO ARGUED THAT THE MARK - UP OF 12.5% WAS HIGH EXCESSIVE AND UNWARRANTED. 5.20. THE LD. CIT DR ON THE OTHER HAND ARGUED THAT THE CREDIT NOTES DO NOT STATE THAT THEY RELATE TO THE AMP EXPENDITUR E AND HAVE ALREADY BEEN REJECTED BY THE TPO SO NO PURPOSE WOULD BE SERVED BY RESTORING THE SAME FOR VERIFICATION. IT WAS HIS VEHEMENT STAND THAT WITH HINDSIGHT AFTER THE DECISION OF THE SPECIAL BENCH THE ARGUMENTS OF THE TAXPAYERS HAVE BEEN THAT SUBSIDY H AS BEEN RECEIVED FOR AMP IT WAS HIS VEHEMENT ARGUMENT THAT DO THE RECORDS SHOW THAT IT WAS SENT FOR THIS SPECIFIC PURPOSE. IT WAS HIS ARGUMENT THAT THE RECORD WOULD SHOW THAT THE ASSESSEE HAS BEEN CONTESTING TILL DATE THAT IT IS NOT AN INTERNATIONAL TRANS ACTION AND THE ASSESSEE HAS NOT EVEN DOCUMENTED IT AS AN INTERNATIONAL TRANSACTION ACCORDINGLY HOW CAN THE ASSESSEE NOW BE ALLOWED TO ARGUE THAT THE SUBSIDY RECEIVED IS FOR THE HIGH AMP EXPENDITURE. ADDRESSING THE ORDER OF THE MUMBAI BENCH IN FINE JEWELLE RY CASE RELIED UPON BY THE LD. AR, IT WAS STATED THAT THE SAME IS NOT IN THE CONTEXT OF TRANSFER PRICING AS SUCH DOES NOT HAVE ANY RELEVANCE IN THE PRESENT PROCEEDINGS. 5.20.1. SUBSEQUENTLY, THE PARTIES WERE REQUIRED TO CLARIFY THE POSITION IN VIEW OF THE FACT THAT THE LD. CIT(A) DR HAD PLACED ON RECORD HIS WRITTEN SUBMISSIONS TO WHICH IT WAS CONSIDERED NECESSARY TO HAVE THE RESPONSE ON BEHALF OF THE ASSESSEE. THE STAND OF THE DEPARTMENT WAS THAT THE DRP S ORDER IS A VERY REASONED AND SPEAKING ORDER. AS S UCH, THERE IS NO REASON TO RESTORE THE ISSUE. THE FOLLOWING NOTE WAS PLACED ON RECORD BY THE CIT(A) DR REPRODUCED HEREUNDER : - MAY IT PLEASE YOUR HONOURS : - THE PLEA OF REVENUE IS THAT THE ISSUE REGARDING AMP EXPENSE ETC. ARE COVERED BY THE LG DECISION O F ITAT (IN ITA NO. 5140/D/2011). THE ELABORATION HEREINAFTER IS FOR TREATMENT OF SUBSIDY ONLY. IF THERE IS AN ELEMENT OF SUBSIDY GIVEN BY THE AE TO THE INDIAN ENTITY, (BY ANY NAME SUCH AS CREDIT NOTES OR SUBVENTION OR ANYTHING SIMILAR), THEN IT HAS TO BE ESTABLISHED BY THE ASSESSEE THAT THE SUBSIDY WAS SPECIFICALLY TOWARDS AMP EXPENSES (OR TOWARDS BRAND BUILDING OR FOR CREATING OR FEEDING INTANGIBLES OR FOR ANY SIMILAR PURPOSE). I.T.A .NO. - 6410/DEL/2012 20 THIS IS FOR THE REASON THAT LAW MANDATES THAT EACH INTERNATIONAL TRANSACTION HAS TO BE SEPARATELY BENCH MARKED. (PLEASE REFER TO PARA 15.1 OF THE ORDER IN THE CASE OF M/S. LG ELECTRONICS INDIA PVT. LTD. A.Y. 2007 - 08, ITA NO. 5140/D/2011). THE WHOLE PARA IS RELEVANT, AND THE FIRST 5 LINES ARE INDICATIVE OF THE DISCUSSION IN THIS PAR AGRAPH, - (15.1 AT THIS STAGE/ WE FEEL IT PRODUCTIVE TO HAVE A MACRO VIEW OF THE TRANSFER PRICING PROVISIONS. SECTION 92 PROVIDES THAT THE INCOME FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO ALP. WHAT IS AN INTERNATIONAL TRANSACTI ON AND WHO IS AN ASSOCIATED ENTERPRISE HAS BEEN DEFINED IN SECTIONS 928 AND 92A RESPECTIVELY.' THE NEED FOR SPECIFIC ATTRIBUTION OF SUBSIDY TOWARDS A SPECIFIC INTERNATIONAL TRANSACTION CAN BE UNDERSTOOD BY THE FOLLOWING EXAMPLE, - S.NO. NATURES OF TRANSACT ION BOOK PRICE (RS.) ARMS LENGTH PRICE (RS.), AS DETERMINED BY T.P.O REMARKS 1. IMPORT OF TV TUBES (PRICE PAID) 1,00,000 60,000 THE ASSESSEE HAS PAID EXCESS PRICE TO THE EXTENT OF RS. 40,000/ - 2. AMP EXPENDITURE TOWARDS BRAND BUILDING (THAT SHOULD HAVE B EEN RECEIVED FROM AE), (A TRANSACTION REPORTED BY ASSESSEE) NIL 20,000 THE ASSESSEE HAS NOT RECEIVED RS. 20,000/ - FROM THE AE, THOUGH IT SHOULD HAVE RECEIVED THE SAME. 3. SUBSIDY RECEIVED. 30,000 IT HAS NOT BEEN SPECIFIED, AS TO THE PURPOSE FOR WHICH SUB SIDY HAS BEEN RECEIVED. ACCORDING TO THE ASSESSEE, THE SUBSIDY IS TO BE APPLIED TO AMP EXPENDITURE. IF SUCH IS THE SITUATION THEN ALP OR AMP EXPENDITURE, ACCORDING TO THE ASSESSEE, WOULD BE RS. ( - ) 10,000/ - , (RS. 20,000 BEING ALP OF AMP EXPENDITURE LESS R S. 30,000 BEING SUBSIDY). THIS IS AN ABSURD RESULT. REVENUE'S CONTENTION IS THAT SINCE THE AMP EXPENDITURE TOWARDS BRAND BUILDING (OR CREATION OR FEEDING OF INTANGIBLES ETC.) HAS NOT BEEN REPORTED AS AN INTERNATIONAL TRANSACTION, AT ALL, HOW CAN SUBSIDY B E ATTRIBUTED TO AMP (OR BRAND BUILDING OR CREATION OF INTANGIBLES ETC). THIS IS TOO FAR - FETCHED A PROPOSITION AND AN AFTERTHOUGHT. SUBSIDY COULD NOT HAVE BEEN GIVEN FOR A TRANSACTION WHICH THE ASSESSEE CLAIMS IS NOT AN INTERNATIONAL TRANSACTION. EVEN THE HON'BLE ITAT, IN THE CASE OF M/S. LG ELECTRONICS (AS REFERRED ABOVE), HAS HELD, ON PAGES 101 & 102, POINT NOS. 9 & 10, AS FOLLOWS - IN OUR CONSIDERED OPINION, FOLLOWING ARE SOME OF THE RELEVANT QUESTIONS, WHOSE ANSWERS HAVE CONSIDERABLE BEARING ON THE QUE STION OF DETERMINATION OF THE COST/VALUE OF THE INTERNATIONAL TRANSACTION OF BRAND/LOGO PROMOTION THROUGH AMP EXPENSES INCURRED BY THE INDIAN AE FOR ITS FOREIGN ENTITY: - ......................... I.T.A .NO. - 6410/DEL/2012 21 9. WHETHER THE FOREIGN AE IS COMPENSATING THE INDIAN ENTITY FOR THE PROMOTION OF ITS BRAND IN ANY FORM~ SUCH AS SUBSIDY ON THE GOODS SOLD TO THE INDIAN AE? 10 WHERE SUCH SUBSIDY IS ALLOWED BY THE FOREIGN AE~ WHETHER THE AMOUNT OF SUBSIDY IS COMMENSURATE WITH THE EXPENSES INCURRED BY THE INDIAN ENTITY ON THE PROMO TION OF BRAND FOR THE FOREIGN AE? AN ANALYSIS OF ITEM NO. 9 ABOVE SHOWS THAT THE COMPENSATION BY THE AE HAS TO BE SPECIFICALLY FOR PROMOTION OF BRAND. THIS COMPENSATION, THOUGH, MAY BE IN THE FORM OF CASH SUBSIDY, OR IN THE FORM OF FREE ADVERTISING MATER IAL, OR FREE MARKETING ASSISTANCE, OR CREDIT NOTES, OR IN ANY OTHER FORM. THUS THE FIRST CONDITION IS THAT THE COMPENSATION HAS TO BE ONLY FOR THE PROMOTION OF BRAND. FURTHER, ITEM NO. 10 ABOVE QUALIFIES SUCH SUBSIDY FOR PURPOSES OF ADEQUACY OR SUFFICIENC Y OR QUANTIFICATION. THIS SUPPORTS THE CONTENTION OF REVENUE THAT THE SUBSIDY HAS TO BE SPECIFICALLY RECEIVED FOR PROMOTION OF BRAND, FOR THE BENEFIT OF SAME TO BE CONSIDERED FOR PURPOSES OF DETERMINATION OF ALP. THOUGH THE SUBSIDY MAY TAKE ANY FORM. (PEEYUSH JAIN) COMMISSIONER OF INCOME TAX (DR) (TP) ITAT, NEW DELHI DATED : - 25 - 04 - 2013 5.21. IN RESPONSE THERETO THE ASSESSEE VIDE ITS SUBMISSION DATED 09.05.2013 GAVE THE FOLLOWING RESPONSE: - BRIEF SUBMISSION ON TRANSFER PR ICING ISSUES DATED - 9 MAY 2013 1. THE TPO/DRP HAS DISREGARDED THE CREDIT NOTES RECEIVED BY SOMC FROM ITS AE AND HAS NOT ADJUSTED THE SAME AGAINST THE AMP EXPENDITURE SOMC INDIA HAS RECEIVED CREDIT NOTES WORTH INR 738,370,4091 - FROM ITS AE (RE FER SUBMISSION DATED 17 JUNE 2011 AT PAGES 96 TO 105 OF PAPER BOOK 1). TPO NOTED THAT CREDIT NOTES HAS BEEN RECEIVED BY THE ASSESSEE, HOWEVER, HAS NOT TAKEN INTO CONSIDERATION THESE EXPENSES WHILE DETERMINING ADJUSTMENT ON AMP EXPENSES. RELEVANT EXTRACTS O F ORDER ARE AS FOLLOWS: '3.6 THE CREDIT NOTES AMOUNTING TO RS. 738,370,409/ - HAVE NO RELATIONS WITH THE EXPENDITURE THAT THE ASSESSEE HAS INCURRED ON THE AMP FOR WHICH NO COMPENSATION/REIMBURSEMENT HAS BEEN MADE BY THE AE. I THEREFORE PROPOSE TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PROMOTING THE TRADE NAME/TRADE MARK WHICH IS BENEFICIALLY OWNED BY THE AE HOWEVER PROMOTED BY THE ASSESSEE FOR WHICH THE ASSESSEE HAS NOT BEEN COMPENSATED.' (REFER 3.4 TO 3.6 ON PAGE 7 OF MAIN APP EAL SET). THE ABOVE APPROACH OF THE TPO IS NOT ONLY CONTRARY TO THE VIEW HELD BY ALL INTERNATIONAL LITERATURE ON THE FUNDAMENTALS OF TRANSFER PRICING BUT ALSO CONTRARY TO THE PRINCIPLE UPHELD BY THE SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA PRIVAT E LIMITED (ITA NO. 5140/DEL/2011). RELEVANT EXTRACT OF ORDER ARE AS FOLLOWS: 'PARA 19......... IF THERE IS NO SUBSIDY IN A COMPARABLE CASE BUT THE ASSESSEE HAS RECEIVED SOME AMOUNT OF SUBSIDY FROM ITS FOREIGN AE ON IMPORTS I.T.A .NO. - 6410/DEL/2012 22 OR IN ANY OTHER MANNER, WHICH F ACT OTHERWISE NEEDS TO BE SPECIFICALLY ESTABLISHED BY