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Before: SHRI R. S. SYAL & SMT SUCHITRA KAMBLE
During the course of hearing the Ld. AR submitted that the Hon'ble Delhi High Court vide order dated 27th July 2016 has remanded the issue regarding the existence of international transaction involving AMP expenses between the assessee and its AE to the ITAT. The Ld. AR further submits that as per the instructions from the assessee/client he is requesting for remand of this issue before the TPO/A.O for determining the existence of international transactions involving AMP expenses. He further submitted that selling expenses should not be considered within the ambit of AMP. For Assessment Year 2007-08 & 2008-09, the Ld. AR submitted that on the legal issue it is covered against the assessee by the Hon'ble High Court judgment in case of Sony Ericson Mobile Communication Pvt. Ltd. vs. CIT (374 ITR 118) but for determining the international transaction as relates to AMP expenses, the factual aspect has to be determined by the TPO. Therefore, the matter needs to be remanded back.
The Ld. DR did not object for these submissions of remanding the matter before the TPO/A.P for determining the existence of international transactions involving AMP expenses between the assessee and the A.E. The Ld. DR further submitted that the judgment of Hon’ble Delhi High Court CIT Vs. M/s. Cushman and Wakefield (India) Pvt. Ltd. (2015) 233 Taxman 250 may be considered while determining the selling expenses within the ambit of AMP.
The factual aspect of the appeals for the three years as per the Ld. AR are recorded as follows:
Assessment Year 2006-07
4.1. The assessee entered into the following international transactions with its AEs, which were duly accepted to be at arm’s length price by the TPO/AO:
5685/Del/2011 & 6339/Del/2012 ita S. Value Action of Transfer Pricing International Transactions No. the TPO/ AO (INR) Method
Import of finished goods and spare TNMM 57,59,03,678 1 for distribution Import of tools and equipment TNMM 1,446,78,183 2 3 TNMM Commission received on direct 10,64,39,135 sales by DIL TPO/ AO 4 Payment of technical fee TNMM 91,35,000 accepted the 5 Payment of royalty TNMM 25,98,620 arm’s length - Reimbursement of warrants 1,62,30,708 6 price of the 7 Reimbursement of commission TNMM 2,35,004 transaction Payment of seminar expenses TNMM 2,32,920 8 9 Reimbursement of freight charges - 8,81,893 Other recoverable TNMM 2,97,946 10 Cost reimbursement TNMM 83,87,418 11 Consultancy services TNMM 48,51,450 12 4.2. The transaction pertaining to import of finished goods for distribution was accepted at arm’s length based on the following comparability analysis:
Weighted Average S No Company Name GP/Sales (%) ACI Infocom Limited 1. 0.12 Business Link Automation (India) Limited 1.59 2. 3. Compuage Infocom India Limited 1.89 4. Control Print (India) Limited 19.81 5. Iris Computers Limited 1.41 Kilburn Office Automation Limited 6. (0.11) 7. Media Video Limited 7.89 Priya Limited 0.96 8. 9. Usha International Limited 1.70 Videocon Industrial Finance Limited 0.05 10. Mean 3.53
5685/Del/2011 & 6339/Del/2012 ita 4.3. However, the TPO observed that the assessee had incurred excessive AMP Expenditure by applying the ‘Bright Line Test’, wherein the TPO selected 7 out of the 10 comparable companies selected by the Assessee:
AMP/ Sales As per TPO Company name Order (%) Business Link Automation (India) Limited 0.42 Control Print (India) Limited 0.64 Iris Computers Limited 0.60 Kilburn Office Automation Limited 2.92 Media Video Limited 1.28 Priya Limited 0.45 Usha International Limited 15.01 Mean 3.05 4.4. The assessee filed an appeal before the Income Tax Appellate Tribunal (“ITAT”). The ITAT, following the decision of the Hon’ble Delhi High Court in the case of Sony Ericsson 374 ITR 118 and decision of the coordinate bench of the ITAT in the case of Toshiba India TS-226- ITAT-2015, set-aside the impugned order and restored it back to the files of the TPO / AO for determination of the ALP of the international transaction of the AMP spend by the assessee, vide order dated October 8, 2015.
