Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI
Before: SH. SHAMIM YAHYA & SH. ANUBHAV SHARMA
The appellant/ assessee has come in appeal challenging the final assessment order dated 25.02.2022 u/s. 143(3) r.w.s. 144C(13) read with section 144B of the Income Tax Act, 1061 (hereinafter referred to as ‘the Act’) and DRP direction dated 19th, 2022.
The facts in brief the assessee company was incorporated on 15.09.2007 and engaged in the business of trading of frames and sunglasses. The assessee company is closely held company with the majority of the shares held by Luxottica BV, Netherlands. The return of assessee was selected for scrutiny through CASS.
2.1 During the year under consideration the assessee company has entered into International Transactions with Associated Enterprises as per the transactions disclosed in Form No. 3CEB filed by the assessee. Ld. AO accordingly referred the matter to Transfer Pricing Officer for computation of Arm’s Length Price in relation to international transactions entered with Associated Enterprises.
2.2 The TPO had examined the issue that assessee company should have been compensated by the Associated Enterprises at mark up @ 15.86% for undertaking advertisement, marketing and publicity activities purely for AE and most importantly creating a marketing intangible for the AE. Based on bright line approach adjustment on protective basis was proposed. Further TPO also proposed and adjustment on the ground of compensation. The assessee must receive for generation of marketing intangibles as per alternative RPM method. TPO had observed that since BLT approach on AMP issued is sub-judice before various appellate forums. The Bench marking has been initially done on protective basis resulting in an adjustment.
2.3 The Ld. AO taking into consideration the TPO proposal passed at draft assessment order against which assessee had approached the DRP and the DRP in its order dated 19.01.2022 has taken into consideration the profile of business of the assessee and relied that DRP directions for A.Y. 2014-15 to conclude that the same are applicable mutatis mutandis to the present A.Y. Accordingly, Ld. AO/ TPO was directed to verify the outcome of any appeal filed by Revenue/ assessee and follow the stand taking by the department thereon, with regard to AMP expenses. Further as with direction on BLT , DRP again took into consideration the direction for A.Y. 2014-15 in the case of assessee and observed that as department is agitating the issue before Hon’ble Supreme Court so there is no infirmity in the action of AO/ TPO. Consequently, the Ld. AO had passed the final assessment order.
2.4 The assessee submitted before the Assessing Officer that in assessee’s own case vide order dated 27.01.2022 the Tribunal has followed the adjustment made on account of protective basis and directed the TPO to follow RPM as the appropriate method after giving intensity adjustment and the Tribunal had relied its earlier order for A.Y. 2012-13. The Ld. AO observed that the facts in the present case are different as the TPO has followed intensity adjusted TNMM method and bench marked the transaction of import of finished goods rather than separately bench marking the transaction of AMP expenses. He observed that in the present assessment year TPO has separately bench mark the AMP transaction using the residual profit split method, therefore concluded that the Tribunal directions for A.Y. 2014-15 are not applicable. On protective adjustment the DRP directions upholding the adjustment on Bright Line Method was accepted.
2.5 Accordingly, the final assessment order was passed against which the assessee is in appeal raising following grounds :-
“ The following grounds of appeal are mutually exclusive and without prejudice to each other: General Grounds 1. That the final assessment order framed by the Ld. AO 1.1. pursuant to the directions of the Hon’ble DRP under section 143(3) read with section 144C of the Act, is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio.
That in framing the impugned assessment order, the 1.2. reference made by the Ld. AO under section 92CA(1) of the Act suffers from jurisdictional error, as the Ld. AO had not recorded any reasons nor he had any material reason on the basis of which he could reach a prima-facie opinion, that it was ‘necessary or expedient’ to refer the matter to the learned Assistant Commissioner of Income Tax, Transfer Pricing Officer - 2(3)(1), New Delhi (hereinafter referred to as “Ld. TPO”) for computation of arm’s length price (“ALP”). That on facts and in law, Ld. TPO has erred, by not 1.3. discharging the statutory onus to establish that the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the ALP determined by the Appellant and proceeded to determine the ALP himself in relation to the international transaction of import of finished goods. That on the facts and circumstances of the case and in 1.4. law, the Hon’ble DRP/ Ld. AO/Ld. TPO erred in making a TP adjustment of INR 28,69,95,112 on account of alleged excessive Advertisement, Marketing and Promotion Expenses (“AMP expenses”) incurred by the Appellant for business purpose of sales of its products in India in the regular course of its business on the ground that it was excessive and should be compensated by the Associated Enterprises (“AEs”). That on the facts of the case and in law, the Ld. TPO/ Ld. 1.5. AO/ Hon’ble DRP has erred in proposing addition based on mere conjunctures and surmises, ignoring the factual matrix of the Appellant as well as the nature of the transactions undertaken by the Appellant. Order passed by the Ld. AO/ Ld. TPO is not in 2. pursuance of directions siven by the Hon’ble DRP and was thus beyond their specific powers On the facts and circumstances of the case and in law, 2.1. the final assessment order passed by the Ld. AO and DRP effect order passed by Ld. TPO is in violation of mandatory provisions under Section 144C( 10) and 144C( 13) of the Act in as much as these orders were passed not in conformity of the directions issued by DRP under Section 144C(5) of the Act.
On the facts and circumstances of the case and 2.1.1. in law, the DRP effect order passed by the Ld. TPO is invalid and beyond jurisdiction as Ld. TPO made contradictory observations as against DRP directions. The DRP directions clearly observed that there was no change in factual matrix for AY 2017-18 vis-a-vis AY 2014-15, however, Ld. TPO is his order has. made a contradictory observation stating that the factual matrix for AY 2017-18 is different from AY 2014-15. On the facts and circumstances of the case and 2.1.2. in law, Ld. TPO erred in observing that there was change in factual matrix for AY 2017-18 vis-a-vis AY 2014-15 on the premise that the Ld. TPO had adopted Residual Profit Split Method (‘RPSM’) to determine the arm’s length price without appreciating that application of a different approach by the Ld. TPO does not result in a change of factual matrix. The functional assets and risk profile of the Appellant had remained the same for AY 2017-18 vis-a-vis AY 2014-15. On the facts and circumstances of the case and 2.1.3. in law, the Ld. TPO erred by not following the specific direction of the Hon’ble DRP. Hon’ble DRP had directed that the Ld. TPO shall follow the directions passed by Hon’ble DRP in Appellant’s own case for AY 2014-15. In doing so, the Ld. TPO was specifically directed to verify the outcome of any appeal filed by the Revenue/ Appellant against Hon’ble DRP’s directions for AY 2014-15 and follow the stand taken by the Department thereon. The Appellant had filed an appeal before Hon’ble ITAT for AY 2014-15 wherein Hon’ble ITAT had directed the Ld. TPO to follow the directions issued in Appellant’s case for AY 2012-13 wherein intensity adjusted Resale Price Method (‘RPM’) was ultimately used as the most appropriate method. Since Department had not filed any appeal against the ITAT order for AY 2014-15, the same should have been followed by Ld. TPO while giving effect to the DRP Directions for AY 2017-18.