THE ASSESSEE, THEN THE INITIAL AMOUNT SO COMPUTED WOULD REQUIRE REDUCTION TO THE EXTENT OF SUCH SUBSIDY OR VICE VERSA' IN THE PRESENT CASE, IT WAS RESPECTFULLY SUBMITTED THAT DURING THE COURSE OF THE T RANSFER PRICING ASSESSMENT IT WAS SPECIFICALLY STATED BY THE ASSESSEE THAT IT HAS RECEIVED SUBSIDY FROM ITS PARENT AMOUNTING TO RS. 73.83 CRORES SO AS TO MAINTAIN ITS PROFITABILITY ABOVE 2% IN ANY CASE. IT WOULD BE SEEN THAT THE TPO HAS MADE AN ADJUSTMENT OF RS.69.94 CRORES TO THE ARM'S LENGTH PRICE AND IF THE AMOUNT OF SUBSIDY IS CONSIDERED NO ADJUSTMENT IS REQUIRED TO BE MADE ON THE FACTS OF THE PRESENT CASE. 2. SELLING EXPENSES AND SALES PROMOTION EXPENSES CANNOT BE CONSIDERED TO BE COST INCURRED FO R BRAND PROMOTION EXPENDITURE TO DETERMINE THE VALUE OF THE COSTS INCURRED BY SOMC INDIA FOR THE PURPOSE OF BRAND PROMOTION, THE TPO IN ADDITION TO ADVERTISING COST HAS CONSIDERED THE FOLLOWING TWO ITEMS OF EXPENDITURE: O SELLING EXPENSES O SALES PRO MOTION EXPENSES THE APPELLANT HAS CLEARLY QUANTIFIED THE ABOVE STATED AMOUNTS AND EXPLICITLY DETERMINED THE EXPENDITURE INCURRED ONLY ON ADVERTISING AND PLACE THIS INFORMATION ON RECORD WITH THE TPO/DRP. THE QUANTIFICATION OF THESE FIGURES ALONG WITH THE RELEVANT PAPERBOOK REFERENCES ARE AS FOLLOWS: NATURE OF EXPENSE AMOUNT (IN INR) REFERENCE IN THE PAPERBOOK ADVERTISEMENT (A) 660,556,778 REFER PAGE 99 OF THE MAIN ITA T APPEAL SET FOR A Y 2008 - 09 AND PAGE 292 OF PAPERBOOK 2 SELLING EXPENSES 153,680 ,934 SCHEDULE 13 - SELLING & DISTRIBUTION EXPENSES ON PAGE 73 OF PAPER BOOK 1 FOR A Y 2008 - 09 POINT - OF - SALES MATERIAL 213,462,895 MERCHANDISING COST 120,536,948 OTHER EXPENSES 8,977,604 BUSINESS PROMOTION & SELLING EXPENSES (B) 496,658,381 REFER PAGE 293 OF PAPER BOOK 2 TOTAL (C=A+B) 1,157,215,159 THE SPECIAL BENCH SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA PRIVATE LIMITED (ITA NO. 5140/DEL/2011) HAS CATEGORICALLY LAID DOWN A DIVIDER TO DISTINGUISH EXP ENSES INCURRED WITH RESPECT TO PROMOTION OF SALES AND EXPENSES INCURRED IN CONNECTION WITH THE SALES.. RELEVANT EXTRACT OF ORDER ARE AS FOLLOWS: 'PARA 18.6 WE, THEREFORE, HOLD THAT THE EXPENSES IN CONNECTION WITH THE SALES WHICH DO NOT LEAD TO BRAND PRO MOTION CANNOT BE BROUGHT WITHIN THE AMBIT OF ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES FOR DETERMINING THE COST/VALUE OF THE INTERNATIONAL TRANSACTION I.T.A .NO. - 6410/DEL/2012 23 THIS CONTENTION HAS BEEN FOLLOWED BY CHANDIGARH ITAT IN THE CASE OF M/S GLAXO SMITH KLINE CONSUMER , HEALTHCARE LTD VS. THE ADDL. CIT RELEVANT EXTRACTS OF THE ORDER ARE AS UNDER: - 29. WE FIND THAT THE SPECIAL BENCH OF THE TRIBUNAL (MAJORITY VIEW) IN M/ S L. G ELECTRONICS INDIA (P) LTD. VS. ACIT (SUPRA) HELD THAT THE EXPENSES IN CONNECTION WITH THE SALES DO NOT LEAD TO BRAND PROMOTIONS AND THUS CANNOT BE BROUGHT WITHIN THE AMBIT OF ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES FOR DETERMINING THE COST/VALUE OF THE INTERNATIONAL TRANSACTION. IN VIEW THEREOF, WE DIRECT THE ASSESSING OFFICER TO EXCLU DE THE EXPENSES INCURRED BY THE ASSESSEE IN CONNECTION WITH THE SALES TOTALING RS. 5500.86 LACS AS THE4 SAME DO NOT FALL WITHIN THE AMBIT OF AMP EXPENSES AND HENCE NOT TO BE CONSIDERED FOR COMPUTING THE CONST/VALUE INTERNATIONAL TRANSACTION. THE ASSESSEE VIDE GROUND NO.4 HAD RAISED THE ISSUE AGAINST THE DISALLOWANCE OF C ONSUMER MARKET RESEARCH EXPENSES OF RS. 567. 49 LACS. IN VIEW OF OUR DECISION IN ALLOWING THE CLAIM OF THE ASSESSEE BEING RELATABLE TO SALES PROMOTION EXPENSES, THIS GROUND OF APPEAL IS THUS ALLOWED. THE GROUND NOS. 2.14 TO 2.16 AND GROUND NO 4 ARE THUS ALLOWED . SIMILAR APPROACH HAS BEEN FOLLOWED BY DELHI ITAT IN THE CASE OF CANON INDIA PVT. LTD VS. DCIT CIR 3(1) (ITA NO. 4602/DEL/2010, 5593/DEL/2011 AND 6086/DEL/2012) IN PARA 7.7 ( COPY OF ORDER IS ATTACHED HEREWITH) THEREFORE, IT IS HUMBLY SUBMITTED THAT FOLLOWING SPECIAL BENCH AND CO - ORDINATE BENCH ORDER THE EXPENSES IN CONNECTION WITH SALES ARE INCURRED POST OCCURRENCE OF ALES AND SUCH EXPENSES REDUCES THE COT OF GOODS SOLD AND AR E DIRECTLY LINKED TO SALES AND CANNOT BE ATTRIBUTED TO ADVERTISEMENT. THEREFORE, EXPENSES AMOUNTING TO INR 49.66 CRORES CANNOT BE HELD AS SUCH EXPENDITURE WHICH HELPS IN BUILDING/PROMOTING SONY BRAND AND SHOULD BE EXCLUDED FROM ADVERTISEMENTS, MARKETING AND PROMOTION EXPENSES FOR DETERMINING THE COST/VALUE OF THE INTERNATIONAL TRANSACTION. 3. TO THE EXTENT OF EXPENDITURE INCURRED ON ADVERTISING AND SALES PROMOTION, THERE HAS BEEN DOUBLE DISALLOWANCE/ADDITION AS THIS EXPENDITURE HAS BEEN TREATED AS CAPIT AL BY THE AO, AND HENCE ENTIRELY DISALLOWED U/S 37(1) IN COMPUTING THE TAXABLE INCOME WHEREAS THE SAID AMOUNT HAS BEEN INCLUDED BY THE TPO WHILE COMPUTING THE ALLEGED EXCESSIVE AMP EXPENDITURE. DURING EACH OF THE SUBJECT ASSESSMENT YEARS, THE TPO HAS MADE THE TRANSFER PRICING ADJUSTMENT AND AT THE SAME TIME THE AO HAS DISALLOWED 10 PERCENT OF THE TOTAL ADVERTISEMENT EXPENSES UNDER SECTION 37(1) OF THE ACT ON THE GROUND THAT THE SAME RESULTED IN ENDURING BENEFITS TO SOMC INDIA AND THEREFORE WERE CAPITAL IN NATURE. THUS, WHILE FOR THE AMOUNT HAS BEEN DISALLOWED BY THE AO FOR THE PURPOSE OF CLAIMING TAX DEDUCTION ON THE OTHER HAND THE TPO HAS CONSIDERED IN ITS COST BASE AND MADE AN ENHANCE OF INCOME ON THE BASIS OF THE SAME AMOUNT. AS A RESULT, SOMC INDIA IS E XPECTED TO PAY DOUBLE TAX ON THE SAME AMOUNT. A SIMPLIFIED REPRESENTATION IS PRESENTED BELOW: PARTICULARS AO S ADDITION TPO S ADDITION DISALLOWANCE BY AO 100 COST BASE USED FOR AMP EXPENDITURE 100 TP ADJUSTMENT AFTER CONSIDERING MARK - UP 11 2.5 I.T.A .NO. - 6410/DEL/2012 24 OF 12.5% ADDITIONAL TAX (ASSUMING CORP. TAX RATE OF 30%) 30 33.75 TOTAL ADDITIONAL TAX 63.75 EFFECTIVE TAX RATE 63.75% AS IS EVIDENT FROM THE ABOVE, AN AMOUNT OF INR 100, THE TAXPAYER WOULD END UP PAYING A TAX OF INR 63.75 ON AN EXPENSE ALLOWANCE OF INR 1 00, I.E. MORE THAN DOUBLE THE (ASSUMED) CORPORATE TAX RATE SIMPLY BECAUSE NEITHER THE AO NOR THE TPO HAS GIVEN EFFECT TO EACH OTHER'S ADJUSTMENTS WHILE COMPUTING THE CONSOLIDATED ADJUSTMENT. PLEASE NOTE THAT THE ABOVE SUBMISSION IS ONLY ON THE GROUNDS ON WHICH THE HON'BLE BENCH HAS ASKED THE APPELLANT FOR A BRIEF SYNOPSIS. OUR REMAINING DETAILED ARGUMENTS ARE FORMING PART OF THE DETAILED SUBMISSION FILED DURING THE HEARING HELD ON 28 FEBRUARY 2013. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE M ATERIAL AVAILABLE ON RECORD INCLUDING THE DECISIONS AND JUDGEMENTS RELIED UPON FOR OUR CONSIDERATION. WE PROPOSE TO CONSIDER AND DISCUSS THE JUDGEMENTS AND DECISIONS SEPARATELY AS TRANSFER PRICING ISSUES ARE VERY FACT DRIVEN AS SUCH, WE FIRST PROPOSE TO REFER TO THE TRANSFER PRICING STUDY MADE AVAILABLE TO THE TPO BY THE ASSESSEE. THE SAME IS PLACED ON PAPER BOOK PAGES 1 - 53. 6.1. A PERUSAL OF THE SAME SHOWS THAT AS PER THE TRANSFER PRICING STUDY AVAILABLE ON RECORD, IT IS CLAIMED THAT SONY ERICSON IS A COMPANY INCORPORATED IN INDIA ON 23.04.2007 AND IS A SUBSIDIARY OF SONY ERICSON MOBILE COMMUNICATION AB, A COMPANY INCORPORATED UNDER THE LAWS OF SWEDEN. THE SWEDISH ENTITY IS A 50:50 JOINT VENTURE BETWEEN TELEFONAKTIEBOLAGET LM ERICSON (SWEDEN) AND SON Y CORPORATION (JAPAN). THE OWNERSHIP PATTERN DEPICTED IN THE TRANSFER PRICING STUDY IS AS UNDER: - 1.2.2. SEIN IS A COMPANY INCORPORATED IN INDIA ON APRIL 23, 2007 AND IS A SUBSIDIARY OF SONY ERICSSON MOBILE COMMUNICATIONS AB , A COMPANY INCORPORATED UNDE R THE LAWS OF SWEDEN. THE SWEDEN ENTITIES A 50:50 JOINT VENTURE BETWEEN TELEFONAKTIEBOLAGET LM ERICSSON (SWEDEN) AND SONY CORPORATION (JAPAN). 