Income Tax Appellate Tribunal - Bangalore
M/S. Acer India Pvt Ltd, Bengaluru vs Assistant Commissioner Of Income Tax, ... on 31 January, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH : BANGALORE
BEFORE SHRI GEORGE GEORGE K. JUDICIAL MEMBER AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
IT(TP)A No.843/Bang/2022
Assessment year : 2017-18
Acer India Pvt. Ltd., Vs. The Asst. Commissioner of
No.13, 6th Floor Embassy Heights, Income-tax,
Magrath Road Next to Hosmat Circle-1(1)(1),
Hospital, Bengaluru.
Bengaluru-560 025.
PAN - AACCA 1237A
APPELLANT RESPONDENT
Assessee by : Shri Neeraj K Jain, Advocate
Revenue by : Shri K Sankar Ganesh, JCIT (DR)
Date of hearing : 10.11.2022
Date of Pronouncement : 31.01.2023
ORDER
This appeal filed by the assessee is against the final order passed by the AO u/s 143(3) l& 144(13) of the Income-tax Act 1961 dated 18/07/2022 for the assessment year 2017-18 with the following grounds of appeal:-
1. That the impugned order of Ld. Assessing Officer ["AO"] dated 18.07.2022, passed under section 144C read with section 143(3) of the Income-tax Act, 1961 ("the Act"), is bad in law and unsustainable.
2. That on the facts and circumstances of the case and in law the order dated 18.07.2022 passed by the assessing officer under section 144C(13) , having been passed beyond limitation provided in terms of Section 144C(13) read with section 153(1) read with section 153(4) of the Act of the Act, is illegal being barred by limitation, void ab initio and is liable to be quashed.
Transfer Pricing Adjustment on Account of AMP Expenses:
3. That the AO/ DRP erred on facts and in law in making addition of Rs.
28,44,84,249allegedly on account of difference in the arm's length price of international transactions resulting from the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant.
3.1 The DRP/ TPO erred on facts and in law in not appreciating that AMP expenses, incurred by the appellant unilaterally in India could not be characterized as an international transaction as per section 92B of the Act, in the absence of any proved understanding / arrangement between the appellant and the associated enterprise (hereinafter referred to as 'AE').
3.2 The TPO erred on facts and in law in adopting Bright Line Test ("BLT") for inferring the existence of international transaction completely disregarding the fact that BLT is not an appropriate method under the India Transfer Pricing regulations.
3.3 That the DRP/AO erred on facts and in law in inferring the existence of international transaction relating to AMP expenses without placing on record any tangible material or evidence in this regard.
3.4 That the DRP/AO erred on facts and in law in not following the decision of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd 381 ITR 117 (Del)and Whirlpool of India Ltd. 381 ITR 154 (Del)holding that these decisions are not binding as they are not the decisions of the jurisdictional High Court of Karnataka 3.5 The DRP/ TPO erred on facts and in law in not appreciating that the advertisement and marketing expenses were incurred by the appellant wholly and exclusively for purposes of its business and not on behalf of or for the benefit of the AE.
3.6 That the DRP/TPO erred on facts and in law in relying upon the OECD guidelines to hold that the appellant is performing the DEMPE functions related to the brand 'ACER' and therefore should have been compensated by the associated enterprise 3.7 That the DRP/TPO erred on facts and in law in not appreciating that even if the appellant is performing the DEMPE functions, such functions are being performed by the appellant for it's own benefit and for promoting it's sales in India 3.8 That the DRP/TPO erred on facts and in law in not appreciating that transfer pricing adjustment on account of AMP expenses made by the TPO under identical circumstances in the appellant's case was deleted by the Hon'ble Tribunal for assessment years 2012-13, 2013-14 and 2014-15.
3.9 Without prejudice, that the DRP/TPO erred on facts and in law in not appreciating that the gross margin of the appellant is higher than that of the comparable companies even after considering AMP expenses. 3.10 Without prejudice, that the DRP/TPO erred on facts and in law in not appreciating that the alleged international transaction of AMP expenses is at arm's length even applying the Transactional Net Margin Method ('TNMM').
3.11 Without prejudice, that the DRP/TPO erred on facts and in law in considering the following expenses as part of AMP expenses not appreciating that such expenses have been incurred for the purpose of sale of products and not for promotion of brand:
a) Trade Discount and Scheme Discounts
b) Advertisement expenses
c) Sales Commission expenses 3.12 Without prejudice, that the DRP/TPO erred in facts and in law in determining the markup for the alleged international transaction of brand promotion services by considering the following companies as comparable companies completely disregarding that the functional profile of these companies are not in accordance with that of the appellant:
Scarecrow Communications Limited Majestic Research Services & Solutions Limited 3.13 That the DRP/TPO erred in facts and in law in not accepting Marketing Consultants and Agencies Limited as Comparable companycompletely disregarding that the functional profile of the same is comparable with the appellant.
Protective Transfer Pricing Adjustment made on Account of Import of Finished Goods:
4. That the DRP/TPO erred on facts and in law in alternatively making addition of Rs. 91,08,32,964, allegedly on account of difference in the arm's length price of international transaction of import of finished goods undertaken by the appellant.
4.1 That the DRP/TPO erred on facts and in law in applying TNMM for benchmarking the international transaction of import of finished goods undertaken by the appellant instead of the RPM applied by the appellant 4.2 That the DRP/TPO erred on facts and in law in not appreciating that RPM is the most appropriate method for benchmarking the international transactions undertaken by the appellant, a normal distributor not adding any value to the goods imported from the associated enterprise.
4.3 That the DRP/TPO erred on facts and in law in not appreciating that Rule 10B(1)(b) specifically provides for application of RPM for benchmarking the international transaction of import of finished goods undertaken by a distributor.
4.4 That the DRP/TPO erred on facts and in law in not appreciating that RPM being a traditional method is to be preferred over TNMM, a transactional profit method.
4.5 That the DRP/TPO erred on facts and in law in not appreciating that the Hon'ble Tribunal in the appellant's own case for AY 2011-12, AY 2012-13, AY 2013-14 and 2014-15 upheld the RPM as the most appropriate method for benchmarking the international transaction of import of finished goods undertaken by the appellant.
4.6 Without prejudice, that the DRP/TPO erred on facts and in law in incorrectly computing the operating margin of the appellant at 0.22% and not appreciating that the correct margin of the appellant at 3.93% in the trading segment falls within the arm's length range of the comparable companies selected by the TPO.
4.7 Without prejudice, that the DRP/TPO erred on facts and in law in not selecting appropriate comparable companies for the purpose benchmarking the international transaction of import of finished goods applying TNMM.
4.8 Without prejudice. that the DRP/TPO erred on facts and in law in not allowing adjustment on account of differences in working capital of the appellant vis-à-vis the comparable companies while benchmarking the international transactions of the appellant applying TNMM.
ITA No.843/Bang/2022 Page 6 of 424.9 Without prejudice, that the DRP/TPO erred on facts and in law incorrectly computing the operating margin of Tech Pacific (India) Ltd. at 16.22% as against the correct operating margin of 1.63%
5. That the AO has erred in facts and in law in initiating the Penalty Proceedings u/s 270A.
The Appellant craves leave to add to. amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing.
2. The brief facts of the case are as the appellant, Acer India Pvt. Ltd. ('AIPL' or 'the assessee') is a company incorporated in India under the Companies Act, 1956. The appellant is a subsidiary of Acer Holding Inc. British Virgin Island and is engaged in a) manufacture and distribution of desktop computers and servers. The company imports certain components and parts from its associated enterprises ('AEs') for the manufacturing of said products and b) distribution of laptops, monitors projectors and peripheral products. AIPL imports computer notebooks and other finished products from its AEs for distribution across India. During the year the assessee filed return of income on 30.11.2017 declaring loss of Rs. 2,16,95,122/-, subsequently the case was selected for scrutiny and statutory notices were issued to the assessee. The assessee submitted documents, and it was observed that the assessee had undertaken international transactions with its AEs. The case was referred to the TPO after obtaining approval from the competent authority vide his approval dated 24.09.2019. The TPO issued notice dated 27.11.2019 u/s 92CA(2), calling for documentation maintained as prescribed u/s 92D(3), accordingly the assessee filed documents vide letter dated 12.12.2019. From the 3CEB report there was international transactions reported as under :-
ITA No.843/Bang/2022 Page 7 of 42Particulars Type Books of Completed
Accounts(Rs.) by assessee(Rs.)