AMP expense incurred by the Appellant not a transaction much less than an international transaction in the absence of any arrangement / agreement / understanding / contract with AEs 3.1 That on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld. AO/Ld. TPO erred in assuming that the AMP expenditure incurred by the Appellant is an “international transaction” within the meaning of the term as contained in section 92B of the Act (including the explanation to section 92B) without appreciating that the AMP expenses incurred by the Appellant is a function performed by the Appellant for the purpose of sale of its goods in India and not for the purpose of creation of marketing intangible in favor of its AE, a factual position which has been accepted by Hon’ble ITAT in Appellant’s own case for AY 2012-13. 3.2 That the Hon’ble DRP/Ld. AO/Ld. TPO grossly erred on facts and in law in not appreciating that AMP expenditure incurred by the Appellant at its own behest could not be regarded as a 'transaction' under Section 92F(v), much less than an international transaction under section 92B of the Act, in the absence of any understanding/ arrangement/ agreement between the Appellant and its AEs (which own the trademarks) for incurrence of extraordinary AMP expenditure by the Appellant for developing marketing intangibles for the AE. 3.3 That on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld. AO/Ld. TPO erred in holding that the AMP expenditure incurred by the Appellant is an international transaction by relying upon the decision of the Sony Ericsson Mobile Communications India Pvt Ltd vs. CIT (ITA No. 16/2014) and without appreciating that unlike the facts of the case in Sony Ericsson Mobile Communications India Pvt Ltd. (supra), the Appellant had -{a) neither received any subsidy/ grant in connection with AMP expenses from its AE; and (b) nor the Appellant had admitted to the existence of an international transaction. 3.4 That on the facts and circumstances of the case and in law, the Hon’ble DRIP/ L’3. AO/ Ld. TPO erred in not appreciating that there are no machinery provisions in the Act to make adjustment in relation to AMP expenses as upheld by the jurisdictional Delhi High Court in the case of Maruti Suzuki India Ltd (ITA 110/2014).
3.5 That on the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/ Ld. TPO erred in not appreciating that the beneficiary on account of incurring of AMP expenses was the Appellant itself and the Appellant does not require to be compensated/remunerated for by the AE for any incidental benefits enjoyed by the AE. That on the facts and circumstances of the case and in 3.6. law, the Hon’ble DRP/ Ld. AO/ Ld. TPO erred in not appreciating that the development, enhancement, maintenance, protection and exploitation (‘DEMPE’) function were undertaken by the Appellant in relation to intangibles owned by the Appellant and not the AE.
Use of erroneous approach/ methodology to determine ALP of alleged international transaction 4.1 That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in not taking into account the economic analyses undertaken by the Appellant in accordance with the Indian TP regulations and not appreciating that according to its compensation model, the Appellant was already remunerated at arm’s length in relation to all the functions and risks undertaken by it (including AMP function) and the same has been suitably benchmarked under application of RPM carried out by the Appellant. 4.2 That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in using RPSM as most appropriate method for determining the ALP of excessive AMP expenses. 4.3 That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in following an arbitrary and erroneous approach for application of RPSM. 4.3.1. The Ld. TPO/ AO have grossly erred in in assessment of functional and risk profile of the Appellant/AE while applying RPSM. The Ld. AO/TPO has grossly erred in allotting weights to the FAR of the AE/appellant in an arbitrary manner for computing the profit split ratio to allocate residual profits. 4.3.2. The Ld. AO/TPO have in law and in facts and circumstances of the case by not recognizing the fact that if supernormal profits are to be retained by the Appellant in India, no further adjustment is required in relation to excessive AMP expense. 4.4 That on the facts and circumstances of the case and in law, the Ld.AO/ Ld. TPO erred in not considering the alternative approach of using Comparable Uncontrolled Price (‘CUP’) method to determine the arm’s length price of the alleged international transaction.
