Indian Kanoon - Search engine for Indian Law

5. Impugned order completely failed to establish existence of international transaction and further erred in imagining routine AMP expenditure incurred by Appellant as 'excessive', as constituting separate international transaction with AE[s] and in the guise of applying Residual Profit Split Method benchmarked it separately by adopting arbitrary process not known to law. Without prejudice to failure of Ld. TPO/AO/DRP in discharging primary onus of establishing international transaction, impugned order is also directly contrary to law laid down bycourts that in the absence of any computation mechanism being prescribed under the Act or the rules made thereunder, such determination is unlawful.

13. Ld. DRP / AO/TPO grossly erred by aggregating royalty paid to AE with notional/ imaginary transaction of AMP by arbitrarily segregating expenses into routine and non -routine by application of subjective process and further erred in thrusting Residual profit split method (PSM) as most appropriate method.

14. Ld. DRP/ AO/ TPO have erred in law and in fact by adopting an incorrect subjective mechanism not in accordance with law for computation of profit split between Appellant and AEs

10. The TPO took the view that the AMP expenses incurred by the assessee is on the higher side and hence, by applying bright line test, split the AMP expenses into routine expenses and non- routine expenses. The TPO chose to adopt "Profit Split Method" to bench mark both royalty and AMP expenses. For this purpose, the TPO re-worked the profit margin of the assessee by considering only routine AMP expenses and the same worked out to 21.58%. The TPO worked out the profit margin of comparable companies without including brand expenses and the average profit margin worked out to 7.76%. Accordingly, the TPO held that the difference between 21.58% and 7.76%, i.e., 13.82% is the non-routine profit. He held that this profit should be shared between the assessee and its AE. The TPO determined the AE's share to be 25% and accordingly worked out AE's share in non- routine profit at Rs.18.41 crores. The aggregate amount of royalty payment and non-routine AMP expenses was Rs.40.25 crores. The TPO accordingly held that the difference between the above said amount of Rs.40.25 crores and Rs.18.41 crores is liable to be adjusted. Accordingly, he adjusted Rs.21.94 crores as transfer pricing adjustment. The Ld Dispute Resolution Panel (DRP) also confirmed the same.

11. We heard the parties on this issue and perused the record. Before us, the Ld A.R placed his reliance on the decision rendered by Hon'ble Delhi High Court in the case of Sony Ericsson (374 ITR

118) and submitted that "Residual profit split method" is not appropriate method to bench mark AMP transactions. He further submitted that the TPO was not justified in considering Royalty payments along with AMP expenses. The Ld D.R, however, supported the order passed by tax authorities.

IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore