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Income Tax Appellate Tribunal, DELHI ‘I-2’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI SUCHITRA KAMBLE
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the assessee has been heard pursuant to the order of the Hon'ble High Court of Delhi in Tax Appeal No. 16/2014 dated 16.03.2015.
2 2. The Hon'ble High Court has restored the appellant’s case for decision on adjustment relating to Advertisement, Marketing and Promotion [AMP] of Rs. 69.95 crores laying down the guidelines while deciding the Tax Appeal No. 16/2014.
Facts of the case are that a reference u/s 92CA(1) of the Income- tax Act, 1961 [hereinafter referred to as 'the Act'] was made in the case of the assessee by the Additional CIT, Tax Range – 9, New Delhi for determination of Arm’s Length Price [ALP] for international transactions undertaken by the assessee during the F.Y. 2007-08 with its Associated Enterprises [AE].
The assessee was incorporated in India on 23.04.2007 and is a subsidiary of Sony Ericsson Mobile Communications AB, a company incorporated under the laws of Sweden. The Sony Ericsson Group offers mobile multimedia devices including feature rich phones and accessories, PC cards and M2M solution for end users. The Sweden entity is a 50:50 joint venture between Telefonakiebolaget LM Ericsson and Sony Corporation, Japan. The group companies own significant valuable intellectual property rights, know how, patents, copyrights etc and other commercial or marketing intangibles i.e., brand name,
3 trademarks, logos, etc and are involved in complex product development, manufacturing and brand development of the products. The assessee company is primarily engaged in the business of importing, buying and selling and distribution of wide range of mobile phones in India and providing related post sale support services.
In its transfer pricing report, the assessee has stated that the development of ALP in this analysis recognises that the assessee company is a distributor undertaking normal risks associated with such activity and employs routine tangible assets. The international transactions entered into during the year under consideration are as under:
Rs. 11,636,221,548 Import of Mobile Handsets & Spares Purchase of Fixed Assets Rs. 9,347,318 Receipt of Services Rs. 19,738,690 Cost Recharge Paid Rs. 1,910,724 Cost Recharge Received Rs. 114,047,737
In order to benchmark the international transactions mentioned at Sr. No. (i) to (iv) above the assessee has used TNMM with Operative Profit/Sales as the PLI. The margin of the assessee company has been computed at 2.50%. In its transfer pricing report the assessee has used 11 companies as comparables whose multiple year data has been used.
4 The mean margin of these companies has been worked out at 0.45%. During the course of transfer pricing proceedings, the assessee was asked to submit the updated margins of the comparable companies. The assessee filed a list of 19 companies as a result of fresh search wherein the mean margin was worked out at 0.48%.
During the course of assessment proceedings, it was noticed that the assessee has incurred huge cost on Advertisement, Marketing and Sales Promotion for promotion of brand name. The assessee was asked to explain on the following points:
1. Who owns the brand name? 2. Is there any agreement for use of brand name? 3. Whether any payment is being made to the AE for use of brand name? 4. Whether any payment is being received from the AE for promotion of brand name in India?
In its reply, the assessee explained that the trade name “Sony Ericsson Mobile Communication AB, Sweden” is considered to be the economic owner of the brand. It was further explained that the assessee has been provided with trade name and trademark without
5 any charges. It was explained that the assessee purchases products at re-sale price minus transfer price. The price is adjusted according to the price level development in the market and operating cost changes in the sales subsidiary. Accordingly, the pricing of products between the assessee and the AE is regulated in a manner that ensures that the assessee earns an arm’s length return with respect to its distribution activity. Therefore, based on the price level development in the market, if at the year end the assessee is not able to achieve arm’s length return with respect to the distribution activity, then as per the policy it receives credit notes from the AE to achieve an arm’s length return on sales. During the year under consideration, the assessee received a credit note of Rs. 738,370,409/- from the AE to in order to achieve an arm’s length result.
In its reply, the assessee stated that it has not made any payment to its AE for using brand name and there is no agreement for using the brand name between overseas AE and the assessee. It was emphasised that the advertisement and marketing expense incurred by the assessee are for furthering its sales in the Indian market and is nowhere related to brand promotion expense,
6 therefore, such transaction does not warrant a reimbursement from AE since these costs represent transactions that are purely domestic in nature and have been undertaken by the assessee to promote its own sale and nowhere related to the international transactions entered into by the assessee with the AE.
Subsequently, the assessee filed details of credit notes and explained that the credit notes have been netted off against the cost of traded goods in the profit and loss account of the assessee.