Purchase of computer Paid/Payable 11461422046 11461422046
Components for
Manufacturing
Sold of components Received/ 589092721 589092721
& Spare Parts Receivable
Advertisement Received/ 352970413 352970413
Supports Receivable
----------------------------------------------
Total Rs. 12403485180 12403485180
3. The assessee adopted TNMM method for benchmarking its transcations in the manufacturing segment. And OP/OC was calculated 0.22%.
3.1 Further the TPO observed that for distribution segment the tax payer adopted RPM method and TPO observed that the RPM is not suitable in this case as the taxpayer has made some value addition to the products. Hence the TPO proceeds to bench mark the distribution segment by applying TNMM, and further the segmental financials are recomputed at the net profit level to arrive at the correct margin rate at enterprises level as under:-
31.03.2017 Particulars Distribution Manufacturing Segment Segment 41.85% 58.15% Net Sales 8302023426 13032424850 Total Income 8302023426 13032424850 Total Expenses 8939719819 12422015042 ITA No.843/Bang/2022 Page 8 of 42 Total Profit -637696393 610409808 OP/OC -7.13% 4.68% 3.2 From the above table it was observed by the TPO , the assessee incurred loss in trading segment, however in the TP study , it has been calculated that the transactions with the AEs were at Arm's Lenth considering the Gross Margin received as under:-
31.03.2017 Net Sales 8302023426 Less: Cost of goods sold 7365603785 Gross Profit 936419641 Gross Margin based on sales 11.28% 3.3 Based on the above the TPO considers that the RPM is not the appropriate method in case of the tax payer, The TPO after considering the application of RPM in the given situation, observed as under:-
4.2.2. Apart from the cost of functions, tere are certain costs like discount and insurance which are realted to the resale and which may or may not be accounted for as cost of goods sold. The treatment of such cost is, therefore, also material in the computation of the gross profit. Accounting consistency is, therefore, to be insured for computing the gross profit margins and it must be shown that same types of costs have been considered for computing the gross profit.
For these reasons paragraph 6.2 7.2 of UN Manual has mandated comparision of "apples with apples" rather than " apples with oranges"
so as to ensure that similar gross margins are compared. Thus, unless complete information is available and there are no issues with the accounting treatment of various expenses, RPM should be avoided.
The taxpayer is added services apart from activity of a mere distributor by protecting trade marks of the AE in India, incussing advertising and marketing expenses , promoting the sale of goods of the AE, using the brand of the AE therby increasing the visibility of AEs brand, keeping the AE informed of the market conditions thereby providing marketing support servces, etc. The taxpayer, in the distribution (trading) segment, has not confined itself just to distribution of trading goods but has performed additional functions as ITA No.843/Bang/2022 Page 9 of 42 mentioned above. Therefore, the company needs to be adequately compensated for such additional functions undertaken by it. In such circumstances, without considering these functions performed by the assesseecompany, it is not right to conclude that the transactions are at Arm's lenth just by comparing the gross margin earned by the assessee company. The expenditure relating to the additional function carried out by the assessee in the form of the AMP are not reflected in computing the gross margin as they are captured below the line. Therefore, the gross margin analysis carried out by the assessee is flawed.
3.4 On perusal of the profit & loss account for the two AY 20169-17 and 2017-18 it was observed that there is huge differencesin the advertisement, marketing & sales promotion expenses which is as under:-
Particulars AY 2016-17 AY 2017-18
(Rs.) (Rs.)
Sales promotion &
Davertisement expenses 5,08,26,485 1,16,74,762
Sales and Trade
Discounts 27,84,09,943 21,86,65,782
Sales Commission 2,59,21,519 7,13,67,222
Scheme Discount 90,13,55,101 95,51,61,235
Total (Rs.) 126,01,13,048 125,68,69,001
3.5 The ld. TPO after discussing in details and applying the judgment of
Hon'ble Delhi Court in the case of Sony Ericsson, held that the taxpayer has taken up additional functions, for which it has not been suitably compensated resulting in loss & RPM can be applied for pure trading activity of buying & selling. Hence , in the taxpayer's case the RPM is not the correct method for determining of ALP and he proceed to apply TNMM and rejecting RPM ITA No.843/Bang/2022 Page 10 of 42 applied by the assessee. Accordingly the show cause notice was issued to the assessee. The assessee furnishes its reply stating that:-
" Acer India earned a Gross Margin Profit of 11.28% for FY 2016-17. Since it is above the arm's length range, it was concluded that Acer India's International transactions relating to import of the said traded goods was in compliance with the arm's lenth principle from Indian Transfer Pricing perspective"
3.6 The TPO did not accept the submissions of the assessee and started fresh computation applying the TNMM and selected 12 companies, calculated Median @3.29%, accordingly he made calculation for adjustment in the distribution segment as under:-
(Rs.) Operating Revenue 830,20,23,426 Arm's length(OP/OR) ( Median) 3.29% Operating Cost 893,9719,819 Alp(Operating Revenue*96.71% 802,88,86,855 Adjustment 91,08,32,964 As per the above he calculated shortfall of Rs. 91,08,32,964.
3.7 From the records the TPO observed that the assessee has received reimbursement of the advertisement expenses incurred to an extent of Rs.
125,68,69,001/- from its parent company, this transaction has been reported in Form No. 3CEB as international transactions and theses transactions were analyzed by the taxpayer in his T.P. Study. The TPo noted that the assessee is not confined itself just to manufacturing and distribution but has performed additional functions in the form of advertisement, marketing and sales promotion. In his TP study the assessee itself selected 12 uncontrolled ITA No.843/Bang/2022 Page 11 of 42 comparables for bench marking in its distribution segments using RPM ( Resale Price Method)as the most appropriate method. A show cause notice dated 24.12.2020 was issued to the assessee proposed to identify the excess amount of AMP expenditure incurred by the taxpayer for promoting the marketing intangible owened by the AE, and make necessary transfer pricing adjustment. He calculated uncontrolled comparables with average PLI OP/OC @ 17.02% . The reply was submitted by the taxpayer. The ld TPO after considering the objections and discussing the issue in details he calculated the adjustment as under:-
Particulars Amount (Rs.) Excess AMP incurred for the benefit of 113,98,04,454 the AE Arms Lenth Margin (refer para No.. 7.3.2) 15.88% Arm's Lenth Price ( 1139804454*115.88% 132,08,05,401 Support for advertisement received 35,29,70,413 Adjustment 96,78,34,988 3.8 Finally the TPO made adjustment of Rs. 96,78,34,988/- u/s 92CA of
the I.T. Act and passed his order on 20.01.2021. The assessing officer passed Draft Order u/s 144C on 12.08.2021, assessing the income at Rs. 94,61,39,866/- considering the adjustment suggested by the TPO. Aggrieved from the Draft Assessment order the assessee filed objection before the ld. DRP, the ld. DRP considering the objections of the assessee passed order on 30.05.2022 after giving marginal relief to the assessee. The AO passed assessment order u/s 143(3) r.w.s. 144C(13) on 18.07.2022 considering the rectification order passed u/s 154 the revised TP adjustment was restricted to Rs. 28,44,84,249/- . Aggrieved from the above order the assessee filed appeal before the Income Tax Appellate Tribunal challenging as per the grounds of appeal noted supra.
ITA No.843/Bang/2022 Page 12 of 423.9 The AR of the assessee filed written submission which is as under:-
Re: Transfer Pricing adjustment of Rs 28,44,84,249 on account of Advertisement, Marketing and Promotion ('AMP') expenses (Ground of appeal No. 3-3.13) .
During the course of transfer pricing proceedings, the TPO, proceeded to undertake benchmarking analysis of the advertisement, marketing and sales promotion (AMP) expenses incurred by the assessee for the products having brand name 'Acer'.
The TPO, in the order made an adjustment of Rs 28,44,84,249 as compensation allegedly for rendering brand building services to the associated enterprise applying the bright line test. The TPO, applying the bright line test, held that since the AMP/Sales ratio of the appellant at 5.48% is higher than those of the comparable companies at 2.90% the appellant incurred extra ordinary expenditure for the benefit of the associated enterprise for which a compensation ought to have been received by the appellant. The TPO further added a mark up of 7.78% on the allegedly excess AMP expenses incurred by the appellant. The TPO accordingly, computed computed an adjustment of Rs 2,07,42,80,122 as under (pg 14 of appeal memo):
Particulars Value
Excess expenditure for 59,14,40,585
benefit of AE
Arm's length margin 7.78%
Arm's length price 63,74,54,662
Support of AMP expenses 35,29,70,413
received
Adjustment 28,44,84,249
It is submitted that the adjustment made by the TPO is not sustainable for the reasons submitted as under:
1) No "international transaction" involved:
Section 92B(1) of the Act defines 'international transaction' to mean 'transaction' between two or more 'associated enterprises', either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provisions of services, etc. The said section further ITA No.843/Bang/2022 Page 13 of 42 provides that the term 'international transaction' shall include a 'mutual agreement' or 'arrangement' between two or more associated enterprises for allocation or apportionment of or contribution to any cost incurred in connection with any benefit or service provided to any such enterprise.