6.1.1 . AS PER THE TRANSFER PRICING STUDY THE SONY ERICSON GROUP OFFERS MOBILE MULTIMEDIA DEVICES, INCLUDING FE ATURE - RICH PHONES AND ACCESSORIES, PC CARDS AND I.T.A .NO. - 6410/DEL/2012 25 M2M SOLUTIONS FOR END USERS. ADDRESSING THE OWNERSHIP OF INTELLECTUAL PROPER AND MARKETING INTANGIBLES AND THE FAR ANALYSIS OF THE ASSESSEE, CERTAIN PORTIONS FROM THE TP STUDY RELEVANT FOR ADDRESSING THE ISS UES IN THE PRESENT APPEAL ARE BEING EXTRACTED HEREUNDER: - 1.2.3. GROUP COMPANIES OWN SIGNIFICANT VALUABLE INTELLECTUAL PROPERTY RIGHTS (KNOW - HOW, PATENTS, COPYRIGHTS ETC.) AND OTHER COMMERCIAL OR MARKETING INTANGIBLES (BRAND NAMES, TRADEMARKS, LOGOS, ETC .) AND ARE INVOLVED IN COMPLEX PRODUCT DEVELOPMENT, MANUFACTURING AND BRAND DEVELOPMENT OF THE PRODUCTS. GROUP COMPANIES ALSO BEAR SIGNIFICANT BUSINESS AND ENTREPRENEURIAL RISKS OF PRODUCT ACCEPTABILITY AND PERFORMANCE IN THE MARKET. 1.2.6 AES ARE RELATIVELY C OMPLEX ENTITIES THAT ENGAGE IN FULL - FLEDGED MANUFACTURING, MARKETING, PRODUCT DEVELOPMENT, PRODUCT SELLING, RENDERING OF SERVICES, ETC. ESSENTIALLY COVERING A WIDE RANGE OF ACTIVITIES AND OPERATING IN VARIOUS GEOGRAPHIES. AES ARE THE DEVELOPERS, OWNERS AND LICENSORS OF VIRTUALLY ALL VALUABLE INTELLECTUAL PROPERTY RIGHTS INCLUDING PROPRIETY PRODUCES AND PROCESSES, COMMERCIAL OR MARKETING INTANGIBLES SUCH AS TRADEMARKS ETC. THEY ALSO BEAR SIGNIFICANT BUSINESS AND ENTREPRENEURIAL RISKS, INCLUDING PRODUCT D EVELOPMENT, PERFORMANCE IN THE MARKET, ETC. IN ADDITION, AES DEVELOP AND SELL A HOST OF PRODUCTS AND SERVICES TO UNRELATED PARTIES ACROSS THE GLOBE, WHICH MAKES IT DIFFICULT TO RELIABLY ISOLATE AES FINANCIALS WITH REGARD TO THEIR INTER - COMPANY TRANSACTION S. 1.2.7 . BASED ON AN ANALYSIS OF THE FUNCTIONS PERFORMED ASSETS EMPLOYED AND RISKS ASSUMED, IT WAS CONCLUDED THAT SEIN HAS RELATIVELY LESS COMPLEX OPERATIONS, BEARS RELATIVELY LESSER SHARE OF RISKS AND WAS ACCORDINGLY SELECTED AS THE TESTED PARTY FOR THI S ANALYSIS. 6.1.2. DESCRIBING ITS ACTIVITIES AS A DISTRIBUTOR, IT CLAIMED ITSOP/SALES RATIO AS 2.5% AS COMPARED TO SIMILAR RATIO OF COMPARABLES AT 0.45% AS SUCH THE TP STUDY CLAIMS THAT THE TRANSACTIONS ARE AT ARM S LENGTH. THE CONCLUSION IS EXTRACTED F ROM PAGE 6 OF THE TP STUDY: - 1.4. CONCLUSION 1.4.1. THE ABOVE ANALYSIS PROVIDES EVIDENCE THAT BOTH THE PRICING BASIS ITSELF OF THE INTERNATIONAL TRANSACTIONS AND THE OUTCOME OF THAT PRICING I.E. THE PROFITABILITY SUPPORT THE VIEW THAT THE INTERNATIONAL TRANSACTI ONS OF SEIN WERE IN ACCORDANCE WITH ARM S LENGTH STANDARD REQUIRED UNDER THE INDIAN REGULATIONS. 1.4.2. IT IS IMPORTANT TO NOTE THAT THE RESULTS OF THE TRANSFER PRICING ANALYSIS AND THE RECOMMENDATIONS ARE BASED ON FACTS AND FINANCIAL DATA FOR FY 2007 - 08 AND AR E PERTINENT TO FINANCIAL YEAR ENDED ON MARCH 31,2008. ON A GOING FORWARD BASIS, THE RESULTS WOULD NEED TO BE ALTERED SO AS TO INCORPORATE LATEST FINANCIAL RESULTS AND ANY CHANGES IN THE FUNCTIONS PERFORMED, RISKS ASSUMED AND THE LEVEL OF TANGIBLE AND INTA NGIBLE ASSETS OWNED AND EMPLOYED BY SEIN AND ITS AES. ALSO, WE RECOMMEND THAT I.T.A .NO. - 6410/DEL/2012 26 SEIN REVIEWS AND UPDATE ITS TRANSFER PRICING ARRANGEMENTS TO REFLECT CHANGES IN THE MARKET OR CHANGES IN THE NATURE OF ITS INTRA - GROUP TRANSACTIONS. (BOLD - TEXTED BY THE BENCH) 6.1.3. THE GROUP COMPANIES OVERVIEW UNIQUE STRENGTH, BACKGROUND, ROLE PERFORMANCE ARE ADDRESSED IN THE TP STUDY AS UNDER: - 2.2.1 . SONY ERICSON MOBILE COMMUNICATIONS AB, A COMPANY INCORPORATED IN SWEDEN, IS A 50:50 JOINT VENTURE (JV) BETWEEN THE WORLD R ENOWNED SONY CORPORATION AND ERICSON GROUP. THE JV ENTITY WAS LAUNCHED AS AN OPERATIONAL BUSINESS ON OCTOBER 1, 2001. ITS ACTIVITIES ARE FOCUSED ON PRODUCT DEVELOPMENT, INDUSTRIAL DESIGN, DISTRIBUTION, SALES, MARKETING AND CUSTOMER SERVICES FOR MOBILE C ONSUMER PRODUCTS. THE JV HAS COME A LONG WAY SINCE ITS INCEPTION IN 2001 TO BECOME ONE OF THE WORLD S MOST APPEALING MOBILE COMMUNICATION BRANDS, ACHIEVING MANY SUCCESSES IN TECHNOLOGY, PRODUCT INNOVATION AND BRAND DEVELOPMENT. THE COMPANY IN THE YEAR 20 07 - 08 REMAINED THE FOURTH LARGEST MOBILE PHONE MANUFACTURER IN THE WORLD . 2.2.2 THE JV IS BUILD ON THE UNIQUE STRENGTHS OF ITS PARENTS. IT CAN READILY TAP INTO EXPERTISE IN TELECOM INFRASTRUCTURE FROM ERICSSON AND KNOWLEDGE OF CONSUMER ELECTRONICS AND BRANDING FROM SONY. IN FACT ERICSON LEAD THE R & D OF MOBILE COMMUNICATIONS TECHNOLOGY, OWNS THE MOST VALUABLE OPERATOR CUSTOMER BASE FOR MOBILE SYSTEMS AND IS AT THE FOREFRONT OF TELECOMMUNICATIONS INDUSTRY S EVOLUTION TO 3G. SONY HAS UNRIVALLED MULTIMEDIA AND C ONSUMER DESIGN, MARKETING AND RETAIL DISTRIBUTION SKILLS. SONY ERICSSON BEING A MEMBER OF THE SONY GROUP HAS ACCESS TO SOME OF THE WORLD S BIGGEST ENTERTAINMENT COMPANIES. 2.2.3 SONY ERICSON OFFERS MOBILE MULTIMEDIA DEVICES, INCLUDING FEATURE - RICH PHONES AND AC CESSORIES, PC CARDS AND M@M SOLUTIONS FOR END USERS. 2.2.4 THE JOINT VENTURE CONTINUES TO BUILD ON THE SUCCESS OF ITS TWO INNOVATIVE PARENTS. IT CREATES VALUE FOR ITS CUSTOMERS BY BRINGING NEW WAYS OF USING MULTIMEDIA COMMUNICATIONS. 2.2.5 THE GROUP IN A SHORT SPAN O F TIME HAS BUILT A TOTAL PRODUCT PORTFOLIO COMPRISING OF A WIDE CHOICE OF HANDSETS, ACCESSORIES AND APPLICATIONS. YEAR 2007 SAW NEW ADDITIONS TO CYBERSHOT SERIES OF MOBILE PHONES, WHICH WERE A REFLECTION OF SUCCESS OF THESE PHONES, SOME OF THE PHONES WHIC H WERE INTRODUCED UNDER THIS SERIES WERE K770, K660, W760 WALKMAN, W890 WALKMAN, XEPERIA X1, UIQ - 3 BASED G - 700, G - 900, W960 WALKMAN PHONES ETC 2.2.6 THE AES ARE RESPONSIBLE FOR PRODUCT RESEARCH, DESIGN AND DEVELOPMENT, AS WELL AS MARKETING, SALES, DISTRIBUTIO N AND CUSTOMER SERVICES. THE GROUP S GLOBAL MANAGEMENT IS BASED IN LONDON AND HAS R&D CENTERS IN VARIOUS COUNTRIES ACROSS THE WORLD AND IN TOTAL HAS APPROXIMATELY 7,500 EMPLOYEES AROUND THE WORLD. 6.1.4. IN THE ABOVE BACKGROUND, THE ROLE OF ASSESSEE I S DESCRIBED ASUNDER : - I.T.A .NO. - 6410/DEL/2012 27 2.3. SEIN 2.3.1 SEIN IS A COMPANY INCORPORATED UNDER THE LAWS OF INDIA ON APRIL 23, 2007. THE COMPANY IS PRIMARILY ENGAGED IN THE BUSINESS OF TRADING OF SONY ERICSSON MOBILE HANDSETS IN INDIA. AS PART OF THIS ACTIVITY, THE COMPANY UNDERTAKES THE PROMOTION, SALES, MARKETING AND DISTRIBUTION OF MOBILE HANDSETS. THE COMPANY ALSO PROVIDES RELATED POST SALES SUPPORT/WARRANTY SERVICES. (BOLD - TEXTED BY THE BENCH) 6.1.5. A PERUSAL OF INDUSTRY OVERVIEW AT PAGES 11 TO 18 OF THE TP STUDY S HOWS THAT THE BACKGROUND HAS BEEN DISCUSSED PRESUMABLY TO ADDRESS THE COMPETITION IN THE MARKET. A PERUSAL OF THE SAME SHOWS THAT FROM A SITUATION WHERE THERE WAS REGULATED MONOPOLY ENJOYED BY THE DEPARTMENT OF TELECOMMUNICATIONS (DOT) THE INDIAN TELECOMM UNICATION INDUSTRY ENTERED A DEREGULATED MARKET COMPETITION WHERE THERE ARE STATED TO BE MULTIPLE PLAYERS LIKE RELIANCE, BHARTI, TATAS, HFCL ETC OFFERING PARALLEL NETWORKS TO THOSE OF DOT/BHARAT SANCHAR NIGAM LTD. (BSNL) AND MAHANAGAR TELEPHONE NIGAM LTD. (MTNL). THE GROWTH IN THE INDUSTRY IS ATTRIBUTED TO FAVOURABLE TELECOM REGULATIONS, REDUCTION IN CALL RATES AND RISE IN FDI LIMIT AND INCREASING COMPETITION AMONG THE SERVICE PROVIDERS. THE STUDY POINTS OUT THE PERFORMANCE OF EARLIER ENTRANTS USING GSM A ND CODE DIVISION MULTIPLE ACCESS (CDMA), THE COMPETITION AMONGST THE ENTRENCHED AND NEW ENTRANTS SPECIALLY THE CHINESE COMPANIES RESULTING IN THE PRICE WARS AMONGST THE PLAYERS AND NEED AND NECESSITY TO FULFILL THE CUSTOMER S DEMAND OF VARIETY IN COLOUR, RINGTONES AND DEMAND FOR ADDED FEATURES LIKE CAMERA, MUSIC, IMAGING, BUSINESS NEEDS, MOBILE NAVIGATION ETC. SO AS TO CATCH THE CONSUMER S EYE, THE IMPACT OF THE CHANGES IN TECHNOLOGY DEMAND FOR ACCESSORIES, SHORT PRODUCT LIFE CYCLE AND CAUSE OF CONCERNS D UE TO COMPETITION FROM THE FLOURISHING GREY MARKET, REPLACEMENT MARKET AND FREQUENT AND COMPETITIVE LAUNCHES OF NEW MODELS PRESUMABLY TO JUSTIFY THE HIGH AMP SPEND KEEPING THE MARKET REALITIES. 6.1 . 