Olympus Medical Systems India Pvt. Ltd., Gurugram V. DCIT, Circle- 3(1), Gurugram

ITA 7414/DEL/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 0209 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Assessment Year: 2014-2015
• Appeal Filed On: 22-11-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ALOK VASANT I
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Application of stay; Wholly owned subsidiary
• Section: 92C; 143(3); 92B; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I - 2 , NEW DELHI BEFORE SHRI AMIT SHUKLA , JUDICIAL M EMBER AND SH RI O.P. KANT , ACCOUNTANT MEMBER ITA NO .7414 /DE L/ 2018 ASSESSMENT YEAR : 2014 - 15 M/S. OLYMPUS MEDICAL SYSTEMS INDIA PVT. LTD., GROUND FLOOR, TOWER - C, SAS TOWER, THE MEDICITY COMPLEX, SECTOR - 38, GURGAON VS. DCIT, CIRCLE - 3(1), GURUGRAM PAN : AABC02131L (APPELLANT) (RESPONDENT) AND S.A. NO.870/DEL/2018 [IN ITA NO .7414 /DEL/ 2018] ASSESSMENT YEAR: 2014 - 15 M/S. OLYMPUS MEDICAL SYSTEMS INDIA PVT. LTD., GROUND FLOOR, TOWER - C, SAS TOWER, THE MEDICITY COMPLEX, SECTOR - 38, GURGAON VS. DCIT, CIRCLE - 3(1), GURUGRAM PAN : AABC02131L (APPELLANT) (RESPONDENT) APPELLANT BY SH. ALOK VASANT I , ADV. RESPONDENT BY SH. H.K. CHOUDHARY, CIT(DR) ORDER PER O.P. KANT, A .M. : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST FINAL ASSESSMENT ORDER DATED 24/10/2018 PASSED BY THE LD. DY. DATE OF HEARING 13.02 .2019 DATE OF PRONOUNCEMENT 27.03.2019 2 ITA NO.7414/DEL/2018 COMMISSIONER OF INCOME T AX, C IRCLE - 3, GURUGRAM [HEREINAFTER REFERRED TO AS THE ASSESSING OFFICER ] PURSUANT TO THE DIRECTION DATED 14/09/2018 OF THE LEARNED D ISPUTE R ESOLUTION P ANEL(DRP) FOR ASSESSMENT YEAR 2014 - 15. IN THE GROUNDS OF APPEAL RAISED, THE AS SESSEE IS AGITATED MAINLY AGAINST ADJUSTMENT MADE TO ADVERTISEMENT, MARKETING AND PROMOTION (AMP) EXPENSES. THE GROUNDS OF APPEAL ARE REPRODUCED AS UNDER: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, OLYMPUS MEDICAL SYSTEMS INDIA PRIVATE LIMITED (HEREINAFTER REFERRED TO AS OMSI OR APPELLANT ) CRAVES LEAVE TO PREFER AN APPEAL AGAINST THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(1), GURUGRAM [HEREINAFTER REFERRED TO AS THE AO ] PURSUANT TO DIRECTIONS ISSUED BY THE HON BLE DISPUTE RESOLUTION PANEL [HEREINAFTER REFERRED TO AS DRP ] UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME - TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ) ON THE FOLLOWING GROUNDS: GENERAL GROUNDS 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSMENT ORDER/DIRECTIONS PASSED BY THE ID. AO / TRANSFER PRICING OFFICER ( TPO ) / DRP ARE BAD IN LAW. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS FAILED TO ADJUDICATE CRITICAL GRO UNDS OF OBJECTIONS RAISED BY THE APPELLANT AND THEREAFTER HAS ISSUED NON - SPEAKING DIRECTIONS. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS MADE VARIOUS FACTUAL INACCURACIES IN ITS DIRECTION LEADING TO MISINTERPRETATION OF FACTS OF THE APPELL ANT AND INCORRECT FINDINGS. GROUNDS AGAINST ADJUSTMENT MAD E IN RELATION TO ADVERTISEMENT, MARKETING AND PROMOTION ( AMP ) EXPENSES 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. AO / TPO/ DRP ERRED IN TREATING THE ROUTINE SELLING EXPE NSES INCURRED BY THE APPELLANT AS NON - ROUTINE ADVERTISEMENT, MARKETING AND PROMOTION ('AMP') EXPENSES WHICH HAVE FURTHER BEEN ASSUMED TO HAVE BEEN INCURRED SOLELY TOWARDS BRAND PROMOTION OF FOREIGN ASSOCIATED ENTERPRISE ( AE ). WHILE DOING SO, THE LD AO/TP O/DR P HAVE COMPLETELY DISREGARDED THE NATURE OF INDUSTRY AND BUSINESS REALITIES OF THE APPELLANT 3 ITA NO.7414/DEL/2018 A. WHILE DOING SO ALL EXPENSES INCURRED BY THE APPELLANT HAVE BEEN CONSIDERED AS NON - ROUTINE, I.E., THE APPELLANT IS DEEMED TO HAVE INCURRED NO ROUTINE AMP/SELLING EXPENSES B. DETERMINATION OF SELLING EXPENSES AS NON - ROUTINE BRAND PROMOTION EXPENSE IS ALSO IN VIOLATION OF ORDER OF THE HON'BLE HIGH COURT ( HC ) IN THE CASE OF SONY ERICSON MOBILE COMMUNICATIONS INDIA PVT. LTD. 5. THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, LD. AO / TPO/ DRP ERRED IN HOLDING THAT THE SALES PROMOTION EXPENDITURE INCURRED BY THE APPELLANT IN INDIA IS AN 'INTERNATIONAL TRANSACTION' AS PER THE PROVISIONS OF THE ACT WITHOUT DEMONSTRATING THE EXISTENCE OF ANY UNDERSTANDING OR AN AGREEMENT BETWEEN THE APPELLANT AND ITS AES WHICH REQUIRES THE APPELLANT TO SPEND EXCESSIVELY TOWARDS BRAND PROMOTION. A. THE ASSUMPTION OF EXISTENCE OF AN INTERNATIONAL TRANSACTION WITHOUT HAVING ANY VALID AGREEMENT AS BASIS HAS BEEN OVERRULED BY THE HON BLE HC IN THE CASES OF MARUTI SUZUKI INDIA LIMITED AND WHIRLPOOL OF INDIA LIMITED. 6. THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, LD. AO / TPO/ DRP ERRED IN NOT APPRECIATING THAT THE SALES PROMOTION EXPENSES INCURR ED BY THE APPELLANT ARE WHOLLY AND EXCLUSIVELY FOCUSED ON GENERATING DOMESTIC SALES FOR ITS DISTRIBUTION OPERATIONS AND THE BENEFIT ARISING FROM THE INCURRENCE OF SALES PROMOTION EXPENSES BY THE APPELLANT HAS BEEN RECEIVED BY THE APPELLANT WITH THE BENEFIT , IF ANY, RESULTING TO ITS AES IS MERELY INCIDENTAL. 7. THE LD. AO / TPO/ DRP HAS ERRED IN NOT APPRECIATING THAT MARKETING IS ONE OF THE PRIMARY FUNCTIONS UNDERTAKEN BY THE APPELLANT AND THE BENEFICIARY ON ACCOUNT OF INCURRING OF AMP EXPENSES WAS THE APPELLANT ITSELF AND THE SAME DOES NOT REQUIRE TO BE COMPENSATED / REMUNERATED SEPARATELY BY THE AE FOR ANY INCIDENTAL BENEFITS ENJOYED BY THE AE. 8. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO / TPO / DRP ERRED IN ASSUMING THAT AMP EXPENSES INCURRED BY APPELLANT HAVE LED TO THE CREATION OF MARKETING INTANGIBLES. 9. THE TPO HAS HIMSELF CONSIDERED AMP COSTS AS PART OF TNMM ANALYSIS WHILE BENCHMARKING IMPORT TRANSACTION WHICH WAS NOT CONTROVERTED BY THE DRP. WITHOUT PREJUDICE TO THE O THER GROUNDS, HAVING REGARD TO THE JURISPRUDENCE LAID DOWN BY DELHI HC IN SONY ERICSON MOBILE COMMUNICATIONS INDIA PVT. LTD., ONCE THE TPO HAS AGGREGATED AMP EXPENSE UNDER TRANSACTIONAL NET MARGIN METHOD TNMM, IT IS NOT OPEN TO THE AO / TPO / DRP TO SEGREG ATE THE SAME 4 ITA NO.7414/DEL/2018 AND BENCHMARK IT SEPARATELY. HENCE, THE SEGREGATED APPROACH OF THE AO / TPO / DRP IS FLAWED AND BAD IN LAW. 10. WITHOUT PREJUDICE TO THE ABOVE GROUNDS AND THE CONTENTION THAT AMP/SALES RATIO IS NOT A MEASURE OF INTENSITY OF AMP FUNCTION, THE AO / TPO / DRP FAILED TO TAKE NOTE OF COMPANIES WHICH HAD SAME LEVEL OF AMP EXPENSES . 11. WITHOUT PREJUDICE TO THE ABOVE GROUNDS AND THE CONTENTION THAT AMP/SALES RATIO IS NOT A MEASURE OF INTENSITY OF AMP FUNCTION, EVEN IF THE ALLEGED INTENSITY OF AMP FU NCTIONS OF THE APPELLANT DID NOT MATCH - THAT OF COMPARABLES, THE AMP EXPENSES COULD HAVE BEEN AGGREGATED ALONG WITH OTHER INTERNATIONAL TRANSACTIONS AND TESTED UNDER TNMM AT ENTITY LEVEL USING INTENSITY ADJUSTMENT. THE APPELLANT WILL BE AT ARM'S LENGTH UND ER SUCH AN APPROACH. SUCH AN APPROACH WAS PROPOSED BY LD. TPO DURING THE ASSESSMENT PROCEEDINGS BUT ULTIMATELY NOT CONSIDERED WHILE PASSING ITS ORDER WITHOUT PROVIDING ANY REASON FOR THE SAME. 12. WITHOUT PREJUDICE TO ANY OTHER CONTENTIONS, IF THE LD. AO / TPO / DRP DOESN'T AGREE WITH AGGREGATION OF AMP UNDER TNMM, THE AMP TRANSACTION CAN BE BENCHMARKED USING THE ADJUSTED RESALE PRICE METHOD ( RPM ) WHICH IS ALSO PREFERRED BY THE HC OVER SEGREGATION APPROACH. 13. WITHOUT PREJUDICE TO ALL T HE OTHER CONTENT IONS, IF THE AO /TPO/DRP PROPOSES ADJUSTMENT TO THE VALUE OF AMP EXPENSES; DIRECT SELLING EXPENSES SHOULD BE EXCLUDED FROM THE VALUE OF SUCH AMP EXPENSES. 14 WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE AO / TPO / DRP ERRED IN FACTS AND CIRCUMSTANCES OF TH E CASE AND IN LAW IN CONCLUDING THAT THE APPELLANT HAS RENDERED BRAND BUILDING SERVICES TO ITS AES AND IT SHOULD CHARGE MARKUP ON COST INCURRED IN RENDERING SUCH SERVICES. 15. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE AO / TPO / DRP ERRED IN FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN USING INAPPROPRIATE COMPARABLES FOR THE PURPOSE OF APPLYING SUCH MARK - UP . 16. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE TPO HAS ERRED IN FACTS AND CIRCUMSTANCES OF THE CASE IN COMPUTATION OF WORKING CAPITAL ADJUSTED MARGINS OF THE COMPARABLES SELECTED PURSUANT TO DRP DIRECTIONS . GROUNDS PERTAINING TO PROTECTIVE ADJUSTMENT 17. THAT PROT ECTIVE ADJUSTMENT BASED ON BRIGHT LINE TEST AS PROPOSED BY ID. AO / TPO/DRP IN HIS ORDER/DIRECTIONS IS AGAINST THE 5 ITA NO.7414/DEL/2018 PRINCIPLES LAID DOWN BY HON BLE DELHI HC. IN THE ABSENCE OF ANY STAY ON THIS DECISION BY THE HON BLE SUPREME COURT, THE DECISION OF HON BLE H IGH COURT HOLDS THE FIELD AND IS FULLY OPERATIONAL AS OF NOW ESPECIALLY WITH CONTEXT TO BRIGHT LINE TEST ( BLT ). HENCE, IN VIEW OF BINDING NATURE OF THIS JUDGMENT TO THE OFFICE OF AO/TPO/DRP, THE APPELLANT SUBMITS THAT THIS APPROACH SHOULD NOT BE CONSIDER ED. 18. THAT UNDER THE PROVISIONS OF INCOME TAX ACT, THERE IS NO PROVISION OF PROTECTIVE ASSESSMENT IN CASE OF MATTERS OVERRULED BY HIGH COURT. THE ORDER OF TPO/AO/DRP IS COMPLETELY UNLAWFUL AND SHOULD BE QUASHED. 19. WITHOUT PREJUDICE TO OTHER GROUNDS, IF THE AO / TPO / DRP PROPOSES ADJUSTMENT TO THE VALUE OF AMP EXPENSES; DIRECT SELLING EXPENSES SHOULD BE EXCLUDED FROM THE VALUE OF SUCH AMP EXPENSES. 