5. Erroneous use of BLT approach for computing transfer pricing adjustment on a protective basis 5.1 That on the facts and circumstances of the case and in law, Hon’ble DRP/ Ld. AO/Ld. TPO have grossly erred in applying the “BLT” to propose transfer pricing adjustment of INR 41,95,10,996 on a protective basis, in complete disregard of the findings of the Hon’ble Jurisdictional Delhi High Court in the case of Sony Ericsson Mobile Telecommunications India Private Limited (supra) and Maruti Suzuki India Ltd (supra). In this regard, the Hon’ble DRP/ Ld. AO/ Ld. TPO also erred in facts and law by disregarding the binding nature of a judicial precedent as it remains unaffected by even if it has been challenged before a higher forum. 5.2 That on the fact and circumstances of the case and in law, Hon’ble DRP/ Ld. AO/ Ld. TPO have grossly erred in using protective assessment for application of BLT approach as the very concept of protective assessment is only relevant where there is an ambiguity regarding the Appellant in whose hands income is chargeable to tax. 5.3 That on the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/ Ld. TPO has erred in not considering that there are other factors which result in creation of brand name and AMP expense alone cannot be considered as leading to creation of marketing intangibles. 5.4 That the Hon’ble DRP/ Ld. AO/Ld. TPO grossly erred in facts and in law in by not appreciating that the AMP expense considered by the Ld. TPO for computing the adjustment using BLT approach are primarily in the nature of at “point of sale expenditure” and thus are selling expenses and not brand promotion expenses. 5.5 That on the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/ Ld. TPO failed to appreciate that ambit of “selling expenses” is not only limited to trade discount/ volume discount, rather, any expense(s) which have been incurred for the purposes of enhancing sales will fall under the purview of “selling expenses”. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal
at any time before or at the time of hearing of the appeal.”
3. Heard and perused the record.
4. On hearing ld. AR it comes up that in assessee’s own case for A.Y. 2014-15 vide order dated 27.01.2022, in para 17, the Tribunal’s findings in ITA no. 344/Del/2017 for A.Y. 2012-13 were relied. It will be appropriate to reproduce the same herein below :- “17. In the background the above factual matrix let us now consider the findings of this Tribunal ITA No.344/Del/2017 for A.Y. 2012-13 :- 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 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 Id. AR fairly accepted this position and requested for proceeding with the issue actually arising from the impugned order. The Id. 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. 14. Succinctly, the facts for the year under consideration are that the ssessee 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 subcontinent. In this backdrop, the TPO opined that for the purpose of benchmarking, the comparables should also have equal intensities of the 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-a-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 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 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-a-vis the earlier years. Whereas up to the assessment year 2011-12, the TPO was 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 Or s. 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 wdiich it has been observed in para 166 that: 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’. Then, it has been held in para 165 that ; 'An external comparable should perform similar AMP functions.... Comparable analysts of the tested party and the comparable would include reference to AMP expenses’. The Id. 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 arm’s length cost. Coming back, the TPO carried out the AMP intensity adjustment in the profit rates of the comparable as under :-
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 Id. AR challenged the computation of ALP of the international transaction of import of finished goods determined by the TPO as under:-
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 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.l 61.09 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 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. 16L09 crore). The Id. 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 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 Id. 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 Id. 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 (TNMM) as the most appropriate method for making the transfer pricing adjustment The id. 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 Id. 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. 20.
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 initially called upon the asses see 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 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'.
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.
Respectfully following the findings of the coordinate Bench (Supra) we direct accordingly.”
Further in regard to use of BLT approach for computing Transfer Pricing Adjustment on protective basis the observations in para 15 onwards are relevant is reproduced below :-
“15. In assessment year 2013-14 this Tribunal in led the occasion to consider the quarrel relating to the use of BLT approach for computing transfer pricing adjustment on a protective basis. The relevant findings of this Tribunal read as under :- 8. Since, the matter stands covered in favour of the assessed for the earlier years and in the absence of any material change in the facts of the case brought to our notice, we hereby direct that the adjustment be determined considering as RPM as MAM.
