Transfer Pricing: Argument, based on BMW, that the AMP adjustment law laid down in L. G. Electronics (SB) does not apply to a full-risk distributor in not correct
In LG Electronics India Pvt. Ltd. vs. ACIT 2013 152 TTJ (Del) (SB) 273 the Special Bench held by majority that incurring of AMP expenses towards promotion of brand, legally owned by the foreign AE, constitutes a `transaction’. The contention that no disallowance could be made out of AMP expenses by benchmarking them separately when the overall net profit rate declared by the assessee was higher than other comparable cases also came to be specifically rejected by the special bench. Resultantly, the transfer pricing adjustment in relation to such AMP expenses was held to be sustainable in principle. In the eventual order, the Special Bench restored the matter to the file of the AO/TPO for fresh determination of Transfer Pricing Adjustment in relation to AMP expenses. In order to enable the determination of correct ALP of AMP expenses, the Tribunal listed out 14 parameters in Para 17.4 of its order which should be examined by the AO/TPO before reaching the final conclusion about the warrant for a TP Adjustment on this score. It is relevant to note that there were 22 interveners in this case, some of which were distributors, while others were licensed manufacturers. While setting out 14 parameters, the Special Bench has held vide first parameter that the AO/TPO should ascertain as to whether the Indian AE is simply a distributor or is holding a manufacturing license from its Foreign AE. The second parameter talks of examining as to whether or not the Indian AE is a full fledge manufacturer and whether it is selling the goods purchased from the Foreign AE as such or is making some value addition to the goods purchased from its Foreign AE before selling it to customers. Thus there is not even a slightest doubt that the special bench order not only applies to a `Manufacturer’, but also extends to a distributor, whether he is a bearing full risk or least risk. Thus, such tests are applicable with full vigor to the extent applicable, to the distributors. There is nothing in the special bench order which restricts its operation only to the `Manufacturers’.
The argument, based on BMW India Pvt. Ltd. vs. ACIT (Del) that as the assessee was a full fledged distributor and as such the benefit of AMP expenses did not spill over to the foreign AE is not acceptable because the Special Bench order in LG Electronics is applicable with full force on all the classes of the assessees, whether they are licensed manufacturers or distributors. The Bench in BMW did not have any occasion to bestow its attention to the correctness of the application by the TPO of the aforesaid parameters laid down in the special bench order as these were naturally not considered by the Officer since he passed his order much before the advent of the special bench order. There is no prize for guessing that Special Bench order has more force and binding effect over the Division Bench order on the same issue.