The TPO was of the firm belief that the amount of Rs. 73.83 crores received by the assessee by way of credit notes represents excess price charged by the AE which has been credited to the assessee so as to achieve arm’s length return on sales by the assessee. The TPO formed a belief that the credit notes amounting to Rs. 73.83 crores have no relation with the expenditure that the assessee has incurred on the AMP for which no compensation/ reimbursement has been made by the AE.
7 12. On perusing the audited financial of the assessee company, the TPO found that it does not own any intangibles in the nature of brand name or marketing intangibles. The audited accounts of the assessee shows following expenses relating to AMP:
Advertisement expenses : Rs. 660,556,778 2. Business Promotion & selling expenses : Rs. 496,658,381 3. Total expenditure on AMP : Rs. 1,157,215,159
The TPO was of the opinion that the expenditure on AMP incurred by the assessee is exclusively to promote the brand name/trade name ‘Sony Ericsson’ which is beneficially owned by the AE. The TPO was of the strong belief that such expenditure has resulted into brand building and increased awareness of the products bearing the brand/trade name ‘Sony Ericsson’. The TPO was convinced that the expenditure incurred by the assessee company is for advantage of its AE and the assessee company should have been suitably compensated by the AE. On finding that the assessee company has not been compensated at all by the AE, for the efforts of the assessee in developing the local marketing intangible for which the assessee had incurred huge sum of Rs. 115.72 crores, drawing support from the provisions of section 8 92F(v) of the Act, the TPO proceeded by treating this to be international transaction.
To determine the ALP of the international transaction of promoting the trade name/trade mark which is beneficially owned by the AE, the TPO issued show cause notice to the assessee. The assessee filed detailed reply to the show cause notice issued by the TPO. After considering the reply of the assessee, the TPO was of the opinion that the onus which was on the assessee to bench mark the international transaction relating to the expenditure incurred on AMP and receipt of compensation/reimbursement has not been discharged. The AO proceeded to bench mark the impugned international transaction.
The TPO determined the ratio of AMP/sales at 7.06% and compared the same by adopting Brightline Test in the case of comparables, which, according to the TPO was at 1.08%. Comparing the ratio of AMP/sales in the case of the assessee with Brightline the TPO found that the assessee has incurred excess expenditure of Rs. 98.02 crores. The TPO was of the strong belief that such excess of brightline limit should have been compensated by the AE and since the 9 assessee has not been compensated by its AE, the TPO proposed to determine the ALP of the impugned international transaction at Rs. 980,237,631/-.
The TPO was also of the opinion that independent entities would not incur expenditure for promoting the trade names owned by some third party and, therefore, would have been remunerated for such efforts. A mark-up of 15% on cost incurred by the independent party would be reasonable and applying the same, the TPO computed the adjustment at Rs. 1,127,273,275/-.
This whole exercise by the TPO has been dismissed by the Hon'ble High Court of Delhi in Tax Appeal No. 16/2014. At para 127 the Hon'ble High Court has observed as under:
“27. We agree and accept the position in the portion reproduced above in bold and italics. The object and purpose of Transfer Pricing adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. There should be adequate and proper compensation for the functions performed including AMP expenses. Thus, we disagree with the 10 Revenue and do not accept the overbearing and orotund submission that the exercise to separate ‘routine’ and ‘non- routine’ AMP or brand building exercise by applying ‘bright line test’ of non-comparables and in all case, costs or compensation paid for AMP expenses would be ‘NIL’, or at best would mean the amount or compensation expressly paid for AMP expenses. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible^ but facts should so reveal and require. To this extent, we would disagree with the majority decision in L.G. Electronics India Pvt. Ltd. (supra). “
Rejecting the application of bright line test, the Hon'ble High Court of Delhi has listed its findings as under:
“ (i) In case of a distributor and marketing AE, the first step in transfer pricing is to ascertain and conduct detailed functional analysis, which would include AMP function expenses (ii) The second step mandates ascertainment of comparables or comparable analysis. This would have reference to the method adopted which matches the functions and obligations performed by the tested party including AMP expenses.
11 (iii) A comparable is acceptable, if based upon comparison of conditions a controlled transaction is similar with the conditions in the transactions between independent enterprises. In other words, the economically relevant characteristics of the two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate the effect of such differences on the price or margin. Thus, identification of the potential comparables is the key to the transfer pricing analysis. As a sequitur, it follows that the choice of the most appropriate method would be dependent upon availability of potential comparable keeping in mind the comparability analysis including befitting adjustments which may be required. As the degree of the comparability increases, extent of potential differences which would render the analysis inaccurate necessarily decreases.
