CASIO INDIA COMPANY PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

O R D E R PER PRASHANT MAHARISHI, A. M.

Page 2 of 26 “4. We have heard the rival submissions and perused the relevant material on record. Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. Vs. ACIT (2013) 152 TTJ (Del) 273 (SB) = 2013-TII-15-ITAT-DEL- SB-TP, by its majority decision held, inter alia, that AMP is a transaction and also an international transaction within the meaning of section 92B of the Act and that the TPO has jurisdiction to compute the ALP of this international transaction despite the same not having been specifically referred to by the AO. On the question of determination of the ALP of this international transaction, the Special bench approved the application of bright line test for working out the amount of non-routine AMP expenses and held that the ALP of AMP expenses should be determined on Cost plus method by treating AMP transaction as a separate and distinct from other international transactions. It was further held that the selling expenses directly incurred in connection with the sales do not lead to brand promotion and hence should not be brought within the ambit of AMP expenses. The Special bench laid down certain parameters to be taken into consideration for determining the ALP of AMP expenses. In the ultimate analysis, the matter was sent back to the TPO for undertaking the exercise afresh in the light of its directions.

5. Following the said order, various benches of the Tribunal decided several cases involving AMP expenses, restoring the matter to the file of AO/TPO for deciding this issue in conformity with the directions given by the Special Bench in LG Electronics. Several assessees as well as the Revenue preferred their respective appeals before the Hon‟ble High Courts against the tribunal orders following the Special bench order. A batch of such appeals led by Sony Ericson Mobile Communications India Pvt. Ltd. Vs. CIT = 2015-TII-06-HC-DEL-TP has been disposed of by Their Lordships of the Hon‟ble Delhi High Court, delivering judgment on 16th March, 2015, upholding the majority view of Special Bench in LG Electronics (supra) treating AMP as an international transaction and also conferring jurisdiction in the TPO to determine the ALP of the international transaction of AMP expenses. The Hon‟ble High Court has held, inter alia, that the international transaction of AMP expenses should be bundled or aggregated with other international transaction carried out by the assessee as a distributor, who either simply acts an agent of manufacturer or purchases goods from the manufacturer for resale at his own account. However, in the case of a manufacturer, the import of raw material has been held to be an independent transaction of marketing and distribution. In the case of a distributor, the Hon‟ble High Court held that where TNMM has been applied as the most appropriate method, which method has not been disturbed by the TPO, then, the international transactions of AMP and distribution activities should be clubbed. It further held that for determining the ALP of such transactions under a combined approach, only such comparables should be chosen which conform to the AMP functions and other distribution functions conducted by the assessee. If there is some difference in the functions under these international transactions, including that of AMP, between the assessee and the comparables, then, suitable adjustment should be made to bring both the transactions at par. If probable comparables are not performing similar functions as done by the assessee and no adjustment is possible for bringing the international transactions of the assessee in an aggregate manner at par with those undertaken by the comparables, then, segregation should be done and the Page 3 of 26 international transaction of AMP spend should be separately processed under the transfer pricing provisions for the purposes of determining its ALP separately. In such determination of ALP of AMP expenses in a segregated manner, proper set off on account of excess purchase price adjustment should be allowed. The view taken by the Tribunal in segregating routine and non-routine expenses on the basis of bright line test has been set aside by the Hon‟ble High Court. The view taken by the Special Bench that the expenses concerned with the sales, such as, rebates and discounts etc., should be excluded from the ambit of AMP expenses, has been upheld.

