Nikon India Pvt. Ltd., Gurugram V. DCIT, Gurgaon

ITA 719/DEL/2017

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6300 (ITAT-DELHI)
• Duration Of Justice: 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 28-03-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 07-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: ANKIT SONNI S
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Competent authority
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.719/DEL./2017 (ASSESSMENT YEAR : 2012-13) NIKON INDIA PVT. LTD., VS. DCIT, CIRCLE 3, PLOT NO.71, SECTOR 32, GURGAON. INSTITUTIONAL AREA, GURUGRAM 122 001 (HARYANA). (PAN : AACCN5100F) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI MUKESH BHUTANI, VISHAL KALRA, GAURAV GUPTA & ANKIT SONNI, ADVOCATES REVENUE BY : SHRI AMRENDRA KUMAR, CIT DR DATE OF HEARING : 28.03.2017 DATE OF ORDER : 31.03.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. NIKON INDIA PVT. LTD., (HEREIN AFTER REFERRED TO AS THE ASSESSEE) BY FILING THE PRESEN T APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 17.01.2017, PASS ED BY THE AO UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (F OR SHORT THE ACT) IN CONSONANCE WITH THE ORDERS PASSED BY THE L D. DRP/TPO QUA THE ASSESSMENT YEAR 2012-13 ON THE GROUNDS INTE R ALIA THAT :- ITA NO.719/DEL./2017 2 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN ASSESSING THE TOTAL INCOME OF THE A PPELLANT UNDER SECTION 143(3) READ WITH SECTION 144C(13) OF THE ACT, FOR THE RELEVANT AY AT 57,32,67,720 AS AGAINST THE RETURNED INCOME OF INR 5,42,98,030. FURTHER, THE DRP ERRED I N UPHOLDING THE SAME. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP / TPO HAVE ERRED IN MAKING ADJUSTMENT OF INR 51,89,69,687 TO THE ARM'S LENGTH PRICE OF ALLEG ED INTERNATIONAL TRANSACTION OF ADVERTISEMENT, MARKETI NG AND PROMOTION ('AMP') EXPENDITURE. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDERS PASSED BY THE AO / TPO WERE BAD IN LAW A S THE PRE-REQUISITE FOR APPLYING CHAPTER-X, I.E., EXISTEN CE OF AN INTERNATIONAL TRANSACTION BETWEEN TWO ASSOCIATED ENTERPRISES CAE'') UNDER SECTION 928 OF THE ACT, WA S NOT SATISFIED OR EXISTED AS THERE WAS NO AGREEMENT, UNDERSTANDING OR ARRANGEMENT BETWEEN THE APPELLANT AND THE AE FOR INCURRENCE OF SUCH EXPENDITURE BY THE AP PELLANT. FURTHER, THE DRP ERRED IN UPHOLDING THE SAME. 4. WITHOUT PREJUDICE, THE ORDERS PASSED BY THE AO / TPO WERE BAD IN LAW AS THE UNILATERAL AMP EXPENDITURE INCURR ED BY THE APPELLANT WAS CATEGORIZED AS 'INTERNATIONAL TRA NSACTION' UNDER CHAPTER X OF THE ACT, BY THE AO / DRP / TPO, CONTRARY TO LAW IN AS MUCH THE AO NEITHER GRANTED T HE APPELLANT PROPER OPPORTUNITY OF BEING HEARD, NOR RE CORDED HIS SATISFACTION IN RESPECT THEREOF. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE TPO ERRED IN RE-CHARACTERIZING THE UNILATERAL A MP EXPENDITURE BEING PAYMENTS MADE BY APPELLANT TO INDEPENDENT THIRD PARTIES AS AN 'INTERNATIONAL TRAN SACTION' UNDER CHAPTER X OF THE ACT AND PARTICULARLY WHEN TH E JURISDICTION OF THE TPO IS ONLY TO COMPUTE ARMS' LE NGTH PRICE (ALP') OF THE INTERNATIONAL TRANSACTION. FUR THER, THE DRP ERRED IN NOT ADJUDICATING THE OBJECTIONS CHALLE NGING THE JURISDICTION OF THE TPO IN THIS REGARD. 5.1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE TPO ERRED IN SUO-MOTA BENCHMARKING THE ALLEGED INTERNATIONAL TRANSACTION RELATED TO AMP EXPENDITUR E WITHOUT THEIR BEING ANY ORDER OR REFERENCE FROM THE AO IN RELATION THERETO. 6. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, AO I DRP HAVE ERRED IN HOLDING THAT THE APPELLANT HAS FAILED TO DEMONSTRATE BUSINESS PURPOSE I BENEFIT FROM INCURRE NCE OF ITA NO.719/DEL./2017 3 ALLEGED EXCESSIVE AMP EXPENDITURE WITHOUT PROVIDING ANY COGENT REASONS AND COMPLETELY IGNORING THAT INCURRE NCE OF THE AMP EXPENDITURE HAS ACCELERATED GROWTH OF APPEL LANT'S TURNOVER OVER THE YEARS. 7. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP / TPO HAVE ERRED IN RE-CHARACTERIZING THE APPELLANT AS SERVICE PROVIDER RENDERING BRAND BUILD ING SERVICES TO ITS AE, WITHOUT APPRECIATING THAT IT IS A FULL RISK BEARING DISTRIBUTOR INCURRING AMP EXPENDITURE IN TH E COURSE OF ITS OWN BUSINESS TO PROMOTE ITS SALES IN INDIA. 8. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW; THE AO / DRP / TPO HAVE ERRED IN NOT FOLLOWING THE VARIOUS DECISIONS OF THE JURISDICTIONAL HIGH COURT. THE DRP FURTHER ERRED IN SUSTAINING THE ORDER OF AO / T PO ON THE PREMISES THAT THE SPECIAL LEAVE PETITION AGAINS T SUCH DECISIONS HAVE BEEN ADMITTED BY THE HON'BLE SUPREME COURT. 9. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP HAS GROSSLY ERRED IN SUSTAINING THE ORDER O F AO / TPO SINCE THE DEPARTMENT CANNOT FILE AN APPEAL AGAI NST THE DIRECTIONS OF THE DRP. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE ABOVE GROUNDS THAT THE AMP EXPENDITURE INCURRED BY THE APPELLANT DOES NOT CONSTITUTE AN INTERNATIONAL TRAN SACTION UNDER CHAPTER X OF THE ACT, THE APPELLANT CRAVES TO RAISE FOLLOWING GROUNDS ON MERITS: RE: ADDITIONS MADE ON SUBSTANTIVE BASIS 10. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP / TPO HAVE ERRED IN NOT APPRECIATING THAT DISTRIBUTION AND MARKETING ARE INTER-CONNECTED AND INTERTWINED FUNCTIONS AND SHOULD BE BENCHMARKED ON AN AGGREGATE BASIS. THE AO / DRP / TPO FURTHER ERRED I N NOT APPRECIATING THAT IF THE TWO FUNCTIONS ARE SEGREGAT ED AND BENCHMARKED, THEN THE SAME WOULD RESULT IN OVER TAX ATION AND IS CONTRARY TO THE PROVISIONS OF THE ACT. 10.1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / TPO HAVE ERRED IN HOLDING THAT THE APPELLANT D ID NOT PROPOSE I FURNISH COMPARABLES WHICH PERFORMED DISTRIBUTION AS WELL AS AMP FUNCTION, WITHOUT APPRE CIATING THAT THE COMPARABLES COMPANIES FURNISHED BY THE APP ELLANT WERE UNDERTAKING AMP EXPENDITURE I FUNCTION AS WELL . FURTHER, THE DRP ERRED IN SUMMARILY REJECTING SUCH ITA NO.719/DEL./2017 4 COMPARABLES WITHOUT PROVIDING ANY OPPORTUNITY TO TH E APPELLANT. 11. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP HAVE ERRED IN HOLDING THAT THE APPELLANT H AS BENCHMARKED THE INTERNATIONAL TRANSACTION OF PURCHA SE OF FINISHED GOODS USING TRANSACTION NET MARGIN METHOD ('TNMM') METHOD, WITHOUT APPRECIATING THAT THE SAME WAS PRIMARILY BENCHMARKED USING RESALE PRICE METHOD (URPM'), AND FURTHER AO / DRP / TPO ERRED IN NOT APPRECIATING THAT OPERATING MARGIN OF THE APPELLANT WAS BETTER THAN THE MARGINS OF THE COMPARABLE COMPANIES USING TNMM ALSO. 12. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO I DRP I TPO HAVE ERRED IN APPLYING COST PLUS MET HOD TO BENCHMARK THE AMP EXPENSES, AND FURTHER ERRED IN APPLYING THE SAME DE HORS THE INDIAN TRANSFER PRICI NG REGULATIONS. 12.1. WITHOUT PREJUDICE AND NOTWITHSTANDING, THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO I DRP I TPO HAVE ERRED IN NOT GRANTING SET-OFF OF EXCESSIVE GROSS PROFIT EARNED BY THE APPELLANT FROM DISTRIBUTION FU NCTION, AGAINST TP ADJUSTMENT PROPOSED IN RELATION TO AMP EXPENSES, EVEN IF SEGREGATE APPROACH WAS TO BE ADOP TED FOR BENCHMARKING THE AMP EXPENDITURE. 13. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, AO I DRP / TPO HAVE ERRED IN NOT APPRECIATING THAT THE APPELLANT HAD NOT PROVIDED ANY VALUE ADDED I BRAND BUILDING SERVICES TO ITS AE BY INCURRING AMP EXPEND ITURE, AND THEREFORE, NO MARK-UP COULD HAVE BEEN CHARGED I LEVIED ON SUCH EXPENDITURE, EVEN IF THE SAME WAS TO BE CHARACTERIZED AS AN 'INTERNATIONAL TRANSACTION'. 14. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE AB OVE GROUND, EVEN IF THE MARK-UP IS TO BE APPLIED, THE S AME COULD HAVE BEEN CHARGED ONLY ON THE VALUE ADDED EXP ENSES INCURRED BY THE APPELLANT FOR SUCH ALLEGED BRAND PR OMOTION SERVICE AND NOT ON THE ENTIRE AMOUNT INCURRED / PAI D TO THIRD PARTY VENDORS. 14.1. WITHOUT PREJUDICE AND NOTWITHSTANDING, THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP / TPO HAVE ERRED IN APPLYING APPELLANT'S GROSS PROFIT RATE AS MARK-UP FOR ALLEGED INTERNATIONAL TRANSACTION RELAT ING RENDITION OF BRAND BUILDING SERVICES (AMP EXPENDITU RE). ITA NO.719/DEL./2017 5 15. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, DRP HAS ERRED IN DIRECTING AO / TPO TO INCLUDE SALE S RELATING EXPENDITURE WHILE BENCHMARKING THE ALLEGED INTERNATIONAL TRANSACTION OF AMP EXPENDITURE, DISRE GARDING THE DECISION OF THE JURISDICTIONAL HIGH COURT. 15.1 THAT ON FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP HAS ERRED IN NOT AFFORDING OPPORTUNITY OF BEING HEARD TO THE APPELLANT, WHICH IS A SINE QUA NON UNDER SEC TION 144C(11) OF THE ACT BEFORE ISSUING ANY DIRECTION WH ICH IS PREJUDICIAL TO THE INTEREST OF THE ASSESSEE, WHILE DIRECTING AO / TPO TO INCLUDE SALES RELATING EXPENDITURE AS P ART OF AMP EXPENDITURE WHILE BENCHMARKING THE SAID INTERNATIONAL TRANSACTION. 16. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP / TPO HAVE ERRED IN NOT GRANTING QUANT ITATIVE I ECONOMIC ADJUSTMENTS (SUCH AS NON-PAYMENT OF ROYA LTY / EXPENSES INCURRED ON NEW PRODUCT LAUNCHES) WHILE QUANTIFYING ADJUSTMENTS RELATING TO ALLEGED EXCESSI VE AMP EXPENDITURE. RE: ADDITIONS MADE ON PROTECTIVE BASIS 17. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE OT HER GROUNDS, THE AO / DRP / TPO HAVE ERRED IN DETERMINI NG ADJUSTMENTS ON PROTECTIVE BASIS BY APPLYING BRIGHT LINE TEST ('BLT') METHOD WHICH HAS BEEN JETTISONED BY TH E HON'BLE JURISDICTIONAL HIGH COURT. 18. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE OT HER GROUNDS, THE DRP HAS ERRED IN NOT AFFORDING OPPORTU NITY OF BEING HEARD TO THE APPELLANT, WHICH IS A SINE QUA N ON UNDER SECTION 144C(11) OF THE ACT BEFORE ISSUING ANY DIRE CTION WHICH IS PREJUDICIAL TO THE INTEREST OF THE ASSESSE E, WHILE DIRECTING AO / TPO TO CARRY OUT ALTERNATIVE COMPARA BILITY ADJUSTMENT. 18.1. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE OTHER GROUNDS, THE DRP HAS ERRED IN ARBITRARILY SELECTING COMPANIES IN MARKET SUPPORT SERVICES FOR CARRYING O UT COMPARABILITY ADJUSTMENT ON ACCOUNT OF DIFFERENCES IN VOLUME OF AMP EXPENDITURE OF THE APPELLANT VIS-A-VI S COMPARABLE COMPANIES, FOR DETERMINING THE AVERAGE R ETURN ON MARKET SUPPORT SERVICES AND FURTHER, ERRED IN CO NSIDERING COMPANIES WHICH ARE FUNCTIONALLY DIFFERENT. 19. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP / TPO HAVE ERRED IN NOT PROVIDING THE ITA NO.719/DEL./2017 6 APPELLANT THE BENEFIT OF (+/-) 5% RANGE AS PROVIDED BY THE PROVISO TO SECTION 92C(2) OF THE ACT. 20. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN CHARGING INTEREST UNDER SECTION S 234B AND 234C OF THE ACT. 20.1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE AO HAS FURTHER ERRED IN INCORRECT CALCULATION O F INTEREST UNDER SECTIONS 234B AND 234C OF THE ACT. 2. BRIEFLY STATED, FACTS OF THIS CASE ARE : NIKON G ROUP IS INTO BROAD SPECTRUM OF BUSINESSES VIZ. PRECISION EQUIPME NT, IMAGING PRODUCTS, INSTRUMENTS AND OTHER BUSINESS WHICH ARE BEING CARRIED OUT THROUGH SEPARATE DIVISIONS, NAMELY, PRECISION EQUIPMENT BUSINESS; IMAGING PROJECT BUSINESS; INSTRUMENT BUSI NESS AND OTHER BUSINESSES. HOWEVER, ASSESSEE COMPANY BEING INCORP ORATED IN MAY, 2007 IS WHOLLY OWNED SUBSIDIARY OF NIKON CORPO RATION, JAPAN AND OPERATING THROUGH A NETWORK OF LOCAL DIST RIBUTORS FROM AUGUST, 2007. ASSESSEE COMPANY IS ENGAGED IN THE D ISTRIBUTION AND MARKETING SERVICES FOR NIKON PRODUCTS IN INDIA. IT ALSO PROVIDES REPAIR SERVICES FOR COMPLETE RANGE OF NIKO N IMAGING AND INSTRUMENT PRODUCTS AND ALSO SALES SUPPORT SERVICES PERTAINING TO NIKON PRODUCTS FOR ITS GROUP COMPANIES INCLUDING MI DDLE EAST COMPANIES. THE SALES SUPPORT SERVICES WERE PROVIDE D IN DECEMBER, 2011. 