JUDGMENT judgment of court was delivered by Sanjiv Khanna J.-This common judgment will dispose of these appeals and cross-appeals by assessee and Revenue in which one of primary issues that emanates for consideration is whether advertisement, marketing and sales promotion expenditure ("AMP", for short) beyond and exceeding "bright line" is separate and independent international transaction undertaken by resident Indian assessee towards brand building for brand owner, i.e., foreign associated enterprise ("AE", for short). Other core issues pertain to aspects of arm's length pricing of international transactions. details of appeals and cross-appeals by assessees and Revenue and assessment years involved are as under: Cross Assessment I. T. A. Assessee appeal by year No. Revenue Sony Ericsson Mobile Communications India Pvt. 16 of Ltd/Sony Mobile 155 of 2008-09 2014 Communication India Pvt. Ltd. 2014 Now known as, Sony India Ltd. 70 of Discovery 218 of 2008-09 2014 Communications India 2014 521 of 132 of 2006-07 Canon India Pvt. Ltd. 2013 2014 92 of Daikin Air Conditioning 214 of 2008-09 2014 (India) Pvt. Ltd. 2014 2007- 93 of Daikin Air Conditioning 215 of 08 2014 (India) Pvt. Ltd. 2014 2008- 99 of 642 of Haier Appliances Pvt. Ltd. 09 2014 2014 2006- 100 of 621 of Haier Appliances Pvt. Ltd. 07 2014 2014 2007- 101 of 622 of Haier Appliances Pvt. Ltd. 08 2014 2014 2008- 109 of 213 of Reebok India Co. 09 2014 2014 2007- 512 of 618 of Casio India Co. Pvt. Ltd. 08 2014 2014 2008- 513 of 498 of Casio India Co. Pvt. Ltd. 09 2014 2014 common substantial questions of law which are required to be dealt with in appeals by assessee read: "1. Whether additions suggested by Transfer Pricing Officer on account of advertising/marketing and promotion expenses ('AMP expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by Assessing Officer, having regard to retrospective amendment to section 92CA of Income-tax Act, 1961, by Finance Act, 2012. 2. Whether AMP expenses incurred by assessee in India can be treated and categorised as international transaction under section 92B of Income-tax Act, 1961. 3. Whether under Chapter X of Income-tax Act, 1961, transfer pricing adjustment can be made by Transfer Pricing Officer/ Assessing Officer in respect of expenditure treated as AMP expenses and if so in which circumstances? 4. If answer to questions Nos. 2 and 3 is in favour of Revenue, whether Income-tax Appellate Tribunal was right in holding that transfer pricing adjustment in respect of AMP expenses should be computed by applying cost plus method? 5. Whether Income-tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by Transfer Pricing Officer by applying parameters specified in paragraph 17.4 of order dated January 23, 2013, passed by Special Bench in case of L. G. Electronics India (P.) Ltd.?" common substantial question of law which are required to be dealt with in appeals by Revenue read: 1. Whether Income-tax Appellate Tribunal was right in distinguishing and directing that selling expenses in nature of trade/ volume discounts, rebates and commission paid to retailers/dealers, etc., cannot be included in AMP expenses? Additional question of law framed in CIT v. Reebok, I. T. A. No. 213 of 2014 reads: "Whether Income-tax Appellate Tribunal was right in setting aside/deleting transfer pricing adjustment made on account of payment of royalty to associated enterprise?" A. Background facts and assessments assessees are subsidiaries of foreign associated enterprises. assessees and foreign associated enterprises are all members of multinational enterprises ("MNE", for short). During relevant period, assessees were engaged in distribution and marketing of imported and branded products, manufactured and sold to them by foreign associated enterprises resident abroad. Intangible rights in brand-name/ trade mark/ trade-name were owned by foreign associated enterprises. There is no dispute or lis that assessees are associated enterprises who had entered into controlled transactions with foreign associated enterprises. It is also uncontested that controlled international transactions can be made subject matter of transfer pricing adjustment in terms of Chapter X of Income-tax Act, 1961 ("the Act", for short). In order to appreciate controversy, we are reproducing in brief findings of Assessing Officer/Transfer Pricing Officer and Incometax Appellate Tribunal ("the Tribunal", for short) in case of Sony Mobile Communication Ltd, i.e. assessee-appellant in I. T. A. No. 16 of 2014 and assessee-respondent in I. T. A. No. 155 of 2014 filed by Revenue pertaining to assessment year 2008-09; Reebok India Co. Ltd., i.e., assessee-appellant in I. T. A. No. 109 of 2014 and assessee-respondent in I. T. A. No. 213 of 2014 filed by Revenue relating to assessment year 2008-09; and Canon India Pvt. Ltd., i.e., appellant in I. T. A. No. 512 of 2013 and respondent in I. T. A. No. 12 of 2014 filed by Revenue relating to assessment year 2006-07. said three assessees have been selected because in case of Sony Mobile Communication Pvt. Ltd., transactional net margin method ("TNM method", for short) has been followed and in case of Reebok India Co. Ltd., TNM method has been followed in respect of goods' sourcing and exports from India; comparable uncontrolled price method ("CUP method", for short) has been followed in respect of royalty paid by Indian associated enterprise to foreign associated enterprise and in respect of which separate substantial question of law has been framed and resale price method ("RP method", for short) has been followed for import of apparels and footwear for resale. In case of Canon India Pvt. Ltd., RP method was adopted by assessee for import of finished goods for resale. In said case, order passed by Transfer Pricing Officer is detailed and is lucid exposition of stand of Revenue. Sony Mobile Communication Pvt. Ltd. I. T. A. No. 16 of 2014 (by assessee) and I. T. A. No. 155 of 2014 (By Revenue) assessment year 2008-09 assessee was subsidiary of Sweden based entity, "Sony Ericsson Mobile Communications AB", 50: 50 joint venture of Sony Corporation (Japan) and Telefonaktiebolaget LM Ericsson (Sweden). assessee was engaged in importing/buying and selling and distribution, promotion and marketing of mobile handsets under brand name "Sony Ericsson", and providing post-sale support/warranty services in India. assessee in transfer pricing report accepted that group companies, i.e., associated enterprises, owned significant and valuable intellectual property rights in commercial or marketing intangibles in form of brand-name, trade mark, logos, etc., but assessee did not own any significant or valuable non-routine intangibles. assessee was primarily importer performing distribution and marketing functions by reselling imported handsets with its primary functions being sales, budgeting, inventory scheduling, marketing including advertisements and sale promotions, creating distribution channels, and servicing warranty claims. As per transfer pricing report, assessee had declared net profit margin of 2.5 per cent. which was better than average or mean of 18 comparables (wrongly mentioned as 19). assessee had applied TNM method for computing arm's length price and profit level indicator ("PLI", for short) adopted was total turnover, in proportion to net profit rate. While computing net profit, assessee had included credit notes worth Rs. 73,83,70,409 received from overseas/ foreign associated enterprises in December, 2007, and March, 2008. Transfer Pricing Officer held that Rs. 73,83,70,409 represented excess price charged by associated enterprise and were issued to achieve arm's length return in accordance with business model of assessee. He observed that total AMP expenditure of Rs. 115,72,15,159 on gross sales of Rs. 1,638,68,08,123 gave AMP to sales ratio of 7.06 per cent. Business promotion and selling expenses of Rs. 49,66,58,381 were included and added to arrive at figure of AMP expenses of Rs. 115,72,15,159. Out of 18 comparables suggested by assessee, Transfer Pricing Officer accepted 12 and rejected 6 for they were involved in brand promotion activities being owners of brandname or intangibles. mean AMP to sales ratio of 12 comparables was 3.35 per cent. This figure of 3.35 per cent. was treated as "bright line" and, accordingly, AMP expenditure, exceeding said ratio was treated as non-routine or abnormal. Thus, Rs. 60,82,57,087 was treated as abnormal or excessive AMP expenditure. To this, Transfer Pricing Officer added mark-up of 15 per cent. Rs. 73,83,70,409 received as credit notes was not set off against AMP expenses. Transfer Pricing Officer made following computation: Computation of TP adjustment In Rs. Value of gross sales 16,386,808,123 AMP/Sales of comparables 3.35% Amount that represents bright line 548,958,072 Expenditure on AMP by assessee 1,157,215,159 Expenditure in excess of bright line 608,257,087 Mark-up at 15 per cent. 91,238,563 Reimbursement that assessee should have 699,495,650 received Reimbursement actually received Nil Adjustment to assessee s income 699,495,650 Dispute Resolution Panel ("the DRP", for short) substantially rejected assessee's objections but reduced mark-up from 15 per cent. to 12.5 per cent. observing it to be reasonable mark-up. Tribunal, in impugned order dated August 30, 2013, observed that function, asset and risk analysis ("FAR analysis", for short) of assessee and comparables was not disputed by Transfer Pricing Officer and, hence, accepted. "bright line test" ratio of 3.35 per cent. as applied on recalculation would be 4.02 per cent., considering partial relief granted by Dispute Resolution Panel in excluding two comparables. Thus, abnormal or non-routine AMP expenditure would be to extent of 3.04 per cent. (7.06 - 4.02). Further, quantum of AMP expenses computed by Transfer Pricing Officer/Revenue required recomputation in terms of decision dated January 23, 2013, of Special Bench of Tribunal in L. G. Electronics India P. Ltd. v. Asst. CIT reported as [2013] 22 ITR (Trib) 1 (Delhi); [2013] 152 TTJ 273 (Delhi). Further, mark-up of 12.5 per cent. as sustained by Dispute Resolution Panel, was not based upon any comparable. Lastly, failure to account for Rs. 73,83,70,409 in form of credit notes was not elucidated and explained by Revenue. Accordingly, order of remand was passed. Reebok India Co. Ltd. I. T. A. No. 109 of 2014 (by assessee) and I. T. A. No. 213 of 2014 (by Revenue) assessment year 2008-09 assessee belongs to "Adidas group", stated to be global leader in sportswear goods' industry with broad portfolio of products. group has approximately 100 subsidiaries and office of parent company is located in Germany with key corporate units in United States of America. assessee, Reebok India Co. Ltd., was incorporated in 1995 as joint venture between Reebok Mauritius and Focus Energy Ltd., India. As per details furnished by assessee, they had entered into following international transactions: S. Method used Nature of Transaction Amount No. by assessee Import of apparels and 1. RPM 34,75,63,922 footwear for resale 2. Royalty CUP 15,28,77,527 Identification of factories in India for 3. TNMM 73,87,878 sourcing/exporting goods aforesaid table also gives details of method adopted by assessee. assessee had received reimbursement of advertisement and other expenses to tune of Rs. 44,67,273 from associated enterprise. In appeals, we are concerned with international transaction at Sl. No. 1, i.e., import of apparels and footwear for resale in India. Transaction No. 2 also arises for consideration but has been examined separately. assessee had adopted RP method for arm's length determination of transaction No. 1. gross margin earned and declared by assessee from controlled transactions was 42.95 per cent. compared to 42.52 per cent. earned from internal comparables, i.e., transactions of assessee with unrelated parties. Thus, it was claimed that price of uncontrolled transaction was at arm's length. Transfer Pricing Officer quoted and relied on clauses of agreement dated March 1, 1995, with Reebok International Ltd., England, to highlight that functions of Indian associated enterprise were to promote and develop market for selling and distributing Reebok branded products in India and to support and co-operate in execution of global marketing plans and strategies. Referring to OECD's report on transfer pricing guidelines from multi-national enterprises and tax administrations, paragraphs 6.4 and 6.36 to 6.39, Transfer Pricing Officer observed that when distributor bears cost of "extraordinary" marketing activities, he should be compensated with return on intangible created because of such expenditure. Distinction between short-term and long-term relationship was highlighted. He referred to Australian Tax Code as well as U. S. IRS Regulations. He held that in OECD Guidelines and as per international tax practices and jurisprudence, "bright line test" was acknowledged and accepted tool to determine and ascertain routine and non-routine AMP expenses. He made reference to cases of DHL and GlaxoSmithKline. Relying on decision of Delhi High Court in Maruti Suzuki India Ltd. v. Addl. CIT/TPO [2010] 328 ITR 210 (Delhi), he held that assessee was engaged in brand promotion by incurring AMP expenses. He made reference to following table: 2001- 2002- 2003- 2004- 2005- 2006- 2007- F.Ys. 02 03 04 05 06 07 08 Sales 69.6 89.4 118 169.4 252.5 366.2 451.23 (WSP) Sales 133.9 172 226.9 325.8 485.6 704.3 867.76 (MRP) AMP 2.6 4.2 5.3 8.3 19.3 27.2 40.62 (Gross) AMP 0.3 0.3 0.3 0.3 3.1 5.1 0.11 (Reimbursement) AMP (net) 2.4 3.9 5.0 8.0 16.2 22.1 40.50 AMP (Net)/Sales 1.78% 2.29% 2.21% 2.44% 3.34% 3.14% 4.67% (MRP) AMP (Gross)/ Sales 3.73% 4.69% 4.49% 4.89% 7.64% 7.43% 9.00% (WSP) % Reimbursement 11.54% 7.14% 5.66% 3.6% 16.06% 18.75% 0.27% of AMP/ AMP Gross Transfer Pricing Officer observed that AMP expenditure had increased significantly as percentage of sales. Further, assessee had offered discounts in form of growth incentive scheme and business volume discount scheme. These expenses were not linked with advertisement functions but they had worked to enhance brand value by popularising use of product through discount and attractive offers, creating familiarity and market for products. Thus, said expenditure should be added to AMP expenses. Accordingly, Rs. 16,61,12,065 on account of selling and distribution was added to advertisement and publicity expenditure of Rs. 39,01,24,915 to reach figure of Rs. 55,62,36,980, which gave ratio of AMP to sales of 12.33 per cent. On question of "bright line" comparables, Transfer Pricing Officer rejected companies like Colgate India Ltd., Dabur India Ltd., GlaxoSmithKline Consumer Healthcare Ltd., Hindustan Unilever Ltd., Marico Ltd., Trent Ltd. and Emami Ltd. with ratio of AMP to sales of Rs. 12.52 per cent. observing that these companies were engaged in promotion of their own name and AMP expenses incurred by them were non-routine. Another list of five comparables was rejected on different grounds. This list included Khadim India Ltd. and Liberty Retail Revolutions Ltd. engaged in similar business of footwear. Transfer Pricing Officer adopted following comparables for bright line limit: S. AMP expenses/sales Name of company No. (%) 1. Bhartiya Global Marketing Ltd. 2.15 2. Globus Stores Pvt. Ltd. 4.66 3. Pokarna Fashions Ltd. 1.49 4. Snowhite Apparels Ltd. 1.72 Mean 2.51 On this base/ratio of 2.51 per cent. of AMP to sales, excess or disproportionate AMP expenses in case of assessee were calculated as under: Value of gross sales 451,23,49,038 AMP/Sales of comparables 2.51% Amount that represent bright line 11,32,59,961 Expenditure on AMP by assessee 55,62,36,980 Expenditure in excess of brightline 44,29,77,019 Transfer Pricing Officer held that assessee was reimbursed Rs. 11,43,021 for aforesaid non-routine AMP activities and was entitled to reimbursement for entire expenditure, plus mark-up of 15 per cent. which he considered to be reasonable as it took care of interest costs which assessee had to bear on money invested in developing and marketing intangibles. Accordingly, total upward adjustment of Rs. 66,11,58,078 was suggested. Dispute Resolution Panel substantially rejected objections of assessee except that they reduced mark-up to 12.50 per cent. and, consequently, reduced adjustment to Rs. 49,72,06,162. Tribunal in impugned order has referred to bifurcation of selling and distribution expenditure of Rs. 1,66,12,066 which is as under: S. Amount Nature of expenses No. (Rs.) 1 Commission on sales 15,852,692 2 Common area maintenance charges 385,206 Discount to customers on cash down 3 566,030 payment 4 Official meetings 1,346,832 5 Rate/ margin difference credit notes 3,368,491 6 Sales scheme credit notes 45,711,507 7 Sales staff business expense 1,811,849 8 Store brokerage charges 1,646,169 9 Store expenses 2,850,634 10 Store registration charges 1,895,050 11 Tax reimbursement credit notes 3,493,251 12 VAT paid on purchases 2,960,787 13 Sample courier charges 11,064,039 14 Gym charges 355,988 Sample expenses for manufacture, suppliers 15 23,396,979 and trade shows 16 Export forwarding and clearing expenses 3,569,537 17 Miscellaneous expenses 3,960,471 18 Sales incentive expenses 2,869,355 Warehouse running and maintenance 19 28,795,393 expenses 20 IITTF trade fair stall expenses 1,810,963 21 Store general merchandising 8,400,943 Total 166,12,066 Referring to judgment in L. G Electronics India Pvt Ltd. (supra), following directions stand passed: "11. Accordingly, we remit issue of AMP expenses to files of Transfer Pricing Officer with following directions: (i) Expenditure in connection with sales as mentioned above cannot be brought within ambit of advertisement, marketing and promotions expenses for determining cost/value of international transactions. However, Transfer Pricing Officer shall examine veracity of description and quantification of amount of selling expenses and, accordingly, allow assessee's claim. (ii) After deducting selling price from AMP expenses as mentioned above, Transfer Pricing Officer shall decide issue of AMP expenses by applying proper comparables after hearing assessee and keeping in view Special Bench directions in this behalf." Canon India Pvt. Ltd. I. T. A. No. 521 of 2013 (by assessee) and I. T. A. No. 132 of 2014 (by Revenue) assessment year 2006-07 assessee, Canon India Pvt. Ltd., is wholly owned subsidiary of Canon Singapore Pte. Ltd. assessee had started Indian operations in 1996 and had entered into various international transactions with Canon group of companies. It had entered into agreements pertaining to purchase and resale of Canon products like photocopiers, fax machines, printers, scanners and cameras in India. Besides, assessee was also engaged in software development and related services to Canon group of companies. As per transfer pricing report, assessee had entered into following international transactions: Table 1 S. Nature of Method used by Value of transaction No. transaction assessee Method PLI Receipt Paid Import of GP/ 1. finished goods for RPM 169,75,21,034 Sales resale Export of TNMM 2. Software (Credited to OP/Sales 13,28,40,833 OP/OC P/L A/c) Provision of software Service 3. TNMM OP/OC 5,78,81,229 (Credited to Service Income in P/L) Reimbursement Not 4. of professional bench 16,27,161 charges marking Cost allocation Not in respect of 5. bench- 12,16,326 computer marking management fees. Receipt of Not 6. special purpose bench- 12,10,48,124 subsidy marking Reimbursement 7. At cost 55,03,334 5,12,007 of expenses Transfer Pricing Officer in his order observed that assessee was engaged in brand building development or enhancing marketing intangibles. precise meaning of term "marketing intangibles" was unclear from text or legal perspective but it would include trade-name, trade mark, trade-dress and logos, local market position of companies or its product know-how that surrounds trade mark such as knowledge of distribution channels, customer relationship, trade secrets, etc. Investment in marketing intangibles was derived from amongst others, company's level of advertisement, marketing and promotion or AMP. Reference was made to OECD guidelines in paragraphs 6.36 to 6.38; and US IRC section 482 to following effect: "(a) US distributor was simply given set transfer price and development of US market was at risk and economic cost of US distributor. (b) foreign parent indirectly subsidised development of US market through reduced transfer price. (c) foreign parent provided distributor with rebate of portion of distributor's AMP expenditure based on sales volumes. Following theories in above tax court case, cheese examples could require return for distributor investment in marketing intangibles either in form of service fee arrangement with appropriate profit margin or more robust operating margins to reflect return for developed marketing intangible. For tax authorities sought to disallow portion of AMP expenditure under notion that it was incurred on behalf of foreign trade mark owner." Reference was made to decisions in DHL Inc. and subsidiaries and GlaxoSmithKline Holding (America's) Inc. and Australian Tax Office Guidelines to hold that AMP expenses should be separately benchmarked. Transfer Pricing Officer held that assessee had incurred AMP expenses totalling Rs. 37,88,97,359, or 12.08 per cent. of total sales, whereas subsidy of Rs. 12,10,48,124 was received. Thus, balance expenditure of Rs. 25,78,49,235 was borne by assessee. assessee had failed to bench mark international transaction of Rs. 12,10,48,124. He rejected argument of assessee that subsidy was to lend financial support and this support was akin to discount and reduction of sale price, relying on written submission of assessee, bifurcating subsidy in following manner: Computation of subsidy Description Amount (INR) Price support for Government tender 43,65,000 Advertisement activities for DV 15,66,296 Channel schemes and consumer promos 22,52,385 Consumer promo awareness building 23,51,211 Product launches and market research report 26,16,549 Retail activities and road show, etc. 8,74,420 Photo Asia and channel promotion programme 30,93,044 Dealer channel promotion for digital cameras 31,82,441 Channel schemes and consumer promos 28,15,870 Advertisement and sales promotion support for fax 19,84,606 machines Advertisement and sales promotion for photocopiers 40,07,023 Credit note 83,902 Marketing development 3,76,717 Advertisement and sales promotion support for printers 50,69,210 and all in one Advertisement and sales promotion support for large 3,87,854 format Advertisement and sales promotion for photocopiers 31,40,325 Printers IP 1000 Liquidation support 22,12,320 Advertisement campaign for EOS Gery 34,29,750 Advertisement and sales promotion support for DSLR 57,16,250 Advertisement and sales promotion, schemes and 22,86,500 activities for DSLR Advertisement and sales promotion, schemes and 22,86,500 activities for DSLR Digital Cameras- Exhibitions, retail banding and support 26,52,340 Digital Cameras- Exhibitions, retail banding and support 21,03,580 Digital Cameras - Sponsorships, free gifts and promos 20,57,850 Digital Cameras- Exhibitions and promo supports 18,29,200 Digital Cameras - Road shows and promotional activities 23,77,960 Advertisement and sales promotion support for laser 30,18,180 beam printer Advertisement and sales promotion support for canon 25,37,421 expo events - Si printer BJ printer for advertisement and sales promotion 23,18,237 Si printer - retail partners support 28,33,888 Ill printer - market development support 14,56,455 Projector promotions 4,46,067 Digital cameras - road show POS and promo material 18,01,200 LV X5 DGS&D 20 sets 1,21,581 Against Nikon Exchange programme - advertisements 6,91,526 and mailers Market development support for copiers 89,93,987 Market development support for copiers 98,72,372 Market development support for faxes 27,10,972 Market development support for faxes 13,57,566 Fabrication and display of neon signs 20,40,011 Advertisement and sales promotion support for scanners 12,86,044 LFP Advertisement and promotion 5,43,149 Major account support for market development and 9,10,000 deliverables Trade-in (buy back) for DC channel sales 14,62,000 Advertisement and promotion -LBP schemes 25,39,980 Advertisement and promotion - LBP support for GIL 19,59,300 project through SI Acer Advertisement and Promotion for DV -To implant 2,86,250 promoters in stores for 6 months Advertisement and promotion for DC -1 GB CF card 7,80,000 for promo Advertisement and promotion for DC POS 19,02,556 MERCHANDISING, PHOTOFAIR Shows and seminar for copiers 18,94,916 Black & white and colour advertisement for copiers 18,53,126 Advertisement and promotion - Expenses BIS-PGA 3,12,236 Total 12,10,48,124 (The table is extracted from reply of assessee dated 20-3-2009) Indian assessee was described by Transfer Pricing Officer, as limited risk distributor whose profit margin during different financial years were as under: 2001- 2002- 2003- 2004- 2005- F.Y. 02 03 04 05 06 Profit margin of - - 4.82% 4.47% 4.10% 1.33% 0.75% assessee But profit margin of Canon Inc., Japan, was substantial higher and was as under: 2001- 2002- 2003- 2004- 2005- F.Y. 02 03 04 05 06 profit margin of Canon 9.68% 11.23% 14.01% 15.92% 16.30% Inc. Japan (AE) profit margins of Canon as mentioned in table pertain to year 2001, 2002, 2003, 2004 and 2005 as extracted from Orbis database. He did comparison between percentage of AMP to gross sales of Indian associated enterprise, i.e., assessee and profits margin of Canon Inc., Japan, to observe that there was co-relation between increase in profit margin of parent associated enterprise and enhanced AMP of Indian associated enterprise and there was negative co-relation between profitability of Indian associated enterprise and AMP expenditure incurred by Indian associated enterprise. Transfer Pricing Officer thus recorded that Indian associated enterprise had borne significant costs and risk associated with development of associated enterprise's trade mark in India. assessee was entitled to retain associated intangible income. In order to compute non-routine or excessive AMP, Transfer Pricing Officer adopted following steps or procedure: "Step 1: first step is to determine AMP expenditure of assessee, Step 2: selection of comparables for determining bright line limit, out of list of finally selected comparable by assessee in its transfer pricing report for benchmarking of international transaction of purchase of Canon product from associated enterprise using RPM. In selection x. process, each comparable was examined to ascertain whether these comparables are routine distributor or engaged in brand promotion and development of marketing intangible for related party or itself being owner of brand trade mark. After this analysis only those comparable which are engaged in routine distribution business and are not carrying out of non routine activities like trade mark promotion and development of marketing intangible are selected. Step 3: to determine AMP expenditure of comparables finally selected for benchmarking of international transaction of subsidy. Step 4: ratios of AMP expenditure to sales of uncontrolled comparables (routine distributors) were taken as comparable uncontrolled price which were compared with ratio of AMP expenditure to sales in case of assessee to determine bright line limit as discussed in paragraph 7.5 and 7.6 of this order. Step 5: AMP expenditure of assessee which was in excess of bright line limit determined on basis of comparable uncontrolled AMP prices was held as arm's length price of subsidy." Accordingly, Transfer Pricing Officer observed that total AMP expenditure of Rs. 37,88,97,359, inclusive of discount and volume rebate of Rs. 16,07,59,162 gave percentage of AMP expenditure to total turnover, of 12.08 per cent. For purpose of comparables, Transfer Pricing Officer rejected comparables adopted by assessee to benchmark international transaction for purpose of non-routine AMP expenses, recording: Gross Percentage advertisement Operating Company Trade of advertisement sales promotion income from third Comments name discount expenditure to and related parties sales expenditure Not ACI separately NA NA 357,682,028 NA Infocom Ltd. disclosed in financials Not Compuage separately NA NA 2,150,581,000 NA Infocom Ltd. disclosed in financials Repair schedule 17. advertisement HCL NA NA 24,362,000,000 NA publicity and Infosystem Ltd. entertainment net of reimbursements Trade Kilbum discount not Office 6,099,997 NA 292,627,187 2.08 shown automation Ltd. separately Trade Savex discount not 96,628,689 NA 2,879,632,210 3.36 computers Ltd. shown separately Trade discount not Spice Ltd. 61,046,000 NA 1,195,018,000 5.11 shown separately Trade Spice discount not 49,146 NA 19,187,953 0.26 Systems Ltd. shown separately Trade SPS discount not International 951,969 NA 110,577,806 0.86 shown Ltd. separately Trade Universal discount not Print systems 759,065 NA 124,953,087 0.61 shown Ltd. separately Trade Xerox discount not 629,983,000 NA 5,342,437,000 11.79 India Ltd. shown separately Arithmetic mean (for 3.44 comparables) He observed that profile of Spice Systems Ltd. and Xerox India Ltd. should not be included in comparables for that they were engaged in non-routine functions like development of marketing intangibles. remaining 5, engaged in routine functions, should be selected for applying "bright line" limit of routine AMP expenses. arithmetical mean of percentage of AMP expenses to sales, was computed at 1.434 per cent. as per following table. Percentage of Company name advertisement expenditure to sales Kilburn Office Automation Ltd. 2.08 Savex Computers Ltd. 3.36 Spice Systems Ltd. 0.26 SPS International Ltd. 0.86 Universal Print Systems Ltd. 0.61 Arithmetic mean (for comparables) 1.434% following table from TPO's order determines arm's length price: Rs. Total revenue of assessee 313,43,55,280 Arm s length % of AMP expenditure 1.434% Rs. Arm s length AMP expenditure 4,49,46,654 Rs. Expenditure incurred by assessee on AMP 37,88,97,359 Expenditure incurred for developing intangibles Rs. Rs. 37,88,97,359 Rs. 4,49,46,654 33,39,50,705 Rs. Arm s length value of subsidy 33,39,50,705 Rs. Amount of subsidy received by assessee 12,10,48,124 Rs. Difference 21,29,02,581 % of difference with value at which international transaction has taken place 175.88% Arm's length price for non-routine AMP expenses was computed at Rs. 21,29,02,581, recording arm's length difference of 175.88 per cent. Dispute Resolution Panel upheld suggested transfer pricing adjustment. Tribunal in impugned order has observed that following majority judgment in L. G. Electronics India Pvt. Ltd. (supra), legal grounds should be decided against assessee. On question of nature and scope of AMP expenditure, as elucidated by majority judgment in L. G. Electronics India Pvt. Ltd. (supra), it was held that sale related expenses, i.e., trade discount, volume rebate, cash discount, commission etc. should be excluded. To this extent, appeal filed by assessee was allowed for statistical purpose, directing that there was no justification for setting aside expenses for verification again to Assessing Officer/ Transfer Pricing Officer. details of subsidy, trade and volume discount, cash discount and commissions as quantified were: AY 2006-07 AY 2007-08 AY 2008-09 Particulars Amount Amount Amount (INR) (INR) (INR) 378,897,359 581,062,073 958,063,110 AMP including trade discount and (para 7.26 (para 7.29 (para 4.2 volume rebates and page 200 of PB 1) page 388 of PB 2) page 46 of PB 1) before reducing subsidy B Less: Subsidy 12,10,48,124 27,10,87,594 50,16,13,022 C Less: Trade discount and volume 14,00,83,068 15,59,68,614 19,65,29,801 rebates D Less: Cash 2,06,76,094 51,49,784 discount/commission E Total AMP expenditure to be considered for 25,47,70,503 purpose of 9,70,90,073 15,40,05,865 comparison in light of Special Bench Order On reducing aforesaid figure from AMP expenses of Rs. 37,88,97,359, total AMP expenses were computed as Rs. 9,70,90,073. Subject to aforesaid, order of remand was passed to apply and determine arm's length price of AMP expenses by applying ratio of majority judgment in L. G. Electronics India Pvt. Ltd. (supra). B. L. G. Electronics India Pvt. Ltd. v. CIT In impugned orders, Tribunal has primarily relied upon and followed majority judgment of Special Bench of Tribunal in L. G. Electronics India Pvt. Ltd. (supra). Learned counsels for parties have extensively referred to both majority and minority judgment in their erudite and