6. We can summarize the relevant position emanating from the judgment of the Hon‟ble High Court, as under : - - AMP expense is an international transaction [Paras 52 & 53 of the judgment]; - The TPO has jurisdiction to determine the ALP of the international transaction of AMP expenses [Para 50 of the judgment]; - Inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set-off [Paras 80 & 81]; - AMP is a separate function. An external comparable should perform similar AMP functions. [Paras 165 &166]; - Bright line test cannot be applied to work out non-routine AMP expenses for benchmarking [Para 194(x)]; - ALP of AMP expenses should be determined preferably in a bundled manner with the distribution activity [Paras 91, 121 & others]; - For determining the ALP of these transactions in a bundled manner, suitable comparables having undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) & others]; - The choice of comparables cannot be restricted only to domestic companies using any foreign brand [Para 120]; - If no comparables having performed both the functions in a similar manner are available, then, suitable adjustment should be made to bring international transactions and comparable transactions at par [Para 194 (iii)]; - If adjustment is not possible or comparable is not available, then, the TNMM on entity level should not be applied [Paras 100, 121, 194(iii) & (vi)]; - In the above eventuality, international transaction of AMP should be viewed in a de-bundled manner or separately [Paras 121& 194(xi)]; Page 4 of 26 - In separately determining the ALP of AMP expenses, the TPO is free to choose any other suitable method including Cost plus method [Para 194(xiii)]; - In so making a TP adjustment on account of AMP expenses, a proper set off/purchase price adjustment should be allowed from the other transaction of distribution of the products [Para 93]; - Selling expenses cannot be considered as part of AMP expenses [Paras 175 & 176 of the judgment].

7. With the above background of the ratio decidendi of the judgment of the Hon‟ble jurisdictional High Court, let us examine the contention put forth by the ld. AR in support of the deletion of addition. He submitted that the assessee applied TNMM as the most appropriate method. Since the profit margin declared by the assessee was favourably comparable with the average margin of the comparables, which fact has not been disputed by the TPO, then, no adjustment should be made on account of AMP expenses because such expenses stand subsumed in the overall operating profit. This was countered by the ld. DR with reference to certain paras of the judgment in Sony Ericsson (supra) not permitting the acceptance of such a wide proposition.

8. We are unable to accept the argument advanced on behalf of the assessee for deletion of the addition towards AMP expenses on the plain logic of the assessee‟s profit margin matching with those of comparables. There is a basic fallacy in the argument of the ld. AR. It is pertinent to note that the TPO examined and got satisfied with the assessee‟s profit margin vis-à-vis the comparables only qua the international transactions of distribution function. He determined the ALP of AMP expenses by applying bright line test and in this process simply compared the quantitative figures of AMP expenses incurred by the assessee and comparables for working out the non-routine expenses. He did not examine the AMP functions carried out by the assessee and the comparables. As the bright line test primarily concentrates on the quantitative aspects of the AMP expenses alone, it overlooks the examination of the AMP functions carried out by the assessee on one hand and the comparables on the other. Now, the Hon‟ble High Court in Sony Ericson Mobile (supra) has held that AMP expense is a separate international transaction and also bright line test is not applicable for determining the ALP of AMP expenses. The manner for the determination of the ALP of the distribution activity and AMP activity has also been set out by the Hon‟ble High Court to be conducted, firstly, in a bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables, and if probable comparables having performed both the functions are not available, then to determine the ALP of AMP expenses in a segregated manner. As such, it becomes immensely important to separately examine the distribution and AMP functions undertaken by the assessee as well as probable comparables. It is vital to highlight the difference between the AMP expenses and AMP functions. Whereas the AMP functions are the means by which the AMP activity is performed, the AMP expenses are the amount spent on the performance of such means (functions). To put it