12 (iv) The assessed, i.e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis should be appropriated and reliable so as to include the AMP functions and costs. (v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction. (vi) The Assessing Officer/TPO can reject a method selected by the assessed for several reasons including want of reliability in the factual matrix or lack / non-
13 availability of comparables. (see Section 92C(3) of the Act). (vii) When the Assessing Officer/TPO rejects the method adopted by the assessed, he is entitled to select the most appropriate method, and undertake comparability analysis. Selection of the method and comparables should be as per the command and directive of the Act and Rules and justified by giving reasons. (viii) Distribution and marketing are inter-connected and intertwined functions. Bunching of inter-connected and continuous transactions is permissible, provided the said transactions can be evaluated and adequately compared on aggregate basis. This would depend on the method adopted and comparability analysis and the most reliable means of determining arm‘s length price. (ix) To assert and profess that brand building as equivalent or substantial attribute of advertisement and sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. ‘Brand’ has reference to a name, trademark or trade name and like ‘goodwill‘ is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient
14 business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. (x) Parameters specified in paragraph 17.4 of the order dated 23rd January, 2013 in the case of L.G. Electronics India Pvt Ltd (supra) are not binding on the assessed or the Revenue. The ‘bright line test‘ has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate routine‘ and ‘non-routine‘ AMP or brand building exercise by applying ‘bright line test‘ of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be ‘NIL‘, or at best would mean the amount or compensation
15 expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to treat the segregated transactional value as NIL‘ when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to the aggregate package. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we would disagree with the majority decision in L.G. Electronics India Pvt. Ltd. (supra). This would be necessary when the arm‘s length price of the controlled transaction cannot be adequately or reliably determined without segmentation of AMP expenses. (xi) The Assessing Officer/TPO for good and sufficient reasons can debundle interconnected transactions, i.e. segregate distribution, marketing or AMP transactions. This may be necessary when bundled transactions cannot be adequately compared on aggregate basis. (xii) When segmentation or segregation of a bundled transaction is required, the question of set off and apportionment must be examined realistically and with a pragmatic approach. Transfer pricing is an income allocating exercise to prevent artificial shifting of net
16 incomes of controlled taxpayers and to place them on parity with uncontrolled, unrelated taxpayers. The exercise undertaken should not result in over or double taxation. Thus, the Assessing Officer/TPO can segregate AMP expenses as an independent international transaction, but only after elucidating grounds and reasons for not accepting the bunching adopted by the assessed, and examining and giving benefit of set off. Section 92(3) does not bar or prohibit set off. (xiii) CP Method is a recognised and accepted method under Indian transfer pricing regulation. It can be applied by the Assessing Officer/TPO in case AMP expenses are treated as a separate international transaction, provided CP Method is the most appropriate and reliable method. Adoption of CP Method and computation of cost and gross profit margin comparable must be justified. (xiv) The object and purpose of Transfer Pricing adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. Costs or expenses incurred for services provided or in respect of property transferred, when made subject matter of arm‘s length price by applying CP Method, cannot be again factored or 17 included as a part of interconnected international transaction and subjected to arm‘s length pricing.“
In our considered view, there cannot be any formula with mathematical precision to determine the ALP of international transaction relating to AMP expenses. All the cases have to be decided on the facts of their own.
Keeping in mind the aforesaid findings of the Hon'ble High Court of Delhi, we find that the assessee company is engaged in the distribution of mobile hand-sets in India. As part of this activity the company undertakes marketing and post sales support for the mobile handsets. The AEs, on the other hand, are engaged in new product development, complex manufacturing and core marketing assuming all the businesses and entrepreneurial risks.
The AEs undertake complex R & D operations relating to the products. They are responsible for ensuring that the products are technologically in line with the market requirements and trends. The AEs are responsible for manufacturing the products that are sold across the globe. They are responsible for quality control, production
18 scheduling vendor development, inventory management, supply chain management, packaging etc. We further find that the AEs own brand rights of all the products and are responsible for core marketing and pricing decisions of the products. The AEs are also responsible for undertaking global sales and distribution function. The AEs shall also provide marketing and product related information to the assessee like brochures, technical information material, etc. to enable the assessee to perform its functions in an efficient manner.
We find that the functions performed by the assessee are as follows:
(i) local marketing of mobile phones; (ii) distribution of mobile phones/technology products; and (iii) provision of repair and maintenance services.
These functions can be elaborately understood as under:
SEIN has employed a team of employees for carrying out local marketing of mobile phones in India. The global recognition of brand name of Sony Ericsson provides good brand equity in India as well as 19 overseas, this also provides support to SEIN's marketing efforts. SEIN also undertakes various product promotion activities such as conducting road shows, participation in industry events, advertising in all forums of media channels, which includes magazines, newspaper, television, radio etc. Some of the activities undertaken by the team include: a) determining both the long term as well as short term business development policies in relation to the India market b) framing and implementing market penetration, future growth etc. strategies for the Indian market c) ensuring customer satisfaction in India
The overall marketing strategy is developed by the AEs as they have the requisite experience for undertaking this activity Based on the broad guidelines provided by the AEs, SEIN develops the local advertising and marketing initiatives.
Distribution of Mobile phones/ technology products
Since the mobile handsets and accessories purchased by SEIN are sold through distributors in India, SEIN is responsible for developing
20 and maintaining dealer network. The Indian Entity s responsible for identifying and selecting dealers, negotiating terms with them, providing product information to dealers etc. It also undertakes routine functions like credit appraisals, order processing, warehousing of products, inventory management, logistic management, receivables management etc.
The sales team is responsible for promotion and sale of products in India. It also looks into maximizing its customer base by acquiring more customers and retaining its old customers. The Indian Entity purchases high-end mobile phones from its AEs. For low-end mobile phones, the AEs have appointed a contract manufacturer in India for manufacturing low-end mobile phones and selling the same to SEIN at negotiated rates. Further, as per the Transfer Pricing model, pricing of products between SEIN and its AEs contract manufacturer is regulated in a manner that ensures that SEIN earns an arm’s length return with respect to the distribution activity. The price is adjusted according to the price level development in the market, and operating cost changes in SEIN. Therefore, based on the price level development in the market, if at the year-end SEIN is not able to achieve arm length return with respect to its distribution activity, then as per the Transfer Pricing model receives credit notes from its AEs to achieve an 21 arm's length return on sales. Based on the above model followed by SEIN, it is able to achieve an arm's length margin after considering all total operating cost.
Based on the above guidance and facts as enunciated above, it is evident that the compensation model of the assessee is structured in such a manner that the reimbursement of any excess third party expenses is already in-built in the transfer price adjustment compensation received by SEIN which allows it to consistently earn an operating margin which is higher than the comparables.
Provision of post sales support services
Prior to SEIN starting its operations in India, the AEs were selling mobile phones directly into India and for rendering warranty support services, they had engaged third party providers. In its initial period of operations, SEIN neither had the necessary set up nor developer processes for providing warranty services to its customers. Accordingly, its AEs provided such post sales support to SEIN by subcontracting the warranty support services to third service providers and subsequently charged the cost to SEIN without any mark-up. However, once the 22 necessary processes were developed by SEIN for provision of warranty support services, it discontinued the availment of services from the AEs and directly provided such services to its customers. SEIN entered into contracts with third party service pro-^B for provision of repair and maintenance services for the mobile phones sold by it and under warranty. Subsequently, the AEs terminated the contract with the third party service for warranty services and entered into a contract with SEIN for providing warranty support services to the customers of AEs. SEIN provided such support services to its AEs during the last quarters of the Financial Year and costs incurred by SEIN towards such third party services provider was reimbursed by its AEs on cost to cost basis.
General Management Functions
The functions addressed below are common functions that are carried out by any business irrespective of their size and type. These functions are the drivers of every business and are indispensable in the economic environment.
23 Corporate Strategy Determination:
Generally, all local policies within SEIN are determined by its own management who continuously monitor the economic environment surrounding the company, assess their strategic position within the industry and target to achieve the broad Group objectives. Finance, Accounting, Treasury and Legal Function:
SEIN is responsible for managing the finance, treasury, legal and accounting functions. In certain areas, wherever necessary, SEIN is guided by the Group policies. SEIN is also responsible for all local statutory compliance.
Human Resource (‘HR’) Management Function:
The HR function is coordinated by its management, which is responsible for recruitment, development and training of the personnel including the emolument structure. In this respect, where appropriate, this function is guided by the Group Policies. However, AEs take all long-term strategic decisions relating to the Sony Ericsson products.