pensive arguments. decision of Special Bench in L. G. Electronics India Pvt. Ltd. (supra) has not yet been made subject matter of challenge before High Court by both assessee therein and Revenue, for said appeal is still pending before Tribunal and has not yet been finally decided. However, as issue is recurring one, arising in significant number of cases with substantial tax effect and even Revenue is aggrieved by certain portions of said decision, it would not be appropriate and proper to adjourn these appeals to await filing of appeal/cross-appeal in case of L. G. Electronics India Pvt. Ltd. (supra). Both sides have pressed for immediate hearing. majority judgment in L. G. Electronics India Pvt. Ltd. (supra) had reached following findings: (i) In terms of sub-section (2B) of section 92CA, Transfer Pricing Officer could have examined and applied transfer pricing provisions to transaction, which comes to his notice, in respect of which assessee has not furnished report under section 92E of Act. Amendment by Finance Act, 2012, incorporating sub-section (2B) of section 92CA was retrospective and applicable with effect from June 1, 2002. Thus, Transfer Pricing Officer could have examined unreported international transaction relating to AMP expenses. (ii) AMP was international transaction, given contours and ambit of term "transaction" and "international transaction" as defined in Act. (iii) said character as international transaction cannot be denied or negated because AMP expenditure was incurred in India and was paid by assessee to independent parties in India. (iv) contention that there was no express agreement propos brand building for incurring AMP expenses was rejected, holding that such agreement or understanding could be inferred and could also be oral. Reference was made to definition of terms "transaction" and'international transaction' including retrospective insertions made by Finance Act, 2012, to explain two terms. (v) Transfer Pricing Officer was entitled to re-categorise any transaction; (i) where economic substance of transaction differs from its form; (ii) where form and substance of transaction are same but arrangements made in relation to transaction, when viewed in their totality, differ from those which would have been adopted by independent enterprise behaving in commercially rational manner. Relying upon decision of Delhi High Court in CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi), which refers to OECD commentary carving out two exceptions, it has been held that second exception was applicable. Thus, Transfer Pricing Officer could have recategorized international transaction as declared to determine arm's length price of unravelled and deciphered international transaction as per mandate of section 92CA(2B) of Act. (vi) In order to determine and decide whether assessee had AMP international transaction with associated enterprise, Transfer Pricing Officer could rely upon "bright line test", both to determine and re-categorize international transaction and to compute contractual value or price of said transaction. Application of "bright line test" was not contrary to Act, i.e., Income-tax Act, 1961. (vii) Application of "bright line test" was only to segregate AMP expenses incurred by assessee for their own business and compute value or cost of AMP expenses incurred by assessee for promoting brand value of associated enterprise, resident abroad. (viii) "Bright line test" does not require statutory endorsement. (ix) On application of "bright line test", if it is ascertained and deduced that assessee had incurred non-routine AMP expenses beyond what similarly situated independent, non-brand owner Indian distributor would have incurred under circumstances, this quantum of difference or excessive expenditure should be treated as independent international transaction of brand building for foreign associated enterprise, owner of said trade mark or brand. (x) Tribunal did not approve of benchmarks or comparables adopted by Transfer Pricing Officer to apply "bright line test". said test should be applied by comparative analysis of comparable uncontrolled cases which should be really comparable, i.e., comparable must deal with same genus of products; have comparable market share; and assets employed; functions performed and risks assumed should be similar. Paragraph 17.2 reads (page 83 of 22 ITR (Trib)): "17.2. We find that first step in making comparability analysis, is to find out some comparable uncontrolled cases. It goes without saying that comparison can be made with cases which are really comparable. case is said to be comparable when it is from same genus of products and also other relevant factors, such as, type of products, market share, assets employed, functions performed and risks assumed, are also similar. Once proper comparable cases are chosen, then next step is to neutralize effect of differences in relevant facts of case to be compared and assessee's case, by making suitable plus or minus adjustments." (xi) Tribunal enumerated 14 criteria/parameters for selection of comparables for applying "bright line test" and determination of cost/value of international transaction of brand/logo promotion by incurring AMP expenses by Indian associated enterprise, for its foreign associated enterprise. 14 point criteria stand recorded in paragraph 17.4, which has been quoted below (page 83 of 22 ITR (Trib)): "17.4 In our considered opinion, following are some of relevant questions, whose answers have considerable bearing on question of determination of cost/value of international transaction of brand/logo promotion through advertising, marketing and promotion expenses incurred by Indian associated enterprise for its foreign entity: 1. Whether Indian associated enterprise is simply distributor or is holding manufacturing licence from its foreign associated enterprise? 2. Where Indian associated enterprise is not full-fledged manufacturer, is it selling goods purchased from foreign associated enterprise as such or is it making some value addition to goods purchased from its foreign associated enterprise before selling it to customers? 3. Whether goods sold by Indian associated enterprise bear same brand name or logo which is that of its foreign associated enterprise? 4. Whether goods sold bear logo only of foreign associated enterprise or logo which is only of Indian associated enterprise or is it joint logo of both Indian entity and its foreign counterpart? 5. Whether Indian associated enterprise, manufacturer, is paying any royalty or any similar amount by whatever name called to its foreign associated enterprise as consideration for use of brand/logo of its associated enterprise as consideration for use of brand/logo of its foreign associated enterprise? 6. Whether payment made as royalty to foreign associated enterprise is comparable with what other domestic entities pay to independent foreign parties in similar situation? 7. Where Indian associated enterprise has got manufacturing licence from foreign associated enterprise, is it also using any technology or technical input or technical know-how acquired from its foreign associated enterprise for purposes of manufacturing such goods? 8. Where Indian associated enterprise is using technical knowhow received from foreign associated enterprise and is paying any amount to foreign associated enterprise, whether payment is only towards fees for technical services or includes royalty part for use of brand name or brand logo also? 9. Whether foreign associated enterprise is compensating Indian entity for promotion of its brand in any form, such as subsidy on goods sold to Indian associated enterprise? 10. Where such subsidy is allowed by foreign associated enterprise, whether amount of subsidy is commensurate with expenses incurred by Indian entity on promotion of brand for foreign associated enterprise? 11. Whether foreign associated enterprise has its presence in India only in one field or different fields? Where it is involved in different fields, then is there only one Indian entity looking after all fields or there are different Indian associated enterprises for different fields? If there are different entities in India, then what is pattern of advertising, marketing and promotion expenses in other Indian entities? 12. Whether year under consideration is entry level of foreign associated enterprise in India or is it case of established brand in India? 13. Whether any new products are launched in India during relevant period or is it continuation of business with existing range of products? 14. How brand will be dealt with after termination of agreement between associated enterprises?" (xii) contention of assessee that comparable cases would be those using foreign brand was expressly rejected in paragraph 17.6. Tribunal rejected contention of assessee that they were economic owners of brand and in commercial sense their right in brand name/trade mark should be accepted. Concept of economic ownership of brand, albeit relevant in commercial sense, was not recognised for purposes of Act. Retailers or dealers of electronic products, etc., who sell branded products do not become economic owners of branded products sold by them. Paragraph 17.6 reads (page 85 of 22 ITR (Trib)): "17.6. In principle, we accept contention of learned authorised representative about necessity of choosing properly comparable cases in first instance before starting exercise of making comparison of AMP expenses incurred by them for finding out amount spent by assessee for its own business purpose. However, way in which such comparable cases should be chosen, as advocated by learned authorised representative , is not acceptable. He submitted that only such comparable cases should be chosen as are using foreign brand. We find that choosing cases using foreign brand ex facie cannot be accepted. It is but natural that AMP expenses of such cases will also include contribution towards brand building of their respective foreign associated enterprises. In such situation comparison would become meaningless as their total AMP expenses will stand on same footing as that of assessee before exclusion of expenses in relation to brand building for foreign associated enterprise. correct way to make meaningful comparison is to choose comparable domestic cases not using any foreign brand. Of course when effect will be given to relevant factors as discussed above, it will correctly reflect cost/ value of international transaction." (xiii) contention of assessee that TNM method required comparison of overall net profit of assessee with comparables, was rejected for following reasons: (a) TNM method postulated in rule 10B(1)(e) of Income-tax Rules, 1962 ("the Rules", for short) stipulates benchmarking of "a" transaction in singular as defined in rule 10A(d). TNM method would relate to profit margin of "a" transaction and not net profit of entity or total sales of entity. It is transaction and not entity based method. (b) Scrutiny of Chapter X of Act and language of section 92(3) mandates and sanctions that TNM method would be applied only on transactional level and not at entity level. (c) Bunching of international transactions was not permissible and each international transaction has to be separately valued and accordingly arm's length price computed. Each transaction should be taken as independent transaction, for computing arm's length price. (d) Profit of entity would depend upon several factors which contribute in earning of profits. Thus, costs of AMP expenses were independent of cost of raw material/products. (e) factum that assessee had declared overall higher profit rate in comparison with comparables was insufficient and sparse. It was certainly not licence to assessee to not record AMP expenses as international transaction. Benefit, service or facility furnished and provided to associated enterprise resident abroad required compensation at arm's length price. (xiv) argument that expenditure incurred on AMP was subsumed and included in value of international transaction already disclosed and paid for by foreign associated enterprise, was rejected for there could be no reason or ground for such assumption. (xv) argument of assessee that under TNM method, net profit of entity includes effect of transactions subject matter of arm's length price between two associated enterprises, was also rejected on ground that effect of five methods prescribed under Chapter X was towards one end, i.e., determination of arm's length price of international transaction and consequences of each method qua international transaction cannot be at variance. Thus, TNM method should not be applied at entity level. (xvi) contention of assessee that set off or adjustment of "excessive"/"higher" net profit declared on international transactions should be allowed, if AMP expenses were treated as separate international transaction, was rejected, relying upon section 92(3) of Act. Set off or adjustments cannot be allowed in respect of profits and gains of one international transaction against another international transaction. (xvii) Assessing Officer/Transfer Pricing Officer without specific reference had in substance applied cost plus method ("CP method", for short) for computing arm's length price of international transaction, i.e., AMP transaction between associated enterprise resident abroad and Indian assessee. CP method was one of methods prescribed in Chapter X of Act. (xviii) Mark-up is mandated under CP method. mark-up had not been correctly computed with reference to comparables and, therefore, determination of quantum of mark-up required remand. (xix) matter also required remand as Transfer Pricing Officer, while applying "bright line test" and computing arm's length value or price of AMP expenses, had not selected appropriate comparables as per criteria stipulated in paragraph 17.4 of majority decision. (xx) Effect of order passed by Supreme Court, reported as Maruti Suzuki India Ltd. v. Addl. CIT/TPO [2011] 335 ITR 121 (SC) on reasons/ratio expounded by Delhi High Court in Maruti Suzuki India Ltd. (supra), was analysed, to hold that decision of High Court was not entirely overruled and ratio decidendi of Delhi High Court judgment on question of incurring of AMP expenditure by Indian associated enterprise, whether it benefits foreign associated enterprise, requirement to compensate Indian associated enterprises and other legal principles enrolled, were binding. What had been set aside by Supreme Court were observations on merits relating to facts and not law. legal principles enunciated by High Court in Maruti Suzuki (supra) were not expressly or impliedly overruled. (xxi) AMP expenses would not include direct selling costs like trade or volume discounts, incentives, etc. Direct marketing and sale related expenses or discounts/concessions would not form part of AMP expenses. (xxii) section 37(1) of Act and arm's length proceedings under Chapter X of Act operate independently. AMP expenses, allowable as expenditure under section 37(1) of Act would not affect determination of arm's length price of international transaction or income of Indian assessee who has to pay tax in India. Accordingly, Transfer Pricing Officer was entitled to make adjustment and compute arm's length price, notwithstanding legal position that AMP expenses were deductible under section 37(1) of Act. Determination and, if required, adjustment of arm's length price is mandate under Chapter X of Act. We are not at this stage referring to minority decision though we will be referring to certain portions of said decision when we take up and answer issues on merits. At outset, we would like to begin our reasoning and decision with reference to findings recorded by majority decision in L. G. Electronics India Pvt Ltd. (supra) with which we concur and hold are as per mandate of law and Act. C. Findings on which we concur with Tribunal Section 92CA of Act Our decision in this and ensuing paragraphs would decide substantial question No. 1. For our decision, we would like to reproduce section 92CA sub- sections (1), (2), (2A), (2B) and (2C) of Act which read: "92CA. Reference to Transfer Pricing Officer.-(1) Where any person, being assessee, has entered into # international transaction or specified domestic transaction in any previous year, and Assessing Officer considers it necessary or expedient so to do, he may, with previous approval of Commissioner, refer computation of arm's length price in relation to said #international transaction or specified domestic transaction under section 92C to Transfer Pricing Officer. (2) Where reference is made under sub-section (1), Transfer Pricing Officer shall serve notice on assessee requiring him to produce or cause to be produced on date to be specified therein, any evidence on which assessee may rely in support of computation made by him of arm's length price in relation to #international transaction or specified domestic transaction referred to in sub-section (1). (2A) Where any other international transaction or specified domestic transaction other than international transaction or specified domestic transaction referred under sub-section (1), comes to notice of Transfer Pricing Officer during course of proceedings before him, provisions of this Chapter shall apply as if such other #international transaction or specified domestic transaction is #international transaction or specified domestic transaction referred to him under sub-section (1). ##(2B) Where in respect of international transaction, assessee has not furnished report under section 92E and such transaction comes to notice of Transfer Pricing Officer during course of proceeding before him, provisions of this Chapter shall apply as if such transaction is international transaction referred to him under sub-section (1). ###(2C) Nothing contained in sub-section (2B) shall empower Assessing Officer either to assess or reassess under section 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under section 154, for any assessment year, proceedings for which have been completed before 1st day of July, 2012. Inserted by Finance Act, 2002, w.e.f. 1-6-2002. Inserted by Finance Act 2011, w.e.f. 1-6-2011. # Substituted by Finance Act 2012, w.e.f. 1-4-2013. ## Inserted by Finance Act 2012, w.r.e.f. 1-6-2002. ### Inserted by Finance Act 2012, w.e.f. 1-7-2012." Section 92CA(1) deals with reference to Transfer Pricing Officer by Assessing Officer, for computation of arm's length price in relation to international transaction or specified domestic transaction. It requires and mandates prior approval of Commissioner. It is undisputed that Assessing Officer had taken approval of Commissioner under subsection (1) of section 92CA of Act. controversy raised is that Assessing Officer had not specifically referred and no previous approval of Commissioner was sought or granted for reference of international transaction relating to AMP expenses. Thus, valuation of contract price and computation of arm's length price, consequent assessments, etc., are without jurisdiction and authority of law. This argument on behalf of assessees would have been weighty and perhaps justified, if Legislature by Finance Act, 2012, had not inserted sub-section (2B). said sub-section is squarely applicable and negates challenge. In these appeals under section 260A of Act, we are not concerned with constitutional validity of aforesaid retrospective amendment and are only required to interpret said provision and apply retrospective provision if it is applicable. Under sub-section (2B) of section 92CA, Transfer Pricing Officer to whom reference has been made under sub- section (1), is entitled to apply provisions of Chapter in respect of international transaction for which assessee has not furnished report under section 92E of Act. Thus, where assessee has failed or not furnished report in respect of international transaction, specific reference for said transaction under sub-section (1) is not required. It is sufficient, if arm's length pricing issue of any international transaction has been referred to Transfer Pricing Officer. On careful analysis of sub-section (2B) of section 92CA of Act, following position emerges: (a) There should be reference under sub-section (1) of section 92CA by Assessing Officer to Transfer Pricing Officer in respect of international transaction. (b) reference should be with prior approval of Commissioner. (c) Satisfaction of conditions (a) and (b) gives jurisdiction to Transfer Pricing Officer. (d) If during course of proceedings, Transfer Pricing Officer comes to conclusion that there was international transaction for which said assessee has not furnished report under section 92E, Transfer Pricing Officer can go into question of arm's length price and apply provisions of Chapter X. No specific reference in respect of such hidden/ unknown international transaction is required under sub-section (1) of section 92CA of Act. conditions and requirements referred to above are fairly stringent. Transfer Pricing Officer has to record finding on satisfaction of said conditions to evaluate transfer price of undeclared and unreported international transaction. Transfer Pricing Officer must justify and establish that there was international transaction. Satisfaction of conditions can be also inferred from findings recorded by Transfer Pricing Officer. Only when these conditions are satisfied, Transfer Pricing Officer would exercise his jurisdiction. Whether or not said conditions are satisfied in given case, would first depend upon factual matrix and also possibly on appropriate and applicable legal principles. Wrong assumption of jurisdiction by recording erroneous finding, deciding whether there was hidden or unknown international transaction or whether report in respect of said international transaction under section 92E was not furnished, are matters that can be argued and adjudicated in appeal. After insertion of sub-section (2B) of section 92CA of Act, with effect from June 1, 2002, we have to give full effect to said provision and not negate or curtail retrospective effect. retrospective amendment has deeming effect and also consequences. said effect cannot be unwritten or erased. argument of assessee that sub-section (2B) of section 92CA was enacted to protect additions made by treating AMP expenses as separate international transaction, may or may not be correct. But once legislative language is clear and express, we are only required to give effect to said retrospective amendment in appeal under section 260A of Act. majority decision of Tribunal in L. G. Electronics India Pvt. Ltd. (supra) has rightly drawn distinction between sub-section (2B) and subsection (2A) of section 92CA of Act. Sub-section (2A) was inserted in 2011, i.e., nearly one year before insertion of section (2B) by Finance Act, 2012. Sub- section (2A) has not been given retrospective effect and it applies only with effect from June 1, 2011. Sub-section (2A) applies to any international transaction or specified domestic transaction of which reference has not been made to Transfer Pricing Officer under sub-section (1). With effect from June 1, 2011, Transfer Pricing Officer can go into arm's length pricing of international transaction or specified domestic transaction not referred to him. distinction between sub-section (2A) and sub-section (2B) being that first clause relates to declared international transaction, i.e., in respect of which report under section 92E has been furnished, whereas sub-section (2B) refers to international transactions in respect of which report under section 92E is not furnished. decision in case of CIT v. Max India Ltd. [2007] 295 ITR 282 (SC) is not applicable as it examines power of Commissioner under section 263 of Act. said power it was held, in context of section 80HHC of Act, was not rightly exercised at time when it was exercised because order passed by Assessing Officer on said aspect was not erroneous or wrong. Revisionary power under section 263 of Act can only be exercised when order passed by Assessing Officer is erroneous and prejudicial to interests of Revenue; two conditions being cumulative. In this context, it was observed that subsequent amendment to section 80HHC in Act after order passed by Commissioner under section 263 of Act, would not determine whether order passed by Assessing Officer was erroneous or not. Commissioner had to record finding on date when he passed order that order passed by Assessing Officer was erroneous. said pre- requisite was missing, on date when order under section 263 of Act was passed. There is additional reason why assessee's contentions must fail. In present case, claim of assessee is that they had disclosed international transaction in their report under section 92E which included AMP expenses incurred by them. This aspect relates to merits, i.e., whether or not there was one composite, bundled or packaged international transaction but once for said transaction report in Form 92E was submitted, separate reference/approval was not required. Reference of bundled transaction under sub-section (1) of section 92CA is sufficient. Section 92CA has to be interpreted pragmatically. Therefore, once reference of composite/bundled or packaged international transaction is made, it will be difficult for assessee to contest applicability of subsection (1) in cases of segregation or when Transfer Pricing Officer invokes sub-section (2B) of section 92CA of Act. This flaw as it existed stands corrected with insertion of sub-section (2B) of section 92CA with retrospective effect. It clarifies and "cures" deficiency and shortcoming of earlier provision. In view of insertion of sub-section (2B) of section 92CA of Act, decision of Delhi High Court in case of CIT v. Amadeus India P. Ltd. [2013] 351 ITR 92 (Delhi) and of Gujarat High Court in Veer Gems v. Asst. CIT [2013] 351 ITR 35 (Guj) would no longer be applicable as ratio of said decisions reflects position of statute before enactment of sub-section (2B) with retrospective effect. With aforesaid observations, we decide first substantial question of law in abstract without reference to facts as legal proposition, in favour of Revenue and against assessee. Transaction and international transaction; Difference between section 37(1) and Chapter X of Act term "international transaction" has been defined in section 92B. section also had retrospective amendment which was inserted by Finance Act, 2012, with retrospective effect from April 1, 2002. Section 92B(1) reads as under: "92B. Meaning of international transaction.-(1) For purposes of this section and sections 92, 92C, 92D and 92E,'international transaction' means transaction between two or more associated enterprises, either or both of whom are non-residents, in 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 bearing on profits, income, losses or assets of such enterprises and shall include mutual agreement or arrangement between two or more associated enterprises for allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with benefit, service or facility provided or to be provided to any one or more of such enterprises." contention that AMP expenses are not international transactions has to be rejected. There seems to be incongruity in submission of assessee on said aspect for simple reason that in most cases assessee have submitted that international transactions between them and associated enterprise, resident abroad included cost/value of AMP expenses, which assessee had incurred in India. In other words, when assessee raise aforesaid argument, they accept that declared price of international transaction included said element or function of AMP expenses, for which they stand duly compensated in their margins or arm's length price as computed. We also fail to understand contention or argument that there is no international transaction for AMP expenses were incurred by assessee in India. question is not whether assessee had incurred AMP expenses in India. This is undisputed position. arm's length determination pertains to adequate compensation to Indian associated enterprise for incurring and performing functions by domestic associated enterprise. dispute pertains to adequacy of compensation for incurring and performing marketing and "non-routine" AMP expenses in India by associate enterprise. expenses incurred or quantum of expenditure paid by Indian assessee to third parties in India, for incurring AMP expenses is not in dispute or under challenge. This is not subject matter of arm's length pricing or determination. fact that this expenditure was incurred and has to be allowed as deduction under section 37(1) of Act has not been challenged by Revenue. Revenue in their written submission accepts and has rightly stated that test of allowability of expenditure under section 37(1) is whether said expenditure is incurred wholly or exclusively for business consideration. So long as expenditure is for business consideration, Assessing Officer cannot question quantum or wisdom of assessee in incurring expense. issue of arm's length price, per se does not arise, when deduction under section 37(1) is claimed. Expenditure and decision of assessee, whether or not to incur said expenditure; quantum thereof, cannot be subject matter of challenge or disallowance by Assessing Officer, once it is accepted that expenditure was wholly, i.e., quantum of expenditure incurred was fully and exclusively for business purpose. In Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 (SC), it has been held that assessee can claim deduction for expenditure incurred for business purposes and no one else has authority to decide whether or not assessee should have incurred said expenditure. expenditure cannot be disallowed wholly or partly because it would incidentally benefit third person once requirements of section 37(1) were satisfied. Reference can be also made to decision of Delhi High Court in CIT v. Nestle India Ltd. [2011] 337 ITR 103 (Delhi), holding that question of reasonableness or measure of expenses to be allowed cannot be subject matter of adjustment or disallowance under section 37(1) of Act. Section 40A(2) clause (b) is provision for computing arm's length price in case of two related parties as defined and applies even when conditions stipulated in section 37(1) of Act are satisfied. said provision relates to reasonability of quantum. Similarly, Chapter X of Act relates to arm's length pricing adjustment. Chapter X is not concerned with disallowance of expenditure but relates to determination of arm's length price/cost of international transaction between two associated enterprises. It relates to income or receipts and also expenses and interest but in different context. Thus, section 37(1) and Chapter X provisions pertain to different fields. Chapter X of Act being specific statutory provision has to be given effect to and in view of said provisions arm's length price can be determined. arm's length procedure prescribed in Chapter X, once applicable has to be given full application. impact of Chapter X of Act cannot be controlled or curtailed by reference to allowability of expenditure under section 37(1) of Act. As noticed above and subsequently, provisions of Chapter X are applicable to international transactions between two related enterprises. purpose of determination of arm's length price is to find out fair and true market value of transaction and, accordingly, adjustment, if required, is made. said exercise has its own object and purpose. In terms of aforesaid discussion, question No. 2 has to be answered against assessee and in favour of Revenue. There are other aspects on which we also agree with majority judgment of Tribunal but would not like to deal with them at this stage but would refer to same when we examine these aspects on merits. D. Transfer pricing of international transactions significant volume of global trade consists of international transfer of goods, services, capital and intangibles. As per United Nations Practical Manual on Transfer Pricing, 2013, international transfers within MNE group entities which are called intra group transfers are growing steadily and account for more than 30 per cent. of total international transactions. What is actually paid by one entity to another entity in intra group transfer is called transfer price. Such transactions are controlled transactions because they are between two associated or connected enterprises as distinct from uncontrolled transactions which are between two entities which are not associated and operate on arm's length basis. Transfer pricing adjustment enables tax administration of country to correct transfer price and compute same on arm's length price, to check, avoid and ensure correct payment of taxes. "Arm's length price", in simple words, means fair market price. reason is that each entity belonging to MNE is treated as separate profit centre and every entity should necessarily make profit and loss at arm's length conditions. This is prevented by correcting either under charging or over charging by associated enterprise in intra group transactions. key issue, therefore, in transfer pricing is valuation of intra group transfers. arm's length principle as set forth in article 9 of OECD Model Convention stipulates that "where conditions are made or imposed between two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profit which would but for those conditions, have accrued to one of enterprises, but by reason of those conditions, having so accrued, may be included in profits of that enterprise and taxed accordingly". effect of transfer pricing order is to determine whether transfer price is same price which would have been agreed for by independent enterprises transacting with each other if price is determined by market forces. In negates distortions in international transaction price when transaction is between two associated enterprises. In nut-shell, basis of transfer pricing is that each individual entity must be taxed on basis that they act at arm's length in transaction with other associated enterprise. aforesaid transfer pricing exercise is enforced and mandated under domestic law and in terms of Chapter X of Act, i.e., Income-tax Act, 1961, by adopting or applying one of specified methods. Transfer pricing mechanisms are created under domestic law and each country can formulate detailed domestic legislation to implement and check controlled pricing. Thus, transfer pricing regulations may differ from country to country. In practice, this is partly true. Growing importance of international trade, globalisation and rapid rise in number of MNEs has resulted in exhaustive and meticulous research and studies in this complex area. transfer pricing methods have seen measure of standardisation, universal recognition and acceptability. Indian transfer pricing regulations have adopted and benefited, from international framework. OECD transfer pricing guidelines for multinational enterprises and tax administration and United Nations' Practical Manual on transfer pricing do reflect international understanding on several aspects relating to transfer pricing. We have taken note and liberally referred to two guidelines as it is found to be conducive and helpful in deciding issues. Their relevance has been examined in some detail below. E. Domestic law, i.e., statutory provisions of Act. Sections 92(1), 92(2) and 92C of Act, are reproduced herein for sake of convenience, "92. Computation of income from international transaction having regard to arm's length price.