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Income Tax Appellate Tribunal, DELHI BENCHES : I-1 : NEW DELHI
Before: SHRI R.S. SYAL & SHRI SUDHANSHU SRIVASTAVA
Date of Hearing : 23.05.2017 Date of Pronouncement : 26.05.2017 ORDER PER R.S. SYAL, VP: This batch of four appeals consisting of three appeals by the assessee for the assessment years 2010-11, 2011-12 and 2012-13 and one cross appeal by the Revenue for the assessment year 2010-11 are directed against the final assessment orders passed by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called ‘the Act’). Since some of the issues raised in these appeals are common, we are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.
Assessment Years 2010-11 & 2011-12
The only issue raised by the assessee in its appeals for these two years is against the addition on account of transfer pricing adjustment in advertisement, marketing and promotion (AMP) expenses. The Revenue , 1205/De/2016 344/Del/2017 & 1117/Del/2015 in its appeal for the A.Y. 2010-11 is also aggrieved against certain aspects impacting only the AMP adjustment.
Briefly stated, the facts of the case are that the assessee is a part of Luxottica group which is a leader in design, manufacture and distribution of sun glasses and prescription frames in mid and premium price categories. The assessee was incorporated in India on 15.11.2007 and commenced its actual operations from February, 2008. The assessee reported four international transactions, namely, Purchase of finished goods and Advertising Material and also reimbursement of expenses to and from AEs for the A.Y. 2010-11; and three international transactions, namely, import of finished goods and reimbursement of expenses to and from AEs for the A.Y. 2011-12. On a reference made by the AO to the Transfer Pricing Officer (TPO) for determining the arm’s length price (ALP) of the international transactions, the TPO noticed that the assessee incurred AMP expenses amounting to Rs.19,31,44,379/- for the A.Y. 2011-12. Applying the bright line test, he proposed transfer pricing adjustment amounting to Rs.13,40,31,274/- for the A.Y. 2011- , 1205/De/2016 344/Del/2017 & 1117/Del/2015 12. Transfer pricing adjustment was made in the same way for the A.Y.
2010-11. The Dispute Resolution Panel (DRP) largely approved the action of the Assessing Officer/TPO but subject to certain modifications.
The Assessing Officer, in his final orders, made transfer pricing additions on account of AMP expenses amounting to Rs.3,13,20,369 for the A.Y. 2010-11 and Rs.13,40,31,274 for the A.Y.2011-12. The assessee is aggrieved against these additions for both the years. The Revenue in its cross appeal for the A.Y. 2010-11 has agitated certain aspects of determination of ALP of AMP expenses.
We have heard the rival submissions and perused the relevant material on record. The ld. AR initially contended that the incurring of AMP expenses is not an international transaction at all and, hence, there can be no question of determining the arm’s length price of this transaction or making any addition thereon. He relied on the judgments of the Hon’ble Delhi High Court in Maruti Suzuki India Ltd. & Another vs. CIT (2015) 129 DTR 25 (Del) and CIT vs. Whirlpool of India Ltd. (2015) 94 CCH 156 DEL-HC to contend that the AMP expenses could , 1205/De/2016 344/Del/2017 & 1117/Del/2015 not be considered as an international transaction. It was submitted that there was no international transaction of AMP expenses on the basis of the principles laid down in these judgments and, hence, the entire exercise of determining its ALP and, ex consequenti, making the transfer pricing adjustment, be set aside.
In the oppugnation, the ld. DR, relied on the judgment of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) in which AMP expenses have been held to be an international transaction and the matter of determination of its ALP has been restored. He also relied on a later judgment of the Hon’ble jurisdictional High Court in Yum Restaurants (India) P. Ltd. vs. ITO (2016) 380 ITR 637 (Del) and still another judgment dated 28.1.2016 of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expense is an international transaction has been restored for a fresh determination. It was argued, that the judgment in the case of Yum Restaurants and Sony Ericson (for , 1205/De/2016 344/Del/2017 & 1117/Del/2015 AY 2010-11) delivered in January, 2016 is later in point of time to the earlier judgments in the case of Maruti Suzuki and Whirlpool, etc. and, hence, the matter should be restored for a fresh determination. It was further submitted that there is no blanket rule of the AMP expenses as a non-international transaction. He stated that the Hon’ble High Court in Whirlpool (supra) has made certain observations, which should be properly weighed for ascertaining if an international transaction of AMP expense, exists. It was argued that the Tribunal in several cases, including the assessee’s own case for the preceding year, has restored this issue to the file of TPO to be decided afresh in the light of the judgment of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del). He also relied on another judgment dated 28.1.2016 of the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expense is an international transaction, has been restored for a fresh determination. He still further referred to three later judgments of the Hon’ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT 6 , 1205/De/2016 344/Del/2017 & 1117/Del/2015 (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). The ld. DR argued that the Hon’ble Delhi High Court in its earlier decision in Sony Ericson Mobile Communications (India)
Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) has held AMP expenses to be an international transaction. It was argued the matter should be restored for a fresh determination.