Page 5 of 26 simply, an examination of AMP functions carried out by the assessee and the probable comparables is sine qua non in the process of determination of the ALP of the international transaction of AMP spend, either in a segregate or an aggregate manner. What Their Lordships have held is to bundle the distribution activity with the AMP activity, being two separate but connected international transactions, for the purposes of determination of the ALP of both these international transactions in a combined manner. The argument of the ld. AR, if taken to a logical conclusion, will make the AMP spend as a non-international transaction, which, in our considered opinion, is not appropriate. Once AMP expense has been held to be an international transaction, it is, but, natural that the functions performed by the assessee under such a transaction need to be compared with similar functions performed by a comparable case. If AMP functions performed by the assessee turn out to be different from those performed by a probable comparable company, then, an adjustment is required to be made so as to bring the AMP functions performed by the assessee as well as the comparable, at the same pedestal. If we concur with the contention of the ld. AR that the addition on account transfer pricing adjustment of AMP expenses be deleted without any examination of the AMP functions carried out by the assessee as well as comparables, this will amount to snatching away the tag of international transaction from AMP expenses, assigned by the Hon‟ble High Court. What Their Lordships have held in the judgment is that the distribution activity and AMP expenses are two separate but related international transactions. It is only for the purposes of determining their ALP that these two should be aggregated. The process of such aggregation does not take away the separate character of the AMP transaction, albeit related. An analysis and examination of the distribution and AMP functions carried out by the assessee must be necessarily done in the first instance, which should be then compared with similar functions performed by some probable comparables. If the distribution and AMP functions performed by the assessee turn out to be different from those performed by probable comparables, then, a suitable adjustment should be made to the profits of the comparable so as to counterbalance the effect of such differences. If however differences exist in such functions, but no adjustment can be made, then, such probable comparable should be dropped from the list of comparables. If, in doing this exercise, there remains no company doing comparable distribution and AMP functions, then, both the international transactions are required to be segregated and then examined on individual basis by finding out probable comparables doing such separate functions similarly. For the international transaction of AMP spend, this can be done by, firstly, seeing the AMP functions actually performed by the assessee and then comparing it with the AMP functions performed by a probable comparable. If both are found out to be similar, then the matter ends and a comparable is found and one can go ahead with determining the ALP of such a transaction. If the AMP functions performed by the two entities are found to be different, then adjustment is required to be made in the case of a probable comparable, so as to make it uniform with the assessee. The assessee may have possibly done, say, four different AMP functions as against the probable comparable having done, say, only three. In such a scenario, again the adjustment will be warranted. In another situation, the AMP functions performed by the assessee and probable comparable may be similar but with varying standards, which will also call for an adjustment. Crux of the matter is Page 6 of 26 that the AMP functions performed by the assessee must be similar to those done by the comparable, in the same manner as such functions are compared in any other international transaction. However, in computing ALP of AMP spend, the adjustment or set off, if any, available from the distribution function, should be made. The essence of the judgment in the case of Sony Ericson Mobile (supra) is that the two international transactions of Distribution and AMP should be examined on the touchstone of transfer pricing provisions, but on an aggregate basis. Determining the ALP of two transactions in an aggregate manner postulates making a comparison of both the functions of distribution and AMP carried out by the assessee with the comparables, so that surplus from the distribution activity could be adjusted against the deficit in the AMP activity. The Hon‟ble High Court has no where laid down that the AMP functions performed by the assessee should not be compared with those performed by the comparable parties. On the contrary, it turned down the contention raised by the ld. AR urging for not treating AMP as a separate function, which is apparent from the extraction from para 165 of the judgment : `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‟. It held vide para 165 of the judgment that : `An external comparable should perform similar AMP functions.‟ Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. Let us we go a step further with the alternative prescription of the judgment that if ALP of both the transactions of Distribution and AMP cannot be determined in a combined manner, then the ALP of AMP function should be separately done. The submission advanced by the assessee of considering the profit on an entity level without making comparison of AMP functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view amounts to treating AMP spend as a non-international transaction, which is patently incapable of acceptance.

9. Adverting to the facts of the instant case, we find that the TPO accepted TNMM as the most appropriate method and did not make any TP adjustment on account of the distribution activity carried out by the assessee. He, however, espoused the AMP expense as a separate and distinct. Treating the AMP spend as a separate international transaction, he applied the Cost plus method and proposed the extant adjustment. In doing so, he segregated routine AMP expenses incurred by the assessee for his business from the non-routine AMP expenses by treating such non- routine AMP expenses leading to the creation of marketing intangible for its AE. This bifurcation of total AMP expenses was done by applying bright line test. It is obvious that in the entire exercise carried out by the TPO, he proceeded on an altogether different line in examining the quantum of AMP expense for determining the value of the international transaction of AMP, without looking at the AMP functions carried out by the assessee and the comparables. Distinct examination of AMP functions does not find place in this method of computing the value or the ALP of AMP spend. Now, when we look at the ratio laid down by the Hon‟ble jurisdictional High Court, it becomes crystal clear that the approach adopted by the TPO for determining ALP of AMP expenses has been rendered incorrect. However, the fact remains that as per the verdict of the Hon‟ble High Court, AMP Page 7 of 26 spend is an international transaction, which is required to be processed under Chapter X of the Act by taking into account the AMP functions performed by the assessee and then comparing such functions with those performed by comparable entities, though, firstly in a combined manner with the distribution functions. We find no reference to the AMP functions carried out by the assessee in the order of the TPO. As such, there can be no question of making any comparison of the assessee‟s AMP functions with those of the comparables. Going by the ratio in the case of Sony Ericson Mobile (supra), it is mandatory to make a comparison of the AMP functions performed by the assessee and comparables and then making an adjustment, if any, due to differences between the two, so that the AMP functions performed by the assessee and comparable are brought to a similar platform. In fact, this is also the prescription of Rule 10B(1)(e), which provides as under :- (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub- clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm‟s length price in relation to the international transaction.‟ 10. A perusal of the sub-clause (iii) of this Rule divulges that net profit margin under a comparable uncontrolled transaction as determined under sub-clause (ii) should be: “adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions.” It is only such adjusted net profit margin in sub-clause (iii) of Rule 10B(1)(e) which is compared with the net profit margin realized by the assessee as per the mandate of sub-clause (iv) of Rule 10B(1)(e).

