HAIER APPLIANCES INDIA PVT. LTD.,NEW DELHI vs. DCIT, CIRCLE-11(1), NEW DELHI

The assessee company is a wholly owned subsidiary company of Haier Electrical and Appliances Corporation Ltd. China and is engaged in the business of distribution of consumer durable products, for example Air Conditioner, Washing Machine, refrigerator, television etc., purchased from foreign associated enterprises. The intangible rights contained in brand name or trademark/trade name in respect of goods so purchased and distributed were owned by the foreign AE only. In the Assessment Year preceeding to the two relevant Assessment Year, the assessee reported following international transaction with the AE in the Transfer Pricing Audit Report submitted to the Assessing Officer: (a) Purchase of finished products from the foreign AE i.e. HAH (HK) Company Ltd., Hong Kong, amounting to Rs.41.66 crores for the purpose of distribution/release in India. (b) Purchase of capital items of Rs.1,95,97,166/-

The legal history of the assessee’s case is as under:-

Against the Tribunal order dated 28/10/2015, the assessee filed appeal before the Hon'ble High Court. The Hon'ble High Court directed the Tribunal to decide the issue. Therefore, the assessee is before us.

The Ld. AR submitted the synopsis and submissions during the hearing as follows:

Break up of advertisement and selling and distribution expenses:

The Ld. DR relied upon the decision of the Sony Ericson Mobile Communication India Ltd. 374 ITR 118. The Ld. DR further relied upon the decision of Toshiba Vs. DCIT being & BMW India Pvt. Ltd. TS-88-ITAT-2017 (Del), both the decisions are of the Hon’ble Delhi High Court.

We have heard both the parties and perused the material available on record. The assessee company is a wholly owned subsidiary company of ‘Haier Electrical and Appliances Corporation Ltd., China and is engaged in the business of distribution of consumer durable products, for example Air Conditioner, Washing Machine, Refrigerator, Television etc. purchased from foreign associated enterprises. The intangible rights contained in brand name or trade name/ trade mark in respect of goods so purchase and distributed were own by the foreign A.E only. The assessee reported purchase of finished products from the foreign AE and purchased of capital items as international transactions with the AE in the transfer pricing audit report submitted to the Assessing Officer. Thus, the AMP expenses were not submitted as international transaction. The submission of the assessee that in order to promote sales of products, the assessee entered into agreements with various bankers and finance companies wherein the assessee agreed to buyer the cost of interest of credit period allowed to the end customers on purchase of Haier Products. But the interest costs on the installment given by the customer are directly paid by the assessee company to the banker’s finance companies. Therefore, the contention of the assessee that it has the zero percent finance pays, as regards second contention dealer expenses are monthly payment made by the assessee to its dealers for the exclusive area demarcated by the dealer at its show room for its play and sale of its product and the same expenses are agreed between the assessee and its dealers on the basis of the area allotted for sale of products to the assessee the location of the show room etc. This submission is factually correct. ISD salary and expenditure on this is in the nature of monthly payment made by the assessee to 3rd party agency for providing sales representative for sale of the products from the premises of its dealers on contract basis. The sale representatives are trade to actively interacted with the prospective customer for promoting sales of the company’s products and installation places. This contention of the assessee appears to be correct expenditure on printing of materials incurred on printing of products body sticker/price tag and products brochures are placed from the products or provided to the customers at the time of the sale of products. This contention is also correct. Expenditure on sales counter expenses is in the nature of payment made to home interior company for temporary construction on counters at the area available at dealer’s location for display of Haier Products. Haier expenditure on free gifts is in the nature of providing small three gifts like Pens, T-shirts, Caps, Jackets etc. along with the product. Such gifts are purchased from local market and the name of the assessee company is imposed on it through third party printing agencies. Diwali and festival gifts given by the assessee to its employee’s dealer etc. Thus, the assessee has quantified AMP expenses at Rs. 273,602,101/- but deducted selling and distribution expenses as well as grant received from A.E. Thus, the net AMP expenses finally quantified by the assessee as Rs. 20,540,848/.- The TPO vide order dated 21/10/2011 considered Vivek Ltd. as appropriate and comparable for bench marking AMP expenses, applying bright line test. As per the contention of the assessee, the TPO while considering Vivek Ltd. as comparable ignored the fact that the said comparable does not own any brand and is just the trader/reseller of home appliances. The Hon'ble High Court vide order dated 25/10/2016 directed the Tribunal in consonance with the argument of the assessee that the Tribunal’s observation to the effect that employing of resale price method would virtually cost the AMP outside the international transactions in Para 17 of the said Tribunals decision. The Hon'ble High Court has categorically mentioned that the said decision/observation is not conclusive and rather those observations has to be considered in light of the Sony Ericson Mobile Communication India Pvt. Ltd. (Para 163 to 167 & 193) of the said decision having regard to what was stated in preceding para i.e. that AMP in such cases is to be included as part of the ALP determination as component of the international transaction and also that whether the most appropriate method is resale price method or CUP method left for application by the TPO. Having regard to the peculiarity of the assessee business module adopted by the assessee. The remit by the Tribunal shall be therefore, decided in the light of the Hon’ble Court’s observation in the preceding paragraph. From the submissions of the Ld. AR as well as the reliance of the Hon’ble Delhi High Court decision in case of Sony Ericsson Ltd. (supra) it can be seen that in the present case assessee is not conducting any band promotion, but in fact is engaged in the business of distribution of consumer durable products. The Hon’ble High Court quoted OECD Transfer Pricing Guidelines in para 133 of the said decision as follows:

The aforesaid paragraphs do not support the Revenue's submission, but stipulate the requirement that the owner of the marketing intangible should adequately compensate the domestic AE incurring costs towards marketing activities by reimbursement of expenses or by sufficient and appropriate return. Where the domestic AE is entitled to compensation as a pure distributor, it would not be entitled to share in any return attributable to the marketing intangible, not being the legal owner. The position may be different where there is a long-term contract of sole distribution rights of the trade marked products, thereby acquiring ―economic ownership‖ benefit. In some cases, where the distributor bears extraordinary marketing expenses, he would be entitled to additional or higher return, through decreased price or reduction of royalty rate. The difficulty in attributing advertisement and other promotional expenditures towards trademark valuation or towards marketing activities, i.e. contributing to manufacture and current income and the impracticability of division in the case of such attribution is highlighted in paragraph 6.39.

It is, therefore, incorrect to suggest or observe that international tax jurisprudence or commentaries recognise ―bright line test‖ for bifurcation of routine and non-routine AMP expenditure, and non-routine AMP expenses is an independent international transaction which should be separately subjected to arm's length pricing.” Further the Hon’ble Delhi High Court in said Sony Ericsson decision held as under:

However, it would be wrong to assert and accept that gross profit margins would not inevitably include cost of AMP expenses. The gross profit margins could remunerate an AE performing marketing and selling function. This has to be tested and examined without any assumption against the assessed. A finding on the said aspect would require detailed verification and ascertainment.

An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made when the result would be reliable and accurate. Otherwise, RP Method should not be adopted. If on comparable analysis, including AMP expenses, gross profit margins match or are within the specified range, no transfer pricing adjustment is required. In such cases, the gross profit margin would include the margin or compensation for the AMP expenses incurred. Routine or non-routine AMP expenses would not materially and substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions. 166. On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument. Moreover, the contention of the assessed in these appeals would mandate rejection of the RP Method, as an appropriate or most appropriate method. Comparison or comparative analysis is undertaken at stage (ii). Adjustments are permissible and undertaken at stage (iv). Under clause (iii), i.e. at stage (iii), from the price ascertained at stage (ii), expenses incurred by the enterprise in connection with the purchase of property or obtaining of services is reduced. Under clause (iv), adjustments have to be made on account of functional difference which would include assets used and risk assumed. It is at stage (iv) of the RP Method that the Assessing Officer/TPO can make adjustments if he finds that an assessee has incurred substantial AMP expenses in comparison to the comparables. Once adjustments are made, then the appropriate arm's length price can be determined. In case, it is not possible to make adjustments, then RP Method may not be the most appropriate and best method to be adopted. 167. Before us, the Revenue has not pleaded or submitted that the RP Method should not have been adopted. The TPO and the Assessing Officer did not reject the RP Method adopted by the assessee. The assessed submit that the Revenue accepts functional parity and in fact, without adjustment. Contra, Revenue would argue that the Assessing Officer/TPO and the Tribunal have adopted and applied the CUP Method for determining arm's length price of AMP expenses. We do not pronounce a firm and final opinion on the said lis as it should be at first examined by the Tribunal.” The Hon’ble High Court further held as under in para 193: “193. We would not like to go into several factual aspects for the first time, for the factual matrix has not been examined and ascertained by the Tribunal. Moreover, in terms with our legal finding, factual findings will have to be examined. An order of remand for de novo consideration to the Tribunal would be appropriate because the legal standards or ratio accepted and applied by the Tribunal was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. The Tribunal, at the first instance, would try and dispose of the appeals, rather than passing an order of remand to the Assessing Officer/TPO. The endeavour should be to ascertain and satisfy whether the gross/net profit margin would duly account for AMP expenses. When figures and calculations as per the TNM or RP Method adopted and applied show that the net/gross margins are adequate and acceptable, the appeal of the assessed should be accepted. Where there is a doubt or the other view is plausible, an order of remand for re- examination by the Assessing Officer/TPO would be justified. A practical approach is required and the tribunal has sufficient discretion and flexibility to reach a fair and just conclusion on the arm's length price.”

In result, appeal of the assessee is partly allowed.