The definition of 'international transaction' as stipulated under section 92B, has the following two limbs:
(I) There must be a "transaction" and such transaction must be between associated enterprises.
or (II) There should be 'mutual agreement' or 'arrangement' between two or more associated enterprises for the allocation or apportionment of or contribution to any cost or expense incurred in connection with benefit, service or facility provided to one or more of the associated enterprises.
The second limb of section 92B of the Act, defining 'international transaction' is coached in the same language as sub-section (2) of section 92 of the Act, which is a specific provision providing for application of the arm's length test in respect of a 'mutual agreement' or 'arrangement' for allocation or apportionment of, or any contribution to any cost or expense incurred in connection with benefit, service or facility provided by one or more of the associated enterprises.
It is submitted that it is neither the case of the Revenue that there was a 'mutual agreement' or 'arrangement' for allocation or apportionment of, or any contribution to any cost or expense incurred by the appellant towards advertisement, marketing and promotion in India. In other words, the AMP expenses, incurred by the appellant, neither give rise to an 'international transaction' in terms of the second limb of section 92B, nor are covered in section 92(2) of the Act, so as to be subjected to the arm's length test under the Transfer Pricing provisions. The jurisdiction assumed by the DRP /TPO to undertake benchmarking of such AMP expenses incurred by the appellant in the course of carrying on of its business, therefore, is clearly unlawful and not sustainable.
Alternatively and in addition to the aforesaid, even otherwise, the AMP expenditure unilaterally incurred by the appellant for the purpose of its business does not give rise to a 'transaction' or 'international transaction' between the associated enterprises, so as to be covered in the first limb of section 92B of the Act for the reasons submitted hereunder:
Clause (v) of section 92F of the Act defines the term "transaction" is as under:ITA No.843/Bang/2022 Page 14 of 42
"92F ..........................
"(v) "transaction" includes an arrangement, understanding or action in concert, -
(A) Whether or not such arrangement, understanding or action is formal or in writing; or (B) Whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding".
It is the case of the appellant that unilateral incurring of AMP expenses by the appellant in India does not result in any "transaction", much less an "international transaction", between the appellant, on the one hand, and the foreign AE, on the other, so as to invoke the transfer pricing regulations, for reasons elaborated hereunder:
From a conjoint reading of section 92B read with section 92F(v) of the Act, it would kindly be appreciated that transfer pricing regulations would be applicable to any "transaction", being an arrangement, understanding or action in concert, whether formal or in writing or whether enforceable or not by legal proceedings.
'Transaction', per se, involves a bilateral arrangement or agreement between the parties. A unilateral action by one of the parties without any binding obligation and in the absence of an 'arrangement', 'understanding', or 'action in concert' (e.g. pre-arranged plan, or design agreed by parties), between the parties could not be termed as a 'transaction'.
Therefore, in order to construe a 'transaction', there has to be an 'express arrangement', 'understanding' or 'action in concert' between the parties and the same cannot be inferred or implied. In other words, the onus of the Revenue, it would be in order to hold existence of a 'transaction', to demonstrate with reference to some positive material that the two parties have come together and there was a unison or agreement for acting together for some common purpose.
In terms of section 92C(3) of the Act and also the judgment of the Hon'ble Delhi High Court in the case of Moser Baer (316 ITR 1) the TPO has to place some empirical evidence or material on record to show that there exist a mutual arrangement or understanding between the parties or they acted in concert so as to constitute an international transaction'. Therefore, assessing officer / TPO cannot, on the basis of a mere presumption reach a conclusion that the parties have been acting in concert or there have an understanding or arrangement between them, so as to construe a transaction.ITA No.843/Bang/2022 Page 15 of 42
Therefore, in order to constitute an "international transaction" in terms of section 92B of the Act, an 'arrangement', 'understanding' or 'action in concert' must be shown to exist between the appellant in India and it's associated enterprise (who is a non-resident).
In the present case, AMP expenses had been incurred by the appellant (which is a tax resident of India) unilaterally, at its own discretion through unrelated Indian parties, for the purpose of its own business, in order to cater to local market needs. Such AMP expenditure was not incurred at the instance of the overseas AEs.
Despite no material having been brought on record by the TPO to establish existence an arrangement, understanding or action in concert with the AE, the TPO in respect of such AMP expenditure unilaterally incurred by the appellant locally, for and on behalf of the AE, held it to be amounting to "international transaction" in terms of section 92B of the Act, warranting invocation of transfer pricing provisions.
The Delhi High Court in the Whirlpool of India Ltd. 381 ITR 154 (Del) held that the provisions under Chapter X envisage a 'separate entity concept' and there cannot be a presumption that since the appellant is a subsidiary of the associated enterprise, all the activities of the appellant are in fact dictated by the associated enterprise. Merely because the associated enterprise has a financial interest, it cannot be presumed that AMP expense incurred by the appellant are at the instance or on behalf of the associated enterprise. The Hon'ble Delhi High Court in the case of Whirlpool of India Ltd (supra) also held that the initial onus is on the Revenue to demonstrate through some tangible material that the appellant and the associated enterprise acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses.
It is submitted that the Bright Line Test applied by the TPO has been rejected by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications (374 ITR 118) In view of the aforesaid, it is respectfully submitted that the Bright Line Test has no mandate under the Act and accordingly the same cannot be resorted to for the purpose of ascertaining if there exists an international transaction of brand promotion services between the assessee and the associated enterprise.
The Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd (supra), while dealing with the issue of benchmarking of AMP expenses held that the Revenue needs to establish the existence of an international ITA No.843/Bang/2022 Page 16 of 42 transaction before undertaking benchmarking of AMP expenses and such transaction cannot be inferred merely on the basis of Bright Line Test. The Court accordingly held that existence of an international transaction needs to be established de hors the Bright Line Test.
The aforesaid decisions of the Hon'ble High Court have been followed by the High Court in the cases of Honda Seil Power Products Ltd vs DCIT [2016] 237 Taxman 304 & Bausch and Lomb Eyecare India Pvt Ltd vs Addl CIT 381 ITR 227 wherein it has been reiterated by the Court that the Revenue needs to establish on the basis of some tangible material or evidence that there exists an international transaction of provision of brand building service between the assessee and the associated enterprise and in the absence of any transaction, there is no question of undertaking any benchmarking analysis with respect to AMP expenses.
Further, in the case of Valvoline Cummins Private Ltd vs DCIT 298 CTR 349 (Delhi) the Hon'ble Delhi High Court held that the Tribunal was not justified in remanding the matter to the AO/TPO for determining the ALP of the alleged international transaction involving AMP expenses, when in fact, the Revenue was unable to show there existed an international transaction between the Assessee and its associated enterprise in first place.
It is submitted that the Hon'ble Tribunal in the appellant's own case for assessment years 2011-12 and 2012-13 (ITA No 502 and 2837/Bang/2017) deleted transfer pricing adjustment made by the TPO under identical circumstances holding that the Revenue has not shown that there existed an international transaction of incurring AMP expenses (Page 58 of paperbook).
Following the aforesaid decision for AY 2011-12 and 2012-13, the Hon'ble Tribunal was pleased deleted transfer pricing adjustment on account of AMP expenses made in the case of appellant for assessment years 2010-11, 2013-14 and 2014-15.
It is further submitted that under similar circumstances, the Hon'ble Bangalore Bench of the Tribunal deleted similar transfer pricing adjustment on account of AMP expenses in the case of H.P India Sales Pvt Ltd (ITA NO 524/Bang/2017) (Copy enclosed) holding as under:
"9. The decision of the Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 was followed and it was held that the bright line test followed by the Revenue in making the AMP TP adjustment cannot be accepted. In the present case also, no material is brought on record by the TPO to establish the existence of an arrangement, understanding or action in concert with the AE for incurring the AMP expenses for the benefit of ITA No.843/Bang/2022 Page 17 of 42 the AE. Merely because the AE has a financial interest, it cannot bepresumed that AMP expenses incurred by the assessee are at the instance or on behalf of the associated enterprise. In the absence of any international transaction relating to AMP expenses, the impugned TP adjustment cannot be sustained. Moreover, the TPO having accepted the ALP of other international transactions at the entity level, proceeded to make a separate TP adjustment for the AMP expenses. At para 4.2 of the TPOs order, the TPO has given a finding that the net margins earned by the taxpayer from the product segment is 3.82% and that at the entity level is 7.29%. The margin earned by the taxpayer at the entity level as calculated by the TPO is 2.50%. Hence, no adverse inference drawn by the TPO in respect of the distribution segment results. Thus, the TPO has accepted the entity level margins earned by the assessee but proceeded to make TP adjustment on AMP expenses. The Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 held that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results."