-(1) Any income arising from international transaction shall be computed having regard to arm's length price. Explanation.-For removal of doubts, it is hereby clarified that allowance for any expense or interest arising from international transaction shall also be determined having regard to arm's length price. (2) Where in international transaction or specified domestic transaction, two or more associated enterprises enter into mutual agreement or arrangement for allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with benefit, service or facility provided or to be provided to any one or more of such enterprises, cost or expense allocated or apportioned to, or, as case may be, contributed by, any such enterprise shall be determined having regard to arm's length price of such benefit, service or facility, as case may be... 92C. Computation of arm's length price.-(1) arm's length price in relation to international transaction or specified domestic transaction shall be determined by any of following methods, being most appropriate method, having regard to nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as Board may prescribe, namely: - (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by Board. (2) most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in manner as may be prescribed: Provided that where more than one price is determined by most appropriate method, arm's length price shall be taken to be arithmetical mean of such prices: Provided further that if variation between arm's length price so determined and price at which international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding three per cent. of latter, as may be notified by Central Government in Official Gazette in this behalf, price at which international transaction or specified domestic transaction has actually been undertaken shall be deemed to be arm's length price. following third proviso shall be inserted after second proviso to sub-section (2) of section 92C by Finance (No. 2) Act, 2014, with effect from April 1, 2015: Provided also that where more than one price is determined by most appropriate method, arm's length price in relation to international transaction or specified domestic transaction undertaken on or after 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly first and second proviso shall not apply. Explanation.-For removal of doubts, it is hereby clarified that provisions of second proviso shall also be applicable to all assessment or reassessment proceedings pending before Assessing Officer as on 1st day of October, 2009. (2A) Where first proviso to sub-section (2), as it stood before its amendment by Finance (No. 2) Act, 2009 (33 of 2009), is applicable in respect of international transaction for assessment year and variation between arithmetical mean referred to in said proviso and price at which such transaction has actually been undertaken exceeds five per cent. of arithmetical mean, then, assessee shall not be entitled to exercise option as referred to in said proviso. (2B) Nothing contained in sub-section (2A) shall empower Assessing Officer either to assess or reassess under section 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under section 154 for any assessment year proceedings of which have been completed before 1st day of October, 2009. (3) Where during course of any proceeding for assessment of income, Assessing Officer is, on basis of material or information or document in his possession, of opinion that- (a) price charged or paid in international transaction or specified domestic transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to international transaction or specified domestic transaction have not been kept and maintained by assessee in accordance with provisions contained in sub-section (1) of section 92D and rules made in this behalf; or (c) information or data used in computation of arm's length price is not reliable or correct; or (d) assessee has failed to furnish, within specified time, any information or document which he was required to furnish by notice issued under sub-section (3) of section 92D, Assessing Officer may proceed to determine arm's length price in relation to said international transaction or specified domestic transaction in accordance with sub-sections (1) and (2), on basis of such material or information or document available with him: Provided that opportunity shall be given by Assessing Officer by serving notice calling upon assessee to show cause, on date and time to be specified in notice, why arm's length price should not be so determined on basis of material or information or document in possession of Assessing Officer. (4) Where arm's length price is determined by Assessing Officer under sub-section (3), Assessing Officer may compute total income of assessee having regard to arm's length price so determined: Provided that no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of amount of income by which total income of assessee is enhanced after computation of income under this sub-section: Provided further that where total income of associated enterprise is computed under this sub-section on determination of arm's length price paid to another associated enterprise from which tax has been deducted or was deductible under provisions of Chapter XVIIB, income of other associated enterprise shall not be recomputed by reason of such determination of arm's length price in case of first mentioned enterprise." We are not elaborately exacerbating said provisions to avoid prolixity and would only refer to specifics relevant to decide present appeals. Sub-section (1) of section 92 states that any income arising from international transaction shall be computed having regard to arm's length price. It includes expense or interest arising from international transaction. Sub-section (2) is adjunct and intrinsically connected with sub-section (1) of section 92. It stipulates that sub-section (1) shall be applicable when two or more associated enterprises enter into mutual agreement or arrangement for allocation, apportionment or contribution to any cost, expense incurred or to be incurred in connection with benefit, service or facility provided or to be provided. international transaction, therefore, means transaction between two or more associated enterprises when either one or both are non-resident; transaction should be in nature of sale, purchase or lease of tangible or intangible property or in nature of provision for services or lending of money or any other transaction having bearing on profits, income, losses or assets. mutual agreement or arrangement for allocation of expenses would also be international transaction. Section 92F defines term "transaction" broadly and is very wide definition, and we observe, that clause (v) thereof stipulates that arrangement, understanding or action in concert would be transaction whether or not such arrangements, etc., are formal or whether or not such arrangements are legally enforceable. Under section 92(1) and (2), cost, expense allocated or apportioned or, as case may be, contribution by associated enterprise shall be determined having regard to arm's length price of such benefit, service or facility. Section 92C(1) is of significance and relevance as it stipulates that arm's length price in relation to international transaction can be determined by any of five methods stipulated therein, with authority to Board to prescribe sixth method. It is accepted case that Board has prescribed such method in rule 10AB with effect from April 1, 2012. five methods are (a) comparable uncontrolled price method; (b) RP method, i.e., resale price method; (c) CP method, i.e., cost plus method; (d) profit split method; and, (e) TNM method, i.e., transactional net margin method. Sub-sections (1) and (2) of section 92C casts obligation on assessee to compute arm's length price as per methods prescribed. Consequently, burden is on assessee to select and justify method adopted and arm's length price declared. Under sub-section (3) of section 92C, Assessing Officer can proceed to determine arm's length price in accordance with section 92C(1) and (2) on basis of material, information or documents in his possession, if any if circumstances mentioned in clauses (a) to (d) are satisfied. circumstances being: price paid or charged for international transaction has not been determined in accordance with sub-sections (1) and (2); information or documents relating to international transaction has not been kept or maintained in accordance with provisions of section 92D(1) or Rules; information or data used in computation of arm's length price is not reliable or correct; or assessee has failed to furnish, within stipulated time, information or document required to be furnished as per notice under sub- section (3) of section 92D (see judgment dated 16th December, 2013, in I. T. A. No. 306 of 2012 titled Li and Fung India Pvt. Ltd. v. CIT [2014] 361 ITR 85 (Delhi)). Five methods Comparable uncontrolled price method ("CUP method", for short) compares price charged for property or service in controlled transaction with price charged for comparable property or service in uncontrolled transaction in comparable circumstances. In RP method, price paid for product by independent third party, i.e., resale price received by associated enterprise is taken as basis. arm's length price is computed by reverse exercise by determining normal gross profit margin, i.e., gross profit margin, of unrelated enterprise. Expenses incurred are thereafter, reduced and adjustments for differences in comparables is made to arrive at arm's length price. This method has been explained below when examining individual case of M/s. Canon India Ltd. and Reebok India Co. Ltd. cost plus method ("CP method", for short) requires determination of appropriate gross profit margin which would be charged by comparable and adding same mark-up to expenditure/cost incurred by associated enterprise to determine appropriate profit in view of market conditions and functions performed. aforesaid three methods are treated as traditional transactional methods. TNM method or profit split method are called transactional profit methods or profit based methods. United Nations' Practical Manual on Transfer Pricing in paragraph 1.5.10 observes that there is growing acceptance of practical importance of profits based methods. TNM method has been elucidated in detail below. profit split method takes combined profit earned by two related parties from one or series of transactions and then divides those profits using economically valid defined basis and aims on replicating division of profits which would have been anticipated in agreement made at arm's length. It requires working back from profit to price. Four steps and comparables Without specifics and niceties, steps involved in making transfer pricing adjustment under each of five methods, will involve four steps: (a) ascertain whether there is international transaction between assessee and its associated enterprise, (b) ascertain price at which that transaction has taken place, i.e., transactional or controlled price, (c) determine arm's length price by applying one of five price discovery methods specified in section 92, i.e., uncontrolled price. (d) compare transaction price with arm's length price and make transfer pricing adjustment by substituting arm's length price for contract price. five methods stipulated in sub-section (1) of section 92C, are set out and articulated step-wise in detail in rule 10B of Rules. Be it any of five methods, first step to be exercised is to identify international transaction and transfer price paid for same by two associated enterprises. second step is to carry out functional analysis, i.e., functions to be performed by two associated enterprises taking into account assets used, risk assumed, contractual terms, economic circumstances of parties and business strategy pursued by parties. On question of comparability analysis, United Nations' Practical Manual on Transfer Pricing in paragraph 5.1.1 states that analysis is used to designate two distinct but related analytical steps. First being to understand economic significant characteristic of controlled transaction between two associated enterprises and respective roles of parties thereto. This has reference to 5 characteristics, i.e., (a) characteristic of property or services transferred; (b) functions performed by parties taking into account assets employed and risk assumed, i.e., functional analysis; (c) contractual terms; (d) economic circumstances and (e) business strategies pursued. second analytical steps is comparison of those conditions of controlled transactions with uncontrolled transactions, i.e., transactions between two associated enterprises taking into account economically significant characteristics of controlled transactions and respective roles of 5 comparability factors. aforesaid analysis, therefore, requires selection of appropriate comparables, i.e., uncontrolled transaction which is to be compared with tested party. comparables can be internal, i.e., when one of associated enterprises enters into similar uncontrolled transaction with independent enterprise; or external, i.e., involving independent enterprise in same market or industry. It is obvious that internal comparable could in several cases be more dependable and reliable than external comparable. comparable is acceptable, if based upon comparison of conditions controlled transaction is similar with conditions in transactions between independent enterprises. comparison must be with reference to comparability analysis as elucidated in paragraph 5.1.1 of United Nations Practical Manual on Transfer Pricing. In other words, economically relevant characteristics of two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect conditions being examined given methodology being adopted for determining price or margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate effect of such differences on price or margin. Thus, identification of potential comparables is key to transfer pricing analysis. As sequitur, it follows that choice of most appropriate method would be dependent upon availability of potential comparable keeping in mind comparability analysis including befitting adjustments which may be required. As degree of comparability increases, extent of potential differences which would render analysis inaccurate necessarily decreases. OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations is similarly worded. selection comparables to be applied to tested party, therefore, depends upon transfer pricing method, for there should be degree of features which can be usefully compared for determination of arm's length price. characters would include in cases of transfer of tangible property, physical features of property, its quality, reliability, availability, volume or supply and in cases of service, nature and extent of service and in cases of intangible property, form of transaction, licensing or sale, type of property, i.e. trade mark, patent, know-how, duration and degree of patent and anticipated benefits. function analysis test in selection of comparables seeks to identify and compare economically significant activities and responsibilities undertaken, asset used and risk assumed by parties to transaction. functions, which assessee may perform, would include design, manufacturing, assembling, research and development servicing, purchasing, distribution, marketing, advertising, transportation, etc. principal function performed by party under examination should be identified. Adjustments should be made for any material differences from functions undertaken by independent comparable enterprise and tested party. While examining functions performed, significance of functions in terms of their frequency, nature and value to respective parties is important factor. Equally important is question or assumption of risk, for increased risk has to be adequately compensated by increase in return. Similarly, recognition must be given to economic circumstances in determining comparable which include geographic location, size of market, extent of competition, position of buyers and sales availability or risk of competitive goods and services, level of demand and supply sold in particular region, consumer purchasing power, nature and extent of Government control, labour and capital, transportation, level of market, i.e., retail or wholesale and so forth. Rules and analytical steps Sub-sections (1) and (2) of section 92C are applicable to assessee, as well as Assessing Officer invoking power under sub-section (3) of section 92C of Act. As noted above, sub-section (2) of section 92C stipulates that most appropriate method, out of methods specified in subsection (1) shall be applied to determine arm's length price in manner as may be prescribed. Rule 10C prescribes manner for determining most appropriate method. Rule 10C reads: "10C. (1) For purposes of sub-section (1) of section 92C, most appropriate method shall be method which is best suited to facts and circumstances of each particular international transaction or specified domestic transaction, and which provides most reliable measure of arm's length price in relation to international transaction or specified domestic transaction, as case may be. (2) In selecting most appropriate method as specified in subrule (1), following factors shall be taken into account, namely:- (a) nature and class of international transaction or specified domestic transaction; (b) class or classes of associated enterprises entering into transaction and functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) availability, coverage and reliability of data necessary for application of method; (d) degree of comparability existing between international transaction or specified domestic transaction and uncontrolled transaction and between enterprises entering into such transactions; (e) extent to which reliable and accurate adjustments can be made to account for differences, if any, between international transaction or specified domestic transaction and comparable uncontrolled transaction or between enterprises entering into such transactions; (f) nature, extent and reliability of assumptions required to be made in application of method." Sub-rule (1) requires ascertainment of facts and circumstances of particular international transaction and method, which would provide most reliable measure of arm's length price. Sub-rule (2) stipulates that while selecting most appropriate method, clauses (a) to (f) should be taken into account. Therefore, it would be appropriate and proper for assessee to indicate why and for what reason method applied is most appropriate. Similarly, if Assessing Officer/Transfer Pricing Officer disagree, they should stipulate and elucidate reason for selecting or applying particular method. Clauses (a) to (f) of sub-rule (2) are wide and prescribe broad criteria which has reference to nature and class of transaction; nature and class of associated enterprise entering into transaction; functions performed by them taking into account asset employed or to be employed and risk assumed. They also refer to availability, coverage and reliability of data necessary for application of method; degree of comparability between controlled and uncontrolled transaction and between enterprises; reliability and accuracy of adjustment, which can be made between tested and uncontrolled transactions and between enterprises. Lastly and significantly, it refers to nature, extent and reliability of assumption required to be made for application of method. Rule 10B after elucidating on five methods, in sub-rule (2) states that comparability of international transaction, i.e., tested transaction, with uncontrolled transaction shall be judged in manner stipulated therein. said rule reads: "10B. (2) For purposes of sub-rule (1), comparability of international transaction or specified domestic transaction with uncontrolled transaction shall be judged with reference to following, namely:- (a) specific characteristics of property transferred or services provided in either transaction; (b) functions performed, taking into account assets employed or to be employed and risks assumed, by respective parties to transactions; (c) contractual terms (whether or not such terms are formal or in writing) of transactions which lay down explicitly or implicitly how responsibilities, risks and benefits are to be divided between respective parties to transactions; (d) conditions prevailing in markets in which respective parties to transactions operate, including geographical location and size of markets, laws and Government orders in force, costs of labour and capital in markets, overall economic development and level of competition and whether markets are wholesale or retail." Clause (a) refers to specific characteristics of property transferred or services provided. Clause (b) refers to functions performed, assets employed or to be employed and risk assumed. Clause (c) makes reference to contractual terms whether in writing or otherwise and to responsibilities, risk and benefits divided between respective parties to transactions. Clause (d) refers to conditions prevailing in markets of respective parties to transactions, overall economic development and level of competition and whether or not markets are wholesale or retail. Equally significant is sub-rule (3) to rule 10B, which reads: "10B. (3) uncontrolled transaction shall be comparable to international transaction or specified domestic transaction if- (i) none of differences, if any, between transactions being compared, or between enterprises entering into such transactions are likely to materially affect price or cost charged or paid in, or profit arising from, such transactions in open market; or (ii) reasonably accurate adjustments can be made to eliminate material effects of such differences." To understand sub-rule (3), one must account for definition of term, "uncontrolled transaction". Rule 10A in clause (a) defines term, "uncontrolled transaction" for rules 10B to 10E, as transactions between enterprises other than associated enterprises, whether resident or nonresident. term "associated enterprises" has been defined in section 92A of Act. uncontrolled transactions may be between residents or non-residents. This is immaterial. However, they should not be between two associated enterprises. They should be between two independent enterprises. Sub-rule (3) of rule 10B requires that transactions should be similar in manner that differences between transaction being compared or between enterprises entered into, should not materially affect price or cost charged or profits arising from such transactions in open market. Uncontrolled transaction can be also treated as comparable, when reasonably adequate adjustments can be made to eliminate material effect of difference(s). It must be stated that transfer pricing is not exact science but method of legitimate quantification which requires exercise of judgment on part of tax administration and taxpayer. It is method and formula based and, therefore, is rational and scientific. However, not being perfect or infallible, first and second provisos to sub-section (2) along with stipulations in sub- section (2A) and sub-section (2B) of section 92C posit "gateway" clause when arm's length price so determined and controlled price does not exceed 5 per cent. (reduced to 3 per cent. with effect from April 1, 2012). In such cases actual price paid or received by assessee from foreign associated enterprise is not disturbed. In other cases, transaction price gets substituted with arm's length price so determined. Sub-section (2A) of section 92C was inserted by Finance Act, 2012, with retrospective effect from April 1, 2002. It states that where arm's length price determined under sub-section (1) exceeds arm's length price as declared by 5 per cent., assessee would not be entitled to exercise option under first proviso to sub-section (2) as it stood before its amendment by Finance (No. 2) Act, 2009. "gateway" of 5 per cent. or 3 per cent., as case may be, can be applied if variation in arm's length price and transaction/controlled price does not exceed specified percentage. Sub-section (2A), therefore, stipulates that where difference exceeds prescribed percentage, assessee would not be entitled to exercise option under first proviso to subsection (2) of section 92C and claim reduction. Similarly, first proviso to section 92C stipulates that where more than one price is determined by most appropriate method, arm's length price shall be taken to be arithmetical mean of such prices. As concept and principle Chapter X does not artificially broaden, expand or deviate from concept of "real income". "Real income", as held by Supreme Court in Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC), means profits arrived at on commercial principles, subject to provisions of Act. Profits and gains should be true and correct profits and gains, neither under nor over stated. Arm's length price seeks to correct distortion and shifting of profits to tax actual income earned by resident/domestic associated enterprise. profit which would have accrued had arm's length conditions prevailed is brought to tax. Misreporting, if any, on account of non-arm's length conditions resulting in lower profits, is corrected. aforesaid methods are systematic and methodical and in spite of prescription, there is element of discretion and flexibility involved in selection of appropriate method, selection of comparable, functional analysis or adjustments. This play in joints and latitude is required and necessitated as arm's length price is not purely mathematical formula but balanced and rational exercise. core object and purpose behind said exercise is to determine fair market price of transaction, had transaction been between two independent entities. Under same method, we can reach different arm's length prices by relying upon variable factors and assumptions for purpose of analysis. We should be more concerned and focused on reasonableness of result for determination is to ascertain fair and just result. G. Section 92(3) of Act and bundled/inter-connected transactions At this stage and before we examine TNM method exhaustively, we deem it necessary to interpret and refer to in some detail sub-section (1) of section 92C and reference to term "transaction" with vowel "an", which has been interpreted by majority judgment of Tribunal to mean single independent transaction and not group or bundle of transactions. We do not think that use of vowel "an" or word "transaction" instead of word "transactions" should be given undue notability and prominence. One of primary rules of statutory construction is that singular includes plural and vice versa. This rule applies unless contrary intention is manifest and exhibited. Merely because statutory provision is drafted in singularity as opposed to plurality, is not enough to exclude application of general rule that singular includes plural. rule is not to be discarded on ground that relevant provision is singular or plural and subsidiary and ancillary provision follow same pattern. Contrary intention to exclude this generic rule is not to be lightly inferred. Contrary intention is not assumed or formed by confining attention to specific provision but it would be apposite to consider provision in setting and placement of legislation. It is substance and tenure of statute which would be meaningfully and critically determinative. This is mandate of section 13(2) of General Clauses Act, 1897 (see Newspapers Ltd. v. State Industrial Tribunal, AIR 1957 SC 532, Narashimaha Murthy v. Smt. Susheelabai [1996] 3 SCC 644, J. Jayalalitha v. Union of India [1999] 5 SCC 138, Blue Metal Industries Ltd. v. R. W. Dilley [1969] 3 All ER 437, Floor v. Davis (Inspector of Taxes) [1979] 2 All ER 677 (HL), Sin Poh Amalgamated (H. K.) Ltd. v. Attorney- General [1965] 1 All ER 225 (PC). use of expression "class of transaction", "functions performed by parties" in section 92C(1) illustrates to contrary, that word "transaction" can never include and would exclude bundle or group of connected transactions. More important would be reference to meaning of term "transaction" in section 92F, clause (v), which as per said definition includes arrangement or understanding or action in concert whether or not same is formal or in writing, whether or not it is intended to be enforceable by legal proceedings. Rule 10A in clause (d) states that "for purpose of this rule and rules 10AB and 10E", term "transaction" would "include number of closely linked transactions". This rule in positive terms declares that legislative intent is not to deviate from generic rule that singular includes plural. meaning or definition of expression "transaction" in clause (d) of rule 10A read with sub-section (1) of section 92C, therefore, does not bar or prohibit clubbing of closely connected or intertwined or continuous transactions. This is discernible also from sub-rule (2) of rule 10B quoted above. sub-rule refers to "services provided", "functions performed", "contractual terms (whether or not such terms are formal or in writing) of transactions" which lay down explicitly or impliedly responsibilities, risks and benefits to be divided between respective parties to transactions. use of plurality by way of necessity and legislative mandate is evident in said rule. Similarly, sub-rule (3) of rule 10B refers to transactions being compared or comparison of enterprises entering into such transactions likely to affect price or cost charged, etc. reading of rule 10C reassures and affirms that general principle of plurality is not abandoned or discarded. There is considerable tax literature and text that CUP method, i.e., comparable uncontrolled price method, RP method, i.e. resale price method and CP method, i.e., cost plus method can be applied to transaction or closely linked, or continuous transactions. Profits split method and TNM method grouped as "transactional profit methods", can be equally effective and reliable when applied to closely linked or continuous transactions. Thus, it would be inappropriate to proceed with arm's length computation methods, with pre- conceived suppositions on singularity as statutory mandate. Clubbing of closely linked, which would include continuous transactions, may be permissible and not ostracised. Aggregation of closely linked transactions or segregation by assessee should be tested by Assessing Officer/Transfer Pricing Officer on benchmark and exemplar; whether such aggregation/segregation by assessee should be interfered in terms of four clauses stipulated in section 92C(3) of Act read with Rules. It would, among other aspects, refer to method adopted and whether reliability and authenticity of arm's length determination is affected or corrupted. We now proceed to examine TNM method, whether there is prohibition in applying this method on entity to entity basis, and if not, when is it permissible to apply entity to entity comparison. discussion would also answer question, when is clubbing or bunching or transactions permissible in TNM method. H. TNM method enunciated TNM method is elucidated in clause (e) of rule 10B(1) of Rules. We are reproducing said rule as it has been applied by assessees in several cases and Transfer Pricing Officer has also accepted application of said method but treated AMP expenses as independent transaction, finding upheld by majority judgment in L. G. Electronics India Pvt. Ltd. (supra) and in present cases. Clause (e) of rule 10B(1) reads: "10B. (1) For purposes of sub-section (2) of section 92C, arm's length price in relation to international transaction or specified domestic transaction shall be determined by any of following methods, being most appropriate method, in following manner, namely:-... (e) transactional net margin method, by which,- (i) net profit margin realised by enterprise from international transaction or specified domestic transaction entered into with associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by enterprise or having regard to any other relevant base; (ii) net profit margin realised by enterprise or by unrelated enterprise from comparable uncontrolled transaction or number of such transactions is computed having regard to same base; (iii) net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account differences, if any, between international transaction or specified domestic transaction and comparable uncontrolled transactions, or between enterprises entering into such transactions, which could materially affect amount of net profit margin in open market; (iv) net profit margin realised by enterprise and referred to in sub- clause (i) is established to be same as net profit margin referred to in sub-clause (iii); (v) net profit margin thus established is then taken into account to arrive at arm's length price in relation to international transaction or specified domestic transaction." Sub-clause (i) refers to net profit margin realised by enterprise from associated enterprise in international transaction which could be with reference to cost incurred; sales affected; assets employed or to be employed in enterprise or having regard to any other base. Thus, subclause (1) refers to net profit in proportion to selected base. appropriate base is referred to as profit level indicator ("PLI", for short). Generally, net profit is applied with reference to sales, i.e., operating profit margin; operating expenses, also referred to as berry ratio; and operating assets, i.e., return on capital. Clause (i) above, gives wider selection choice by stipulating optional base with reference to any other base. selection, it is obvious, must be appropriate. must be appropriate. Under sub-clause (ii), net profit margin realised from comparable uncontrolled transaction or number of such transactions is computed having regard to one of base. Under sub-clause (iii), net profit margin computed under sub-clause (ii) has to be adjusted by taking into account difference, if any, between international transaction and comparable uncontrolled transactions or between enterprises entering into such transactions, which would affect amount of net profit margin in open market. Sub-clause (iii) permits subjective adjustments required with reference to differences, if any, between controlled and uncontrolled transaction, which would materially affect net profit margin in open market. Under sub-clause (v), net profit margin thus established, is taken to arrive at arm's length price in relation to international transaction. TNM method has seen transition from disfavoured comparable method, to possibly most appropriate transfer pricing method due to ease and flexibility of applying compatibility criteria and enhanced availability of comparables. Net profit record/data is assessable and within reach. It is readily and easily available, entity-wise in form of audited accounts. TNM method is preferred transfer pricing arm's length principle for its proficiency, convenience and reliability. Ideally, in TNM method preference should be given to internal or in-house comparables. In absence of internal comparables, taxpayer can and would need to rely upon external comparables, i.e., comparable transactions by independent enterprises. For several reasons, database providers, it is apparent, have requisite information and data of external comparables to enable comparability analysis of controlled and uncontrolled transactions with necessary adjustment to obtain reliable results under TNM method. This method also works to benefit and advantage of tax authorities in view of convenience and easier availability of data not only from third party providers but on their own level, i.e., assessment records of other parties. strength of TNM method is that net profit indicators are less affected by transactional differences in comparison with some other methods. This method is more tolerant to functional differences between controlled and uncontrolled transactions in comparison with resort to gross profit margins. Yet net profit indicators have potentiality to introduce element of volatility, primarily for two reasons. Firstly, factors which do not affect gross profit margin and prices can influence net profit indicators due to variation of operating expenses or vice versa. This potentiality has reference to variation in operational expenses including AMP expenses. other factors include taxpayers competitive position in form of price and margins and in some cases, it may be difficult to eliminate or compute effect of these factors. These difficulties in applying or accepting TNM method arise when there is complexity of functions and each party to transaction(s) makes valuable unique contribution. Reliability of TNM method is sufficiently certain where one of parties makes all contribution involved in controlled transaction. This is position even as per Revenue's case in present set of appeals. Revenue has asserted that Indian subsidiaries, i.e., assessees are mere dummies which implement, promote and incur AMP expenses for building brand value of foreign associated enterprise. value addition for Indian associated enterprise is not pleaded or argued. Selection of TNM method where adopted by assessee remains unchallenged by Transfer Pricing Officer/Assessing Officer. In case tested party is engaged in single line of business, there is no bar or prohibition from applying TNM method on entity level basis. focus of this method is on net profit amount in proportion to appropriate base or PLI. In fact, when transactions are interconnected, combined consideration may be most reliable means of determining arm's length price. There are often situations where closely linked and connected transactions cannot be evaluated adequately on separate basis. Segmentation may be mandated when controlled bundled transactions cannot be adequately compared on aggregate basis. Thus, taxpayer can aggregate controlled transactions if transactions meet specified common portfolio or package parameters. For complex entities or where one of entities is not "plain vanilla distributor", it should be applied when necessary and applicable comparables on functional analysis, with or without adjustments are available. Otherwise, TNM method should not be adopted or applied on account of being inappropriate method. majority judgment refers to example where Indian associated enterprise may have earned actual profit of Rs. 140 but returned reduced net profit of Rs. 120 as Indian associated enterprise had incurred brand building expenses to tune of Rs. 20 for foreign associated enterprise, whereas net profit on sales declared by comparable uncontrolled transactions was Rs. 100 only. Thus, it was observed that costs including AMP expenses are independent of cost of imported raw materials/finished products having some correlation with overall profit. example highlights weakness of TNM method. reasoning would be equally valid, where no AMP or "brand building" expenses are incurred (see paragraphs 21.8 to 22.10 of majority decision). net profit margins can be affected by variation of operating expenses. Thus, requirement to select appropriate comparable and adjustment. It would be inappropriate and unsound to accept comparables, with or without adjustment and apply TNM method, and yet conjecturise and mistrust arm's length price. TNM method would not be most appropriate method when there are considerable value additions by subsidiary associated enterprises. In paragraph 22.9, majority decision has observed that all costs including AMP expenses are independent of cost of material. This indicates that observations have been made with reference to manufacturing activities. It would not be appropriate and proper to apply TNM method in case Indian assessee is engaged in manufacturing activities and distribution and marketing of imported and manufactured products, as interconnected transactions. Import of raw materials for manufacture would possibly be independent international transaction, viz., marketing and distribution activities or functions. We have earlier used term "plain vanilla distributor". When we use words "plain vanilla distributor" we do not mean plain vanilla situations, but value additions and each party making valuable unique contribution. example given below would make it clear: Particulars Case 1 Case 2 Sales 1,000 1,000 Purchase price 600 500 400 500 Gross margin (40%) (50%) Marketing, sales promotion expenses 50 150 Overhead expenses 300 300 Net profit 50 (5%) 50 (5%) above illustrations draw distinction between two distributors having different marketing functions. In case 2, distributor having significant marketing functions incurs substantial expenditure on AMP, three times more than in case 1 but purchase price being lower, Indian associated enterprise gets adequately compensated and, therefore, no transfer pricing adjustment is required. In case we treat AMP expenses in case 2 as Rs. 50, i.e., identical as case 1 and AMP of Rs. 100 as separate transaction, position in case 2 would be: Particulars Case 2 Sales 1,000 Purchase price 500 Gross margin 500 (50%) Overhead expenses 300 Marketing expenses 50 Net profit 150 (15%) It is obvious that this would not be correct way and method to compute arm's length price. purchase price adjustments/set off would be mandated to arrive at arm's length price, if AMP expenses are segregated as independent international transaction. position may be worse for assessee, in case Assessing Officer makes addition of Rs. 100 and adds 15 per cent. thereto by applying CP method, i.e., cost plus method. Consequently, addition made would be of Rs. 115. When Rs. 115 is added to TNM method computation of Rs. 150, it would result in total income of Rs. 265 or net profit of 26.5 per cent. Even if Assessing Officer does not reduce AMP expenses from Rs. 150 to Rs. 50, while computing arm's length price by applying TNM method, it would yet result in unacceptable anomaly for net profit margin would be Rs. 50 plus Rs. 115 or 16.15 per cent. instead of 5 per cent. Besides said approach would be illogical and unacceptable for AMP expenses when segregated as independent international transaction, must be treated so in all aspects. These anomalies arise on account of fact that there was no apportionment and division of transactional compensation but packaged transaction has been bifurcated and divided into two. This position is not acceptable as it is irrational and unsound. example given by Tribunal refers to efficiencies or better management skills of assessee associated enterprise which is not duly accounted. Albeit, this could be accounted for by way of adjustment under clause (iii) of rule 10B(1)(e). Illustratively, as indicated in majority judgment of Tribunal net profit margin would undergo change in case operating expenses are different in case 1 and case 2, as these relate to operational costs and expenses incurred. Better and more efficient management or other valid ground or contrarily could justify difference. If there is substantial difference in said figure which cannot be justified and explained, suitable adjustment is permissible and allowed under clause (iii) of rule 10B(1)(e). If said adjustment is made and actual net profit margin is computed, difference of Rs. 20, as pointed out by majority judgment of Tribunal, would not arise. In alternative, comparable or even TNM method can be rejected. United Nations' Practical Manual on Transfer Pricing in paragraph 6.3.12.1 acknowledges that TNM method is usually applied to broad comparable functions rather than broad controlled transactions. Return on these functions when measured with PLI base in proportion to net profit margins would get affected by factors unrelated to arm's length pricing, which is negative factor, and for this reason TNM method is typically applied when related parties are engaged in continuous series of transactions and one of parties controls intangible assets for which arm's length price/return is not easy to determine. It is favourable to apply TNM method when one party is performing routine marketing, distribution and other functions that do not involve control over intangible assets as it allows appropriate return to party controlling unique or difficult to value intangible assets. Success or efficacy of particular method would depend upon functional analysis of tested party and comparable. Once we accept comparable on basis of functional analysis and if required, after making adjustments, then there should be no difficulty in accepting international transfer price. In case of discrepancy, addition may be justified where net profit margin declared in case of tested party is lower than comparable. comparable should be accepted if it deals with same or identical or similar property under same or substantially same circumstances as controlled transaction so as to give reliable and more certain measure of arm's length result. All methods including TNM method acknowledge that there could be difference between tested part and comparable on functional analysis but this would not be material where it is possible to reasonably ascertain effect on account of differences for which appropriate adjustments can be made. Thus, selection of comparable depends upon functional analysis, similarity as to several factors and whether or not it is possible to make adjustments to account for material differences in such circumstances to accept or reject comparable. Selection of appropriate comparable ensures similar profit potential and, accordingly, taxation of subsidiary associated enterprise in country of its residence. We would also reproduce paragraphs 3.9 to 3.12 of Chapter 3; comparability analysis from OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration which reads as under: "3.9 Ideally, in order to arrive at most precise approximation of arm's length conditions, arm's length principle should be applied on transaction- by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on separate basis. Examples may include 1. Some long-term contracts for supply of commodities or services, 2. Rights use intangible property, and 3. pricing range of closely linked products (e.g., in product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be licensing of manufacturing know-how and supply of vital components to associated manufacturer; it may be more reasonable to assess arm's length terms for two items together rather than individually. Such transactions should be evaluated together using most appropriate arm's length method. further example would be routing of transaction through another associated enterprise; it may be more appropriate to consider transaction of which routing is part in its entirety, rather than consider individual transactions on separate basis. 3.10 Another example where taxpayer's transactions may be combined is related to portfolio approaches. portfolio approach is business strategy consisting of taxpayer bundling certain transactions for purpose of earning appropriate return across portfolio rather than necessarily on any single product within portfolio. For instance, some products may be marketed by taxpayer with low profit or even at loss, because they create demand for other products and/or related services of same taxpayer that are then sold or provided with high profits (e.g., equipment and captive aftermarket consumables, such as vending coffee machines and coffee capsules, or printers and cartridges). Similar approaches can be observed in various industries. Portfolio approaches are example of business strategy that may need to be taken into account in comparability analysis and when examining reliability of comparables. See paragraphs 1.59-1.63 on business strategies. However, as discussed in paragraphs 1.70-1.72, these considerations will not explain continued overall losses or poor performance over time. Moreover, in order to be acceptable, portfolio approaches must be reasonably targeted as they should not be used, to apply a. transfer pricing method at taxpayer's company-wide level in those cases where different transaction's have different economic logic and should be segmented. See paragraphs 2.78 - 2.79. Finally, above comments should not be misread as implying that it would be acceptable for one entity within MNE group to have below arm's length return in order to provide benefits to another entity of MNE group, see in particular paragraph 1.71. 3.11 While some separately contracted transactions between associated enterprises may need to be evaluated together in order to determine whether conditions are arm's length, other transactions contracted between such enterprises as package may need to be evaluated separately. MNE may package as single transaction and establish single price for number of benefits such as licences for patents, know-how, and trade marks, provision of technical and administrative services, and lease of production facilities. This type of arrangement is often referred to as package deal. Such comprehensive packages would be unlikely to include sales of goods, however, although price charged for sales of goods may cover some accompanying services. In some cases, it may not be feasible to evaluate package as whole so that elements of package must be segregated. In such cases, after determining separate transfer pricing for separate elements, tax administration should none less consider whether in total transfer pricing for entire package is arm's length. 3.12 Even in uncontrolled transactions; package deals may combine elements that are subject to different tax treatment under domestic law or income-tax convention. For example, royalty payments may be subject to withholding tax but lease payments may be subject to net taxation. In such circumstances; it may still be appropriate to determine transfer pricing on package basis, and tax administration could then determine whether for other tax reasons it is necessary to allocate price to elements of package. In making this determination, tax administrations should examine package deal between associated enterprises in same way that they would analyse similar deals between independent enterprises. Taxpayers should be prepared to show that package deal reflects appropriate transfer pricing." Paragraph 3.9 at outset states that ideally in order to arrive at more precise approximation, arm's length computation should be made on transaction to transaction basis. But this valuation may not possible on separate basis where there are separate transactions which are closely linked and continuous. Paragraph 3.11 referred to package deal specially in cases where transaction between two associated enterprises is in form of one single agreement with number of arrangements. Paragraph 3.12 acknowledges effect of domestic law or double taxation avoidance agreement which may mandate different tax treatments to particular type of income or tax event. In such cases it would be appropriate to segregate transactions. Paragraph 3.12 of OECD guidelines quoted above also refers to allocation of price elements of package or bundle of transactions. It recommends that segregation should be done in way that tax administration must be able to analyse similar deals between independent enterprises. This aspect of segregation has been examined separately. Transfer Pricing Officer/Assessing Officer can overrule assessee as to method adopted and select most appropriate method. reasons for selecting or adopting particular method would depend upon functional analysis, comparison, which requires availability of data of comparables performing of similar or suitable functional tasks in comparable business. When suitable comparables relating to particular method are not available and functional analysis or adjustments is not possible, it would be advisable to adopt and apply another method. This would mean in example given above, if Assessing Officer/Transfer Pricing Officer notices that operating expenses in case of tested party are substantially lower than comparable or indicative of greater and better efficiency, he can make suitable adjustments and then compute operating profit. In case it is not possible to make adjustment, he may reject method selected by assessee and adopt another method. Several recourses may be available. Of course, justification and reasons must be stated and elucidated. However, once Assessing Officer/Transfer Pricing Officer accepts and adopts TNM method but then chooses to treat particular expenditure like AMP as separate international transaction without bifurcation/ segregation it would, as noticed above, lead to unusual and incongruous results as AMP expenses is cost or expense and is not diverse. It is factored in net profit of interlinked transaction. This would be also in consonance with rule 10B(1)(e), which mandates only arriving at net profit margin by comparing profits and loss account of tested party with comparable. TNM method proceeds on assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made all things get taken into account and stand reconciled when computing net profit margin. Once comparables pass functional analysis test and adjustments have been made then profit margin as declared when matches with comparables would result in affirmation of transfer price as arm's length price. Then to make comparison of horizontal item without segregation would be impermissible. I. Brand and brand building We begin our discussion with reference to elucidation on concept of brand and brand building in minority decision in case of L. G. Electronics India Pvt Ltd. (supra). term "brand", it holds, refers to name, term, design, symbol or any other feature that identifies one seller's goods or services as distinct from those of others. word "brand" is derived from word "brandr" of Old Norse language and represented identification mark on products by burning part. Brand has been described as cluster of functional and emotional values. It is matter of perception and reputation as it reflects customers' experience and faith. Brand value is not generated overnight but is created over period of time, when there is recognition that logo or name guarantees consistent level of quality and expertise. Leslie de Chernatony and McDonald have described "a successful brand is identifiable product, service, person or place, augmented in such way that buyer or user perceives relevant, unique, sustainable added values which match their needs most closely". words of Supreme Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal Khenger Shah v. Khorshedbanu Dabida Boatwala, to describe "goodwill", can be adopted to describe brand as intangible asset being whole advantage of reputation and connections formed with customer together with circumstances which make connection durable. definition given by Lord MacNaghten in Commissioner of Inland Revenue v. Muller and Co. Margarine Ltd. [1901] AC 217 (223) can also be applied with marginal changes to understand concept of brand. In context of "goodwill" it was observed: "It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is bought and sold every day. It may be acquired. I think, in any of different ways in which property is usually acquired. When man has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will-of course, under conditions attaching to property of that nature... What is goodwill? It is thing very easy to describe very difficult to define. It is benefit and advantage of good name, reputation, and connection of business. It is attractive force which brings in custom. It is one thing which distinguishes old established business from new business at its first start. goodwill of business must emanate from particular centre or source. However, widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to source from which it emanates. Goodwill is composed of variety of elements. It differs in its composition in different trades and in different businesses in same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as Commissioners desire to do until nothing is left but dry residuum ingrained in actual place where business is carried on while everything else is in air, seems to me to be as useful for practical purposes as it would be to resolve human to be as useful for practical purposes as it would be to resolve human body into various substances of which it is said to be composed. goodwill of business is one whole, and in case like this it must be dealt with as such. For my part, I think that if there is one attribute common to all cases of goodwill it is attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to business. Destroy business, and goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again..." "Brand" has reference to name, trade mark or trade name. brand like "goodwill", therefore, is value of attraction to customers arising from name and reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon great number of facts relevant for particular business. It reflects reputation which proprietor of brand has gathered over passage or period of time in form of widespread popularity and universal approval and acceptance in eyes of customer. To use words from CIT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566 (Cal); AIR 1971 Cal 70, it would mean: "...It has been horticulturally and botanically viewed as'a seed sprouting' or an'acorn growing into mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in business. It has been described in terms of magnet as the'attracting force'. In terms of comparative dynamics, goodwill has been described as 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a'habit' and sociologically it is a'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 as the'sap and life' of business." There is line of demarcation between development and exploitation. Development of trade mark or goodwill takes place over passage of time and is slow ongoing process. In cases of well recognised or known trade marks, said trade mark is already recognised. Expenditures incurred for promoting product(s) with trade mark is for exploitation of trade mark rather than development of its value. trade mark is market place device by which consumers identify goods and services and their source. In context of trade mark, said mark symbolises goodwill or likelihood that consumers will make future purchases of same goods or services. Value of brand also would depend upon and is attributable to intangibles other than trade mark. It refers to infrastructure, know-how, ability to compete with established market leaders. Brand value, therefore, does not represent trade mark as standalone asset and is difficult and complex to determine and segregate its value. Brand value depends upon nature and quality of goods and services sold or dealt with. Quality control being most important element, which can mar or enhance value. Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and sale promotion would be largely incorrect. It represents co-ordinated synergetic impact created by assortment largely representing reputation and quality. There are good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also cases where in spite of extensive and large scale advertisements, brand values have not been created. Therefore, it would be erroneous and fallacious to treat brand building as counterpart or to commensurate brand with advertisement expenses. Brand building or creation is vexed and complexed issue, surely not just related to advertisement. Advertisements may be quickest and effective way to tell brand story to large audience but just that is not enough to create or build brand. Market value of brand would depend upon how many customers you have, which has reference to brand goodwill, compared to baseline of unknown brand. It is in this manner that value of brand or brand equity is calculated. Such calculations would be relevant when there is attempt to sell or transfer brand name. Reputed brands do not go in for advertisement with intention to increase brand value but to increase sales and thereby earn larger and greater profits. It is not case of Revenue that foreign associated enterprises are in business of sale/transfer of brands. Accounting Standard 26 exemplifies distinction between expenditure incurred to develop or acquire intangible asset and internally generated goodwill. intangible asset should be recognised as asset, if and only if, it is probable that future economic benefits attributable to said asset will flow to enterprise and cost of asset can be measured reliably. estimate would represent set off of economic conditions that will exist over useful life of intangible asset. At initial stage, intangible asset should be measured at cost. above proposition would not apply to internally generated goodwill or brand. Paragraph 35 specifically elucidates that internally generated goodwill should not be recognised as asset. In some cases expenditure is incurred to generate future economic benefits but it may not result in creation of intangible asset in form of goodwill or brand, which meets recognition criteria under AS-26. Internally generated goodwill or brand is not treated as asset in AS- 26 because it is not identifiable resource controlled by enterprise, which can be reliably measured at cost. Its value can change due to range of factors. Such uncertain and unpredictable differences, which would occur in future, are indeterminate. In subsequent paragraphs, AS-26 records that expenditure on materials and services used or consumed, salary, wages and employment related costs, overheads, etc., contribute in generating internal intangible asset. Thus, it is possible to compute goodwill or brand equity/value at point of time but its future valuation would be perilous and iffy exercise. In paragraph 44 of AS-26, it is stated that intangible asset arising from development will be recognised only and only if amongst several factors, it can demonstrate technical feasibility of completing intangible asset so that it will be available for use or sale and intention is to complete intangible asset for use or sale is shown or how intangible asset will generate probable future benefits, etc. aforesaid position finds recognition and was accepted in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC); [1981] 2 SCC 460, decision relating transfer to goodwill. Goodwill, it was held, was capital asset and denotes benefits arising from connection and reputation. variety of elements go into its making and composition varies in different trades, different businesses in same trade, as one element may pre-dominate one business, another element may dominate in another business. It remains substantial in form and nebulous in character. In progressing business, brand value or goodwill will show progressive increase but in falling business, it may vain. Thus, its value fluctuates from one moment to another, depending upon reputation and everything else relating to business, personality, business rectitude of owners, impact of contemporary market reputation, etc. Importantly, there can be no account in value of factors producing it and it is impossible to predicate moment of its birth for it comes silently into world unheralded and unproclaimed. Its benefit and impact need not be visibly felt for some time. Imperceptible at birth, it exits unwrapped in concept, growing or fluctuating with numerous imponderables pouring into and affecting business. Thus, date of acquisition or date on which it comes into existence is not possible to determine and it is impossible to say what was cost of acquisition. aforesaid observations are relevant and are equally applicable to present controversy. It has been repeatedly held by Delhi High Court that advertisement expenditure generally is not and should not be treated as capital expenditure incurred or made for creating intangible capital asset. Appropriate in this regard would be to reproduce observations in CIT v. Monto Motors Ltd. [2012] 206 Taxman 43 (Delhi), which read: "4.... Advertisement expenses when incurred to increase sales of products are usually treated as revenue expenditure, since memory of purchasers or customers is short. Advertisement are issued from time to time and expenditure is incurred periodically, so that customers remain attracted and do not forget product and its qualities. advertisements published/displayed may not be of relevance or significance after lapse of time in highly competitive market, wherein products of different companies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for short duration. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought on record. Expenses for advertising consumer products generally are part of process of profit earning and not in nature of capital outlay. expenses in present case were not incurred once and for all, but were periodical expenses which had to be incurred continuously in view of nature of business. It was on-going expense. Given factual matrix, it is difficult to hold that expenses were incurred for setting profit earning machinery in motion or not for earning profits." (Also see, CIT v. Spice Distribution Ltd., I. T. A. No. 597 of 2014, decided by Delhi High Court on September 19, 2014 [2015] 374 ITR 30 (Delhi) and CIT v. Salora International Ltd. [2009] 308 ITR 199 (Delhi). Accepting parameters of "bright line test" and if said parameters and tests are applied to Indian companies with reputed brands and substantial AMP expenses would lead to difficulty and unforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Bajaj, Godrej, Videocon group and several others are both manufacturers and owners of intangible property in form of brand names. They incur substantial AMP expenditure. If we apply "bright line test" with reference to indicators mentioned in paragraph 17.4 as well as ratio expounded by majority judgment in L. G. Electronics India Pvt Ltd.'s case (supra) in paragraph 17.6 to bifurcate and segregate AMP expenses towards brand building and creation, results would be startling and unacceptable. same is situation in case we apply parameters and "bright line test" in terms of paragraph 17.4 or as per contention of Revenue, i.e., AMP expenses incurred by distributor who does not have any right in intangible brand value and product being marketed by him. This would be unrealistic and impracticable, if not delusive and misleading (aforesaid reputed Indian companies, it is patent, are not to be treated as comparables with assessee, i.e., tested parties in these appeals, for latter are not legal owners of brand name/trade mark). Branded products and brand image is result of consumerism and commercial reality, as branded products "own" and have reputation of intrinsic believability and acceptance which results in higher price and margins. Trans- border brand reputation is recognised judicially and in commercial world. Well known and renowned brands had extensive goodwill and image, even before they became freely and readily available in India through subsidiary associated enterprises, who are assessees before us. It cannot be denied that reputed and established brands had value and goodwill. But new brand/trade mark/trade-name would be relatively unknown. We have referred to said position not to make comparison between different brands but to highlight that these are relevant factors and could affect function undertaken which must be duly taken into consideration in selection of comparables or when making subjective adjustment and, thus, for computing arm's length price. aforesaid discussion substantially negates and rejects Revenue's case. But there are aspects and contentions in favour of Revenue which requires elucidation. J. Bright line test majority decision of Tribunal holds that excessive AMP expenses beyond "bright line test" should be treated as separate international transaction for promoting brand owned by foreign associated enterprise. minority opinion is to contrary. Discussion on this issue would involve several aspects, whether Transfer Pricing Officer/Assessing Officer can apply "bright line test" to split AMP expenses, as essential and non- routine; paragraph 17.6 rejecting associated enterprises of reputed brands as comparables; whether "bright line tests" comparables mentioned in paragraph 17.4 of majority decision are justified and correct; whether CP method is appropriate method and concept and effect of economic ownership of brand. Discussion under heading "I" "Brand and brand building", deals and answers several issues. In order to decide remaining aspects, we would like to reproduce following relevant paragraphs from majority judgment (page 47 of 22 ITR (Trib)): "9.10. We do not find any force in contention of learned Departmental representative that mere fact of assessee having spent proportionately higher amount on advertisement in comparison with similarly placed independent entities be considered as conclusive to infer that some part of advertisement expenses were incurred towards brand promotion for foreign associated enterprise. Every businessman knows his interest best. It is for assessee to decide that how much is to be incurred to carry on his business smoothly. There can be no impediment on power of assessee to spend as much as he likes on advertisement. fact that assessee has spent proportionately more on advertisement can, at best be cause of doubt for Assessing Officer to trigger examination and satisfy himself that no benefit etc. in shape of brand building has been provided to foreign associated enterprise. There can be no scope for inferring any brand building without there being any advertisement for brand or logo of foreign associated enterprise, either separately or with products and name of assessee. Assessing Officer/Transfer Pricing Officer can satisfy himself by verifying if advertisement expenses are confined to advertising products to be sold in India along with assessee's own name. If it is so, matter ends. Assessing Officer will have to allow deduction for entire AMP expenses whether or not these are proportionately higher. But if it is found that apart from advertising products and assessee's name, it has also simultaneously or independently advertised brand or logo of foreign associated enterprise, then initial doubt gets converted into direct inference about some tacit understanding between assessee and foreign associated enterprise on this score. As in case of express agreement, incurring of AMP expenses for brand building draws strength from such express agreement; in like manner, incurring of proportionately more AMP expenses coupled with advertisement of brand or logo of foreign associated enterprise gives strength to inference of some informal or implied agreement in this regard. 9.11. Adverting to facts of instant case, it is noticed that learned Departmental representative has amply shown that assessee not only promoted its name and products through advertisements, but also foreign brand simultaneously, which has remained uncontroverted on behalf of assessee. This factor together with fact that assessee's AMP expenses are proportionately much higher than those incurred by other comparable cases, lends due credence to inference of transaction between assessee and foreign associated enterprise for creating marketing intangible on behalf of latter. 9.12. learned authorised representative has vehemently argued that when assessee incurred AMP expenses for its business purpose and recorded them as such, Revenue went wrong in recharacterising this transaction by splitting it into two parts, viz., one towards advertisement expenses for assessee's business and second towards brand building for foreign associated enterprise. He fortified this contention by relying on judgment of EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi). There is absolutely no doubt that paragraph 17 of judgment unambiguously lays down that tax administration should not disregard actual transaction and substitute other transactions for it. However, it is imperative to note that proposition laid down in paragraph 17 is not infallible or is not unexceptionable rule. Caveat has been included in immediately next paragraph 18. Two exceptions have been carved out of general rule against recharacterisation of any transaction as set out in paragraph 17, viz.,'(i) where economic substance of transaction differs from its form; and (ii) where form and substance of transaction are same but arrangements made in relation to transaction, viewed in their totality differ from those which would have been adopted by individual enterprise behaving in commercially rational manner'. In our considered opinion, second exception governs extant situation, as per which, where form and substance of transaction are same but arrangements made in relation to transaction viewed in totality differ from those which would have been adopted by independent enterprises behaving in commercially rational manner. assessee incurred AMP expenses and explicitly showed them as such. Thus, form of showing AMP expenses coincides with substance of AMP expenses. But arrangement made in such transaction, viewed in totality, differs from that which would have been adopted by independent enterprises behaving in commercially rational manner. Though AMP expenses were shown as such but covert act of showing such expenses as its own is different from what is incurred by independent enterprises behaving in commercially rational manner, which unearths covert act of treating AMP expenses incurred for brand building for and on behalf of foreign associated enterprise, as also its own. What is relevant to consider is as to whether independent enterprise behaving in commercially rational manner would incur expenses to extent assessee has incurred. If answer to this question is in affirmative, then transaction cannot be recharacterised. If, however, answer is in negative, then transaction needs to be probed further for determining as to whether its recharacterisation is required. Such recharacterisation can be done with help of ratio decidendi of this judgment itself, being, making comparison with what'independent enterprises behaving in commercially rational manner' would do, tied with fact of assessee also simultaneously advertising brand of its foreign associated enterprise. Reverting to context of AMP expenses, one needs to find out as to how much AMP expenses would independent enterprises behaving in commercially rational manner, incur. Once by making such comparison, result follows that Indian associated enterprise, prominently displaying brand of its foreign associated enterprise in its advertisements, has incurred expenses proportionately more than that incurred by independent enterprises behaving in commercial rational manner, then it becomes eminent to recharacterise transaction of total AMP expenses with view to separate transaction of brand building for foreign associated enterprise. Even United Nations Transfer Pricing Manual, which has only persuasive value, provides for allocation of such cost between MNE and its subsidiaries. We, therefore, hold that in facts and circumstances of present case, there is transaction between assessee and foreign associated enterprise under which assessee incurred AMP expenses towards promotion of brand which is legally owned by foreign entity. Economic vis-a-vis legal ownership of brand... 10.2. We do not find any weight in contention put forth about economic ownership and legal ownership of brand. It is not denied that there can be no economic ownership of brand, but that exists only in commercial sense. When it comes in context of Act, it is only legal ownership of brand that is recognised. If we accept contention of learned authorised representative that it be held as economic owner of brand or logo of its foreign associated enterprise for purposes of Act and hence expenses incurred for brand building, which is legally owned by foreign associated enterprise, should be allowed as deduction in its hands, then incongruous results will follow. It is patent that manufacturer does not ordinarily sells its goods directly to ultimate customers. There is normally chain of middlemen ending with retailer. Going by that logic and descending in line, distributors or wholesalers to whom assessee sells its goods, also become economic owners of brand on parity of reasoning that they also exploit brand for purpose of selling goods to retailers. Similarly retailers also become economic owners of brand on premise that on basis of such brand they are selling goods to ultimate customers. All these middlemen and assessee can be considered as economic owners of brand only in commercial sense for limited purpose of exploiting it for business purpose, which is otherwise legally owned by foreign associated enterprise. Such economic ownership is nothing more than that. Suppose foreign company, who is legal owner of brand, sells its brand to third party for particular consideration, can it be said that Indian assessee or for that purpose wholesalers or retailers should also get share in total consideration towards sale of brand because they were also economic owners of such brand to some extent? answer is obviously in negative. It is only foreign enterprise who will recover entire sale consideration for sale of brand and will be subjected to tax as per relevant taxing provisions. There can be no tax liability in hands of Indian associated enterprise or wholesalers or retailers for parting with economic ownership of such brand under Act. In that view of matter we are of considered opinion that concept of economic ownership of brand, albeit relevant in commercial sense, is not recognised for purposes of Act. above discussion leads us to irresistible conclusion that advertisement done by assessee also carrying brand/logo of its foreign associated enterprise coupled with fact that it spent proportionately higher amount on AMP expenses, gives clear inference of a'transaction' between assessee and its associated enterprise of building and promoting foreign brand... 11.4. However, we are not agree with remaining part of contention of learned authorised representative that legal character of one enterprise can be altered only where Revenue positively proves factum of existence of influence of foreign associated enterprise over affairs of Indian associated enterprise in general or in respect of specific transactions. In fact, it is due to this close relation between associated enterprises of MNC that Chapter X has been enshrined in Act as anti-tax avoidance measure. No doubt associated enterprises in India and abroad are two separate legal entities subject to tax in different tax jurisdictions, but fact that economic behaviour of one depends on wish of other, can never be totally lost sight of. Due to this factor, it becomes significant to verify as to whether decisions taken by Indian associated enterprise are influenced by its foreign associated enterprise. If any decision taken by Indian associated enterprise is found to be uninfluenced, then transaction is accepted as such by Revenue at its face value. If, however, it turns out that behaviour of Indian associated enterprise has been influenced by foreign associated enterprise, then there arises need for adjustment to that extent by removing effect of such influence. In fact, transfer pricing provisions (hereinafter also called'the transfer pricing provisions') are aimed at discovering, in first instance, if there is any influence of foreign associated enterprise over transactions between it and its Indian counterpart; and if answer is in affirmative, then by unloading effect of such influence on transaction. This entire exercise is executed by firstly visualising value of international transaction between two associated enterprises; then ascertaining arm's length price of such transaction; and then eventually computing total income of Indian associated enterprise having regard to arm's length price of international transaction. Initial burden is always on assessee to prove that international transaction with foreign associated enterprise is at arm's length price... (V) Cost/value of transaction... 15.3. learned Departmental representative countered submissions put forth for assessee. It was stated that bright line test is simply tool to ascertain cost of international transaction and it is wrong to contend that arm's length price has been determined by applying bright line test, which is not part of Indian tax law... 15.6. There can be international transaction between assessee and its associated enterprise under which assessee incurs some expenses on behalf of its associated enterprise. There arises no difficulty when despite there being no formal agreement, Indian associated enterprise incurs such expenses and keeps them in separate account. difficulty arises only when such expenses are either clubbed with certain other expenses incurred for foreign associated enterprise or combined with certain similar expenses incurred by Indian associated enterprise for its own business purpose. It is in such later situation that task of separating costs incurred for foreign associated enterprise and those for business of Indian associated enterprise, assumes significance. If such expenses in two classes are identifiable, one can separate them with ease. But when both expenses are intermingled and otherwise inseparable, then some mechanism needs to be devised for ascertaining cost of international transaction, being amount of expenses incurred for foreign associated enterprise. 15.7 As in present case assessee did not declare any cost/ value of international transaction of brand building, it became imperative for Transfer Pricing Officer to find out such cost/value by applying some mechanism. In fact, bright line test in our case is way of finding out cost/value of international transaction, which is first variable under transfer pricing provisions and not second variable, being arm's length price of international transaction. Bright line is line drawn within overall amount of AMP expense. amount on one side of bright line is amount of AMP expense incurred for normal business of assessee and remaining amount on other side is cost/value of international transaction representing amount of AMP expense incurred for and on behalf of foreign associated enterprise towards creating or maintaining its marketing intangible. Now, pertinent question is where to draw such line. If assessee fails to give any basis for drawing this line by not supplying cost/value of international transaction, and further by not showing any other more cogent way of determining cost/value of such international transaction, then onus comes upon Transfer Pricing Officer to find out cost/value of such international transaction in some rational manner. 15.8 In present case, assessee did not declare any cost/value of international transaction in nature of brand building. As such, it fell upon Transfer Pricing Officer to find out such amount out of total AMP expenses incurred by assessee. In absence of any assistance from assessee in determining such cost/ value, logically it could have been by first assessee in determining such cost/ value, logically it could have been by first identifying comparable independent domestic cases; ascertaining amount of advertisement, marketing and promotion expenses incurred by them and percentage of such AMP expenses to their respective sales; noting total AMP expenses incurred by assessee; discovering amount of AMP expenses incurred by Indian entity for its business purpose, by applying above percentage of comparable cases to assessee's sales. excess of total AMP expenses over such amount as determined as per immediately preceding step ought to have been and has been rightly taken as measure to determine amount of AMP expenses incurred by assessee for brand promotion of foreign associated enterprise. In other words, amount coming up as per last step is cost/value of such international transaction. 15.9. figure so deduced, by applying above approach, representing cost/value of international transaction, in instant case is Rs. 161.21 crores. Transfer Pricing Officer impliedly considered same figure as both representing cost/value of international transaction and also its arm's length price. However, Dispute Resolution Panel came to hold that mark-up of 13 per cent. should also have been applied. In way, Dispute Resolution Panel adopted cost/value of international transaction at Rs. 161.21 crores and computed arm's length price of such transaction at Rs. 182.71 crores. It is this final figure of Rs. 182.71 crores which was eventually considered by Assessing Officer for making adjustment, against which assessee has come up in appeal before Tribunal. 15.10. fact of matter is that it is cost/value of international transaction at Rs. 161.21 crores which has been determined by applying bright line test. Position would have been different if arm's length price of international transaction would have been determined by invoking bright line test. What is appropriate is substance of matter and not nomenclature given to transaction. In our considered opinion name given to method of computing cost/value of international transaction, whether bright line test or otherwise, has no significance. Since in present case it is cost/value of international transaction which has been determined by applying bright line test, contention raised by learned counsel in this regard has been rendered without merit." Paragraphs 17.4 and 17.6 have been quoted above. Revenue during course of arguments had made reference to United Nations Practical Manual on Transfer Pricing for Developing Countries, Chapter 2 relating to business framework. said Chapter gives exhaustive background material on MNEs, their cross-border operations, value chain analysis, organisation or legal/commercial structure, etc. In said Chapter, in figure 2.1, exposits details of value chain analysis of MNEs and their interaction with third parties including subsidiaries. said figure is as under: In written arguments filed by Revenue, it is stated that various MNEs use different business models, sometimes country specific. Some of common business models used have been elucidated as under : (i) Execute licensing agreements with independent parties for manufacturing product having brands owned by MNCs. Since these products have established brands, MNCs charge franchise fees or royalty for use of brands and technology developed by them. Prominent examples of this model are Domino's Pizza being sold by independent party Jubilant Food Works Ltd. or undergarments of Jockey brand sole by Page Industries Ltd. (ii) Establish subsidiary for carrying out distribution function. Examples of this include various appellants before this court. (iii) Establish subsidiary for carrying out distribution and manufacturing function. Maruti Suzuki Ltd. one of appellants is example of this business mode. (iv) Establish subsidiary for manufacturing product and use independent companies for distribution. Pepsi Foods Ltd. is example of this type. It manufactures concentrate which is then sold to bottlers. Some of bottlers are associated enterprises (AEs) of Pepsi group but some others are independent parties. (v) Establishment of subsidiary for carrying out only marketing support services (customers are identified by these subsidiaries and orders are negotiated by foreign MNC and sales are directly made by foreign MNCs to Indian customers). In these models, foreign companies invariably remunerate Indian subsidiary with cost together with some additional fee for such market support activities." It was urged by Revenue that development of markets for products is core function of entrepreneur, which in this case is foreign company, associated enterprise. Implementation depends upon business models of MNEs and how they want this core function to be exercised. Performance of this function clearly benefits brands and market intangibles owned by parent company. test to determine whether Indian subsidiary was/is incurring AMP expenses for itself or at instance of associated enterprise was/is to find out whether independent party would have undertaken same level of AMP expenses. independent party with short-term agreement with MNE would not incur costs which give long-term benefits of brand and market development advantage to another entity. It is fallacious to contend that brand promotion would benefit independent entity, for increase in volume of sales largely benefits manufacturer both in terms of profit with increased sales and enhanced value to brand. Benefit to Indian entity is only marginal or incidental. contention is that action of independent subsidiary amounts to rendering of service to foreign associated enterprise for which arm's length compensation was/is payable. No third party distributor would incur expenditure on development of marketing and brand, which does not eventually belong to it. We have already dealt with and examined concept of brand as intangible asset. Routine or day-to-day marketing or sale promotion expenses even, when excessive and exorbitant, would not amount per se to "brand building" expenses. Revenue in written submissions in fact have accepted in paragraph 8.8 that promotion of products go hand in hand and at most of times brand is distinguishable from products as only by display of products in particular manner or emphasis on particular feature of product, consumer is given message of what to expect from given "brand" (sic, product). Hence, it is difficult to compartmentalise promotion of product or promotion of brand expenses and record them as separate from each other. aforesaid assertions reflect thin edge and difficult path Revenue has adopted in bifurcating AMP expenses into marketing or sale promotions and "brand building" by creating and adopting "bright line test". We have elaborately discussed concept of term "brand" and "brand building" and observe that it would be incorrect to treat advertisement as equivalent or synonymous with "brand building" for latter in commercial sense refers to several facets and components. primary being quality and reputation of product or name, which is acquired gradually and silently over passage of time. aforesaid arguments fails to notice fundamental principle of international taxation and Chapter X of Act that foreign associated enterprise and Indian associated enterprise are two separate tax centres and taxable entities. Profits or enhanced profits consequent to higher manufacturing turnover would be taxed in hands of foreign associated enterprise, whereas higher profits as result of increased turnover relatable to distribution and marketing functions would be taxed in hands of Indian subsidiary, i.e., associated enterprise. position would be different if foreign associated enterprise has permanent establishment in India. Revenue has generalised and argument adopts universal and ubiquitous approach in contention that increased turnover would not benefit Indian associated enterprise. argument is sceptical and conjectural. Moreover, transfer pricing can always correct profit shifting, albeit, by reducing/increasing price/consideration payable to Indian associated enterprise. Indian subsidiaries, in present case, are engaged in distribution and marketing functions of products manufactured by foreign associated enterprises and in some cases, products are also manufactured by them under licence in India. Figure 2.1 refers to value chain analysis, and treats "marketing" and "distribution" as two headings but this does not mean that marketing and distribution functions cannot be combined and treated as one package or bundle. functions performed could be both marketing and distribution. Marketing in form of sale promotion, advertisements, etc., would necessarily involve expenditure both in terms of third party expenditure which Indian assessee would be liable to incur, as also towards office maintenance and other overhead expenses. Even as one package or bundle, Indian subsidiary, i.e., assessee must be adequately compensated by adhering to arm's length price. This is core of transfer pricing adjudication. Price paid by or compensation paid to domestic associated enterprise must complement and reciprocate for functions performed. pure distribution company would be comparatively low risk company as compared to marketing and distribution company. profits and earnings or arm's length price would accordingly vary. arm's length price in case of pure distribution company would enure lower price/profit as compared to company engaged in distribution and marketing. In most of cases, distribution and marketing operations would go hand in hand. Marketing itself is term of wide import and connotation, which includes development of marketing strategy which may have certain common worldwide elements and would normally be creation and premised by parent foreign associated enterprise but Indian assessee engaged in marketing operations could devise its own marketing strategies, determine as to nature and type of advertisements, media selection, timings, etc. Even choice of products could depend upon local/national conditions. While determining arm's length price, issue would be whether or not Indian assessee is adequately compensated by foreign associated enterprise. Indian assessee also benefits from increased sales which results in higher profits and more taxable income in India. AMP, i.e., advertisements, marketing and sales promotions, therefore, benefit both Indian associated enterprise, i.e., assessee and foreign associated enterprise resident abroad. same is true and correct position even in case of distribution company though in said case sales would increase and there would not be any element of AMP. fact that increased sales benefit foreign manufacturer is reason why services of Indian assessees have been engaged by associated enterprises resident abroad. This argument itself does not show that brand building is being independently undertaken and, therefore, should be treated as separate international transaction. However, arm's length computation made both by assessee as well as Transfer Pricing Officer must take into account AMP expenses. Notwithstanding above position, argument of Revenue goes beyond adequate and fair compensation and ratio of majority decision mandates that in each case where Indian subsidiary of foreign associated enterprise incurs AMP expenditure should be subjected to "bright line test" on basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond bright line should be regarded as separate international transaction of brand building. Such broad-brush universal approach is unwarranted and would amount to judicial legislation. During course of arguments, it was accepted by Revenue that Transfer Pricing Officers/Assessing Officers have universally applied "bright line test" to decipher and compute value of international transaction and, thereafter, applied "cost plus method" or "cost method" to compute arm's length price. said approach is not mandated and stipulated in Act or Rules. list of parameters for ascertaining comparables for applying bright line test in paragraph 17.4 and, thereafter, assertion in paragraph 17.6 that comparison can be only made by choosing comparable of domestic cases not using any foreign brand, is contrary to Rules. It amounts to writing and prescribing mandatory procedure or test which is not stipulated in Act or Rules. This is beyond what statute in Chapter X postulates. Rules also do not so stipulate. argument and reasoning in paragraph 17.6 in way loses focus on main issue and controversy; whether arm's length price fixed between two associated enterprise is adequate and justified and would have been paid if transaction was between two independent enterprises. two independent enterprises must be two unrelated parties having no connection. It does not matter whether comparables are domestic enterprises or not. However, and it is manifest that comparable should have similar rights, if any, as tested party in brand name, trade mark, etc. During course of hearing before us, counsel for Revenue had submitted that paragraph 17.4 should be treated as illustrations and not as binding comparables. We would prefer to observe that Assessing Officer/Transfer Pricing Officer can go and must examine question whether assessee is performing functions of pure distributor or performing distribution and marketing functions, in latter case, he must examine and ascertain whether transfer price takes into consideration marketing function, which would include AMP functions. This would ensure adequate transaction price and, hence, assure no loss of revenue. When distribution and marketing functions are interconnected and reliable comparables are available, arm's length price could be computed as package, if required and necessary by making adequate adjustments. When Assessing Officer/Transfer Pricing Officer comes to conclusion that it is not possible to compute arm's length price without segregating and dividing distribution and marketing or AMP functions, he can so proceed after giving justification and adequate reasons. At that stage, he would have apportioned price received or compensation paid by foreign associated enterprise towards distribution and marketing or AMP functions. Transfer Pricing Officer can then apply appropriate method and compute arm's length price of two independently and even by applying separate methods. This will be in terms of provisions of Act and Rules and also as per general principles of international taxation accepted and applied universally. On other hand, as recorded by us above, applying "bright line test" on basis of parameters prescribed in paragraphs 17.4 and 17.6 would be adding and writing words in statute and Rules and introducing new concept which has not been recognised and accepted in any of international commentaries or as per general principles of international taxation accepted and applied universally. There is nothing in Act or Rules to hold that it is obligatory that AMP expenses must and necessarily should be subjected to "bright line test" and non-routine AMP expenses as separate transaction to be computed in manner as stipulated. During course of hearing, our attention was drawn to United States ISR Regulations, 4-1-2004 Edition, section 1.482-4, Methods to determine taxable income in connection with transfer of intangible property and also final regulations 26 CPR Parts 1 and 31 and 602 effective from July 31, 2009. These are specific regulations framed and applicable in United States. Care and caution has to be used when we make reference or apply these regulations or interpretation placed by IRS, in United States of America. 1.482-4 of 2009 Regulations, relating to methods to determine taxable income in connection with transfer of intangible property, elucidates that arm's length consideration for contribution by one controlled taxpayers that develops or enhances value or may be reasonably anticipated to develop or enhance value of intangible property of other associated enterprise would depend upon several circumstances. If consideration for such contribution is embedded within contractual term for controlled transaction then ordinarily no separate allocation will be made for such contribution. Thereafter, examples have been given. It stands recorded that comparability analysis would include consideration of all relevant factors, including compensation for activities performed by subsidiary and that it is provided in transfer price, rather than provided by separate agreement. Reference is also made to requirement to pay royalty and effect thereof. In 1.482-6, in context of profit split method, it is recorded that allocation of income to controlled taxpayers, routine contribution will not reflect profit attributable to each controlled taxpayers contribution but nonroutine contribution is not to be accounted for as routine contribution. non-routine contribution of intangible property may be measured by external benchmarks that reflect fair market value of such intangible property, or in alternative relative value of non-routine property contributions may be estimated by capital cost of differentiating intangible property and all related improvements updates, less appropriate amount of amortisation based on useful life of each intangible property. In present case, none of parties had applied profit split method and, therefore, observations in paragraph 1.482-6 would not be of much relevance. Section 1.482-4, however, does state that development or enhancement of intangible property owned by another controlled taxpayer should be accounted for in evaluating availability of controlled transaction with comparable transactions. We have quoted Indian position on subject under heading "Brand and brand building". We are not examining and evaluating profit split method. We have accepted need and postulate of adequate compensation to domestic associated enterprises for incurring AMP expenses. Australian Income Tax Assessment Act, 1997, as amended up to Act No. 124, 213, is lucid and has tangible illustrations. On question of identifying most suitable method, it is observed that most appropriate and relevant method should have regard to all factors including respective strength and weaknesses of possible methods in their application to actual conditions, circumstances including functions performed, assets used and risk borne by entities, availability of reliable information required to apply particular method and degree of comparability between actual circumstances and comparable circumstances, including reliability of adjustments to eliminate effect of material differences. In identifying comparable circumstances, functions, assets and risk analysis, characteristics of property or services transferred, terms of relevant contract, economic circumstances and business strategies of entities assume importance. Circumstances are comparable to actual circumstances, if and to extent that circumstances differ from actual circumstances, when said difference does not materially affect condition that is relevant to method or reasonably adequate adjustment can be made to eliminate effect of difference on condition that is relevant to method. Illustrations, six in number, draw distinction between long-term distribution or distribution-cum-marketing agreements and short-term contractual arrangements. resident associated enterprises must be compensated by foreign associated enterprise for services provided; whether it be in nature of pure distribution or promotional services; or services as marketer which also undertakes advertisement and sales promotion expenses resulting in return attributable to marketing intangibles. longterm pure distributor, who bears no cost or risk of development and market would not be entitled to any return on marketing intangibles. same would be position in short-term contract. In case of long-term contract where marketing expenditures are not abnormal and resident associated enterprise has been proportionately compensated for marketing activities, no separate addition towards compensation is warranted. In cases of long-term contract of exclusive and market distribution rights for trade mark product, where market development activities and extraordinary marketing expenditures are in excess of what comparable independent enterprise with similar rights would incur, adjustment may be required, provided such compensation has not been paid. Reference was made to paragraph 6.38 of OECD Transfer Pricing Guidelines, which stipulate that said associated enterprise might obtain additional return from owner of trade mark perhaps through lower purchase price of product or reduction in royalty rate. It could also be direct compensation. For distinguishing short-term and long-term contracts, reference has been made to paragraph 3.74 and 2.130 of 2010 OECD Transfer Pricing Guidelines, to observe that this has to be determined ordinarily based on conditions existing at start of arrangement and, therefore, consequent effect that contract is or is not renewed, ordinarily would not be factor in its initial pricing. This may be otherwise, if there is evidence at start of arrangement to indicate that contract would be renewed. Therefore, in cases of short-term contract, adjustment would be justified, if there is no direct compensation; marketing expenditure incurred is not included in profit element by reduction of price or royalty payable. This would be accounted for while taking into account available data about profits of comparable independent enterprises during corresponding years of similar short-term marketing and distribution agreements. examples also deal with re-negotiation. There is difference between pure and simple independent distributor and distributor with marketing rights. independent distributor with full marketing right is person or entity legally independent of manufacturer, who purchases goods from manufacturer for re-sale on its own accounts. transaction between two is straightforward sale in which distributor takes all economic risk of product distribution and ultimately gains or makes loss depending upon market and other conditions. manufacturer is not concerned. In case of low or no risk distributor and he virtually acts as agent for loss and gain is that of manufacturer. There is no economic risk on distribution of profits. He is, therefore, entitled to fixed remuneration for self-efforts, i.e., relating to task or function of distribution. Similar will be position of low risk distributor with marketing functions, except that said distributor should be compensated for marketing, including AMP function. distributor with marketing function can be normal or high risk distributor. Such distributors should be compensated but quantum of compensation would be higher. Such cases have to be distinguished from cases of true distributor, who is in independent business, uses his own money for purchasing at low price and selling at high price and, accordingly, shoulders burden in case of bad judgment. Profits or losses, therefore, correspond to risk and market consideration. There is also functional incompatibility between distributor and retailer. Retailers cannot be compared with distributor also performing marketing functions. Foreign global enterprises frequently adopt subsidiary model, i.e., products are distributed and marketed in targeted country through wholly owned subsidiary or sales subsidiary. comparable would be unrelated identity with similar distribution and marketing functions. United Nations' Manual in Chapter 10 relating to country specific practices notes Indian stand but records that first nine Chapters of Manual provide practical guidance for application of transfer pricing rules based upon article 9(1) of U. N. Model Tax Convention and arm's length principle embodied therein. However, there were disagreements on certain points in sub-committees and Chapter 10 records individual country's view point and experiences for information of readers. This does not reflect consistent or consensus view of sub-committee (See paragraph 10.1.1.2) United Nations' Manual Transfer Pricing in paragraph 10.4.8.15 records that determination of arm's length price in cases of marketing intangibles would involve functional assets analysis of profile of Indian entity and parent company to ascertain whether Indian entity has risk free, limited risk bearing or risk bearing entity. This mandates identification of nature, types and stages of development of marketing intangibles, i.e., whether foreign parties are new entrants into Indian market and, therefore, related party in India would incur substantial expenses. Awareness of trade mark or brand profit or services of parent company in India, customer loyalty and brand existence of dealer network whether Indian entity is to provide after sales service support, market and customer details, etc. It acknowledged that stand of Indian tax authorities, who have applied concept of "bright line test" of no risk or limited risk distributor or to determine non-routine expenses, has led to multifarious challenges on several account. However, it stands recorded in sub-paragraph 18 that important issue in determination of arm's length price is to examine benefits of AMP expenditure and whether Indian entities do not receive share of excess profits related to local marketing intangible. Accordingly, claim of Revenue is that extraordinary AMP expenditure does not result in appropriate enhancement of profitability of Indian subsidiary or related party. question, therefore, when subsidiary entity engaged in distribution and marketing incurs AMP expenses, is to ascertain whether subsidiary associated enterprise entity has been adequately and properly compensated for undertaking said expenditure. Such compensation may be in form of lower purchase price, non or reduced payment of royalty or by way of direct payments to ensure adequate profit margin. This ensures proper payment of taxes and curtails avoidance or lower taxes of Indian subsidiary as separate juristic entity. We agree and accept position in portion reproduced above in bold and italics. object and purpose of transfer pricing adjustment is to ensure that controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. There should be adequate and proper compensation for functions performed including AMP expenses. Thus, we disagree with Revenue and do not accept overbearing and orotund submission that exercise to separate "routine" and "non-routine" AMP or brand building exercise by applying "bright line test" of non-comparables and in all case, costs or compensation paid for AMP expenses would be "nil", or at best would mean amount or compensation expressly paid for AMP expenses. Unhesitatingly, we add that in specific case this criteria and even zero attribution could be possible but facts should so reveal and require. To this extent, we would disagree with majority decision in L. G. Electronics India Pvt. Ltd. (supra). Decisions in case of GlaxoSmithKline and DHL In respect of GlaxoSmithKline, very little information is available except that in 1993 advance pricing agreement was accepted by IRS and SmithKline Beecham in respect of sale of certain drugs. Glaxo was then competitor of SmithKline Beecham and was marketing similar drug. In 1992, IRS initiated audit in case of Glaxo for years 1989-90. In 1994, Glaxo and IRS tried to resolve dispute through advance pricing agreement but were unsuccessful. Double Taxation Avoidance Agreement between U. K. and U. S. was invoked. dispute, it appears was predicated on IRS's assertion that advertisement and marketing was more valuable in respect of said drug, whereas Glaxo and U. K. taxing authority believed that high transfer price was reasonable because research and development work was more valuable. In December, 2000, Glaxo merged with SmithKline Beecham Corporation. As noted above, SmithKline Beecham had earlier entered into advance tax agreement with IRS in respect of same drug. terms of said advance pricing agreement were made public. In 2004, litigation took another turn, when GlaxoSmithKline sued IRS claiming that they had erred in increasing assessed income and sought refund along with interest. matter was scheduled for trial, when on September 11, 2006, IRS and GlaxoSmithKline announced settlement. GlaxoSmithKline agreed to pay $ 3.4 billion or 60 per cent. of total contested amount and dropped their claim for refund. Noticeably, this was after about 14 years. dispute in case of DHL Corporation, U. S. A. in appeal was decided in favour of assessee. DHL Corporation, U. S. A. was registered owner of trade mark and had exclusive right to use and sublicence DHL trade mark in United States. U.S. Corporation had entered into long-term agreement with group company, namely, Document Handling Ltd. International, Hong Kong ("DHLI", for short) which was responsible for operations outside U. S. No royalty was payable to DHL, U. S. In 1992, third party consortium in terms of agreement, exercised their option to purchase majority stake in DHLI and another group company, DHLI Middleton, N. V. which owned most of overseas operating companies. said consortium, through new entity created by them, exercised option to purchase DHL trade mark rights for US$ 20 million. Several questions arose in said case including valuation of trade mark rights. One of contentious issues related to attribution of sale consideration paid for trade mark between DHL, U. S. and DHLI, Hong Kong. On question of ownership analysis, appellate court referred to plain language of then governing "1968 Regulations" to observe that legal ownership was not proper test, for 1968 regulations stipulated that property would be treated as owned by controlled taxpayer that had borne greatest share of cost of development. Thus, 1968 regulations ignored legal ownership in favour of economic ownership. "1994 Regulations" superseded aforesaid effect. Applying concept of developer-assister rule to factual matrix, it was observed that DHLI Hong Kong had incurred cost and risk for development of intangibles. Thus, DHLI Hong Kong had status of developer. These decisions, contrary to transfer pricing orders, do not assist or foster Revenue's stand. Paragraphs 6.36 to 6.39 of OECD Transfer Pricing Guidelines Transfer Pricing Officers have referred to paragraphs 6.36 to 6.39. For sake of completeness, we would quote said paragraphs from OECD Transfer Pricing Guidelines, which read: "6.36 Difficult transfer pricing problems can arise when marketing activities are undertaken by enterprises that do not own trade marks or tradenames that they are promoting (such as distributor of branded goods). In such case, it is necessary to determine how marketer should be compensated for those activities. issue is whether marketer should be compensated as service provider, i.e., for providing promotional services, or whether there are any cases in which marketer should share in any additional return attributable to marketing intangibles. related question is how return attributable to marketing intangibles can be identified. 6.37 As regards first issue-whether marketer is entitled to return on marketing intangibles above normal return on marketing activities-the analysis requires assessment of obligations and rights implied by agreement between parties. It will often be case that return on marketing activities will be sufficient and appropriate. One relatively clear case is where distributor acts merely as agent, being reimbursed for its promotional expenditures by owner of marketing intangible. In that case, distributor would be entitled to compensation appropriate to its agency activities alone and would not be entitled to share in any return attributable to marketing intangible. 6.38 Where distributor actually bears cost of its marketing activities (i.e., there is no arrangement for owner to reimburse expenditures), issue is extent to which distributor is able to share in potential benefits from those activities. In general, in arm's length transactions ability of party that is not legal owner of marketing intangible to obtain future benefits of marketing activities that increase value of that intangible will depend principally on substance of rights of that party. For example, distributor may have ability to obtain benefits from its investments in developing value of trade mark from its turnover and market share where it has long-term contract of sole distribution rights for trade marked product. In such cases, distributor's share of benefits should be determined based on what independent distributor would obtain in comparable circumstances. In some cases, distributor may bear extraordinary marketing expenditures beyond what independent distributor with similar rights might incur for benefit of its own distribution activities. independent distributor in such case might obtain additional return from owner of trade mark, perhaps through decrease in purchase price of product or reduction in royalty rate. 6.39 other question is how return attributable to marketing activities can be identified. marketing intangible may obtain value as consequence of advertising and other promotional expenditures, which can be important to maintain value of trade mark. However, it can be difficult to determine what these expenditures have contributed to success of product. For instance, it can be difficult to determine what advertising and marketing expenditures have contributed to production or revenue, and to what degree. It is also possible that new trade mark or one newly introduced into particular market may have no value or little value in that market and its value may change over years as it makes impression on market (or perhaps loses its impact). dominant market share may to some extent be attributable to marketing efforts of distributor. value and any changes will depend to extent on how effectively trade mark is promoted in particular market. More fundamentally, in many cases higher returns derived from sale of trade marked products may be due as much to unique characteristics of product or its high quality as to success of advertising and other promotional expenditures. actual conduct of parties over period of years should be given significant weight in evaluating return attributable to marketing activities. See paragraphs 3.75-3.79 (multiple year data)." aforesaid paragraphs do not support Revenue's submission but stipulate requirement that owner of marketing intangible should adequately compensate domestic associated enterprise incurring costs towards marketing activities by reimbursement of expenses or by sufficient and appropriate return. Where domestic associated enterprise is entitled to compensation as pure distributor, it would not be entitled to share in any return attributable to marketing intangible, not being legal owner. position may be different where there is long-term contract of sole distribution rights of trade marked products, thereby acquiring "economic ownership" benefit. In some cases, where distributor bears extraordinary marketing expenses, he would be entitled to additional or higher return, through decreased price or reduction of royalty rate. difficulty in attributing advertisement and other promotional expenditures towards trade mark valuation or towards marketing activities, i.e., contributing to manufacture and current income and impracticability of division in case of such attribution is highlighted in paragraph 6.39. It is, therefore, incorrect to suggest or observe that international tax jurisprudence or commentaries recognise "bright line test" for bifurcation of routine and non-routine AMP expenditure and non-routine AMP expenses is independent international transaction which should be separately subjected to arm's length pricing. K. Aggregation or disaggregation of transactions and set off in segregation of bundled transactions; whether section 92(3) prohibits segregation This leads us to question of set off when bundled transactions are segregated. Conceptually, this is justified and equitable, as tax is payable on total income after transfer pricing computation in respect of international transactions (see section 92(4) of Act). question of aggregation and disaggregation of transactions when TNM method or even in other methods is sought to be applied, must have reference to strength and weaknesses of TNM method or applicable method. Aggregation of transactions is desirable and not merely permissible, if nature of transaction(s) taken as whole is so interrelated that it will be more reliable means of determining arm's length consideration for controlled transactions. There are often situations where separate transactions are intertwined and linked or are continuous that they cannot be evaluated adequately on separate basis. Secondly, controlled transaction should ordinarily be based on transaction actually undertaken by associated enterprises as has been struck by them. We should not be considered as advocating broad-brush approach but detailed scrutinised ascertainment and determination whether or not aggregation or segregation of transactions would be appropriate and proper while applying particular method, is necessary. OECD Commentary in this regard is relevant and reproduced below: "3.13 intentional set-off is one that associated enterprises incorporate knowingly into terms of controlled transactions. It occurs when one associated enterprise has provided benefit to another associated enterprise within group that is balanced to some degree by different benefits received from that enterprise in return. These enterprises may indicate that benefit each has received should be set-off against benefit each has provided as full or part payment for those benefits so that only net gain or loss (if any) on transactions needs to be considered for purposes of assessing tax liabilities. For example, enterprise may license another enterprise to use patent in return for provision of knowhow in another connection and indicate that transactions result in no profit or loss to either party. Such arrangements may sometime be encountered between independent enterprises and should be assessed accordance with arm's length principle in order to quantify value respective benefits present as set offs. 3.14 Intentional set-offs may vary in size and complexity. Such setoffs may range from simple balance of two transactions. (such as favourable selling price for manufactured goods in return for favourable purchase price for raw material used in producing goods). To arrangement for general settlement balancing all benefits accruing to both parties over period. Independent enterprises would be very unlikely to consider latter type of arrangement unless benefits could be sufficiently accurately quantified and contract is created in advance. Otherwise, independent enterprises normally would prefer to allow their receipts and disbursements to flow independently of each other, taking any profit or loss resulting from normal trading. 3.15 Recognition of intentional set-offs does not change fundamental requirement that for tax purposes transfer prices for controlled transactions must be consistent with arm's length principle. It would be good practice for taxpayers to disclose existence of set-offs intentionally built into two or more transactions between associated enterprises and demonstrate (or acknowledge that they have relevant supporting information and have undertaken sufficient analysis to be able to show) that, after taking account of set-offs, conditions governing transactions are consistent with arm's length principle. 3.16 It may be necessary to evaluate transactions separately to determine whether they each satisfy arm's length principle. If transactions are to be analysed together, care should be taken in selecting comparable transactions and regard had to discussion at paragraphs 3.9 - 3.12. terms of set-offs relating to international transactions between associated enterprises may not be fully consistent with those relating to purely domestic transactions between independent enterprises because of differences in tax treatment of set-off under different national tax systems or differences in treatment of payment under bilateral tax treaty. For example, withholding tax would complicate set-off of royalties against sales receipts. 3.17 taxpayer may seek on examination reduction in transfer pricing adjustment based on unintentional over-reporting of taxable income. Tax administrations in their discretion may or may not grant this request. Tax administrations may also consider suchrequests in context of mutual agreement procedures and corresponding adjustments (see Chapter IV)." majority judgment in case of L. G. Electronics India Pvt. Ltd. (supra) opines that Act, i.e., Chapter X of Act, prohibits and does not permit set off or adjustment. Reference stands made to sub-section (3) of section 92 of Act. We would like to reproduce said section and understand object and purpose behind said provision. "(3) provisions of this section shall not apply in case where computation of income under sub-section (1) or sub-section (2A) or determination of allowance for any expense or interest under sub-section (1) or sub-section (2A), or determination of any cost or expense allocated or apportioned, or, as case may be, contributed under sub-section (2) or sub- section (2A), has effect of reducing income chargeable to tax or increasing loss, as case may be, computed on basis of entries made in books of account in respect of previous year in which international transaction or specified domestic transaction was entered into." Sub-section (3), we do not think incorporates bar or prohibits set offs or adjustments. It states that section 92, which refers to computation of income from international transaction with reference to arm's length price under sub-section (2) or sub-section (2A), would not have effect of reducing income chargeable to tax or increase loss, as case may be, computed by assessee on basis of entries in books of account. Income chargeable to tax or loss as computed in books is with reference to previous year. effect of sub-section is that profit or loss declared, i.e., computed by assessee on basis of entries in books of account shall not be enhanced or reduced because of transfer pricing adjustments under sub-section (2) or sub-section (2A) of section 92. It states obvious and apparent. In case assessee has declared better and more favourable results as per entries in books of account then income chargeable to tax or loss shall not be decreased or increased by reason of transfer pricing computation. Thus, transfer pricing adjustments do not enure to benefit or advantage assessee, thereby reducing income declared or enhancing declared loss. Pertinently, sub-section makes reference to income chargeable to tax or increase in loss on basis of entries in books of account. concept of set off or adjustments was/is well recognised and accepted internationally and by tax experts/commentators. In case legislative intent behind sub-section (3) of section 92 was to deny set off, same would have been spoken about and asserted in different and categorical words. legislative intent to contrary should not be assumed. principle of literal interpretation would be applicable for section must be construed as it reads, without any addition or subtraction. Constitutional Bench of Supreme Court in CIT v. Vatika Township P. Ltd. [2014] 367 ITR 466 (SC), has observed (page 494): "Tax laws are clearly in derogation of personal rights and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of tax. In Billings v. U. S. 232 U. S. 261 at page 265, Supreme Court clearly acknowledged this basic and long- standing rule of statutory construction: 'Tax Statutes... should be construed, and, if any ambiguity be found to exist, it must be resolved in favour of citizen. Eidman v. Martinez 184 US 578 (1902), 583;...' Again, in Unites States v. Merriam, 263 U. S. 179 Supreme Court clearly stated at pages 187-88: 'On behalf of Government it is urged that taxation is practical matter and concerns itself with substance of thing upon which tax is imposed, rather than with legal forms or expressions. But, in statutes levying taxes, literal meaning of words employed is most important, for such statutes are not to be extended by implication beyond clear import of language used. If words are doubtful, doubt must be resolved against Government and in favour of taxpayer. Gould v. Gould 245 U.S. 151 (1917), 153.' As Lord Cairns said many years ago in Partington v. AttorneyGeneral [1869] LR 4 HL 100:'As I understand principle of all fiscal legislation it is this: If person sought to be taxed comes within letter of law he must be taxed, however, great hardship may appear to judicial mind to be. On other hand, if Crown, seeking to recover tax, cannot bring subject within letter of law, subject is free, however apparently within spirit of law case might otherwise appear to be." Legislature, therefore, if it wanted to provide and stipulate that set off would not be available or should be denied, would have appropriately expressed their intention in specific and express words. intention on other hand of Legislature is not what is propounded by Revenue. Consistent, stand of Revenue, it is apparent is divergent from internationally accepted practice relating to transfer pricing determinations. Legislature when it wanted to deviate, has adopted such recourse as with year data and use of inter-quartile range. We do not read any repugnancy on this aspect in section 92(3) of Act. Thus, where Act, i.e., Income- tax Act, 1961, or Rules do not devise or enact contrary provision, we should not discard or ignore, without adequate justification, OECD Transfer Pricing Guidelines or U. N. Transfer Pricing Manual. Otherwise we deny ourselves benefit and advantage of study and dexterous and deliberated elucidations made in extant OECD Transfer Pricing Guidelines or U. N. Transfer Pricing Manual, as if they are redundant and superfluous. Act, i.e., Income-tax Act, 1961, and Rules are supreme but OECD Transfer Pricing Guidelines or U. N. Transfer Pricing Manual can be supplement and constitute valuable and convenient commentary on subject. They are not binding but surely their rational and articulacy requires cogitation, if not acceptance, when warranted. It may be interesting to reproduce portion of sub-paragraph (h) of paragraph 3 of written submissions filed by Revenue before us which reads: "In fact, in large number of cases parent companies have reimbursed such expenses to Indian entities either by not charging royalty, by subvention or by direct subsidy or by reimbursement of expenses. In light of such glaring facts, suggestion that existence of international transaction is being inferred by Revenue by applying some mathematical tool is not correct." It should not be understood that we are holding or pronouncing our verdict on basis of said written submissions but we have quoted aforesaid portion to show that Revenue is conscience and aware of commercial business realities and need to account for set offs. It is commonly recognised and accepted. object and purpose behind arm's length principle is to tax actual and commercial income which could have been earned by associated enterprise in India. question of set off would only arise in case two transactions are separate and arm's length price should be computed separately. It would not arise for consideration in cases where there are closely linked or continuous international transactions. Yet, there may be third category of cases, where assessee perceives and files his report in Form 92E treating international transaction as one or as continuous or interconnected package but Revenue perceives and believes that transaction is not one but should be segregated for purpose of computation of arm's length price. For present reasoning, we will assume and accept that position of Revenue is correct and "aggregation" made by assessee is wrong. In such cases, it would be grossly unfair and inequitable not to apportion or segregate transactions as declared in reasonable and logical manner. It would be conspicuously wrong and incorrect to treat segregated transactional value as "nil" when in fact two associated enterprises had treated international transactions as package or single one and contribution is attributed to aggregate package. It is noticeable that sub-section (3) of section 92 does not make reference to computation of Form 92E but makes reference to books of account and computation on basis of entries in books of account. It stipulates that computation made under sub-section (2) or sub-section (2A) shall not have effect of reducing income or increasing losses as declared on basis of said entries. Income or loss is net figure which is computed after taking into account business activities undertaken by assessee associated enterprise which will have reference to declared bundled/packaged international transaction. In impugned decision, majority decision has observed that there is no basis for presumption that international arm's length price of one transaction was lower and this position has to be proved de hors overall net profit rate. It should be proved by assessee by comparison with what was charged for similar goods supplied by other independent enterprises dealing with India. We with respect have reservation and do not agree with commanding universal affirmative approach. This may be relevant in given case if arm's length price is computed transaction by transaction and not as bundle. Albeit, net profit rate in TNM method may be indicative, or in given case, sufficient proof of adequate compensation. onus would be on assessee but relevant facts must be ascertained. use of expression "special circumstances", etc., in majority decision is unacceptable. In fact, there cannot be any assumption against assessee when arm's length price by applying TNM method is accepted to discern and infer that purchase price did not account and did not subsume AMP expenses incurred by Indian associated enterprise. Whether higher net profit rate would indicate lower or reduced purchase price, we observe is question of fact and not law. Subsidy paid could account for bundled transaction, including entire set of transactions included. final finding should be reasoned and analytical. It should be sound as per mathematical and accountancy principles. In case of package or bunched transaction, this would require forthright and rigorous examination. If bifurcation is legitimate and mandated, apportionment should proceed on accurate and punctilious manner which is fair and reasonable. When Assessing Officer/the Transfer Pricing Officer bifurcates or segregates packaged transaction as declared by assessee, he must conduct exercise, rationally and objectively. CIT v. EKL Appliances Ltd.-Disregarding actual transaction tax authorities examine related and associated parties' transaction as actually undertaken and structured by parties. Normally, tax authorities cannot disregard actual transaction or substitute same for another transaction as per their perception. Restructuring of legitimate business transaction would be arbitrary exercise. This legal position stands affirmed in EKL Appliances Ltd. (supra). decision accepts two exceptions to said rule. first being where economic substance of transaction differs from its form. In such cases, tax authorities may disregard parties' characterisation of transaction and re-characterise same in accordance with its substance. Tribunal has not invoked said exception but second exception, i.e., when form and substance of transaction are same but arrangements made in relation to transaction, when viewed in their totality, differ from those which would have been adopted by independent enterprise behaving in commercially rational manner. second exception also mandates that actual structure should practically impede tax authorities from determining appropriate transfer price. majority judgment does not record second condition and holds that in their considered opinion, second exception governs instant situation as per which, form and substance of transaction were same but arrangements made in relation to transaction, when viewed in their totality, differ from those which would have been adopted by independent enterprise behaving in commercially rational manner. aforesaid observations were recorded in light of fact in case of L. G. Electronics (supra). Commenting on factual matrix of L. G. Electronics case (supra) would be beyond our domain; however, we do not find any factual finding to this effect by Transfer Pricing Officer or Tribunal in any of present cases. However, in L.G. Electronics decision (supra), it is observed that if AMP expenses and when such expenses are beyond bright line, transaction viewed in their totality would differ from one which would have been adopted by independent enterprise behaving in commercially rational manner. No reason or ground for holding or ratio is indicated or stated. There is no material or justification to hold that no independent party would incur AMP expenses beyond bright line AMP expenses. Free market conditions would indicate and suggest that independent third party would be willing to incur heavy and substantial AMP expenses, if he presumes this is beneficial, and he is adequately compensated. compensation or rate of return would depend upon whether it is case of long-term or short-term association and market conditions, turnover and ironically international or worldwide brand value of intangibles by third party. There is no material or data on record to show that independent enterprise acting in commercially rational manner would not enter into agreement for distribution and marketing as has been entered into by Indian assessee, subsidiary of foreign associated enterprise. It would be incongruous and presumptuous to hold, without any data or good reason, that transactions for distribution and marketing as package are not executed between foreign enterprise and independent enterprise. "bright line test" we hasten to reiterate is not and cannot be criteria, reason or data. Commercial men would seek appropriate margins to incur AMP expenses and yet earn net profit as per market conditions. concept of re-categorisation of transaction is not identical or similar to aggregation or segregation of transactions. Re-categorisation of transaction is different exercise and would result in re-categorisation of functions and, therefore, accordingly comparables. simple example of re-categorisation would be cases of "thin capitalisation". Aggregation or segregation of transactions accepts that transactions per se do not require re- categorisation of transactions. However, in given case when there is re- categorisation of transaction, as consequence, segregation or aggregation may be required. However, two aspects/principles prevail and operate in their own field. L. Economic ownership value of tangible property may be affected by value of intangible property, such as trade mark affixed on tangible property. Transfer of tangible property with embedded intangible property normally is not considered transfer of such intangible particularly when controlled purchasers do not acquire any right to exploit intangible property other than right to re-sell tangible property with embedded or affixed intangible rights. However, while computing arm's length price, cost or value of embedded intangible would be relevant when comparability test is adopted and applied between controlled transaction with uncontrolled transactions. Economic ownership of trade name or trade mark is accepted in international taxation as one of components or aspects for determining transfer pricing. Economic ownership would only arise in cases of longterm contracts and where there is no negative stipulation denying economic ownership. Economic ownership when pleaded can be accepted if it is proved by assessee. burden is on assessee. It cannot be assumed. It would affect and have consequences, when there is transfer or termination of economic ownership of brand or trade mark. Determination whether arrangement is long-term with economic ownership or short-term should be ordinarily based upon conditions existing at start of arrangement and not whether contract is subsequently renewed. However, it is open to party, i.e., assessee, to place evidence including affirmation from brand owner associated enterprise that at start of arrangement it was accepted and agreed that contract would be renewed. Economic ownership of brand is intangible asset, just as legal ownership. Undifferentiated, economic ownership brand valuation is not done from moment to moment but would be mandated and required if assessee is deprived, denied or transfers economic ownership. This can happen upon termination of distribution-cum-marketing agreement or when economic ownership gets transferred to third party. Transfer pricing valuation, therefore, would be mandated at that time. international transaction could then be made subject matter of transfer pricing and subjected to tax. Brand or trade mark value is paid for, in case of sale of brand or otherwise by way of merger or acquisition with third parties. Revenue in paragraph 8.9 of written submissions have referred to acquisition of brand name "Reebok" by "Adidas" and asserted that entire benefit was reaped by parent entity and not by Reebok India Co. Ltd. Reorganisation, sale and transfer of brand as result of merger and acquisition or sale is not directly subject matter of these appeals. As noted above, in given case where Indian associated enterprise claims economic ownership of brand and is deprived or transfers said economic ownership, consequences would flow and it may require transfer pricing assessment. In written submissions filed by Sony India P. Ltd., they have accepted said position and stated as under: "7.8 Two inferences are, therefore, inevitable till brand gets terminated, transferred or sold, its value is measured only in terms of market share or sales turnover. At time of sale, in certain circumstances it becomes independent standalone transfer of intangible right commanding separate value or consideration. As result of which: 7.8.1 commercial benefit of advertisement or marketing accrues to appellant/the tested party in India for having promoted sale of products in India. Income-tax Act recognises this and, therefore, allows it as revenue expense wholly and exclusively expended for purposes of business, said issue has also been upheld by this court in case of CIT v. Agra Beverages Corporation P. Ltd. [2011] 11 Taxmann.com 350 (Refer page 284 of paperbook)." M. Decision in case of Maruti Suzuki and order of Supreme Court With respect, majority judgment of Tribunal has not appreciated effect of order passed by Supreme Court on appeal in case of Maruti Suzuki. order passed by Supreme Court short one, reads ([2011] 335 ITR 121): "Leave granted. By consent, matter is taken up for hearing. In this case, High Court has remitted matter to Transfer Pricing Officer ('the TPO', for short) with liberty to issue fresh showcause notice. High Court has further directed Transfer Pricing Officer to decide matter in accordance with law. Further, on going through impugned judgment of High Court dated July 1, 2010, we find that High Court has not merely set aside original show-cause notice but it has made certain observations on merits of case and has given directions to Transfer Pricing Officer, which virtually concludes matter. In circumstances, on that limited issue, we hereby direct Transfer Pricing Officer, who, in meantime, has already issued show-cause notice on September 16, 2010, to proceed with matter in accordance with law uninfluenced by observations/directions given by High Court in impugned judgment dated July 1, 2010. Transfer Pricing Officer will decide this matter on or before December 31, 2010. civil appeal is, accordingly, disposed of with no order as to costs." Division Bench of Delhi High Court in writ petition challenging transfer pricing order had dealt with transfer pricing issues and had enrolled and culled out legal ratios and principles. Directions were issued. At same time, order of remand to Transfer Pricing Officer to compute arm's length price on basis of said principles was passed. It would not be correct to hold that Supreme Court had accepted and had given seal of approval and not interfered with principles/ratio enunciated in judgment of Delhi High Court. Supreme Court as is lucid did not want to examine principles or ratio as enunciated and express their opinion on merits, though directions issued by High Court, it was observed, "conclude matter". Supreme Court perceived and accepted that "issue" of arm's length price should be re-examined by Transfer Pricing Officer without being curtailed or restrained by legal principles/ratio delineated. As Supreme Court itself was not examining principles/ratio on merits, it did not pass any order in favour or against assessee or Revenue. Accordingly, aforesaid observations. effect thereof was that judgment of Delhi High Court would not operate as res judicata between parties and merits, if required, would be examined and gone into in appellate proceedings. majority judgment has incorrectly inferred that legal principles and directions issued by Delhi High Court would continue to be binding decidendi and had attained finality, viz., tax authorities and Tribunal. It is not so indicated. If legal principles/ratio was not binding on writ petitioner, i.e., assessee in said case, it would be malapropos and inappropriate to treat directions as binding ratio, in respect of third parties. Therefore, we have not treated decision of Delhi High Court in case of Maruti Suzuki Ltd. (supra) as binding precedent. Importantly, Revenue has relied upon final conclusions as recorded and assessee have relied upon earlier portions of judgment. We have considered reasoning given in aforesaid decision and have reached our own conclusion. N. Resale price method We begin by reproducing rule 10B(1)(b) of Rules: "10B. Determination of arm's length price under section 92C.-(1) For purposes of sub-section (2) of section 92C, arm's length price in relation to international transaction or specified domestic transaction shall be determined by any of following methods, being most appropriate method, in following manner, namely:-... (b) Resale price method, by which,- (i) price at which property purchased or services obtained by enterprise from associated enterprise is resold or are provided to unrelated enterprise, is identified; (ii) such resale price is reduced by amount of normal gross profit margin accruing to enterprise or to unrelated enterprise from purchase and resale of same or similar property or from obtaining and providing same or similar services, in comparable uncontrolled transaction, or number of such transactions; (iii) price so arrived at is further reduced by expenses incurred by enterprise in connection with purchase of property or obtaining of services; (iv) price so arrived at is adjusted to take into account functional and other differences, including differences in accounting practices, if any, between international transaction or specified domestic transaction and comparable uncontrolled transactions, or between enterprises entering into such transactions, which could materially affect amount of gross profit margin in open market; (v) adjusted price arrived at under sub-clause (iv) is taken to be arm's length price in respect of purchase of property or obtaining of services by enterprise from associated enterprise;..." RP method as axiom, United Nations' Manual exposits: "6.2.6.3. Consequently, under RPM starting point of analysis for using method is sales company. Under this method transfer price for sale of products between sales company (i.e., associated enterprise 2) and related company (i.e. Associated Enterprise 1) can be described in following formula: TP = RSP A-(1-GPM), where: - TP = transfer price of product sold between sales company and related company; - RSP = resale price at which product is sold by sales company to unrelated customers; and - GPM = gross profit margin that specific sales company should earn, defined as ratio of gross profit to net sales. Gross profit is defined as net sales minus cost of goods sold." RP method, i.e., resale price method computes arm's length price by ascertaining or identifying price at which product is resold by associated enterprise to independent enterprise. From this price, amount of gross profit margin accruing to associated enterprise or to unrelated enterprise, i.e., comparable, is subtracted. comparable should be engaged in purchase and resale of same or similar property and/or obtaining or providing similar services. From this amount, expenses incurred by associated enterprise in connection with purchase of property or obtaining of services are further subtracted. At fourth stage, adjustments are made taking into account functional and other differences, including accountancy practices, if any, between tested international transaction and comparable uncontrolled transactions to extent they would materially affect gross profit margins in open market. price computed after two reductions and after adjustment on account of functional and other differences, determines arm's length price of purchased property or services obtained by assessee from associated enterprise. RP method postulates reverse calculation, as it first requires identification and ascertainment of resale price, then reductions and adjustment. It hypothesises ascertainment of normal gross profit margins of comparables including, if required, adjustment on account of functional and other differences with comparables. Uncontrolled transaction is comparable with controlled transaction for purpose of RP method, only if two conditions are satisfied: that there is no difference between functions, which would materially affect normal gross profit margins in open market; and reasonably accurate adjustments can be made to eliminate material effect of such differences. RP method may require fewer adjustments on account of product differences in comparison to CUP method, i.e., comparable uncontrolled price method because minor product differences are less likely to have material effect on profit margins as they do on price. Compensation for performing similar functions tends to equalise across different activities, whereas in case of products, equalisation is normally possible to extent that products are substitute for each other. Nevertheless, similarity of property as transferred in controlled transaction for closer comparability of products/services would produce more accurate results. Sometimes, RP method is adopted as more accurate or best method where controlled and uncontrolled transactions are comparable in all characteristic, other than product itself. In some cases, it may be preferable and more reliable method in comparison to CUP method or CP method. However, RP method has its weaknesses. It loses its accuracy and reliability where reseller adds substantially to value of product or goods are further processed or incorporated into more sophisticated product or when product/service is transformed. In OECD Commentary on Transfer Pricing Guidelines it has been observed: "... Another example where resale price margin requires particular care is where reseller contributes substantially to creation or maintenance of intangible property associated with product (e.g., trade marks or trade names) which are owned by associated enterprise. In such cases, contribution of goods originally transferred to value of final product cannot be easily evaluated. 2.30 resale price margin is more accurate where it is realised within short time of reseller's purchase of goods. more time that elapses between original purchase and resale, more likely it is that other factors- changes in market; in rates of exchange; in costs, etc.,-will need to be taken into account in any comparison. 2.31 It should be expected that amount of resale price margin be influenced by level of activities performed by reseller. This level of activities can range widely from case where reseller performs only minimal services as forwarding agent to case where reseller takes on full risk of ownership together with full responsibility for and risks involved in advertising, marketing, distributing and guaranteeing goods, financing stocks, and other connected services. If reseller in controlled transaction does not carry on substantial commercial activity, but only transfers goods to third party, resale price margin could, in light of functions performed, be small one. resale price margin could be higher where it can be demonstrated that reseller has some special expertise in marketing of such goods, in effect bears special risks, or contributes substantially to creation or maintenance of intangible property associated with product. However, level of activity performed by reseller, whether minimal or substantial, would need to be well supported by relevant evidence. This would include justification for marketing expenditures that might be considered unreasonably high; for example, when part or most of promotional expenditure was clearly incurred as service performed in favour of legal owner of trade mark. In such case cost plus method may well supplement RP method." United Nations' Manual on RP method highlights that this method is based upon arm's length gross profits, rather than directly determining arm's length prices. As compared to CUP method, RP method requires less direct transactional (product) comparability than CUP method. However, there must be functional comparability. similar level of compensation is expected for performing similar functions across different activities. This uniformity and similitude is necessary because similar gross profits are being compared. If there are material differences that reflect in gross profit margins between controlled and uncontrolled transaction, adjustments should be possible on account of such differences. Functions performed can be simple and cover limited field of sales, general or administrative expenses; to more complex one, adding substantially to gross profit margins. latter may happen if reseller adds substantially to value of product by assisting considerably in creation and maintenance of intangible products or where goods are further processed into more valuable or complicated product. Referring to weaknesses of said method, commentary states: "The method can be used without forcing distributors to inappropriately'make profits'. distributor earns arm's length gross profit margin, however, but could have operating losses due, for example, to high selling expenses caused by business strategies such as market penetration strategy. By comparison, application of transactional net margin method, which analyses financial ratio based on operating profits, will generally result in arm's length range of positive operating profits. tested party in analysis would then probably also earn positive operating profit within range. However, resale price method does not necessarily result in positive operating profits to be earned by tested party.... 6.2.11. When to use resale price method 6.2.11.1. In typical inter-company transaction involving a'fullyfledged' manufacturer (i.e., as compared, for example, with limited risk company or contract manufacturer) owning valuable patents or other intangible properties and affiliated sales companies which purchase and resell products to unrelated customers, resale price method is appropriate method to use if: - CUP method is not applicable; - sales companies do not own valuable intangible properties; and - Reliable comparisons can be made on COGS (cost of goods sold)." In case of Reebok India Co. Ltd., assessee has applied RS method using internal comparable. Contrary to general rule, internal comparable possibly may not be appropriate when assessee has incurred considerable (not necessarily extraordinary or non-routine) AMP expenses. reason is obvious; there is no comparability analysis possible. In such cases, it is not possible to examine and compare functional comparability between controlled tested transaction and uncontrolled internal party transaction on account of AMP expenses. Internal comparable would not account for credible gross profit rate, which associated enterprise should be ensured when it incurs AMP expenses. Functionally comparable is merely manufacturer and, thus, said function is compared. AMP expenses do not get factored and compared. As abundant caution, we would still add that where adjustments clause (iv) can give reliable and accurate results, internal comparables could still be applied. This would likely happen, when AMP expenses are insignificant in quantum. Thus, in such cases, external comparables where said parties are performing similar functions including AMP expenses would give more accurate and precise results. However, it would be wrong to assert and accept that gross profit margins would not inevitably include cost of AMP expenses. gross profit margins could remunerate associated enterprise performing marketing and selling function. This has to be tested and examined without any assumption against assessee. finding on said aspect would require detailed verification and ascertainment. external comparable should perform similar AMP functions. Similarly comparable should not be legal owner of brand name, trade mark, etc. In case comparable does not perform AMP functions in marketing operations, function which is performed by tested party, comparable may have to be discarded. Comparable analysis of tested party and comparable would include reference to AMP expenses. In case of mismatch, adjustment could be made when result would be reliable and accurate. Otherwise, RP method should not be adopted. If on comparable analysis, including AMP expenses, gross profit margins match or are within specified range, no transfer pricing adjustment is required. In such cases, gross profit margin would include margin or compensation for AMP expenses incurred. Routine or non-routine AMP expenses would not materially and substantially affect gross profit margins when tested party and comparable undertake similar AMP functions. On behalf of assessee, it was initially argued that Transfer Pricing Officer cannot account for or treat AMP as function. This argument on behalf of assessee is flawed and fallacious for several reasons. There are inherent flaws in said argument. Moreover, contention of assessee in these appeals would mandate rejection of RP method, as appropriate or most appropriate method. Comparison or comparative analysis is undertaken at stage (ii). Adjustments are permissible and undertaken at stage (iv). Under clause (iii), i.e., at stage (iii), from price ascertained at stage (ii), expenses incurred by enterprise in connection with purchase of property or obtaining of services is reduced. Under clause (iv), adjustments have to be made on account of functional difference which would include assets used and risk assumed. It is at stage (iv) of RP method that Assessing Officer/Transfer Pricing Officer can make adjustments if he finds that assessee has incurred substantial AMP expenses in comparison to comparables. Once adjustments are made, then appropriate arm's length price can be determined. In case, it is not possible to make adjustments, then RP method may not be most appropriate and best method to be adopted. Before us, Revenue has not pleaded or submitted that RP method should not have been adopted. Transfer Pricing Officer and Assessing Officer did not reject RP method adopted by assessee. assessee submit that Revenue accepts functional parity and in fact, without adjustment. Contra, Revenue would argue that Assessing Officer/Transfer Pricing Officer and Tribunal have adopted and applied CUP method for determining arm's length price of AMP expenses. We do not pronounce firm and final opinion on said lis as it should be at first examined by Tribunal. Tribunal has upheld adoption of CP method after applying "bright line test" in case of Reebok India Co. Ltd. and Canon India Pvt. Ltd. "bright line test" adopted to demarcate routine and non-routine AMP expenditure is predicated on selection of domestic distributor and marketing company that does not own intangible brand rights. Contract value would be treated as nil. In terms of our finding recorded above, said finding would not be correct. approach and procedure for ascertaining/determining arm's length price under RP method is different. For this reason, and other grounds recorded, we have passed order of remit to Tribunal for examination of factual matrix. O. Cost plus method CP Method as stipulated in rule 10B(1)(c) is as under: "10B. (1) For purposes of sub-section (2) of section 92C, arm's length price in relation to international transaction shall be determined by any of following methods, being most appropriate method, in following manner, namely:-... (c) cost plus method, by which,- (i) direct and indirect costs of production incurred by enterprise in respect of property transferred or services provided to associated enterprise, are determined; (ii) amount of normal gross profit mark-up to such costs (computed according to same accounting norms) arising from transfer or provision of same or similar property or services by enterprise, or by unrelated enterprise, in comparable uncontrolled transaction, or number of such transactions, is determined; (iii) normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account functional and other differences, if any, between international transaction and comparable uncontrolled transactions, or between enterprises entering into such transactions, which could materially affect such profit mark-up in open market; (iv) costs referred to in sub-clause (i) are increased by adjusted profit mark-up arrived at under sub-clause (iii); (v) sum so arrived at is taken to be arm's length price in relation to supply of property or provision of services by enterprise;" United Nations' Manual in arithmetic terms has elucidated CP method in following manner: "The formula for transfer price in inter-company transactions of products is as follows: TP = COGS x (1 + cost plus markup), where : - TP = transfer price of product sold between manufacturing company and related company; - COGS = cost of goods sold to manufacturing company; and - Cost plus mark-up = gross profit mark-up defined as ratio of gross profit to cost of goods sold. Gross profit is defined as sales minus cost of goods sold." said method is strictly applied to manufacturing or assembling activities or relatively simple service providers. Like RP method, CP method is gross margin method as it attempts to derive arm's length price on mark-up of cost of goods or services provided. Determination of cost or expense can cause difficulties in applying CP method. Careful consideration should be given, what would constitute cost, i.e., what should be included or excluded from cost. studied scrutiny of CP method would indicate that when said method is applied by treating AMP expenses as independent transaction, it would not make any difference whether same are routine or non-routine, once functional comparability with or without adjustment is accepted. gross profit of comparable is applied and accepted, when there is no difference between AMP and other functions being compared that would materially affect gross profit mark-up or when reasonably accurate adjustments can be performed. Thus, CP method requires functional comparability. This comparability analysis would necessarily imply that comparable must and should be performing similar functions, including nature of costs and expenses incurred. If discounts/incentives and for that matter entire distribution and marketing expenses are treated as costs, functional and comparable analysis comparison should be similar. Thus, entire cost, i.e., marketing expense or distribution and marketing expense, can be made subject matter and included in "cost", for determining arm's length price by applying CP method. United Nations' Manual discourages application of CP method in transactions involving full-fledged manufacturer who owns valuable product intangibles, i.e., manufacturer who has incurred considerable cost on research and development, patent, technology, etc., for reason that it is difficult to locate similar independent manufacturer owning comparable. There is no finding or examination on this aspect by Tribunal. We caution, reference above is to valuable product intangibles and not marketing intangibles. assessee rely upon associated enterprises valuable product intangibles. issue can be answered after ascertaining facts and whether similar comparables are available. We have not pronounced firm opinion. Obviously, aforesaid caveat would not arise if and when, AMP as transaction is separately benchmarked and tested. This task of arm's length pricing in case of tested party may become difficult when number of transactions are interconnected and compensated but transaction is bifurcated and segregated. Allocation of price or compensation paid would be contentious question and apportionment must be justified and fair. CP method, when applied to segregated transaction must pass criteria of most appropriate method. If and when such determination of gross profit with reference to AMP transaction is required, it must be undertaken in fair, objective and reasonable manner. Costs or expenses incurred for services provided or in respect of property transferred, when made subject matter of arm's length price by applying CP method cannot be again factored or included as part of interconnected international transaction and subjected to arm's length pricing. This situation would possibly result in over, if not double taxation, contrary to object and purpose of arm's length pricing, which is to tax real income after correcting negative impact, if any, of controlled conditions. Therefore, if entire marketing and distribution expenses or marketing or AMP expenses are bench marked under CP method, then it would be injudicious and irrational to apply any other method to compute arm's length price of larger composite international transaction, of which said costs and expenses form only part. Logically, if costs or expenses as function are excluded or included in cost while computing arm's length price under CP method, gross profit as result of such transaction would be lower or higher. This situation would be different from subjecting same international transaction to arm's length pricing by two different methods, which is permissible, in manner stipulated in first proviso to section 92C of Act. P. Direct marketing expenses argument of Revenue on direct marketing expenses is as under: "1. Special Bench of Income-tax Appellate Tribunal has decided in case of L. G. Electronics India Pvt. Ltd. that selling expenses such as discounts and incentives/pricing adjustments should not be considered as part of AMP expenses. argument against their inclusion in AMP expenses is that these expenses are nothing but reduction in price of product and do not create any marketing intangible. 2. objective of AMP activities is not to merely advertise brand to ultimate customers. It is also to make brand popular to dealers who will eventually push "XX" brand over other brands in market. Only when reasonable amount of brand loyalty is built up among dealers, entire circle of AMP activities will be complete. discounts and incentives that assessee is passing on to dealers is tool that it employs to create this brand loyalty among them. Once they are convinced that this company is passing on greater benefit to them only then will they push products of this company towards ultimate customer, over other brands. 3. dealer incentives and other selling expenses form part of market penetration strategy of assessee. Incentives given to dealers help assessee in enhancing market share of assessee and create loyalty for brand of associated enterprise among dealers. Since, these dealer incentives lead to creation of marketing intangible, same need to be also considered as part of AMP expenses. 4. In this connection, it may be mentioned that normal discounts are factored into sales that are taken for calculation of AMP expenses. 5. As regards other selling expenses, over and above normal discounts, if they are being incurred at behest of associated enterprise, as part of market penetration strategy, they will qualify as AMP expenses. These expenses form part of brand building strategy that is being executed by Indian subsidiary on behalf of associated enterprise." aforesaid argument, when AMP expenses are segregated from composite transaction including distribution and marketing function is flawed and has to be rejected. respondent-assessees are engaged in distribution and marketing of consumer goods. Distribution and marketing exercise in case of tangibles requires transfer/sale of goods to third parties, be it sub-distributors or retailers. said transaction is in nature of sale of goods for consideration. marketing or selling expenses like trade discounts, volume discounts, etc., offered to sub-distributors or retailers are not in nature and character of "brand promotion". They are not directly or immediately related to "brand building" exercise but have live link and direct connect with marketing and increased volume of sales or turnover. brand building connect is too remote and faint. To include and treat direct marketing expenses like trade or volume discount or incentive as "brand building" exercise would be contrary to common sense and would be highly exaggerated. These reduce net profit margin. It would lead to abnormal financial results defying accountancy practices and commercial and business sense. expenses being in nature of selling expenses have immediate connection with price/consideration payable for goods sold. They are not incurred for publicity or advertisement. Direct marketing and sale related expenses or discounts/concessions would not form part of AMP expenses. In present case, neither assessee nor Assessing Officer/ Transfer Pricing Officer has adopted CUP method for determination of arm's length price. TNM method or RP method has been adopted and accepted as most appropriate method. TNM method, as noticed above, obligates analysis of profit and loss account and test is benchmarking of operating profits with relevant PLI and comparison with reference to comparable. Discount and incentives offered, reduce operating profits and, therefore, benchmarking exercise with comparables, reflects and accounts for same. We have examined impact and consequences of applying CP method, by factoring and treating AMP expenses and trade discounts and incentives as independent international transaction, when we continue to treat said expenses as component of packaged international transaction, which is separately benchmarked. This would not lead us to accurate and reliable results. There is need and requirement to check over or double taxation. prime lending rate cannot be basis for computing mark-up under rule 10B(1)(c) of Rules, as case set up by Revenue pertains to mark- up on AMP expenses as international transaction. Mark-up as per sub- clause (ii) of rule 10B(1)(c) would be comparable gross profit on cost or expenses incurred as AMP. mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. Revenue's stand in some cases applying prime lending rate fixed by Reserve Bank of India with further mark-up, is mistaken and unfounded. Interest rate mark-up would apply to international transactions granting/availing of loans, advances, etc. Q. Arm's length price of royalty paid by Reebok India Co. Ltd. (I. T. A. No. 213 of 2014 We now proceed to examine and answer, question raised by Revenue in appeal filed against Reebok India Co. Ltd. Royalty of Rs. 15,28,77,527 paid to Reebok International Ltd., U. K., was benchmarked by assessee using CUP method as most appropriate method. Royalty paid by Sierra Industrial Enterprises Pvt. Ltd. to Nike International Ltd., USA, at 5 per cent. was taken as valid comparable. In addition, assessee relied upon Foreign Exchange Management (Current Account Transactions) Rules, 2000, authorising remission of royalty of up to 5 per cent. on domestic sales and up to 8 per cent. on exports under automatic route to foreign technical collaborators. Transfer Pricing Officer rejecting claim, observed that assessee had not established cost-benefit analysis for payment of royalty. No such exercise had been carried out. Transfer Pricing Officer referred to technology licence agreement dated October 1, 2002, between assessee and Reebok International Ltd., U. K. for providing data, documentation, drawings and specifications relating to inventions, designs, formulae, processes and similar properties, referred to as know-how and nonexclusive, non-transferable right granted to utilise technology to manufacture and distribute Reebok products in India. He referred to profitability data of assessee and observed that technology and payment of royalty was not reflected in profit margins or commensurate benefit. He, therefore, came to conclusion that no independent enterprise would make payments for royalty which were not contributing to its profitability. profitability data relied upon by Assessing Officer reads as under: Financial years 2005-06 2006-07 2007-08 Sales (WSP) 252.5 366.2 451.23 Royalty 6.82 9.62 15.29 Net profit 17.76 32.81 33.34 Net profit/sales 7.03% 8.96% 7.4% Transfer Pricing Officer, accordingly, determined arm's length price of royalty as "nil" in place on Rs. 15,28,77,527 under CUP method. Dispute Resolution Panel affirmed action of Transfer Pricing Officer and, consequently, assessment order holding that arm's length price of royalty was "nil", in place of controlled transaction value of Rs. 15,28,77,527, was passed. Tribunal in impugned order while allowing appeal, has referred to technology and know-how furnished in form of "PUMP" technology, "DMX" technology and "3D Ultralite" technology. New products were designed and developed after research and development at research and development and product creation centre in Canton, USA. These patented and development and product creation centre in Canton, USA. These patented technologies were used in local development and manufacturing process for footwear and apparels. entire business of assessee in India was dependent upon patented technology provided by associated enterprise which could not have been used without licence/permission. total revenue of assessee had increased to Rs. 451.97 crores from Rs. 360.95 crores in previous year, registering growth of 25.21 per cent. technology was required to survive and grow in competitive industry where continuous innovation was pre-requisite. Tribunal observed that payment of royalty was treated as bona fide expenditure in earlier years and it was undisputed position that know-how or technical information had been provided under licence agreement. On question whether royalty should have been paid or not, we are in agreement with finding of Tribunal that question of payment of royalty cannot be determined on basis of profitability or earnings of assessee, once it is accepted that know-how and technical information was provided. It is not alleged or case of Revenue that technology or know-how was hopeless and useless. finding of Assessing Officer/Transfer Pricing Officer that assessee had not derived any commercial benefit as technology and know-how had not resulted in any substantial profit increase has been rightly rejected as totally unsustainable. Profitability of assessee could have been lower or varied due to various reasons and lower profitability in one or more years cannot lead to conclusion that no benefits were derived or technology was unproductive. justification given by assessee for lower profits on account of bad debts, high rent, increase in legal cost stand highlighted and accepted by Tribunal. transfer pricing provisions, as noted above, recognise separate entity principle. Therefore, as sequitur, it follows that associated enterprise is separate entity and when it avails of and secures advantage of technical know- how, it should pay arm's length price for right to use. arm's length price would be fair market price of technical knowhow, which is licensed. Royalty payable for availing of right to use would depend upon corresponding price, which would have been paid by independent or unrelated enterprise. This is judged by applying comparables. Transfer Pricing Officer has not rejected quantum of royalty on said principle. reasoning given by Transfer Pricing Officer is not only erroneous for reasons stated above but is also contrary to Rules. Depending upon method selected, net profit or gross profit of assessee has to be compared with profit margins of related enterprise. formula prescribed under Rules does not accept ratiocination adopted and applied by Transfer Pricing Officer. similar controversy had arisen before Delhi High Court in EKL Appliances Ltd. (supra). assessee in said case was incurring losses and on this pretext, Transfer Pricing Officer had disallowed entire brand fee or royalty. Tribunal disagreed with Revenue. appeal filed by Revenue was dismissed stating that considerations relied on by Transfer Pricing Officer were irrelevant considerations for purpose of rule 10B. Division Bench of this court rejected argument that financial health of assessee alone would determine whether or not transfer price paid was appropriate and fair market value. This would be extraneous consideration for disallowing whole expenditure, when technology was required and provided. opinion of assessee matters. transfer pricing regulations permit examination of international transaction and suitable adjustments. It would be different matter if it is established that independent entity, in given prevailing circumstances would not have entered into said transaction with associated enterprise. This is not case set up by Revenue. assessee in present case has made profits. Tribunal in impugned order, therefore, had rightly applied test of commercial expediency and has recorded that assessee was free to conduct business in manner it deems fit. We hasten to add that two exceptions have been carved out in case of EKL Appliances Ltd. (supra) but exceptions have not been invoked nor are conditions satisfied. Importantly, assessee had benchmarked royalty with instances of royalty paid by third party licensee/distributors and had relied upon three agreements, which were quoted as comparables. As per comparables, royalty paid was between 10-12 per cent. and they are: "(ii) Agreement between Double D'Import S. A. R. I. (France) with Adidas International for payment of royalty at 12 per cent. (iii) Agreement of Sportsvision with Adidas international for payment of royalty at 10 per cent. (iv) Agreement of Molten Corporation Japan with Adidas International Marketing BV for payment of royalty at 12 per cent." Tribunal has noted with disapproval observation of Transfer Pricing Officer that comparable instances were not given, observing that this was factually incorrect. However, we do not agree with finding recorded by Tribunal that as Government of India had permitted remission of royalty through automatic route, royalty paid can be per se or conclusively treated as arm's length price. Applicable rules authorise remission of royalty up to particular percentage under automatic route to foreign collaborators. Authorising remission through automatic route up to particular percentage does not reflect examination of arm's length principle. It would be incorrect to read into general authorisation under Foreign Exchange Management Act and Rules, implied adjudication order on question of quantum or arm's length price. When specific permission is granted, issue may acquire different dimension. We do not express any opinion, when specific permission is relied upon. fact that royalty has been paid would be relevant consideration and factum, when we consider arm's length price of international transaction of distribution and marketing. Tax treatment of royalty payments being different, royalty transaction, therefore, may be benchmarked separately. However, payment of royalty even if justified and appropriate on applying arm's length principle can be relevant factor when question of compensation of domestic associated enterprise for undertaking distribution and marketing functions arises for consideration. R. Question of remand During course of oral arguments, assessee had filed tabulated computations to establish and show inaccuracies, unsavoury and severe, if not bitter, consequences of adjustments made by Transfer Pricing Officer. For example, in case of Canon India P. Ltd., reasoning of Transfer Pricing Officer was challenged on ground of absurdity and perversion alleging that Indian turnover was miniscule percentage of global turnover and, thus, profit shifting by attributing higher or greater profits to Canon Inc. Japan, etc., was fallacious. Revenue has contested some of submissions by filing their own charts/ tables. We would not like to go into several factual aspects for first time, for factual matrix has not been examined and ascertained by Tribunal. Moreover, in terms with our legal finding, factual findings will have to be examined. order of remand for de novo consideration to Tribunal would be appropriate because legal standards or ratio accepted and applied by Tribunal was erroneous. On basis of legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, assessee and Revenue should be asked to furnish details or tables. Tribunal, at first instance, would try and dispose of appeals, rather than passing order of remand to Assessing Officer/Transfer Pricing Officer. endeavour should be to ascertain and satisfy whether gross/net profit margin would duly account for AMP expenses. When figures and calculations as per TNM or RP method adopted and applied show that net/gross margins are adequate and acceptable, appeal of assessee should be accepted. Where there is doubt or other view is plausible, order of remand for re-examination by Assessing Officer/Transfer Pricing Officer would be justified. practical approach is required and Tribunal has sufficient discretion and flexibility to reach fair and just conclusion on arm's length price. Answers to substantial questions of law In view of aforesaid discussion, substantial questions of law in appeals filed by assessee are answered as under: "Question 1. Whether additions suggested by Transfer Pricing Officer on account of advertising/marketing and promotion expenses ('AMP expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by Assessing Officer, having regard to retrospective amendment to section 92CA of Income-tax Act, 1961, by Finance Act, 2012?" In terms of and subject to discussion under heading C, paragraph 41 to 50, substantial question of law No. 1 is answered in favour of Revenue and against assessee. "Question 2. Whether AMP expenses incurred by assessee in India can be treated and categorised as international transaction under section 92B of Income-tax Act, 1961?" In terms of and subject to discussion under heading C, paragraphs 51 to 57, substantial question of law No. 2 is answered in favour of Revenue and against assessee. "Question 3. Whether under Chapter X of Income-tax Act, 1961, transfer pricing adjustment can be made by Transfer Pricing Officer/Assessing Officer in respect of expenditure treated as AMP expenses and if so in which circumstances? Question 4. If answer to questions Nos. 2 and 3 is in favour of Revenue, whether Income-tax Appellate Tribunal was right in holding that transfer pricing adjustment in respect of AMP expenses should be computed by applying cost plus method.? Question 5. Whether Income-tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by Transfer Pricing Officer by applying parameters specified in paragraph 17.4 of order dated January 23, 2013, passed by Special Bench in case of L. G. Electronics India (P) Ltd.?." In terms of and subject to discussion under headings D to P, we hold that legal ratio accepted and applied by Tribunal relying upon majority decision in L. G. Electronics India Pvt. Ltd. (supra) is erroneous and unacceptable. For reasons set out above, we have passed order of remand to Tribunal to examine and ascertain facts and apply ratio enunciated in this decision. For purpose of clarity, we would like to enlist our findings: (i) In case of distributor and marketing associated enterprise, first step in transfer pricing is to ascertain and conduct detailed functional analysis, which would include AMP function/expenses. (ii) second step mandates ascertainment of comparables or comparable analysis. This would have reference to method adopted which matches functions and obligations performed by tested party including AMP expenses. (iii) comparable is acceptable, if based upon comparison of conditions controlled transaction is similar with conditions in transactions between independent enterprises. In other words, economically relevant characteristics of two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect conditions being examined given methodology being adopted for determining price or margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate effect of such differences on price or margin. Thus, identification of potential comparables is key to transfer pricing analysis. As sequitur, it follows that choice of most appropriate method would be dependent upon availability of potential comparable keeping in mind comparability analysis including befitting adjustments which may be required. As degree of comparability increases, extent of potential differences which would render analysis inaccurate necessarily decreases. (iv) assessee, i.e., domestic associated enterprise must be compensated for AMP expenses by foreign associated enterprise. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. method selected and comparability analysis should be appropriated and reliable so as to include AMP functions and costs. (v) Where Assessing Officer/Transfer Pricing Officer accepts comparables adopted by assessee, with or without making adjustments, as bundled transaction, it would be illogical and improper to treat AMP expenses as separate international transaction, for simple reason that if functions performed by tested parties and comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept comparables and determine or accept transfer price and still segregate AMP expenses as international transaction. (vi) Assessing Officer/Transfer Pricing Officer can reject method selected by assessee for several reasons including want of reliability in factual matrix or lack/non-availability of comparables (see section 92C(3) of Act). (vii) When Assessing Officer/Transfer Pricing Officer rejects method adopted by assessee, he is entitled to select most appropriate method, and undertake comparability analysis. Selection of method and comparables should be as per command and directive of Act and Rules and justified by giving reasons. (viii) Distribution and marketing are interconnected and intertwined functions. Bunching of interconnected and continuous transactions is permissible, provided said transactions can be evaluated and adequately compared on aggregate basis. This would depend on method adopted and comparability analysis and most reliable means of determining arm's length price. (ix) To assert and profess that brand building as equivalent or substantial attribute of advertisement and sale promotion would be largely incorrect. It represents co-ordinated synergetic impact created by assortment largely representing reputation and quality. "Brand" has reference to name, trade mark or trade name and like "goodwill" is value of attraction to customers arising from name and reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon great number of facts relevant for particular business. It reflects reputation which proprietor of brand has gathered over passage or period of time in form of widespread popularity and universal approval and acceptance in eyes of customer. Brand value depends upon nature and quality of goods and services sold or dealt with. Quality control being most important element, which can mar or enhance value. (x) Parameters specified in paragraph 17.4 of order dated January 23, 2013, in case of L. G. Electronics India Pvt Ltd. (supra) are not binding on assessee or Revenue. "bright line test" has no statutory mandate and broad-brush approach is not mandated or prescribed. We disagree with Revenue and do not accept overbearing and orotund submission that exercise to separate "routine" and "non-routine" AMP or brand building exercise by applying "bright line test" of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be "nil", or at best would mean amount or compensation expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to treat segregated transactional value as "nil" when in fact two associated enterprises had treated international transactions as package or single one and contribution is attributed to aggregate package. Unhesitatingly, we add that in specific case this criteria and even zero attribution could be possible but facts should so reveal and require. To this extent, we would disagree with majority decision in L. G. Electronics India Pvt. Ltd. (supra). This would be necessary when arm's length price of controlled transaction cannot be adequately or reliably determined without segmentation of AMP expenses. (xi) Assessing Officer/Transfer Pricing Officer for good and sufficient reasons can de-bundle interconnected transactions, i.e., segregate distribution, marketing or AMP transactions. This may be necessary when bundled transactions cannot be adequately compared on aggregate basis. (xii) When segmentation or segregation of bundled transaction is required, question of set off and apportionment must be examined realistically and with pragmatic approach. Transfer pricing is income allocating exercise to prevent artificial shifting of net incomes of controlled taxpayers and to place them on parity with uncontrolled, unrelated taxpayers. exercise undertaken should not result in over or double taxation. Thus, Assessing Officer/Transfer Pricing Officer can segregate AMP expenses as independent international transaction but only after elucidating grounds and reasons for not accepting bunching adopted by assessee and examining and giving benefit of set off. Section 92(3) does not bar or prohibit set off. (xiii) CP method is recognised and accepted method under Indian transfer pricing regulation. It can be applied by Assessing Officer/Transfer Pricing Officer in case AMP expenses are treated as separate international transaction, provided CP method is most appropriate and reliable method. Adoption of CP method and computation of cost and gross profit margin comparable must be justified. (xiv) object and purpose of transfer pricing adjustment is to ensure that controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. Costs or expenses incurred for services provided or in respect of property transferred, when made subject matter of arm's length price by applying CP method, cannot be again factored or included as part of interconnected international transaction and subjected to arm's length pricing. abovenoted pointers have to be read along with our discussion under headings D to P. In case of any doubt, debate or purported conflict, it would be preferable to rely upon detailed elucidation made under headings, D to P. Common questions raised by Revenue in their appeals: "1. Whether Income-tax Appellate Tribunal was right in distinguishing and directing that selling expenses in nature of trade/ volume discounts, rebates and commission paid to retailers/dealers, etc., cannot be included in AMP expenses?" In terms of and subject to our discussion under headings O and P, substantial question of law has to be answered against Revenue and in favour of assessee. Substantial question of law in CIT v. Reebok, I. T. A. No. 213 of 2014 following substantial question of law is raised: "Whether Income-tax Appellate Tribunal was right in setting aside/deleting transfer pricing adjustment made on account of payment of royalty to associated enterprise?" In view of discussion under heading Q, substantial question of law is answered against Revenue and in favour of assessee. Lastly, word of caution is necessary that our findings or ratio should not be construed as attempt to impart talismanic precision to this complex issue which would to large extent depend on factual matrix of given case. Disputes of such nature, highlight importance of "safe harbour rules", for they instil certainty and curtail litigation. We must, at conclusion, commend and acknowledge contemplative and epiphanic arguments put forth by learned counsels of assessee and Revenue. We had benefit of meticulous and intensive research and study by counsel for assessee along with their associates, and Revenue, who were ably assisted by team of officers. appeals are accordingly disposed of. No costs. In order to cut short delay, parties are directed to appear before Tribunal on April 20, 2015, when date of hearing will be fixed. *** Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income-tax