6. SPECIFIC REFERENCE MAY ALSO BE MADE TO THE DISTRIBUTIO N SEGMENT AS UNDER : - 3.3.3 DISTRIBUTION SEGMENT HAS ALSO WITNESSED LOTS OF DEVELOPMENT, RIGHT FROM OPENING UP OF EXPERIENCE STORES TO AVAILABILITY OF PHONES IN BRANDED RETAIL SHOPS. IN ORDER TO INCREASE COVERAGE IN THE RURAL AREAS, EXISTING I.T.A .NO. - 6410/DEL/2012 28 CHANNELS HA VE BEEN ROPED IN TO PROVIDE NECESSARY COVERAGE IN TERMS OF DISTRIBUTION. THERE HAS BEEN A SHIFT IN STRATEGY, CDMA OPERATORS ARE MOVING TOWARDS OPEN MARKET WHEREAS GSM OPERATORS ARE MOVING TOWARDS BUNDLED OFFERING WITH OPERATORS AS HANDSET VENDORS ARE PLAN NING TO LEVERAGE ON ALL EXISTING RESOURCES TO TAP ALL THEIR CUSTOMERS. 3.3.27 . WITH THE EXPANSION HAPPENING IN SMALLER TOWNS AND CITIES, THE HANDSET VENDORS HAVE TO LOOK AT LOW COST DISTRIBUTION MODELS SO THAT THE PRODUCT IS ALSO AVAILABLE IN SMALLER TOWN S AND TALUKAS. NOT ONLY SALES, FOCUS IS ALSO ON COLLECTION POINTS TO IMPROVE AFTER SALES SERVICE. 3.3.28. AS MENTIONED EARLIER, ALL MAJOR PLAYER ARE TYING UP WITH RETAIL CHAINS AND CELLULAR OPERATORS IN ORDER TO HAVE THE MAXIMUM REACH TO THE CUSTOMS AND TO I NCREASE THEIR VISIBILITY IN THE MARKET PLACE. GOING FORWARD THIS TREND IS GOING TO INCREASE AS THE NEXT CHALLENGE IS TO PENETRATE THE RURAL MARKET WHICH WOULD REQUIRE A SUBSTANTIAL INVESTMENT IN DEVELOPMENT OF THE DISTRIBUTION CHANNEL, THEREFORE IN ORDER TO MAXIMIZE THEIR REACH AND AT SAME TIME TOO REMAIN PROFITABLE, MOST OF THE PLAYERS HAVE TIED UP WITH ESTABLISHED NAMES WHO HAVE A STRONG DISTRIBUTION NETWORK. 3.3.29. IN CURRENT MARKET CONDITIONS, DISTRIBUTION HAS ATTAINED CRITICAL IMPORTANCE. THIS IS BE CAUSE THE CHALLENGE IS TO DISTRIBUTE PRODUCTS QUICKLY ANYWHERE ACROSS COUNTRY AND PROVIDE SPEED TO THE MARKET CONSIDE RING COUNTRY S DEMAND POTENTIAL. 3.3.30. MAJOR MOBILE VENDORS HAVE REALIZED IMPORTANCE OF DISTRIBUTION NETWORK, IT IS EVIDENT FROM NUM BER OF RETAIL OUTLETS, UNTIL LAST YEAR THERE WERE 79,000 MOBILE OUTLETS, OUT OF WHICH 72,000 WERE OF NOKIA, OTHER VENDORS REALIZING IMPORTANCE OF THESE OUTLETS HELPED IN INCREASING TOTAL MOBILE OUTLETS TO 1,30,000 OUT OF WHICH 75,000 BELONGED TO NOKIA. HE NCE, IMPLYING THAT WHILE NOKIA HAD REGISTERED AN INCREASE OF 4% IN NUMBER OF RETAIL OUTLETS OVER LAST YEAR, THE OTHER PLAYERS REGISTERED A STAGGERING GROWTH OF 684% IN NUMBER OF RETAIL OUTLETS OVER LAST YEAR. 3.4.1. MOBILE PHONES HAVE MOVED TO THE MASSES IN URBAN AREAS, BUT THE CHALLENGE IS HOW TO ADDRESS SEMI - URBAN AND RURAL AREAS. MOBILE OPERATORS ALREADY COVER MOST OF THE URBAN MARKET AND THE 40% OF NEW SUBSCRIBERS ARE COMING FROM RURAL MARKET. BY THE END OF FY 2007 - 08, RURAL SUBSCRIBERS ACCOUNTED FOR C LOSE TO 25% OF THE TOTAL MOBILE USER BASE IN THE COUNTRY. THE RURAL POPULATION IS LIKELY TO REACH 800 MILLION BY 2010, WHICH IS INDICATES THAT THERE IS A HUGE POTENTIAL MARKET WAITING TO BE TAPPED BY THE TELECOM COMPANIES. ACCORDING TO VOICE AND DATA ESTIM ATES, OF THE NEXT 250 MILLION USERS AS MANY AS 100 MILLION WILL BE FROM THE RURAL PARTS OF THE COUNTRY'. TURNING THESE ESTIMATES INTO REALITY WILL INDEED BE A HERCULEAN TASK AND WILL REQUIRE THE SERVICE PROVIDERS, VENDORS, AND CHANNEL PARTNERS TO WORK TOGE THER SO THAT INDIA CAN ACHIEVE THE HIGH TELEPHONE PENETRATION LEVELS. 3.4.2 THE FIRST CHALLENGE IS TO ENHANCE THE DISTRIBUTION COVERAGE AREA FROM PRESENT 4,000 TO 5,000 - 6,000 CITIES, AND TO PROVIDE FOR AFTER SALES SERVICES IN ALL THESE CITIES.' THE SEC OND CHALLENGE IS THE HIGH LEVEL OF LOCALISATION AS THE POWER SITUATION IN THESE AREAS IS ERRATIC AND THE INTERFACE OF THE PHONES WILL HAVE TO BE CONVERTED TO LOCAL LANGUAGES. THE THIRD CHALLENGE IS TO ENSURE THAT THESE PHONES I.T.A .NO. - 6410/DEL/2012 29 ARE AVAILABLE AT A COST THAT W ILL BE WITHIN THE REACH OF A LARGE POPULATION IN THE SEMI - URBAN AND RURAL AREAS. ALREADY FEW COMPANIES ARE COMING OUT WITH INNOVATIVE SOLUTIONS TO PROBLEMS OF RURAL AREAS. 3.4.3 THE INDUSTRY HAS IMMENSE GROWTH POTENTIAL BUT FOR SMALL PLAYERS LIKE BENQ, HAIER, UTSTARCOM, ZTE, HUAWEI AND OTHERS, IT IS A TOUGH ROAD AHEAD. ACQUIRING MARKET SHARE OF ESTABLISHED PLAYERS ARE GOING TO BE AN UPHILL TASK AND THEY CAN ONLY DO SO AFTER OFFERING PHONES WITH PREMIUM FEATURES (MP3, FM RADIO, CAMERA ETC.) AT CHEAPER RAT ES. HOWEVER, THIS ENTRY STRATEGY OF THESE SMALL PLAYERS WOULD ADVERSELY AFFECT THEIR MARGINS. 3.4.4 THE MOBILE TELEPHONY IN INDIA IS CHARACTERIZED BY INTENSE PRICE COMPETITION. THE YEAR WITNESSED AN INCREASE IN DEMAND FOR MOBILE HANDSETS FROM ALL CORNER S, NAMELY, LOW PRICE MOBILE PHONES DEMAND FROM SMALL TOWNS AND RURAL AREAS TO MORE AND MORE FEATURE LOADED PHONES FOR URBAN TOWNS. THE INCREASE IN VOLUME AND ADVENT OF NEW PLAYERS IN THE MARKET HAS LED TO CUT THROAT COMPETITION CREATING AN INCREASED PRESSU RE ON PRICE OF HANDSETS AND CONSEQUENTLY THE MARGINS OF VENDORS. 3.4.5 BEYOND MAINTAINING MARGINS, VENDORS NEED TO OVERCOME RURAL CHALLENGES LIKE DISMAL INFRASTRUCTURE AND AFTER SALES SERVICE, AS WELL AS THE NEED TO EDUCATE CUSTOMERS AND RETAILERS ABOUT PRODUCT BENEFIT. 3.4.6 THOUGH DEMAND FOR MOBILES WILL BE PRIMARILY DRIVEN BY THE RURAL SECTOR, IMPORTANCE OF REPLACEMENT DEMAND IN URBAN SECTOR CANNOT BE SIDELINED. REPLACEMENT DEMAND WILL PROVIDE AN OPPORTUNITY FOR COMPANIES TO DIFFERENTIATE AND PROVID E VALUE ADDED FEATURES AND PROTECT THEIR MARGINS FROM COMPETITION. 3.4.7 COMPETITIVE ACTIONS ARE PUTTING IMMENSE PRESSURES ON PROFITS AS PRICES DROP IN FACE OF COMPETITIVE ACTIONS, THIS IS ESPECIALLY TRUE IN CASE OF ENTRY - LEVEL SEGMENT. SO MANY COMPANIE S ARE SHIFTING THEIR FOCUS TOWARDS MID TO PREMIUM LEVEL SEGMENT, WHOSE VALUE ADDED PHONES PROVIDE SOME DEGREE OF PROTECTION AGAINST MARGIN EROSION, BUT ECONOMIC SLOWDOWN CAN AFFECT TELECOM SECTOR AS LUXURY END OF HANDSET MARKET IS PARTICULARLY PRONE TO ECO NOMIC SLOWDOWN. BESIDES THAT, THERE IS SIGNIFICANT PRESSURE ON TELECOM COMPANIES TO REDUCE COST THAT WILL REQUIRE EFFICIENT DISTRIBUTION OF RESOURCES. IN SHORT, TELECOM HANDSET COMPANIES MIGHT HAVE TO FIGHT ON ALL FRONTS TO STAY IN THE RACE OR EVEN SURVIVE . (BOLD - TEXT ING PROVIDED FOR EMPHASIZE ) 6. 2 . T HE FUNCTIONS OF THE ASSESSEE ARE STATED TO BE LOCAL MARKETING OF MOBILE PHONES DISTRIBUTOR OF MOBILE PHONES/PRODUCTS; PROVISION FOR REPAIR AND MAINTENANCE SERVICES WHICH INVOLVE, DETERMINING LONG - TER M AND SHORT TERM POLICIES IN RELATION TO THE MARKET IN INDIA; FRAMING AND IMPLEMENTING MARKET PENETRATION AND FUTURE GROWTH STRATEGIES. BASED ON THE BROAD GUIDELINES PROVIDED BY THE AES WHO IS RESPONSIBLE FOR ALL R ESEARCH, CORE, STRATEGIC AND COMPLEX DECI SIONS , IT MAY BE RELEVANT TO EXTRACT PARA 4.4.5, 4.4.6, 4.4.8 & 4.4.9 OF THE TP STUDY AS UNDER : - I.T.A .NO. - 6410/DEL/2012 30 4.4.5. THE OVERALL MARKETING STRATEGY IS DEVELOPED BY THE AES AS THEY HAVE THE REQUISITE EXPERIENCE FOR UNDERTAKING THIS ACTIVITY. BASED ON THE BROAD GUIDEL INES PROVIDED BY THE AE, SEIN DEVELOPS THE LOCAL ADVERTISING AND MARKETING INITIATIVES. 4.4.6. SINCE THE MOBILE HANDSETS AND ACCESSORIES PURCHASED BY SEIN ARE SOLD THROUGH DISTRIBUTORS IN INDIA, SEIN IS RESPONSIBLE FOR DEVELOPING AND MAINTAINING DEALER NET WORK. THE INDIAN ENTITY IS RESPONSIBLE FOR IDENTIFYING AND SELECTING DEALERS, NEGOTIATING TERMS WITH THEM, PROVIDING PRODUCT INFORMATION TO DEALERS ETC. IT ALSO UNDERTAKES ROUTINE FUNCTIONS LIKE CREDIT APPRAISALS, ORDER PROCESSING, WAREHOUSING OF PRODUCT S, INVENTORY MANAGEMENT, LOGISTICS MANAGEMENT, RECEIVABLES MANAGEMENT ETC . 4.4.7. THE SALES TEAM IS RESPONSIBLE FOR PROMOTION AND SALE OF PRODUCTS IN INDIA. IT ALSO LOOKS INTO MAXIMIZING ITS CUSTOMER BASE BY ACQUIRING MORE CUSTOMERS AND RETAINING ITS OLD CUSTOME RS. THE INDIAN ENTRY PUR CHASES HIGH - END MOBILE PHONES F ROM ITS AES. FOR LOW - END MOBILE PHONES, THE AES HAVE APPOINTED A CONTRACT MANUFACTURER IN INDIA FOR MANUFACTURING LOW - END MOBILE PHONES AND SELLING THE SAME TO SEIN AT NEGOTIATED RATES. 4.4.8. FURTHER, AS P ER THE TRANSFER PRICING MODEL, PRICING OF PRODUCTS BETWEEN SEIN AND ITS AES/CONTRACT MANUFACTURER IS REGULATED IN A MANNER THAT ENSURES THAT SEIN EARNS AN ARM S LENGTH RETURN WITH RESPECT TO THE DISTRIBUTION ACTIVITY. THE PRICE IS ADJUSTED ACCORDING TO TH E PRICE LEVEL DEVELOPMENT IN THE MARKET, IF AT THE YEAR END SEIN IS NOT ABLE TO ACHIEVE ARM S LENGTH RETURN WITH RESPECT TO ITS DISTRIBUTION ACTIVITY, THEN AS PER THE TRANSFER PRICING MODEL IT RECEIVES CREDIT NOTES FROM ITS AES TO ACHIEVE AN ARM S LENGTH R ETURN ON SALES. BASED ON THE ABOVE MODEL FOLLOWED BY SEIN, IT IS ABLE TO ACHIEVE AN ARM S LENGTH MARGIN AFTER CONSIDERING ALL TOTAL OPERATING COST. 4.4.9. BASED ON THE ABOVE GUIDANCE AND FACTS AS ENUNCIATED ABOVE, IT IS EVIDENT THAT THE COMPENSATION MODEL OF THE ASSESSE E IS STRUCTURED IN SUCH A MANNER THAT THE REIMBURSEMENT OF ANY EXCESS THIRD PARTY EXPENSES IS ALREADY IN - BUILT IN THE TRANSFER PRICE ADJUSTMENT COMPENSATION RECEIVED BY SEIN WHICH ALLOWS IT TO CONSISTENTLY EARN AN OPERATING MARGIN WHICH IS HIGHER T HAN THE COMPARABLES. C) PROVISION OF POST SALES SUPPORT SERVICES. (BOLD - TEXT ING PROVIDED FOR EMPHASIZE ) 6.3. THE TP STUDY FURTHER STATES THAT THE INTANGIBLE ARE OWNED BY THE AE/GROUP COMPANIES AND THE ASSESSEE IS ONLY A DISTRIBUTOR OWNING NORMAL ROUTINE TANGIBLE ASSETS LIKE OFFICE PREMISES, WAREHOUSING FACILITY, FURNITURE & FIXTURES, COMPUTERS & OFFICE EQUIPMENTS, VEHICLES ETC. FOR READY - REFERENCE, WE EXTRACT PARA 4.5.4 OF THE TP STUDY AS UNDER : - 4.5.4 . THE TRADE NAME SONY ERICSON IS OWNED B Y OVERSEAS GROUP COMPANIES. ACCORDINGLY, THE INDIAN ENTITY IS A DISTRIBUTOR OF BRANDED PRODUCTS, THE I.T.A .NO. - 6410/DEL/2012 31 BRAND BEING OWNED BY THE OVERSEAS SUPPLIER. THE SALE OF A BRANDED PRODUCT TO A DISTRIBUTOR CARRIES WITH IT THE STATED OR IMPLIED RIGHT TO USE THE SUPPLIE R S TRADEMARK OR TRADE NAME ONLY FOR THE PURPOSE OF RESELLING THE SUPPLIER S PRODUCTS. SEIN DOES NOT HAVE NAY OTHER ADDITIONAL RIGHTS TO USE OR EXPLOIT THE MARKETING INTANGIBLES (TRADEMARKS OR TRADE NAMES) OWNED BY GROUP COMPANIES. 6.4. AS PER THE RISK PROFILE THE ASSESSEE IS CHARACTERIZED AS A NORMAL RISK DISTRIBUTOR CARRYING OUT SALES MARKETING AND DISTRIBUTION ACTIVITIES. BEFORE WE PROCEED TO CONSIDER HOW AND TO WHAT EXTENT THE DECISION OF THE SPECIAL B ENCH IN THE CASE OF L.G. ELECTRONIC S CASE IS A PPLICABLE TO THE FACTS OF THE PRESENT CASE, IT IS NECESSARY TO EMPHASIZE A RELEVANT FACT THAT THE PRINCIPAL APPELLANT IN THE CASE OF L.G.ELECTRONIC S CASE WAS A LICENSED MANUFACTURER. ON THE OTHER HAND IN THE PRESENT CASE, THE ASSESSEE IS A DISTRIBUTOR . HENCE WHILE CONSIDERING THE PRECEDENT VALUE OF SPECIAL BENCH IN L.G.ELECTRONIC S CASE TO THE FACTS OF THE PRESENT CASE, THE DISTINGUISHING FACTS AND MORE SO THE MATERIAL FACTS WILL HAVE TO BE KEPT IN MIND . Q UESTIONS AND ISSUES ARISING OUT OF FACTS WHICH NE ITHER AROSE NOR WERE REFERRED TO FOR ITS CONSIDERATIONS NOR ARGUED BEFORE THE SPECIAL BENCH CANNOT BE DEEMED TO HAVE BEEN COVERED AS A BINDING PRECEDENT OF SPECIAL BENCH SO AS APPLY TO THE FACTS OF THE PRESENT CASE. 6.5. WHILE CONSIDERING THE LANGUAGE US ED IN A JUDGEMENT/DECISION, IT IS NECESSARY TO BE BORNE IN MIND THAT IT IS TO BE INTERPRETED PLAINLY AND UNAMBIGUOUSLY AND ARTIFICIAL CONSTRUCTION IS TO BE AVOIDED. THE IMPORTANCE OF READING THE ENTIRE JUDGEMENT/DECISION CAN NEVER BE OVER - EMPHASIZED ESP ECIALLY IF THERE IS A DOUBT CAST BY ANY OF THE PARTIES ABOUT THE PRECEDENT LAID DOWN IN THE JUDGEMENT. THE APPROACH TO REFER TO A STRAY SENTENCE OR A CASUAL REMARK HAS FREQUENTLY BEEN FROWNED UPON BY COURTS AND A WORD O R A SENTENCE BY ITSELF CANNOT BE TR EATED AS A BINDING PRECEDENT. A CASE IS A PRECEDENT FOR WHAT IT ACTUALLY DECIDES AND NOTHING MORE. IT IS EQUALLY WELL - SETTLED THAT FOR CONSIDERING THE APPLICABILITY OF RULES OF INTERPRETATION TO THE WORDS USED IN THE JUDGEMENTS AND DECISIONS VIS - - VIS T HE ACTS OF PARLIAMENT, THE WORDS USED BY THE JUDGES ARE NOT TO BE READ AS IF THEY ARE WORDS I.T.A .NO. - 6410/DEL/2012 32 USED IN AN ACT OF THE PARLIAMENT. STATUTES LAY DOWN RULES IN FIXED VERBAL FORM PRECEDENTS DO NOT. IT HAS TO BE BORNE IN MIND THAT THE PARTICULAR WORDS ARE NOT N ECESSARILY USED BY PRECEDENT COURTS AFTER WEIGHTING THE PROS AND CONS OF ALL CONCEIVABLE SITUATIONS THAT MAY ARISE. THEY CONSTITUTE JUST THE REASONING OF THE JUDGES IN THE PARTICULAR CASE, TAILORED TO A GIVEN SET OF FACTS AND CIRCUMSTANCES, AND ONLY THE PROPOSITION OF LAW WHICH CONSTITUTES RATIO DECIDENDI IS BINDING ON THE SAME SET OF FACTS. THE WORDS USED IN THE ACTS OF PARLIAMENT AS IS WELL KNOWN ON THE OTHER HAND ON ACCOUNT OF THE CAREFUL DRAFTING - PRESUMABLY WITH REFERENCE TO ANALOGOUS STATUTES; THE M ULTIPLE READINGS TO WHICH IT IS SUBJECTED IN THE LEGISLATURE AND THE DISCUSSIONS WHICH GO BEHIND THE MAKING OF A STATUTE INJECT A DEGREE OF SANCTITY AND DEFITENESS TO THE MEANING OF THE WORDS USED BY THE LEGISLATURE. THE SAME CANNOT NECESSARILY BE ALWAYS SAID OF A DECISION WHICH DEALS WITH A CERTAIN GIVEN SET OF FACTS FOR ANSWERING THE SPECIFIC QUESTION POSED TO THE JUDGES. THE JUDGES WHILE DECIDING THE SAME MAY DWELL ON VARIOUS POSSIBILITIES WITHOUT THE BENEFIT OF THE FACTS IN THOSE CASES AND CONSEQUENT LY ARGUMENTS THEREON WHICH THEY MAY DELIBERATE AND AT TIMES WITHOUT THE BENEFIT OF SPECIFIC ARGUMENTS ON THOSE FACTS . THE OBSERVATIONS WHICH MAY HAVE BEEN MADE IN PASSING IN THESE DELIBERATIONS DO NOT FORM THE RATIO DECIDENDI OF THE DECISION . IT WOULD BE TOO MUCH TO ASCRIBE AND READ PRECISE MEANING TO WORDS IN A DECISION WHICH THE JUDGES WHO WROTE THEM MAY NOT HAVE HAD IN MIND. IN SUPPORT OF THE ABOVE LEGAL POSITION, WE MAY MAKE SPECIFIC REFERENCE TO CWT VS DR. KARAN SINGH AND OTHERS. (1993) 200 ITR 614 (SC); CIT VS K. RAMAKRISHNAN (1993) 202 ITR 997 (KERALA) AND KTMTM ADBUL KAYOOM & ANOTHER VS. CIT (1962) 44 ITR 689. THE OBSERVATIONS OF THE HON BLE APEX COURT IN THE CASE OF CIT VS. SUN ENGINEERING WORKS PVT. LTD. (1992) 198 ITR 297 (SC) SPECIFICALLY O BSERVED THAT IT IS NEITHER DESIRABLE NOR PERMISSIBLE TO PICK OUT A WORD OR A SENTENCE FROM THE JUDGEMENT OF THE HON BLE SUPREME COURT DIVORCED FROM THE CONTEXT OF THE QUESTION UNDER CONSIDERATION AND TREAT IT TO BE THE COMPLETE LAW DECLARED. I.T.A .NO. - 6410/DEL/2012 33 6.6. WE MAY ALSO QUOTE THE OBSERVATIONS AS QUOTED IN CIT VS K. RAMAKRISHNAN (1993) 202 ITR 997 (KER.) AND STATE OF ORRISA VS SUDHANSU SHEKHAR MISRA AND OTHERS AIR 1968 SC 647 FROM OF LORD HALSBURY LC FROM QUINN V. LEATHEM [1901] AC 495 (HL), AT PAGE 506: .THERE A RE TWO OBSERVATIONS OF A GENERAL CHARACTER WHICH I WISH TO MAKE, AND ONE IS TO REPEAT WHAT I HAVE VERY OFTEN SAID BEFORE, THAT EVERY JUDGEMENT MUST BE READ AS APPLICABLE TO THE PARTICULAR FACTS PROVED, OR ASSUMED TO BE PROVED, SINCE THE GENERALITY OF THE E XPRESSION WHICH MAY BE FOUND THERE ARE NOT INTENDED TO BE EXPOSITIONS OF THE WHOLE LAW, BUT GOVERNED AND QUALIFIED BY THE PARTICULAR FACTS OF THE CASE IN WHICH SUCH EXPRESSIONS ARE TO BE FOUND. THE OTHER IS THAT A CASE IS ONLY AN AUTHORITY FOR WHAT IT AC TUALLY DECIDES. I ENTIRELY DENY THAT IT CAN BE QUOTED FOR A PROPOSITION THAT MAY SEEM TO FOLLOW LOGICALLY FROM IT. SUCH A MODE OF REASONING ASSUMES THAT THE LAW IS NECESSARILY A LOGICAL CODE, WHEREAS EVERY LAWYER MUST ACKNOWLEDGE THAT THE LAW IS NOT ALWA YS LOGICAL AT ALL . 6.7. THE LEGAL POSITION CAN BE SUMMED UP BY STATING THAT THE CORRECT APPROACH IS THAT A JUDGEMENT OR A DECISION CONSIDERED TO BE A BINDING PRECEDENT NECESSARILY HAS TO BE READ AS A WHOLE AND THE RATIO DECIDENDI OF THE RULING EXPRESSLY OR IMPLIEDLY GIVEN BY A COURT OR TRIBUNAL IS SUFFICIENT TO SETTLE A POINT OF LAW PUT IN ISSUE BY THE ARGUMENTS OF THE PARTIES IN A CASE, BEING A POINT ON WHICH A RULING WAS NECESSARY TO JUSTIFY THE DECISION IN THAT PARTICULAR CASE IN THE LIGHT OF THE QUE STION WHICH WAS BEFORE THE COURT. IT GOES WITHOUT SAYING THAT A DECISION OF THE COURT AND THAT EQUALLY APPLIES TO THE TRIBUNAL ALSO TAKES ITS COLOUR FROM THE QUESTIONS POSED IN THE CASE IN WHICH IT IS RENDERED AND WHILE APPLYING THE DECISION TO A LATER CA SE, IT IS NECESSARY FOR THE COURTS TO ASCERTAIN THE TRUE PRINCIPLE LAID DOWN BY THE COURT. SIMILAR WOULD NECESSARILY BE THE POSITION CONSIDERING THE DECISION OF A CO - ORDINATE BENCH OR THE SPECIAL BENCH IN WHICH CASE THE SPECIAL BENCH BEING A LARGER BENCH HAS GREATER PRECEDENT VALUE IN THE CONTEXT OF THE QUESTION POSED TO IT. THE TRANSFER PRICING LITIGATION AND ADJUDICATION BEING FACT BASED NECESSARILY REQUIRES CONSIDERATION OF THE BUSINESS MODEL OF THE ASSESSEE AND THE CONTRACTUAL TERMS ENTERED INTO WITH THE AE ALONG WITH A DETAILED FAR ANALYSIS SO AS TO CHARACTERIZE THE TRANSACTIONS AND THE BUSINESS MODEL. AFTER CHARACTERING THE TAXPAYER ON THE BASIS OF FAR ANALYSIS, A SELECTION OF COMPARABLE COMPANIES HAS TO MADE WHERE I.T.A .NO. - 6410/DEL/2012 34 FUNCTIONAL SIMILARITY QUA THE TRAN SACTION ON THE BASIS OF THE FAR ANALYSIS OF THE COMPARABLE COMPANIES IS NECESSARILY REQUIRED TO BE DONE. IN ORDER TO DECIDE THE APPLICABILITY OF ANY SECTION, RULE OR PRINCIPLE UNDERLYING THE DECISION OR JUDGEMENT WHICH WOULD BE BINDING AS A PRECEDENT IN A CASE, AN APPRAISAL OF FACTS OF THE CASE IN WHICH THE DECISION HAS BEEN RENDERED IS NECESSARY SINCE THE SCOPE AND AUTHORITY OF A PRECEDENT SHOULD NEVER BE EXPANDED UNNECESSARILY BEYOND THE NEEDS OF A GIVEN SITUATION AS HELD BY THE HON BLE SUPREME COURT IN P.A.SHAH VS. STATE OF GUJARAT AIR 1986 SC 468. MORE SO IN THE CASE OF TRANSFER PRICING THE DETAILED ANALYSIS CANNOT BE OVER LOOKED AS ONLY THEREAFTER THE APPLICABILITY OF THE DECISION TO THE FACTS OF A CASE TO WHICH IT IS SOUGHT TO BE APPLIED CAN BE CO NSIDERED. 6.8. THE NEED IN THE FACTS OF THE PRESENT CASE IS MORE SO, AS TRANSFER PRICING LEGISLATION AND THE RULES THEREUNDER SPECIFICALLY RULE 10B(2) FRAMED U/S 92C OF THE INCOME TAX ACT MANDATE THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN TRANSACTIONS/ FUNCTIONS PERFORMED TAKING INTO ACCOUNT THE ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED B Y THE RESPECTIVE PARTIES TO THE TRANSACTIONS; THE CONTRACTUAL TERMS WHETHER OR NOT SUCH TERMS ARE FORMALLY PUT IN WRITING OR ARE ORALLY AGREED WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES AND EVIDENCES THE RISKS AND BENEFITS TO BE DIVID ED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS HOW THE PARTIES HAVE ACTUALLY ACTED; AND CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATIONS AND SIZE OF THE MARKETS, T HE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION IN THE SECTOR AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. 6.9. ON A CONSIDERATION OF THE ARGUMENTS AND CONSIDER ATION OF THE MATERIAL AVAILABLE ON RECORD, WE ARE OF THE VIEW THAT THE ORDERS AND JUDGEMENTS OF CO - ORDINATE DIVISION BENCHES OR SPECIAL BENCHES OF THE TRIBUNAL CONSISTING OF 3 I.T.A .NO. - 6410/DEL/2012 35 MEMBERS AS IN L.G. ELECTRONICS CASE OR THE HON BLE HIGH COURT AND HON BLE APEX C OURT SPECIALLY IN TRANSFER PRICING ADJUDICATION CANNOT NECESSARILY ALWAYS BE TAKEN AS A BINDING PRECEDENT UNLESS FACTS AND CIRCUMSTANCES ARE IN PARI MATERIA IN A CASE CITED BEFORE THE COURT AS HELD IN RAMESH SINGH VS. STATE OF A.P 2004 (2) SUPREME 749. ONE MAY ALSO REFER TO RUDRAPPA RAMOPPA VS. STATE OF KARNATKA AIR 2004 SC 4148 AND ABDUL KAYOOM S CASE (CITED SUPRA). THE APPLICABILITY OF THE DECISIONS AND ORDERS IN TRANSFER PRICING ADJUDICATION CAN ONLY COME AFTER IT HAS BEEN ESTABLISHED THAT RELEVANT F ACTS ARE IDENTICAL TRANSFER PRICING ISSUES, BEING FACT DRIVEN, THE NEED AND NECESSITY TO CAREFULLY EXAMINE THE FACTS IN ORDER TO CULL OUT THE RELEVANT FACTS IS THUS IMPERATIVE. THIS ENTIRE ENQUIRY IS FACT STREWN AND FACT DRIVEN AND THE CHANGE OR NUANCED C HANGE IN THE FACTS OF A CASE CAN LEAD TO DIFFERENT CONCLUSIONS. F OR INSTANCE THE TERMS OF THE CONTRACT IN THE CASE UNDER CONSIDERATION AND THE DECISION WHOSE PRECEDENT IS BEING SOUGHT TO APPLY MAY SIGNIFICANTLY VARY OR ON THE CONTRARY IT MAY BE BORNE OUT THAT THE TERMS OF THE CONTRACT ARE IDENTICAL HOWEVER THE CONDUCT OF THE PARTIES EVIDENCED DESPITE A SIMILARITY IN THE SIGNIFICANT TERMS OF THE CONTRACT MAY BE DIAMETRICALLY DIFFERENT. AS SUCH THE CONCLUSIONS QUA THE FUNCTIONS PERFORMED VIS - A - VIS THE FUNCT IONS ASSUMED WOULD BE ENTIRELY DIFFERENT. 6. 10 . IN THE FACTS OF THE PRESENT CASE ON BEHALF OF THE ASSESSEE, THE STAND HAS BEEN THAT KEEPING ITS LEGAL CLAIM ALIVE THE ISSUE MAY BE RESTORED CONSIDERING THE WITHOUT PREJUDICE ARGUMENTS, IN TERMS OF THE DECI SION OF THE SPECIAL BENCH IN L.G. ELECTRONIC S CASE. THE CLAIM OF THE DEPARTMENT ON THE CONTRARY HAS BEEN THAT THE LEGAL ISSUES HAVING BEEN DECIDED AGAINST THE ASSESSEE, THE ORDER MAY BE CONFIRMED AS THE ISSUE IS COVERED . ACCORDINGLY, CONSIDERING THE AB OVE LEGAL PRINCIPLES ADDRESSING THE PRECEDENT VALUE OF DECISION, WE HOLD THAT IN ORDER TO DECIDE THE ISSUE REFERENCE HAS TO BE MADE TO THE SPECIFIC FACTS OF THE CASE AND THEN APPLY THE LEGAL PRINCIPLE WHICH CAN BE SAID TO CONSTITUTE A PRECEDENT FOR DECIDIN G THE ISSUES. IT WOULD BE A GRAVE ERROR OF JUDGEMENT TO BLINDLY RELY UPON A DECISION I.T.A .NO. - 6410/DEL/2012 36 AS A PRECEDENT FOR ALL FUTURE CASES SIMPLY BECAUSE THE DECISION IS BY A LARGER BENCH OR AN EARLIER CO - ORDINATE BENCH SINCE THE FACTS OF EACH AND EVERY CASE WILL DETERMINE THE EXTENT TO WHICH THE SAID DECISION IS BINDING. T O HOLD OTHERWISE WOULD SET A BAD PRECEDENT OF DECIDING ON ISSUES DE - HORSE THE FACTS ON RECORDS. THIS MANDATORY EXERCISE IS ALWAYS REQUIRED TO BE DONE BY AN ADJUDICATING BODY/AUTHORITY SO THAT ITS DECISI ON CAN WITHSTAND LEGAL SCRUTINY. A FINDING OF FACT BECOMES THE LEGAL FINDING ONLY WHEN THE PROCEDURES PRESCRIBED BY LAW IS FOLLOWED I.E THE CHARACTERIZATION AND A DETAILED FAR EXAMINATION OF THE TAXPAYER ALONG WITH SIMILAR CHARACTERIZATION AND FAR ANALY SIS OF THE DECISION SOUGHT TO BE APPLIED. 6.11. IN VIEW OF THE PROPOSITION OF LAW APPLICABLE TO TRANSFER PRICING CASES AS LAID DOWN ABOVE ON A DETAILED CONSIDERATION OF THE TP STUDY OF THE ASSESSEE (PARA 4.4.5 EXTRACTED IN THE EARLIER PART OF THIS ORDER) , WE HOLD THAT THE ASSESSEE HAS PERFORMED SIGNIFICANT INTENSITY FUNCTIONS IN ADVERTISING MARKETING AND SELLING THE PRODUCT CARRYING THE BRAND NAME OF THE AE. WHILE DOING SO THE ASSESSEE HAS DONE FOLLOWING THE GUIDELINES OF THE AE WHO AS PER THE TP STUDY O F THE ASSESSEE HAD THE REQUISITE EXPERIENCE FOR DEVELOPING OVERALL MARKETING STRATEGY. AS SUCH WE HOLD THAT THE ASSESSEE HAS PERFORMED SERVICES BEYOND THE ROUTINE SERVICES AND ACTIVELY CONTRIBUTION TO BRAND BUILDING FOR ITS AE AS THE ASSESSEE IN ITS OWN TP STUDY ACCEPTS THAT SIGNIFICANT INTENSITY FUNCTIONS OF ADVERTISING, MARKETING, SELLING, PROMOTION ETC. HAVE BEEN PERFORMED AND THE CLAIMS OF THE ASSESSEE STATING THAT ONLY ROUTINE FUNCTIONS HAVE BEEN PERFORMED AS A DISTRIBUTOR ARE NOT AGREE D WITH SINCE T HE AMP/SALES RATIO OF THE ASSESSEE IS HIGHER THAN THOSE OF THE COMPARABLES . ACCORDING LY THE ASSESSEE S CLAIMS IN THE TP STUDY DESCRIBING THE FUNCTIONS AS ROUTINE FUNCTIONS IS NOT ACCEPTABLE. THE RECORD SHOWS THAT CONSIDERING THE 12 COMPARABLES OF THE AS SESSEE ITSELF ACCEPTED BY THE TPO (OUT OF THE 18 COMPARABLES GIVEN) THE ASSESSEE S AMP/SALES RATIO IS 7.06% AS COMPARED TO 3.35 % OF THE COMPARABLES. THE ARITHMETIC MEAN OF THE AMP/SALES RATIO OF THE COMPARABLES I.T.A .NO. - 6410/DEL/2012 37 BEING THE BRIGHT LINE HAS BEEN UPH E LD BY THE SPECIAL BENCH IN L.G.ELECTRONIC S CASE. THE LEGAL ISSUE FOLLOWING THE PRECEDENT LAID DOWN BY THE SPECIAL BENCH IN L.G. ELECTRONIC S CASE, IS HELD AGAINST THE ASSESSEE. THE ARGUMENT THAT THESE CONSTITUTE ROUTINE FUNCTIONS FOR A DISTRIBUTOR APPLYING TH E BRIGHT - LINE TEST, FOLLOWING THE PRECEDENT HAS TO BE DECIDED AGAINST THE ASSESSEE AND ASSERTIONS TO THE CONTRARY THAT THESE ARE ROUTINE FUNCTIONS FOR A DISTRIBUTOR WOULD HAVE NO RELEVANCE. 