24 33. Having considered the respective functions of the AE and the assessee company, we find that in so far as comparables are considered, there is no quarrel. There is no dispute that TNMM is the most appropriate method and the assessee’s net margin is at 2.5% whereas the mean margin of comparable companies is at 0.4%. As mentioned elsewhere, during the course of assessment proceedings, the assessee has undertaken a fresh search for comparables indentifying a set of 19 comparable with average margin of 0.48%. In addition, the assessee has also furnished a margin of 12 comparables identified by the TPO for BLT computation where average margin works out to minus 0.35%.
From the above, it can be safely concluded that the assessee earned margin of 2.5% after considering AMP expenditure which is much higher than the average margin of comparables. Moreover, as mentioned elsewhere, AE has assured that the assessee company earns net margin of at least 2% on its sales and remunerates it for any shortfall in margins by way of credit notes. During the year, the assessee company has received two credit notes totalling to Rs. 73.83 crores which were adjusted against purchases in financial statements
25 since the same were received to cover up for short fall in margin under TNMM for transaction of purchase of goods.
Para 6.37 of the OECDs Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations edition 2010 suggests that :
“where the marketer / distributor acts as an agent of a principal which supplies goods, it will normally be sufficient to compensate the distributor with a service fee and not provide it with a return on marketing intangibles. TPG paragraph suggests that where the distributor bears the cost of marketing activities, whether it should be compensated with a return on any intangibles created through such expenditures will turn on the contractual rights of the parties. The paragraph also indicates that there may be a difference between long term and short term relationships. Finally it indicates that where the distributor bears “extraordinary” marketing expenditures, beyond those a comparable independent distributor with similar rights might incur for its own benefit, it may be entitled to a return on intangibles. Paragraph 6.38 finally suggests that such a return might be provided by means of a purchase price reduction or a reduction in applicable royalty rates. TPG paragraph 6.39 indicates that even if one can determine that a marketer / distributor are entitled to a return on the marketing intangibles, determination of the appropriate return is a very difficult matter. That paragraph provides little specific guidance for measuring the appropriate returns, other than suggesting that the actual conduct of the parties over a period of years may be relevant.”
From the above guidelines, even the OECD suggests that it will be sufficient to compensate the distributor with a service fee and not provide it with a return on marketing intangibles. It is further suggested that where the distributor bears the cost of marketing activity, whether it should be compensated with a return on any intangible created through such expenditures will turn on the contractual rights of the parties. Elsewhere we have mentioned the functions of the assessee company and the AE. In our considered opinion, it is merely a presumption that the assessee has incurred some extra ordinary expense in excess of the normal routine expenses and should have been compensated by the AE. As mentioned elsewhere, the assessee has spent advertisement expenses at Rs. 660,556,778/- business promotion and selling expenses at Rs. 496,658,381/- totaling to Rs. 1,157,215,159/-.
We do not find any force in the findings of the lower authorities that the above said expenditure on AMP has been incurred exclusively to promote the brand/trade name ‘Sony Ericsson’ and such 27 expenditure has resulted into brand building and increased awareness of the products bearing brand/trade name ‘Sony Ericsson’ and also that such expenditure incurred by the assessee company is for the advantage of its AE. 38. “Brand” means unique design, sign, symbol, words, or a combination of these, employed in creating an image that identifies a product and differentiates it from its competitors. Over time, this image becomes associated with a level of credibility, quality, and satisfaction in the consumer's mind. Thus brands help harried consumers in crowded and complex marketplace, by standing for certain benefits and value.
As mentioned elsewhere, the assessee’s AEs are engaged in designing and developing new technology and products for mobile communication and over the years have successfully developed several new products and technologies. The AEs are responsible for core marketing and pricing decisions of the products. Also the AEs are responsible for undertaking the global sales and distribution functions. Therefore, in our opinion, by incurring advertisement expenses in the domestic market, the assessee could not have done any value addition to the brand name of the AE.
Advertisement expenditure incurred by the assessee company could not have added any value to the brand Soni Ericsson owned by the AE. Since this is the first year of business in India, the assessee had to advertise aggressively but could not be considered as expenditure incurred for brand building. At the most, the same can be considered as having been incurred for brand maintenance. As the saying goes “Public memory is very short”, such companies have to hit the public eyes through advertisements via print, media or electronic media or any other mode of advertisement because, again as the saying goes “Out of sight, out of mind”. Soni Ericsson being a new entrant in the mobile segment in the year under consideration, the assessee had to incur advertisement expenses to remind the general public of its existence in the domestic market. In our considered view, such advertisement expenses cannot be considered as being incurred towards brand building. As mentioned elsewhere, the AEs own brand rights of all products and are responsible for core marketing and pricing decisions of the products and are also responsible for undertaking global sales and distribution function.