4.5. Aggrieved by the order of the ITAT, the Assessee filed an appeal before the Hon’ble Delhi HC. The HC vide order dated July 27, 2016 held that the ITAT has not rendered any categorical finding on the central issue of existence of international transaction between Assessee and its AE involving AMP expenses. Accordingly, the HC remanded the matter back to the file of the ITAT, to first decide the question regarding the existence of international transaction with the direction that the Tribunal shall not remand the matter to lower authorities for decision.
5685/Del/2011 & 6339/Del/2012 ita 4.6. Exclusion of direct selling expenses from AMP expenditure for the purpose of determination of ALP, as per the directions of the Delhi HC in Sony Ericsson 374 ITR 118
Particulars Amount (INR) Sales Commission (Refer pg 281 vol 1 of PB) 60,660,239 40,301,259 Publicity & Sales Promotion (Refer pg 281 Vol 1 of PB) Total AMP considered by TPO 100,961,498 Less: Sales Commission 60,660,239 Less: Selling and Dealer incentive 15.491250 AMP without direct selling expenses ( 24,810,009 )
Assessment Year 2007-08 4.7 The Assessee entered into the following international transactions with its AEs:
Transfer Pricing Action of the Value of transaction International Transactions Method / PLI TPO / AO (INR) Import of finished goods and spare TNMM 72,81,15,693 for distribution NP/Sales Import of tools and equipment TNMM 38,16,053 TPO/ AO NP/Sales accepted the TNMM Commission received on direct sales arm’s length 6,54,87,184 (Market support services) NP/Total Cost price of the Payment of technical fee TNMM 17,35,906 transaction NP/Sales TNMM Reimbursement of training 1,70,89,777 NP/Sales expenses, freight charges, etc. Reimbursement of warranty claims - 1,97,96,770 4.8 The transaction pertaining to import of finished goods for distribution was accepted at arm’s length based on the following comparability analysis:
5685/Del/2011 & 6339/Del/2012 ita
Weighted Average (%) SNo Company Name NP/Sales ACI Infocom Limited -1.89 1. Business Link Automation (India) Limited 7.3 2. 3. Compuage Infocom India Limited 3.21 4. Kilburn Office Automation Limited 14.63 5. Media Video Limited 8.23 Priya Limited 1.43 6. 7. Iris Computers Limited 1.26 Control Print (India) Limited 15.87 8. 9. Usha International Limited 3.67 SES Technologies Limited 0.74 10. Mean (%) 5.43 4.9 However, the TPO observed that the Assessee had incurred excessive AMP Expenditure by applying the ‘Bright Line Test’ wherein he selected 7 out of the 10 comparable companies selected by the Assessee
AMP/ Sales - as per TPO Company name Order (%) ACI Infocom limited 0.44% Business Link Automation (India) Limited 1.51% Compuage Infocom India Limited 0.00% Kilburn Office Automation Limited 1.07% Priya Limited 0.08% Iris Computers Limited 0.56% Control Print (India) Limited 1.00% Mean 0.66% 4.10 The Assessee preferred an appeal before the Income Tax Appellate Tribunal (“ITAT”) and the ITAT vide order dated July 31, 2013, followed the Special Bench decision in the case of L.G. Electronics; [2013] 22 ITR(T) 1 and granted partial relief by excluding sales commission amounting to INR 7,79,07,784 at the threshold itself. However, the legal issues in respect of AMP expenses were decided against the Appellant.
4.11 Aggrieved by the ITAT order, the Assessee filled an appeal before the 5685/Del/2011 & 6339/Del/2012 ita Delhi High Court (“HC”) and the HC vide judgment dated March 16, 2015 in the case of Sony Ericsson; 374ITR118 remanded the matter back to the ITAT for de novo consideration on the basis of legal principles laid down in the said decision.
AMP Expenditure to be considered by applying the HC principles:
Particulars Amount (INR)
7,27,88,356 Publicity & Sales Promotion (Refer page No. 476 Vol 2 PB) Sales Commission (B) (Refer Page 476 Vol 2 PB) 7,79,07,784 15,06,96,140 Total AMP considered by the TPO (C) = (A+B) Less: Sales Commission (77,907,784) Less: Selling and dealer incentives (24,239,105) Total AMP to be considered by applying HC principles 48,549,251 Assessment Year 2008-09 4.12 The Assessee entered into the following international transactions with its AEs :
Value of Transfer Pricing Action of the International Transactions transaction Method / PLI TPO / AO (INR) TNMM 98,37,35,533 Import of air conditioners and spare OP/OR parts TNMM Management and technical training 13,90,100 OP/OR services Receipt of consultancy services TNMM TPO/ AO 89,02,817 OP/OR accepted the Import of fixed assets TNMM arm’s length 29,03,096 OP/OR price of the TNMM transaction Market support and maintenance 9,29,91,747 OP/OC services Reimbursement of expenses NA 1,68,00,247 Recovery of expenses NA 2,39,33,406
5685/Del/2011 & 6339/Del/2012 ita 4.13 The transaction pertaining to import of finished goods for distribution was accepted at arm’s length based on the following comparability analysis:
Weighted Average (%) S No Company Name OP/OR 1. Bajaj Electricals Limited 9 08 2. Khaitan (India) Limited 8.84 3. Media Video Limited 8.25 4. Modi Hoover International Limited 2.91 5. Usha International Limited 10.40 Mean (%) 7.89 4.14 However, the TPO observed that the Assessee had incurred excessive AMP Expenditure by applying the ‘Bright Line Test’, wherein 3 comparable companies were selected for application of bright line: AMP/ Sales - as per TPO Company name Order (%) Kilburn Office Automation Limited 1.07 Priya Limited 0.24 Vivek Limited 3.99 Mean (%) 1.77 4.15 The Assessee preferred an appeal before the Income Tax Appellate Tribunal (“ITAT”) and the ITAT vide order dated July 31, 2013, followed the Special Bench decision in the case of L.G. Electronics 22 ITR(T) 1 and granted partial relief by excluding sales commission amounting to INR 9,73,58,499 at the threshold itself. However, the legal issues in respect of AMP expenses were decided against the Assessee.
4.16 Aggrieved by the ITAT order, the Assessee filed an appeal before the Delhi High Court (“HC”) and the HC vide judgment dated March 16, 2015 in the case of Sony Ericsson 374 ITR118 remanded the matter back to the ITAT for de novo consideration on the basis of legal principles laid down in 5685/Del/2011 & 6339/Del/2012 ita the said decision.
AMP Expenditure to be considered by applying the HC principles:
Particulars Amount (INR) Publicity & Sales Promotion (A) (Refer Page 270 of PB) 8,10,18,516 9,73,58,499 Sales Commission (B )(Refer page No. 270 of PB) 178,377,015 Less: Sales Commission (97,358,499) Less: Selling and dealer incentives (33,802,245) Total AMP to be considered by applying HC principles 47,216,271
We have heard both the sides and perused all the records. As per the Hon'ble Delhi High Court’s direction given in an appeal by the assessee, while remanding back the matters before the ITAT, the Hon'ble High Court in Para 12 (b) directed ITAT to itself decide the question regarding the existence of an international transaction involving AMP Expenses between the assessee and its AE. The Ld. AR fairly, at the outset, accepting that the decision on the question of AMP as an international transaction requires in-depth analysis of a large numbers of documents and facts, therefore, requested that the matter be restored to the TPO for decision. The Ld. DR also supported the Ld. AR in this regard. As such, we are accepting this submission and remanding the matter relating to the existence of international transaction to the TPO/AO. The TPO/AO is further directed that selling expenses should not be considered within the ambit of AMP. The Ld. AR’s contention in the tabulated form for Annexure 3 annexed to his submissions for all the years has to be considered by the TPO/AO. For Assessment Year 2007-08 & 2008-09 though the Hon’ble High Court in case of Sony Ericson Mobile Communication India Pvt. Ltd. has decided the legal issue against the assessee, the factual aspect related to international transaction related to AMP in assessee’s case has to be dealt with by the TPO/AO. Therefore, the issue related to these three appeals filed by the 5685/Del/2011 & 6339/Del/2012 ita assessee are remanded back to the TPO/A.O for deciding as per the directions given hereinabove.
In result, all the three appeals are partly allowed for statistical purposes.
Order pronounced in the Open Court on this 17th Day of April, 2017.