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Vol. 11 Issue 5.5 May 29, 2015
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Comparison of AMP functions is sine qua non for determination of
Arm’s Length Price
The Delhi Bench of the Income Tax Appellate Tribunal (“Tribunal”) in the case of
Toshiba India (P) Ltd.[1] has passed an order interpreting the Delhi High Court
(“HC”) ruling of Sony Ericsson Mobile Communications India Pvt. Ltd[2] on the
issue of determination of arm’s length price (“ALP”) of advertising, marketing and
sales promotion (“AMP”) expenses. The Tribunal has clarified that the HC has
allowed the aggregation of distribution functions with AMP function only for
determining the ALP of these transactions in a bundled manner, wherein suitable
comparables having undertaken similar functions for both distribution and AMP
expenses are to be selected. Thus, making it clear that the examination of ‘AMP
functions’ with comparables is sine qua non for determination of ALP of an
international transaction.
Brief facts of the case
Toshiba India (P) Ltd., (“Taxpayer”) is engaged in the trading of consumer
durables, IT products and also providing representative and marketing support
services to Toshiba group companies worldwide.
For assessment year 2010-11, the Taxpayer benchmarked its international
transactions by using the Transactional Net Margin Method (“TNMM”) as the most
appropriate method (“MAM”) which was accepted by the Transfer Pricing Officer
(“TPO”) to be at ALP. The TPO did not make any TP adjustment on account of the
distribution activity carried out by the Taxpayer. However, the TPO treated the
AMP expense as separate and distinct transaction and applied the ‘Bright Line
Test’ to calculate the non-routine expenditure in excess of bright line. Accordingly,
transfer pricing adjustment of INR 40.14 crore was made to the income of the
Taxpayer, which was later upheld by the DRP. Aggrieved by the assessment
order, the Taxpayer preferred an appeal before the Tribunal.
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Mukesh Butani
Contention of the Taxpayer
The Taxpayer contended that since it had applied TNMM as the MAM and its net
profit margin was healthier than the average margin of comparables, which fact
has not been disputed by the TPO, no adjustment on account of AMP expenses is
warranted, since such expenses stand subsumed in the overall operating profit.
Decision of the Tribunal
The Tribunal rejected the Taxpayer’s argument for deletion of addition towards
AMP expenses on the logic that the Taxpayer’s profit margin was higher than that
of comparables and observed as under:
TPO had examined the ALP for the international transactions of distribution
function by using TNMM and for ‘AMP expenses’ by applying the bright line
test. However, the TPO did not examine the ‘AMP functions’ carried out by the
Taxpayer and the comparables.
AMP expenses are different from AMP functions; while 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 functions.
It is the examination of such ‘AMP functions’ which is a necessary condition in
the process of determination of the ALP of the international transaction of AMP
function, either in a segregate or an aggregate manner.
Further, the Tribunal laid down the following parameters for determining the ALP
of distribution and AMP function:
The distribution and AMP functions are two separate international activities,
which need to be compared with uncontrolled transactions. Because of their
intertwining, it is only for the purposes of determining their ALP that both these
transactions can be aggregated in the first instance, so that the surplus from
one could be adjusted against the deficit from the other in an overall approach.
It does not mean that because of aggregation, the AMP expense transaction
sheds its character of a separate international transaction and, hence, the
AMP functions should not be matched with the AMP functions carried out by
probable comparables.
If suitable comparables can be found having performed both distribution and
AMP functions, then, the ALP should be determined on aggregate basis.
Mukesh Butani, New Delhi
+91 11 3066 3010
Rajeev Dimri, New Delhi +91 124 669 5050 [email protected]
Gokul Chaudhri, New Delhi
+91 124 669 5040
Bobby Parikh, Mumbai
+91 22 6135 7010
Sriram Seshadri, Chennai
+91 44 4298 7000
Amit Jain, Pune +91 20 668 19010 [email protected]
Vishal Kalra
Vrinda Tulshan
Khyati Dadhwal
If, however, there is some difference in the distribution or AMP functions
performed by the Taxpayer vis-à-vis the probable comparables, then an
attempt should first be made to iron out such difference by making a suitable
adjustment to the profit margin of comparables.
If such an adjustment is not possible, then such probable comparable should
be eliminated. If, by making a comparative analysis of the distribution and
AMP functions jointly, there remains no comparable case performing such
distribution and AMP functions, then, the international transaction of AMP
should be segregated and its ALP be determined separately by applying a
suitable method Cost plus or any other suitable method be applied for
determining the ALP of AMP expenses.
In view of the above, the Tribunal sent the matter back to the file of the TPO / AO
for determining the ALP of the international transaction of AMP in accordance with
the above parameters, which are in line with the decision of the HC in the case of
Sony Ericson Mobile (supra).
BMR Comments
The Tribunal rejected the Taxpayers argument that no separate adjustment
was warranted for AMP expenses on the sole reasoning that the Taxpayer
was earning healthy net margins while applying TNMM for the main
distribution function. The Tribunal held that the argument was fallacious
since the HC has held that AMP is a separate international transaction and
in order to determine the ALP of AMP expenses, comparison of AMP
functions of the Taxpayer and of the comparables must be made. Once
such an examination is done, comparables whose AMP functions are
different from that the Taxpayer should be rejected in the event that
appropriate adjustments cannot be made.
Despite the fact that the Tribunal has laid down certain parameters for
examining the AMP functions and thereafter determining the ALP of the
AMP expenses, it is still uncertain how the directions given by the Tribunal
will actually be carried out by the TPO since making a comparison of the
AMP functions is a qualitative aspect which has till date not been examined
by the Revenue authorities.
Further, by setting aside the order and sending the matter back to the file of
the AO/ TPO for determining the ALP of AMP afresh would result in another
round of litigation and the controversy seems to be far from being settled.
[1]Toshiba India (P) Ltd. vs DCIT (ITA No.1101/Del/2015)
[2]Sony Ericsson Mobile Communications India Pvt. Ltd and others vs CIT [2015] 276 CTR 97
(Delhi)(MAG.)
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