Zimmer India Pvt. Ltd., Gurgaon V. DCIT, Gurgaon

ITA 674/DEL/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91119 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 29-04-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 03-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJIT KUMAR SINGH; JUDY JAMES STANDING C
• Assessee Lawyers: HIMANSHU S SINHA
• Keywords: Business income; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 244A; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI A.T. VARKEY: JUDICIAL MEMBER ITA NOS. 674/DEL/2015 A.Y. 2010-11 ZIMMER INDIA PVT. LTD., VS. DCIT CIRCLE 4, 14 TH FLOOR, TOWER B, NEW DELHI. BUILDING NO. 5, CYBER TERRACES, DLF CYBER CITY PHASE-III, GURGAON. PAN: AAECS 7432 H ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI HIMANSHU S. SINHA ADV. RESPONDENT BY : SHRI AJIT KUMAR SINGH CIT(DR) & SHRI JUDY JAMES STANDING COUNSEL DR DATE OF HEARING : 29-04-2015 DATE OF ORDER : 05-06-2015. O R D E R PER S.V. MEHROTRA, A.M:- THIS APPEAL, PREFERRED BY THE ASSESSEE, IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 30-12-2014, PASSED BY THE DCIT, CIRCLE- 4, GURGAON U/S 143(3) READ WITH SECTION 144C(13) OF THE INCOME-TAX ACT, 1961. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF ZIMMER SWITZERLAND HOLDINGS LTD., SWITZERLAND. THE COMPANY IS PRIMARILY ENGAGED IN THE BUSINESS OF IMPORTING, MARKETING AND DISTRIBUTING ZIMMER 2 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. ORTHOPEDIC IMPLANT AND INSTRUMENTS TO CUSTOMERS IN INDIA THROUGH DIRECT SALES AND ALSO THROUGH A NETWORK OF DEALERS. LD. TPO IN HIS O RDER HAS OBSERVED THAT ZIMMER INDIA ACTS AS A ROUTINE DISTRIBUTOR EXPOSED TO NOR MAL RISKS RELATING TO THE DISTRIBUTION BUSINESS. 3. THE ASSESSEE HAD FILED ITS RETURN OF INCOME DECL ARING TOTAL INCOME OF RS. 11,47,33,153/-. THE AO NOTICED THAT THE ASSESSEE HA D ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS: NATURE OF INTERNATIONAL TRANSACTION METHOD SELECTED AMOUNT(IN INR) PURCHASE OF HIP. KNEE AND TRAUMA IMPLANTS ETC. TNMM 475,487,449 PURCHASE OF INSTRUMENTS 21,494,576 REIMBURSEMENT OF EXPENSES RECEIVED CUP 2,126,571 REIMBURSEMENT OF EXPENSES PAID CUP 4,814,142 4. ACCORDINGLY, REFERENCE WAS MADE TO TPO FOR DETER MINATION OF ALP OF INTERNATIONAL TRANSACTIONS. 5. LD. TPO HAS NOT DISPUTED THE ALP OF ABOVE TRANSA CTIONS. HOWEVER, HE NOTED FROM THE AUDITED ACCOUNTS THAT THE ASSESSEE WAS INC URRING HUGE AMOUNT ON ADVERTISEMENT AND MARKET PROMOTION (AMP). HE WAS OF THE OPINION THAT THE ASSESSEE WAS SPENDING THIS AMOUNT ON EXTENDING T HE REACH OF THE BRANDS OWNED BY THE AES. THE FINAL BENEFICIARY WAS THE AE AS THE BRANDS OWNED BY IT WERE GAINING IN VALUE DUE TO THE MARKETING EFFORTS OF TH E ASSESSEE. 6. LD. TPO ISSUED A DETAILED SHOW CAUSE NOTICE WHIC H IS REPRODUCED IN PARA 3 OF HIS ORDER. IN THIS NOTICE PRIMARILY TPO POINTED OUT THAT THE FUNCTIONAL PROFILES AS PER TP DOCUMENTATION OF THE ASSESSEE, WAS AS UNDER: 3 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. (I) DISTRIBUTION OPERATIONS (II) PRICING OF PRODUCTS (III) CREDIT TERMS (IV) MARKETING (V) PROCUREMENT, ORDER PROCESSING. (VI) INVENTORY MANAGEMENT INVENTORY PLANNING/ FORECAST ING. 7. HE FURTHER POINTED OUT THAT AS PER THE TP REPORT , THE MARKETING STRATEGY FOLLOWED BY THE ASSESSEE WAS TO SELL ITS PRODUCTS T HROUGH THREE PRINCIPAL CHANNELS: (A) DIRECT TO HEALTH CARE INSTITUTIONS, SUCH AS HOSPITA LS; (B) THROUGH STOCK DISTRIBUTORS AND IN THE ASIA PACIFIC REGION, HEALTHCARE DEALERS. (C) DIRECTLY TO DENTAL PRACTICES AND DENTAL LABORATORIE S. 8. AFTER CONSIDERING THE FUNCTIONAL PROFILE AND MAR KETING STRATEGY, THE LD. TPO POINTED OUT THAT THIS INDICATED THAT THE EXPENSES I NCURRED IN CONNECTION WITH THE SALE CHANNELS, LIKE SALES COMMISSIONS, DISCOUNTS ET C. WERE ALSO RELEVANT TO THE ISSUE OF EVALUATING AMP EXPENSE. HE POINTED OUT TH AT THE KINDS OF PRODUCTS DEALT BY THE ASSESSEE WERE NOT THOSE THAT COULD BE PUSHED BY DIRECT MARKETING OR MARKETING STRATEGIES THAT WOULD BE APPLICABLE IN TH E FMCG SECTOR. THE PRODUCT COULD BE ADVERTISED BY AND THROUGH PERSONS LIKE DEA LERS OF SUCH PRODUCTS, HOSPITALS ETC. HE, THEREFORE, POINTED OUT THAT EXPENSES SHOWN UNDER THE HEAD ADVERTISEMENT AND MARKET PROMOTION IN THE P&L A/C WOULD NOT BE T HE ONLY EXPENSE RELEVANT TO THE AMP RELATED ACTIVITY IN THIS CASE BUT WOULD COM PRISE OF FOLLOWING ITEMS: (I) SPONSORSHIP AND SALES PROMOTION RS. 34,165,550 (II) DISCOUNT ALLOWED RS. 54,994 (III) SALES COMMISSION RS. 18,298,811 TOTAL: RS. 52,519,355 4 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. 9. HE POINTED OUT THAT ON THIS ANALYSIS AMP /SALES RATIO WAS 6.78%. LD. TPO REFERRED TO THE TP REPORT OF THE ASSESSEE AND A NALYSED THE COMPARABLES GIVEN IN THE SAME WHICH IS TABULATED BELOW: S.NO. NAME SALES (RS.) AMP EXPENSES (RS.) AMP/SALES% 1. HICKS THERMOMETERS (INDIA) LTD. THIS COMPANY IS THE OWNER OF THE WELL KNOWN AND RECOGNIZED BRAND. THIS CANNOT BE CALLED A ROUTINE DISTRIBUTOR. THIS IS NOT A SUITABLE COMPARABLE. 2 . KUSAM ELECTRICAL INDS. LTD. THIS COMPANY IS FUNCTIONALLY DIFFERENT. IT IS NOT A GOOD COMPARABLE. 3. REMI SALES & ENGG. LTD. 781,192,364 ADVERTISEMENT & SALES PROMOTION 3,702,485 COMMISSION ON SALES 4,220,610 DISCOUNT ALLOWED 786,253 1.11 4. SATAYTEJ COMMERCIAL CO. LTD. 35,947,789 COMMISSION 1,054,000 3.64 5. AFCO INDUSTRIAL & CHEMICALS LTD. NO AMP EXPENSES DURING THE YEAR 0.00 6. AMBALAL SARABHAI 591,170,000 SELLING COMMISSION 5- 54,000 WHOLESALERS/ DISTRIBUTORS DISCOUNT 308,000 SELLING EXPENSES 2,563,000 DISTRIBUTION EXPENSE 3,277,000 1.89 7. REMI ELEKTROTECHNIK LTD. THIS SEGMENT OF REMI GROUP IS A MANUFACTURER OF LABORATORY AND BLOOD BANK INSTRUMENTS. 10. BASED ON ABOVE ANALYSIS, HE PROPOSED THAT FOLLO WING COMPANIES SHALL BE USED AS COMPARABLES FOR DETERMINING THE BRIGHT L INE WITH REFERENCE TO THE AMP EXPENSES INCURRED BY THEM: 5 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. S NO. NAME OF THE COMPANY AMP HEAD SALES AMOUNT IN INR AMP/SALES(%) 1. REMI SALES & ENGG. LTD. ADVERTISEMENT & SALES PROMOTION 3,702,485 781,192,364 COMMISSION ON SALES 4,220,610 DISCOUNT ALLOWED 786,253 TOTAL 8,709,348 1.11 2. AFCO INDUSTRIAL & CHEMICALS LTD. NIL 6,829,960 0.00 3. AMBALAL SARABHAI ENTERPRISES LTD. SELLING COMMISSION 5,054,000 591,170,000 WHOLESALERS/ DISTRIBUTORS DISCOUNT 308,000 SELLING EXPENSE 2,563,000 DISTRIBUTION EXPENSE 3,277,000 TOTAL 11,202,000 4. BRAWN BIOTECH LTD. (BRAWN PHARMACEUTICALS LTD.) ADVERTISEMENT 29,733 9,535,338 0.31 5. LIFELINE DRUG & PHARMA LTD. SELLING EXPENSES 19,875 ADVERTISEMENT EXP. 52,416 TOTAL 72,291 622,440,000 0.01 6. TRIVITRON HEALTHCARE COMMISSION 22866610 ADVERTISEMENT AND SALES PROMOTION TOTAL 48390482 1,270,160,306 3.81 7 FRONTLINE ELECT RO MEDICAL LTD. SALES COMMISSION 18,797,174 BUSINESS PROMOTION 393,166 ADVERTISEMENT IN - CONFERENCES 1,778,000 REBATE & DISCOUNT 456,780 6 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. TOTAL 21,425,120 252,923,490 8.47 8. SATAYTEJ COMMERCIAL CO. LTD. COMMISSION 1,054,000 DISCOUNT 172,084 ADVERTISEMENT 7,129 RENT FOR HOARDING 75,000 TOTAL 1,308,213 35,947,789 3.64 AVERAGE AMP/SALES 2.41% 11. THE ASSESSEE IN ITS REPLY POINTED OUT THAT DISC OUNT AND COMMISSION SHOULD NOT BE INCLUDED UNDER THE HEAD OF AMP. THE S ALES AND DISTRIBUTION EXPENSES HAVE NO NEXUS WITH THE CREATION OF BRAND O R TRADE MARK. LD. TPO POINTED OUT THAT TRAUMA IMPLANTS, THE PRODUCTS THAT THE ASSESSEE DEALS IN ARE NOT OF SUCH NATURE THAT THEY ARE PURCHASED FROM A S HOP OR STORE BY A PERSON AT HIS LEISURE. THIS IS USED BY DOCTORS AND HOSPITALS AND THE PATIENTS WILL HAVE LITTLE CHOICE AS TO THE BRAND OF THE TRAUMA IMPLANT . THE CHOICE WILL BE MADE BY THE DOCTOR AND THE HOSPITAL AND THE BRAND WILL B E PUSHED BY THE DEALER. THE EXPENSE ITEMS LIKE DISCOUNT AND COMMISSION ARE THE INCENTIVES THAT THE ASSESSEE PROVIDES TO THE DEALER WHO PUSH THE BRAND WITH THE HOSPITAL AND DOCTORS. HE POINTED OUT THAT WHICH PARTICULAR EXPE NSE WILL BE PART OF THE AMP EXPENSES IS A MATTER THAT WILL BE DECIDED BY T HE NATURE OF THE BUSINESS AND THE PRODUCT THAT IS BEING SOLD. WHAT IS THE AMP FOR A PRODUCT IN THE FMCG SECTOR MAY NOT BE SO IN ANOTHER SECTOR. SIMILA RLY, WHAT IS RELEVANT AMP EXPENSES IN THE CASE OF MARKETING OF TRAUMA IMP LANTS WILL BE DECIDED BY THE NUANCES OF THIS INDUSTRY. HE DID NOT ACCEPT THE ASSESSEES CONTENTION THAT THE DISCOUNT, COMMISSION AND OTHER INCENTIVES HAD MANAGED TO SET UP A QUICK RESPONSE SUPPLY CHAIN THAT WILL CATER TO THE ELEMENT OF EMERGENCY THAT IS INHERENT IN THIS BUSINESS. 12. LD. TPO IN FINAL ANALYSIS ADOPTED THE FOLLOWING COMPARABLES: 7 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. SL. NO. NAME AMP/SALES(%) 1. TRIVITRON HEALTHCARE PVT. LTD. 3.81 2. FRONTLINE ELECTRO MEDICAL LIMITED 8.47 3. SATAYTEJ COMMERCIAL COMPANY LTD. 3.64 4. REMI SALES & SALES ENGG. LTD. 1.11 5. LIFELINE DRUGS & PHARMA LTD. 0.01 AVERAGE 3.40 13. ACCORDINGLY HE COMPUTED THE ALP OF THE INTERNAT IONAL TRANSACTIONS, RELATED AMP EXPENDITURE LEADING TO CREATION OF MARK ETING INTANGIBLE BENEFITING THE AE AS UNDER: TOTAL SALES MADE BY YOU RS. 77,47,89,626 ARMS LENGTH LEVEL OF AMP EXP. (3.40% OF SALE) RS . 