“4. The short question that arises for consideration in this appeal by the Assessee against the order dated 26th June, 2015 = 2015-TII-268-ITAT- DEL-TP passed by the Income Tax Appellate Tribunal („ITAT‟) in Assessment Year ('AY') 2006-07 is whether the ITAT ought to have addressed the issue raised by the Assessee that there was in fact no international transaction entered into by it with its Associated Enterprise (AE) concerning Advertising Marketing and Promotion (AMP) expenses which required determination of Arms Length Price (ALP) for the purposes of transfer pricing (TP) adjustment.

Page 11 of 26 5. It is fairly stated that for the AY 2007-08 and 2008-09, the Assessee‟s case was part of the batch of matters which was considered by this Court in Sony Ericsson Mobile Communications India Pvt. Ltd. v. Deputy Commissioner of Income Tax (2015) 374 ITR 118 (Del.) = 2015-TII-06- HC-DEL-TP. It is contended that notwithstanding that in para 2 of the said judgment there is a tabular column which mentions the two appeals filed by the Assessee the facts of the said appeals were not discussed. It is also stated that finding in para 52 of the said judgment regarding existence of an international transaction involving the Assessee‟s AE, is being contested by the Assessee in the appeal filed by it against the said judgment before the Supreme Court.

6. The present case concerns in relation to AY 2006-07. The specific plea of the Assessee before the ITAT that there was no international transaction involving the AE for AMP expenses was not decided by the ITAT in the impugned order. However, in terms of the decision of this Court in Sony Ericsson (supra) the ITAT has remanded the matter to the Transfer Pricing Officer (TPO) for the purposes of determination of the ALP of the said transaction.

8. In the present case, the Court is of the view that it was incumbent upon the ITAT to have addressed the above issue since it was specifically raised before it by the Assessee. Only after satisfying itself that there was an international transaction with the AE concerning AMP expenses, should a further inquiry have been ordered for determination of the ALP of such international transaction.