6.12. ON FACTS THE BRIGHT - LINE FROM 3.35% WILL BE NEEDED TO BE C ALCULATED AGAIN AS CONSIDERING THE PARTIAL RELIEF GRANTED BY THE DRP AS A RESULT OF EXCLUDING REDITON INDIA LTD. AND COMPUAGE INFOCOM WILL RESULT IN 4.02% AS THE BRIGHT LINE . APPLYING THIS BRIGHT LINE THERE IS STILL A DIFFERENCE IN 7.06% AND 4.02% AS THER E IS STILL EXPENDITURE IN EXCESS TO THE EXTENT OF 3.04% (7.06 - 4.02=3.04). THUS APPLYING THE PRECEDENT, THE EXPENDITURE TO THAT EXTENT SHALL CONSTITUTE NON - ROUTINE FUNCTIONS AS A RESULT OF WHICH THE BRAND OWNED BY THE AE HAS BENEFITED RESULTING IN SERVICE TO THE AE WHICH HAS BEEN DONE AT THE COST OF THE PROFITS OF THE ASSESSEE EARNED IN INDIA . ACCORDINGLY UPHOLDING THE APPLICATION OF THE BRIGHT LINE TEST AND UPHOLDING THE FINDING THAT ASSESSEE HAS ENTERED INTO AN INTERNATIONAL TRANSACTION, THE LEGAL ISSUES TO THAT EXTENT ARE DECIDED AGAINST THE ASSESSEE FOLLOWING THE PRECEDENT IN THE DECISION OF THE SPECIAL BENCH IN L.G. ELECTRONICS CASE. CONSEQUENTLY , THE GROUNDS ASSAILING THE ACTION OF THE DRP IN UPHOLDING THE TPO S ORDER, HOLDING THE TRANSACTION AS AN I NTERNATIONAL TRANSACTION; AND HOLDING THAT COMPENSATION FOR NON - ROUTINE INCURRING OF EXPENDITURE FOR ADVERTISING THE BRAND OF THE AE BY WHICH THE BENEFIT HAS ACCRUED TO THE AE APPLYING THE BRIGHT LINE TEST IS DECIDED AGAINST THE ASSESSEE. WHILE SO HOLDING , WE RESTORE THE ISSUE FOR CORRECTLY CALCULATING AMP EXPENSES FOLLOWING THE DECISION OF THE SPECIAL BENCH IN L.G. ELECTRONIC S CASE AS A RESULT OF WHICH SALESMAN/DEALER BONUS/SELLING EXPENSES ARE TO BE EXCLUDED. 6. 13 . THE LD. AR IN THE COURSE OF THE ARGUME NTS HAS REQUESTED FOR A DIRECTION THAT CONSIDERING THE QUESTION NOS. - 9 & 10 CONSIDERED BY THE SPECIAL BENCH, NO COMPENSATION WOULD BE WARRANTED AND THE TPO BE DIRECTED TO LOOK INTO IT AS IN THE I.T.A .NO. - 6410/DEL/2012 38 FACTS OF THE PRESENT CASE, CREDIT NOTES AMOUNTING TO RS.73 CR ORE ODD HAVE BEEN RECEIVED BY THE ASSESSEE. THE LD. CIT DR AS OBSERVED EARLIER ALSO HAS VEHEMENTLY ARGUED THAT WITH HINDSIGHT DUE TO THE DECISION OF THE SPECIAL BENCH, THE ASSESSEE CANNOT NOW BE ALLOWED TO ARGUE THAT THIS WAS FOR AMP EXPENDITURE AS THE AS SESSEE HAS NOT SHOWN AMP EXPENDITURE AS AN INTERNATIONAL TRANSACTION AS SUCH IT CANNOT NOW BE ALLOWED TO ARGUE THAT FOR HIGH AMP CREDIT NOTES WERE ISSUED. 6. 13 .1. CONSIDERING THE ARGUMENTS ON BEHALF OF THE ASSESSEE AND THE DEPARTMENT, WE ARE OF THE VIEW THAT THE NARRATIONS QUA THE CREDIT NOTES SHOULD BE TREATED AS FROZEN IN TIME AND THE ASSESSEE SHOULD NOT NOW BE ALLOWED TO RE - WRITE THE NARRATIONS AS TO FOR WHAT PURPOSE THEY WERE GIVEN. HOWEVER ENQUIRY AND EXAMINATION THEREOF CANNOT BE BLOCKED/OBSTRUCTE D , THE SAME NECESSARILY HAS TO BE DONE. IN THE FACTS OF THE PRESENT CASE, IT IS SEEN THAT RIGHT FROM THE BEGINNING, THE CLAIM OF THE ASSESSEE HAS BEEN THAT THE CREDIT NOTES HAVE BEEN RECEIVED IN ORDER TO ENSURE THAT THE ASSESSEE MAINTAINS PROFITABILITY. IT IS ALSO SEEN THAT AS PER PARA 4.4.8 AND 4.4.9 OF THE TP STUDY EXTRACTED IN THE EARLIER PART OF THIS ORDER (AT PAGE 30) THAT IT IS CLAIMED THAT PRICE IS ADJUSTED ACCORDING TO THE PRICE LEVEL DEVELOPMENT IN THE MARKET AND IF AT THE YEAR END , THE ASSESSE E IS NOT ABLE TO ACHIEVE ARM S LENGTH RETURN WITH RESPECT TO THE DISTRIBUTION ACTIVITY THEN AS PER THE TRANSFER PRICING MODEL, IT RECEIVES CREDIT NOTES FROM THE AE TO ACHIEVE AN ARM S LENGTH RETURN ON SALES. BASED ON THIS MODEL, IT IS STATED THE ASSESSEE IS ABLE TO ACHIEVE AN ARM S LENGTH MARGIN AFTER CONSIDERING TOTAL OPERATING COSTS. IT IS SEEN THAT SUBMISSIONS ON SIMILAR LINE HA D BEEN MADE BEFORE THE TPO AND THE DRP STATING THAT AS PER THE GLOBAL PRICING POLICY, ASSESSEE IS ASSURED OF 2% PROFIT. RELIA NCE IN THE COURSE OF THE ARGUMENTS HAS BEEN PLACED ON THE PRACTICAL MANUAL ON TRANSFER PRICING MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES WHERE INDIA HAS BEEN REPRESENTED THROUGH THE REPRESENTATIVE OF THE REVENUE. PARA 10.3.8.15 (EXTRACTED IN THE EARLIER PART OF THIS ORDER) ADDRESSES THE CONCERN OF THE REVENUE ON WHICH IT HAS BEEN ARGUED THAT THE CONCERN EXPRESSED IS IN THE CONTEXT OF DISTRIBUTORS WHO ARE STATED TO I.T.A .NO. - 6410/DEL/2012 39 BE NO RISK/LOW RISK ENTITIES SHOWING NEGATIVE INCOMES/HUGE LOSSES. FROM A PERUSAL OF PAGE 23 - 26 PAGED WRITTEN SUBMISSION NUMBERING 60 PAGES, IT IS SEEN THAT IN THE RECENTLY RELEASED PRACTICAL MANUAL ON TRANSFER PRICING MANUAL FOR DEVELOPING COUNTRIES WHICH INCLUDES THE WORKING OF VARIOUS AUTHORS INCLUDING REPRESENTATIVES OF REVENUE, GO VT. OF INDIA AS IS EVIDENT FROM THE FORWARD TO THE MANUAL THE CONCERNS ADDRESS LOSS MAKING DISTRIBUTORS WHO ARE STATED TO BE NO RISK//LOW RISK DISTRIBUTOR. THE PARTICIPATION OF THE REPRESENTATIVE OF INDIA EVIDENCED FROM THE FORWARD TO THE MANUAL IS REPRODU CED FOR READY - REFERENCE : - WHILE CONSENSUS HAS BEEN SOUGHT AS FAR AS POSSIBLE, IT WAS CONSIDERED MOST IN ACCORD WITH A PRACTICAL MANUAL TO INCLUDE SOME ELEMENTS WHERE CONSENSUS COULD NOT BE REACHED, AND IT FOLLOWS THAT SPECIFIC VIEWS EXPRESSED IN THIS MAN UAL SHOULD NOT BE ASCRIBED TO ANY PARTICULAR PERSONS INVOLVED IN ITS DRAFTING. CHAPTER 10 IS DIFFERENT FROM OTHER CHAPTERS IN ITS CONCEPTION, HOWEVER. IT REPRESENT AN OUTLINE OF PARTICULAR COUNTRY ADMINISTRATIVE PRACTICES AS DESCRIBED IN SOME DETAIL BY RE PRESENTATIVES OF THOSE COUNTRIES , AND IT WAS NOT CONSIDERED FEASIBLE OR APPROPRIATE TO SEEK A CONSENSUS ON HOW SUCH COUNTRY PRACTICES WERE DESCRIBED. CHAPTER 10 SHOULD BE READ WITH THAT DIFFERENCE IN MIND. 6.13.2. THE CONCERN ADDRESSING LOSS MAKING DIS TRIBUTORS ARE CULLED OUT FROM P AGE 24 OF VOL. - 3 OF THE PAPER BOOK WHICH CONTAIN S THE COPY OF THE UN PRACTICAL MANUAL IN TRANSFER PRICING FOR DEVELOPING COUNTRIES : - 10.3.8.15. THE IMPORTANT ISSUE IN THE DETERMINATION OF ALP IN THESE CASES IS TO EXAMINE WH O BENEFITS FROM THE EXTRAORDINARY AMP EXPENDITURE. TAXPAYERS GENERALLY CLAIM THAT SUCH EXTRAORDINARY EXPENDITURE HELPS THE BUSINESS OF THE INDIAN ENTITY ALSO IN ADDITION TO PARENT MNE. HOWEVER, THE TAX AUTHORITIES IN INDIA HAVE FOUND THAT INDIAN DISTRIBU TORS ARE CLAIMED TO BE NO RISK OR LOW RISK BEARING ENTITIES AND ARE GETTING FIXED AND ROUTINE RETURN ON COST PLUS BASIS. THEY DO NOT GET A SHARE IN THE EXCESS PROFIT RELATABLE TO LOCAL MARKETING INTANGIBLES. ACCORDINGLY, EXTRA - ORDINARY AMP EXPENDITURE DO ES NOT ENHANCE THE PROFITABILITY OF INDIAN SUBSIDIARY OR RELATED PARTY. THIS CONCLUSION OF THE TAX AUTHORITIES IS FURTHER SUPPORTED BY THE FACT THAT THESE SO CALLED RISK - FREE OR LIMITED RISK DISTRIBUTORS HAVE DISCLOSED HUGE LOSSES EVEN WHEN THEY ARE ENTIT LED FOR FIXED RETURN ON COST PLUS BASIS AND SHOULD NOT HAVE INCURRED LOSSES. 6.1 3.3 . ON CONSIDERATION OF THE ABOVE CONCERNS, IT IS SEEN THAT THE CONCERNS IN THE SAID PARA NAMELY THE INCURRING OF HUGE LOSSES WAS JUSTIFIABLY QUESTIONED AND QUESTIONABLE IN THE ACTIVITY OF A DISTRIBUTOR WHO IS CLAIMED TO BE NO RISK OR LOW RISK I.T.A .NO. - 6410/DEL/2012 40 ENTITY GETTING FIXED AND ROUTINE RETURN WITH COST PLUS. AS SUCH THERE IS SIGNIFICANT MERIT IN THE ARGUMENTS ADVANCED ON BEHALF OF THE ASSESSEE THAT HAVING SHOWN A HIGHER PROFIT AS COMP ARED TO THE COMPARABLES COMPENSATION MAY NOT STILL BE DUE. THE RECORD SHOWS THAT THE NET PROFIT OF THE ASSESSEE IS 2.5% AND THAT OF THE COMPARABLES IS 0.35% THE HIGHER MARGIN CAN BE ARGUED TO BE RECEIVED FOR THE SERVICES RENDERED. THE REMUNERATION MODEL OF A DISTRIBUTOR AS PER OECD TP GUIDELINES MANUAL AND AUSTRALIAN TAX OFFICE GUIDELINES ALSO SUPPORTS THE ARGUMENT THAT A DISTRIBUTOR CAN BE REWARDED BY PRICING ADJUSTMENT; DIRECT PAYMENT OF FEES FOR SERVICES RENDERED AND ALSO BY SUBSIDIES AND CREDIT NOTES ETC. IN THE FACTS OF THE PRESENT CASE, IT NEEDS TO BE KEPT IN MIND THAT THE ASSESSEE IS CHARACTERIZED AS A DISTRIBUTOR AND CONSIDERING ITS FAR ANALYSIS IT HAS PERFORMED A HIGHER INTENSITY OF SERVICES WHEN COMPARED TO ITS COMPARABLES. THE DISTINGUISHING F EATURE THAT WHE REAS THE ASSESSEE HAS RECEIVED CREDIT N OTES WORTH 78 CRORE ODD IS A FACT, THE POSITION WHETHER THE COMPARABLES HAVE ALSO RECEIVED ANY SUCH BENEFIT OR SUBSIDY AS OBSERVED IN PARA 19 IN THE CASE OF THE L.G. ELECTRONICS NEEDS TO BE CONSIDERED A S SUBMITTED ON BEHALF OF THE ASSESSEE WHO REQUESTS SIMILAR ENQUIRY QUA THE COMPARABLES MAY ALSO BE DONE. AS SEEN THE SPECIAL BENCH IN THE CASE OF L.G. ELECTRONICS WAS CONSIDERING THE FACTS OF A LICENSED MANUFACTURER WHO WAS THE PRINCIPAL APPELLANT AND THO UGH THE SPECIAL BENCH DID ATTEMPT TO CONSIDER THE SITUATION OF ALL POSSIBLE DIVERSE BUSINESS MODELS AND VARIOUS POSSIBLE PERMUTATIONS AND COMBINATIONS WHICH MAY BE INCORPORATED IN THE TERMS OF THE AGREEMENT S BY THE PARTIES FINALLY ACCEPTED ITS HUMANE LIMIT ATIONS WHEN IT GIVES VOICE TO THE IMPOSSIBILITY OF THE HERCULIAN TASK UNDERTAKEN WHILE OBSERVING THAT THERE CANNOT BE A STRAIGHT JACKET FORMULA . OPERATING WITHIN THE LIMITATIONS OF OPINING WITHOUT HAVING THE BENEFIT OF SPECIFIC FACTS AND ARGUMENT 14 PA RAMETERS HAVE BEEN SUGGESTED IN PARA 17.4 BY THE SPECIAL BENCH. QUESTION NO. - 1 IN PARA 17.4 SETS OUT THAT IT IS NECESSARY TO SEE WHETHER THE ASSESSEE IS A DISTRIBUTOR OR A LICENSED MANUFACTURES THEREBY ACCEPTING THAT THERE ARE MATERIAL AND DISTINGUISHING FEATURES I.T.A .NO. - 6410/DEL/2012 41 IN THE TWO. SIMILARLY QUESTION NO - 9 & 10 CONSIDERS THE NECESSITY OF THE FACT WHETHER ANY COMPENSATION IN THE FORM OF A SUBSIDY IS RECEIVED FOR THE AE AND WHETHER IT IS ADEQUATE FOR THE SERVICES RENDERED. AS SUCH THE FACTUM OF CREDIT NOTES IN THE FACTS OF THE PRESENT CASE IS NECESSARILY REQUIRED TO BE SEEN SO AS TO CONSIDER FOR WHAT PURPOSE IT HAS BEEN ISSUED AND IF IT IS TO MAINTAIN THE PROFITABILITY UPTO AN EXTENT SO AS TO COVER THE HIGHER INTENSITY OF FUNCTIONS VIS - - VIS THE COMPARABLES THEN EN QUIRY WHETHER IT IS ADEQUATE TO COVER THE SERVICES RENDERED WILL COME INTO CONSIDERATION. QUESTION NO - 12 OF THE L.G. ELECTRONICS CASE ALSO SUGGESTS THAT WHETHER THIS IS THE ENTRY LEVEL YEAR IS ALSO AN AREA REQUIRING CONSIDERATION. IN THE FACTS OF THE PRE SENT CASE AS PER THE TP STUDY THIS IS THE FIRST YEAR OF THE ASSESSEE IN INDIA. CONSIDERATION OF THE SAID FACT ALSO NEEDS TO KEEP IN MIND. 6.1 4 . ACCORDING ON ACCOUNT OF THE DETAILED REASONS GIVEN HEREINABOVE, WE HOLD THAT THE GROUNDS QUA THE APPLICATION OF BRIGHT - LINE TEST IS DECIDED AGAINST THE ASSESSEE, THERE AFTER HOLDING THAT THE ASSESSEE HAS RENDERED HIGHER INTENSITY FUNCTIONS QUA THE COMPARABLES BY WHICH THE AE OF THE ASSESSEE HAS BEEN BENEFITED BY BRAND BUILDING EXERCISE ON THE PART OF THE ASSESSEE AF FECTING THE PROFIT OF THE ASSESSEE THEREBY ERODING THE TAX BASE BY THE SAID INTERNATIONAL TRANSACTION. ON CONSIDERATION OF FACTS, THE ISSUE FOR CALCULATING THE CORRECT AMP EXPENSE IS RESORTED TO THE TPO/AO WHO IS FURTHER DIRECTED TO CONSIDER ON FACTS WHET HER COMPENSATION WAS STILL DUE ON ACCOUNT OF THE PRICING ADJUSTMENT CONSIDERING PARA 4.8 .8 AND 4.4.9 IN THE TP STUDY REPORT AVAILABLE ON RECORD AND THE CREDIT NOTES OF RS.78 CRORE ODD RECEIVED BY THE ASSESSEE AND QUESTION NO - 1,9,10 & 12 OF PARA 17.4 OF L. G. ELECTRONIC CASE KEEPING IN MIND OUR FINDING THAT THE ASSESSEE IS A DISTRIBUTOR WHOSE REMUNERATION MODEL IS NOT ONLY SUPPORTED BY INTERNATIONAL TAX JURISPRUDENCE AS AVAILABLE IN THE OECD GUIDELINES AND AUSTRALIAN TAX GUIDELINES BUT IS ALSO FOUND SUPPORTE D BY QUESTIONS 1,9 & 10 OF THE L.G. ELECTRONICS CAS E AS CONSIDERED BY THE SPECIAL B ENCH. THE ASSESSEE HAS MADE A REFERENCE TO ITS GLOBAL PRICING POLICY ON I.T.A .NO. - 6410/DEL/2012 42 WHICH THE TP STUDY IS BASED, THE SAME MAY BE PRODUCE BEFORE THE TPO/AO. AS SUCH THE ARGUMENTS OF TH E ASSESSEE TO THE ABOVE EXTENT ARE UPHELD. 6.15 . ON THE ISSUE OF MARK - UP IF STILL SO WARRANTED ON FACTS THE ARGUMENTS OF THE LD. AR HAVE BEEN THAT THE SAME IS EXCESSIVE. IT IS SEEN THAT THERE IS NO DISCUSSION IN THE TPO S ORDER AS TO WHY A MARK - UP OF 15 % IS ADEQUATE. SIMILARLY DRP ALSO DO ES NOT GIVE ANY JUSTIFICATION FOR REDUCING THE SAME TO 12.5%. W E REFRAIN FROM SUBSTITUTING THE ARBITRARY MARK - UP BY OUR OWN ARBITRARY ESTIMATE IN THE ABSENCE OF ANY FACTS OR MATERIAL ON RECORD. EVEN ESTIMATES HAVE TO HAVE SOME RATIONALE AND REASONING WHICH IS COMPLETELY ABSENCE IN THE ORDERS AND ARGUMENTS ADVANCED BEFORE US. ACCORDINGLY, WE DEEM IT APPROPRIATE TO SET ASIDE THE ORDERS AND RESTORE THE ISSUE BACK TO THE TPO/AO WITH THE DIRECTION TO GIVE A RATIONALE BAS IS FOR APPLYING A MARK - UP AFTER HEARING THE ASSESSEE , IF SO WARRANTED ON FACTS . IN PRINCIPL E THE DEPARTMENTAL STAND THAT OVER AND ABOVE COMPENSATION OF COSTS INCURRED MARK - UP FACTORING IN THE PROFITS FOR APPLICATION O F ITS FUNDS , RESOURCES AND EFFORTS IN TERMS OF TIME AND ENERGY NEEDS BE CONSIDERED A LS O. WHETHER ON FACTS, THE ADJUSTMENT IN ARM S LENGTH PRICE IS STILL WARRANTED OR NOT SHALL BE DECIDED ON THE FACTS OF THE CASE , C ONSIDERING THE GUIDELINES OF THE SPECIAL BENCH WHICH NEED TO BE CONSIDERED FOR CALCULATING THE CORRECT AMP AND THE QUESTION NOS. - 1, 9, 10 & 12 IN PARA 17.4 OF THE SPECIAL BENCH. ACCORDINGLY, TH E LEGAL ISSUE IS DECIDED IN FAVOUR OF THE REVENUE. 6.1 6 . VIDE GROUND NO - 17, THE ASSESSEE HAS AGITATED THAT FOR COMPUTER PERIPHERALS THE RATE OF DEPRECIATION ON UPS SHOULD BE 60% AS OPPOSED TO 15% ALLOWED. BEFORE THE DRP, THE ASSESSEE RELIED UPON CIT VS BSES YAMUNA POWER IN ITA - 1267/2010 AND CIT VS BSES RAJDHANI POWER IN ITA 1266/2010 OF THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT WHICH CLA IM HAS NOT BEEN ALLOWED ON THE GROUND THAT THE MATTER HAS NOT ATTAINED FINALITY. 6.1 7 . CONSIDERING THE ARGUMENTS AND POSITION OF LAW ON THE ISSUE, THE AO IS DIRECTED TO GRANT NECESSARY RELIEF IN ACCORDANCE WITH LAW FOLLOWING THE JUDGEMENT I.T.A .NO. - 6410/DEL/2012 43 AND DECISION OF THE JURISDICTIONAL HIGH COURT IN CIT VS. BSES YAMUNA POWER. THE GR OUND OF THE ASSESSEE IS ALLOWED 6.1 8 . VIDE GROUND NO S . - 18 & 20, THE ASSESSEE HAS ASSAILED THE ACTION OF THE AO/DRP IN MAKING A DISALLOWANCE OF 10% OF THE EXPENDITURE OF ADVERTISEMENT AND SELLING EXPENSES ON THE GROUND OF ENDURING BENEFIT. IT IS SEEN THAT THE RELIANCE PLACED UPON SONY INDIA PVT. LTD. VS DCIT (2009) 315 ITR (AT) 150 DELHI BY THE ASSESSEE WAS NOT CONSIDERED BY THE DRP ON THE GROUND THAT THE MATTER HAS NOT ATTAINED FINALITY. THE SAID APPROACH IS NEITHER CORRECT NOR CAN IT BE UPHELD. THE ASSESSEE HAS ALSO ARGUED THAT IT RESULTS IN DOUBLE DISALLOWANCE. ON CONSIDERATION OF FACTS ON RECORD, WE HOLD T HE DRP S ORDER A NON - SPEAKING ORDER . THE REASONING ADOPTED FOR REJECTING THE CLAIM OF THE ASSESSEE AND REFUSING TO APPLY ITS MIND TO THE FACTS AND LAW CANNOT BE GIVEN JUDICIAL SANCTITY . AS SUCH IT IS SET ASIDE AND THE ISSUE IS RESTORED TO THE AO WITH THE DIRECTION TO DECIDE THE SAME IN ACCORDANCE WITH LAW BY WAY OF A SPEAKING ORDE R, AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 30 TH OF AUGUST 2013. SD/ - SD/ - (B.C. MEENA) ( DIVA SINGH ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 30 /0 8 /201 3 *AMIT KUMAR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI
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