2,63,42,847 AMOUNT ACTUALLY SPENT ON AMP EXP. RS. 5,25,19,3 55 AMOUNT SPENT ON CREATION OF MARKETING INTANGIBLE RS. 2,61,76,508 MARK UP @ 12.50% RS. 32,72,063 TOTAL RS. 2,94,48,571 14. THE AO HAD PASSED THE DRAFT ASSESSMENT ORDER IN PURSUANCE TO THE TPOS ORDER. THE ASSESSEE FILED OBJECTION TO THE DR AFT ASSESSMENT ORDER BEFORE DRP. THE ASSESSEES MAIN OBJECTIONS WERE AS UNDER: (I) SINCE THE ASSESSEES INTERNATIONAL TRANSACTIONS WER E ACCEPTED TO BE AT ARMS LENGTH UNDER TNMM, THEREFORE, ANALYSING IN DIVIDUAL ELEMENTS OF COST (LIKE THE AMP EXPENSES) WAS INCONS ISTENT WITH THE TENETS OF THE APPLICATION OF TNMM. THE ASSESSEE HAD RELIED ON THE DECISION IN THE CASE OF BMW INDIA PVT. LTD. FOR AY 2008-09. (II) THE TPO INCORRECTLY COMPUTED THE AMP EXPENSES/ SALE S RATIO BY TAKING INTO ACCOUNT THE ITEMS LIKE DISCOUNT ALLOWED OF RS. 54,994/- AND SALES COMMISSION OF RS. 1,82,98,811/- WHICH WER E PURELY LINKED WITH ACTUAL SALES MADE BY THE ASSESSEE. 8 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. (III) THE ASSESSEE OBJECTED TO THE APPLICATION OF THE MAR K UP OF 12.50% IN RESPECT OF ASSESSEES AMP EXPENSES. (IV) THE ASSESSEE ALSO OBJECTED TO THE SELECTION OF 5 CO MPARABLE COMPANIES BY TPO. (V) THE ASSESSEE ALSO OBJECTED TO THE USE OF BRIGHT LIN E TEST. 15. THE LD. DRP REFERRED TO THE DECISION OF SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. VS. ACIT AND POINTED OUT THAT THE CLUBBING OF TRANSACTION IS POSSIBLE ONLY WHEN THE UNDERLYING INTERNATIONAL TRANSACTIONS WERE HOMOGENOUS IN NATURE. IT POINTED OUT THAT THE INTERNATIONAL TRANSACTION RELATING TO AMP EXPENDITURE WAS NOT RECOGNIZED BY T HE ASSESSEE AS AN INTERNATIONAL TRANSACTION WHICH VIEW HAS NOT BEEN A CCEPTED BY SPECIAL BENCH IN L.G. ELECTRONICS INDIA (P) LTD. (SUPRA). LD. DRP HAS ALSO HELD THAT THE ASSESSEE HAD INCURRED HUGE AMP EXPENDITURE FOR THE VALUE ADDITION OF THE BRAND OWNED BY ITS FOREIGN AE. 16. LD. DRP ALSO UPHELD THE TPOS FINDING AS REGARD S THE USE OF BRIGHT LINE TEST. LD. DRP ALSO APPROVED THE COMPARABLES SE LECTED BY TPO. AS REGARDS THE ASSESSEES PLEA THAT ITEMS LIKE DISCOUN T AND SALE COMMISSION SHOULD NOT BE PART OF AMP EXPENDITURE FOR BENCHMARK PURPOSES, LD. DRP CONFIRMED TPOS ACTION ON THIS COUNT, INTER ALIA, O BSERVING THAT THE BRAND ROYALTY TO BE GENERATED AIMS AT ALL LEVELS OF THE C HAIN OF TRANSACTIONS. THE MIDDLEMEN IN THE CHAIN ARE DISTRIBUTORS/ COMMISSION AGENTS. THEY ARE THE REAL FOOT SOLDIERS PUSHING THE GOODS OF THE ASSESSE E AS AGAINST THE GOODS OF THE COMPETITOR. IT HELD THAT THE COMMISSION ON SALE S OR SALES DISCOUNTS, REBATES, DEALERS & SALESMEN BONUS, OTHER SALES PROM OTION EXPENSES ETC. HELPED THE COMPANY TO CREATE A LOYALTY AMONG THE 9 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. DISTRIBUTORS OR THE MIDDLEMEN BETWEEN THE ASSESSEE AND THE ULTIMATE CONSUMERS. THUS, IN SUM AND SUBSTANCE LD. DRP REJEC TED ALL THE OBJECTIONS RAISED BY THE ASSESSEE. BEING AGGRIEVED, THE ASSESS EE HAS IS IN APPEAL BEFORE US AND RAISED FOLLOWING GROUNDS OF APPEAL: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE ORDER PASSED BY THE LD. ASSESSING OFFIC ER (AO') IS BAD IN LAW AND VOID AB-INITIO 3. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ LD. TRANSFER PRICING OFFICER (TPO')/ L D. DISPUTE RESOLUTION PANEL (DRP') ERRED ON FACTS AND CIRCUMS TANCES OF THE CASE IN DETERMINING THE ARM'S LENGTH ADJUSTMENT TO THE APPELLANT'S ALLEGED INTERNATIONAL TRANSACTION WITH ASSOCIATED ENTERPRISES (AES'), THEREBY RESULTING IN THE ENHAN CEMENT OF RETURNED INCOME OF THE APPELLANT BY RS. 29,448,571. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE REFERENCE MADE BY THE LD. AO SUFFERS FROM JURISDICTIONAL ERROR AS THE LD. AO HAS NOT RECORDED ANY REASONS IN THE ASSESSMENT ORDER BASED ON WHICH HE REACHED T HE CONCLUSION THAT IT WAS 'EXPEDIENT AND NECESSARY' TO REFER THE MATTER TO THE LD. TPO FOR COMPUTATION OF THE ARM'S LENGTH PRICE, AS IS REQUIRED UNDER SECTION 92CA(1) OF THE INCOME TAX ACT, 1961 (ACT'). 4. THAT THE LD. AO/ LD. TPO/ LD. DRP ERRED ON FACTS AND IN LAW IN ENHANCING THE INCOME OF THE APPELLANT BY RS. 29,448,571 BY MAKING A TRANSFER PRICING (TP') ADJU STMENT ON ACCOUNT OF 'ALLEGED EXCESSIVE' ADVERTISING, MARKETI NG AND PROMOTION (AMP') EXPENSES INCURRED BY THE APPELLAN T AND IN DOING SO HAVE GROSSLY ERRED IN: 10 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. 4.1 DISREGARDING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT REPRESENT PURELY DOMESTIC TRANSACTION(S) UNDERTAKEN TOWARDS THIRD PARTIES, NOT COVERED UNDER THE PURVIE W OF SECTION 92 OF THE ACT; 4.2 DISREGARDING SUBMISSIONS MADE BY THE APPELLANT ON THE FUNCTIONAL AND RISK CHARACTERIZATION OF ITS MARKETI NG FUNCTION TO DEMONSTRATE THAT THE AMP EXPENSES INCURRED BY THE A PPELLANT WERE IN RESPECT OF ITS OWN BUSINESS REQUIREMENTS/ CONSIDERATIONS/ PURPOSES AS AN INDEPENDENT DECISION MAKER AND THAT ALL BENEFIT RESULTING FROM SUCH EXPENDITURE AR E TO ITS OWN ACCOUNT 4.3 DISREGARDING THE NATURE OF SALES AND SPONSORSH IP EXPENSES INCURRED BY THE APPELLANT WHICH CLEARLY SET FORTH T HAT THE EXPENSES WERE INCURRED BY APPELLANT ON VARIOUS EVEN TS AND CONFERENCES ORGANIZED WHICH WERE IN THE NATURE OF S ELLING EXPENSES AND THUS HAD NO NEXUS WITH BRAND PROMOTION ; AND INCORRECTLY HOLDING THAT SUCH EXPENSES RESULT IN DE VELOPING MARKETING INTANGIBLE FOR THE AES; 4.4 WITHOUT PREJUDICE TO ITS ABOVE CONTENTIONS, IN CORRECTLY COMPUTING AMP EXPENSES/ SALES RATIO OF THE APPELLAN T BY TAKING INTO ACCOUNT THE ITEMS LIKE DISCOUNT ALLOWED OF RS. 54,994 AND SALES COMMISSION OF RS. 18,298,811 WHICH ARE PURELY LINKED WITH ACTUAL SALES MADE BY THE APPELLA NT AND THUS CONTRADICTING THE PRINCIPLES LAID DOWN BY SPECIAL B ENCH OF THE ITAT IN THE CASE OF LG ELECTRONICS INDIA PRIVATE LI MITED REGARDING THE EXCLUSION OF SELLING EXPENSES; 4.5 IGNORING THE FACT THAT ONCE THE APPELLANT'S IN TERNATIONAL TRANSACTIONS ARE ACCEPTED TO BE AT ARM'S LENGTH UND ER TRANSACTIONAL NET MARGIN METHOD ('TNMM') AS THE PRI MARY METHOD CORROBORATED BY RESALE PRICE METHOD ('RPM'), CHALLENGING/ ANALYSING INDIVIDUAL ELEMENTS OF COSTS (LIKE THE 11 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. AMP EXPENSES) IS INCONSISTENT WITH THE TENETS OF TH E APPLICATION OF TNMM; 4.6 IGNORING THE FACT THAT 'BRIGHT LINE TEST' IS S IMPLY A TOOL AND NOT A METHOD PRESCRIBED UNDER THE ACT READ WITH THE INCOME-TAX RULES, 1962 (LITHE RULES') AND HENCE THE ARITHMETIC MEAN OF THE AMP EXPENSES OF COMPARABLE COMPANIES SHOULD NOT BE CONSIDERED FOR COMPUTING THE IMPUGNED TP ADJUSTMENT ; 4.7 NOT TAKING COGNIZANCE OF THE RULING PRONOUNCED BY THE HON'BLE INCOME-TAX APPELLATE TRIBUNAL ('ITAT'), DEL HI BENCH IN THE CASE OF BMW INDIA PRIVATE LIMITED ('BMW INDI A') WHEREIN IT WAS ADJUDGED THAT IF A DISTRIBUTOR IS SU FFICIENTLY COMPENSATED BY THE AE THROUGH THE PRICING OF PRODUC TS, I.E. THROUGH HIGHER MARGINS, THE SAME WOULD HAVE CATERED TO EXCESS AMP EXPENSES AND DOES NOT WARRANT A SEPARATE COMPEN SATION IN THE FORM OF REIMBURSEMENT FROM THE AES; 4.8 BY INCORRECTLY DETERMINING THE AMP EXPENSES AS EXCESSIVE BY COMPARING AGAINST THE BRIGHT LINE LIMI T ARRIVED AT ARBITRARILY USING INAPPROPRIATE COMPARABLES THAT: ( I) ARE NOT OPERATING ON THE SAME LEVEL OF BUSINESS VALUE CHAIN AS THAT OF THE APPELLANT; AND (II) ARE WHOLLY DISSIMILAR TO TH E APPELLANT IN RESPECT OF THE BRANDS PROMOTED BY THEM; 4.9 ERRONEOUSLY HOLDING THAT THE APPELLANT HAS REN DERED SERVICES TO THE AES BY INCURRING 'EXCESSIVE' AMP EX PENSES AND BY HOLDING THAT A MARK-UP HAS TO BE EARNED BY THE A PPELLANT IN RESPECT OF THE 'ALLEGED EXCESSIVE' AMP EXPENSES; 4.10 ERRONEOUSLY APPLYING AN AD-HOC MARK-UP OF 12.5 0% IN RESPECT OF APPELLANT'S 'ALLEGED EXCESSIVE' AMP EXPE NSES, WITHOUT ANY BASIS FOR THE SAME WHATSOEVER; 12 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. 5. THAT THE LD. AO ERRED IN FACTS AND IN LAW IN CHA RGING INTEREST UNDER SECTION 234D AND 244A OF THE ACT 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PR OCEEDINGS U/S 271(1)(C) OF THE ACT MECHANICALLY AND WITHOUT RECORDING ANY ADEQUATE SATISFACTION FOR SUCH INITIATION. 17. LD. COUNSEL FOR THE ASSESSEE HAS PRIMARILY ADVA NCED TWO FOLD SUBMISSIONS. FIRST IS THAT SINCE THE ASSESSEE HAD A DOPTED TNMM METHOD IN REGARD TO BENCHMARKING OF INTERNATIONAL TRANSACTION S, THEREFORE, SINCE THE OPERATING MARGIN WAS 11.07% AS AGAINST THE OPERATIN G MARGIN OF COMPARABLES OF 4.03%, THEREFORE, IN VIEW OF THE DEC ISION OF HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMM UNICATIONS INDIA PVT. LTD & ORS. (ITA NO. 16/2014 DATED 16-3-2015), NO AD JUSTMENT IS CALLED FOR. IN THIS REGARD, LD. COUNSEL REFERRED TO PARA 101 OF HONBLE HIGH COURTS DECISION IN THE CASE OF SONY ERICSSON MOBILE COMMU NICATIONS INDIA PVT. LTD & ORS. (SUPRA), WHICH IS REPRODUCED HEREUNDER: 101. HOWEVER, ONCE THE ASSESSING OFFICER/TPO ACCEP TS AND ADOPTS TNM METHOD, BUT THEN CHOOSES TO TREAT A PART ICULAR EXPENDITURE LIKE AMP AS A SEPARATE INTERNATIONAL TR ANSACTION WITHOUT BIFURCATION/SEGREGATION, IT WOULD AS NOTICE D ABOVE, LEAD TO UNUSUAL AND INCONGRUOUS RESULTS AS AMP EXPENSES IS THE COST OR EXPENSE AND IS NOT DIVERSE. IT IS FACTORED IN TH E NET PROFIT OF THE INTER- (I) LINKED TRANSACTION. THIS WOULD BE AL SO IN CONSONANCE WITH RULE 10B(1)( E), WHICH MANDATES ONL Y ARRIVING AT THE NET PROFIT MARGIN BY COMPARING THE PROFITS A ND LOSS ACCOUNT OF THE TESTED PARTY WITH THE COMPARABLE. TH E TNM METHOD PROCEEDS ON THE ASSUMPTION THAT FUNCTIONS, A SSETS AND RISK BEING BROADLY SIMILAR AND ONCE SUITABLE ADJUST MENTS HAVE BEEN MADE, ALL THINGS GET TAKEN INTO ACCOUNT AND ST AND 13 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. RECONCILED WHEN COMPUTING THE NET PROFIT MARGIN. ON CE THE COMPARABLES PASS THE FUNCTIONAL ANALYSIS TEST AND A DJUSTMENTS HAVE BEEN MADE, THEN THE PROFIT MARGIN AS DECLARED WHEN MATCHES WITH THE COMPARABLES WOULD RESULT IN AFFIRM ATION OF THE TRANSFER PRICE AS THE ARM'S LENGTH PRICE. THEN TO M AKE A COMPARISON OF A HORIZONTAL ITEM WITHOUT SEGREGATION WOULD BE IMPERMISSIBLE. 18. TO BUTTRESS HIS ARGUMENT THAT THE AMP EXPENSES WERE SUBSUMED IN THE OVERALL PROFIT MARGIN, LD. COUNSEL REFERRED TO PAGE 118 OF PB WHEREIN SCHEDULE 2.4 OTHER EXPENSES, IS CONTAINED, WHICH INCLUDES THE THREE ITEMS TAKEN AS CONSTITUENT OF AMP EXPENSES BY TPO. 19. LD. COUNSEL REFERRED TO PAGE 204 OF THE PB, WHE REIN THE TP STUDY SUBMITTED BY ASSESSEE IS CONTAINED TO DEMONSTRATE T HAT THE AVERAGE PLI OF SIX COMPARABLES, SELECTED BY ASSESSEE WAS 4.03% WHE REAS ASSESSEE WAS 11.07%, AS IS EVIDENT FROM PAGE 274 OF THE TP STUDY . 20. THE SECOND LIMB OF LD. COUNSELS SUBMISSION WAS THAT LD. TPO HAS WRONGLY TAKEN THE COMPONENTS OF AMP WHICH HAD NO RO LE IN THE BRAND PROMOTION BUT WERE ONLY SELLING EXPENSES. IN THIS R EGARD LD. COUNSEL REFERRED TO PARAS 175 & 176 IN THE CASE OF SONY ERICSSON MO BILE COMMUNICATIONS INDIA PVT. LTD & ORS. (SUPRA) , WHEREIN THE HONBLE HIGH COURT HAS APPROVED THE DECISION OF SPECIAL BENCH IN THE CASE OF L.G. ELECTRONICS INDIA (P) LTD. (SUPRA), FOR EXCLUDING DIRECT MARKETING AN D SALE RELATED EXPENSES OR DISCOUNT/ CONCESSION FROM AMP EXPENSES. HE POINTED OUT THAT SELLING COST CANNOT BE TAKEN AS PART OF AMP EXPENSES. HE, THEREF ORE, SUBMITTED THAT THERE IS NO DISPUTE THAT DISCOUNT ALLOWED AND SALES COMMI SSION ARE PURELY LINKED TO SALES AND ARE NOT IN THE NATURE OF ADVERTISEMENT AND PROMOTION ACTIVITIES 14 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. 21. AS REGARDS SPONSORSHIP AND SALES PROMOTION EXPE NSES, LD. COUNSEL HAS GIVEN DETAILS OF AMOUNT SPENT ON SALES PROMOTION, B USINESS PROMOTION AND BUSINESS CONSULTING AS UNDER: PARTICULARS DESCRIPTION AMOUNT (IN RS.) CLUB MEMBERSHIP ANNUAL FEES FOR CONFEDERATION OF INDIAN INDUSTRY FOR PRODUCT DEMONSTRATION 20,000 MEALS EXPENSES REIMBURSEMENT FOR MEALS OF SALES TEAM DURING THE SITE VISITS AND TRAVELLING 688,225 THIRD PARTY GRANTS GRANT GIVEN TO CHRONIC CARE FOUNDATION (CCF)(CCF IS A TRUST WHICH UNDERTAKES VARIOUS EDUCATION ACTIVITIES FOR HEALTHCARE FRATERNITY) SALES PROMOTION EXPENSES ON VARIOUS EVENTS ORGANIZED I.E. CONFERENCES, CAMPS FOR CREATING PATIENT AWARENESS ON ORTHOPEDIC PROBLEMS, EDUCATING SURGEONS AND COMMUNITY AT LARGE ON THE USAGE OF IMPLANTS ETC. 12,083,502 ADVERTISEMENT 120,000 BUSINESS PROMOTION EXPENSES ON VARIOUS EVENTS ORGANIZED BY THE MEDICAL EDUCATION DEPARTMENT FOR MEDICAL EDUCATION AND AWARENESS. FURTHER, IT ALSO INCLUDES THE EXPENSES INCURRED FOR CADAVER WORKSHOPS 6,560,648 BUSINESS CONSULTING PROFESSIONAL FEE PAID TO DELEGATES FOR PRESENTING VARIOUS TRAUMA CASES MEDICAL PROFESSIONALS FOR CREATING PATIENT AWARENESS 669,452 22. WITH REFERENCE TO ABOVE DETAILS, LD. COUNSEL PO INTED OUT THAT DETAILS WERE PRESENTED BEFORE LD. DRP AND TPO BUT THE SAME HAS NOT BEEN CONSIDERED. LD. COUNSEL SUBMITTED THAT, IN ANY VIEW OF THE MATTER, THE EXPENDITURE WHICH IS A PURE REIMBURSEMENT OF ADMINI STRATIVE EXPENSES, WHICH INTER ALIA, INCLUDES EXPENSES INCURRED ON TRA VELLING, MEALS, ACCOMMODATION, PRINTING ETC., HAVE TO BE EXCLUDED. HE POINTED OUT THAT THE EXPENSES HAD BEEN INCURRED IN CONNECTION WITH THE P RODUCT SPECIFIC 15 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. AGREEMENT IN RELATION TO ORTHOPEDIC SURGERY AND HAV E NO NEXUS WITH BRAND PROMOTION OR CREATION OF MARKETING INTANGIBLES. LD. COUNSEL POINTED OUT THAT AT BEST ADVERTISEMENT OF RS. 1,20,000/- BOOKED UNDE R THE HEAD SALES PROMOTION CAN BE TAKEN AS COMPONENT OF AMP. 23. LD. CIT(DR) SUBMITTED THAT THE MATTER SHOULD BE RESTORED BACK TO THE FILE OF AO/ TPO AS THE ITAT DOES NOT HAVE THE EXPER TISE OF EXAMINING THE COMPONENTS OF AMP EXPENSES IN THE LIGHT OF THE DECI SION OF HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMM UNICATIONS INDIA PVT. LTD & ORS. (SUPRA). IN THIS REGARD HE REFERRED TO P ARA 116 OF THE DECISION AND POINTED OUT THAT HONBLE HIGH COURT HAS OBSERVED AS UNDER: 116. IT WAS URGED BY THE REVENUE THAT DEVELOPMENT OF MARKETS FOR THE PRODUCTS IS THE CORE FUNCTION OF THE ENTREP RENEUR, WHICH IN THIS CASE IS THE FOREIGN COMPANY, AN AE. IMPLEME NTATION DEPENDS UPON THE BUSINESS MODELS OF MNES AND HOW TH EY WANT THIS CORE FUNCTION TO BE EXERCISED. PERFORMANCE OF THIS FUNCTION CLEARLY BENEFITS THE BRANDS AND MARKET INTANGIBLES OWNED BY THE PARENT COMPANY. THE TEST TO DETERMINE WHETHER THE I NDIAN SUBSIDIARY WAS/IS INCURRING THE AMP EXPENSES FOR IT SELF OR AT THE INSTANCE OF THE AE WAS/ IS TO FIND OUT WHETHER AN INDEPENDENT PARTY WOULD HAVE UNDERTAKEN THE SAME LE VEL OF AMP EXPENSES. AN INDEPENDENT PARTY WITH SHORT-TERM AGREEMENT WITH AN MNE WOULD NOT INCUR COSTS WHICH G IVE LONG- TERM BENEFITS OF BRAND AND MARKET DEVELOPMENT ADVAN TAGE TO ANOTHER ENTITY. IT IS FALLACIOUS TO CONTEND THAT BR AND PROMOTION WOULD BENEFIT AN INDEPENDENT ENTITY, FOR INCREASE I N VOLUME OF SALES LARGELY BENEFITS THE MANUFACTURER BOTH IN TER MS OF THE PROFIT WITH INCREASED SALES AND ENHANCED VALUE TO T HE BRAND. BENEFIT TO THE INDIAN ENTITY IS ONLY MARGINAL OR IN CIDENTAL. THE CONTENTION IS THAT THE ACTION OF THE INDEPENDENT SU BSIDIARY AMOUNTS TO RENDERING OF SERVICE TO THE FOREIGN AE F OR WHICH ARM'S LENGTH COMPENSATION WAS/IS PAYABLE. NO THIRD PARTY 16 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. DISTRIBUTOR WOULD INCUR EXPENDITURE ON DEVELOPMENT OF MARKETING AND BRAND, WHICH DOES NOT EVENTUALLY BELO NG TO IT. 24. LD. CIT(DR) FURTHER REFERRED TO PARA 121 OF S ONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD & ORS. (SUPRA) AND PO INTED OUT THAT TPO HAD TO EXAMINE THE QUESTION WHETHER THE ASSESSEE WAS PE RFORMING FUNCTIONS OF A PURE DISTRIBUTOR OR PERFORMING DISTRIBUTION AND MAR KETING FUNCTIONS AND IF THE ASSESSEE WAS ALSO PERFORMING MARKETING FUNCTION S THEN TPO HAS TO EXAMINE AND ASCERTAIN WHETHER THE TRANSFER PRICE TA KES INTO CONSIDERATION THE MARKETING FUNCTIONS WHICH WOULD INCLUDE AMP FUNCTIO NS ALSO. HE POINTED OUT THAT IT IS TO BE EXAMINED WHETHER MARKETING AND DISTRIBUTION FUNCTIONS ARE INTER TWINED OR NOT, BECAUSE COMPARABLES HAVE TO BE SELECTED ACCORDINGLY. HONBLE HIGH COURT OBSERVED AS UNDER: - 121. DURING THE COURSE OF HEARING BEFORE US, COUNSE L FOR THE REVENUE HAD SUBMITTED THAT PARAGRAPH 17.4 SHOULD BE TREATED AS ILLUSTRATIONS AND NOT AS BINDING COMPARABLES. WE WOULD PREFER TO OBSERVE, THAT AN ASSESSING OFFICER/ TPO C AN GO AND MUST EXAMINE THE QUESTION WHETHER THE ASSESSEE IS P ERFORMING FUNCTIONS OF A PURE DISTRIBUTOR OR PERFORMING DISTR IBUTION AND MARKETING FUNCTIONS, IN THE LATTER CASE, HE MUST EX AMINE AND ASCERTAIN WHETHER THE TRANSFER PRICE TAKES INTO CON SIDERATION THE MARKETING FUNCTION, WHICH WOULD INCLUDE AMP FUN CTIONS. THIS WOULD ENSURE ADEQUATE TRANSACTION PRICE AND HE NCE ASSURE NO LOSS OF REVENUE. WHEN THE DISTRIBUTION AND MARKE TING FUNCTIONS ARE INTER CONNECTED AND RELIABLE COMPARAB LES ARE AVAILABLE, ARM'S LENGTH PRICE COULD BE COMPUTED AS A PACKAGE, IF REQUIRED AND NECESSARY BY MAKING ADEQUATE ADJUST MENTS. WHEN THE ASSESSING OFFICER/TPO COMES TO THE CONCLUS ION THAT IT IS NOT POSSIBLE TO COMPUTE ARM'S LENGTH PRICE WITHO UT SEGREGATING AND DIVIDING DISTRIBUTION AND MARKETING OR AMP FUNCTIONS, HE CAN SO PROCEED AFTER GIVING JUSTIFICA TION AND ADEQUATE REASONS. AT THAT STAGE, HE WOULD HAVE APPO RTIONED THE PRICE RECEIVED OR THE COMPENSATION PAID BY THE FORE IGN AE TOWARDS DISTRIBUTION AND MARKETING OR AMP FUNCTIONS . THE TPO 17 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. CAN THEN APPLY AN APPROPRIATE METHOD AND COMPUTE TH E ARM'S LENGTH PRICE OF THE TWO INDEPENDENTLY AND EVEN BY A PPLYING SEPARATE METHODS. THIS WILL BE IN TERMS OF THE PROV ISIONS OF THE ACT AND THE RULES AND ALSO AS PER THE GENERAL PRINC IPLES OF INTERNATIONAL TAXATION ACCEPTED AND APPLIED UNIVERS ALLY. ON THE OTHER HAND, AS RECORDED BY US ABOVE, APPLYING 'BRIG HT LINE TEST' ON THE BASIS OF PARAMETERS PRESCRIBED IN PARAGRAPHS 17.4 AND 17.6 WOULD BE ADDING AND WRITING WORDS IN THE STATU TE AND THE RULES AND INTRODUCING A NEW CONCEPT WHICH HAS NOT B EEN RECOGNISED AND ACCEPTED IN ANY OF THE INTERNATIONAL COMMENTARIES OR AS PER THE GENERAL PRINCIPLES OF IN TERNATIONAL TAXATION ACCEPTED AND APPLIED UNIVERSALLY. THERE IS NOTHING IN THE ACT OR THE RULES TO HOLD THAT IT IS OBLIGATORY THAT THE AMP EXPENSES MUST AND NECESSARILY SHOULD BE SUBJECTED T O 'BRIGHT LINE TEST' AND THE NON-ROUTINE AMP EXPENSES AS A SE PARATE TRANSACTION TO BE COMPUTED IN THE MANNER AS STIPULA TED. 25. LD. CIT(DR) FURTHER REFERRED TO PARA 193 IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD & ORS. (SUPRA) AND POINTED OUT THAT THE HONBLE HIGH COURT TAKING INTO CONSIDERATION TH E FACTUAL FINDINGS TO BE EXAMINED, HAS GIVEN SUFFICIENT DISCRETION AND FLEXI BILITY TO TRIBUNAL TO REACH A FAIR AND JUST CONCLUSION ON THE ALP AND IF NECESS ARY TO REMAND THE MATTER TO AO/ TPO IF THE EXERCISE CANNOT BE CARRIED OUT AT TRIBUNALS LEVEL. 26. IN REJOINDER, LD. COUNSEL REFERRED TO TPOS ORD ER TO SUBMIT THAT THE BRIGHT LINE WAS DETERMINED BY TPO BY CONSIDERING T HE ASSESSEE AS A DISTRIBUTOR. 27. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. AS FAR AS LD. COUNSELS SUBMISSION TH AT SINCE THE AO/ TPO HAD ACCEPTED AND ADOPTED TNMM METHOD WITH REGARD TO OTH ER INTERNATIONAL TRANSACTION, THEREFORE, NO SEPARATE BIFURCATION OF AMP EXPENSES IS TO BE MADE IN VIEW OF PARA 101 OF SONY ERICSSON CASE (SU PRA), REPRODUCED EARLIER, 18 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. CANNOT BE ACCEPTED BECAUSE TPO HAD APPLIED THE BRIG HT LINE TEST BY CONSIDERING THOSE COMPARABLES WHICH WERE ROUTINE DI STRIBUTORS. HE DID NOT CARRY OUT ANY STUDY WITH REFERENCE TO THE FUNCTIONS PERFORMED BY COMPARABLES SELECTED BY HIM VIS A VIS FUNCTIONS PER FORMED BY ASSESSEE IN REGARD TO ITS MARKETING AND DISTRIBUTION ACTIVITIES . LD. COUNSEL HAS RELIED ON PARA 101 OF THE JUDGMENT IN SONY ERICSSONS CASE. H OWEVER, THE SAID PARA IS TO BE READ ALONG WITH THE PRECEDING DISCUSSION IN T HE JUDGMENT. IN PARA 96, HONBLE HIGH COURT, INTER ALIA, OBSERVED AS UNDER:- 96. THE UNITED NATIONS' PRACTICAL MANUAL ON TRANSFE R PRICING IN PARAGRAPH 6.3.12.1 ACKNOWLEDGES THAT TNM METHOD IS USUALLY APPLIED TO BROAD COMPARABLE FUNCTIONS, RATHER THAN BROAD CONTROLLED TRANSACTIONS. RETURN ON THESE FUNCTIONS WHEN MEASURED WITH THE PLI BASE IN PROPORTION TO THE NET PROFIT MARGINS, WOULD GET AFFECTED BY FACTORS UNRELATED TO ARM'S LENGTH PRICING, WHICH IS A NEGATIVE FACTOR, AND FOR THIS R EASON TNM METHOD IS TYPICALLY APPLIED WHEN THE RELATED PARTIE S ARE ENGAGED IN CONTINUOUS SERIES OF TRANSACTIONS AND ON E OF THE PARTIES CONTROLS INTANGIBLE ASSETS FOR WHICH ARM'S LENGTH PRICE/RETURN IS NOT EASY TO DETERMINE. IT IS FAVOUR ABLE TO APPLY TNMM METHOD WHEN ONE PARTY IS PERFORMING ROUTINE MARKETING, DISTRIBUTION AND OTHER FUNCTIONS THAT DO NOT INVOLVE CONTROL OVER INTANGIBLE ASSETS AS IT ALLOWS APPROPR IATE RETURN TO THE PARTY CONTROLLING UNIQUE OR DIFFICULT TO VALUE INTANGIBLE ASSETS .. SUCCESS OR EFFICACY OF A PARTICULAR METHO D WOULD DEPEND UPON FUNCTIONAL ANALYSIS OF THE TESTED PARTY AND THE COMPARABLE. ONCE WE ACCEPT THE COMPARABLE ON THE BA SIS OF FUNCTIONAL ANALYSIS AND IF REQUIRED, AFTER MAKING A DJUSTMENTS, THEN THERE SHOULD BE NO DIFFICULTY IN ACCEPTING THE INTERNATIONAL TRANSFER PRICE. IN CASE OF DISCREPANCY, ADDITION MA Y BE JUSTIFIED WHERE THE NET PROFIT MARGIN DECLARED IN THE CASE OF THE TESTED PARTY IS LOWER THAN THE COMPARABLE. A COMPARABLE SH OULD BE ACCEPTED IF IT DEALS WITH THE SAME OR IDENTICAL OR SIMILAR PROPERTY UNDER THE SAME OR SUBSTANTIALLY THE SAME CIRCUMSTANCES AS THE CONTROLLED TRANSACTION SO AS T O GIVE RELIABLE AND MORE CERTAIN MEASURE OF ARM'S LENGTH RESULT. AL L METHODS INCLUDING THE TNM METHOD ACKNOWLEDGE THAT THERE COU LD BE 19 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. DIFFERENCE BETWEEN TESTED PART AND THE COMPARABLE O N FUNCTIONAL ANALYSIS, BUT THIS WOULD NOT BE MATERIAL WHERE IT I S POSSIBLE TO REASONABLY ASCERTAIN THE EFFECT ON ACCOUNT OF THE D IFFERENCES FOR WHICH APPROPRIATE ADJUSTMENTS CAN BE MADE. THUS, SE LECTION OF THE COMPARABLE DEPENDS UPON THE FUNCTIONAL ANALYSIS , SIMILARITY AS TO THE SEVERAL FACTORS AND WHETHER OR NOT IT IS POSSIBLE TO MAKE ADJUSTMENTS TO ACCOUNT FOR THE MATERIAL DIFFER ENCES IN SUCH CIRCUMSTANCES TO ACCEPT OR REJECT A COMPARABLE . SELECTION OF THE APPROPRIATE COMPARABLE ENSURES SIMILAR PROFI T POTENTIAL AND ACCORDINGLY TAXATION OF THE SUBSIDIARY AE IN TH E COUNTRY OF ITS RESIDENCE. 28. IN PARA 100, HONBLE HIGH COURT HAS OBSERVED AS UNDER:- 100. THE TPO/ ASSESSING OFFICER CAN OVERRULE THE AS SESSEE AS TO THE METHOD ADOPTED AND SELECT THE MOST APPROPRIA TE METHOD. THE REASONS FOR SELECTING OR ADOPTING A PARTICULAR METHOD WOULD DEPEND UPON FUNCTIONAL ANALYSIS, COMPARISON, WHICH REQUIRES AVAILABILITY OF DATA OF COMPARABLES PERFORMING OF S IMILAR OR SUITABLE FUNCTIONAL TASKS IN A COMPARABLE BUSINESS. WHEN SUITABLE COMPARABLES RELATING TO A PARTICULAR METHO D ARE NOT AVAILABLE AND FUNCTIONAL ANALYSIS OR ADJUSTMENTS IS NOT POSSIBLE, IT WOULD BE ADVISABLE TO ADOPT AND APPLY ANOTHER ME THOD. THIS WOULD MEAN IN THE EXAMPLE GIVEN ABOVE, IF THE ASSES SING OFFICER/TP'O NOTICES THAT OPERATING EXPENSES IN THE CASE OF THE TESTED PARTY ARE SUBSTANTIALLY LOWER THAN THE COMPA RABLE OR INDICATIVE OF GREATER AND BETTER EFFICIENCY, HE CAN MAKE SUITABLE ADJUSTMENTS AND THEN COMPUTE THE OPERATING PROFIT. IN CASE IT IS NOT POSSIBLE TO MAKE ADJUSTMENT, HE MAY REJECT THE METHOD SELECTED BY THE ASSESSED AND ADOPT ANOTHER METHOD. SEVERAL RECOURSES MAY BE AVAILABLE. OF COURSE, JUSTIFICATIO N AND REASONS MUST BE STATED AND ELUCIDATED. 29. FROM THE ABOVE OBSERVATIONS, IT IS EVIDENT THAT THE INTERNATIONAL TRANSACTION OF AMP EXPENSES CAN BE CLUBBED WITH OTH ER INTERNATIONAL TRANSACTIONS CARRIED OUT BY ASSESSEE AS DISTRIBUTOR , IF AMP FUNCTIONS PERFORMED BY TESTED PARTY AND COMPARABLES ARE SAME. IF THERE IS DIFFERENCE IN THE FUNCTIONS BETWEEN THE ASSESSEE AND COMPARABLES, THE SUITABLE ADJUSTMENT 20 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. WAS TO BE FIRST MADE TO BRING THE BOTH AT SAME PEDE STALS. AS POINTED OUT BY LD. CIT(DR), IN PARA 121 OF THE JUDGMENT, HONBLE H IGH COURT HAS VERY SPECIFICALLY OBSERVED THAT TPO HAS TO EXAMINE WHETH ER ASSESSEE WAS PERFORMING FUNCTIONS OF A PURE DISTRIBUTOR OR PERFO RMING DISTRIBUTION AND MARKETING FUNCTIONS. LD. COUNSEL POINTED OUT THAT A SSESSEE WAS PERFORMING ONLY DISTRIBUTION FUNCTION, HOWEVER, HAVING REGARD TO THE FACT THAT AMP IS CONSIDERED AS SEPARATE INTERNATIONAL TRANSACTION, I N THE LIGHT OF OBSERVATIONS MADE BY HONBLE HIGH COURT IN REGARD TO AGGREGATION OF TRANSACTIONS IT IS NECESSARY THAT TPO HAS TO RECORD SPECIFIC FINDINGS ON THESE ASPECTS PARTICULARLY WITH REFERENCE TO AMP FUNCTIONS OF COM PARABLES VIS A VIS ASSESSEE. IT NEEDS TO BE EXAMINED WHETHER COMPARABL ES SELECTED FOR BENCH MARKING DISTRIBUTION ACTIVITY WERE ALSO INCURRING A MP EXPENSES OR NOT AND, IF YES, THE AMP FUNCTIONS PERFORMED BY THOSE COMPAR ABLES. 30. PARA 101 RELIED UPON BY LD. COUNSEL CAN COME IN TO PLAY ONLY WHEN THE COMPARABLES PASSED THE FUNCTIONAL ANALYSIS TEST AND ADJUSTMENTS HAVE BEEN MADE BECAUSE IT IS ONLY THE PROFIT MARGIN AS DECLAR ED BY ASSESSEE CAN BE COMPARED WITH THE PROFIT MARGIN OF THE COMPARABLES. SINCE TPO HAS NOT CARRIED OUT THIS EXERCISE THE MATTER NEEDS TO BE RE STORED BACK TO THE FILE OF AO/ TPO FOR CARRYING OUT DETAILED FUNCTIONAL ANALYS IS OF THE COMPARABLES. IT IS PERTINENT TO NOTE THAT COMPARABLES SELECTED BY A SSESSEE IN ITS TP STUDY FOR BENCHMARKING THE DISTRIBUTION ACTIVITY WERE AS UNDE R: S. NO. NAME OF THE COMPANY DATA SOURCE AVERAGE PLI 1 HICKS THERMOMETERS (INDIA) P 4.95% 2. KUSAM ELECTRICAL INDS LTD. P 11.06& 3. REMI SALES & ENGG LTD. P 3.57% 4. SATAYTEJ COMMERCIAL CO LTD. AR 1.60% 5. AFCO INDUSTRIAL & CHEMICALS LTD. SEG-P -2.83% 6. AMBALAL SARABHAI ENTERPRISES LTD. SEG-P 4.39% 7. REMI ELEKTROTECHNIK LTD. SEG-P 5.44% 21 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. MEAN 4.03% MEDIAN 4.39% UPPER QUARTILE 5.20% LOWER QUARTILE 2.59% 31. THESE WERE ACCEPTED BY TPO APPLYING TNMM METHOD . HOWEVER, FOR BENCHMARKING THE AMP FUNCTIONS TPO SELECTED FOLLOWI NG FIVE COMPARABLES:- S. NO. NAME AMP/SALES (%) 1. TRIVITRON HEALTHCARE PVT. LTD. 3.81 2. FRONTLINE ELECTRO MEDICAL LIMITED 8.47 3. SATAYTEJ COMMERCIAL COMPANY LTD. 3.64 4. REMI SALES & SALES ENGG. LTD. 1.11 5. LIFELINE DRUGS & PHARMA LTD. 0.01 AVERAGE 3.40 32. THUS, ONLY REMI ELEKTROTECHNIK LTD. IS COMMON I N BOTH. THEREFORE, THE PLEA THAT SINCE TPO HAS ACCEPTED TNMM METHOD, T HEREFORE, AMP EXPENDITURE SHOULD NOT BE SEPARATELY CONSIDERED IS DEVOID OF ANY MERIT. 33. NOW WE WILL EXAMINE THE SECOND LIMB OF LD. COUN SELS ARGUMENT. IN VIEW OF THE DECISION OF HONBLE HIGH COURT IN SONY ERICSSON CASE (SUPRA), THERE IS NO DISPUTE THAT THE DISCOUNT AND SALES COM MISSION BEING DIRECTLY ATTRIBUTABLE TO SELLING ACTIVITIES OF ASSESSEE, HA VE TO BE EXCLUDED FROM THE COMPONENTS SELECTED BY TPO IN REGARD TO AMP EXPENSE S. HOWEVER, AS FAR AS SUBMISSIONS OF LD. COUNSEL WITH REGARD TO THE EXPEN SES IN CONNECTION WITH THE SPONSORSHIP AND SALES PROMOTION ARE CONCERNED, WE ARE OF THE OPINION THAT SINCE THE ASSESSEES PLEA HAS NOT BEEN EXAMINE D BY LD. DRP/ TPO, THE MATTER SHOULD BE RESTORED TO FILE OF TPO/ DRP TO RE CORD A FINDING ON THE ASSESSEES CLAIM AS NOTED IN THE SUBMISSIONS OF LD. AUTHORIZED REPRESENTATIVE. 22 ITA 674/DEL/2015 - ZIMMER INDIA PVT. LTD. 34. IN VIEW OF ABOVE DISCUSSION, THE ASSESSEES APP EAL IS ALLOWED FOR STATISTICAL PURPOSES IN TERMS OF ABOVE NOTED OBSERV ATIONS. ORDER PRONOUNCED IN OPEN COURT ON 05-06-2015. SD/- SD/- (A.T. VARKEY ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: _______-06-2015. 0MP: C OPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR