Appeal Details
Counselvise Citation
[2015] 140 COUNSELVISE.COM (IT) 97426 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
7 month(s) 19 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
28-09-2015
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
I2
Next Hearing Date
02-07-2015
Assessment Year
2010-2011
Appeal Filed On
09-02-2015
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER ITA NO.789/DEL./2015 (ASSESSMENT YEAR : 2010-11) M/S. NIKON INDIA (PVT.) LTD., VS. DCIT, CIRCLE-3 PLOT NO. 17, SEC-32, GURGAON. INSTITUTIONAL AREA GURGAON. (PAN NO: AACCN5100F) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI MUKESH BUTANI & GOURAV GUPTA , ADVOCATES S/SHRI SUCHINT MAJMUDER & NIPUN ARORA, CAS REVENUE BY : SHRI ANURAG SHARMA, SENIOR DR DATE OF HEARING : 02.07.2015 DATE OF PRONOUNCEMENT : 28.09.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE UNDER SECTION 253(1) OF THE INCOME TAX ACT, 1961 IS DIRECTED AGAINST THE FINAL ORDER PASSED BY THE TRANSFER PRICING OFFICER (TPO) / ASSESSING OFFI CER (AO) ON 05.01.2015 U/S 143(3) READ WITH SECTION 144C OF THE INCOME-TAX 2 ITA NO.789/DEL/2015 ACT, 1961 (HEREINAFTER ALSO CALLED 'THE ACT') IN RE LATION TO THE ASSESSMENT YEAR 2010-11. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE, IS A WHOLLY OWNED SUBSIDIARY OF NIKON CORPORATION, JAPAN (NIKON JAPAN). IT IS ENGAGED IN THE DISTRIBUTION AND MARK ETING SERVICES FOR NIKON PRODUCTS IN INDIA. 2.1 THE ASSESSEE E-FILED ITS RETURN DECLARING LOSS OF RS. (-) 22,93,287/- WHICH WAS DULY PROCESSED U/S 143(1) ON 31.05.2011. 2.2 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT THE ASSESSEE REPORTED CERTAIN INTERNATIONAL TR ANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) WHICH ARE ENLISTED HER EUNDER :- SR. NO. NATURE OF TRANSACTION METHOD VALUE OF TRANSACTION (RS.) 1 PURCHASES OF PRODUCTS, SPARES, PROMOTIONAL AND OTHER SUPPLIES RPM 1,59,06,94,564 2 PURCHASE OF FIXED ASSETS TNMM 3,09,931 3 SALES AND SERVICE SUPPORT INCOME TNMM 1,19,11,847 4 COMMISSION INCOME TNMM 17,51,40,980 5 PURCHASE OF FIXED ASSETS CUP 16,74,880 6 COST OF REIMBURSEMENTS RECEIVED CUP 2,29,50,609 7 COST OF REIMBURSEMENTS PAID CUP 28,54,154 3 ITA NO.789/DEL/2015 2.3 THE ASSESSEE EMPLOYED THE TRANSACTIONAL NET MAR GIN METHOD (TNMM) IN RESPECT OF THREE INTERNATIONAL TRANSACTIO NS; THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD IN RESPE CT OF THREE TRANSACTIONS; RESALE PRICE METHOD IN RESPECT OF ONE INTERNATIONAL TRANSACTION. ON A REFERENCE MADE BY THE AO FOR DETE RMINING THE ARM'S LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANS ACTIONS, THE TPO NOTED THAT FOR (I) PURCHASE OF FIXED ASSETS (II) SA LES AND SERVICE SUPPORT INCOME (III) COMMISSION INCOME, THE ASSESSE E HAD USED TRANSACTIONAL NET MARGIN METHOD ('TNMM') AS THE MOS T APPROPRIATE METHOD WITH OPERATING PROFIT/SALES AS T HE PROFIT LEVEL INDICATOR AND SELECTED THE FOLLOWING COMPARABLE COM PANIES IN THE TP STUDY TO BENCHMARK ITS INTERNATIONAL TRANSACTION S: SR.NO. NAME OF THE COMPARABLE COMPANY GROSS MARGIN(%) OP/SALES (%) 1 ALLIED PHOTOGRAPHICS INDIA LTD. 9.83 0.85 2 CCS INFOTECH LTD. 6.31 2.31 3 COMPUAGE INFOCOM LTD. 6.03 2.41 4 COMPUTER POINT LTD. 6.27 -0.48 5 EMPOWER INDIA LTD. 2.89 0.03 6 GENERAL SALES LTD. 23.66 -4.79 7 MVL INDUSTRIES LTD. 11.08 8.58 8 MOBILE TELECOMMUNICATIONS LTD. 6.20 0.51 9 SALORA INTERNATIONAL LTD. 9.32 2.24 10 SPICE MOBILES LTD. 18.87 2.07 AVERAGE 10.05 1.37 NIKON INDIA 17.65% -1.76% 4 ITA NO.789/DEL/2015 2.4 THE ASSESSEE'S CONTENTION WAS THAT FOR ABOVE ME NTIONED INTERNATIONAL TRANSACTIONS, THE PLI BEING OPERATING PROFIT/SALES OF COMPARABLE WAS 1.37% AS COMPARED TO -1.76% OF ASSES SEE I.E. WITHIN +-5% RANGE AS PER PROVISO TO SECTION 92C(2) OF THE ACT. THEREFORE, IT WAS CONTENDED THAT INTERNATIONAL TRAN SACTIONS WERE AT ARM'S LENGTH. THE TPO THEREAFTER ACCEPTED THE REPOR TED INTERNATIONAL TRANSACTIONS AT ALP. HE, HOWEVER, FRO M THE AUDITED ACCOUNTS FOR THE YEAR, NOTICED THAT THE ASSESSEE IN CURRED ADVERTISEMENT, MARKETING AND PROMOTION (AMP) EXPENS ES TO THE TUNE OF RS. 37,62,75,469/- DURING THE YEAR IN QUEST ION. 2.5 THE TPO OBSERVED THAT THE INTERNATIONAL TRANSAC TIONS RELATING TO MARKETING EXPENDITURE HAVE BEEN BENCHMARKED BY A GGREGATING IT WITH OTHER TRANSACTIONS IN DIFFERENT BUSINESS SEGME NTS WHICH HAVE BEEN ANALYZED UNDER RPM/TNMM WITHOUT ANY FURTHER AN ALYSIS AS CAN BE OBSERVED FROM THE TPOS ORDER WHICH READS AS UNDER: (BENCHMARKING OF INTERNATIONAL TRANSACTIONS RELATI NG TO ADVERTISEMENT AND SALES PROMOTION:- 5 ITA NO.789/DEL/2015 2. IT IS SEEN FROM YOUR AUDITED FINANCIALS THAT A S UM OF 37,62,75,469/- HAS BEEN INCURRED BY YOU ON ADVERTIS EMENT AND MARKETING AND SALES PROMOTION (AMP). THIS TRANSACTI ON DOES NOT APPEAR TO HAVE BEEN BENCHMARKED IN YOUR TP REPORT. IT APPEARS THAT THE INTERNATIONAL TRANSACTIONS RELATING TO MARKETIN G EXPENDITURE INCURRED BY YOU ON THE BRANDS OF THE AES AND FOR DE VELOPING MARKETING INTANGIBLES HAVE BEEN BENCHMARKED BY AGGR EGATING WITH THE OTHER TRANSACTIONS IN DIFFERENT BUSINESS SEGMEN TS WHICH HAVE BEEN ANALYZED UNDER RPM/TNMM WITHOUT ANY FURTHER ANALYSI S. 2.6 THE TPO AFTER CONSIDERING THE TP DOCUMENTATION OBSERVED THAT THE ASSESSEE, BY INCURRING EXPENDITURE ON ADVE RTISEMENT MARKETING AND PROMOTIONAL ACTIVITIES (AMP), WAS DEV ELOPING MARKETING INTANGIBLE FOR NIKON JAPAN. THE TPO, FOR BENCHMARKING THE AMP EXPENDITURE, TOOK THE FOLLOWING COMPANIES A S COMPARABLE AND REJECTED THE OTHER COMPANIES BY STAT ING THAT SOME OF THESE COMPANIES ARE EITHER DEVELOPING BRANDS OR ARE NOT COMPARABLE COMPANIES. FOR BENCHMARKING THE AMP EXPE NDITURE, WE REQUIRE COMPANIES WHICH ARE NOT DEVELOPING BRAND S. HENCE, ONLY FOLLOWING COMPANIES CAN BE TAKEN AS COMPARABLE : SR.NO. COMPANY NAME SALES AMP AMP% 1 ALLIED PHOTOGRAPHICS INDIA LTD. 11.08 0.4 3.61 2 CCS INFOTECH LTD. 63.79 0.53 0.83 3 COMPUAGE INFOCOM LTD. 1087.8 0 0.00 4 COMPUTER POINT LTD. 116.17 0.03 0.03 5 EMPOWER INDIA LTD. 67.67 0 0.00 6 ITA NO.789/DEL/2015 6 MVL INDUSTRIES LTD. 437.51 0.49 0.11 7 MOBILE TELECOMMUNICATIONS LTD. 55.32 0.15 0.27 8 SALORA INTERNATIONAL LTD. 524.55 3.45 0.66 AVERAGE 0.69 2.7 THE TPO COMPUTED THE MEAN OF THE EXPENDITURE I NCURRED ON AMP/SALES OF SUCH COMPARABLE COMPANIES IS THE BRI GHT LINE. ANY EXPENDITURE IN EXCESS OF THE BRIGHT LINE IS FOR THE DEVELOPMENT OF MARKETING INTANGIBLE (WHICH IS OWNED BY THE AE) THAT NEEDS TO BE SUITABLY COMPENSATED BY THE AE. THE AMOUNT WHICH REPRESENTS THE BRIGHT LINE AND THE AMOUNT THAT SHOULD HAVE BEE N COMPENSATED TO THE ASSESSEE COMPANY WERE COMPUTED AS UNDER: PARTICULARS AMOUNT ADVERTISING 20,10,75,600 BUSINESS PROMOTION 17,51,99,869 TOTAL AMP EXPENDITURE 37,62,75,469 NET SALES 203,87,33,264 AMP/SALES RATIO 18.46% 2.8 ACCORDINGLY, THE ARMS LENGTH PRICE OF THIS INT ERNATIONAL TRANSACTION WAS PROPOSED TO BE WORKED OUT AS FOLLOW S: TOTAL SALES RS.203,87,33,264 ARMS LENGTH LEVEL OF AMP EXPENSE (0.69% OF SALES) RS. 1,40,67,260 AMP EXPENSES ACTUALLY INCURRED RS. 37,62,75,469 AMP EXPENDITURE WHICH SHOULD HAVE BEEN REIMBURSED RS. 36,22,08,209 7 ITA NO.789/DEL/2015 2.9 FURTHER, THE TPO CONDUCTED A SEARCH IN RESPECT OF BUSINESS SERVICES COMPANIES BY APPLYING THE FOLLOWING FILTER S: (I) USE OF CORRECT KEYWORDS (II) USE OF CURRENT YEAR DATA (III) REJECT COMPANIES HAVING DIFFERENT FINANCIAL YEAR (IV) REJECT COMPANIES WHERE TURNOVER IS LESS THAN RS. 1 CRORE (V) SELECT COMPANIES WHERE THE RATIO OF SERVICE INCOME TO TOTAL INCOME IS AT LEAST 75% (VI) REJECT COMPANIES WHERE RELATED PARTY TRANSACTIONS EXCEED 25% OF SALES (VII) REJECT COMPANIES THAT HAVE EMPLOYEE COST LESS THAN 25% OF TOTAL COST (VIII) REJECT COMPANIES THAT HAVE INTEREST COST MORE THAN 25% OF TOTAL COST (IX) REJECT COMPANIES THAT ARE AFFECTED BY SOME PECULIAR ECONOMIC CIRCUMSTANCES (X) SELECT COMPANIES PROVIDING ADVERTISING AND MARKETIN G SERVICES 2.10 BASED ON THE SEARCH PROCESS, FOLLOWING COMPARA BLES WERE SELECTED FOR THE MARK-UP ON AMP SERVICES: 8 ITA NO.789/DEL/2015 SR. NO. COMPANY NAME OP/OC (W/O FX) 1 CRYSTAL HUES LTD. 9.10% 2 QUADRANT COMMUNICATIONS LTD. 13.11% 3 CYBER MEDIA RESEARCH LTD. 14.85% AVERAGE 12.36% 2.11 THE TPO FURTHER COMPUTED THE OPPORTUNITY COST FOR THE FUNDS BLOCKED BY THE ASSESSEE ON THE BASIS THAT HALF OF T HE FUNDS SHOULD HAVE BEEN REIMBURSED AND CONSIDERING A NOMINAL INTE REST RATE OF 12% ON HALF OF FUNDS, OPPORTUNITY COST COMES OUT TO BE 6%, THEREFORE, TOTAL MARK-UP WAS HELD TO BE 18.36% (12. 36% + 6%) WHICH IN HIS VIEW SHOULD HAVE BEEN CHARGED BY THE A SSESSEE AND CALCULATED THE ARMS LENGTH PRICE OF THE INTERNATIO NAL TRANSACTION RELATED TO THE AMP EXPENDITURE LEADING TO THE CREAT ION OF A MARKETING INTANGIBLE AS BELOW:- TOTAL SALES RS.203,87,33,264/- ARMS LENGTH LEVEL OF AMP EXPENSE (0.69% OF SALES) RS. 1,40,67,260/- AMP EXPENSES ACTUALLY INCURRED RS. 37,62,75,469/- AMP EXPENDITURE WHICH SHOULD HAVE BEEN REIMBURSED RS. 36,22,08,209/- MARK-UP @ 18.36% RS. 6,65,01,427/- ADJUSTMENT U/S 92CA RS. 42,87,09,637/- 9 ITA NO.789/DEL/2015 2.12 THE ASSESSEE IN ITS REPLY DATED 03.01.2014 RAI SED THE FOLLOWING CONTENTIONS :- (I) AMP EXPENSE IS NOT AN INTERNATIONAL TRANSACTION (II) BENEFIT OF AMP EXPENDITURE ACCRUE TO THE ASSESSEE O NLY AND SO EXPENDITURE IS WHOLLY AND EXCLUSIVELY FOR ASSESSEES BUSINESS NO DISALLOWANCE U/S 37(1) POSSIBLE (III) ANY BENEFIT TO AE IS INCIDENTAL IN NATURE (IV) ARGUMENTS ON THE USE OF BRIGHT LINE CONCEPT (V) INDIAS POSITION AS STATED IN UN TRANSFER PRICING M ANUAL NEEDS TO BE APPLIED (VI) ASSESSEE HAS A LONG TERM ROYALTY FREE DISTRIBUTION RIGHT (VII) SELLING EXPENSES (EXPENSE IN CONNECTION WITH SALES) SHOULD BE EXCLUDED FROM AMP EXPENSES (VIII) QUANTITATIVE ADJUSTMENTS TO BE MADE TO DETERMINE TH E VALUE OF AMP EXPENDITURE/SALES RATIO. (IX) CHOICE OF COMPARABLES FOR DETERMINING BRIGHT LINE I S NOT CORRECT (X) MARK UP CHARGED ON THE AMP AMOUNT ABOVE BRIGHT LINE IS INCORRECT, 2.13 FURTHER, AFTER CONSIDERING THE ASSESSEES REPL Y, TPO HAS HELD AS UNDER :- 10 ITA NO.789/DEL/2015 (I) THE TPO HAS DEALT THE ISSUE IN DETAIL AND HELD THAT THE AMP EXPENDITURE IS AN INTERNATIONAL TRANSACTION (PA RAS 7.2 & 7.3 OF THE TPO ORDER) (II) BRIGHT LINE CONCEPT CAN BE APPLIED TO THE ASSE SSEE. (PARA 8.4 OF THE TPO ORDER) (III) THE BENEFIT OF AMP EXPENDITURE WILL NOT BE WI TH THE ASSESSEE BUT WITH THE AE AS IT IS THE LEGAL OWNER O F THE BRAND. HENCE, THE ASSESSEE IS WORKING FOR THE BENEF IT OF AE BY PROMOTING ITS BRAND BY MAKING EXCESSIVE AMP EXPENDITURE FOR PENETRATION OF BRANDS IN INDIA WHIC H IS MUCH MORE THAN THE FUNCTIONALLY COMPARABLE COMPANIE S TAKEN BY THE ASSESSEE. (PARA 9.4 OF THE TPO ORDER) (IV) THE PAYMENT FOR ADDITIONAL FUNCTIONS IS DEFERR ED TILL THE TERMINATION AND NOT GIVEN IN THE DUE COURSE REGULAR LY. SECONDLY, THE ROYALTY MIGHT HAVE BEEN EMBEDDED IN T HE PRICE OF THE PRODUCT THAT THE ASSESSEE IS IMPORTING FROM THE AE. (PARA 10.3 OF THE TPO ORDER) (V) THE BENEFIT OF AE IS SIGNIFICANT AND ONLY INCID ENTAL BENEFIT IS RECEIVED TO THE ASESSEE. (PARAS 11.8, 11 .9, 11.10 AND 11.11 OF THE TPO ORDER) (VI) AS REGARDS THE ARGUMENT ABOUT THE BINDING NATU RE OF THE INDIAS POSITION, THE COURT HAS FOUND THE SAME TO H AVE PERSUASIVE VALUE AND NOT A FINAL WORD WHICH IS 11 ITA NO.789/DEL/2015 DETERMINED BY THE STATUTE. UN VIEW OF THE SAME, THE ARGUMENT OF THE ASSESSEE IS NOT ACCEPTABLE. (PARA 1 2.3 OF THE TPO ORDER) (VII) SELLING EXPENSES SHOULD NOT BE EXCLUDED IN AS SESSEES CASE. (PARA 13.4 OF THE TPO ORDER) (VIII) THE LD. TPO IN PARA 14.4 OF HIS ORDER HELD T HAT THE ADJUSTMENT WHICH THE ASSESSEE IS SEEKING TO MAKE IN RESPECT OF ADVERTISEMENT OF NEW PRODUCTS IS NOT PERMISSIBLE IN VIEW OF LGS CASE. BECAUSE, BRIGHT L INE IS FOR DETERMINING THE ROUTINE EXPENDITURE WHICH IS INCURRED JUST FOR EXPLOITATION OF ALREADY ESTABLISH ED BRAND WHILE THE EXCESSIVE EXPENDITURE IS IN RESPECT OF EXPENDITURE FOR BRAND PENETRATION. HENCE, ON ACCOUN T OF NEW PRODUCTS, IN FACT THE EXPENSES ARE CLEARLY IN T HE NATURE OF BRAND PENETRATION AND HENCE SHOULD FALL OUTSIDE THE BRIGHT LINE HENCE, IN VIEW OF NON-AVAILABILITY OF DATA IN RESP ECT OF COMPARABLES, ADJUSTMENT CANNOT BE GRANTED. 2.14 THE TPO USED THE COST PLUS METHOD FOR THE BE NCHMARKING OF THE AMP EXPENSES AND SELECTED THE FOLLOWING COMP ARABLES FOR DETERMINING MARK-UP ON AMP EXPENSES :- 12 ITA NO.789/DEL/2015 SR. NO. COMPANY NAME OP/OC 1 CRYSTAL HUES LTD. (CORRECTED MARGIN BY THE ASSESSEE) 8.68% 2 QUADRANT COMMUNICATIONS LTD. 13.11% 3 CYBER MEDIA RESEARCH LTD. 14.85% AVERAGE 12.21% 2.15 FURTHER, A MARK-UP OF 6% WAS PROPOSED TO BE CH ARGED TO COVER THE RETURN ON FUNDS THAT HAVE BEEN BLOCKED AN D REMUNERATION FOR THE SERVICES PROVIDED, I.E. INTEREST RATE OF 12 % ON HALF OF FUNDS WHICH SHOULD HAVE BEEN REIMBURSED. THE ASSESSEE CON TENDED THE SAME AND AS PER THE INTER-COMPANY AGREEMENT, NIKON INDIA IS ALLOWED A CREDIT PERIOD OF 60 DAYS. AS PER THE AGRE EMENT, IF THE COMPANY PAYS BEYOND 60 DAYS, THEN AN INTEREST RATE OF LIBOR +2% WOULD BE CHARGED. HOWEVER, IT IS NOTED THAT THE AE HAS NOT CHARGED ANY INTEREST ON THE OUTSTANDING AMOUNT. IN VIEW OF THE ASSESSEES EXPLANATION, INTEREST MARK-UP OF 6% WAS NOT CHARGED AND TOTAL MARK-UP 12.21% WAS COMPUTED . 2.16 AFTER TAKING INTO ACCOUNT THE ABOVE ARGUMENTS, THE LD. TPO COMPUTED THE ARMS LENGTH PRICE OF VALUE OF THE REM UNERATION FOR SERVICES AT RS. 40,64,33,832/- WHICH IS SHOWN AS UN DER :- 13 ITA NO.789/DEL/2015 TOTAL SALES RS.203,87,33,264/- ARMS LENGTH LEVEL OF AMP EXPENSE (0.69% OF SALES) RS. 1,40,67,260/- AMP EXPENSES ACTUALLY INCURRED RS. 37,62,75,469/- AMP EXPENDITURE WHICH SHOULD HAVE BEEN REIMBURSED RS. 36,22,08,209/- MARK-UP @ 12.21% RS. 4,42,25,622/- ADJUSTMENT U/S 92CA RS. 40,64,33,832/- 2.17 THE AO, ACCORDINGLY, AFTER GIVING OPPORTUNITY TO THE ASSESSEE, PASSED THE DRAFT ASSESSMENT ORDER DATED 1 8.03.2014 BY MAKING ADDITION OF RS. 40,64,33,832/-. 2.18 THE ASSESSEE, INTER ALIA, FILED THE FOLLOWING OBJECTIONS BEFORE LD. DRP :- 1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRAFT ORDER PASSED BY THE LD. ASSESSING OFFICER (A O) IS BAD IN LAW AND VOID AB-INITIO 2 THE LD. AO/LD. TRANSFER PRICING OFFICER (TPO) E RRED ON FACTS AND CIRCUMSTANCES OF THE CASE IN DETERMINING THE AR MS LENGTH ADJUSTMENT TO THE ASSESSEES ALLEGED INTERNATIONAL TRANSACTION WITH ASSOCIATED ENTERPRISES(AES), THEREBY RESULTING IN THE ENHANCEMENT OF RETURNED INCOME OF THE ASSESSEE BY RS. 40,64,33, 832 3 THAT THE REFERENCE MADE BY THE LD. AO SUFFERS FRO M JURISDICTIONAL ERROR AS THE LD. AO HAS NOT RECORDED ANY REASONS IN THE DRAFT ASSESSMENT ORDER BASED ON WHICH HE REACHED TH E CONCLUSION THAT IT WAS EXPEDIENT AND NECESSARY TO REFER THE MATTE R TO THE LD. TPO FOR COMPUTATION OF THE ARMS LENGTH PRICE, AS IS REQUIR ED UNDER SECTION 92CA(1) OF THE INCOME TAX ACT, 1961 (ACT) 14 ITA NO.789/DEL/2015 4 THE LD. AO/LD. TPO ERRED ON FACTS AND IN LAW IN E NHANCING THE INCOME OF THE ASSESSEE BY INR 406,433,832 BY HOLDIN G THAT THE ASSESSEE INCURS EXCESSIVE AMP (ADVERTISEMENT, MAR KETING AND PROMOTION) EXPENSES IN RELATION TO ITS BUSINESS ACT IVITIES THEREBY QUALIFYING THE ALLEGED EXCESSIVE AMP EXPENDITURE AS SERVICES AS PER THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE ACT, AND IN DOING SO HAVE GROSSLY ERRED IN: 4.1 DISREGARDING THAT THE AMP EXPENSES INCURRED BY THE ASSESSEE REPRESENT PURELY DOMESTIC TRANSACTION(S) UNDERTAKEN TOWARDS THIRD PARTIES, NOT COVERED UNDER THE PURVIEW OF SECTION 9 2 OF THE ACT AND THAT THE ANALYSIS OF DOMESTIC TRANSACTIONS UNDERT AKEN WITH THIRD PARTIES, IN RESPECT OF WHICH NO TP REFERENCE HAS BE EN MADE BY THE LD. AO TO THE LD. TPO, IS BEYOND THE POWERS VESTED WITH THE TPO UNDER SECTION 92CA OF THE ACT. 4.2 DISREGARDING THE DETAILED SUBMISSIONS MADE BY T HE ASSESSEE ON THE FUNCTIONAL, ASSET AND RISK ANALYSIS OF THE ASSE SSEE RELATED TO ITS MARKETING FUNCTION AS AN INDEPENDENT DECISION MAKER AND HENCE SHOULD ALSO ASSUME THE COST ASSOCIATED WITH ITS FUN CTIONS AND DECISIONS 4.3 DISREGARDING THE CONTRACTUAL ARRANGEMENTS BETWE EN THE ASSESSEE AND THE AE WHEREIN THE ASSESSEE ACTS AS A LONG TERM , EXCLUSIVE DISTRIBUTOR AND HAS THE RIGHT TO RECEIVE AN ARMS L ENGTH COMPENSATION IN CASE OF ANY TERMINATION OF THE INTER-COMPANY DIS TRIBUTION AGREEMENT 4.4 DISREGARDING DETAILED SUBMISSIONS MADE BY THE A SSESSEE TO DEMONSTRATE THAT THE AMP EXPENSES INCURRED BY THE A SSESSEE WERE IN RESPECT OF ITS OWN BUSINESS REQUIREMENT/ CONSIDERAT IONS/ PURPOSES AND THAT ALL BENEFIT RESULTING FROM SUCH EXPENDITURE AR E TO ITS OWN ACCOUNT 4.5 INCORRECTLY COMPUTING THE AMP EXPENSES/ SALES B Y TREATING THE SELLING EXPENDITURE INCURRED BY THE ASSESSEE AS PAR T OF SALES PROMOTION EXPENDITURE 4.6 NOT PROVIDING QUANTITATIVE ADJUSTMENTS TO TAKE INTO ACCOUNT THE DIFFERENCES IN COMPARABILITY BETWEEN THE ASSESSEE A ND THE COMPANIES SELECTED FOR THE BRIGHT LINE ANALYSIS. SPECIFICALLY , THE LD. TPO/AO HAVE NOT PROVIDED FOR QUANTITATIVE ADJUSTMENT TO AC COUNT FOR: 15 ITA NO.789/DEL/2015 A. NO PAYMENT FOR ROYALTY MADE BY THE ASSESSEE TO T HE AE FOR THE RIGHT TO USE THE BRAND NAME/TRADEMARK B. DIFFERENCES IN EXPENSES INCURRED BY THE ASSESSEE VISA VIS COMPARABLE COMPANIES BECAUSE OF THE INTRODUCTION OF NEW PRODUCTS BY THE ASSESSEE WHEN THERE WERE NO SIMILAR ECONOMIC FA CTS APPLICABLE TO THE COMPANIES SELECTED FOR THE BRIGHT LINE TEST BY THE LD. TPO 4.7 BY REJECTING COMPANIES THAT OWNED DOMESTIC BRAN DS FOR THE PURPOSE OF COMPUTING THE BRIGHT LINE TEST AND THERE BY ERRONEOUSLY SELECTING COMPANIES WHICH ARE NOT COMPARABLE IN THE IR ASSET AND RISK PROFILE TO THE ASSESSEE; 4.8 ERRONEOUSLY HOLDING THAT THE ASSESSEE HAS RENDE RED SERVICES TO THE AES BY INCURRING EXCESSIVE AMP EXPENSES AND B Y HOLDING THAT A MARK-UP HAS TO BE EARNED BY THE ASSESSEE IN RESPECT OF THE ALLEGED EXCESSIVE AMP EXPENSES; 4.9 APPLYING A MARK-UP OF 12.21% ON THE ALLEGED EX CESSIVE AMP EXPENSES, FOR DETERMINING THE COMPENSATION/ SERVICE FEE TOWARDS ALLEGED AMP SERVICE BY THE ASSESSEE TO ITS AES BY DISREGARDING THE NEW COMPARABLES SELECTED BY THE ASSESSEE. 5 THE LD. AO ERRED IN FACTS AND IN LAW IN CHARGING AND COMPUTING INTEREST UNDER SECTION 234A, 234B, 234C A ND 234D OF THE ACT 6 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT MECHANICALLY AND WITHOUT RECORDING ANY ADEQUATE SATISFACTION FOR SUCH INITIATION THAT THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO EACH OTHER. THE ASSESSEE CRAVES LEAVE TO ADD, AMEND, ALTER, DEL ETE, RESCIND, FORGO OR WITHDRAW ANY OF THE ABOVE GROUNDS OF OBJECTION E ITHER BEFORE DURING THE COURSE OF THE DISPUTE RESOLUTION PANEL P ROCEEDINGS IN THE INTEREST OF THE NATURAL JUSTICE. 16 ITA NO.789/DEL/2015 2.19 THE LD. DRP AFTER CONSIDERING THE ASSESSEES O BJECTIONS, CONCLUDED AS UNDER :- (I) GROUND OF OBJECTION NOS. 1 & 2 ARE GENERAL IN NATURE THEREFORE NO SPECIFIC DIRECTION IS REQUIRED ON THESE GROUNDS. (II) GROUND OF OBJECTION NOS. 3 TO 4.9: LD. DRP HAS PLACED HIS RELIANCE ON THE JUDGMENT OF LG ELECTRONICS INDIA PV T.LTD. VS. ACIT REPORTED IN 29 TAXMANN.COM 300 (DEL)(SB) AND THE AB OVE GROUNDS OF OBJECTION ARE REJECTED IN THE INSTANT CASE. (III) GROUND OF OBJECTION NO 5: INITIATION AND IMPO SITION OF INTEREST IS PREROGATIVE OF THE AO WHILE PASSING THE ASSESSME NT ORDER AND IS BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE. H ENCE THE DRP IS NOT REQUIRED TO ISSUE ANY DIRECTION ON THIS GROUND AT THIS STAGE AND OBJECTION IS THEREFORE REJECTED AS BEING PREMATURE. (IV) GROUND OF OBJECTION NO 6: INITIATION AND IMPOS ITION OF PENALTY IS PREROGATIVE OF THE AO WHILE PASSING THE ASSESSME NT ORDER AND IS BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE. H ENCE THE DRP IS NOT REQUIRED TO ISSUE ANY DIRECTION ON THIS GROUND AT THIS STAGE AND OBJECTION IS THEREFORE REJECTED AS BEING PREMATURE. 2.20 ACCORDINGLY, LD. AO, AS PER THE DIRECTIONS OF LD. DRP, PASSED THE FINAL ASSESSMENT ORDER DATED 05.01.2015 UPHOLDING THE ADJUSTMENT MADE OF RS. 40,64,33,832/- BY THE LD. TP O IN HIS ORDER DATED 29.01.2014 U/S 92CA OF THE ACT. 17 ITA NO.789/DEL/2015 3. BEING AGGRIEVED WITH THE ORDER OF AO, THE ASSESS EE IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL AS UNDER :- 1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN ASSESSING THE TOTAL INCOME OF THE A PPELLANT U/S 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 (THE A CT) FOR THE RELEVANT ASSESSMENT YEAR AT INR 40,41,40,545 AS AGA INST THE RETURNED LOSS OF INR 22,93,287/- 2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP/AO HAVE ERRED IN NOT APPRECIATING THAT SUO MOTO ADJUSTMENTS PROPOSED BY THE TPO IN RELATION TO ADVERTISEMENT, M ARKETING AND PROMOTION (AMP) EXPENSES INCURRED BY THE APPELLAN T, WITHOUT ANY REFERENCE FROM THE AO, WAS BEYOND JURISDICTION AND BAD IN LAW. 3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP/AO/TPO ERRED IN MAKING/UPHOLDING THE TRANSFER P RICING (TP) ADJUSTMENT OF INR 40,64,33,832 ON ACCOUNT OF AMP EX PENDITURE, ALLEGING THE SAME TO BE NOT AT ARMS LENGTH AS PER PROVISIONS OF SECTIONS 92C(1) AND 92C(2) OF THE ACT, READ WITH RU LE 10D OF THE INCOME TAX RULES 192 (THE RULE) 4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP/AO/TPO ERRED IN MAKING TP ADJUSTMENTS, ALLEGING THAT THE UNILATERAL AMP EXPENDITURE, BEING PAYMENTS MADE TO THIRD PARTIES, IS AN INTERNATIONAL TRANSACTIONS AS PER THE PROVISIO N OF SECTION 92B OF THE ACT, WITHOUT APPRECIATING THAT THERE WAS NO AGR EEMENT, UNDERSTANDING OR ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISES (AE) FOR INCURRENCE OF SUC H EXPENDITURE. 5 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP/AO/TPO HAVE ERRED IN NOT APPRECIATING THAT NO S UCH TP ADJUSTMENT CAN BE MADE IN RESPECT OF AMP EXPENSES B EING LEGITIMATE, BONAFIDE AND DEDUCTIBLE BUSINESS EXPENDITURE INCURR ED BY THE APPELLANT TOWARDS PAYMENTS TO INDEPENDENT PARTIES T HE BENEFIT OF WHICH ACCRUES TO THE APPELLANT. 18 ITA NO.789/DEL/2015 6 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP/AO/TPO HAVE ERRED, IN CONCLUDING THAT THE APPEL LANT, BY INCURRING EXCESSIVE AMP EXPENDITURE, WAS RENDERING INTRA GROUP SERVICES TO ITS AE RESULTING IN CREATION OF MARKETI NG INTANGIBLES AND SHOULD HAVE BEEN REMUNERATED AT ARMS LENGTH. 7 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE TPO HAS ERRED IN RE-CHARACTERISING THE FUNCTIONS OF INCURRING AMP EXPENDITURE AND HOLDING THE APPELLANT TO BE THE SER VICES PROVIDER ENGAGED IN BRAND BUILDING SERVICES. 8 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE DRP/AO/TPO HAVE ERRED IN USING THE BRIGHT LINE TE ST, WHICH IS NOT A PRESCRIBED METHOD UNDER THE TP REGULATIONS IN PLA CE IN INDIA, AS A METHOD FOR BENCHMARKING THE AMP EXPENDITURE INCURRE D BY THE APPELLANT WITHOUT CORRECTLY APPLYING ANY OF THE MET HODS IN THE MANNER PRESCRIBED UNDER RULE 10B OF THE RULES. 9 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP/AO/TPO HAVE ERRED IN APPLYING THE BRI GHT LINE THEORY AS ARTICULATED IN TRANSFER PRICING REGULATIONS OF F OREIGN JURISDICTIONS AND DECISIONS RENDERED BY FOREIGN COURTS (BASED ON SPECIFIC TRANSFER PRICING REGULATIONS OF THOSE COUNTRIES). 10 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP ERRED IN DISPOSING THE OBJECTIONS OF APPELLANT BY PASSING A NON SPEAKING ORDER, THUS, THE ORDER PASSED IS NON EST A ND BAD IN LAW. WITHOUT PREJUDICE TO THE ABOVE GROUNDS OF THE APPEL LANT THAT THE AMP EXPENDITURE INCURRED BY IT DOES NOT CONSTITUTE AN I NTERNATIONAL TRANSACTION UNDER CHAPTER X OF THE ACT, THE APPELLA NT CRAVES TO RAISE FOLLOWING GROUNDS OF APPEAL ON MERITS. 11 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE DRP/AO/TPO ERRED IN NOT APPRECIATING THAT ALL THE T RANSACTIONS OF THE APPELLANT WERE ESTABLISHED TO BE AT ARMS LENGTH BY APPLYING THE TRANSACTIONAL NET MARGIN METHOD (TNMM) ON ENTITY-WI DE BASIS, AND THEREAFTER THE AMP EXPENSES CANNOT BE ALLEGED TO BE EXCESSIVE, SEPARATELY. 19 ITA NO.789/DEL/2015 12 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP/AO/TPO HAVE ERRED IN CONSIDERING CERTAIN EXPENS ES WHICH ARE INEXTRICABLY LINKED TO THE PRODUCT SALES AND DID NO T LEAD TO BRAND PROMOTION AND SHOULD HAVE BEEN EXCLUDED FROM THE AM P EXPENDITURE AT THE OUTSET, WHILE BENCHMARKING THE ALLEGED EXCES SIVE AMP EXPENDITURE. 13 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP/AO/TPO HAVE ERRED IN NOT GRANTING THE BENEFIT O F QUANTITATIVE ADJUSTMENTS (SUCH AS NON-PAYMENT OF ROYALTY/EXPENDI TURE INCURRED ON NEW PRODUCT LAUNCHES), WHILE COMPUTING THE ALLEGED EXCESSIVE AMP EXPENDITURE. 14 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO/TPO HAVE ERRED IN ARBITRARILY REJECTING AND SELE CTING COMPARABLE COMPANIES FOR BENCHMARKING THE AMP EXPENDITURE AND, FURTHER ERRED IN NOT CONSIDERING THE FUNCTIONALLY COMPARABLE COMP ANIES FOR SUCH ALLEGED BRAND BUILDING SERVICES AND THE DRP FURTHER ERRED IN NOT ADJUDICATING THE GROUNDS OF OBJECTIONS RAISED IN RE LATION THERETO. 15 THAT THE DRP/AO/TPO ERRED ON THE FACTS AND CIRCU MSTANCES OF THE CASE AND IN LAW IN NOT APPRECIATING THAT MARK-U P COULD NOT BE LEVIED ON THE AMP EXPENDITURE INCURRED BY THE APPEL LANT. 15.1 WITHOUT PREJUDICE TO THE ABOVE AND NOT ADMITTI NG, IF AT ALL A MARK UP SHOULD HAVE BEEN CHARGED BY THE APPELLANT A SSUMING IT TO BE A BRAND BUILDING SERVICE PROVIDER, THE SAID MARKUP COULD HAVE BEEN CHARGED ONLY ON THE VALUE ADDITION EXPENSES INCURRE D BY THE APPELLANT FOR SUCH ALLEGED BRAND PROMOTION SERVICE AND NOT TH E ENTIRE AMOUNT INCURRED/PAID TO THIRD PARTY VENDORS. 16 THAT ON THE FACT AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE AO HAS ERRED IN CHARGING INTEREST U/S 234A, 234B, 2 34D AND 244A OF THE ACT. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE SPECIAL BENCH OF THE TRIBUN AL IN THE CASE 20 ITA NO.789/DEL/2015 OF LG ELECTRONICS INDIA (P.). LTD. V. ASSTT. CIT [2 013] 140 ITD 41/29 TAXMANN.COM 300 (DELHI - TRIB.), BY ITS MAJOR ITY DECISION HELD, INTER ALIA, THAT AMP IS A TRANSACTION AND ALS O AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92B OF TH E ACT AND THAT THE TPO HAS JURISDICTION TO COMPUTE THE ALP OF THIS INTERNATIONAL TRANSACTION DESPITE THE SAME NOT HAVING BEEN SPECIF ICALLY REFERRED TO BY THE AO. ON THE QUESTION OF DETERMINATION OF T HE ALP OF THIS INTERNATIONAL TRANSACTION, THE SPECIAL BENCH APPROV ED THE APPLICATION OF BRIGHT LINE TEST FOR WORKING OUT THE AMOUNT OF NON- ROUTINE AMP EXPENSES AND HELD THAT THE ALP OF AMP E XPENSES SHOULD BE DETERMINED ON COST PLUS METHOD BY TREATIN G AMP TRANSACTION AS A SEPARATE AND DISTINCT FROM OTHER I NTERNATIONAL TRANSACTIONS. IT WAS FURTHER HELD THAT THE SELLING EXPENSES DIRECTLY INCURRED IN CONNECTION WITH THE SALES DO NOT LEAD T O BRAND PROMOTION AND HENCE SHOULD NOT BE BROUGHT WITHIN TH E AMBIT OF AMP EXPENSES. THE SPECIAL BENCH LAID DOWN CERTAIN P ARAMETERS TO BE TAKEN INTO CONSIDERATION FOR DETERMINING THE ALP OF AMP EXPENSES. IN THE ULTIMATE ANALYSIS, THE MATTER WAS SENT BACK TO THE 21 ITA NO.789/DEL/2015 TPO FOR UNDERTAKING THE EXERCISE AFRESH IN THE LIGH T OF ITS DIRECTIONS. FOLLOWING THE SAID ORDER, VARIOUS BENCH ES OF THE TRIBUNAL DECIDED SEVERAL CASES INVOLVING AMP EXPENS ES, RESTORING THE MATTER TO THE FILE OF AO/TPO FOR DECIDING THIS ISSUE IN CONFORMITY WITH THE DIRECTIONS GIVEN BY THE SPECIAL BENCH IN LG ELECTRONICS INDIA (P.) LTD. (SUPRA). SEVERAL ASSESS EES AS WELL AS THE REVENUE PREFERRED THEIR RESPECTIVE APPEALS BEFORE T HE HON'BLE HIGH COURTS AGAINST THE TRIBUNAL ORDERS FOLLOWING THE SP ECIAL BENCH ORDER. A BATCH OF SUCH APPEALS LED BY SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. V. CIT [2015] 231 TA XMAN 113/55 TAXMANN.COM 240 (DELHI) HAS BEEN DISPOSED OF BY THE IR LORDSHIPS OF THE HON'BLE DELHI HIGH COURT, DELIVERING JUDGMEN T ON 16TH MARCH, 2015, UPHOLDING THE MAJORITY VIEW OF SPECIAL BENCH IN LG ELECTRONICS INDIA (P.) LTD. (SUPRA) TREATING AMP AS AN INTERNATIONAL TRANSACTION AND ALSO CONFERRING JURISDICTION IN THE TPO TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION OF AMP EXPENSES. THE HON'BLE HIGH COURT HAS HELD, INTER AL IA, THAT THE INTERNATIONAL TRANSACTION OF AMP EXPENSES SHOULD BE BUNDLED OR 22 ITA NO.789/DEL/2015 AGGREGATED WITH OTHER INTERNATIONAL TRANSACTION CAR RIED OUT BY THE ASSESSEE AS A DISTRIBUTOR, WHO EITHER SIMPLY ACTS A N AGENT OF MANUFACTURER OR PURCHASES GOODS FROM THE MANUFACTUR ER FOR RESALE AT HIS OWN ACCOUNT. HOWEVER, IN THE CASE OF A MANUF ACTURER, THE IMPORT OF RAW MATERIAL HAS BEEN HELD TO BE AN INDEP ENDENT TRANSACTION OF MARKETING AND DISTRIBUTION. IN THE C ASE OF A DISTRIBUTOR, THE HON'BLE HIGH COURT HELD THAT WHERE TNMM HAS BEEN APPLIED AS THE MOST APPROPRIATE METHOD, WHICH METHOD HAS NOT BEEN DISTURBED BY THE TPO, THEN, THE INTERNATIO NAL TRANSACTIONS OF AMP AND DISTRIBUTION ACTIVITIES SHOULD BE CLUBBE D. IT FURTHER HELD THAT FOR DETERMINING THE ALP OF SUCH TRANSACTI ONS UNDER A COMBINED APPROACH, ONLY SUCH COMPARABLES SHOULD BE CHOSEN WHICH CONFORM TO THE AMP FUNCTIONS AND OTHER DISTRI BUTION FUNCTIONS CONDUCTED BY THE ASSESSEE. IF THERE IS SO ME DIFFERENCE IN THE FUNCTIONS UNDER THESE INTERNATIONAL TRANSACTION S, INCLUDING THAT OF AMP, BETWEEN THE ASSESSEE AND THE COMPARABLES, T HEN, SUITABLE ADJUSTMENT SHOULD BE MADE TO BRING BOTH THE TRANSAC TIONS AT PAR. IF PROBABLE COMPARABLES ARE NOT PERFORMING SIMILAR FUN CTIONS AS DONE 23 ITA NO.789/DEL/2015 BY THE ASSESSEE AND NO ADJUSTMENT IS POSSIBLE FOR B RINGING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN AN AG GREGATE MANNER AT PAR WITH THOSE UNDERTAKEN BY THE COMPARABLES, THEN, SEGREGATION SHOULD BE DONE AND THE INTERNATIONAL TRANSACTION OF AMP SPEND SHOULD BE SEPARATELY PROCESSED UNDER THE TRANSFER P RICING PROVISIONS FOR THE PURPOSES OF DETERMINING ITS ALP SEPARATELY. IN SUCH DETERMINATION OF ALP OF AMP EXPENSES IN A SEGR EGATED MANNER, PROPER SET OFF ON ACCOUNT OF EXCESS PURCHAS E PRICE ADJUSTMENT SHOULD BE ALLOWED. THE VIEW TAKEN BY THE TRIBUNAL IN SEGREGATING ROUTINE AND NON-ROUTINE EXPENSES ON THE BASIS OF BRIGHT LINE TEST HAS BEEN SET ASIDE BY THE HON'BLE HIGH CO URT. THE VIEW TAKEN BY THE SPECIAL BENCH THAT THE EXPENSES CONCER NED WITH THE SALES, SUCH AS, REBATES AND DISCOUNTS ETC., SHOULD BE EXCLUDED FROM THE AMBIT OF AMP EXPENSES, HAS BEEN UPHELD. 5. WE CAN SUMMARIZE THE RELEVANT POSITION EMANATING FROM THE JUDGMENT OF THE HONBLE HIGH COURT, AS UNDER :- AMP EXPENSE IS AN INTERNATIONAL TRANSACTION [PARAS 52 & 53 OF THE JUDGMENT] ; 24 ITA NO.789/DEL/2015 THE TPO HAS JURISDICTION TO DETERMINE THE ALP OF TH E INTERNATIONAL TRANSACTION OF AMP EXPENSES [PARA 50 OF THE JUDGMENT]; INTER-CONNECTED INTERNATIONAL TRANSACTIONS CAN BE AGGREGATED AND SECTION 92(3) DOES NOT PROHIBIT THE SET- OFF [PARAS 80 & 81]; AMP IS A SEPARATE FUNCTION. AN EXTERNAL COMPARABLE SHOULD PERFORM SIMILAR AMP FUNCTIONS. [PARAS 165 &166] ; BRIGHT LINE TEST CANNOT BE APPLIED TO WORK OUT NON- ROUTINE AMP EXPENSES FOR BENCHMARKING [PARA 194(X)] ; ALP OF AMP EXPENSES SHOULD BE DETERMINED PREFERABLY IN A BUNDLED MANNER WITH THE DISTRIBUTION ACTIVITY [PARAS 91, 121 & OTHERS] ; FOR DETERMINING THE ALP OF THESE TRANSACTIONS IN A BUNDLED MANNER, SUITABLE COMPARABLES HAVING UNDERTAKEN SIMILAR ACTIVITIES OF DISTRIBUTION OF TH E PRODUCTS AND ALSO INCURRING OF AMP EXPENSES, SHOULD BE CHOSEN [PARAS 194(I), (II), (VIII) & OTHERS];T THE CHOICE OF COMPARABLES CANNOT BE RESTRICTED ONLY TO DOMESTIC COMPANIES USING ANY FOREIGN BRAND [PARA 12 0] ; IF NO COMPARABLES HAVING PERFORMED BOTH THE FUNCTIO NS IN A SIMILAR MANNER ARE AVAILABLE, THEN, SUITABLE ADJUSTMENT SHOULD BE MADE TO BRING INTERNATIONAL TRANSACTIONS AND COMPARABLE TRANSACTIONS AT PAR [PA RA 194 (III)] ; IF ADJUSTMENT IS NOT POSSIBLE OR COMPARABLE IS NOT AVAILABLE, THEN, THE TNMM ON ENTITY LEVEL SHOULD NO T BE APPLIED [PARAS 100, 121,194(III) & (VI)] ; 25 ITA NO.789/DEL/2015 IN THE ABOVE EVENTUALITY, INTERNATIONAL TRANSACTION OF AMP SHOULD BE VIEWED IN A DE-BUNDLED MANNER OR SEPARATELY [PARAS 121& 194(XI)] ; IN SEPARATELY DETERMINING THE ALP OF AMP EXPENSES, THE TPO IS FREE TO CHOOSE ANY OTHER SUITABLE METHOD INCLUDING COST PLUS METHOD [PARA 194(XIII)]; IN SO MAKING A TP ADJUSTMENT ON ACCOUNT OF AMP EXPENSES, A PROPER SET OFF/PURCHASE PRICE ADJUSTMEN T SHOULD BE ALLOWED FROM THE OTHER TRANSACTION OF DISTRIBUTION OF THE PRODUCTS [PARA 93] ; SELLING EXPENSES CANNOT BE CONSIDERED AS PART OF AM P EXPENSES [PARAS 175 & 176 OF THE JUDGMENT]. 6. WITH THE ABOVE BACKGROUND OF THE RATIO DECIDENDI OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT, LET US EXAMINE THE CONTENTION PUT FORTH BY THE LD. AR IN SUPPORT O F THE DELETION OF ADDITION. HE SUBMITTED THAT RESALE PRICE METHOD (RP M) WAS SELECTED AS THE MOST APPROPRIATE METHOD FOR THE DIS TRIBUTION ACTIVITIES. FOR THE PURPOSE OF APPLYING THE METHOD, GP/SALES WAS CONSIDERED TO BE THE MOST APPROPRIATE PROFIT LEVEL INDICATOR (PLI). SINCE THE PROFIT MARGIN DECLARED BY THE AS SESSEE WAS FAVORABLY COMPARABLE WITH THE AVERAGE MARGIN OF THE COMPARABLES, WHICH FACT HAS NOT BEEN DISPUTED BY THE TPO, THEN, NO ADJUSTMENT 26 ITA NO.789/DEL/2015 SHOULD BE MADE ON ACCOUNT OF AMP EXPENSES BECAUSE S UCH EXPENSES STAND SUBSUMED IN THE OVERALL OPERATING PR OFIT. THIS WAS COUNTERED BY THE LD. DR WITH REFERENCE TO CERTAIN P ARAS OF THE JUDGMENT IN SONY ERICSSON (SUPRA) NOT PERMITTING TH E ACCEPTANCE OF SUCH A WIDE PROPOSITION. 7. WE ARE UNABLE TO ACCEPT THE ARGUMENT ADVANCED ON BEHALF OF THE ASSESSEE FOR DELETION OF THE ADDITION TOWARDS A MP EXPENSES ON THE PLAIN LOGIC OF THE ASSESSEE THAT ALL THE TRANSA CTIONS WERE ESTABLISHED TO BE AT ARMS LENGTH BY APPLYING TNMM ON ENTITY WIDE BASIS. THERE IS A BASIC FALLACY IN THE ARGUMEN T OF THE LD. AR. IT IS PERTINENT TO NOTE THAT THE TPO EXAMINED AND G OT SATISFIED WITH THE ASSESSEE'S PROFIT MARGIN VIS--VIS THE COMPARAB LES ONLY QUA THE INTERNATIONAL TRANSACTIONS OF DISTRIBUTION FUNCTION . HE DETERMINED THE ALP OF AMP EXPENSES BY APPLYING BRIGHT LINE TES T AND IN THIS PROCESS SIMPLY COMPARED THE QUANTITATIVE FIGURES OF AMP EXPENSES INCURRED BY THE ASSESSEE AND COMPARABLES FOR WORKIN G OUT THE NON- ROUTINE EXPENSES. HE DID NOT EXAMINE THE AMP FUNCTI ONS CARRIED 27 ITA NO.789/DEL/2015 OUT BY THE ASSESSEE AND THE COMPARABLES. AS THE BRI GHT LINE TEST PRIMARILY CONCENTRATES ON THE QUANTITATIVE ASPECTS OF THE AMP EXPENSES ALONE, IT OVERLOOKS THE EXAMINATION OF THE AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE ON ONE HAND AND THE COM PARABLES ON THE OTHER. NOW, THE HON'BLE HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) HAS HELD THA T AMP EXPENSE IS A SEPARATE INTERNATIONAL TRANSACTION AND ALSO BRIGHT LINE TEST IS NOT APPLICABLE FOR DETERMINING THE ALP OF A MP EXPENSES. THE MANNER FOR THE DETERMINATION OF THE ALP OF THE DISTRIBUTION ACTIVITY AND AMP ACTIVITY HAS ALSO BEEN SET OUT BY THE HON'BLE HIGH COURT TO BE CONDUCTED, FIRSTLY, IN A BUNDLED M ANNER BY CONSIDERING THE DISTRIBUTION AND AMP FUNCTIONS PERF ORMED BY THE ASSESSEE AS WELL AS THE PROBABLE COMPARABLES, AND I F PROBABLE COMPARABLES HAVING PERFORMED BOTH THE FUNCTIONS ARE NOT AVAILABLE, THEN TO DETERMINE THE ALP OF AMP EXPENSE S IN A SEGREGATED MANNER. AS SUCH, IT BECOMES IMMENSELY IM PORTANT TO SEPARATELY EXAMINE THE DISTRIBUTION AND AMP FUNCTIO NS UNDERTAKEN BY THE ASSESSEE AS WELL AS PROBABLE COMPARABLES. IT IS VITAL TO 28 ITA NO.789/DEL/2015 HIGHLIGHT THE DIFFERENCE BETWEEN THE AMP EXPENSES A ND AMP FUNCTIONS. WHEREAS THE AMP FUNCTIONS ARE THE MEANS BY WHICH THE AMP ACTIVITY IS PERFORMED, THE AMP EXPENSES ARE THE AMOUNT SPENT ON THE PERFORMANCE OF SUCH MEANS (FUNCTIONS). TO PUT IT SIMPLY, AN EXAMINATION OF AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE AND THE PROBABLE COMPARABLES IS SINE QUA N ON IN THE PROCESS OF DETERMINATION OF THE ALP OF THE INTERNAT IONAL TRANSACTION OF AMP SPEND, EITHER IN A SEGREGATE OR AN AGGREGATE MANNER. WHAT THEIR LORDSHIPS HAVE HELD IS TO BUNDLE THE DISTRIBUTION ACTIVITY WITH THE AMP ACTIVITY, BEING TWO SEPARATE BUT CONNECTED INTERNATIONAL TRANSACTIONS, FOR THE PURPO SES OF DETERMINATION OF THE ALP OF BOTH THESE INTERNATIONA L TRANSACTIONS IN A COMBINED MANNER. THE ARGUMENT OF THE LD. AR, I F TAKEN TO A LOGICAL CONCLUSION, WILL MAKE THE AMP SPEND AS A NO N- INTERNATIONAL TRANSACTION, WHICH, IN OUR CONSIDERED OPINION, IS NOT APPROPRIATE. ONCE AMP EXPENSE HAS BEEN HELD TO BE A N INTERNATIONAL TRANSACTION, IT IS, BUT, NATURAL THAT THE FUNCTIONS PERFORMED BY THE ASSESSEE UNDER SUCH A TRANSACTION NEED TO BE 29 ITA NO.789/DEL/2015 COMPARED WITH SIMILAR FUNCTIONS PERFORMED BY A COMP ARABLE CASE. IF AMP FUNCTIONS PERFORMED BY THE ASSESSEE TURN OUT TO BE DIFFERENT FROM THOSE PERFORMED BY A PROBABLE COMPAR ABLE COMPANY, THEN, AN ADJUSTMENT IS REQUIRED TO BE MADE SO AS TO BRING THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AS WELL AS THE COMPARABLE, AT THE SAME PEDESTAL. IF WE CONCUR WITH THE CONTENTION OF THE LD. AR THAT THE ADDITION ON ACCOUNT TRANSFER PRICING ADJUSTMENT OF AMP EXPENSES BE DELETED WITHOUT ANY E XAMINATION OF THE AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE AS WELL AS COMPARABLES, THIS WILL AMOUNT TO SNATCHING AWAY THE TAG OF INTERNATIONAL TRANSACTION FROM AMP EXPENSES, ASSIGN ED BY THE HON'BLE HIGH COURT. WHAT THEIR LORDSHIPS HAVE HELD IN THE JUDGMENT IS THAT THE DISTRIBUTION ACTIVITY AND AMP EXPENSES ARE TWO SEPARATE BUT RELATED INTERNATIONAL TRANSACTIONS . IT IS ONLY FOR THE PURPOSES OF DETERMINING THEIR ALP THAT THESE TWO SH OULD BE AGGREGATED. THE PROCESS OF SUCH AGGREGATION DOES NO T TAKE AWAY THE SEPARATE CHARACTER OF THE AMP TRANSACTION, ALBE IT RELATED. AN ANALYSIS AND EXAMINATION OF THE DISTRIBUTION AND AM P FUNCTIONS 30 ITA NO.789/DEL/2015 CARRIED OUT BY THE ASSESSEE MUST BE NECESSARILY DON E IN THE FIRST INSTANCE, WHICH SHOULD BE THEN COMPARED WITH SIMILA R FUNCTIONS PERFORMED BY SOME PROBABLE COMPARABLES. IF THE DIST RIBUTION AND AMP FUNCTIONS PERFORMED BY THE ASSESSEE TURN OUT TO BE DIFFERENT FROM THOSE PERFORMED BY PROBABLE COMPARABLES, THEN, A SUITABLE ADJUSTMENT SHOULD BE MADE TO THE PROFITS OF THE COM PARABLE SO AS TO COUNTERBALANCE THE EFFECT OF SUCH DIFFERENCES. IF H OWEVER DIFFERENCES EXIST IN SUCH FUNCTIONS, BUT NO ADJUSTM ENT CAN BE MADE, THEN, SUCH PROBABLE COMPARABLE SHOULD BE DROPPED FR OM THE LIST OF COMPARABLES. IF, IN DOING THIS EXERCISE, THERE REMA INS NO COMPANY DOING COMPARABLE DISTRIBUTION AND AMP FUNCTIONS, TH EN, BOTH THE INTERNATIONAL TRANSACTIONS ARE REQUIRED TO BE SEGRE GATED AND THEN EXAMINED ON INDIVIDUAL BASIS BY FINDING OUT PROBABL E COMPARABLES DOING SUCH SEPARATE FUNCTIONS SIMILARLY. FOR THE IN TERNATIONAL TRANSACTION OF AMP SPEND, THIS CAN BE DONE BY, FIRS TLY, SEEING THE AMP FUNCTIONS ACTUALLY PERFORMED BY THE ASSESSEE AN D THEN COMPARING IT WITH THE AMP FUNCTIONS PERFORMED BY A PROBABLE COMPARABLE. IF BOTH ARE FOUND OUT TO BE SIMILAR, TH EN THE MATTER 31 ITA NO.789/DEL/2015 ENDS AND A COMPARABLE IS FOUND AND ONE CAN GO AHEAD WITH DETERMINING THE ALP OF SUCH A TRANSACTION. IF THE A MP FUNCTIONS PERFORMED BY THE TWO ENTITIES ARE FOUND TO BE DIFFE RENT, THEN ADJUSTMENT IS REQUIRED TO BE MADE IN THE CASE OF A PROBABLE COMPARABLE, SO AS TO MAKE IT UNIFORM WITH THE ASSES SEE. THE ASSESSEE MAY HAVE POSSIBLY DONE, SAY, FOUR DIFFEREN T AMP FUNCTIONS AS AGAINST THE PROBABLE COMPARABLE HAVING DONE, SAY, ONLY THREE. IN SUCH A SCENARIO, AGAIN THE ADJUSTMEN T WILL BE WARRANTED. IN ANOTHER SITUATION, THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AND PROBABLE COMPARABLE MAY BE SIMILAR BUT WITH VARYING STANDARDS, WHICH WILL ALSO CALL FOR AN ADJU STMENT. CRUX OF THE MATTER IS THAT THE AMP FUNCTIONS PERFORMED BY T HE ASSESSEE MUST BE SIMILAR TO THOSE DONE BY THE COMPARABLE, IN THE SAME MANNER AS SUCH FUNCTIONS ARE COMPARED IN ANY OTHER INTERNATIONAL TRANSACTION. HOWEVER, IN COMPUTING ALP OF AMP SPEND , THE ADJUSTMENT OR SET OFF, IF ANY, AVAILABLE FROM THE D ISTRIBUTION FUNCTION, SHOULD BE MADE. THE ESSENCE OF THE JUDGME NT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) L TD. (SUPRA) IS 32 ITA NO.789/DEL/2015 THAT THE TWO INTERNATIONAL TRANSACTIONS OF DISTRIBU TION AND AMP SHOULD BE EXAMINED ON THE TOUCHSTONE OF TRANSFER PR ICING PROVISIONS, BUT ON AN AGGREGATE BASIS. DETERMINING THE ALP OF TWO TRANSACTIONS IN AN AGGREGATE MANNER POSTULATES MAKI NG A COMPARISON OF BOTH THE FUNCTIONS OF DISTRIBUTION AN D AMP CARRIED OUT BY THE ASSESSEE WITH THE COMPARABLES, SO THAT S URPLUS FROM THE DISTRIBUTION ACTIVITY COULD BE ADJUSTED AGAINST THE DEFICIT IN THE AMP ACTIVITY. THE HON'BLE HIGH COURT HAS NO WHERE L AID DOWN THAT THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE SH OULD NOT BE COMPARED WITH THOSE PERFORMED BY THE COMPARABLE PAR TIES. ON THE CONTRARY, IT TURNED DOWN THE CONTENTION RAISED BY T HE LD. AR URGING FOR NOT TREATING AMP AS A SEPARATE FUNCTION, WHICH IS APPARENT FROM THE EXTRACTION FROM PARA 166 OF THE JUDGMENT : 'ON BEHALF OF THE ASSESSEE, IT WAS INITIALLY ARGUED THAT THE TPO CANNOT ACCOUNT FOR OR TREAT AMP AS A FUNCTION. THIS ARGUMENT ON BE HALF OF THE ASSESSEE IS FLAWED AND FALLACIOUS FOR SEVERAL REASO NS. THERE ARE INHERENT FLAWS IN THE SAID ARGUMENT'. IT HELD VIDE PARA 165 OF THE JUDGMENT THAT, AN EXTERNAL COMPARABLE SHOULD PERF ORM SIMILAR 33 ITA NO.789/DEL/2015 AMP FUNCTIONS. SIMILARLY THE COMPARABLE SHOULD NOT BE THE LEGAL OWNER OF THE BRAND NAME, TRADE MARK ETC. IN CASE A COMPARABLE DOES NOT PERFORM AMP FUNCTIONS IN THE MARKETING OPE RATIONS, A FUNCTION WHICH IS PERFORMED BY THE TESTED PARTY, TH E COMPARABLE MAY HAVE TO BE DISCARDED. COMPARABLE ANALYSIS OF TH E TESTED PARTY AND THE COMPARABLE WOULD INCLUDE REFERENCE TO AMP E XPENSES. IN CASE OF A MISMATCH, ADJUSTMENT COULD BE MADE WHEN T HE RESULT WOULD BE RELIABLE AND ACCURATE. OTHERWISE, RP METHO D SHOULD NOT BE ADOPTED. IF ON COMPARABLE ANALYSIS, INCLUDING AM P EXPENSES, GROSS PROFIT MARGINS MATCH OR ARE WITHIN THE SPECIF IED RANGE, NO TRANSFER PRICING ADJUSTMENT IS REQUIRED. IN SUCH CA SES, THE GROSS PROFIT MARGIN WOULD INCLUDE THE MARGIN OR COMPENSAT ION FOR THE AMP EXPENSES INCURRED. ROUTINE OR NON-ROUTINE AMP E XPENSES WOULD NOT MATERIALLY AND SUBSTANTIALLY AFFECT THE G ROSS PROFIT MARGINS WHEN THE TESTED PARTY AND THE COMPARABLE UN DERTAKE SIMILAR AMP FUNCTIONS. THUS IT IS MANIFEST THAT CO MPARISON OF AMP FUNCTIONS IS VITAL WHICH CANNOT BE DISPENSED WI TH. LET US WE GO A STEP FURTHER WITH THE ALTERNATIVE PRESCRIPTION OF THE JUDGMENT 34 ITA NO.789/DEL/2015 THAT IF ALP OF BOTH THE TRANSACTIONS OF DISTRIBUTIO N AND AMP CANNOT BE DETERMINED IN A COMBINED MANNER, THEN THE ALP OF AMP FUNCTION SHOULD BE SEPARATELY DONE. THE SUBMISS ION ADVANCED BY THE ASSESSEE OF CONSIDERING THE PROFIT ON AN ENTITY LEVEL WITHOUT MAKING COMPARISON OF AMP FUNCTIONS DO NE BY THE ASSESSEE AS WELL AS THE COMPARABLE, WILL RENDER THI S ALTERNATIVE APPROACH INCAPABLE OF COMPLIANCE. CANVASSING SUCH A VIEW AMOUNTS TO TREATING AMP SPEND AS A NON-INTERNATIONA L TRANSACTION, WHICH IS PATENTLY INCAPABLE OF ACCEPTANCE. 8. FURTHER, THE HON'BLE DELHI HIGH COURT IN THE CAS E OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P.) LTD. CASE (SUPRA) IN PARA 137 HAS OBSERVED THAT THE AGGREGATION AND DISA GGREGATION OF TRANSACTIONS IN THE TNM METHOD OR EVEN IN OTHER MET HODS IS SOUGHT TO BE APPLIED, MUST HAVE REFERENCE TO THE ST RENGTH AND WEAKNESS OF THE TNM METHOD OR THE APPLICABLE METHOD . IT WAS OBSERVED THAT AGGREGATION OF TRANSACTIONS IS DESIRA BLE AND NOT MERELY PERMISSIBLE, IF THE NATURE OF TRANSACTION(S) TAKEN AS A WHOLE 35 ITA NO.789/DEL/2015 IS SO INTER- RELATED THAT IT WILL BE MORE RELIABLE MEANS OF DETERMINING THE ARM'S LENGTH CONSIDERATION FOR THE CONTROLLED TRANSACTIONS. IT WAS FURTHER OBSERVED THAT THERE AR E OFTEN SITUATIONS WHERE SEPARATE TRANSACTIONS ARE INTER WINED AND LIN KED OR ARE CONTINUOUS THAT THEY CANNOT BE EVALUATED ADEQUATELY ON SEPARATE BASIS. SECONDLY, THE CONTROLLED TRANSACTION SHOULD ORDINARILY BE BASED ON THE TRANSACTION ACTUALLY UNDERTAKEN BY THE AES AS HAS BEEN STRUCK BY THEM. HON'BLE JURISDICTIONAL HIGH CO URT CAUTIONED THAT IT WAS NOT ADVOCATING A BROAD-BRUSH APPROACH B UT, A DETAILED SCRUTINIZED ASCERTAINMENT AND DETERMINATION WHETHER OR NOT THE AGGREGATION OR SEGREGATION OF TRANSACTIONS WOULD BE APPROPRIATE AND PROPER WHILE APPLYING THE PARTICULAR METHOD. 9. ACCORDINGLY ON A CONSIDERATION OF THE ENTIRETY O F THE FACTS AND SUBMISSION OF THE PARTIES, WE FIND THAT REFEREN CE MAY ALSO BE MADE TO PARAS 162 AND 168 OF THE SAID JUDGEMENT WHE RE REFERENCE HAS BEEN MADE TO THE POSITION IN 2008-09 ASSESSMENT YEAR WHERE THE ASSESSEE IS FOUND TO HAVE APPLIED RESALE PRICE METHOD USING 36 ITA NO.789/DEL/2015 INTERNAL COMPARABLES. IN PARA 166 OF THE SAID JUDGE MENT IT IS SEEN THAT THE ARGUMENTS OF THE ASSESSEE WERE HELD TO BE FLAWED AND FALLACIOUS FOR SEVERAL REASONS. HOWEVER THEIR LORDS HIPS FURTHER IN PARA 167 OBSERVED THAT THE REVENUE BEFORE THE HON'B LE HIGH COURT DID NOT PLEAD THAT THE R.P.METHOD SHOULD NOT HAVE B EEN ADOPTED. QUA THE SAME THEIR LORDSHIPS OBSERVED THAT NO FINAL PRONOUNCEMENT WAS BEING MADE. A PERUSAL OF THE PARA 168 SHOWS THAT THE TRIBUNAL HAD UPHELD ADOPTION OF CP METHOD AFTER APPLYING THE BRIGHT-LINE TEST. THE FINDING WAS FOUND TO BE N OT CORRECT AS APPROACH AND PROCEDURE FOR ASCERTAINING/DETERMINING ARM'S LENGTH PRICE UNDER THE RESALE PRICE METHOD IS DIFFERENT. T HE DISCUSSION ON THE MOST APPROPRIATE METHOD BY THEIR LORDSHIPS WOUL D FURTHER SUPPORT THE VIEW TAKEN AS THE SAID EXERCISE NEEDS T O BE DONE IN THE FACTS OF THE PRESENT CASE. FOR READY-REFERENCE, WE REPRODUCE THE AFORESAID HEREUNDER: '162. IN THE CASE OF REEBOK INDIA CO. LTD., THE ASS ESSEE HAS APPLIED RS METHOD USING INTERNAL COMPARABLE. CONTRARY TO THE G ENERAL RULE, THE INTERNAL COMPARABLE POSSIBLY MAY NOT BE APPROPRIATE WHEN THE ASSESSED HAS INCURRED CONSIDERABLE (NOT NECESSARILY EXTRA-OR DINARY OR NON- ROUTINE) AMP EXPENSES. THE REASON IS OBVIOUS; THERE IS NO 37 ITA NO.789/DEL/2015 COMPARABILITY ANALYSIS POSSIBLE. IN SUCH CASES, IT IS NOT POSSIBLE TO EXAMINE AND COMPARE THE FUNCTIONAL COMPARABILITY BE TWEEN THE CONTROLLED TESTED TRANSACTION AND UNCONTROLLED INTE RNAL PARTY TRANSACTION ON ACCOUNT OF AMP EXPENSES. INTERNAL COMPARABLE WOU LD NOT ACCOUNT FOR THE CREDIBLE GROSS PROFIT RATE, WHICH AN AE SHO ULD BE ENSURED WHEN IT INCURS AMP EXPENSES. FUNCTIONALLY THE COMPARABLE IS MERELY A MANUFACTURER AND THUS, THE SAID FUNCTION IS COMPARE D. AMP EXPENSES DO NOT GET FACTORED AND COMPARED. AS AN ABUNDANT CA UTION, WE WOULD STILL ADD THAT WHERE ADJUSTMENTS CLAUSE (IV) CAN GI VE RELIABLE AND ACCURATE RESULTS, INTERNAL COMPARABLES COULD STILL BE APPLIED. THIS WOULD LIKELY HAPPEN, WHEN AMP EXPENSES ARE INSIGNIF ICANT IN QUANTUM. 163. THUS, IN SUCH CASES, EXTERNAL COMPARABLES WHER E 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 ACCEP T THAT GROSS PROFIT MARGINS WOULD NOT INEVITABLY INCLUDE COST OF AMP EX PENSES. THE GROSS PROFIT MARGINS COULD REMUNERATE AN AE PERFORMING MA RKETING AND SELLING FUNCTION. THIS HAS TO BE TESTED AND EXAMINE D WITHOUT ANY ASSUMPTION AGAINST THE ASSESSED. A FINDING ON THE S AID ASPECT WOULD REQUIRE DETAILED VERIFICATION AND ASCERTAINMENT. 165. AN EXTERNAL COMPARABLE SHOULD PERFORM SIMILAR AMP FUNCTIONS. SIMILARLY THE COMPARABLE SHOULD NOT BE THE LEGAL OW NER OF THE BRAND NAME, TRADE MARK ETC. IN CASE A COMPARABLE DOES NOT PERFORM AMP FUNCTIONS IN THE MARKETING OPERATIONS, A FUNCTION W HICH IS PERFORMED BY THE TESTED PARTY, THE COMPARABLE MAY HAVE TO BE DISCARDED. COMPARABLE ANALYSIS OF THE TESTED PARTY AND THE COM PARABLE WOULD INCLUDE REFERENCE TO AMP EXPENSES. IN CASE OF A MIS MATCH, ADJUSTMENT COULD BE MADE WHEN THE RESULT WOULD BE RELIABLE AND ACCURATE. OTHERWISE, RP METHOD SHOULD NOT BE ADOPTED. IF ON C OMPARABLE ANALYSIS, INCLUDING AMP EXPENSES, GROSS PROFIT MARG INS MATCH OR ARE WITHIN THE SPECIFIED RANGE, NO TRANSFER PRICING ADJ USTMENT IS REQUIRED. IN SUCH CASES, THE GROSS PROFIT MARGIN WOULD INCLUD E THE MARGIN OR COMPENSATION FOR THE AMP EXPENSES INCURRED. ROUTINE OR NON-ROUTINE AMP EXPENSES WOULD NOT MATERIALLY AND SUBSTANTIALLY AFFECT THE GROSS PROFIT MARGINS WHEN THE TESTED PARTY AND THE COMPAR ABLE UNDERTAKE SIMILAR AMP FUNCTIONS. 38 ITA NO.789/DEL/2015 166. ON BEHALF OF THE ASSESSEE, IT WAS INITIALLY AR GUED 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. MORE OVER, THE CONTENTION OF THE ASSESSED IN THESE APPEALS WOULD M ANDATE REJECTION OF THE RP METHOD, AS AN APPROPRIATE OR MOST APPROPRIAT E METHOD. COMPARISON OR COMPARATIVE ANALYSIS IS UNDERTAKEN AT STAGE (II) ADJUSTMENTS ARE PERMISSIBLE AND UNDERTAKEN AT STAGE (IV). UNDER CLAUSE (III), I.E. AT STAGE (III), FROM THE PRICE ASCERTAI NED AT STAGE (II), EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE P URCHASE OF PROPERTY OR OBTAINING OF SERVICES IS REDUCED. UNDER CLAUSE ( IV), ADJUSTMENTS HAVE TO BE MADE ON ACCOUNT OF FUNCTIONAL DIFFERENCE WHIC H WOULD INCLUDE ASSETS USED AND RISK ASSUMED. IT IS AT STAGE (IV) O F THE RP METHOD THAT THE ASSESSING OFFICER/TPO CAN MAKE ADJUSTMENTS IF H E FINDS THAT AN ASSESSEE HAS INCURRED SUBSTANTIAL AMP EXPENSES IN C OMPARISON TO THE COMPARABLES. ONCE ADJUSTMENTS ARE MADE, THEN THE AP PROPRIATE ARM'S LENGTH PRICE CAN BE DETERMINED. IN CASE, IT IS NOT POSSIBLE TO MAKE ADJUSTMENTS, THEN RP METHOD MAY NOT BE THE MOST APP ROPRIATE AND BEST METHOD TO BE ADOPTED. 167. BEFORE US, THE REVENUE HAS NOT PLEADED OR SUBM ITTED THAT THE RP METHOD SHOULD NOT HAVE BEEN ADOPTED. THE TPO AND TH E ASSESSING OFFICER DID NOT REJECT THE RP METHOD ADOPTED BY THE ASSESSEE. THE ASSESSED SUBMIT THAT THE REVENUE ACCEPTS FUNCTIONAL PARITY AND IN FACT, WITHOUT ADJUSTMENT. CONTRA, REVENUE WOULD ARGUE THA T THE ASSESSING OFFICER/TPO AND THE TRIBUNAL HAVE ADOPTED AND APPLI ED THE CUP METHOD FOR DETERMINING ARM'S LENGTH PRICE OF AMP EX PENSES. 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 'BRIGHT LINE TEST' ADOPTED TO DEMARCA TE THE ROUTINE AND NON-ROUTINE AMP EXPENDITURE IS PREDICATED ON SELECT ION OF A DOMESTIC DISTRIBUTOR AND MARKETING COMPANY THAT DOES NOT OWN INTANGIBLE BRAND RIGHTS. CONTRACT VALUE WOULD BE TREATED AS NIL. IN TERMS OF OUR FINDING RECORDED ABOVE, THE SAID FINDING WOULD NOT BE CORRE CT. THE APPROACH AND PROCEDURE FOR ASCERTAINING /DETERMINING ARM'S L ENGTH PRICE UNDER THE RP METHOD IS DIFFERENT. FOR THIS REASON, AND OT HER GROUNDS 39 ITA NO.789/DEL/2015 RECORDED, WE HAVE PASSED AN ORDER OF REMIT TO THE T RIBUNAL FOR EXAMINATION OF THE FACTUAL MATRIX.' 10. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE TPO ESPOUSED THE AMP EXPENSE AS A SEPARATE AND DIST INCT. TREATING THE AMP SPEND AS A SEPARATE INTERNATIONAL TRANSACTION, HE APPLIED THE COST PLUS METHOD AND PROPOSED THE EXTAN T ADJUSTMENT. IN DOING SO, HE SEGREGATED ROUTINE AMP EXPENSES INC URRED BY THE ASSESSEE FOR HIS BUSINESS FROM THE NON-ROUTINE AMP EXPENSES BY TREATING SUCH NON-ROUTINE AMP EXPENSES LEADING TO T HE CREATION OF MARKETING INTANGIBLE FOR ITS AE. THIS BIFURCATION O F TOTAL AMP EXPENSES WAS DONE BY APPLYING BRIGHT LINE TEST. IT IS OBVIOUS THAT IN THE ENTIRE EXERCISE CARRIED OUT BY THE TPO, HE PROC EEDED ON AN ALTOGETHER DIFFERENT LINE IN EXAMINING THE QUANTUM OF AMP EXPENSE FOR DETERMINING THE VALUE OF THE INTERNATIO NAL TRANSACTION OF AMP, WITHOUT LOOKING AT THE AMP FUNCTIONS CARRIE D OUT BY THE ASSESSEE AND THE COMPARABLES. DISTINCT EXAMINATION OF AMP FUNCTIONS DOES NOT FIND PLACE IN THIS METHOD OF COM PUTING THE VALUE OR THE ALP OF AMP SPEND. NOW, WHEN WE LOOK AT THE RATIO 40 ITA NO.789/DEL/2015 LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT, IT BECOMES CRYSTAL CLEAR THAT THE APPROACH ADOPTED BY THE TPO FOR DETERMINING ALP OF AMP EXPENSES HAS BEEN RENDERED INCORRECT. HO WEVER, THE FACT REMAINS THAT AS PER THE VERDICT OF THE HON'BLE HIGH COURT, AMP SPEND IS AN INTERNATIONAL TRANSACTION, WHICH IS REQUIRED TO BE PROCESSED UNDER CHAPTER X OF THE ACT BY TAKING INTO ACCOUNT THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AND THEN CO MPARING SUCH FUNCTIONS WITH THOSE PERFORMED BY COMPARABLE E NTITIES, THOUGH, FIRSTLY IN A COMBINED MANNER WITH THE DISTR IBUTION FUNCTIONS. WE FIND NO REFERENCE IN THE ORDER OF THE TPO OF MAKING ANY COMPARISON OF THE ASSESSEE'S AMP FUNCTIONS WITH THOSE OF THE COMPARABLES. GOING BY THE RATIO IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA), IT I S MANDATORY TO MAKE A COMPARISON OF THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AND COMPARABLES AND THEN MAKING AN ADJUSTM ENT, IF ANY, DUE TO DIFFERENCES BETWEEN THE TWO, SO THAT THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE AND COMPARABLE ARE BROUGH T TO A SIMILAR 41 ITA NO.789/DEL/2015 PLATFORM. IN FACT, THIS IS ALSO THE PRESCRIPTION OF RULE 10B(1)(E), WHICH PROVIDES AS UNDER :- (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH,- (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGA RD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III) ; (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO T HE INTERNATIONAL TRANSACTION.' 11. A PERUSAL OF THE SUB-CLAUSE (III) OF THIS RULE DIVULGES THAT NET PROFIT MARGIN UNDER A COMPARABLE UNCONTROLLED TRANS ACTION AS DETERMINED UNDER SUB-CLAUSE (II) SHOULD BE: 'ADJUST ED TO TAKE INTO 42 ITA NO.789/DEL/2015 ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS.' IT IS ONLY SUCH ADJUSTED NET PROFIT MARGIN IN SUB-CLAUSE (III) OF RULE 10B(1)(E) WHICH IS COMPARED WITH THE NET PROFIT MAR GIN REALIZED BY THE ASSESSEE AS PER THE MANDATE OF SUB-CLAUSE (IV) OF RULE 10B(1)(E). 12. SUB-RULE (2) OF RULE 10B PROVIDES THAT 'FOR THE PURPOSES OF SUB- RULE (1)', THE COMPARABILITY OF AN INTERNATION AL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH RE FERENCE TO THE FOLLOWING, NAMELY - (A) THE SPECIFIC CHARACTERISTIC S OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACT ION; (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMP LOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, SUCH TERMS ARE FOR MAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICI TLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE P ARTIES TO THE 43 ITA NO.789/DEL/2015 TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LO CATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN F ORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS AR E WHOLESALE OR RETAIL. SUB-RULE (3) OF RULE 10B STIPULATES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSA CTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSA CTIONS IN THE OPEN MARKET ; OR (II) REASONABLY ACCURATE ADJUSTMENTS CA N BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 13. ON A COMPARATIVE READING OF SUB-RULES (1), (2) AND (3) OF RULE 10B, IT BECOMES PALPABLE THAT THE INTERNATIONA L TRANSACTION AND THE UNCONTROLLED TRANSACTION WITH WHICH COMPARI SON IS SOUGHT TO BE MADE FOR DETERMINING THE ALP, IN THE FIRST IN STANCE, MUST HAVE OVERALL SIMILAR CHARACTERISTICS. IT IS VIVID T HAT IF THE 44 ITA NO.789/DEL/2015 GOODS/SERVICES ARE DIFFERENT, THEN NO EFFECTIVE COM PARISON CAN BE MADE. ONCE THE GOODS/SERVICES UNDER BOTH THE TRANSA CTIONS ARE BROADLY SIMILAR BUT THERE IS A DIFFERENCE IN THEM B ECAUSE OF CERTAIN SPECIFIC CHARACTERISTICS; AND/OR THE PRODUCTS/SERVI CES IN BOTH THE TRANSACTIONS ARE IDENTICAL, BUT STILL THERE ARE CER TAIN DIFFERENCES DUE TO THE CONTRACTUAL TERMS OR THE GEOGRAPHICAL LOCATI ON, ETC., THEN, A REASONABLY ACCURATE ADJUSTMENT SHOULD BE MADE FOR E LIMINATING THE MATERIAL EFFECTS OF SUCH DIFFERENCES SO AS TO BRING THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TION ON THE SAME PODIUM. IF DUE TO ONE REASON OR THE OTHER, NO REASONABLE ACCURATE ADJUSTMENT CAN BE MADE DUE TO SUCH DIFFERE NCES, THEN, SUCH UNCONTROLLED TRANSACTION SHOULD NOT BE CONSIDE RED AS A COMPARABLE TRANSACTION. 14. IT IS DISCERNIBLE THAT THE PRESCRIPTION OF RULE 10B IS IN COMPLETE HARMONY WITH THE RATIO OF THE JUDGMENT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA), TO THE EFFECT THAT THE AMP FUNCTIONS CARRIED OUT BY TH E ASSESSEE ARE 45 ITA NO.789/DEL/2015 REQUIRED TO BE NECESSARILY COMPARED WITH THE AMP FU NCTIONS CARRIED OUT BY A COMPARABLE ENTITY IN DETERMINING T HE AMP OF ALP EXPENSES. DIFFERENCE BETWEEN THE FUNCTIONS, IF CAPA BLE OF ADJUSTMENT, SHOULD BE GIVEN EFFECT TO IN THE PROFIT RATE OF THE COMPARABLE AND IF SUCH DIFFERENCE CANNOT BE GIVEN E FFECT TO, THEN, THE PROBABLE COMPARABLE SHOULD BE ELIMINATED FROM T HE LIST OF COMPARABLES. GOING FURTHER, IF NO PROPER COMPARABLE SURVIVES, THEN THE TNMM SHOULD BE DISCARDED AND AN ALTERNATIVE MET HOD, MAY BE, COST PLUS OR ANY OTHER SUITABLE METHOD BE APPLI ED FOR DETERMINING THE ALP OF AMP EXPENSES. 15. AT THE COST OF REPETITION, WE SUMMARIZE THAT TH E DISTRIBUTION AND AMP FUNCTIONS ARE TWO SEPARATE INTERNATIONAL AC TIVITIES, WHICH NEED TO BE COMPARED WITH UNCONTROLLED TRANSACTIONS. BECAUSE OF THEIR INTER-TWINNING, IT IS ONLY FOR THE PURPOSES O F DETERMINING THEIR ALP THAT BOTH THESE TRANSACTIONS CAN BE AGGREGATED IN THE FIRST INSTANCE, SO THAT THE SURPLUS FROM ONE COULD BE ADJ USTED AGAINST THE DEFICIT FROM THE OTHER IN AN OVERALL APPROACH. IT D OES NOT MEAN THAT 46 ITA NO.789/DEL/2015 BECAUSE OF AGGREGATION, THE AMP EXPENSE TRANSACTION SHEDS ITS CHARACTER OF A SEPARATE INTERNATIONAL TRANSACTION A ND HENCE THE AMP FUNCTIONS SHOULD NOT BE MATCHED WITH THE AMP FU NCTIONS CARRIED OUT BY PROBABLE COMPARABLES. IF SUITABLE CO MPARABLES CAN BE FOUND HAVING PERFORMED BOTH DISTRIBUTION AND AMP FUNCTIONS, THEN, THEIR ALP SHOULD BE DETERMINED ON AGGREGATE B ASIS. IF, HOWEVER, THERE IS SOME DIFFERENCE IN THE DISTRIBUTI ON OR AMP FUNCTIONS PERFORMED BY THE ASSESSEE VIS--VIS THE P ROBABLE COMPARABLES, THEN AN ATTEMPT SHOULD FIRST BE MADE T O IRON OUT SUCH DIFFERENCE BY MAKING A SUITABLE ADJUSTMENT TO THE P ROFIT MARGIN OF COMPARABLES. IF SUCH AN ADJUSTMENT IS NOT POSSIBLE, THEN SUCH PROBABLE COMPARABLE SHOULD BE ELIMINATED. IF, BY MA KING A COMPARATIVE ANALYSIS OF THE DISTRIBUTION AND AMP FU NCTIONS JOINTLY, THERE REMAINS NO COMPARABLE CASE PERFORMIN G SUCH DISTRIBUTION AND AMP FUNCTIONS, THEN, THE INTERNATI ONAL TRANSACTION OF AMP SHOULD BE SEGREGATED AND ITS ALP BE DETERMIN ED SEPARATELY BY APPLYING A SUITABLE METHOD. HOWEVER, IN SO DETERMINING THE ALP OF SUCH AN INTERNATIONAL TRANSA CTION OF AMP 47 ITA NO.789/DEL/2015 EXPENSES ON SEPARATE BASIS, A PROPER SET OFF, IF AN Y, AVAILABLE FROM THE DISTRIBUTION ACTIVITY, SHOULD BE ALLOWED. 16. THE AR OF THE ASSESSEE STRESSED THAT AMP FUNCTI ONS OF THE COMPARABLES HAVE BEEN EXAMINED BY THE TPO IN THIS C ASE. ON BEING ASKED TO SHOW THE EXAMINATION OF AMP FUNCTION S OF THE ASSESSEE ALONG WITH COMPARABLES, THE AR TOOK OUR AT TENTION TO PAGES 7-8 OF TPO ORDER BUT THOSE WERE ONLY FIGURES OF EXPENDITURE OF AMP INCURRED BY THE COMPARABLES AND NOT THE FUNCTIONAL ANALYSIS OF THE COMPARABLE DONE BY THE TPO 17. WITHOUT PREJUDICE TO HIS AFOREMENTIONED ARGUMEN TS, LD. COUNSEL FURTHER SUBMITTED THAT, IN ANY VIEW OF THE MATTER, WHILE DETERMINING THE AMP EXPENDITURE, THE COMPONENTS REL ATING TO SELLING AND DISTRIBUTION EXPENSES HAVE TO BE EXCLUD ED. IN VIEW OF DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA), LD. COUNSEL SUBMITTED THAT IN ORDER TO DETERMINE THE AMP FUNCTI ONS PERFORMED BY ASSESSEE VIS-A-VIS COMPARABLES, THEN THE MATTER SHOULD BE 48 ITA NO.789/DEL/2015 RESTORED BACK TO THE FILE OF LD. TPO WITH FOLLOWING DIRECTION THAT SELLING AND DISTRIBUTION EXPENSES TO BE EXCLUDED AS HAS BEEN HELD BY HON'BLE DELHI HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. CASE (SUPRA) 18. RELIANCE WAS PLACED ON THE DECISION OF COORDINA TE BENCH IN THE CASE OF TOSHIBA INDIA PVT. LTD. VS. DCIT 41 ITR (TRI) 300 (DEL) WHEREIN IT HAS BEEN HELD AS UNDER: 15. COMING BACK TO THE FACTS OF THE INSTANT CASE, WE FIND THAT NO DETAIL OF THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE IS AVAI LABLE ON RECORD. SIMILARLY, THERE IS NO REFERENCE IN THE ORDER OF TH E TPO TO ANY AMP FUNCTIONS PERFORMED BY COMPARABLES. IN FACT, NO SUC H ANALYSIS OR COMPARISON HAS BEEN UNDERTAKEN BY THE TPO BECAUSE O F HIS APPLYING THE BRIGHT LINE TEST FOR DETERMINING THE VALUE OF THE I NTERNATIONAL TRANSACTION OF AMP EXPENSE AND THEN APPLYING THE COST PLUS METHOD FOR DETERMINING ITS ALP. THE LD. AR ALSO FAILED TO DRAW OUR ATTENTION T OWARDS ANY MATERIAL DIVULGING THE AMP FUNCTIONS PERFORMED BY THE ASSESS EE AS WELL AS COMPARABLES. AS SUCH, WE ARE HANDICAPPED TO DETERMI NE THE ALP OF AMP EXPENSES AT OUR END, EITHER IN A COMBINED OR A SEPA RATE APPROACH. UNDER SUCH CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER AND SEND THE MATTER BACK TO THE FILE OF THE TPO/AO FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF AMP SPEND AFRESH IN ACCORDANCE WITH THE MANNER LAID DOWN BY THE HON'BLE HIGH COURT IN SONY ERICSSON MOBILE C OMMUNICATIONS INDIA (P.) LTD. (SUPRA). EX CONSEQUENTI, THE GROUND RAISE D ABOUT THE TPO HAVING NO JURISDICTION TO DETERMINE THE ALP OF AMP EXPENSE S, IS DISMISSED FOLLOWING THE JUDGMENT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA). 19. ALSO, IN THE FOLLOWING CASES, SIMILAR VIEW HAS BEEN EXPRESSED AS UNDER :- 49 ITA NO.789/DEL/2015 1. 59 TAXMANN.COM 148 (DEL) PERFETTI VAN MELLE IND IA (P.) LTD. VS. DCIT 15. TURNING TO THE FACTS OF THE CASE, WE FIND THAT THE TPO/AO HAVE FOLLOWED THE SPECIAL BENCH DECISION IN LG ELECTRONI CS INDIA (P.) LTD. (SUPRA) FOR DETERMINING THE ALP OF AMP EXPENSES. TH ERE IS NO DISCUSSION ABOUT THE AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE OR COMPARABLES. NOW SINCE THE SPECIAL BENCH ORDER HAS BEEN PARTLY MODIF IED BY THE HON'BLE DELHI HIGH COURT, INCLUDING THE NON-APPLICABILITY OF THE BRIGHT LINE TEST, AND NO MATERIAL HAS BEEN PLACED ON RECORD BY THE LD. AR TO , FIRSTLY, DEMONSTRATE THE AMP FUNCTIONS CARRIED OUT BY THE ASSESSEE AND THEN, TO COMPARE SUCH FUNCTIONS WITH THOSE DONE BY COMPARABLES, THIS ISSU E CANNOT BE DECIDED AT OUR END. UNDER SUCH CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF THE AO/TPO FOR DECI DING IT AFRESH AS PER LAW. IN THIS FRESH EXERCISE, THE TPO WILL FOLLOW THE PAR TS OF THE JUDGMENT IN SONY ERICSSON MOBILE COMMUNICATION (P.) LTD. (SUPRA) AS ARE COMMON TO BOTH MANUFACTURERS AND DISTRIBUTORS; APPLY THE PARTS OF THE JUDGMENT AS ARE APPLICABLE TO A 'MANUFACTURER'; AND IGNORE THE PART S OF THE JUDGMENT WHICH PERTAIN EXCLUSIVELY TO A 'DISTRIBUTOR'. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDINGS. 2. 58 TAXMANN.COM 375 (DEL) CASIO INDIA CO. (P.) LT D. VS. DCIT 15. COMING BACK TO THE FACTS OF THE INSTANT CASE, WE FIND THAT NO DETAIL OF THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE IS AVAI LABLE ON RECORD. SIMILARLY, THERE IS NO REFERENCE IN THE ORDER OF TH E TPO TO ANY AMP FUNCTIONS PERFORMED BY COMPARABLES. IN FACT, NO SUC H ANALYSIS OR COMPARISON HAS BEEN UNDERTAKEN BY THE TPO BECAUSE O F HIS APPLYING THE BRIGHT LINE TEST FOR DETERMINING THE VALUE OF THE I NTERNATIONAL TRANSACTION OF AMP EXPENSE AND THEN APPLYING THE COST PLUS METHOD FOR DETERMINING ITS ALP. THE LD. AR ALSO FAILED TO DRAW OUR ATTENTION T OWARDS ANY MATERIAL DIVULGING THE AMP FUNCTIONS PERFORMED BY THE ASSESS EE AS WELL AS COMPARABLES. AS SUCH, WE ARE HANDICAPPED TO DETERMI NE THE ALP OF AMP EXPENSES AT OUR END, EITHER IN A COMBINED OR A SEPA RATE APPROACH. UNDER SUCH CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER AND SEND THE MATTER BACK TO THE FILE OF THE TPO/AO FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF AMP SPEND AFRESH IN ACCORDANCE WITH THE MANNER LAID DOWN BY THE HON'BLE HIGH COURT IN SONY ERICSON MOBILE CO MMUNICATIONS INDIA (P.) LTD. (SUPRA). IT IS, HOWEVER, MADE CLEAR THAT THE TPO/AO, WHILE COMPUTING ADJUSTMENT, IF ANY, ON ACCOUNT OF AMP EXP ENSES WILL NOT 50 ITA NO.789/DEL/2015 INCLUDE SELLING EXPENSES DIRECTLY INCURRED IN CONNE CTION WITH SALES IN THE OVERALL BASE OF AMP EXPENSES. 3. ITA NOS. 5120/DEL/2010 DATED 24.08.2015 MARUTI S UZUKI INDIA LTD. VS. ADDL. CIT 13.15. TURNING TO THE FACTS OF THE CASE, WE FIND T HAT THE TPO/AO HAVE COMPUTED DISALLOWANCE OF AMP EXPENSES ON THE BASIS OF BRIGHT LINE TEST. THERE IS NO DISCUSSION ABOUT THE AMP FUNCTIONS CARR IED OUT BY THE ASSESSEE OR COMPARABLES. NOW SINCE THE SPECIAL BENCH ORDER H AS BEEN PARTLY MODIFIED BY THE HONBLE DELHI HIGH COURT, INCLUDING THE NON APPLICABILITY OF THE BRIGHT LINE TEST, AND NO MATERIAL HAS BEEN P LACED ON RECORD BY THE LD. AR TO, FIRSTLY, DEMONSTRATE THE AMP FUNCTIONS CARRI ED OUT BY THE ASSESSEE AND THEN, TO COMPARE SUCH FUNCTIONS WITH THOSE DONE BY COMPARABLES, THIS ISSUE CANNOT BE DECIDED AT OUR END. UNDER SUCH CIRC UMSTANCES, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF THE AO/TPO FOR DECIDING IT AFRESH AS PER LAW. IN THIS FRESH EXERCI SE, THE TPO WILL FOLLOW THE PARTS OF THE JUDGMENT IN SONY ERICSON (SUPRA) AS AR E COMMON TO BOTH MANUFACTURERS AND DISTRIBUTORS; APPLY THE PARTS OF THE JUDGMENT AS ARE APPLICABLE TO A `MANUFACTURER; AND IGNORE THE PART S OF THE JUDGMENT WHICH PERTAIN EXCLUSIVELY TO A `DISTRIBUTOR. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDINGS. 13.16. NOW WE ESPOUSE THE CONTENTION OF THE LD. AR TO SEND THE MATTER BACK TO THE TPO/AO FOR DECIDING THIS ISSUE IN CONFO RMITY WITH THE DECISION YET TO BE RENDERED BY THE HONBLE HIGH COURT IN ITS OWN CASE, FOR WHICH HEARING IS STILL GOING ON. THIS CONTENTION, IN OUR CONSIDERED OPINION, IS DEVOID OF ANY MERIT. IT IS AXIOMATIC THAT THERE CAN BE NO DIRECTION TO FOLLOW A FORTHCOMING JUDGMENT WHICH IS NOT IN EXISTENCE AT THE TIME OF GIVING DIRECTION. A DIRECTION CAN BE GIVEN BY A HIGHER AUT HORITY TO THE LOWER AUTHORITY TO FOLLOW ONLY SUCH A DECISION WHICH IS A VAILABLE FOR CONSIDERATION AT THE TIME OF GIVING DIRECTION BY THE HIGHER AUTHO RITY. THERE CAN BE NO DIRECTION TO FOLLOW A DECISION, WHICH ITSELF HAS NO T YET SEEN THE LIGHT OF THE DAY AT THAT POINT OF TIME. PRESENTLY, WE HAVE THE B ENEFIT OF THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN SONY ERICSSON (SUPR A), WHICH HAS ALSO DEALT WITH THE TREATMENT TO BE GIVEN IN THE CONTEXT OF A MANUFACTURER. THE DELHI BENCH OF THE TRIBUNAL IN SOME DECISIONS INCLU DING PERFETTI VAN MELLE INDIA (SUPRA) HAS DEALT WITH THE MANNER OF COMPUTAT ION OF THE ALP OF THE AMP EXPENSES INCURRED BY MANUFACTURERS IN THE LIGHT OF THE JUDGMENT IN THE CASE OF SONY ERICSSON (SUPRA). NO REASONS, EXCE PT THE PENDENCY OF THE MATTER IN THE HONBLE HIGH COURT IN ASSESSEES OWN CASE, HAVE BEEN GIVEN BY THE LD. AR TO CLAIM DEPARTURE FROM THE VIEW TAKE N BY THE TRIBUNAL IN EARLIER CASES. WE, THEREFORE, TURN DOWN THE REQUES T OF THE LD. AR IN THIS REGARD. WITH THESE OBSERVATIONS, WE SEND THE MATTER BACK TO THE FILE OF 51 ITA NO.789/DEL/2015 TPO/AO FOR A FRESH DETERMINATION OF THE ALP OF THE AMP EXPENSES IN ACCORDANCE WITH OUR ABOVE OBSERVATIONS. IN VIEW OF OUR DECISION IN RESTORING THE ISSUE OF CALCULATION OF ALP OF AMP EX PENSES TO THE TPO/AO, THE ASSESSEES APPEAL AGAINST THE ORDER PASSED BY T HE AO/TPO U/S 154, ENHANCING THE AMOUNT OF TP ADJUSTMENT, WOULD AUTOMA TICALLY BE TAKEN CARE OF IN SUCH FRESH PROCEEDINGS. WE WANT TO CLARIFY TH AT IN SUCH FRESH PROCEEDINGS, THE ASSESSEE WILL BE AT LIBERTY TO LEA D ANY FRESH EVIDENCE IN SUPPORT OF ITS CASE. 20. IN FINAL ANALYSIS, WE FIND THAT NO DETAIL OF TH E AMP FUNCTIONS PERFORMED BY THE ASSESSEE IS AVAILABLE ON RECORD. S IMILARLY, THERE IS NO REFERENCE IN THE ORDER OF THE TPO TO ANY AMP FUN CTIONS PERFORMED BY COMPARABLES. IN FACT, NO SUCH ANALYSIS OR COMPARISON HAS BEEN UNDERTAKEN BY THE TPO BECAUSE OF HIS APPLY ING THE BRIGHT LINE TEST FOR DETERMINING THE VALUE OF THE INTERNAT IONAL TRANSACTION OF AMP EXPENSE AND THEN APPLYING THE COST PLUS METH OD FOR DETERMINING ITS ALP. THE LD. AR ALSO FAILED TO DRAW OUR ATTENTION TOWARDS ANY MATERIAL DIVULGING THE AMP FUNCTIONS PE RFORMED BY THE ASSESSEE AS WELL AS COMPARABLES. AS SUCH, WE AR E HANDICAPPED TO DETERMINE THE ALP OF AMP EXPENSES AT OUR END, EI THER IN A COMBINED OR A SEPARATE APPROACH. UNDER SUCH CIRCUMS TANCES, WE SET ASIDE THE IMPUGNED ORDER AND SEND THE MATTER BA CK TO THE FILE OF THE TPO/AO FOR DETERMINING THE ALP OF THE INTERNATI ONAL 52 ITA NO.789/DEL/2015 TRANSACTION OF AMP SPEND AFRESH IN ACCORDANCE WITH THE MANNER LAID DOWN BY THE HON'BLE HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. ( SUPRA ). EX CONSEQUENTI , THE GROUND RAISED ABOUT THE TPO HAVING NO JURISDICTION TO DETERMINE THE ALP OF AMP EXPENSES, IS DISMISSED FOLLOWING THE JUDGMENT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. ( SUPRA ). 21 IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 28 TH DAY OF SEPTEMBER, 2015. SD/- SD/- (R.S. SYAL) (A.T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : THE 28 TH DAY OF SEPTEMBER, 2015 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.
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