29 41. “Marketing” means the management process through which goods and services move from concept to the customer. It includes the coordination of four elements:
(i) identification, selection and development of a product, (ii) determination of its price,
(iii) selection of a distribution channel to reach the customer's place, and (iv) development and implementation of a promotional strategy.
Items 1, 2 and 4 mentioned hereinabove are not applicable in the case of the assessee company. Further, marketing is based on thinking about the business in terms of customer needs and their satisfaction. Marketing differs from selling because "Selling concerns itself with the tricks and techniques of getting people to exchange their cash for your product. It is not concerned with the values that the exchange is all about. And it does not, as marketing invariable does, view the entire business process as consisting of a tightly integrated effort to discover, create, arouse and satisfy customer needs." In other words, marketing has less to do with getting customers to pay for your product as it does developing a demand for that product and fulfilling the customer's needs.
30 43. In the light of the aforesaid definition, the assessee has employed a team of employees for carrying out local marketing of mobile phones in India. Global recognition of the brand name “Sony Ericsson” provides support to the assessee company in its marketing effort. The assessee has also undertaken various product promotion activities such as conducting road shows, participating in industry events, advertisement in all forms of media channels, etc.
Advertisement means a means of communication with the users of a product or service. Advertisements are messages paid for by those who send them and are intended to inform or influence people who receive them.
“Business Promotion Expenses” means all expenses incurred in respect of promotion of business. Though, all expenses relating to the advertisement and publicity also help to promote the sales of a business firm but there are so many expenditures which are not advertisement expenses even then they play very important role in maintaining the prestige of the business firm. For example:-
(a) Refreshment expenses for business clients. (b) Gifts to the business clients on certain events.
31 (c) To sell the goods to the clients at special discount for their personal use etc.
Though, these expenses can be booked in Advertisement and Publicity Expenses Account but to have the idea of actual expenditures on these types of expenses, a separate head as ‘Business Promotion Expenses’ or ‘Sales Promotion Expenses’ or ‘Expenses With Business Clients’ is created.
Testing the functions performed by the assessee vis a vis AMP expenses incurred by it, we do not find that the assessee has incurred AMP for the benefit of its AE. All the expenditure incurred by the assessee are in relation to its business and its promotion. Moreover, as mentioned elsewhere, the net margin is much higher than the comparables and looking from that angle also, we do not find any merit in the transfer pricing adjustments. It is incorrect to say that the amount of Rs. 73.83 crores received by the assessee by way of credit notes represents the excess price charged by AE which has been credited to the assessee. The business model of the assessee with its AE is such that the AE ensures that the assessee achieves an arms’ length return on sales made by it.
32 48. Assuming, yet not accepting that the assessee should have been compensated by its AE towards AMP and such compensation as worked out by the TPO is Rs. 69.94 crores, then also no adjustment is required since the assessee has received credit notes worth 74.83 crores and has been suitably compensated.
If the AMP expenses are considered as an independent transaction and combined transaction approach is not considered, then also excessive profit derived by bench marking of distribution segment should be adjusted with alleged excessive AMP expenditure thereby providing benefit of set off. This view finds support from the judgment of the Hon'ble High Court of Delhi in its findings at clause xii at page 140 in Tax Appeal No. 16/2014 at para 136 to 146.
But this will only be considered when the Assessing Officer/TPO has rejected the comparables adopted by the assessee as a bundled transaction. In the case in hand, and as mentioned elsewhere, the Assessing Officer/TPO has accepted the comparables adopted by the assessee as bundled transaction and, therefore, it would be illogical and improper to treat the AMP expenses as separate international transaction as mentioned by the Hon'ble High Court in its list of findings at clause (v) at page 138 of its order.
33 51. To sum up, considering the guidelines/findings of the Hon'ble High Court of Delhi [supra] and considering the facts of the case in hand from all possible angles, we are of the considered view that the assessee company has been suitably compensated by its AEs and, therefore, no further adjustment is required. We order accordingly.
Before closing, the dispute that AMP expenses are not international transaction has been settled by the Hon'ble Delhi High Court in the afore-mentioned judgment at para 52 wherein the Hon'ble High Court has rejected this contention.
In the result, the appeal of the assessee in is allowed.
The order is pronounced in the open court on 26.07.2018.