20. WITHOUT PREJUDICE TO OTHER GROUNDS, THAT THE LD. TPO/AO ERRED IN MAKIN G INAPPROPRIATE SELECTION OF COMPARABLES FOR THE MARK - UP ON ALLEGED BRAND BUILDING/AMP EXPENDITURE WHILE COMPUTING ADJUSTMENT IN PROTECTIVE ASSESSMENT. 21. WITHOUT PREJUDICE TO THE OTHER GROUNDS, THE LD. TPO/AO HAVE ERRED IN FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW BY IGNORING THE FACT THAT EVEN IF THE APPELLANT S REMUNERATION MODEL IS TO BE RE - CHARACTERIZED TO A SERVICE FEE FOR ALLEGED BRAND BUILDING/AMP ACTIVITIES, THE PROFIT EARNED BY THE APPELLANT OVER AND ABOVE THE RETURN EARNED BY A DISTRIBUTOR UNDERTAKING NO OR LIMITED AMP ACTIVITIES SHOULD BE CONSIDERED AS A REMUNERATION FOR ITS ALLEGED AMP ACTIVITY AS STIPULATED BY THE HON BLE DELHI HIGH COURT IN THE IN THE CASE OF SONY ERICSON MOBILE COMMUNICATIONS INDIA PRIVATE LIMITED FURTHER, SINCE THE A BOVE - MENTIONED APPROACH HAS BEEN FOLLOWED AT PRESENT ONLY ON PROTECTIVE BASIS, THE APPELLANT RESERVES ALL RIGHTS IN LAW TO RAISE SUITABLE OBJECTIONS IN FUTURE, IF OFFICE OF LD. TPO PROPOSE ANY ADJUSTMENT TO THE ASSESSEE S INCOME USING BRIGHT LINE / OR ANY OTHER VARIANT OF THE SAME APPROACH GROUNDS PERTAINING TO PENALTY PROCEEDINGS 22. THAT ON FACTS AND IN LAWS, THE AO ERRED IN HOLDING THAT THE APPELLANT HAS FURNISHED INACCURATE PARTICULARS OF INCOME IN RESPECT OF EACH ITEM OF DISALLOWANCE/ ADDITIONS AND I N INITIATING PENALTY PROCEEDINGS UNDER SECTION 271 (1 )(C) OF THE ACT. 2. B RIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE, OLYMPUS M EDICAL S Y STEM INDIA PRIVATE LIMITED ( OLYMPUS INDIA ) 6 ITA NO.7414/DEL/2018 WAS INCORPORATED ON 20/10/2009. IT IS A WHOLLY - OWNED SUBSIDIARY OF OLYMPUS CORPORATION ASIA PACIFIC LTD., HONG KONG AND ULTIMATELY HELD BY OLYMPUS MEDICAL SYSTEM CORPORATION, JAPAN . THE ASSESSEE IS ENGAGED IN IMPORT A ND RESALE OF MEDICAL EQUIPMENTS, LIKE GASTROINTESTINAL ENDOSCOPE, SURGICAL ENDOSCOPE, ETC . A ND INSTALLATION, REPAIR AND MAINTENANCE OF THESE EQUIPMENTS IN INDIA. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE FILE D RETURN OF INCOME ON 27/11/2014 , DECLARING TOTAL INCOME OF RS.20,71,27,220/ - . THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECT ION 143(2) OF THE I NCOME T AX A CT, 1961 (IN SHORT THE A CT ) WAS ISSUED AND COMPLIED WITH. THE ASSESSING OFFICER NOTICED INTERNATIONAL TRANSACTION WITH ITS A SSOCIATED E NTERPRISES (AE S) , REPORTED BY THE ASSESSEE AND ACCORDINGLY , HE REFERRED THE MATTER FOR D ETERMINATION OF ARM S LENGTH PRICE OF THOSE INTERNATIONAL TRANSACTIONS TO THE LD. TRANSFER PRICING O FFICER (TPO). A LIST OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE RELATES TO AE ARE REPRODUCED AS UNDER: S. NO. DESCRIPTION OF THE TRANSACTIONS AMOUNT (RS.) 1 IMPORT OF FINISHED GOODS 83,39,07,222 2 IMPORT OF CONSUMABLES 48,04,602 3 IMPORT OF ASSESSORIES FOR DEMO & LOANER & OTHER ITEMS 95,53,192 4 RECEIPT OF SERVICE INCOME 3,36,14,586 5 SALE OF COMPONENTS 1,20,580 6 IMPORT OF DEMO/LOANER & JIGS & TOOLS FORMING PART OF FIXED ASSETS 4,91,01,078 7 PROVISION FOR MARKET SUPPORT SERVICES 11,19,84,248 8 INTEREST PAID ON SUPPLIER CREDIT 73,906 9 PAYMENT FOR IT EXPENSES 1,10,46,055 10 REIMBURSEMENT OF EXPENSES TO AES 78,80,989 11 REIMBURSEMENT OF EXPENSES BY AES 44,23,944 7 ITA NO.7414/DEL/2018 TOTAL 1,06,65,10,402 2.1 T HE LD. TPO, DID NOT PROPOSE ANY ADJUSTMENT TO THE ABOVE INTERNATIONAL TRANSACTIONS, HOWEVER , ON PERUSAL OF THE AUDITED FINANCIALS, HE FOUND ADVERTISING , MARKETING AND S ALES PROMOTION (AMP) EXPENSES INCURRED BY ASSESSEE OF RS.8,63,61,000/ - . ACCORDING TO THE LEARNED TPO , THE EXPENDITURE ON AMP EXPENSES HAD BEEN INCURRED TO PROMOTE THE BRAND/TRADE NAME WHICH IS OWNED BY THE AE AND RESULTED IN BUILDING AND INCREASED AWARENES S OF THE PRODUCTS BEARING THE BRAND/ TRADE NAME. THE LEARNED TPO NOTED THAT IN VIEW OF SECTION 92F(V) OF THE A CT, ANY TRANSACTION INCLUDES AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT, WHETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR ACTION IS FORMA L OR IN WRITING AND IN VIEW OF THE RULE 10 B(2)(C) OF I NCOME TAX R ULES, 1962, THE EXPENDITURE INCURRED ON AMP BY THE TAXPAYER AND THEREBY PROMOTING THE BRAND/TRADE NAME OWNED BY THE AES , IS AN INTERNATIONAL TRANSACTION, WHICH HAS NOT BEEN REPORTED IN FOREI GN NO. 3CEB AND ASSESSEE WAS REQUIRED TO BENCHMARK THIS INTERNATIONAL TRANSACTION. THE ASSESSING OFFICER PROPOSED THE ASSESSEE TO BENCHMARK THIS INTERNATIONAL TRANSACTION. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE OBJECTING TO BENCHMARK THIS INTERNA TIONAL TRANSACTION OF AMP EXPENSES, THE LEARNED TPO , HELD THE INCURRING OF EXPENSES ON AMP A S INTERNATIONAL TRANSACTION AND BENCHMARKED FOLLOWING THE BLT (BRIGHT LINE T EST) ON PROTECTIVE BASIS AND FOLLOWING COST PLUS METHOD ON SUBSTANTIVE BASIS. 2.2 FOR BENCHMARKING ON PROTECTIVE BASIS, THE LEARNED TPO COMPUTED THE AMP EXPENSES IN TERMS OF SALES AS UNDER: 8 ITA NO.7414/DEL/2018 EXPENDITURE ON AMP 8,57,15,671 VALUE OF GROSS SALES 1,70,95,95,399 AMP/SALES % 5.01% 2.3 THE LEARNED TPO EXTRACTED , THE 5 COMPARABLES USED BY THE ASSESSEE FOR DISTRIBUTION SEGMENT AND HE USED THE SAME FOR THE PURPOSE OF COMPARISON OF THE AMP EXPENDITURE A S UNDER: S. NO. NAME OF COMPARABLES AMP EXPENDITURE SALES TURNOVER AMP/SALES(5) 1. ADS DIAGNOSTIC 923746 73624772 1.25 2. FRONTLINE ELECTRO 2223055 207154850 1.70 3. SATYATEJ 5977174 71287763 8.38 4. ADVANCED MICRONIC 2871485 213873831 1.34 5. CONFIDENT SALES INDIA 4088844 361570828 1.13 AVERAGE AMP/SALES RATIO IN CASE OF COMPARABLE COMPANIES 2.64 2.4 THE LEARNED TPO OBSERVED THAT INTENSITY OF THE AMP SPENT BY THE ASSESSEE IS MUCH HIGHER THAN THAT OF COMPARABLES TAKEN BY THE ASSESSEE, AND ACCORDINGLY THE AMP EXPENSES OVER AND ABOVE SIMILAR EXPENSES BY THE COMPARABLE ENTITIES WAS HELD AS COMPONENT OF INTERN ATIONAL TRANSACTION ATTRIBUTED TO THE ASSOCIATED ENTERPRISE TOWARDS BUILDING UP OF INTANGIBLES WHICH WAS REQUIRED TO BE SUITABLY COMPENSATED BY THE AE. THE LEARNED TPO COMPUTED THE EXPENSES IN EXCESS OF THE BRIGHT LINE I.E. OVER AND ABOVE THE EXPENSES INCU RRED BY COMPARABLE ENTITIES , AS UNDER: PARTICULARS VALUE VALUE OF GROSS SALES 1,70,95,95,399 AMP/SALES OF COMPARABLES 2.64% AMOUNT THAT REPRESENT BRIGHT LINE 4,51,33,319 9 ITA NO.7414/DEL/2018 EXPENDITURE ON AMP BY TAXPAYER 8,57,15,671 EXPENDITURE IN EXCESS OF BRIGHT LINE 4,05,82,352 2.5 ACCORDING TO THE LEARNED TPO AN INDEPENDENT ENTITY UNDER SIMILAR CIRCUMSTANCES MUST HAVE CHARGE D MARKUP ON THIS EXCESS EXPENDITURE, FOR THE MONEY SPENT ON THE SERVICE ELEMENT. HE NOTED THAT THE MARKETING FUNCTION PROVIDES A RETURN IN THE MARKET, HE SELECTED 10 COMPARABLE COMPANIES AND THE AVERAGE PROFIT MARGINS RETURNED BY ENTITIES PROVIDING MARKET F UNCTIONS WAS COMPUTED AS UNDER: S.NO. COMPANY NAME OP/OC 1. APITCO LTD. 8.86% 2. CAMEO CORPORATE SERVICES LTD. 5.22% 3. CRYSTAL HUES LTD. 5.61% 4. GLOBAL PROCUREMENT CONSULTANTS LTD. 30.97% 5. GOLDMINE ADVERTISING LTD. 5.25% 6. 1 C R A MANAGEMENT CONSULTING SERVICES LTD. 5.36% 7. KILLICK AGENCIES & MKTG. LTD. 25.39% 8. SUPERNOVA ADVERTISING LTD. 5.48% 9. TATA REALTY & INFRASTRUCTURE LTD. 27.66% 10. TECHPROCESS PAYMENT SERVICES LTD. 8.39% AVERAGE 12.82% 2.6 IN VIEW OF THE LEARNED TPO, THE TAXPAYER COMPANY SHOULD HAVE BEEN COMPENSATED BY T HE ASSOCIATED ENTERPRISE AT RS. 4,05,82, 352/ - PLUS MARKUP AT THE RATE OF 12.82% ( RS.52,02,657 / - ) FOR THE AMP ACTIVITIES AND THUS , HE WORKED OUT 10 ITA NO.7414/DEL/2018 THE NET ADJUSTMENT OF RS.4,57,85,009/ - FOLLOWING TH E BRIGHT LINE TEST ON PROTECTIVE BASIS. 2.7 THE LEARNED TPO ALTERNATIVELY ALSO PROPOSED SUBSTANTIVE ADJUSTMENT USING COST PLUS METHOD, FOLLOWING THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. VS. CIT, ITA NO.16/2014 (ORDER DATED 16.03.2015) A S UNDER : TOTAL EXPENDITURE ON AMP BY THE ASSESSEE 8,57,15,671 MARK - UP @ 12.82% 1,09,88,749 ADJUSTMENT U/S 92CA 9,67,04,420 2.8 ACCORDINGLY , THE LEARNED TPO PROPOSED ADJUSTMENT OF RS. 9,67,04,420/ - ON SUBSTANTIVE BASIS. 2.9 IN THE DRAFT ASSESSMENT ORDER ISSUED ON 12/12/2017, THE LEARNED ASSESSING OFFICER INCLUDED THE ADDITION FOR TRANSFER PRICING ADJUSTMENT OF RS.9,70,55,020/ - ON SU BSTANTIVE BASIS AND RS. 4,57,85,009/ - ON PROTECTIVE BASIS. 