The other issue raised during the arguments pertains to adjustment on protective basis following the BIT method. This issue has been squarely covered by the order of the Co-ordinate Bench of ITAT Delhi in ITA No. 6531/Del/2017 for the assessment year 2013- 14 vide order dated 30.11.2017 in the case of M/s Toshiba India Pvt. Ltd., wherein one of the Members of this bench was the signatory. The relevant part of the said order is as under: "3.1 The Hon'ble Delhi High Court in the case of Sony Ericsson (supra) rejected the Bright Line Test (BLT) method for computing the arm's length price of the AMP transaction and directed that for the purpose of comparability, the comparable should be identified in such a way that they are carrying out marketing and distribution function and the comparables should have comparable intensities of expenses incurred for sales and marketing and in the case of the assessee. The Ld. TPO computed the adjustment under AMP according to the manner proposed by the Hon'ble Delhi High Court in the case of Sony Ericsson (supra) on substantive basis at Rs. 19,80,30,988/- and also proposed addition on protective basis following the BLT method amounting to Rs.131,21,90,000/-. 3.2 Against the adjusted proposed by the Id. TPO, the assessee before the Ld. DR, the assessee filed objections before the Ld. DRP. The Ld. DRP directed to verify the segmental account and other arithmetical errors/factual mistakes to allow certain expenses out of AMP. In view of the directions of the Ld. DRP, adjustment was revised. A table revising the adjustment both on substantive as well as protective basis by the Assessing Officer in the impugned final assessment order is reproduced as under:
3.3 Thus, we find that substantive addition on AMP adjustment on AMP stands already deleted by the Ld. DRP, and only the addition made on protective basis following the BLT method was sustained by the Id. DRP, against which, the assessee is in appeal before us. The Ld. counsel submitted that ground No. 1 and 1.1 of the 4. appeal are general in nature. Since the ground being general in nature we are not required to adjudicate upon specifically and accordingly dismissed as infructuous.
5. Further, during the hearing of the case, the Ld. counsel did not press the ground Nos. 1.2 to 1.5 and 2.1 to 2.4 and ground No. 3, accordingly all these grounds are dismissed as infructuous. The ground Nos. 2, 2.5 to 2.6 relates to protective addition 6. made applying the BLT. 6.1 Before us, the learned counsel submitted that Tribunal in the case of Nickon India Private Limited (ITA No. 4574/DeI/2017, dated 20.09.2017) has deleted the identical addition of protective nature, and therefore, in the case of the assessee also, no addition could be sustained.
6.2 The Ld. CIT(DR), on the other hand, relied on the finding of the lower authorities. 6.3 We have heard the rival submission and perused the relevant material on record. We find that Tribunal in the case of Nickon India Private Limited (supra) has deleted the adjustment made on protective basis applying the BLT. The relevant finding of the Tribunal is reproduced as under: "18. So, following the decision rendered by Hon'ble Delhi High Court in case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra) and coordinate Bench of the Tribunal in Perfetti Van Meiie India Pvt. Ltd. (supra), TP adjustment amounting to Rs.22,30,18,964/- by applying BLT is not sustainable on protective basis having no statutory mandate. So, ground no. 5 is determined in favour of the assessee." 6.4 We find that the BLT for computing Arm's Length Price of AMP transaction has already been rejected by the Hon'ble Delhi High Court in the case of Sony Ericsson (supra), and thus adjustment even protective basis cannot be sustained. The decision of the Hon'ble Jurisdictional High Court is a binding precedent and the lower authorities cannot disregard it merely because the Revenue has challenged it before the Hon'ble Supreme Court. Thus, respectfully following the above decision of the Tribunal, we direct the Ld. AO/TPO to delete the protective addition of Rs.51,09,87,000/-. Accordingly, we allow the relevant grounds of the appeal of the assessee."
Since, the matter stands covered in favour of the assessee and in the absence of any material change in the facts of the case brought to our notice, we hereby hold that the adjustment made on protective basis cannot be sustained.”
We are satisfied that Ld. AO has fallen in error in not taking into account the findings in assessee’s own case for AY 2014-15. The issue with regard to RPM as the MAMstands settled in favour of the assessee and the application of BLT for computing the arm’s length price of AMP stands rejected by Tribunal in assessee’s own case for 2014-15. When DRP was satisfied that there are no change in facts of the case from AY 2014-15 then making substantive adjustment by applying RPSM instead of RPM is not sustainable.
Consequently the grounds no 1, 4 and 5, as pressed for the assessee deserve to be sustained and consequently the appeal of assessee is allowed. The Ld. AO shall follow the directions of Tribunal in assessee’s own case of AY 2014-15 for the re-determination of the ALP of the international transaction of ‘Import of finished goods’.