3. ASSESSEE COMPANY ENTERED INTO FOLLOWING INTERNAT IONAL TRANSACTIONS DURING THE YEAR UNDER ASSESSMENT :- ITA NO.719/DEL./2017 7 INTERNATIONAL TRANSACTION TRANSFER PRICING METHOD PROFIT LEVEL INDICATOR TOTAL VALUE OF TRANSACTION (AMOUNT IN INR) PURCHASE OF PRODUCTS, SPARES, PROMOTIONAL AND OTHER SUPPLIES RESALE PRICE METHOD (RPM) GROSS PROFIT / SALES 5,306,499,488 PURCHASES OF FIXED ASSETS TRANSACTIONAL NET MARGIN METHOD (TNMM) OPERATING PROFIT / SALES 5 ,664,445 SALES AND SERVICE SUPPORT INCOME 18,684,779 COMMISSION INCOME 252,061,329 PURCHASE OF FIXED ASSETS COMPARABLE UNCONTROLLED PRICE METHOD (CUP) 8,527,876 COST REIMBURSEMENTS RECEIVED 2,151,406 WARRANTY REIMBURSEMENTS 82,281,676 COST R EIMBURSEMENT PAID 5,905,314 TOTAL 5,681,776,313 4. TPO NOTICED THAT ASSESSEE HAS INCURRED RS.1,04,3 8,52,817/- ON ACCOUNT OF ADVERTISEMENT, MARKETING AND PROMOTIO NAL (AMP) EXPENDITURE WHICH AMOUNTS TO 14.17% OF THE SALES WH EREAS AMP / SALES RATIO OF THE COMPARABLES WAS ONLY 0.46%. TPO PROPOSED TO SEPARATELY BENCHMARKED THE AMP EXPENDITURE ON THE G ROUND THAT THE ASSESSEE HAS RENDERED INTRA GROUP SERVICES WHIC H AMOUNTS TO INTERNATIONAL TRANSACTIONS. 5. ASSESSEE COMPANY IN ITS TP STUDY HAS CHARACTERIZ ED ITSELF AS A ROUTINE DISTRIBUTION WHICH ASSUMES NORMAL BUSINES S RISKS. TPO NOTICED THAT THE ASSESSEE INCURRED AMP EXPENDITURE TO PROMOTE THE BRAND / TRADE NAME WHICH IS OWNED BY THE AE AND AS SUCH, EXPENDITURE HAS RESULTED IN BRAND BUILDING AND INCR EASED AWARENESS OF THE PRODUCTS BEARING THE BRAND / TRADE NAME AND CONSEQUENTLY, ITA NO.719/DEL./2017 8 ISSUED THE SHOW-CAUSE NOTICE TO THE ASSESSEE. TPO, AFTER REJECTING THE ARGUMENTS ADDRESSED BY THE ASSESSEE COMPANY, OB SERVED INTER ALIA THAT THE AMP ADJUSTMENT IS AN INTERNATIONAL TR ANSACTIONS; THAT THE ASSESSEE HAS FAILED TO FURNISH COMPLETE DETAILS REGARDING AMP EXPENDITURE; THAT THE ASSESSEE HAS ALSO FAILED TO F URNISH ANY MARKET SURVEYS IN REGARD TO MARKET SHARE AND EVALUATION OF EFFECTIVENESS OF MARKETING STRATEGY; THAT THE CLAIM OF THE ASSESSEE THAT ITS AE DOES NOT HAVE ANY ROLE IN THE AMP STRATEGY AND EXPENDITU RE IN INDIA IS ALSO NOT SUSTAINABLE. 6. TPO PROCEEDED TO CONCLUDE THAT THE AMP EXPENDITU RE IS INTERNATIONAL TRANSACTION AS THE ASSESSEE HAS RENDE RED INTRA GROUP SERVICES WHICH ARE REQUIRED TO BE SEPARATELY BENCHM ARKED. TPO USED BRIGHT LINE TEST FOR BENCHMARKING TO MAKE AD JUSTMENT ON PROTECTIVE BASIS. TPO USED COST PLUS METHOD FOR BE NCHMARKING AND ALSO APPLIED MARK UP USING ASSESSEES OWN GP MARGIN RATE FOR MAKING SUBSTANTIVE ADJUSTMENT AND THEREBY PROPOSED THE ADJUSTMENT OF RS.51,89,69,687/- ON SUBSTANTIVE BASI S. 7. THE ASSESSEE COMPANY CARRIED THE MATTER BY WAY O F FILING OBJECTIONS BEFORE THE DRP BUT FAILED TO GET RELIEF. FEELING AGGRIEVED, THE ASSESSEE HAS COME UP BEFORE THE TRIB UNAL BY WAY OF FILING THE PRESENT APPEAL. ITA NO.719/DEL./2017 9 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 9. AT THE VERY OUTSET, IT IS BROUGHT TO THE NOTICE OF THE BENCH BY BOTH THE LD. REPRESENTATIVES OF THE PARTIES THAT ID ENTICAL ISSUE HAS ALREADY BEEN DETERMINED BY THE COORDINATE BENCH IN ASSESSEES OWN CASE BEARING ITA NO.6314/DEL/2015 ORDER DATED 15.07.2016 BY RESTORING THE MATTER BACK TO THE TPO TO DETERMIN E AFRESH AS TO WHETHER THERE EXISTS ANY INTERNATIONAL TRANSACTION OF AMP EXPENSES. 10. NOW, COMING TO THE MOOT POINT TO BE DETERMINED BY THE BENCH IF AMP EXPENSES IS NOT INTERNATIONAL TRANSACTION AS CONTENDED BY THE ASSESSEE COMPANY, WE HAVE GONE THROUGH THE JUDGMENTS OF HONBLE JURISDICTIONAL HIGH COURT RELI ED UPON BY THE LD.AR FOR THE ASSESSEE CITED AS MARUTI SUZUKI INDIA LTD. & ANR. VS. CIT (2015) 129 DTR 25 (DEL.) AND CIT VS. WHIRLPOOL OF INDIA LTD. (2015) 94 CCH 156 DEL-HC . 11. NO DOUBT, THE RATIO OF THE JUDGMENT IN AFORESAI D CASES OF MARUTI SUZUKI INDIA LTD. AND WHIRLPOOL OF INDIA LTD. (SUPRA) RELIED UPON BY THE ASSESSEE IS THAT THERE WAS NO IN TERNATIONAL TRANSACTION OF AMP EXPENSES AND AS SUCH THE ENTIRE EXERCISE OF ITA NO.719/DEL./2017 10 DETERMINING ITS ALP AND CONSEQUENTLY MAKING TRANSFE R PRICING ADJUSTMENT IS TO BE SET ASIDE. 12. HOWEVER, ON THE OTHER HAND, LD. DR RELIED UPON THE JUDGMENT CITED AS SONY ERICSON MOBILE COMMUNICATIONS (INDIA) PVT. LTD. VS. CIT (2015) 374 ITR 118 (DEL.) IN WHICH AMP EXPENSES HAVE BEEN HELD TO BE INTERNATIONAL TRANSAC TION AND THE MATTER OF DETERMINATION OF ALP HAS BEEN RESTORED TO THE TPO. 13. FURTHERMORE, IN THE JUDGMENT CITED AS YUM RESTAURANTS (INDIA) PVT. LTD. VS. ITO (2016) 380 ITR 637 (DEL ) AND SONY ERICSON MOBILE COMMUNICATIONS (INDIA) PVT. LTD. OR AY 2010-11 DELIVERED ON 28.01.2016 , HONBLE HIGH COURT RESTORED THE ISSUE, AS TO WHETHER AMP EXPENSES IS INTERNATIONAL TRANSA CTION FOR FRESH DETERMINATION. 14. FURTHERMORE, THE ISSUE IN QUESTION AS TO WHETHE R AMP EXPENSES ARE INTERNATIONAL TRANSACTION AGAIN CROPPE D UP BEFORE THE HONBLE JURISDICTIONAL HIGH COURT IN JUDGMENT CITED AS RAYBAN SUN OPTICS INDIA LTD. VS. CIT (DATED 14.09.2016), P R. CIT VS. TOSHIBA INDIA PVT. LTD. (DATED 16.08.2016) AND PR. CIT VS. BOSE CORPORATION (INDIA) PVT. LTD. (DATED 23.08.2016) WHEREIN THE IDENTICAL ISSUE HAS AGAIN BEEN RESTORED FOR FRESH D ETERMINATION IN THE LIGHT OF THE DECISIONS RENDERED IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD . SUPRA). ITA NO.719/DEL./2017 11 15. COMING TO THE CASE AT HAND, WE ARE OF THE CONSI DERED VIEW THAT WHEN THE TPO HAS DETERMINED THE AMP EXPENSES T O BE INTERNATIONAL TRANSACTION, HE HAD NO OCCASION TO FO LLOW THE RATIO OF THE JUDGMENTS IN RAYBAN SUN OPTICS INDIA LTD. VS. CIT, PR. CIT VS. TOSHIBA INDIA PVT. LTD. AND PR. CIT VS. BOSE CO RPORATION (INDIA) PVT. LTD. (SUPRA) RENDERED BY HONBLE JURISDICTIONAL HIGH COURT DISCUSSED IN THE PRECEDING PARAS SINCE THOSE JUDGMENTS WERE NOT AVAILABLE TO HIM. AFORESAID DECISIONS HAVE CON SISTENTLY BEEN FOLLOWED BY COORDINATE BENCHES OF THE TRIBUNAL. 16. IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERE D VIEW THAT IT WOULD BE IN THE INTEREST OF JUSTICE IF THE IMPUGNED ORDER IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF TPO/AO FOR FR ESH DETERMINATION OF THE QUESTION TO DETERMINE, AS TO WHETHER AMP EXPENDITURE IS INTERNATIONAL TRANSACTION, IN THE LIGHT OF THE JUDGMENTS RENDERED BY HONBLE DELHI HIGH COURT DISCUSSED IN PRECEDING PAR AS. 17. IN CASE THE EXISTENCE OF SUCH AN INTERNATIONAL TRANSACTION IS NOT PROVED, THERE SHALL NOT BE ANY TRANSFER PRICING ADDITION, BY THE LD. AR FOR THE ASSESSEE. HOWEVER, IN CASE THE INTE RNATIONAL TRANSACTION IS PROVED TO BE EXISTED, THEN THE TPO W ILL DETERMINE SUCH INTERNATIONAL TRANSACTION IN THE LIGHT OF THE JUDGMENT RENDERED BY HONBLE JURISDICTIONAL HIGH COURT AFTER PROVIDIN G AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ITA NO.719/DEL./2017 12 18. THE LD. AR FOR THE ASSESSEE ALSO BROUGHT ON REC ORD THE FACTUAL ERROR COMMITTED BY AO BY NOT FOLLOWING THE DIRECTIONS ISSUED BY LD. DRP REGARDING AMP INTENSITY ADJUSTMEN T TO BE MADE ON PROTECTIVE BASIS WHICH ARE REPRODUCED AS UNDER F OR READY PERUSAL:- 3. ALTERNATIVELY, AND WITHOUT PREJUDICE TO THE AB OVE FINDINGS; IN THE EVENT THAT THE ABOVE ADJUSTMENTS ARE NOT APP ROVED BY1HE HIGHER JUDICIAL AUTHORITIES, AN AMP INTENSITY ADJUS TMENT SHOULD BE MADE ON A PROTECTIVE BASIS, IN 1HE FOLLOWING MANNER . (I) THE EXPENDITURE OF COMPARABLES AND THE ASSESSE E IS SEGREGATED INTO DIRECT EXPENSES, EXPENSES OTHER THA N AMP EXPENSES, AND AMP EXPENSES. (II) THE RATIO OF AMP EXPENSES TO SALES IS DETERMI NED FOR THE ASSESSEE AND THE COMPARABLES. THE DIFFERENCE IN INT ENSITY OF THE ASSESSEE AND EACH OF THE COMPARABLES IS THUS IDENTI FIED. (III) THIS DIFFERENCE IN. INTENSITY IS QUANTIFIED AS THE EXTRA AMP EXPENSES REQUIRED TO BE BORNE BY THE COMPARABLES, I N ORDER TO HAVE THE SAME INTENSITY OF FUNCTIONS AS THAT OF THE ASSE SSEE. (IV) SINCE EXTRA COST IS ALLOCATED TO THE COMPARAB LES, CORRESPONDING TO THE ADDITIONAL FUNCTIONS OF MARKET ING, THE RETURN CORRESPONDING TO SUCH EXTRA FUNCTION BEING CARRIED OUT IN THE MARKET IS DETERMINED, HAVING REGARD TO THE AVERAGE RETURN EARNED BY THE ENTITIES ENGAGED IN PROVIDING MARKETING SUPP ORT SERVICES. (V) SINCE THE COST FOR THE COMPARABLES IS INCREASE D, ON THE BASIS OF MATCHING PRINCIPLE, SALES OF THE COMPARABLE IS A LSO INCREASED BY THE AMOUNT OF COST AND THE PROFIT EARNED ON SUCH CO ST, CONSIDERING THE AVERAGE RETURN DETERMINED ON MARKET SUPPORT SER VICES WORKED OUT IN STEP V. (VI) THE ADJUSTED SALES AND COST IS CONSIDERED FOR DETERMINING THE PLI OF THE COMPARABLES. 3. THE CALCULATION OF THE ADJUSTMENT ON THE BASIS OF ABOVE DISCUSSION IS ILLUSTRATED AS UNDER: ITA NO.719/DEL./2017 13 COMPARABLE TAXPAYER TOTAL OPERATING REVENUE A AC=108 AA=110 COST OF GOODS B 100 100 ADD: CHANGE INVENTORY C 0 0 DIRECT COST D=B+C 100 100 GROSS PROFIT E=A-D 8 10 EMPLOYEE AND OTHER ROUTINE EXPENSES F 2 2 AMP EXPENSES G 3 18 TOTAL INDIRECT COST H=F+G 5 20 TOTAL OPERATING COST I=D+H 105 120 NET PROFIT J=A-I 3 -10 GP/SALES K=E/A 7.41% 9.09% NP/SALES L=J/A LC=2.78% LA=9.09% AMP EXPENSES/SALES N=G/A NC=2.78% NA=16.36% DIFFERENCE IN. INTENSITY OF AMP SIGNIFYING MARKETING FUNCTION O=NA-NC 13.58% DIFFERENCE IN COST P=O*A 14.67 ADJUSTED COST Q=I+P 119.67 ADJUSTMENT IN SALES R=1.15*P 16.87 ADJUSTED SALES S=A+R 124.87 ADJUSTED PROFIT T=S - Q 5.20 ADJUSTED OP/OR U=T/S 4.16% AVERAGE MARGIN 4.16% ARMS LENGTH MARGIN V 4.16% ADJUSTMENT W=V LA/AA 14.575 ASSUMPTION: FOR THE PURPOSE OF ILLUSTRATION, 15% IS TAKEN AS THE RETURN ON 'AMP EXPENSES' INCURRED BY ANY INDEPENDENT ENTITY P ROVIDING MARKETING SUPPORT SERVICES. (THE PARTICULAR MARGIN APPLICABLE HAS BEEN QUANTIFI ED AT 17.32% AS DISCUSSED IN PARA 12.10.) 4. IT MAY BE MENTIONED THAT THIS ADJUSTMENT IS NOT DEPENDENT ON WHETHER THERE IS AN INTERNATIONAL TRANSACTION. A S DISCUSSED IN PARA 4, THERE IS CLEARLY AN INTERNATIONAL TRANSACTI ON IN THIS CASE HOWEVER, IF THIS VIEW IS NOT ACCEPTED BY HIGHER JUD ICIAL AUTHORITIES, THE AMP INTENSITY ADJUSTMENT WOULD STILL STAND. 19. AFORESAID ERROR POINTED OUT BY THE LD. AR FOR T HE ASSESSEE IS APPARENT ON THE RECORD AND AO IS REQUIRED TO FOLLOW THE DIRECTIONS IN ACCORDANCE WITH LAW. ITA NO.719/DEL./2017 14 20. TPO/AO IS ALSO REQUIRED TO BENCHMARK THE DISTRI BUTION AND MARKETING FUNCTIONS BOTH BEING INTERCONNECTED AND I NTERTWINED ON AN AGGREGATE BASIS IN ACCORDANCE WITH THE DECISION RENDERED BY COORDINATE BENCH IN ASSESSEES OWN CASE FOR AY 2011 -12. HOWEVER, SO FAR AS FIRST PART OF THE DIRECTIONS ISS UED BY THE DRP QUA LEGAL ISSUES ARE CONCERNED, THE ASSESSEE SOUGHT TO RESERVE ITS RIGHT TO ARGUE THE SAME BEFORE THE COMPETENT FORUM. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT THIS REMEDY IS OTHE RWISE ALWAYS AVAILABLE TO THE ASSESSEE TO ARGUE ON LEGAL ISSUES BEFORE THE COMPETENT AUTHORITY 19. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, THE P RESENT APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PU RPOSES AND THE MATTER IS RESTORED TO THE TPO/AO FOR DECIDING AFRES H AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSE SSEE IN ACCORDANCE WITH THE DIRECTIONS GIVEN HEREIN BEFORE. ORDER PRONOUNCED IN OPEN COURT ON THIS 31 ST DAY OF MARCH, 2017. SD/- SD/- (N.K. SAINI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 31 ST DAY OF MARCH, 2017 TS ITA NO.719/DEL./2017 15 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.