2.10 AGGRIEVED, THE ASSESSEE FILE D OBJECTION BEFORE THE LEARNED DRP. AFTER CONSIDERING SUBMISSION OF THE ASSESSEE , THE LEARNED DRP NOTED THAT THE ASSESSEE DID NOT FILE COPY OF ANY AGREEMENT OR ARRANGEMENT WITH M/S . J MITRA , I.E ., A N ENTITY PRIOR TO 2009 WITH WHOM, THE PARENT COMPANY WAS TRADING THE PRODUCTS IN INDIA, TO DEMONSTRATE THAT SIMILAR TERMS OF AGREEMENT EXISTS WITH THE ASSESSEE WITH REGARD TO THE REMUNERATION/FUNCTIONS AND MARKETING AND BRAND PROMOTION EXPENSES. THE LD. DRP DIFFERENTIATED THE DECISIONS RELIED UPON BY THE ASSESSEE AND NOTED THAT ON THE ISSUE OF AMP EXPENSES, THE DEPARTMENT HAS ALREADY FILED S PECIAL L EAVE P ETITION (SLP) BEFORE THE HON BLE SUPREME COURT , WHICH IS PENDING FOR DECISION . THE LEARNED DRP CONFIRMED 11 ITA NO.7414/DEL/2018 THE ACTION OF THE ASSESSING OFFICER OF ASSESSING THE ADJUSTMENT ON PROTECTIVE BASIS AND ALSO ON SUBSTANTIVE BASIS. HOWEVER, THE LEARNED DRP DIRECTED T HE AO/TPO TO REJECT CERTAIN COMPARABLE S OU T OF THE SET OF 10 COMPARABLES V IDE ORDER DATED 14/09/2018 . THE LD. TPO V IDE LETTER DATED 10/10/2018 WORKED OUT THE AVERAGE PROFIT MARGINS OF THOSE COMPARABLE AT 16.03% AND ON FURTHER AFTER ALLOWING WORKING CAPITAL ADJUSTMENT, HE WORKED OUT AVERAGE A DJUSTED PROFIT MARGIN AT 18.30% . THE LEARNED TPO RECOMPUTED THE ADJUSTMENT ON PROTECTIVE AS WELL AS SUBSTANTIVE BASIS AS UNDER: PARTICULARS AMOUNT IN RS. EXPENDITURE IN EXCESS OF BRIGHT LINE 4,05,82,353/ - MARK UP @ 18.30% 74,26,371/ - ADJUSTMENT ON PROJECTIVE BASIS 4,80,08,924/ - SUBSTANTIVE ADJUSTMENT PARTICULARS AMOUNT IN RS. EXPENDITURE ON AMP BY THE ASSESSEE 8,57,15,671/ - MARK UP @ 18.30% 1,56,85,968/ - ADJUSTMENT ON SUBSTANTIVE BASIS 10,14,01,639/ - 3. BEFORE US, THE ASSESSEE IS IN APPEAL AGAINST ABOVE TRANSFER PRICING ADJUSTMENT OF AMP EXPENSES INCLUDED IN THE FINAL ASSESSMENT ORDER BY THE ASSESSING OFFICER PURSUANT TO THE DIRECTION OF THE LEARNED DRP. 4. BEFORE US, THE LD. COUNSEL SUBMITTED THAT GROUND S NO. 1 TO 3 OF THE APPEAL ARE GENERAL IN NATURE AND THUS , THE SAME ARE NOT REQUIRED TO BE ADJUDICATED SPECIFICALLY. ACCORDINGLY, WE DISMISS THESE GROUNDS AS INFRUCTUOUS. 12 ITA NO.7414/DEL/2018 5. THE GROUND S NO. 4 TO 16 OF THE APPEAL ARE IN RELATION TO THE TRANSFER PRICING ADJU STMENT FOR AMP EXPENSES MADE ON SUBSTANTIVE BASIS. 5.1 BEFORE US , THE LEARNED COUNSEL OF THE ASSESSEE FILED TWO PAPER BOOKS CONTAINING PAGES 1 TO 551 AND PAGE 1 TO 686 RESPECTIVELY. THE LEARNED COUNSEL REFERRED TO THE PAGE 2 OF ORDER OF THE LEARNED TPO, W HEREIN IT IS MENTIONED THAT THE ASSESSEE IN ITS TRANSFER PRICING STUDY HAS CHARACTERIZED ITSELF AS A DISTRIBUTOR OF GROUP S PRODUCTS IN INDIA. THE LEARNED COUNSEL SUBMITTED THAT DURING THE YEAR ASSESSEE , AGAINST SALES TURNOVER OF APPROXIMATELY RS. 170 CROR E AND PROFIT OF RS. 20.71 CRORES, HAVE INCURRED AMP EXPENSES OF APPROXIMATELY 6 CRO RES ONLY, WHICH COMES TO APPROXIMATELY 5% OF THE SALES TURNOVER. ACCORDING TO THE LEARNED COUNSEL , THE AMP EXPENSES HAVE BEEN INCURRED FOR AUGMENTING SALES REVENUE OF THE PR ODUCT SOLD BY THE ASSESSEE AND NOT FOR THE BRAND PROMOTION AS ALLEGED BY THE LD. TPO. THE LEARNED COUNSEL REFERRED TO PAGE 34 OF THE ORDER OF TPO WH EREIN DETAIL OF EXPENSES OF RS. 8,57,15,671 / - INCURRED ON AMP HAVE BEEN ANALYZED BY THE LEARNED TPO. ACCORDIN G TO THE LEARNED COUNSEL, THE EXPENSES HAVE BEEN INCURRED MAINLY ON CONFERENCE AND SEMIN AR S, DEMO AND LOANER EXPENSES AND SALES PROMOTION EXPENSES , WHICH IN ANY WAY HAS NOT BENEFITED THE BRAND OF THE AE. T HE LEARNED COUNSEL SUBMITTED THAT THE ASSESSEE HAS CO MPARED ITS MARGIN UNDER THE TNM M WITH OTHER COMPARABLE S HAVING SIMILAR FUNCTIONS. THE LEARNED COUNSEL REFERRED TO PAGE 7 OF APB - II AND SUBMITTED THAT ADJUSTED MARGIN OF THE ASSESSEE IS 8.69% AS COMPARED THE ADJUST ED AVERAGE MARGIN OF THE COMPARABLE S , WHICH IS 0.609% PERCENTAGE AND , THUS , THE MARGIN OF THE ASSESSEE BEING HIGHER 13 ITA NO.7414/DEL/2018 THEN THE COMPARABLES, NO AMP ADJUSTMENT WAS REQUIRED IN THE CASE OF THE ASSESSEE. 5.2 IN SUPPORT OF THE CONTENTION THAT INCURRING AMP EXPEN SES BY THE ASSESSEE, WHICH ACCORDING TO THE LEARNED TPO IS IN EXCESS OF THE AMP EXPENSES INCURRED BY OTHER COMPARABLE S , IS NOT AN INTERNATIONAL TRANSACTION, THE LEARNED COUNSEL REFERRED TO PAGE 15 OF THE LEARNED TPO, WHEREIN IT IS ADMITTED THAT THERE IS N O AGREEMENT BETWEEN THE ASSESSEE AND IT S AE REGARDING THE POLICY OF SHARING OF AMP EXPENSES. THE COUNSEL ALSO REFERRED TO PAGE 193 TO 199 TH E PAPER - BOOK - II , WHEREIN ANALYSIS OF TRANSACTIONS OF DISTRIBUTION WITH REFERENCE TO FUNCTIONS, ASSETS AND RISK HAS BEEN REPORTED BY THE ASSESSEE IN THE TRANSFER PRICING STUDY. ACCORDING TO THE LEARNED COUNSEL , ALL RISK RELATED TO THE DISTRIBUTION ACTIVITY HAVE BEEN BORNE BY THE ASSESSEE AND THERE IS NO BENEFIT TO THE ASSESSEE BY WAY OF AMP EXPENSES INCURRED BY THE ASSE SSEE. THE LEARNED COUNSEL FURTHER REITERATED THAT ENTIRE EXPENDITURE UNDER THE HEAD AMP HAS BEEN INCURRED ON ORGANIZING CONFERENCE/WORKSHOP ETC WHICH HAS NOT BENEFITED IN ANY MANNER IN DEVELOPING THE BRAND OF THE AE. 5.3 IN SUPPORT OF THE CONTENTION, TH AT INCURRING AMP EXPENSES IS NOT AN INTERNATIONAL TRANSACTION, THE LEARNED COUNSEL RELIED ON THE DECISION OF THE COORDINATE BENCH OF THE T RIBUNAL IN TH E CASE OF M/S PEPSICO INDIA HOLDING PRIVATE LIMITED (ITA NO. 1044/DEL/2014), A COPY OF WHICH HAS BEEN FILE D AT PAGES 1 TO 140 OF COMPENDIUM OF CASE - LAWS. 5.4 THE LEARNED DR , ON THE OTHER HAND , SUBMITTED THAT NO DISTRIBUTION AGREEMENT EXISTS BETWEEN THE ASSESSEE AND IT S AE AND THE ASSESSEE IS PURCHASING ON BILL TO BILL BASIS FROM IT S AE AND SELLING THE PRODUCT FURTHER TO THE DISTRIBUTOR/DEALER. HE 14 ITA NO.7414/DEL/2018 SUBMITTED THAT WHEN GOODS HAVE BEEN PURCHASED BY THE ASSESSEE ON BILL TO BILL BASIS, THERE WAS NO REQUIREMENT OF INCURRING ADVERTISEMENT EXPENSES DISPLAYING THE NAME OF THE PARENT ENTITY DURING THE WORKSHOP OR CONFERENCE. AS FAR AS THE RISK UNDERTAKEN BY THE ASSESSEE AND IT S AE IS CONCERNED, THE LD. DR REFERRED TO PAGE 199 OF THE PAPER - BOOK AND SUBMITTED THAT THE REFERENCE TO THE TRANSACTION OF THE PURCHASE OF FINISHED GOODS, CONSUMABLE, ACCESSORIES FOR DEMO AND LOAN ITEMS, THE AE HAS PARTLY UNDERTAKEN BUSINESS RISK, INVENTORY RISK AND FOREIGN - EXCHANGE RISK, WHEREAS THE ENTIRE PRODUCT LIABILITY RISK IS WITH THE AE. THUS ACCORDING TO THE LD. DR IT IS WRONG TO ASSUME THAT ASSESSEE IS A FULL - FLEDGED DIS TRIBUTOR , IMMUNE TO VARIOUS RISK A SSOCIATED WITH THE TRANSACTIONS . THE LEARNED DR SUBMITTED THAT BY W AY OF SALE OF PRODUCTS IN INDIA , THE AE IS ALSO BENEFITED AND THEREFORE IT NEEDED BRAND BUILDING EXPENSES. THE LEARNED DR REFERRED TO PAGE 8 - 652 OF THE PA PER BOOK VOLUME II, WHEREIN THE ASSESSEE HAS FILED DETAILS OF THE AMP EXPENSES. THE LEARNED DR REFERRED TO PAGE 197 SPECIFICALLY AND SUBMITTED THAT NAME OF THE OLYMPUS BRAND WAS DISPLAYED PROMINENTLY IN ALL CONFERENCES/SEMINAR OR WORKSHOPS ORGANISED FOR THE DOCTORS AND OTHER TECHNICAL PERSONS. HE SUBMITTED THAT THE ASSESSEE WAS ENTITLED FOR DISTRIBUTION COMMISSION ON SALE OF THE PRODUCTS WHEREAS THE AE WHO HAS MANUFACTURED THE PRODUCTS WOULD BE BENEFITED MORE AS COMPARED TO THE ASSESSEE. HE REFERRED TO PA GE 173 OF THE PAPER BOOK VOLUME II, WHEREIN THE ASSESSEE HAS BEEN CLAIMED TO HAVE BEEN ENGAGED IN THE BUSINESS OF DEVELOPING, MANUFACTURING AND SELLING OF VARIOUS MEDICAL EQUIPMENT AND ACC ESSORIES UNDER THE BRAND NAME OLYMPUS IN AND OUTSIDE INDIA. THE LE ARNED DR SUBMITTED THAT THE ASSESSEE IS CLAIMING TO BE ONE OF THE MAIN DISTRIBUTOR FOR 15 ITA NO.7414/DEL/2018 DISTRIBUTING THE PRODUCTS TO VARIOUS DISTRIBUTOR AND DEALERS. THE LEARNED DR POINTED OUT THAT ASSESSEE HAS NOT BROUGHT OUT ANY COMPARISON OF THE EXPENSES INCURRED BY THO SE OTHER DEALER/DISTRIBUTOR OF THE ASSESSEE VIZ - A - VIZ THE ASSESSEE BECAUSE THOSE DISTRIBUTOR/DEALERS ARE ALSO INTERESTED IN INCREASING THEIR SALES VOLUME BUT THEY HAVE NOT INCURRED EXPENSES TO THE EXTENT OF WHAT HAS BEEN INCURRED BY THE ASSESSEE, BECAUSE T HE ASSESSEE IS MORE INTERESTED IN BRAND BUILDING FOR THE AE ALONGWITH THE INCREASE IN SALES. IN VIEW OF THE ARGUMENTS MADE, THE LEARNED DR SUBMITTED THAT THERE IS A ARRANGEMENT OR UNDERSTANDING OR ACTION IN CONCERT BETWEEN THE AE AND THE ASSESSEE WHICH IS FORMAL IN NATURE, FOR INCURRING AMP EXPENSES BY WAY OF THE SPONSORING CONFERENCES/SEMINAR S FOR DOCTORS AND OTHER TECHNICAL PERSONS. HE ALSO SUBMITTED THAT BY WAY OF INCURRING THOSE EXPENSES, THE AE ALSO GET BENEFITED BY WAY OF MORE SALES TO THE ULTIMATE C USTOMERS THROUGH THE ASSESSEE OR DEALERS. IN VIEW OF THE AFORESAID ARGUMENTS , THE LEARNED DR SUBMITTED THAT IN VIEW OF THE DECISION OF THE HON BLE HIGH COURT IN THE CASE OF SONY ERICSSON (SUPRA) THE INTERNATIONAL TRANSACTION EXIST AND WHICH MAY BE BENCHMARKED EITHER FOLLOWING THE AGGREGATED APPROACH OR SEGREGATED APPROACH WITH TRANSACTIONS OF PURCHASE OF THE PRODUCTS. 5.5 WE HAVE HEARD THE RIVAL SU BMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD INCLUDING THE PAPER BOOK FILED BY THE ASSESSEE AND THE ORDER OF THE T RIBUNA L IN THE CASE OF PEPSICO INDIA HOLDING PRIVATE L IMITED (SUPRA) RELIED UPON BY THE LEARNED COUNSEL OF THE ASSESSEE. THE FIRST AN D FOREMOST ISSUE , WHICH HAS BEEN CHALLENGED BEFORE US BY THE LD. COUNSEL IS THAT INCURRING OF AMP EXPENSES IS NOT AN INTERNATIONAL TRANSACTION. THE LEARNED 16 ITA NO.7414/DEL/2018 COUNSEL IN SUPPORT OF HIS CONTENTION, HAS RELIED ON THE DECISION OF THE PEPSICO INDIA H OLDING P RIVAT E L IMITED (SUPRA). IN THE SAID CASE, THE ASSESSEE IS MAINLY INVOLVED IN MANUFACTURING OF SOFT DRINK/JUICE - BASED CONCENTRATE AND OTHER AGRO PRODUCTS AND SUPPLY OF CONCENTRATED AERATED AND NON - AERATED SOFT DRINKS IN INDIA AS WELL AS TO ITS AES IN BANGLADESH, NEPAL BHUTAN AND SRI LANKA. THE SAID ASSESSEE WAS GRANTED A NON - TRANSFERABLE, ROYALTY FREE LICENSE FOR THE USE OF TRADEMARKS OF THE AE IN INDIA. THE SAID ASSESSEE CHARACTERIZED ITSELF AS A FULL - FLEDGED MANUFACTURER EXPOSED TO ALL KIND S OF RISK ASSOCIATED WITH CARRYING OUT SUCH BUSINESS. THE T RIBUNAL (SU P RA) REFER RED TO PROVISIONS OF SECTION 9 2B, REL EVANT EXPLANATION TO SECTION 92B AND CLAUSE (V) OF SECTION 9 2F OF THE A CT WITH REGARD TO THE ISSUE OF WHAT IS AN INTERNATIONAL TRANSACTION. AFTER APPRECIA TING VARIOUS PROVISIONS OF THE T RIBUNAL OBSERVED IN PARA 53 AS UNDER: 53 .. THIS DEFINITION OF TRANSACTION HAS TO BE READ IN CONJUNCTION WITH THE DEFINITION GIVEN IN SECTION 92 B, WHICH MEANS THAT THE TRANSACTION HAS TO BE FIRST IN THE NATURE GIVEN IN SECTION 92B (1); AND THEN WHEN SUCH TRANSACTION INCLUDES ANY KIND OF ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT AMONGST THE PARTIES, WHETHER IN WRITING OR FORMAL, THEN TOO IT IS TREATED AS INTERNATIONAL TRANSACTION, HERE THE CONJOI NT READING OF BOTH THE SECTIONS LEAD TO AN INFERENCE THAT IN ORDER TO CHARACTERIZED AS INTERNATIONAL TRANSACTION, IT HAS TO BE DEMONSTRATED THAT TRANSACTION AROSE IN PURSUANT TO AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT. SUCH AN ARRANGEMENT LIAS T O BE BETWEEN THE TWO PARTIES AND NOT ANY UNILATERAL ACTION BY ONE OF THE PARTIES WITHOUT ANY BINDING OBLIGATION ON THE OTHER OR WITHOUT ANY MUTUAL UNDERSTANDING OR CONTRACT. IF ONE OF THE PARTY BY ITS OWN VOLITION IS ENTERING ANY EXPENDITURE FOR ITS OWN BU SINESS PURPOSE, THEN WITHOUT THERE BEING ANY CORRESPONDING BINDING OBLIGATION ON THE OTHER OR ANY SUCH KIND OF AN ARRANGEMENT ACTUALLY EXISTING IN WRITING OR ORAL OR OTHERWISE, IT CANNOT BE CHARACTERIZED AS INTERNATIONAL TRANSACTION WITHIN THE SCOPE AND DE FINING OF SECTION 92B(1). 5.6 THE T RIBUNAL (SUPRA) OBSERVED THAT THE ASSESSEE HAD BEEN INDEPENDENTLY PERFORMING THE FUNCTION OF PROCUREMENT OF RAW 17 ITA NO.7414/DEL/2018 MATERIAL, MANUFACTURING OF CONCENTRATES, DEVELOPMENT OF ADVERTISING AND MARKETING STRATEGY, DETERMINATION OF THE MARKETING BUDGET, DESIGN CONCEPT AND CONTENT OF ADVERTISEMENT, CHOICE OF MEDIA, PRICING OF CONCENTRATE ON THE SALES OF CONCENTR ATE TO RETAILERS AND DISTRIBUTORS AND THUS ALL THE REWARDS FOR SUCH FUNCTION AND THE RETURNS ASSOCIATED WITH, COMMERCIAL E XPLOITATION OF THE BRAND WAS COMPLETELY ENJOYED BY THE ASSESSEE. IN THE AFORESAID CIRCUMSTANCES , THE T RIBUNAL HELD THAT THE ASSESSEE WAS FREE TO DECIDE ITS OWN AMP EXPENSES WHICH HAD BEEN BORNE BY IT AND THEREFORE, TWO HOLD O R PRESUME THAT PARENT AE SHOULD HAVE REIMBURSED SOME OR PART OF THE EXPENDITURE , WOULD NOT BE CORRECT. THE T RIBUNAL ALSO OBSERVED THAT THERE WAS NO EXISTENCE OF ANY DIRECT BENEFIT PASSED ON TO THE PARENT AE, BECAUSE NO ROYALTY HAS BEEN PAID TO THE PARENT AE FOR THE USE OF BRAND AND TECHN OLOGY AND THE ASSESSEE HAD PAID A VERY MINISCULE AMOUNT FOR THE IM PORT OF KEYS AND ESSENCES. THE T RIBUNAL(SUPRA) IN PARA 63 OF THE ORDER HAS LAID DOWN AS UNDER WHAT CIRCUMSTANCES IT CAN BE SAID TO EXIST IN INTERNATIONAL TRANSACTION OF AMP EXPENSES. THE RE L EVANT PARA OF THE ORDER OF THE T RIBUNAL (SUPRA) IS REPRODUCED AS UNDER: 63. BEFORE EXAMINING AS TO WHETHER ANY TRANSFER PRICING ADJUSTMENT ON AMP IS REQUIRED OR NOT FOR THE REASON STATED ABOVE, THE FIRST AND FOREMOST CONDITION IS THAT, EXISTENCE OF AN IN TERNATIONAL TRANSACTION IN RELATION TO ANY SERVICE OF BENEFIT HAS TO BE ESTABLISHED BEFORE THE TRANSFER PRICING PROVISION CAN BE TRIGGERED SO AS TO PLACE VALUE ON SERVICE OF BENEFIT FOR THE PURPOSE OF DETERMINING THE COMPENSATION. MERE FACT OF EXCESSIVE AM P EXPENDITURE CANNOT ESTABLISH THE EXISTENCE OF SUCH A TRANSACTION. IT IS ONLY WHEN SUCH A TRANSACTION IS ESTABLISHED THEN PERHAPS IT MAY BE POSSIBLE TO BENCH MARK IT SEPARATELY. UNDER THE INDIAN TRANSFER PRICING PROVISIONS, IT HAS BEEN WELL ESTABLISHED OV ER THE PERIOD OF TIME THAT DETAILED FAR ANALYSIS HAS TO BE CARRIED OUT TO IDENTIFY ALL THE FUNCTIONS OF RESIDENT TAX PAYER COMPANY AND THE NON - RESIDENT AES PERTAINING TO ALL THE INTERNATIONAL TRANSACTIONS LIKE PURCHASE OF RAW MATERIAL, PAYMENT OF ROYALTY, PURCHASE OF FINISHED GOODS, EXPORT OF FINISHED GOODS, SUPPORT SERVICES OR WHETHER THERE IS ANY DIRECT SALES BY AE IN INDIA. 18 ITA NO.7414/DEL/2018 FURTHER IT NEEDS TO BE SEEN, WHETHER MARKETING ACTIVITIES RELATING TO DEMPE FUNCTIONS REFLECTED IN ANY SUCH EXPENDITURE INCURRED BY THE RESIDENT TAX PAYER COMPANY AND THE NON - RESIDENT AE IN INDIA ARE IN CONFORMITY WITH THE FUNCTIONS AND RISK PROFILES AND THE BENEFIT DERIVED BY THE TAX PAYER COMPANY AND THE AE. IT IS ALSO VERY RELEVANT TO EXAMINE, WHETHER THE AE IS ASSUMING ANY KIND OF RISK IN THE INDIAN MARKET OR IS BENEFITTING FROM INDIA IN ONE WAY OR THE OTHER. THUS, FAR ANALYSIS IS THE KEY WHICH NEEDS TO BE SEEN WHAT KIND OF FUNCTIONS IS BEING CARRIED OUT BY THE AE IN INDIA, THE NATURE OF ASSETS WHICH HAVE BEEN DEPLOYED AND THE RISK WHICH HAVE BEEN ASSUMED. IF THERE IS NO RISK OF SUCH ATTRIBUTES WHICH IS BEING CARRIED OUT BY THE NON - RESIDENT AE IN INDIA THEN THERE IS NO QUESTION OF AE COMPENSATING TO ITS SUBSIDIARY IN INDIA FOR ANY MARKETING EXPENSES. HERE, WE HAVE ALREADY STATED AT S EVERAL PLACES THAT PARENT AE OF THE ASSESSEE - COMPANY HAS NOT CARRIED OUT ANY FUNCTION IN INDIA AND HAD NOT ASSUMED ANY RISK IN INDIA AND EVEN FOR THE LICENSE FOR USE OF TRADEMARK, NO ROYALTY HAS BEEN PAID. HENCE, NO BENEFIT WHATSOEVER HAS ACCRUED TO THE PA RENT AE. ACCORDINGLY, WE ARE OF THE OPINION THAT UNDER THESE FACTS AND CIRCUMSTANCES OF THE CASE IT IS VERY DIFFICULT TO ATTRIBUTE ANY KIND OF ARM S LENGTH COMPENSATION WHICH IS SUPPOSED TO BE MADE BY THE AE TO THE ASSESSEE COMPANY. 5.7 WHEN WE EXAMINE T HE FACTS OF THE INSTANT CASE IN VIEW OF THE ABOVE PRINCIPLES LAID DOWN, WE FIND THAT FACTS OF THE INSTANT CASE ARE ENTIRELY DIFFERENT FROM THE FACTS IN THE CASE OF PEPSICO INDIA HOLDING PRIVATE LIMITED (SUPRA). IN THE SAID CASE , THE ENTITY IS THE MANUFACTU RING ENTITY BEARING ALL KIND OF RISK AND THERE WAS NO REQUIREMENT OF PAYMENT OF ROYALTY ON THE PRODUCTS MANUFACTURED IN INDIA. IN THE INSTANT CASE , THE ASSESSEE HAS MERELY PURCHASED PRODUCTS FROM ITS AES AND SOLD FURTHER TO DISTRIBUTOR/DEALERS IN INDIA. TH US , FUNCTION OF THE ASSESSEE ARE AKIN TO DISTRIBUTOR THOUGH THERE WAS NO DISTRIBUTION AGREEMENT BETWEEN THE ASSESSEE AND ITS AE. THE LEARNED DRP HAS BROUGHT ON RECORD THAT PRIOR TO 2009, THE PARENT COMPANY WAS TRADING IT S PRODUCT THROUGH THIRD - PARTY ( J MITRA & CO. P LTD.). THE LD. D RP FOR COMPARISON OF THE TERMS OF AGREEMENT WITH REGARD TO REMUNERATION/FUNCTIONS AND MARKETING AND BRAND PROPORTIONS ENTERED INTO WITH SAID THIRD - PARTY AND THE AE , ASKED TO FILE 19 ITA NO.7414/DEL/2018 AGREEMENTS WITH SAID THIRD - PARTY, HOWEVER , NO S UCH DETAILS WERE FILED BEFORE THE LEARNED DRP. DETAILS OF THE EXPENSES INCURRED BY THE SAID THIRD - PARTY ON AMP, COULD HAVE PROVIDED A DIRECT COMPARISON WITH THE EXPENSES INCURRED BY THE ASSESSEE BUT IN ABSENCE OF ANY SUCH INFORMATION PROVIDED BY THE ASSESS EE, THAT COMPARISON COULD NOT HAVE BEEN DONE. IN THE FACTS OF THE INSTANT CASE , WE HAVE TO EXAMINE WHETHER THE AE HAS UNDERTAKEN ANY RISK IN THE ENTIRE TRANSACTION OF SALE OF PRODUCT BY THE ASSESSEE. ON PAGE 199 OF THE PAPER BOOK VOLUME - I , THE ASSESSEE HAS REPORTED VARIOUS RISK ASSOCIATED WITH THE TRANSACTION OF PURCHASE OF PRODUCTS BY THE ASSESSEE AS UNDER: TYPE OMSI (THE ASSESSEES) AES BUSINESS RISK YES YES INVENTORY RISK YES YES PRODUCT LIABILITY RISK NO YES WARRANTY RISK YES NO CREDIT AND COLLECTION RISK YES NO FOREIGN EXCHANGE RISK LIMITED YES 5.8 THUS , WE FIND THAT ALONG WITH THE BUSINESS RISK AND INVENTORY RISK SHARED WITH THE ASSESSEE, THE AE WAS SUBJECTED TO HUNDRED PERCENT PRODUCT LIABILITY RISK. THE RELEVANT CLAUSE OF THE PRODUCTIVITY RISK ON PAGE 198 OF THE PAPER BOOK - I READS AS UNDER: 4.1.3.3 PRODUCT LIABILITY RISK PRODUCT LIABILITY RISK REFERS TO THE RISK ASSOCIATED WITH FAILURE OF A PRODUCT OR THE POSSIBILITY OF FACING LEGAL ACTION FROM CUSTOMERS DUE TO DEFECTS IN THE PRODUCTS PROVIDED. IN CASE OF INHERENT DEFAULT IN THE MANUFACTURED PRODUCT, THE AES ARE RESPONSIBLE FOR REPAIR COST. FURTHER, THE RISK OF LEGAL SUITS IS COVERED BY WAY OF INSURANCE POLICY TAKEN BY THE AES OF OMSI. 20 ITA NO.7414/DEL/2018 5.9 AS WE FIND THAT THE AE , WHO IS ASS UMING THE RISK OF THE LEGAL DISPUTE WITH RESPECT TO THE PRODUCTS SOLD IN INDIA . ACCORDING TO US , IT IS THE REASON AS THE WHY AE IS INTERESTED IN INCREASING TECHNICAL AWARENESS OF ITS PRODUCTS AMONG THE DOCTORS AND THE HOSPITAL, FOR WHICH THE ASSESSEE HAS I NCURRED EXPENSES ON SEMINARS AND CONFERENCES. AND THIS REASON, THE ASSESSEE MUST HAVE BEEN SUITABLY COMPENSATED BY THE AE FOR THE EXPENSES INCURRED ON SEMINARS AND CONFERENCES. 5.10 FURTHER , IT IS UNDISPUTED THAT SEMINARS AND CONFERENCES HAVE BEEN ORGANIS ED FOR THE DOCTORS IN THE HOSPITAL, WHO WERE INSTRUMENTAL IN PRESCRIBING THE PRODUCT OF THE AE TO THE FINAL CUSTOMERS I.E. PATIENTS , HAS PLAYED A DOMINANT ROLE IN INCREASING SALE OF THE PRODUCTS, WHICH ULTIMATELY BENEFITED THE AE. THE PRODUCT MANUFACTURE D BY THE AE WERE EXCLUSIVELY DISPLAYED IN VARIOUS SEMINAR/CONFERENCES ALONG WITH DISPLAY OF THE BRAND NAME OF THE OLYMPUS , WHICH IS OWNED BY THE AE AND NOT BY THE ASSESSEE. 5.11 IN VIEW OF THE AFORESAID DISCUSSION, WE HOLD THAT BY WAY OF INCURRING AMP EXPENSES, THE AE HAS BEEN BENEFITED AND IT WAS REQUIRED TO COMPENSATE THE ASSESSEE SUITABLY . AS THE BENEFIT FROM THE AMP EXPENDITURE IS HAVING BEARING ON THE PROFIT, INCOME, LOSSES OR ASSETS OF THE AE, THE TRANSACTION UNDISPUTEDLY FALLS UNDER THE CATEGO RY OF INTERNATIONAL TRANSACTION. 6. NOW THE ISSUE INVOLVED AS HOW THIS TRANSACTION CAN BE BENCHMARKED. THE TPO HAS BENCHMARKED IT ON PROTECTIVE BASIS FOLLOWING BLT METHOD AND ON SUBSTANTIVE BASIS FOLLOWING COST - PLUS METHOD. THE BLT METHOD OF BENCHMARKING HAS ALREADY BEEN REJECTED BY THE HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON (SUPRA). THE HON BLE HIGH COURT IN THE CASE OF SONY 21 ITA NO.7414/DEL/2018 ERICS SON (SUPRA) IN PARA 117 HAS ALREADY DEALT IN DETAIL WHICH EXPENSES UNDER THE HEAD AMP EXPENSES WOULD GO TO THE BRAND BUILDING AND WHICH GO TOWARDS THE PRODUCT ADVERTISEMENT. THE HON BLE HIGH COURT HAS OBSERVED THAT PROFITS OR ENHANCED PROFITS CONSEQUENT TO HIGHER MANUFACTURING TURNOVER WOULD BE TAXED IN THE HANDS OF THE FOREIGN AE, WHEREAS HIGHER PROFITS AS A RESULT OF INCREASED TURNOVER RELATED TO DISTRIBUTION MARKETING FUNCTION WOULD BE TAXED IN THE HANDS OF THE INDIAN SUBSIDIARY. THE HON BLE HIGH COURT I N PARA 118 HAS CONSIDERED THE CASES OF THE ENTITIES ENGAGED IN DISTRIBUTION AND MARKETING FUNCTIONS IN INDIA AND OBSERVED THAT INDIAN ENTITY I.E. THE DISTRIBUTOR MUST BE COMPENSATED BY ADHERING TO THE ARM S - LENGTH PRICE, WHICH IS THE CORE OF TRANSFER PRICI NG ADJUDICATION. THE RELEVANT FINDING OF THE HON BLE HIGH COURT IS REPRODUCED AS UNDER: 118. THE INDIAN SUBSIDIARIES IN THE PRESENT CASE ARE ENGAGED IN DISTRIBUTION AND MARKETING FUNCTIONS OF THE PRODUCTS MANUFACTURED BY FOREIGN AES AND IN SOME CASES, PR ODUCTS ARE ALSO MANUFACTURED BY THEM UNDER LICENSE IN INDIA. FIGURE 2.1 REFERS TO THE VALUE CHAIN ANALYSIS, AND TREATS MARKETING' AND DISTRIBUTION' AS TWO HEADINGS, BUT THIS DOES NOT MEAN THAT MARKETING AND DISTRIBUTION FUNCTIONS CANNOT BE COMBINED AND TRE ATED AS ONE PACKAGE OR A BUNDLE. THE FUNCTIONS PERFORMED COULD BE BOTH MARKETING AND DISTRIBUTION. MARKETING IN THE FORM OF SALE PROMOTION, ADVERTISEMENTS, ETC. WOULD NECESSARILY INVOLVE EXPENDITURE BOTH IN TERMS OF THIRD PARTY EXPENDITURE WHICH THE INDIAN ASSESSEE WOULD LIABLE TO INCUR, AS ALSO TOWARDS THE OFFICE MAINTENANCE AND OTHER OVERHEAD EXPENSES. EVEN AS ONE PACKAGE OR A BUNDLE, THE INDIAN SUBSIDIARY, I.E. AN ASSESSEE, MUST BE ADEQUATELY COMPENSATED BY ADHERING TO THE ARM'S LENGTH PRICE. THIS IS THE CORE OF THE TRANSFER PRICING ADJUDICATION. PRICE PAID BY OR COMPENSATION PAID TO THE DOMESTIC AE MUST COMPLEMENT AND RECIPROCATE FOR THE FUNCTIONS PERFORMED. 6.1 I N PARA 119 OF THE ORDER, THE HON BLE HIGH COURT HAS FURTHER EMPHASIZE D THAT WHILE COMPUTIN G ARM S - LENGTH PRICE OF THE INTERNATIONAL TRANSACTION THE AMP EXPENSES SHOULD BE CONSIDERED 22 ITA NO.7414/DEL/2018 IN CASE OF DISTRIBUTION COMPANIES. THE RELEVANT FINDING OF THE HON BLE HIGH COURT IS REPRODUCED AS UNDER: 119. A PURE DISTRIBUTION COMPANY WOULD BE A COMPARATIVELY LOW RISK COMPANY AS COMPARED TO A MARKETING AND DISTRIBUTION COMPANY. THE PROFITS AND EARNINGS OR ARM'S LENGTH PRICE WOULD ACCORDINGLY VARY. THE ARM'S LENGTH PRICE IN CASE OF A PURE DISTRIBUTION CO MPANY WOULD ENURE LOWER PRICE/PROFIT AS COMPARED TO A COMPANY ENGAGED IN DISTRIBUTION AND MARKETING. IN MOST OF THE CASES, DISTRIBUTION AND MARKETING OPERATIONS WOULD GO HAND IN HAND. MARKETING ITSELF IS A TERM OF WIDE IMPORT AND CONNOTATION, WHICH INCLUDE S DEVELOPMENT OF MARKETING STRATEGY WHICH MAY HAVE CERTAIN COMMON WORLDWIDE ELEMENTS AND WOULD NORMALLY BE THE CREATION AND PREMISED BY THE PARENT FOREIGN AE BUT THE INDIAN ASSESSEE ENGAGED IN MARKETING OPERATIONS COULD DEVISE ITS OWN MARKETING STRATEGIES, DETERMINE AS TO THE NATURE AND TYPE OF ADVERTISEMENTS, MEDIA SELECTION, TIMINGS, ETC. EVEN THE CHOICE OF PRODUCTS COULD DEPEND UPON LOCAL/NATIONAL CONDITIONS. WHILE DETERMINING THE ARM'S LENGTH PRICE, THE ISSUE WOULD BE WHETHER OR NOT THE INDIAN ASSESSEE IS ADEQUATELY COMPENSATED BY THE FOREIGN AE. THE INDIAN ASSESSEE ALSO BENEFITS FROM THE INCREASED SALES WHICH RESULTS IN HIGHER PROFITS AND MORE TAXABLE INCOME IN INDIA. AMP, I.E. ADVERTISEMENTS, MARKETING AND SALE PROMOTIONS, THEREFORE, BENEFIT BOTH THE I NDIAN AE, I.E. THE ASSESSEE AND THE FOREIGN AE RESIDENT ABROAD. SAME IS TRUE AND CORRECT POSITION EVEN IN CASE OF A DISTRIBUTION COMPANY, THOUGH IN THE SAID CASE SALES WOULD INCREASE AND THERE WOULD NOT BE ANY ELEMENT OF AMP. THE FACT THAT INCREASED SALES BENEFIT THE FOREIGN MANUFACTURER IS THE REASON WHY SERVICES OF INDIAN ASSESSEES HAVE BEEN ENGAGED BY THE AES RESIDENT ABROAD. THIS ARGUMENT ITSELF DOES NOT SHOW THAT BRAND BUILDING IS BEING INDEPENDENTLY UNDERTAKEN AND, THEREFORE, SHOULD BE TREATED AS A SE PARATE INTERNATIONAL TRANSACTION. HOWEVER, THE ARM'S LENGTH COMPUTATION MADE BOTH BY THE ASSESSEE AS WELL AS THE TPO MUST TAKE INTO ACCOUNT THE AMP EXPENSES. 6.2 FURTHER , THE HON BLE HIGH COURT HAS DISCUSSED AS HOW A PURE OR A SIMPLE INDEPENDENT DISTRIBU TOR OR A DISTRIBUTOR HAVING LOW - RISK SHOULD BE COMPENSATED. THE RELEVANT FINDING OF THE HON BLE HIGH COURT IS REPRODUCED AS UNDER: 124. THERE IS A DIFFERENCE BETWEEN A PURE AND A SIMPLE INDEPENDENT DISTRIBUTOR AND A DISTRIBUTOR WITH MARKETING RIGHTS. AN INDEPENDENT DISTRIBUTOR WITH A FULL MARKETING RIGHT IS A PERSON OR AN ENTITY LEGALLY INDEPENDENT OF THE MANUFACTURER, WHO PURCHASES GOODS FROM THE MANUFACTURER FOR RE - SALE ON ITS OWN ACCOUNTS. THE TRANSACTION BETWEEN THE TWO IS A STRAIGHTFORWARD SALE IN WHICH THE 23 ITA NO.7414/DEL/2018 DISTRIBUTOR TAKES ALL ECONOMIC RISK OF PRODUCT DISTRIBUTION AND ULTIMATELY GAINS OR MAKES LOSS DEPENDING UPON MARKET AND OTH ER CONDITIONS. THE MANUFACTURER IS NOT CONCERNED. IN CASE OF A LOW OR NO RISK DISTRIBUTOR AND HE VIRTUALLY ACTS AS AN AGENT FOR THE LOSS AND GAIN IS THAT OF THE MANUFACTURER. THERE IS NO ECONOMIC RISK ON DISTRIBUTION OF PROFITS. HE IS, THEREFORE, ENTITLED TO FIXED REMUNERATION FOR THE SELF EFFORTS, I.E., RELATING TO THE TASK OR FUNCTION OF DISTRIBUTION. SIMILAR WILL BE THE POSITION OF A LOW RISK DISTRIBUTOR WITH MARKETING FUNCTIONS, EXCEPT THAT THE SAID DISTRIBUTOR SHOULD BE COMPENSATED FOR THE MARKETING, I NCLUDING AMP FUNCTION. A DISTRIBUTOR WITH MARKETING FUNCTION CAN BE NORMAL OR A HIGH RISK DISTRIBUTOR. SUCH DISTRIBUTORS SHOULD BE COMPENSATED BUT THE QUANTUM OF COMPENSATION WOULD BE HIGHER. SUCH CASES HAVE TO BE DISTINGUISHED FROM CASES OF A TRUE DISTRIB UTOR, WHO IS IN AN INDEPENDENT BUSINESS, USES HIS OWN MONEY FOR PURCHASING AT A LOW PRICE AND SELLING AT A HIGH PRICE AND ACCORDINGLY SHOULDERS THE BURDEN IN CASE OF A BAD JUDGMENT. PROFITS OR LOSSES, THEREFORE, CORRESPOND TO THE RISK AND MARKET CONSIDERAT ION. THERE IS ALSO FUNCTIONAL INCOMPATIBILITY BETWEEN A DISTRIBUTOR AND A RETAILER. RETAILERS CANNOT BE COMPARED WITH DISTRIBUTOR ALSO PERFORMING MARKETING FUNCTIONS. FOREIGN GLOBAL ENTERPRISES FREQUENTLY ADOPT A SUBSIDIARY MODEL, I.E. THE PRODUCTS ARE DIS TRIBUTED AND MARKETED IN A TARGETED COUNTRY THROUGH A WHOLLY OWNED SUBSIDIARY OR A SALES SUBSIDIARY. A COMPARABLE WOULD BE AN UNRELATED IDENTITY WITH SIMILAR DISTRIBUTION AND MARKETING FUNCTIONS. 125. THE UNITED NATIONS' MANUAL IN CHAPTER 10 RELATING TO CO UNTRY SPECIFIC PRACTICES NOTES THE INDIAN STAND, BUT RECORDS THAT THE FIRST NINE CHAPTERS OF THE MANUAL PROVIDE PRACTICAL GUIDANCE FOR APPLICATION OF TRANSFER PRICING RULES BASED UPON ARTICLE 9(1) OF THE U.N. MODEL TAX CONVENTION AND THE ARMS LENGTH PRINCIPLE EMBODIED THEREIN. HOWEVER, THERE WERE DISAGREEMENTS ON CERTAIN POINTS IN THE SUB - COMMITTEES AND CHAPTER 10 RECORDS INDIVIDUAL COUNTRY'S VIEW POINT AND EXPERIENCES FOR INFORMATION OF READERS. THIS DOES NOT REFLECT A CONSISTENT OR CONSENSUS VIEW OF THE SUB - COMMITTEE (SEE PARAGRAPH 10.1.1.2) 126. THE UNITED NATIONS' MANUAL TRANSFER PRICING IN PARAGRAPH 10.4.8.15 RECORDS THAT DETERMINATION OF ARM'S LENGTH PRICE IN CASES OF MARKETING INTANGIBLES WOULD INVOL VE FUNCTIONAL ASSETS ANALYSIS OF THE PROFILE OF THE INDIAN ENTITY AND THE PARENT COMPANY TO ASCERTAIN WHETHER INDIAN ENTITY HAS A RISK FREE, LIMITED RISK BEARING OR RISK BEARING ENTITY. THIS MANDATES IDENTIFICATION OF THE NATURE, TYPES AND STAGES OF DEVELO PMENT OF MARKETING INTANGIBLES, I.E. WHETHER THE FOREIGN PARTIES ARE NEW ENTRANTS INTO THE INDIAN MARKET AND, THEREFORE, RELATED PARTY IN INDIA WOULD INCUR SUBSTANTIAL EXPENSES. AWARENESS OF THE TRADE MARK OR BRAND PROFIT OR SERVICES OF THE PARENT COMPANY IN INDIA, CUSTOMER LOYALTY AND THE BRAND EXISTENCE OF DEALER NETWORK WHETHER THE INDIAN ENTITY IS TO PROVIDE AFTER SALES SERVICE THE SUPPORT, MARKET AND CUSTOMER DETAILS, ETC. IT ACKNOWLEDGED THAT THE STAND OF THE INDIAN TAX AUTHORITIES, WHO HAVE 24 ITA NO.7414/DEL/2018 APPLIED T HE CONCEPT OF BRIGHT LINE TEST' OF NO RISK OR LIMITED RISK DISTRIBUTOR OR TO DETERMINE NON - ROUTINE EXPENSES, HAS LED TO MULTIFARIOUS CHALLENGES ON SEVERAL ACCOUNT. HOWEVER, IT STANDS RECORDED IN SUB - PARAGRAPH NO.18 THAT THE IMPORTANT ISSUE IN DETERMINATI ON OF ARM'S LENGTH PRICE IS TO EXAMINE THE BENEFITS OF THE AMP EXPENDITURE AND WHETHER INDIAN ENTITIES DO NOT RECEIVE SHARE OF EXCESS PROFITS RELATED TO LOCAL MARKETING INTANGIBLE. ACCORDINGLY, THE CLAIM OF THE REVENUE IS THAT EXTRAORDINARY AMP EXPENDITURE DOES NOT RESULT IN APPROPRIATE ENHANCEMENT OF PROFITABILITY OF INDIAN SUBSIDIARY OR RELATED PARTY. THE QUESTION, THEREFORE, WHEN A SUBSIDIARY ENTITY ENGAGED IN DISTRIBUTION AND MARKETING INCURS AMP EXPENSES, IS TO ASCERTAIN WHETHER THE SUBSIDIARY AE ENTIT Y HAS BEEN ADEQUATELY AND PROPERLY COMPENSATED FOR UNDERTAKING THE SAID EXPENDITURE. SUCH COMPENSATION MAY BE IN THE FORM OF LOWER PURCHASE PRICE, NON OR REDUCED PAYMENT OF ROYALTY OR BY WAY OF DIRECT PAYMENTS TO ENSURE ADEQUATE PROFIT MARGIN. THIS ENSURES PROPER PAYMENT OF TAXES AND CURTAILS AVOIDANCE OR LOWER TAXES OF THE INDIAN SUBSIDIARY AS A SEPARATE JURISTIC ENTITY. 127. WE AGREE AND ACCEPT THE POSITION IN THE PORTION REPRODUCED ABOVE IN BOLD AND ITALICS. THE OBJECT AND PURPOSE OF TRANSFER PRICING ADJ USTMENT IS TO ENSURE THAT THE CONTROLLED TAXPAYERS ARE GIVEN TAX PARITY WITH UNCONTROLLED TAXPAYERS BY DETERMINING THEIR TRUE TAXABLE INCOME. THERE SHOULD BE ADEQUATE AND PROPER COMPENSATION FOR THE FUNCTIONS PERFORMED INCLUDING AMP EXPENSES. THUS, WE DISA GREE WITH THE REVENUE AND DO NOT ACCEPT THE OVERBEARING AND OROTUND SUBMISSION THAT THE EXERCISE TO SEPARATE ROUTINE' AND NON - ROUTINE' AMP OR BRAND BUILDING EXERCISE BY APPLYING BRIGHT LINE TEST' OF NON - COMPARABLES AND IN ALL CASE, COSTS OR COMPENSATION PAID FOR AMP EXPENSES WOULD BE NIL', OR AT BEST WOULD MEAN THE AMOUNT OR COMPENSATION EXPRESSLY PAID FOR AMP EXPENSES. UNHESITATINGLY, WE ADD THAT IN A SPECIFIC CASE THIS CRITERIA AND EVEN ZERO ATTRIBUTION COULD BE POSSIBLE, BUT FACTS SHOULD SO REVEAL AN D REQUIRE. TO THIS EXTENT, WE WOULD DISAGREE WITH THE MAJORITY DECISION IN L.G. ELECTRONICS INDIA PVT. LTD. (SUPRA). 6.3 THUS , IN THE ABOVE PARAGRAPHS, THE HON BLE HIGH COURT HAS REJECTED THE BRIGHT LINE TEST AND EXERCISE OF SEPARATING ROUTINE AND NON - ROUTINE AMP EXPENSES BUT HAS ACCEPTED THAT THERE SHOULD BE ADEQUATE AND PROPER COMPENSATION TO THE INDIAN ENTITY FOR THE FUNCTIONS PERFORMED INCLUDING AMP EXPENSES. 6.4 FURTHER, THE HON BL E HIGH COURT IN PARA 136 ONWARD , HAS DIRECTED TO EXAMINE WHETHER TH E AMP TRANSACTION CAN BE 25 ITA NO.7414/DEL/2018 BENCHMARKED IN AGGREGATED OR BUNDLED MANNER WITH OTHER TRANSACTION OF IMPORT OF GOODS OR IN SEGREGATED MANNER. THE HON BLE HIGH COURT HAS OBSERVED THAT POSSIBILITY OF FACTORING THE AMP EXPENSES IN THE COST OF THE GOODS CHARGED TO T HE INDIAN ENTITY SHOULD BE EXAMINED. 6.5 THE HON BLE HIGH COURT THEREAFTER HAS EXAMINED APPLICABILITY BOTH OF RESALE PRICE METHOD AND COST - PLUS METHOD FOR BENCHMARKING THE AMP EXPENSES. THE RELEVANT FINDING WITH REFERENCE TO RESALE PRICE METHOD IS REPRODU CED AS UNDER: N. RESALE PRICE METHOD 157. WE BEGIN BY REPRODUCING RULE 10B(1)(B) OF THE RULES: - 'DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 92C . 10B. (1) FOR THE PURPOSES OF SUB - SECTION (2) OF SECTION 92C , THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : -- (A) XXX (B) RESALE PRICE METHOD, BY WHICH, -- (I) THE PRICE AT WHICH PROPERTY PURCHASED OR SERVICES OBTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD OR ARE PROVIDED TO AN UNRELATED ENTERPRISE, IS IDENTIFIED; (II) SUCH RESALE PRICE IS REDUCED BY THE AMOUNT OF A NORMAL GROSS PROFIT MARGIN ACCRUING TO THE ENTERPRISE OR TO AN UNRELATED ENTERPRISE FROM THE PURCHASE AND RESALE OF THE SAME OR SIMILAR PROPERTY OR FROM OBTAINING AND PROVIDING THE SAME OR SIMILAR SERVIC ES, IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS; (III) THE PRICE SO ARRIVED AT IS FURTHER REDUCED BY THE EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE PURCHASE OF PROPERTY OR OBTAINING OF SERVICES; (IV) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING DIFFERENCES IN ACCOUNTING PRACTICES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF GROSS PROFIT MARGIN IN THE OPEN MARKET; 26 ITA NO.7414/DEL/2018 (V) THE ADJUSTED PRICE ARRIVED AT UNDER SUB - CLAUSE (IV) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT O F THE PURCHASE OF THE PROPERTY OR OBTAINING OF THE SERVICES BY THE ENTERPRISE FROM THE ASSOCIATED ENTERPRISE; XXX 158. RP METHOD AS AN AXIOM, THE UNITED NATIONS' MANUAL EXPOSITS: 6.2.6.3. CONSEQUENTLY, UNDER THE RPM THE STARTING POINT OF THE ANALYSIS FOR USING THE METHOD IS THE SALES COMPANY. UNDER THIS METHOD THE TRANSFER PRICE FOR THE SALE OF PRODUCTS BETWEEN THE SALES COMPANY (I.E. ASSOCIATED ENTERPRISE 2) AND A RELATED COMPANY (I.E. ASSOCIATED ENTERPRISE 1) CAN BE DESCRIBED IN THE FOLLOWING FORMULA: T P = RSP X (1 - GPM), WHERE: TP = THE TRANSFER PRICE OF A PRODUCT SOLD BETWEEN A SALES COMPANY AND A RELATED COMPANY; RSP = THE RESALE PRICE AT WHICH A PRODUCT IS SOLD BY A SALES COMPANY TO UNRELATED CUSTOMERS; AND GPM = THE GROSS PROFIT MARGIN THAT A SPECIFIC SALES COMPANY SHOULD EARN, DEFINED AS THE RATIO OF GROSS PROFIT TO NET SALES. GROSS PROFIT IS DEFINED AS NET SALES MINUS COST OF GOODS SOLD. 159. RP METHOD, I.E. THE RESALE PRICE METHOD COMPUTES THE ARM'S LEN GTH PRICE BY ASCERTAINING OR IDENTIFYING THE PRICE AT WHICH THE PRODUCT IS RESOLD BY THE AE TO AN INDEPENDENT ENTERPRISE. FROM THIS PRICE, THE AMOUNT OF GROSS PROFIT MARGIN ACCRUING TO THE AE OR TO AN UNRELATED ENTERPRISE, I.E. COMPARABLE, IS SUBTRACTED. T HE COMPARABLE SHOULD BE ENGAGED IN PURCHASE AND RE - SALE OF SAME OR SIMILAR PROPERTY AND/OR OBTAINING OR PROVIDING SIMILAR SERVICES. FROM THIS AMOUNT, THE EXPENSES INCURRED BY THE AE IN CONNECTION WITH THE PURCHASE OF PROPERTY OR OBTAINING OF SERVICES ARE F URTHER SUBTRACTED. AT THE FOURTH STAGE, ADJUSTMENTS ARE MADE TAKING INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING THE ACCOUNTANCY PRACTICES, IF ANY, BETWEEN THE TESTED INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS TO THE EXTENT THEY WOULD MATERIALLY AFFECT THE GROSS PROFIT MARGINS IN THE OPEN MARKET. THE PRICE COMPUTED AFTER THE TWO REDUCTIONS AND AFTER THE ADJUSTMENT ON ACCOUNT OF THE FUNCTIONAL AND OTHER DIFFERENCES, DETERMINES THE ARM'S LENGTH PRICE OF THE PURCHASE D PROPERTY OR SERVICES OBTAINED BY THE ASSESSED FROM THE AE. 160. RP METHOD POSTULATES REVERSE CALCULATION, AS IT FIRST REQUIRES IDENTIFICATION AND ASCERTAINMENT OF RESALE PRICE, THEN REDUCTIONS AND ADJUSTMENT. IT HYPOTHESISES ASCERTAINMENT OF NORMAL GROSS PROFIT MARGINS OF COMPARABLES INCLUDING, IF REQUIRED, ADJUSTMENT ON ACCOUNT OF FUNCTIONAL AND OTHER DIFFERENCES WITH COMPARABLES. UNCONTROLLED TRANSACTION IS COMPARABLE WITH THE CONTROLLED TRANSACTION FOR THE PURPOSE OF RP METHOD, ONLY IF TWO CONDITIONS A RE SATISFIED: THAT THERE IS NO DIFFERENCE BETWEEN THE FUNCTIONS, WHICH WOULD MATERIALLY AFFECT THE NORMAL GROSS PROFIT MARGINS IN THE OPEN 27 ITA NO.7414/DEL/2018 MARKET; AND REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE MATERIAL EFFECT OF SUCH DIFFERENCES. RPMETHOD MA Y REQUIRE FEWER ADJUSTMENTS ON ACCOUNT OF PRODUCT DIFFERENCES IN COMPARISON TO THE CUP METHOD, I.E. COMPARABLE UNCONTROLLED PRICE METHOD BECAUSE MINOR PRODUCT DIFFERENCES ARE LESS LIKELY TO HAVE MATERIAL EFFECT ON THE PROFIT MARGINS AS THEY DO ON THE PRICE . COMPENSATION FOR PERFORMING SIMILAR FUNCTIONS TENDS TO EQUALISE ACROSS DIFFERENT ACTIVITIES, WHEREAS IN CASE OF PRODUCTS, THE EQUALISATION IS NORMALLY POSSIBLE TO THE EXTENT THAT PRODUCTS ARE SUBSTITUTE FOR EACH OTHER. NEVERTHELESS, SIMILARITY OF THE PRO PERTY AS TRANSFERRED IN THE CONTROLLED TRANSACTION FOR CLOSER COMPARABILITY OF PRODUCTS/SERVICES WOULD PRODUCE MORE ACCURATE RESULTS. SOMETIMES, RP METHOD IS ADOPTED AS MORE ACCURATE OR BEST METHOD WHERE CONTROLLED AND UNCONTROLLED TRANSACTIONS ARE COMPARA BLE IN ALL CHARACTERISTIC, OTHER THAN THE PRODUCT ITSELF. IN SOME CASES, IT MAY BE A PREFERABLE AND MORE RELIABLE METHOD IN COMPARISON TO THE CUP METHOD OR CP METHOD. HOWEVER, RP METHOD HAS ITS WEAKNESSES. IT LOSES ITS ACCURACY AND RELIABILITY WHERE THE RE SELLER ADDS SUBSTANTIALLY TO THE VALUE OF THE PRODUCT OR THE GOODS ARE FURTHER PROCESSED OR INCORPORATED INTO A MORE SOPHISTICATED PRODUCT OR WHEN THE PRODUCT/SERVICE IS TRANSFORMED. IN THE OECD COMMENTARY ON TRANSFER PRICING GUIDELINES IT HAS BEEN OBSERVE D: ... ANOTHER EXAMPLE WHERE THE RESALE PRICE MARGIN REQUIRES PARTICULAR CARE IS WHERE THE RESELLER CONTRIBUTES SUBSTANTIALLY TO THE CREATION OR MAINTENANCE OF INTANGIBLE PROPERTY ASSOCIATED WITH THE PRODUCT (E.G. TRADEMARKS OR TRADE NAMES) WHICH ARE OWNE D BY AN ASSOCIATED ENTERPRISE. IN SUCH CASES, THE CONTRIBUTION OF THE GOODS ORIGINALLY TRANSFERRED TO THE VALUE OF THE FINAL PRODUCT CANNOT BE EASILY EVALUATED. 2.30 A RESALE PRICE MARGIN IS MORE ACCURATE WHERE IT IS REALISED WITHIN A SHORT TIME OF THE RE SELLER'S PURCHASE OF THE GOODS. THE MORE TIME THAT ELAPSES BETWEEN THE ORIGINAL PURCHASE AND RESALE, THE MORE LIKELY IT IS THAT OTHER FACTORS -- CHANGES IN THE MARKET; IN RATES OF EXCHANGE; IN COSTS ETC. -- WILL NEED TO BE TAKEN INTO ACCOUNT IN ANY COMPARI SON. 2.31 IT SHOULD BE EXPECTED THAT THE AMOUNT OF THE RESALE PRICE MARGIN BE INFLUENCED BY THE LEVEL OF ACTIVITIES PERFORMED BY THE RESELLER. THIS LEVEL OF ACTIVITIES CAN RANGE WIDELY FROM THE CASE WHERE THE RESELLER PERFORMS ONLY MINIMAL SERVICES AS A F ORWARDING AGENT TO THE CASE WHERE THE RESELLER TAKES ON THE FULL RISK OF OWNERSHIP TOGETHER WITH THE FULL RESPONSIBILITY FOR AND THE RISKS INVOLVED IN ADVERTISING, MARKETING, DISTRIBUTING AND GUARANTEEING THE GOODS, FINANCING STOCKS, AND OTHER CONNECTED SE RVICES. IF THE RESELLER IN THE CONTROLLED TRANSACTION DOES NOT CARRY ON A SUBSTANTIAL COMMERCIAL ACTIVITY, BUT ONLY TRANSFERS THE GOODS TO A THIRD PARTY, THE RESALE PRICE MARGIN COULD, IN LIGHT OF THE FUNCTIONS PERFORMED, BE A SMALL ONE. THE RESALE PRICE 28 ITA NO.7414/DEL/2018 M ARGIN COULD BE HIGHER WHERE IT CAN BE DEMONSTRATED THAT THE RESELLER HAS SOME SPECIAL EXPERTISE IN THE MARKETING OF SUCH GOODS, IN EFFECT BEARS SPECIAL RISKS, OR CONTRIBUTES SUBSTANTIALLY TO THE CREATION OR MAINTENANCE OF INTANGIBLE PROPERTY ASSOCIATED WIT H THE PRODUCT. HOWEVER, THE LEVEL OF ACTIVITY PERFORMED BY THE RESELLER, WHETHER MINIMAL OR SUBSTANTIAL, WOULD NEED TO BE WELL SUPPORTED BY RELEVANT EVIDENCE. THIS WOULD INCLUDE JUSTIFICATION FOR MARKETING EXPENDITURES THAT MIGHT BE CONSIDERED UNREASONABLY HIGH; FOR EXAMPLE, WHEN PART OR MOST OF THE PROMOTIONAL EXPENDITURE WAS CLEARLY INCURRED AS A SERVICE PERFORMED IN FAVOUR OF THE LEGAL OWNER OF THE TRADEMARK. IN SUCH \ A CASE THE COST PLUS METHOD MAY WELL SUPPLEMENT THE RP METHOD. 161. THE UNITED NATIONS' MANUAL ON RP METHOD HIGHLIGHTS THAT THIS METHOD IS BASED UPON ARM'S LENGTH GROSS PROFITS, RATHER THAN DIRECTLY DETERMINING ARM'S LENGTH PRICES. AS COMPARED TO CUP METHOD, RP METHOD REQUIRES LESS DIRECT TRANSACTIONAL (PRODUCT) COMPARABILITY THAN CUP METHOD. HOWEVER, THERE MUST BE FUNCTIONAL COMPARABILITY. A SIMILAR LEVEL OF COMPENSATION IS EXPECTED FOR PERFORMING SIMILAR FUNCTIONS ACROSS DIFFERENT ACTIVITIES. THIS UNIFORMITY AND SIMILITUDE IS NECESSARY BECAUSE SIMILAR GROSS PROFITS ARE BEING COMPARED. IF THE RE ARE MATERIAL DIFFERENCES THAT REFLECT IN THE GROSS PROFIT MARGINS BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTION, ADJUSTMENTS SHOULD BE POSSIBLE ON ACCOUNT OF SUCH DIFFERENCES. FUNCTIONS PERFORMED CAN BE SIMPLE AND COVER A LIMITED FIELD OF SALES, G ENERAL OR ADMINISTRATIVE EXPENSES; TO MORE COMPLEX ONE, ADDING SUBSTANTIALLY TO THE GROSS PROFIT MARGINS. THE LATTER MAY HAPPEN IF THE RESELLER ADDS SUBSTANTIALLY TO THE VALUE OF THE PRODUCT BY ASSISTING CONSIDERABLY IN CREATION AND MAINTENANCE OF INTANGIB LE PRODUCTS OR WHERE THE GOODS ARE FURTHER PROCESSED INTO A MORE VALUABLE OR COMPLICATED PRODUCT. REFERRING TO THE WEAKNESSES OF THE SAID METHOD, THE COMMENTARY STATES: - THE METHOD CAN BE USED WITHOUT FORCING DISTRIBUTORS TO INAPPROPRIATELY MAKE PROFITS . THE DISTRIBUTOR EARNS AN ARM'S LENGTH GROSS PROFIT MARGIN, HOWEVER, BUT COULD HAVE OPERATING LOSSES DUE, FOR EXAMPLE, TO HIGH SELLING EXPENSES CAUSED BY BUSINESS STRATEGIES SUCH AS A MARKET PENETRATION STRATEGY. BY COMPARISON, THE APPLICATION OF THE TRAN SACTIONAL NET MARGIN METHOD, WHICH ANALYSES A FINANCIAL RATIO BASED ON OPERATING PROFITS, WILL GENERALLY RESULT IN AN ARM'S LENGTH RANGE OF POSITIVE OPERATING PROFITS. THE TESTED PARTY IN THE ANALYSIS WOULD THEN PROBABLY ALSO EARN A POSITIVE OPERATING PROF IT WITHIN THE RANGE. HOWEVER, THE RESALE PRICE METHOD DOES NOT NECESSARILY RESULT IN POSITIVE OPERATING PROFITS TO BE EARNED BY THE TESTED PARTY. XXX 6.2.11. WHEN TO USE THE RESALE PRICE METHOD 6.2.11.1. IN A TYPICAL INTER - COMPANY TRANSACTION INVOLVING A FULLY - FLEDGED MANUFACTURER (I.E. AS COMPARED, FOR EXAMPLE, WITH A LIMITED RISK 29 ITA NO.7414/DEL/2018 COMPANY OR CONTRACT MANUFACTURER) OWNING VALUABLE PATENTS OR OTHER INTANGIBLE PROPERTIES AND AFFILIATED SALES COMPANIES WHICH PURCHASE AND RESELL THE PRODUCTS TO UNRELATED CU STOMERS, THE RESALE PRICE METHOD IS AN APPROPRIATE METHOD TO USE IF: > THE CUP METHOD IS NOT APPLICABLE; > THE SALES COMPANIES DO NOT OWN VALUABLE INTANGIBLE PROPERTIES; AND > RELIABLE COMPARISONS CAN BE MADE ON COGS (COST OF GOODS SOLD). 162. IN THE CASE OF REEBOK INDIA CO. LTD., THE ASSESSEE HAS APPLIED RS METHOD USING INTERNAL COMPARABLE. CONTRARY TO THE GENERAL RULE, THE INTERNAL COMPARABLE POSSIBLY MAY NOT BE APPROPRIATE WHEN THE ASSESSED HAS INCURRED CONSIDERABLE (NOT NECESSARILY EXTRA - ORDINARY OR NO N - ROUTINE) AMP EXPENSES. THE REASON IS OBVIOUS; THERE IS NO COMPARABILITY ANALYSIS POSSIBLE. IN SUCH CASES, IT IS NOT POSSIBLE TO EXAMINE AND COMPARE THE FUNCTIONAL COMPARABILITY BETWEEN THE CONTROLLED TESTED TRANSACTION AND UNCONTROLLED INTERNAL PARTY TRA NSACTION ON ACCOUNT OF AMP EXPENSES. INTERNAL COMPARABLE WOULD NOT ACCOUNT FOR THE CREDIBLE GROSS PROFIT RATE, WHICH AN AE SHOULD BE ENSURED WHEN IT INCURS AMP EXPENSES. FUNCTIONALLY THE COMPARABLE IS MERELY A MANUFACTURER AND THUS, THE SAID FUNCTION IS CO MPARED. AMP EXPENSES DO NOT GET FACTORED AND COMPARED. AS AN ABUNDANT CAUTION, WE WOULD STILL ADD THAT WHERE ADJUSTMENTS CLAUSE (IV) CAN GIVE RELIABLE AND ACCURATE RESULTS, INTERNAL COMPARABLES COULD STILL BE APPLIED. THIS WOULD LIKELY HAPPEN, WHEN AMP EXP ENSES ARE INSIGNIFICANT IN QUANTUM. 163. THUS, IN SUCH CASES, EXTERNAL COMPARABLES WHERE SAID PARTIES ARE PERFORMING SIMILAR FUNCTIONS INCLUDING AMP EXPENSES WOULD GIVE MORE ACCURATE AND PRECISE RESULTS. 164. HOWEVER, IT WOULD BE WRONG TO ASSERT AND ACCEPT THAT GROSS PROFIT MARGINS WOULD NOT INEVITABLY INCLUDE COST OF AMP EXPENSES. THE GROSS PROFIT MARGINS COULD REMUNERATE AN AE PERFORMING MARKETING AND SELLING FUNCTION. THIS HAS TO BE TESTED AND EXAMINED WITHOUT ANY ASSUMPTION AGAINST THE ASSESSED. A FINDI NG ON THE SAID ASPECT WOULD REQUIRE DETAILED VERIFICATION AND ASCERTAINMENT. 165. AN EXTERNAL COMPARABLE SHOULD PERFORM SIMILAR AMP FUNCTIONS. SIMILARLY THE COMPARABLE SHOULD NOT BE THE LEGAL OWNER OF THE BRAND NAME, TRADE MARK ETC. IN CASE A COMPARABLE DO ES NOT PERFORM AMP FUNCTIONS IN THE MARKETING OPERATIONS, A FUNCTION WHICH IS PERFORMED BY THE TESTED PARTY, THE COMPARABLE MAY HAVE TO BE DISCARDED. COMPARABLE ANALYSIS OF THE TESTED PARTY AND THE COMPARABLE WOULD INCLUDE REFERENCE TO AMP EXPENSES. IN CAS E OF A MISMATCH, ADJUSTMENT COULD BE MADE WHEN THE RESULT WOULD BE RELIABLE AND ACCURATE. OTHERWISE, RP METHOD SHOULD NOT BE ADOPTED. IF ON COMPARABLE ANALYSIS, INCLUDING AMP EXPENSES, GROSS PROFIT MARGINS MATCH OR ARE WITHIN THE SPECIFIED RANGE, NO TRANSF ER PRICING 30 ITA NO.7414/DEL/2018 ADJUSTMENT IS REQUIRED. IN SUCH CASES, THE GROSS PROFIT MARGIN WOULD INCLUDE THE MARGIN OR COMPENSATION FOR THE AMP EXPENSES INCURRED. ROUTINE OR NON - ROUTINE AMP EXPENSES WOULD NOT MATERIALLY AND SUBSTANTIALLY AFFECT THE GROSS PROFIT MARGINS WHE N THE TESTED PARTY AND THE COMPARABLE UNDERTAKE SIMILAR AMP FUNCTIONS. 166. ON BEHALF OF THE ASSESSEE, IT WAS INITIALLY ARGUED THAT THE TPO CANNOT ACCOUNT FOR OR TREAT AMP AS A FUNCTION. THIS ARGUMENT ON BEHALF OF THE ASSESSEE IS FLAWED AND FALLACIOUS FOR SEVERAL REASONS. THERE ARE INHERENT FLAWS IN THE SAID ARGUMENT. MOREOVER, THE CONTENTION OF THE ASSESSED IN THESE APPEALS WOULD MANDATE REJECTION OF THE RP METHOD, AS AN APPROPRIATE OR MOST APPROPRIATE METHOD. COMPARISON OR COMPARATIVE ANALYSIS IS UNDERTAK EN AT STAGE (II). ADJUSTMENTS ARE PERMISSIBLE AND UNDERTAKEN AT STAGE (IV). UNDER CLAUSE (III), I.E. AT STAGE (III), FROM THE PRICE ASCERTAINED AT STAGE (II), EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE PURCHASE OF PROPERTY OR OBTAINING OF S ERVICES IS REDUCED. UNDER CLAUSE (IV), ADJUSTMENTS HAVE TO BE MADE ON ACCOUNT OF FUNCTIONAL DIFFERENCE WHICH WOULD INCLUDE ASSETS USED AND RISK ASSUMED. IT IS AT STAGE (IV) OF THE RP METHOD THAT THE ASSESSING OFFICER/TPO CAN MAKE ADJUSTMENTS IF HE FINDS TH AT AN ASSESSEE HAS INCURRED SUBSTANTIAL AMP EXPENSES IN COMPARISON TO THE COMPARABLES. ONCE ADJUSTMENTS ARE MADE, THEN THE APPROPRIATE ARM'S LENGTH PRICE CAN BE DETERMINED. IN CASE, IT IS NOT POSSIBLE TO MAKE ADJUSTMENTS, THEN RP METHOD MAY NOT BE THE MOST APPROPRIATE AND BEST METHOD TO BE ADOPTED. 167. BEFORE US, THE REVENUE HAS NOT PLEADED OR SUBMITTED THAT THE RP METHOD SHOULD NOT HAVE BEEN ADOPTED. THE TPO AND THE ASSESSING OFFICER DID NOT REJECT THE RP METHOD ADOPTED BY THE ASSESSEE. THE ASSESSED SUBMI T THAT THE REVENUE ACCEPTS FUNCTIONAL PARITY AND IN FACT, WITHOUT ADJUSTMENT. CONTRA, REVENUE WOULD ARGUE THAT THE ASSESSING OFFICER/TPO AND THE TRIBUNAL HAVE ADOPTED AND APPLIED THE CUP METHOD FOR DETERMINING ARM'S LENGTH PRICE OF AMP EXPENSES. WE DO NOT PRONOUNCE A FIRM AND FINAL OPINION ON THE SAID LIS AS IT SHOULD BE AT FIRST EXAMINED BY THE TRIBUNAL. 168. THE TRIBUNAL HAS UPHELD ADOPTION OF CP METHOD AFTER APPLYING BRIGHT LINE TEST' IN THE CASE OF REEBOK INDIA CO. LTD. AND CANON INDIA PVT. LTD. THE BR IGHT LINE TEST' ADOPTED TO DEMARCATE THE ROUTINE AND NON - ROUTINE AMP EXPENDITURE IS PREDICATED ON SELECTION OF A DOMESTIC DISTRIBUTOR AND MARKETING COMPANY THAT DOES NOT OWN INTANGIBLE BRAND RIGHTS. CONTRACT VALUE WOULD BE TREATED AS NIL. IN TERMS OF OUR F INDING RECORDED ABOVE, THE SAID FINDING WOULD NOT BE CORRECT. THE APPROACH AND PROCEDURE FOR ASCERTAINING /DETERMINING ARM'S LENGTH PRICE UNDER THE RP METHOD IS DIFFERENT. FOR THIS REASON, AND OTHER GROUNDS RECORDED, WE HAVE PASSED AN ORDER OF REMIT TO THE TRIBUNAL FOR EXAMINATION OF THE FACTUAL MATRIX. 31 ITA NO.7414/DEL/2018 6.6 THE FINDING OF THE HON BLE HIGH COURT WITH REFERENCE TO COST PLUS METHOD IS REPRODUCED AS UNDER: O. COST PLUS METHOD 169. CP METHOD AS STIPULATED IN RULE 10B (1)(C) IS AS UNDER: '10B. (1) FOR THE PURPOSES OF SUB - SECTION (2) OF SECTION 92C , THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : XXX (C) COST PLUS METHOD, BY WHICH, (I) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INCURRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SERVICES PROVIDED TO AN ASSOCIATED ENTERPRISE, ARE DETERMINED; (II) THE AMOUNT OF A NORMAL GROSS PROFIT MARK - UP TO SUCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) ARISING FROM THE TRANSFER OR PROVISION OF THE SAME OR SIMILAR PROPERTY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTERPRISE, IN A COMPARABLE UNCONTROL LED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS DETERMINED; (III) THE NORMAL GROSS PROFIT MARK - UP REFERRED TO IN SUB - CLAUSE (II) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SUCH PROFIT MARK - UP IN THE OPEN MARKET; (IV) THE COSTS REFERRED TO IN SUB - CLAUSE (I) ARE INCREASED BY THE ADJUSTED PROFIT MARK - UP ARRIVED AT UNDER SUB - CLAUSE (III); (V) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RELATION TO THE SUPPLY OF THE PROPERTY OR PROVISION OF SERVICES BY THE ENTERPRISE; 170. UNITED NATIONS' MANUAL IN ARITHMETIC TERMS HAS ELUCIDATED CP METHOD IN THE FOLLOWING MANNER: THE FORMULA FOR THE TRANSFER PRICE IN INTER - COMPANY TRANSACTIONS OF PRODUCTS IS AS FOLLOWS: TP = COGS X (1 + COST PLUS MARKUP), WHERE : > TP = THE TRANSFER PRICE OF A PRODUCT SOLD BETWEEN A MANUFACTURING COMPANY AND A R ELATED COMPANY; 32 ITA NO.7414/DEL/2018 > COGS = THE COST OF GOODS SOLD TO THE MANUFACTURING COMPANY; AND > COST PLUS MARK - UP = GROSS PROFIT MARK - UP DEFINED AS THE RATIO OF GROSS PROFIT TO COST OF GOODS SOLD. GROSS PROFIT IS DEFINED AS SALES MINUS COST OF GOODS SOLD. THE SAID METHOD IS STRICTLY APPLIED TO MANUFACTURING OR ASSEMBLING ACTIVITIES OR RELATIVELY SIMPLE SERVICE PROVIDERS. LIKE RP METHOD, CP METHOD IS A GROSS MARGIN METHOD AS IT ATTEMPTS TO DERIVE THE ARM'S LENGTH PRICE ON A MARK - UP OF COST OF GOODS OR SERVICES PROVID ED. 171. DETERMINATION OF COST OR EXPENSE CAN CAUSE DIFFICULTIES IN APPLYING CP METHOD. CAREFUL CONSIDERATION SHOULD BE GIVEN, WHAT WOULD CONSTITUTE COST I.E. WHAT SHOULD BE INCLUDED OR EXCLUDED FROM COST. A STUDIED SCRUTINY OF CP METHOD WOULD INDICATE THA T WHEN THE SAID METHOD IS APPLIED BY TREATING AMP EXPENSES AS AN INDEPENDENT TRANSACTION, IT WOULD NOT MAKE ANY DIFFERENCE WHETHER THE SAME ARE ROUTINE OR NON - ROUTINE, ONCE FUNCTIONAL COMPARABILITY WITH OR WITHOUT ADJUSTMENT IS ACCEPTED. THE GROSS PROFIT O F THE COMPARABLE IS APPLIED AND ACCEPTED, WHEN THERE IS NO DIFFERENCE BETWEEN THE AMP AND OTHER FUNCTIONS BEING COMPARED THAT WOULD MATERIALLY AFFECT THE GROSS PROFIT MARK UP OR WHEN REASONABLY ACCURATE ADJUSTMENTS CAN BE PERFORMED. THUS, CP METHOD REQUIRE S FUNCTIONAL COMPARABILITY. THIS COMPARABILITY ANALYSIS WOULD NECESSARILY IMPLY THAT THE COMPARABLE MUST AND SHOULD BE PERFORMING SIMILAR FUNCTIONS, INCLUDING THE NATURE OF COSTS AND EXPENSES INCURRED. IF THE DISCOUNTS/INCENTIVES AND FOR THAT MATTER ENTIRE DISTRIBUTION AND MARKETING EXPENSES ARE TREATED AS COSTS, FUNCTIONAL AND COMPARABLE ANALYSIS COMPARISON SHOULD BE SIMILAR. THUS, THE ENTIRE COST, I.E. MARKETING EXPENSE OR DISTRIBUTION AND MARKETING EXPENSE, CAN BE MADE SUBJECT MATTER AND INCLUDED IN COS T', FOR DETERMINING ARM'S LENGTH PRICE BY APPLYING CP METHOD. 172. THE UNITED NATIONS' MANUAL DISCOURAGES APPLICATION OF CP METHOD IN TRANSACTIONS INVOLVING FULL - FLEDGED MANUFACTURER WHO OWNS VALUABLE PRODUCT INTANGIBLES I.E. A MANUFACTURER WHO HAS INCURRE D CONSIDERABLE COST ON RESEARCH & DEVELOPMENT, PATENT, TECHNOLOGY ETC. FOR THE REASON THAT IT IS DIFFICULT TO LOCATE A SIMILAR INDEPENDENT MANUFACTURER OWNING COMPARABLE. THERE IS NO FINDING OR EXAMINATION ON THIS ASPECT BY THE TRIBUNAL. WE CAUTION, THE RE FERENCE ABOVE IS TO VALUABLE PRODUCT INTANGIBLES AND NOT MARKETING INTANGIBLES. THE ASSESSED RELY UPON AES VALUABLE PRODUCT INTANGIBLES. THE ISSUE CAN BE ANSWERED AFTER ASCERTAINING FACTS AND WHETHER SIMILAR COMPARABLES ARE AVAILABLE. WE HAVE NOT PRONOUNCE D A FIRM OPINION. OBVIOUSLY, THE AFORESAID CAVEAT WOULD NOT ARISE IF AND WHEN, AMP AS A TRANSACTION IS SEPARATELY BENCHMARKED AND TESTED. 33 ITA NO.7414/DEL/2018 173. THIS TASK OF ARM'S LENGTH PRICING IN THE CASE OF TESTED PARTY MAY BECOME DIFFICULT WHEN A NUMBER OF TRANSACTIONS ARE INTERCONNECTED AND COMPENSATED BUT A TRANSACTION IS BIFURCATED AND SEGREGATED. ALLOCATION OF PRICE OR COMPENSATION PAID WOULD BE A CONTENTIOUS QUESTION AND APPORTIONMENT MUST BE JUSTIFIED AND FAIR. CP METHOD, WHEN APPLIED TO THE SEGREGATED TRANSACTION, MUST PASS THE CRITERIA OF MOST APPROPRIATE METHOD. IF AND WHEN SUCH DETERMINATION OF GROSS PROFIT WITH REFERENCE TO AMP TRANSACTION IS REQUIRED, IT MUST BE UNDERTAKEN IN A FAIR, OBJECTIVE AND REASONABLE MANNER. 174. COSTS OR EXPENSES INCURRED FOR SERVICES PROVIDED OR IN RESPECT OF PROPERTY TRANSFERRED, WHEN MADE SUBJECT MATTER OF ARM'S LENGTH PRICE BY APPLYING CP METHOD, CANNOT BE AGAIN FACTORED OR INCLUDED AS A PART OF INTER - CONNECTED INTERNATIONAL TRANSACTION AND SUBJECTED TO ARM'S LENGTH PRICING. THIS S ITUATION WOULD POSSIBLY RESULT IN OVER, IF NOT DOUBLE TAXATION, CONTRARY TO THE OBJECT AND PURPOSE OF ARM'S LENGTH PRICING, WHICH IS TO TAX THE REAL INCOME AFTER CORRECTING THE NEGATIVE IMPACT, IF ANY, OF THE CONTROLLED CONDITIONS. THEREFORE, IF ENTIRE MAR KETING AND DISTRIBUTION EXPENSES, OR MARKETING OR AMP EXPENSES ARE BENCH MARKED UNDER CP METHOD, THEN IT WOULD BE INJUDICIOUS AND IRRATIONAL TO APPLY ANY OTHER METHOD TO COMPUTE THE ARM'S LENGTH PRICE OF A LARGER COMPOSITE INTERNATIONAL TRANSACTION, OF WHI CH THE SAID COSTS AND EXPENSES FORM ONLY A PART. LOGICALLY, IF THE COSTS OR EXPENSES AS A FUNCTION ARE EXCLUDED OR INCLUDED IN THE COST WHILE COMPUTING THE ARM'S LENGTH PRICE UNDER THE CP METHOD, THE GROSS PROFIT AS A RESULT OF SUCH TRANSACTION WOULD BE LO WER OR HIGHER. THIS SITUATION WOULD BE DIFFERENT FROM SUBJECTING THE SAME INTERNATIONAL TRANSACTION TO ARM'S LENGTH PRICING BY TWO DIFFERENT METHODS, WHICH IS PERMISSIBLE, IN THE MANNER STIPULATED IN THE FIRST PROVISO TO SECTION 92C OF THE ACT. 6.7 IN VIEW OF THE AFORESAID DISCUSSION, WE HOLD THAT INTERNATIONAL TRANSACTION OF AMP FUNCTIONS EXISTS IN THE CASE OF THE ASSESSEE, HOWEVER , AS FAR AS BENCHMARKING OF THE SAID TRANSACTION IS CONCERN ED, WE FIND THAT THE LD. TRANSFER PRICING OFFICER HAS C L A I M E D T O H A V E FOLLOWED THE DIRECTIONS OF HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSION (SUPRA). THE ASSESSEE IS AGGRIEVED WITH NOT CONSIDERING THE AMP EXPENSES IN AGGREGATED MANNER WITH IMPORTS OF GOODS UNDER TNMM. THE ASSESSEE IS ALSO AGGRIEVED WITH COST PLUS METHOD IN SEGREGATED MANNER WITHOUT PROPERLY COMPARING THE FUNCTIONS OF THE 34 ITA NO.7414/DEL/2018 COMPARABLE COMPANIES. IN SUCH CIRCUMSTANCES, WE FEEL IT APPROPRIATE TO RESTORE THE ISSUE TO THE FILE OF THE LD. TPO FOR FOLLOWI NG THE DIRECTION OF THE HON BLE DELHI HIGH COURT FOR BENCHMARKING UNDER TNMM IN AGGREGATED MANNER ALONG WITH THE PURCHASE OF GOODS FROM THE AE OR IN THE SEGREGATED MANNER , AFTER TAKING INTO ACCOUNT APPROPRIATE COMPARABLES OR APPLYING OF RESALE PRICE METHOD OR COST - PLUS METHOD KEEPING IN VIEW THE FINDING OF THE HON BLE DELHI HIGH COURT AFTER APPRECIATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE VIS - - VIS VARIOUS SITUATIONS POINTED OUT BY THE HON BLE HIGH COURT. WE ARE RESTORING THIS ISSUE TO LD. TRANSFER P RICING OFFICER BECAUSE FACTUAL INFORMATION ON THE ISSUE S RAISED BY THE HON BLE COURT ARE NOT BEFORE FULLY. THE LD. TPO MAY ALSO DECIDE THE ISSUE OF DIRECT SELLING EXPENSES AND APPLYING MARKUP FOLLOWING THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CA SE OF SONY ERICSSON (SUPRA). IT IS NEEDLESS TO MENTION THAT ASSESSES SHALL BE AFFORDED ADEQUATE OPPORTUNITY OF BEING HEARD. 6.8 IN THE RESULT, THE GROUND OF THE ASSESSEE FROM SERIAL NO. 4 TO 16 ARE ALLOWED FOR STATISTICAL PURPOSES. 7. THE GROUND S NO. 17 T O 21 OF THE APPEAL ARE WITH RESPECT TO PROTECTIVE ADJUSTMENT MADE BY THE LD. TPO AND CONFIRMED BY THE LD. DRP. WE HAVE ALREADY HELD THAT IN VIEW OF THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PRIVAT E LIMITED (SUPRA) NO ADJUSTMENT CAN BE MADE FOLLOWING THE BRIGHT LINE TEST FOR ROUTINE AND NON - ROUTINE EXPENSES, AND THUS THE ADDITION MADE ON THE PROTECTED BASIS IS DIRECTED TO BE DELETED. ALL THE GROUND S NO. 17 TO 21 ARE ACCORDINGLY ALLOWED. 8. IN THE GROUND NO. 22 THE ASSESSEE HAS RAISED THE ISSUE OF PENALTY PROCEED ING INITIATED UNDER SECTION 27 1 ( 1 )(C) OF THE ACT. 35 ITA NO.7414/DEL/2018 SINCE AT THIS STAGE, NO PENALTY HAS BEEN LEVIED, THIS PRAYER OF THE ASSESSEE IS PREMATURE AND ACCORDINGLY , WE DISMISS THE SAME. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . 10 AS REGARDS THE STAY APPLICATION FILED IN THIS APPEAL , SINCE THE APPEAL OF THE ASSESSEE HAS ALREADY BEEN ADJUDICATED, THE STAY APPLICATION HAS BECOME INFRUCTUOUS, THE SAME IS ACCORDINGLY DISMISSED. ORDER PRONOUN CED IN THE OPEN COURT ON 2 7 T H MARCH, 201 9 . S D / - S D / - [ AMIT SHUKLA ] [O.P. KANT] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 2 7 T H MARCH , 2019 . RK / - [D.T.D.S] COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR ASST. REGISTRAR, ITAT, NEW DELHI