We find that when the TPO held AMP expense to be an international transaction, he did not have any occasion to consider the ratio laid down in several judgments of the Hon’ble jurisdictional High Court, which is now available for consideration. This has been candidly accepted by both the sides. It is further observed that similar issue was raised before the Tribunal for the immediately preceding assessment year 2009-10. Vide order dated 05.11.2014, the Tribunal restored the matter to the Assessing Officer/TPO for a fresh adjudication. The , 1205/De/2016 344/Del/2017 & 1117/Del/2015 assessee challenged the said order before the Hon'ble High Court. Vide judgment dated 06.11.2015, the Hon'ble High Court remitted the matter to the file of the Tribunal for fresh decision in the light of the judgment of the Hon'ble jurisdictional High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del). In the second round, the Tribunal has dealt with the issue, vide its order dated 06.06.2016, holding as under:-
“7. In view of the above developments, we find that the only issue pending adjudication before us in the above cross appeals is in respect of AMP expenses. We thus respectfully following the above order dated 20.5.2015 of the Hon'ble jurisdictional High Court of Delhi in the appeal preferred by the assessee (ITA No.336/2015), while setting aside the matter to the file of the learned TPO direct him to decide the issue of adjustment made on account of AMP expenses applying the ratios of decision in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. vs. CIT (supra) after considering merits of the matter including comprehension of the assessee that AMP determination itself, by taking into consideration that the AMP expenses is not warranted in the circumstances. It is needless to mention over here that while deciding the issue afresh as directed above, the learned TPO will afford opportunity of being heard to the assessee. The appeal of the assessee is accordingly allowed for statistical purposes.”
It is clear from the order passed by the Tribunal in assessee’s own case for the immediately preceding assessment year that the matter has been sent back to the A.O./TPO for deciding it afresh in the light of the , 1205/De/2016 344/Del/2017 & 1117/Del/2015 judgment of the Hon'ble Delhi High Court in Sony Ericsson Mobile
The ld. AR contended that the TPO for the A.Y. 2012-13 in assesse’s own case has not made any transfer pricing adjustment on account of AMP expenses but has factored in the AMP intensity adjustment in the profit margin of the comparables and made transfer pricing addition on account of the international transaction of `Import of finished goods’. It was urged that instead of restoring the matter to the A.O./TPO for deciding the existence of an international transaction and determining the ALP of this transaction, if any, the matter should be restored with a direction to carry out AMP intensity adjustment in conformity with the view taken by the TPO for the A.Y. 2012-13. This was objected to by the ld. DR.
We are not convinced with the proposition put forth on behalf of the assessee because the entire proceedings before the TPO/DRP/AO have proceeded on the basis of a separate international transaction of AMP and its independent benchmarking. There is not even a whisper in , 1205/De/2016 344/Del/2017 & 1117/Del/2015 the orders about carrying out AMP intensity adjustment instead of treating AMP as an international transaction. If the contention of the ld. AR is accepted, it will change the entire complexion of the case and would amount to travelling beyond the impugned order. As the TPO has considered AMP as a separate international transaction and determined its ALP; and further that the tribunal in assessee’s own case for the immediately preceding A.Y. 2009-10, following the judgment of the Hon'ble jurisdictional High Court rendered in its own case for the same year, has dealt with the determination of the AMP as a separate international transaction, we cannot now concur with the request of the assessee in allowing the setting up of an altogether different case. This contention, ergo, fails.
The ld. DR candidly submitted that if the matter is restored for a fresh adjudication in the light of the order passed by the Tribunal for the immediately preceding assessment year, then there will be no need for a separate adjudication of the grounds taken in its appeal as the same , 1205/De/2016 344/Del/2017 & 1117/Del/2015 relate to some aspects of the determination of ALP of AMP expenses.
We accept this contention.
To sum up, since the facts and circumstances of the instant appeals are mutatis mutandis similar to the immediately preceding year, respectfully following the precedent, we set aside the impugned order and send the matter back to the A.O./TPO for deciding this issue afresh in light of the foregoing discussion and the directions given by the Tribunal in its order for the immediately preceding year in the second round. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in the resulting fresh proceedings.
In the result, all the three appeals are allowed for statistical purposes.
Assessment Year 2012-13
All the grounds taken by the assessee in its appeal assail the transfer pricing adjustment of AMP expenses. Ground no. 1 is general.
Ground no. 2 is the main ground, with several sub-grounds. Such main , 1205/De/2016 344/Del/2017 & 1117/Del/2015 ground has been captioned as :`Transfer pricing adjustment in respect of AMP expenses’. The sub-grounds are: `No transaction much less than an international transaction’; `No arrangement/ Agreement/ Understanding/ contract with AEs’; `Erroneous approach for determining the ALP of alleged AMP expenses’; etc. etc. Though all the grounds are aimed at challenging the addition of transfer pricing adjustment on AMP transaction treated as an international transaction, we notice that the TPO has not made any separate transfer pricing adjustment for AMP expenses. In fact, the transfer pricing adjustment is only for the international transaction of `Import of finished goods’, albeit, factoring in the AMP intensity adjustment in the profit rates of comparables. The ld. AR fairly accepted this position and requested for proceeding with the issue actually arising from the impugned order. The ld. DR did not raise any serious objection to it. We are, therefore, espousing the issue in the appeal de hors the language of separate grounds taken in the memorandum of appeal. , 1205/De/2016 344/Del/2017 & 1117/Del/2015 14. Succinctly, the facts for the year under consideration are that the assessee reported three international transactions, viz., `Import of finished goods’ amounting to Rs.81,78,20,743 and two other transactions of reimbursement to and by AEs. The Assessing Officer referred the determination of ALP of the international transactions to the TPO, who observed that the assessee benchmarked its international transaction of `Import of finished goods’ with the Resale Price Method (RPM) as the most appropriate method. The assessee claimed that the import of finished goods by the assessee was at ALP. The TPO noticed that the assessee incurred significant amount of AMP expenses and opined that the AE of the assessee was the ultimate beneficiary of such AMP expenses, as the value of the brand owned by the latter was increasing due to the marketing efforts of the asessee. The same was considered as the discharge of marketing functions by the assessee. It was thus held that the assessee was creating marketing intangibles in favour of the AE by carrying out AMP efforts in the Indian sub- continent. In this backdrop, the TPO opined that for the purpose of benchmarking, the comparables should also have equal intensities of the 13 , 1205/De/2016 344/Del/2017 & 1117/Del/2015 expenses incurred for sales and marketing. Out of four comparable companies chosen by the assessee to benchmark its international transaction of Import of finished goods, the TPO accepted three, namely, Deep Diamonds India Ltd., Emsons Chain Ltd. and Minal Industries Ltd. On going through the financials of the above three comparable companies, the TPO noticed that they were carrying out low or negligible marketing functions. Since the comparables identified were having low intensity of marketing functions, the TPO held that a comparability adjustment was required to be made to the profits of the comparables before comparing their PLIs with the assessee for determining the ALP of the international transaction. He, therefore, made the AMP intensity adjustment in the margins of the comparables by identifying the excess intensity of expenditure incurred by the assessee on its AMP function vis-à-vis such comparables. Conscious of the fact that the Hon'ble Delhi High Court has rejected the contention of the Revenue on the applicability of the bright line test and the consequent determination of separate ALP of the AMP expenses, the , 1205/De/2016 344/Del/2017 & 1117/Del/2015 TPO adopted this alternative approach in this year, which has been outlined on page 42 of his order as under:-
• “The taxpayer’s selling, marketing and promotion expenses were determined as a percentage of sales – Intensity of expenses incurred by taxpayer. • Companies which were comparable with the taxpayer were identified. • Selling, marketing and promotion expenses as a percentage of sale of such comparable companies were determined – Intensity of expenses incurred by comparable companies • The intensity of expenses of taxpayer was compared with the intensity of expenses of comparable. • The excess intensity of expenses in taxpayer’s expenses as compared to the intensity of comparable was considered as excessive AMP expenditure considered by the taxpayer. ”
The assessee claimed before the TPO that out of total AMP expenses incurred by it to the tune of Rs.13.01 crore, only the AMP , 1205/De/2016 344/Del/2017 & 1117/Del/2015 expenditure incurred on in-house brands of Luxottica Group i.e.
Rs.11.55 crore, should be considered for the purposes of benchmarking.
This contention was accepted and the TPO carried out the excess AMP intensity adjustment in the profit margins of the comparables and computed their average reselling margin at 6.03%. By applying such average adjusted margin, the TPO proposed transfer pricing adjustment amounting to Rs.4,25,51,845/-. The assessee’s contention for allowing (+)/(-) 5% was accepted in principle, but, found, on the factual application, to be not sending the case out of the transfer pricing addition. The assessee unsuccessfully challenged the TPO’s order before the DRP. In the final order passed by the Assessing Officer on 13.12.2006, a transfer pricing addition of Rs.4.25 crore and odd was made. The assessee is aggrieved against the addition.
We have heard the rival submissions and perused the relevant material on record. It is noticed that there is a significant departure from the course of action adopted by the TPO in this year vis-à-vis the earlier years. Whereas up to the assessment year 2011-12, the TPO was , 1205/De/2016 344/Del/2017 & 1117/Del/2015 treating AMP expense as a separate international transaction and determining its ALP independently, in this year, such a line of action has been dispensed with. Treating the marketing activity as a function performed by the assessee as a part of its role and responsibility as a distributor, the TPO has not treated AMP expense as a separate international transaction. Instead, he made AMP intensity adjustment to the profit rates of the comparables for bringing the intensity of AMP functions of the assessee at par with theirs in computing the ALP of the international transaction of Import of goods. This view of treating AMP as a function has been taken by considering the judgment of the Hon'ble jurisdictional High Court in the case of Bausch & Lomb Eyecare India Pvt. Ltd. and Ors. Vs. Addl.CIT and Ors. (2016) 381 ITR 227 (Del) in which it has been held: “that a distinction is required to be drawn between ‘a function’ and ‘a transaction’ and that every expenditure forming part of the function cannot be construed as a transaction.” We are satisfied with the view taken by the TPO in this regard, which is also supported by the judgment in Sony Ericsson (2015) 374 ITR 118 (Del) in which it has been observed in para 166 that : `On behalf of the assessee, 17 , 1205/De/2016 344/Del/2017 & 1117/Del/2015 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’. Then, it has been held in para 165 that : `An external comparable should perform similar AMP functions…. Comparable analysis of the tested party and the comparable would include reference to AMP expenses’. The ld. AR has not raised any objection, and rightly so, to the carrying out of the AMP intensity adjustment to the profit rates of the comparables, as the same is in accordance with the view of the Hon’ble jurisdictional High Court. It will be seen infra that his objection is confined only to the computation of the amount of transfer pricing adjusting by using the ratio for apportionment of the excess cost incurred by the assessee over and above the arm’s length cost. Coming back, the TPO carried out the AMP intensity adjustment in the profit rates of the comparables as under :-
TABLE-A
Luxottica India DDeep Diamond Emsons Chain Minal Industries D Name of the company Eyewear Private InIndia Limited Limited Limited Limited
Total Operating Revenue A 3,22,16,619 1,19,85,019 1,01,41,00,364 2,14,01,47,987.00 Revenue Cost of Materials B 2,81,30,612 56,88,354 Consumed Purchase of Stock in 58,89,612 17,74,997 1,31,76,42,609 1,67,00,45,000 C Trade Add .Change Inventory D (1,10,93,726) (34,03,12,253) (5,91,20.985) Direct Cost E=B+C+D 2,29,26,498 74,63,351 97,73,30,356 1,61,09,24,015 Gross Profit F=A-E 92,90,121 45,21,668 3,67,70,008 52,92,23,972
Employee expenses G 9,57,087 22,49,316 6,04,703 10,48,67,204 AMP Cost H - 73,395 13,01,81,750 - Other Expenses I 52,05,279 18,25,730 68,71,888 24,88,49,373 Total Indirect Cost J =G+H+I 61,62,366 40,75,046 75,49,986 48,38,98,327 Total Operating Cost K=E+J 2,90,88,864 115,38,397 98,48,80,342 2 09,48,22,342 Net Profit L=·A-K 31,27,755 4,46,622 2,92,20,022 4, 53,25,645 GP/Sales M=F/A 28.84% 37.73% 3.63% 24.73%% NP/Sales N=L/A 9.71% 3.73% 2.88% 2.12%
AMP for in-house brands =115,516,314/ 5.40% A 0.01% AMP/Sales O=H/A 0.00% 0.00% 5.40% Difference In Intensity of 5.40% P=5.40%-O 5.40% 5.39% AMP Difference in Cost Q=P*A 17,38,920 6,46,902 5,46,63,538 Adjusted Cost R=K+Q 3,08,27,784 1,21,85,299 1,03,95,43,880 Adjustment in sales S=1.l817*Q 20,54,881 7,64,444 6,45,95,902 Adjusted sales T=A+S 3,42,71,500 1,27,49,463 1,07,86,96,266 Adjusted profit U=T-R 34,43,717 5,64,164 3,91,52,387 Adjusted OP/OR V=U/T 10.05% 4.43% 3.63% Average Margin 6.03% -
It can be seen from the above Table that the TPO has carried out AMP intensity adjustment in the profit margins of the comparables and that is how the adjusted average margin of the comparables has been computed at 6.03%. This exercise done by the TPO has not been disputed by the assessee. The ld. AR challenged the computation of ALP of the international transaction of import of finished goods determined by the TPO as under:-
TABLE-B
Computation of Arm’s Length Price (in INR) Total Revenue 2,14,01,47,987 Arms Length Margin (OP/OR) 6.03% Arms Length Cost 2,01,10,04,721 Actual Cost incurred 2,09,48,22,342 Difference in cost 8,38,17,621 International Transaction 81,78,20,743 Purchase of traded goods and change in 1,61,09,24,015 inventories Proportionate 50.77% Proposed Adjustment 4,25,51,845
The above computation of ALP shows that the total revenue of the assessee is Rs.214.01 crore. Arm’s length margin of 6.03% has been applied on this figure of the revenue for computing the arm’s length cost at entity level, in backward manner, at Rs.201.10 crore. As against such , 1205/De/2016 344/Del/2017 & 1117/Del/2015 arm’s length cost, the assessee actually incurred cost of Rs.209.48 crore, leading to the payment of excess differential cost to the tune of Rs.8.38 crore on entity level. We can find from the last column of the Table A that the total direct cost of Material (finished goods) incurred by the assessee at the entity level is Rs.161.09 crore. This direct cost of material comprises of two figures, viz., the purchase of stock-in-trade from AEs and non-AEs as adjusted due to opening and closing inventory. Purchase of Material from the AE, being the international transaction, stands at Rs.81.78 crore. Thus, it is clear that out of total direct cost of Material incurred by the assessee to the tune of Rs.161.09 crore, the value of international transaction of purchase of Material is Rs.81.78 crore. The TPO apportioned the entity level excess cost incurred by the assessee over and above the arm’s length cost, to the international transaction by multiplying it with the cost of Material purchased from AE and dividing it with the total cost of Material consumed, purchased from AEs and non-AEs. That is how, he proposed transfer pricing adjustment of Rs.4.25 crore by multiplying the entity level cost over and above the arm’s length cost (Rs.8.38 crore) with the 21 , 1205/De/2016 344/Del/2017 & 1117/Del/2015 value of international transaction of purchase of Material (Rs.81.78 crore) and dividing it with the total cost of Material consumed, namely, purchased from AEs and non-AEs (Rs.161.09 crore). The ld. AR has objected only to the use of denominator as the total cost of Material consumed (Rs.161.09 crore). He contended that, instead, the denominator should have been total operating costs (Rs.209.48 crore) which, apart from the cost of Material also include Employees cost, AMP cost and other indirect costs. This argument is fallacious inasmuch as it seeks to do apportionment by taking only the purchase cost of Material from AE (to the exclusion of the proportionate indirect costs) as numerator and total purchase cost of Material consumed from AEs and non-AEs (including all the indirect costs) as denominator. Such a basis is totally illogical. Components of the numerator and denominator have to remain same. There cannot be item-wise difference in the composition of the two. If the numerator has only the purchase cost of Material from AEs, then the denominator should also have only the purchase cost of Material consumed from AEs and non-AEs. As the numerator in the instant case is the purchase cost of Material from the 22 , 1205/De/2016 344/Del/2017 & 1117/Del/2015 AE, which is not disputed by the assessee, then as a natural corollary, the denominator cannot be any figure other than the purchase cost of Material consumed purchased from AEs and non-AEs. If we accept the view buttressed by the ld. AR and proceed with restricting the numerator as the purchase cost of Material from the AEs and extend the denominator also to other indirect costs, the result will obviously be distorted. Such a contention advanced on behalf of the assessee is aimed at expanding the denominator to the maximum possible extent so that the amount of the resulting transfer pricing addition, from the total excess cost over the arm’s length cost attributable to international transaction of purchase of Material, could be reduced. We cannot countenance it. As such, we hold that the TPO has taken an unimpeachable view in making apportionment of the excess cost incurred on entity level to the international transaction.
The ld. AR next contended that the assessee applied Resale Price Method (RPM) as the most appropriate method in its Transfer pricing study report and the TPO used the Transactional Net Margin Method , 1205/De/2016 344/Del/2017 & 1117/Del/2015 (TNMM) as the most appropriate method for making the transfer pricing adjustment. The ld. AR argued that the Tribunal in its order for the assessment year 2009-10 has approved the RPM as the most appropriate method and the Hon'ble High Court has not interfered with the Tribunal order on this issue. This was opposed by the ld. DR who submitted that the Hon'ble High Court has simply chosen not to interfere in the Tribunal order without giving any separate reasons and, hence, it cannot be said that the Tribunal order on this issue has been affirmed by the Hon'ble High Court.
We find that the TPO in the instant case, though noted in para 2 of its order, that the assessee applied RPM as the most appropriate method, but gave no reasons for rejecting the same and went on to compute transfer pricing adjustment under the TNMM. It is a matter of fact that the assessee for the assessment year 2009-10 adopted TNMM as the most appropriate method to demonstrate that its international transaction of purchase of material was at ALP. Such determination was sought to be corroborated by also applying RPM. The TPO for that year , 1205/De/2016 344/Del/2017 & 1117/Del/2015 initially called upon the assessee to show cause as to why the RPM be not applied as the most appropriate method. Later on, the TPO went with the TNMM as the most appropriate method. The Tribunal noticed that the main business of the assessee was to carry on trading of sunglasses and frames. The goods purchased were sold without making any value addition. It was, therefore, held that RPM was the most appropriate method in preference over the TNMM. The Hon'ble High Court did not interfere with the view taken by the Tribunal. It is, therefore, manifest that the application of the RPM as the most appropriate method has been finally approved for the A.Y. 2009-10.
However, a significant factor which cannot be lost sight of for the A.Y. 2009-10 is that instead of making any AMP intensity adjustment in the profit rate of comparables, the TPO considered AMP expenditure as a separate international transaction and determined its ALP independent of the ALP of the international transaction of purchase of material from its AE. As such there was no need to subsume the AMP function in the determination of the ALP of the international transaction of purchase of material. But in so far as the facts for the extant year are concerned, it is 25 , 1205/De/2016 344/Del/2017 & 1117/Del/2015 patent that the AMP function has been embedded by the TPO in the international transaction of purchase of Material from the AE and the transfer pricing adjustment has been made for such an international transaction alone, though by factoring in the effect of higher intensity AMP functions carried out by the assessee. Respectfully following the decision taken for the A.Y. 2009-10, we hold that, firstly, the RPM should be applied as the most appropriate method for determining the ALP of the international transaction of purchase of material from the AE, but, by carrying out the AMP intensity adjustment in the profit rate of comparables. If, however, it turns out that such an adjustment cannot be done due to one reason or the other, then the RPM should be discarded and another suitable method be adopted, which encompasses the effect of AMP intensity adjustment. Our view is fortified by the judgment in the case of Sony Ericsson (supra), in which it has been held in para 165 that : `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’. 26 , 1205/De/2016 344/Del/2017 & 1117/Del/2015 21. We, therefore, set aside the impugned order and remit the matter to the file of Assessing Officer/TPO for re-determining the ALP of the international transaction of ‘Import of finished goods’ in the manner delineated above. The assessee should be given an adequate opportunity of hearing in such fresh proceedings.
In the result, the appeal of the assessee is allowed for statistical purposes.
The order pronounced in the open court on 26.05.2017.