In view of the aforesaid, it is respectfully submitted that since there is no change in the facts of the case, the transfer pricing adjustment made by the TPO on account of AMP expenses is not sustainable and is liable to be deleted.
Re: Application of TNMM instead of RPM applied by the appellant for benchmarking international transaction of import of goods on without prejudice basis (Ground of appeal No. 4-4.9) (Pg 184 and 205-206 of TP order) 3.10 It is submitted that the TPO, in the order passed under section 92CA(3) of the Act has made an adjustment of Rs 91,08,32,964 on a without prejudice basis stating that if the adjustment on account of AMP expenses is deleted, the adjustment made on without prejudice basis shall be revived. For the purpose of making the adjustment the TPO has applied the TNMM instead of the RPM applied by the appellant for benchmarking the international transaction of import of finished goods. Since the operating profit margin of the comparable companies selected by the TPO at 3.29% ITA No.843/Bang/2022 Page 18 of 42 was higher than that of the appellant at -7.13%, the TPO has made an adjustment of Rs 91,08,32,964 on account of international transaction of import of finished goods.
3.11 It is submitted that the Hon'ble Tribunal for assessment years 2013-14 and 2014-15 upheld the use of RPM over TNMM in the case of the appellant for under taking benchmarking analysis of international transaction of import of finished goods holding that the appellant does not undertake any value addition to the products imported from the AE and in case where there is no value addition, the Resale Price Method ('RPM') is the most appropriate method (Page 72-82 (For 2013-14) and 110 (For 2014-15) of paperbok).
3.12 In view of the aforesaid, it is submitted that the adjustment of Rs 91.08 crore made by the TPO on without prejudice basis is not sustainable and is liable to be deleted.
4. The ld. DR relied on the order of the lower authorities.
5. After hearing the rival contentions we notice that the similar issue has been decided by the coordinate bench in assessee's own case in ITA NO. 502/Bang/2017 for the AY 2012-13 order dated 10.05.2019 in respect of ground No. 3 to 3.13 . The relevant parts of the order are as under:-
17. We heard the parties and perused the record. The Ld A.R contended that the AMP expenses incurred by the assessee do not fall under the definition of "International Transactions" given in sec.92B and 92F of the Act. By placing reliance on the decision rendered by Hon'ble Delhi High Court in the case of Moser Baer (316 ITR 1), the Ld A.R submitted that the TPO has to bring on record some empirical evidence or material on record to show that there existed a mutual arrangement or understanding between the parties or they acted in concert so as to constitute an international transaction. Accordingly he contended that the AO/TPO cannot reach his conclusions on mere presumptions that the parties have acted in concert or they had an understanding or arrangement between them so as to ITA No.843/Bang/2022 Page 19 of 42 construe existence of a transaction, which can be termed as international transaction.
18. The Ld A.R submitted that the TPO has followed Bright Line Test (BLT) in order to determine the alleged excess expenses incurred by the assessee towards AMP expenses. He submitted that the Hon'ble Delhi High Court has rejected the BLT as means for determining the ALP of an international transaction in the case of Sony Ericsson Mobile Communications India P Ltd vs. CIT (374 ITR 118). He submitted that the above said decision has been followed by the Tribunal in various case laws.
He further placed his reliance on the decision rendered by Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd (381 ITR 117) and submitted that the TPO cannot make TP adjustment without proving existence of international transaction. He submitted that the assessee has only disclosed the reimbursement received by it from its AE as an international transaction. The assessee did not consider the AMP expenses incurred by it as International transaction at all. Accordingly he submitted that the tax authorities are not justified in making TP adjustment on account of AMP expenses incurred by the assessee. The Ld A.R further submitted that the Ld DRP has deleted the identical T.P adjustment made in AY 2011-12. He also submitted that the TPO should not have considered Sales schemes, trade discounts and sales commission as part of AMP expenses, as they have been incurred only for promotion of sales. He also submitted that the AMP expenditure is closely linked with the business of the assessee and the profit margin of the assessee is better than the comparables. Hence no adjustment is necessary under TNMM method. He submitted that the operating margin of the assessee is 4.14% in the manufacturing segment and 7.37% in the distribution segment. Both these margins are higher than the comparable companies, which stand at 2.41% in the manufacturing segment and 4.22% in the distribution segment.
19. The Ld D.R, on the contrary, submitted that the Hon'ble Delhi High Court has only held in the case of Maruti Suzuki Ltd (supra) that that TPO has to initially show that there existed an international transaction related to AMP expenditure and thereafter should proceed to make T.P adjustment. The Ld D.R submitted that the conduct of the assessee and its AE would show that there existed an international transaction on account of AMP expenses. He submitted that the assessee has received reimbursement of part of AMP expenses, which would showthat there existed an international transaction. Further the assesee is also responsible for conducting market research for the products in demand in India and also responsible for identifying customers in India. The assessee is required to keep its AE updated on the general market data available with it. This information includes competitive analysis, market driver requests for new products etc. Further, the key marketing decisions are taken by the assessee in consultation with its AE. The Ld D.R, accordingly submitted that these activities would show the existence of international transaction on account of AMP.
20. We heard rival contentions on this issue and perused the record. The Hon'ble Delhi High Court has held in the case of Maruti Suzuki Ltd (supra) that the revenue needs to establish the existence of international transaction before undertaking benchmarking of AMP expenses. In the instant case, we notice that the TPO has ITA No.843/Bang/2022 Page 20 of 42 entertained the belief on the basis of presumptions that the assessee's AMP expenses have promoted the brand value of its AE, i.e., no material has been brought on record to show the existence of International transaction. Before us, the Ld A.R placed his reliance on various case laws. We notice that the decision rendered by Delhi bench of ITAT in the case of L.G. Electronics India P Ltd vs. ACIT (ITA No.6253/DEL/2012 dated 14-01-2019) is applicable to the facts of the present case, wherein also identical T.P adjustment had been made. For the sake of convenience, we extract below the relevant observations made and decision taken by the Delhi bench of Tribunal:-
"8. The TPO observed that since AMP expenses incurred by the assessee as percentage of sales was more than similar percentage for comparable companies, the assessee had incurred such AMP expenditure on brand promotion and development of marketing intangibles for the AE. The TPO further added a mark-up of 15%, which was subsequently reduced to 12.5% by the DRP and, accordingly, adjustment of Rs. 2,64,96,17,750/- was made, which was computed as under:
Computation of TP adjustment Rs.
Value of sales 8605,67,65,713
AMP/Sales of the comparables 4.93%
Arms Length Price (as per Bright Line) 424,25,98,549
Expenditure on AMP by the appellant 689,60,79,670 Expenditure in excess of bright line 265,34,81,121 Mark-up at 12.5% on excessive AMP as 33,16,85,139 per DRP direction Reimbursement that appellant should 298,51,66,260 have received.
Reimbursement that appellant has 33,55,48,510 received.
Adjustment to assessee's income 264,96,17,750
9. Before us, the ld. AR has vehemently stated that the TPO has proceeded by inferring the expenses of international transaction by applying BLT by drawing support from the judgment of the Special Bench of the Tribunal in the case of assessee in ITA No. 5140/DEL/2011.
10. At the outset, we have to state that the Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT 374 ITR 118 has discarded the BLT. The Hon'ble High Court, at para 120 held as under:
"120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be subjected to the bright line test on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate international transaction ITA No.843/Bang/2022 Page 21 of 42 of brand building. Such a broad-brush universal approach is unwarranted and would amount to judicial legislation. During the course of arguments, it was accepted by the Revenue that the TPOs/Assessing Officers have universally applied bright line test to decipher and compute value of international transaction and thereafter applied Cost Plus Method or Cost Method to compute the arm's length price. The said approach is not mandated and stipulated in the Act or the Rules. The list of parameters for ascertaining the comparables for applying bright line test in paragraph 17.4 and, thereafter, the assertion in paragraph 17.6 that comparison can be only made by choosing comparable of domestic cases not using any foreign brand, is contrary to the Rules. It amounts to writing and prescribing a mandatory procedure or test which is not stipulated in the Act or the Rules. This is beyond what the statute in Chapter X postulates. Rules also do not so stipulate."
11. Respectfully following the judgment of the Hon'ble High Court of Delhi [supra], we hold that BLT has no mandate under the Act and accordingly, the same cannot be resorted to for the purpose of ascertaining if there exists an international transaction of brand promotion services between the assessee and the AE. IT
12. In our considered opinion, while dealing with the issue of bench marking of AMP expenses, the Revenue needs to establish the existence of international transaction before undertaking bench marking of AMP expenses and such transaction cannot be inferred merely on the basis of BLT. For this proposition, we draw support from the judgment of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd 381 ITR 117.
13. In this case, the Hon'ble High Court held that existence of an international transaction needs to be established de hors the Bright Line Test. The relevant finding of the Hon'ble High Court reads as under:
"43. Secondly, the cases which were disposed of by the judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act.
44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a ITA No.843/Bang/2022 Page 22 of 42 quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated.
XXX
51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses.
XXX
60. As far as clause (a) is concerned, SMC is a nonresident. It has, since 2002, a substantial share holding in MSIL and can, therefore, be construed to be a nonresident AE of MSIL. While it does have a number of 'transactions' with MSIL on the issue of licensing of IPRs, supply of raw materials, etc. the question remains whether it has any 'transaction' concerning the AMP expenditure. That brings us to clauses (b) and (c). They cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand of SMC. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction.
61. The submission of the Revenue in this regard is: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service ITA No.843/Bang/2022 Page 23 of 42 or benefit." Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC.
XXX
68....................In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT."
14. In the light of the aforesaid finding of the Hon'ble High Court, before embarking upon a benchmarking analysis, the Revenue needs to demonstrate on the basis of tangible material or evidence that there exists an international transaction between the assessee and the AE. Needless to mention, that the existence of such a transaction cannot be a matter of inference.
15. The Hon'ble Delhi High Court in case of Whirlpool of India Ltd vs DCIT 381 ITR 154 has held that there should be some tangible evidence on record to demonstrate that there exists an international transaction in relation with incurring of AMP expenses for development of brand owned by the AE. In our considered opinion, in the absence of such demonstration, there is no question of undertaking any benchmarking of AMP expenses. The relevant findings of the Hon'ble High Court in the case of Whirlpool of India Ltd [supra] read as under
"32. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. XXX
34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by ITA No.843/Bang/2022 Page 24 of 42 the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. 35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have "acted in concert".
XXX
37. The provisions under Chapter X do envisage a 'separate entity concept'. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses. XXX
39. It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO.
XXX
47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP."
ITA No.843/Bang/2022 Page 25 of 4216. The case of the Revenue is that Indian subsidiary incurred certain expenses for the promotion of brands in India and for development of the Indian market and the creation of marketing intangibles in India which remain the functions of the parent company which is the entrepreneur. The brands are owned by the parent company. The Indian subsidiary only acts on behalf of the parent company. The Revenue alleges that eventual beneficiary of the acts of the Indian subsidiary is the parent company. Any benefit that may accrue to the Indian subsidiary is at best incidental to the entire exercise. This action of the Indian subsidiary amounts to rendering of a service to its foreign AE for which arm's length compensation was payable by foreign AE to its Indian subsidiary.
17. It is the say of the ld. DR that the functions carried out by the assessee are in the nature of development, enhancement, maintenance, protection and exploitation of the relevant intangibles and thus, the assessee deserves compensation.
18. The case of the ld. DR is that the act of incurring of AMP expenses by the assessee is not a unilateral act and is an international transaction for following reasons:-
i) Though, the AMP expenditure may be for the purpose of business of the assessee but it is in performance of function of market development for the brands and products of the AE that enhances the value of the marketing intangibles owned by the foreign AE, and hence there is a transaction of rendering of service of market development to the AE.
ii) The short term benefit of the transaction accrues both to assessee and AE in terms of higher sales but long term benefit accrues only to the AE.
iii) The benefit to the AE is not incidental but significant. Once, it is established that the act of incurring of AMP expenditure is not a unilateral act of the assessee; the AE needs to compensate the assessee for AMP expenses.
iv) It is a fact that brands are valuable and even loss making enterprises having no real assets are purchased for substantial value for their brand and marketing intangibles. v) The issue is not that of transfer of marketing intangibles to AE as the brands and marketing intangibles are already owned by the AE. The issue is that of addition in the value of marketing intangibles owned by the AE owing to the services of development of brand and markets by the assessee for the AE and that of compensation for rendering these services not provided unilaterally by the assessee.
19. We do not find any force in the aforesaid contentions of the ld. DR. As mentioned elsewhere, the Revenue needs to establish on the basis of some tangible material or evidence that there exists an international transaction of provisions of brand building service between the assessee and the AE. We ITA No.843/Bang/2022 Page 26 of 42 find support from the decision of the Hon'ble Delhi High Court in the case of Honda Seil Power Products Ltd vs DCIT ITA No 346/2015.
20. The Hon'ble Delhi Court in its recent decision in the case of CIT vs Mary Kay Cosmetic Pvt Ltd (ITA No.1010/2018), too, dismissed the Revenue's appeal, following the law laid down in its earlier decision (supra) and held as under:
"We have examined the assessment order and do not find any good ground and reason given therein to treat advertisement and sales promotion expenses as a separate and independent international transaction and not to regard and treat the said activity as a function performed by the respondent-assessee, who was engaged in marketing and distribution. Further, while segregating / debundling and treating advertisement and sales promotion as an independent and separate international transaction, the assessing officer did not apportion the operating profit/ income as declared and accepted in respect of the international transactions."
21. In our understanding of the facts and law, mere agreement or arrangement for allowing use of their brand name by the AE on products does not lead to an inference that there is an "action in concert" or the parties were acting together to incur higher expenditure on AMP in order to render a service of brand building. Such inference would be in the realm of assumption/surmise. In our considered opinion, for assumption of jurisdiction u/s 92 of the Act, the condition precedent is an international transaction has to exist in the first place. The TPO is not permitted to embark upon the bench marking analysis of allocating AMP expenses as attributed to the AE without there being an 'agreement' or 'arrangement' for incurring such AMP expenses.
22. The aforesaid view that existence of an international transaction is a sine qua non for invoking the transfer pricing provisions contained in Chapter X of the Act, can be further supported by analysis ofsection 92(1) of the Act, which seeks to benchmark income / expenditure arising from an international transaction, having regard to the arm's length price. The income / expenditure must arise qua an international transaction, meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expenditure payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and unrelated third parties in India, where there is no income arising to the Indian enterprise from the foreign payee or there is no payment of expense by the Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not seek to benchmark transactions between two Indian enterprises.
23. The Revenue further contends that the assessee is not an independent manufacturer but is manufacturing for the benefit of the group entities and ITA No.843/Bang/2022 Page 27 of 42 his status is akin to that of a contract manufacturer. Hence AMP activity is not for the sole benefit of the assessee but for the group as a whole.
24. It is the say of the ld. DR that pricing regulations are to applied keeping in mind the overall scheme of the tax payer's business arrangement. The contention of the ld. DR can be summarized as under:
a) The assessee being part of a group is not completely independent in its pricing policies including price of raw material purchased from AE, payments in respect of copyrights and patents payable to the AE.
Even their product pricing is not completely independent. Linder such circumstances, the benefits emanating from the AMP function cannot be enjoyed by the assessee alone. The assessee is not an independent manufacturer who takes all the risks and enjoys all the benefits of the functions performed by them.
b) The assessee is not engaged only in manufacture. It is also engaged in distribution of goods by its own admission. In fact, the assessee has a dual function of manufacturer and distributor. In any case, given its distribution function, the assessee is covered by the judgement of Hon'ble Delhi High Court in M/s Sony Ericsson.
c) The benefits to the AE from AMP function continue to be the same as in the case of distributor like increase in sale of raw material, components and spare parts, increase in dividend, and increase in copyright and patent payments apart from creation/enhancement of Brand value. Therefore, the argument advanced by the assessee would not have any bearing on the existence of 'international transaction' just because it is engaged in manufacture has not merit.
25. Considering the aforesaid contention of the Revenue, we are of the considered view that the Hon'ble High Court in the case of Maruti Suzuki India Ltd [supra] held that the findings of the Hon'ble High Court with regard to existence of international transaction was only with respect to the case of three limited risk distributors namely, Sony Ericsson, Canon and Reebok etc., wherein the existence of international transaction was admitted and not in dispute. The Court accordingly held that such findings in the case of Sony Ericsson cannot be applied to the case of the manufacturers.
26. The Hon'ble High Court held as under:
"43. Secondly, the cases which were disposed of by the Sony Ericsson judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. XXX ITA No.843/Bang/2022 Page 28 of 42
45. Since none of the above issues that arise in the present appeals were contested by the Assessees who appeals were decided in the Sony Ericsson case, it cannot be said that the decision in Sony Ericsson, to the extent it affirms the existence of an international transaction on account of the incurring of the AMP expenses, decided that issue in the appeals of MSIL as well."
27. At this stage, it would not be out of place to refer to para 6.38 of the OECD Transfer Pricing Guidelines which apply only to limited risk distributors and not to full risk manufacturers like the assessee. The said para from OECD TP Guidelines read as under:
"6.38 Where the distributor actually bears the cost of its marketing activities (i.e. there is no arrangement for the owner to reimburse the expenditures), the issue is the extent to which the distributor is able to share in the potential benefits from those activities. In general, in arm's length transactions the ability of a party that is not the legal owner of a marketing intangible to obtain the future benefits of marketing activities that increase the value of that intangible will depend principally on the substance of the rights of that party. For example, a distributor may have the ability to obtain benefits from its investments in developing the value of a trademark from its turnover and market share where it has a long-term contract of sole distribution rights for the trademarked product. In such cases, the distributor's share of benefits should be determined based on what an independent distributor would obtain in comparable circumstances. In some cases, a distributor may bear extraordinary marketing expenditures beyond what an independent distributor with similar rights might incur for the benefit of its own distribution activities. An independent distributor in such a case might obtain an additional return from the owner of the trademark, perhaps through a decrease in the purchase price of the product or a reduction in royalty rate."
28. The Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd (supra) has further held that no transfer pricing adjustment in respect of AMP expenses can be made where the assessee (Indian entity) has economic ownership of the brand/logo/trademark in question, in the case of long term right of use of the same. This principle also squarely covers the present case. The assessee has a long term agreement for the use of the trademark 'LG' in India. This clearly evidences the fact that the economic benefit arising out of the alleged promotion of the AE's logo is being enjoyed by the assessee. There is a clear opportunity and reasonable anticipation for the assessee to benefit from the marketing activities undertaken by it. This is clearly evidenced by the significantly higher profits made by assessee compared to its industry peers and also the very sizeable year on year increase in its turnover. In view of the aforesaid, it is respectfully submitted that the economic ownership of the trademark 'LG' rests with the assessee. The Hon'ble High Court in the case ITA No.843/Bang/2022 Page 29 of 42 of Sony Ericsson Mobile Communications India Pvt Ltd (supra) disagreed with the finding of the Special Bench that the concept of economic ownership is not recognized under the Act. The relevant observations in paras 151 to 154 of the judgement are reproduced hereunder:
"151. Economic ownership of a trade name or trade mark is accepted in international taxation as one of the components or aspects for determining transfer pricing. Economic ownership would only arise in cases of longterm contracts and where there is no negative stipulation denying economic ownership. Economic ownership when pleaded can be accepted if it is proved by the assessed. The burden is on the assessed. It cannot be assumed. It would affect and have consequences, when there is transfer or termination of economic ownership of the brand or trademark.
152. Determination whether the arrangement is longterm with economic ownership or short-term should be ordinarily based upon the conditions existing at the start of the arrangement and not whether the contract is subsequently renewed. However, it is open to the party, i.e. the assessed, to place evidence including affirmation from the brand owner AE that at the start of the arrangement it was accepted and agreed that the contract would be renewed.
153. Economic ownership of a brand is an intangible asset, just as legal ownership. Undifferentiated, economic ownership brand valuation is not done from moment to moment but would be mandated and required if the assessed is deprived, denied or transfers economic ownership. This can happen upon termination of the distribution- cum-marketing agreement or when economic ownership gets transferred to a third party. Transfer Pricing valuation, therefore, would be mandated at that time. The international transaction could then be made a subject matter of transfer pricing and subjected to tax.
154. Brand or trademark value is paid for, in case of sale of the brand or otherwise by way of merger or acquisition with third parties. .... ..... .....
Re-organisation, sale and transfer of a brand as a result of merger and acquisition or sale is not directly a subject matter of these appeals. As noted above, in a given case where the Indian AE claims economic ownership of the brand and is deprived or transfers the said economic ownership, consequences would flow and it may require transfer pricing assessment." (emphasis supplied)
29. As held by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications (supra), if the Indian entity is the economic owner of the brand and is incurring AMP expenses for the purpose of promotion of such brand, benefit is only received by the Indian entity. It was submitted that the economic ownership of the brand rests with the assessee and accordingly, the assessee cannot be expected to seek compensation for the expenditure ITA No.843/Bang/2022 Page 30 of 42 incurred on the asset economically owned by it. No Transfer Pricing adjustment on account of AMP expenses would be warranted. The aforesaid test is fully satisfied in the case of the assessee and the Transfer Pricing adjustment on account of AMP expenses made by the TPO is liable to be deleted.
30. The assessee being a full-fledged manufacturer, entire AMP expenditure is incurred at its own discretion and for its own benefit for sale of LG products in India. In the case of the appellant, the advertisements are aimed at promoting the sales of the product sold under trademark 'LG' manufactured by the assessee and not towards promoting the brand name of the AE. In such circumstances, the alleged excess AMP expenditure does not result in an international transaction and the assessee cannot be expected to seek compensation for such expenses unilaterally incurred by it from the AE.
31. The Revenue has strongly objected for the aggregated bench marking analysis for the AMP. According to the Revenue, the assessee company has not been able to demonstrate that there is any logic or rationale for aggregation or that the transactions of advertisement expenditure and the other transactions in the distribution activity are inter-dependent, the clubbing of transactions cannot be allowed. According to the Revenue, bench marking of AMP transaction is to be carried out using segregated approach and for determination of ALP of such transactions, Bright Line is used as the tool.
32. This contention of the Revenue is no more good as BLT has been discarded by the Hon'ble High Court of Delhi as mentioned elsewhere. The Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd in Tax Appeal NO. 16 of 2014 has held that if the Indian entity has satisfied Transactional Net Margin Method (TNMM), i.e., as long as the operating margins of the Indian enterprise are higher than the operating margins of comparable companies, no further separate compensation for AMP expenses is warranted. The Hon'ble Court held as under:
"101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter- linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the ITA No.843/Bang/2022 Page 31 of 42 profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible."
33. Considering the aforementioned findings of the Hon'ble Jurisdictional High Court of Delhi In the case in hand, the operating profit margin of the assessee is at 5.01% in the manufacturing segment and 4.52% in the distribution segment and the same is higher than that of the comparable companies at 4.04% in the manufacturing segment and 4.46% in the distribution segment. TNMM has undisputedly been satisfied. Since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment on account of AMP expenses is warranted.
34. Considering the facts of the case in hand in totality, we are of the view that the Revenue has failed to demonstrate by bringing tangible material evidence on record to show that an internationaltransaction does exist so far as AMP expenditure is concerned. Therefore, we hold that the incurring of expenditure in question does not give rise to any international transaction as per judicial discussion hereinabove and without prejudice to these findings, since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment is warranted. Ground Nos. 3 to 3.34 of the assessee are allowed."
21. We notice that the above said decision squarely applies to the facts of the present case. In his arguments, the Ld A.R also submitted that the economic ownership of brand lies in the hands of the assessee. As noticed earlier, the revenue has not shown that there existed any international transaction on account of incurring of AMP expenses. Accordingly, following the above said decision, we hold that the AO/TPO was not justified in making T.P adjustment on account of AMP expenses. Accordingly we hold that no adjustment needs to be done in respect of AMP expenses and accordingly delete the addition made by the AO in this regard.
5.1 Since the issues involved in this are similar as decided in assessee's own case, respectfully following the above judgment Ao/TPO was not justified in making T.P. adjustment on account of AMP expenses. The grounds No. 3 to 3.13 raised by the assessee are allowed.
Ground No. 04 to 4.09 ITA No.843/Bang/2022 Page 32 of 42
6. Since this does not arises from the order of the AO, but the assessee has raised this issue from the order of the TPO that TPO has taken alternatively stand that if AMP issue is deleted the addition made towards international transaction of import of finished goods of Rs. 91,08,32,964 will be survive by using the TNMM method and calculated margin at @ 3.29% whereas the assessee applied the RPM and calculated margin @ -7.13%. The assessee strongly objected to the proposal of the TPO to adopt TNMM as most appropriate method. The main contention of the assessee was that the "trade discounts and sale commission and scheme discount expenses incurred by the Assessee are in the nature of product selling expenses and cannot be considered as incurred for the purpose of promotion of brand of the AE and hence the same should not be considered to be in the nature of brand advertisement and promotion as they in no way result in brand promotion.
Since this issue has also been decided by the co-ordinate bench of the Tribunal in assessee's own case in ITA No. 2837/Bang/2017 & 3391/Bang/2018 for the assessment year 2013-14 & 2014-15 respectively order dated 05.03.2020 in favour of the assessee , the relevant parts of the order are as under:-
5. The strongly objected to the proposal of the TPO to adopt TNMM as most appropriate method. The main contention of the asseseewas that the "
trade discounts and sale commission and scheme discount expenses incurred by the Assessee are in the nature of product selling expenses and cannot be considered as incurred for the purpose of promotion of brand of the AE and hence the same should not be considered to be in the nature of brand advertisement and promotion as they in no way result in brand promotion. However, the TPO did not accept the contentions of the assessee and accordingly rejected the same with the following observations:-
"As explained above, the tax payer's submission concentrates on why the AMP expenditure should not be separately benchmarked. It has ITA No.843/Bang/2022 Page 33 of 42 been accepted by the tax payer that functions in the nature of advertisement, marketing and sales promotion are undertaken to sell the goods in India. The argument of the tax payer is that such functions are not carried out at the behest of its Associated Enterprises, but in its own interest for increasing the volume of sales and consequently the volume of profits. When functions in the nature of sales promotion, advertisement and marketing are undertaken, benchmarking the transactions in the trading segment at gross level using RPM method cannot be accepted. The correct profits to be compared are the profits at the net level. Therefore, Transaction Net Margin Method (TNMM) is selected as the Most Appropriate Method."
Accordingly, the TPO selected Profit Level Indicator (PLI) as OP/OR. The TPO computed PLI of the assessee (by including the AMP expenses as part of operating cost) at (-) 1.58%. The average PLI of the comparable companies was worked out at 1.49%. Accordingly, the TPO made adjustment of RS.58.35 crores. As stated earlier, no separate addition was made by the TPO, as telescoped this adjustment against the adjustment of AMP expenses made by him. Since the Tribunal has deleted the adjustment made towards AMP expenses, this addition shall revive. The Ld DRP also confirmed the addition.
6. The dispute here is about the method to be adopted for benchmarking the trading transactions. According to the assessee the Resale Price Method is the most appropriate method, while the TPO has held that the TNMM is the most appropriate method.
7. The Ld A.R submitted that the assessee is importing the computer and other items and sells them in India. He submitted that the TPO has taken the view that the AMP expenses incurred by the assessee constitutes value addition, which is misconceived. He submitted that the assessee is incurring AMP expenses for its own purposes for the purpose of increasing expenses and major portion of AMP expenses consists of trade discounts, sales commission and scheme discounts. Accordingly he submitted that the TPO was not justified in holding those expenses as representing value addition items. Accordingly he submitted that the "Resale Price Method" is most appropriate method for the trading operations undertaken by the assessee. In support of his contentions, he placed reliance on the following case law:- (a) M/s Celio Future Fashion P Ltd (ITA No.1928/Mum/2016)
(b) M/s Videojet Technologies (I) P Ltd (ITA No.6956/Mum/2012)
(c) M/s A.O.Smith India Water Heating P Ltd (ITA No.176/Bang/2015)
8. On the contrary, the Ld D.R strongly placed his reliance on the order passed by Ld DRP/TPO.
9. We heard the parties on this issue and perused the record. The details of AMP expenses incurred by the assessee have been extracted by TPO at page 24 of his order as under:-
ITA No.843/Bang/2022 Page 34 of 42- Sales Promotion and Advertisement - 39,94,28,670 Sales and Trade discounts 38,20,32,185 Sales Commission - 10,12,89,783 Scheme Discounts - 116,43,10,673
--------------------
Total - 204,70,61,311
=============
It can be noticed that the actual advertisement and Sales promotion expenses incurred by the assessee was Rs.39.94 crores, which constitute 19.5% of the total expenses incurred under this head. The remaining expenses represent discounts, commission etc given to the distributors. The total turnover achieved by the assessee for the year under consideration was 2892 crores and the actual sales promotion and advertisement expenses constitute only 1.38% of the total sales. In view of the above, it was contended that the opinion expressed by the TPO that the assessee is protecting trademarks of the AE in India, is not correct. The view of the TPO, however, is that the assessee was wantonly incurring operating loss in its trading business only by incurring excessive AMP expenses and the same results in protection of trademark of AE.
10. In our considered view, the view so entertained by TPO is based on surmises and conjectures. He has merely relied upon the fact that the assessee was making losses in its trading segment. We notice that the AO has not brought any material on record to support his view. There is no dispute with regard to the fact that the assessee does not make any value addition to the products imported by it from its AE. When there is no value addition and the imported products are sold as it is, then "Resale Price method" is held to be most appropriate method in the cases relied upon by Ld A.R. In the case of M/s Celio Future Fashion P Ltd (supra), the Mumbai bench of Tribunal held so by following the decision rendered by Delhi bench of Tribunal in the case of Burberry India P Ltd (ITA No.758 & 7684/Del/2017 dated 22.06.2018). Identical issue was considered by the Bangalore bench of Tribunal in the case of M/s A.O.Smith India Water Heating P Ltd (supra), wherein the Tribunal, after considering various case laws on the matter, held that the RPM is the most appropriate method in case of a distributor of products. For the sake of convenience, we extract of 52 below the relevant observations made by the Tribunal in the case of A.O Smith India Water Heating P Ltd (supra):-
14. Now the assessee is before us with the submission that it is an accepted principle that the computation of ALP based on a direct method like RPM, which tests the results at gross level unlike the TNMM which tests the results at net level, extinguishes the requirement o making adjustment in relation to the difference in operating expenses, which could be different from enterprise to enterprise. It was further contended that as provided in Rule l0B, under RPM price of international transaction needs to be computed ITA No.843/Bang/2022 Page 35 of 42 on the basis of gross profit margin earned in uncontrolled transactions, while under TNMM price of international transaction is computed on the basis of net profit margin of uncontrolled transactions. As per Rule 100(1), the most appropriate method for determining the ALP depends upon the facts and circumstances of each case. Similarly, the operating expenses incurred by the assessee is different from the operating expenses incurred by comparable companies. The learned counsel for the assessee has highlighted that I incurs certain expenses which does not affect sale/purchase price of the goods sold. Therefore, in a situation where incurrence of item expenses affects only the net profit of the entity without corresponding effect of gross profit or price of transactions, the TNMM will not provide the most reliable arms length results. The selection of TNMM would require making reliable adjustment to arrive at the operating profit i.e., adjustment for expenditure incurred in the current year, the benefit of which will be received in the future year. In the absence of reliable adjustment, the selection of TNMM will not result in arriving at the ALP of the international transaction. In transactions method like RPM or Cost Plus method, the effect of these factors may be eliminated as natural consequences of insisting upon greater product of function similarity. Depending upon the facts and circumstances of the case and particular on the effect of functional differences on the cost structure and the revenue of the potential comparables, the net profit indicators can be less sensitive than the gross margin to the difference in the extent of complexity of function and difference in the level of risk.
15. It was further contended that comparability should not be interpreted in isolation because of the conditions and circumstances of the controlled transactions should be taken into consideration while comparing the net margin. Under the facts and circumstances of the assessee, the net margin comparability is more volatile than the gross margin comparable. In the light of the facts, it was contended that if the cost structure is such that costs are effecting in net profit directly without affecting the price or gross margin, then there can be no two opinions that RPM should be preferred over the TNMM method. In support of these contentions, he placed reliance upon the following judgments-.-
(1) Horiba India Pvt. Ltd., v. OCIT, 81 taxmann.com 209 (2) Bose Corporation Pvt. Ltd., v. ACIT, Circle 3(1), New Delhi, 77 taxmann.com 194 (3) ITO v. L'Oreal India Pvt. Ltd., (2015) 24 taxmann.corn 192 (Born) (4) Mattel Toys India Pvt. Ltd., v. DOlT in ITA No.2476/Mum/2008. The Id. DR placed reliance upon the order of the AO and the DRP.
ITA No.843/Bang/2022 Page 36 of 4216. Having heard the rival submissions and from a careful perusal of the record, we find that undisputedly the assessee is a trading company and carries out distribution and marketing of products of AOS group in India. It imports water filters from AO Smith China and sells them in India. AO Smith India is, according to the TP document, a distributor of AOS Water Heaters in India. The Tribunal has examined the most appropriate method in the case of distributor to determine the ALP for the international transactions. In the case of Horiba India Pvt. Ltd. (supra), the Tribunal has held that in the case of a distributor where the goods are purchased from the AE and resold to other independent entities without any value addition, then the resale price method should be reckoned as most appropriate method. One of the main reason given by the TPO as well as the DRP is that the assessee is full fledged/full risk distributor and performing host of functions, therefore RPM should not be taken as the most appropriate method, because all these functions require huge cost which may not represent the gross profit margin. This contention of the revenue was rejected by the Tribunal and it was held that in comparable controlled transaction scenario, a normal distributor will undertake all kinds of functions which are related to sales of the product. The things like market research, sales & marketing, warehousing, controlled quality and also risks like market risk, credit risk, etc. are undertaken by any distributor for the sale of the products. The Tribunal further held that what is important to see is whether there is any value addition or not on the cost purchased for resale. If there is no value addition to the finished goods purchased from the AE are sold in the market as it is, then gross profit margin earned on such transactions become determining factor to analyse the gross compensation after the cost of sales. Accordingly the Tribunal held that the RPM is the most appropriate method.
17. Similarly, in the case of Bose Corporation Pvt. Ltd. v ACIT (supra), the assessee company was engaged in the business of distribution of sound and audio assistant for individual customers and public places. It was a wholly owned subsidiary of Bose Corporation, USA. During the relevant year, assessee purchased furnished goods from its AE and resold the same in India to unconnected parties. The assessee adopted resale price method (RPM) as most appropriate method (MAM) for determining the ALP of the said international transactions. The profit level indication (PLI) adopted by the assessee was gross profit/sale and the assessee has made itself tested party for the purpose of international transactions. The TPO rejected the transfer pricing study of the assessee and opined that transactional net margin method was to be applied for determining ALP of international transactions under question. While determining the issue as to which is the most ITA No.843/Bang/2022 Page 37 of 42 appropriate method in case of distributor, the Tribunal has held that the resale price method (RPM) is the most appropriate method and directed the TPO to calculate margin of the comparables by using RMP. The relevant observation of the Tribunal is extracted hereunder for the sake of reference:
"8.1 At this juncture, we note the mandate of Rule 10C which defines the 'Most appropriate method'. Sub-rule (1) of Rule 10C states that:
"For the purposes of subsection (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length in relation to the international transaction." Sub-rule (2) of Rule 10C lists certain factors which should be taken into account in selecting the most appropriate method as specified in sub-rule (1). These factors, inter olio, include ©, the availability coverage and reliability of data necessary application of the method'; and (d) the degree of comparability existing between the international transaction and the uncontrolled transaction...........' 8.2 An overview of the factors prescribed for choosing the most appropriate method indicates that firstly, the data necessary for application of the given method should be available and secondly, the uncontrolled transactions should be functionally similar, if not identical. A company, in order to be ranked as comparable under the RPM, should preferably be engaged in doing similar activity as that of the assessee or at least of the some genus of the activity, with a different product. The Ld. TPO himself has categorized the corn parables chosen by the assessee as traders akin to computer industry or engaged in trading of instruments. As the basic requirements under rule 10(c)(1) are fulfilled by these corn parables and that the Ld. TPO has not brought on record any evidence to prove material difference between the assessee and the corn parables so selected, we direct the Ld. TPO to calculate the margin of the comparables by using RPM."
18. In the case of CIT Vs. L'Oreal India Pvt. Ltd., similar dispute was raised before the Hon'ble High Court of Bombay. In that case, assessee had business in 2 segments viz., manufacturing and distribution, In respect of business of distribution, the TPO suggested transfer pricing adjustment by applying the TNMM and rejected the resale price method (RPM) adopted by the assessee because the TPO found that assessee was incurring loss consistently and hence the price police was not at arm's length. The Hon'ble High Court, having examined all aspects have finally concluded that RPM is the most appropriate method. The relevant observation of the Hon'ble High Court is extracted hereunder for the sake of reference:
ITA No.843/Bang/2022 Page 38 of 42"7. After having perused the relevant part of the order passed by the Commissioner and this Tribunal on this question, we are in agreement with Mr. IT Pardiwalla that the Tribunal did not commit any error of law apparent on the face of the record nor can the findings can be said to be perverse. The Tribunal has found that the TPO has passed an order earlier accepting this method. The Tribunal has noted in para 19 of the order under challenge that this method is one of the standard method and the OECD (Organization of Economic Commercial Development) guidelines also state in case of distribution or marketing activities when the goods are purchased from associated entities and there are soles effected to unrelated parties without any further processing, then, this method can be adopted. The findings of fact are based on the materials which have been produced before the Commissioner as also the Tribunal. Further, it was highlighted before the Commissioner as also the Tribunal that the RPM has been accepted by the TPO in the preceding as well as succeeding assessment years. That is in respect of distribution segment activity of the Assessee. In such circumstances, and when no distinguishing features were noted by the Tribunal, it did not commit any error in allowing the Assessee's Appeal. Such findings do not raise any substantial question of law. The Appeal is devoid of merits and is, therefore, dismissed. There would be no orders as to costs
19. Copy of the order of the Tribunal in the case of L'Oreal India Pvt. Ltd., is also placed on record to demonstrate as to under what circumstances the RPM was considered to be most appropriate method. Similarly, in the case of Mettal Toys India Pvt. Ltd., v. DCIT (supra), the Tribunal again reaffirmed its view that in the case of distributor, the RPM is the most appropriate method by holding that ultimate aim of the transfer pricing is to examine whether price of the margin arising from the international transactions with a related party is at ALP or not. The determination of the approximate ALP is a key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed method other than choosing earlier, the most appropriate ALP can be determined, the assessng authorities as well as the appellate authorities should take into consideration such a plea raised before them provided it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case. The Tribunal accordingly rejected the contention of the Revenue and directed the TPO to adopt RPM instead of TNMM for computing the ALP.
20. Turning to the facts of the case, we find that undisputedly, assessee is a distributor of AO Smith China which is involved in the manufacture of water heaters and sells the water heater imported ITA No.843/Bang/2022 Page 39 of 42 from AO Smith China in India without making any value addition to the product. in a similar type of case, it has been repeatedly held by the Tribunal and the Hon'ble High Court of Bombay that in case of distributor, whether the product is being sold to the uncontrolled entities without making any value addition RPM is the most appropriate method and should be preferred over TNMM. Accordingly, we set aside the order of the AO, passed consequent to the direction of the DRP in this regard and direct the AOITPO to adopt the RPM as the most appropriate method."
11. Since the facts are identical in this case, we hold that the Resale Price Method is most appropriate method in the facts and circumstances of the present case. Accordingly we direct the AO/TPO to adopt Resale Price Method as most appropriate method and determine the ALP of the transactions accordingly.
7. Respectfully following the above judgment of the co-ordinate bench of the Tribunal in assessee's own case cited supra we hold that the RPM method should be adopted instated of TNMM as applied by the TPO. In view of this the grounds raised by the assessee are allowed.
ITA No.843/Bang/2022 Page 40 of 42 ITA No.843/Bang/2022 Page 41 of 428. Ground No.1 is general in nature and ground No.2 & 5 is not pressed, hence does not require any adjudication.
9. In the result, the appeal of the assessee is partly allowed.
Order pronounced in court on 31st day of January, 2023 Sd/- Sd/-
(GEORGE GEORGE K) (LAXMI PRASAD SAHU)
Judicial Member Accountant Member
Bangalore,
Dated, 31st January, 2023
/ vms /
Copy to:
1. The Applicant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR, ITAT, Bangalore.
6. Guard file
By order
Asst. Registrar, ITAT, Bangalore.
ITA No.843/Bang/2022
Page 42 of 42
1. Date of Dictation ..........................................
2. Date on which the typed draft is placed before the dictating Member .........................
3. Date on which the approved draft comes to Sr.P.S ...................................
4. Date on which the fair order is placed before the dictating Member ....................
5. Date on which the fair order comes back to the Sr. P.S. .......................
6. Date of uploading the order on website...................................
7. If not uploaded, furnish the reason for doing so ................................
8. Date on which the file goes to the Bench Clerk .......................
9. Date on which order goes for Xerox & endorsement..........................................
10. Date on which the file goes to the Head Clerk .........................
11. The date on which the file goes to the Assistant Registrar for signature on the order .....................................
12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order ...............................
13. Date of Despatch of Order.
.....................................................