Page 12 of 26 4. The Ld. authorized representative submitted his arguments as under:- a. He referred to the order of the Ld. Transfer pricing officer, citing Para No. 2 showing that assessee is a distributor and further he referred to the order of the Ld. CIT (A) for assessment year 2007 – 08 wherein in Para number 6.2.13. It is held that the assessee is not a limited risk distributor. He further referred to the transfer pricing study report of the assessee for assessment year 2006 – 07 show that assessee is not a limited risk distributor and therefore incurring all the expenditure on advertisement marketing and promotion for its own business. b. He further supported his contention by citing the decision of the Hon’ble Delhi High Court in case of ITA 643/2014 Bausch & Lomb Eyecare (India) Pvt. Ltd. VT LTD Vs The Additional CIT [2015-TII-65- HC-DEL-TP] and submitting that marketing or brand enhancement is just one of the incidental activities and not a separate line of service. Marketing could, at best, be a 'function' but not a 'transaction' for the purposes of Section 92B of the Act. The promotion of services, according to him, could be a 'transaction'; but AMP expenses for this purpose can only be a 'function' and not a 'transaction'. Under Chapter X, what were required to be benchmarked were an 'international transaction' and not a 'function' of such transaction. He further elaborated that not every expenditure forming part of the function can be construed as a 'transaction'. He further submitted that, the onus was on the Revenue to demonstrate through some tangible material, the existence of an 'arrangement' or 'understanding' between the Assessee and its AE that the Assessee would incur extraordinary AMP expense in order to develop marketing intangibles for the AE. He further submitted that existence of an international transaction regarding AMP expenses requires the interpretation of provisions of Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE. According to him, revenue could not. He further submitted that reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an Page 13 of 26 ‘international transaction’ shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the ‘price’ of the ‘transaction’ and not of the function. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP and not the function. c. He further referred to the decision of the coordinate bench in case of L’Oreal India private limited versus DCIT – 6 (3) Mumbai in for assessment year 2008 -2009 and submitted that there is no scope for restoring of the matter to the file of the Ld. assessing officer. He further submitted that non-availability of a particular decision of the higher forum cannot justify the restoring of issue to the file of the AO in each and every case. He further stressed upon page No. 17 of that decision and submitted that the coordinate bench has held that after the judgments of Maruti Suzuki and Bausch and Lomb (supra) there is no scope for any other interpretation about the AMP expenditure. He referred that in that particular case also, the AO/TPO has not brought anything on record that there existed an agreement, formal or informal, between the assessee and the associated enterprise to share/reimburse AMP expenditure incurred by the assessee in India. Therefore in absence of such an agreement, which is 1st and primary precondition that transaction in question is an international transactions remains unfulfilled. He further referred that in the present case also, the revenue could not bring anything to support its contention that there is an agreement, formal or informal. Therefore, according to him there is no international transaction with respect to AMP expenditure. d. He further referred to the decision of the coordinate bench in Bacardi India private limited versus deputy Commissioner of income tax (ITA No. 1197/Del/2016) ( assessment year 2011 – 12) to submit that it is not that each and every case with respect to AMP expenses is required to be restored to the file of the Ld. assessing officer. According to the submission only those cases where there is an acceptance on behalf Page 14 of 26 of the assessee regarding the AMP expenses being an international transaction are required to be set-aside. He submitted that in present case there is no such evidence available with the revenue or brought by the revenue, which even remotely suggests that there is an agreement, which existed between the assessee and its associated enterprise for incurring such expenditure. e. He further submitted chart showing details for 3 years, amount of sales of the group, AMP expenses of the group and demonstrated that ratio of such expenses to overall sales of the group is 22.66%, 21.79%, and 22.33% for 2004, 2005, and 2006 respectively. He further stated that that percentage of sales of Indian entity to global sale of group is 0.14%, 0.14%, and 0.18% for these respective 3 years. The chart further demonstrates that the percentage of AMP expenditure incurred by the Indian entity compared to global expenses of the group is 0.15%, 0.14%, and 0.19% for respective 3 years. It also states that percentage of AMP expenditure of Indian entity global sales of the group is just 0.03%, 0.03%, and 0.04% respectively. He therefore submitted that this belies the possibility of any arrangement or understanding between assessee and its associated entity where assessee is obliged to incur the AMP expenditure for and on behalf of its foreign AE.

Page 17 of 26 i. Further referring to the facts of the case, he submitted that that when part of the expenditure have been reimbursed by the associated enterprise and part of the expenditure have been shown by the assessee in its profit and loss account, it itself shows that there is an unwritten agreement between the parties and they are ‘acting in Concert’ which resulted into International transaction. Therefore, the existence of international transaction has been proved by the books of accounts of the assessee itself. Thus, existence of international transactions is established by the assessee himself and there is no further need for the revenue to show anything more. j. He further referred to page No. 9 of the Ld. transfer pricing officer’s order wherein in Para No. 1.4 the assessee stated that it is a no risk distributor who is not the owner of the brand and therefore it cannot be said that he does not have any other risk therefore is a full-fledged is distributor or Trader and therefore he bears full risk. Therefore, the contention of the assessee that it has a limited risk is devoid of any merit. k. Reverting to the financial statements of the assessee. He vehemently stated that that there is an artificial bifurcations of expenses. Regarding showing the amount is not reimbursement but a subsidy and whatever is not reimbursement is debited to the profit and loss account. Thus, it is an agreement, which shows that the foreign AE is required to reimburse the advertisement marketing and promotion expenses and hence, there exists an international transaction. He further referred that out of the total expenses of Rs. 4 crores, 40% of such expenses are reimbursed by the associated enterprise therefore there is no incidental benefit but tangible and quantifiable benefit which is substantially nature received by the foreign AE. l. He further referred to the order of the Ld. transfer pricing officer which shows that there are other agreements the assessee has entered into and only one agreement is extracted and therefore complete examination of these agreements are required to determine whether there is any transaction or not over and above what is stated to determine the existence of international transaction.

Page 18 of 26 m. On computation mechanisms of impugned function and on the argument of the Ld. authorized representative that AMP has been function and therefore it should not be separately benchmarked he referred to the Para No. 8 of the order of the coordinate bench where detailed reasoning’s are given for benchmarking the AMP expenses. He therefore submitted that this argument of the Ld. authorized representative is not correct.

Page 19 of 26 7. We have carefully considered the rival contentions. In short, in the present appeal the issue restored by the Hon’ble high court is to examine whether there was an international transaction involving the assessee and its associated enterprise concerning AMP expenses or not. We are conscious of over duty that in case if complete information is available before us and if this bench can reach to a conclusion on appreciation of those available information which have been dealt with by the lower authorities and on the basis of the arguments advanced and further evidences placed, if any, before us, the issue of the termination of ‘existence of international transaction’ cannot be restored to the file of lower authorities. However in case if we find that the facts available before us requires further examination, we would be duty-bound to restore the matter to the file of the lower authorities in the interest of Justice, to provide a reasonable opportunity of putting forth their claim to both the parties. In view of above we proceed to decide the issue is under:- a. Meaning of international transaction is provided under the provisions of section 92B of the income tax act. According to that provision the international transaction means ‘transaction’ between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprise for the allocation or apportionment of, or any contribution to, any costs or expenses incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Further, an explanation was added by the finance act 2012 with retrospective effect from 01/04/2012 which included in the ambit of ‘international transaction’ 5 types of transactions and further expanded the scope of expression ‘intangible property’. Further, the provisions of section 92F (V) defines ‘transaction’ which includes an arrangement, understanding or action in concert irrespective of it being formal or in writing or its enforceability. Therefore, it is imperative to look into the fact whether there is any Page 20 of 26 transaction entered into by the assessee for provision of any services and/or any expenses incurred which is in connection with a benefit to be provided to its associated enterprise. It is interesting to note that at page No. 156 of the paper book, an agreement was entered on 13/05/2005 between its associated enterprise and the appellant titled as Casio watches/outsource of advertisement and the article 1 of that agreement provides that strictly for increased sales and enhancement of the brand image and reputation of CASIO watch and clock in India, Casio India (the appellant) carries out local promotion on behalf of Casio (AE). The appellant shall make advance planning for such local promotional activities and furnish Casio with the schedule and its relevant estimated quotation before execution for possible comments, suggestions and alterations and final approval by AE. Further, the appellant has indemnified the foreign entity against any claim or damages on alleged infringement of third party. According to article, three of that agreement the AE shall pay to appellant expenses only after AE receives the evidence, and such reimbursement shall not exceed 7 million Japanese yen. The period of such agreement is up to 30/09/2005. An identically worded agreement was further entered into between the parties on 20/12/2005 extending the period up to 31st day of March 2006. Further, in June 2005 a special promotion subsidiary agreement was entered into between the parties for calculators and digital diaries where the maximum amount specified was 3.5 million Japanese yen. There was several such agreement which are entered into by the appellant with its AE for subsidy of advertisement which are tabled at serial No. 8 to 11 of the paper book from page No. 156 to 177. In Para No. 4.2 at page No. 5 of the order of the Ld. transfer pricing officer. He has nearly analyzed only one such agreement to set out the terms and conditions of such agreement. However, there is no finding in the order of the Ld. Transfer pricing officer with respect to the examination of the actual expenditure incurred. The assessee has placed its annual accounts for the year ended on 31st of March 2006 at page No. 13 to 23 of the paper book No. 1 wherein at page No. 25 in the schedule of other expenses. It is mentioned that advertisement and sales promotion Page 21 of 26 expenses debited to the profit and loss account are only Rs. 19490013/-whereas as per note No. 9 to seduce 16 of such annual accounts, it is mentioned that that appellant has during the year received Rs. 18816511/- as sales promotion support from the holding company. This amount has been adjusted against the expenditure incurred on advertisement and sales promotion expenses. The company has received Rs. 271542/- towards development of software for after sales service advertisement and training expenses and for procurement of capital assets. Therefore it is apparent that assessee has received Rs. 18816511/- from its parent holding company on account of advertisement and sales promotion expenditure which are covered by the agreement stated above. Therefore, the Ld. Transfer pricing officer has computed the total expenditure on advertisement marketing and promotion incurred by the assessee of Rs. 41021945/– . On reading of all these agreements and its reconciliation with the books of accounts. It is not apparent that what is the amount of expenditure that is pertaining to those agreements and what are the other expenditure which are owned by the assessee as its own expenditure debited into the profit and loss account. b. Claim of the assessee before the Ld. Transfer pricing officer was that that the advertisement marketing and promotion expenditure were incurred by the assessee in order to promote its product accordingly and therefore, the Ld. assessing officer is incorrect in holding that expenditure was incurred by the assessee for the benefit of associated enterprise. Looking at the risk assumed by the assessee, in its trading function it carried the risk of inventory fully, with respect to customer credit risk, it does not bear any risk, with respect to the other market risk, as it purchases the goods on its own account from Casio, Japan it owns the complete market risk. It also assumes foreign exchange fluctuation risk borne by the appellant. The assets employed by the assessee are normal assets which are necessary to perform the importing, warehousing, administration and distribution functions for carrying out its business in India. As regarding the assets employed of intangible nature, it has only distribution network, customer list and sales systems and procedures. Whereas the Page 22 of 26 associated enterprise owns trademark and brand equity as well as the product design, etc, which generally and normally effective owns. Against this, the Ld. transfer pricing officer has held in Para No. 7.10 of his order that assessee was not selling its own products, but it was limited risk distributor who was selling products manufactured by its associated enterprise and it is for this reason that it entered into an agreement for reimbursement of AMP expenditure incurred by it by its associated enterprise. Further he held that it is a matter of record that the associated enterprise of the assessee and its parent company had acknowledged increase in its sales due to the marketing affords of the assessee in India. Further he held that despite aggressive marketing in India which is contributed to the increase in the worldwide sales of the product of the group the profitability of the assessee has registered a decree is where assessee has incurred net operating loss and this loss is because of non-reimbursement of AMP expenditure. Against this the claim of the assessee is that the proportion of net sales of Indian entity to global sales of the group is less than 0.2% for 3 years stated above and further the total AMP expenses spent by Indian entity compared to the global spending on AMP expenditure is also less than 0.2% and whereas the expenses incurred by the Indian entity to global sales of the group is less than 0.05%. Therefore it needs to be examined in detail whether the services rendered by the appellant of incurring expenditure incurred by the assessee has really resulted into any benefit to the foreign AE as the figures provided by the Ld. A R shows that they are miniscule compared to the global figures of the group, whereas the Ld. assessing officer has contested that increase in the sales of the global entity is on account of advertisement and marketing and promotion expenditure incurred by the assessee. c. Hon’ble Delhi High Court in 618/2014, 512/2014 and 513/2014 for assessment year 2007 – 08 and 2008 – 09, In cross appeal by the parties, vide its order dated 16/03/2015 at page No. 136 of 142 of that decision, has held that AMP expenses incurred by the assessee in India can be treated and categorized as international transaction under section 92B of the income tax act, Page 23 of 26 1961. The Hon’ble high court at Para No. 51 to 57 of that decision has dealt with these issue as under :-

“Transaction and International Transaction; Difference between Section 37(1) and Chapter X of the Act 51. The term 'international transaction' has been defined in Section 92B. The section also had retrospective amendment which was inserted by the Finance Act, 2012 w.r.e.f. 1 April 2002. Section 92B(1) reads as under: "92B Meaning of international transaction. — (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises."