R.S. Syal, Accountant Member - The Hon'ble President has constituted this Special Bench to adjudicate the following two questions:

"1. Whether, on the facts and in circumstances of the case, the Assessing Officer was justified in making transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee?

2. Whether the Assessing Officer was justified in holding that the assessee should have earned a mark up from the Associated Enterprise in respect of AMP expenses alleged to have been incurred for and on behalf of the AE?"

2. The factual matrix of the case is that L.G. Electronics Inc. (hereinafter called as "LGK"), is a Korean based company, engaged in the business of manufacture, sale and distribution of electronic products and electrical appliances such as television, audio/video equipments, washing machines, refrigerators and air-conditioners etc. Pursuant to the approval of the Govt. of India, conveyed vide letter dated 29-1-1997, LGK was permitted to establish a wholly owned subsidiary in India. L.G. Electronics India Pvt. Ltd. (hereinafter called as "LGI"), that is the assessee in question, was incorporated in 1997 as a wholly owned subsidiary of LGK. An agreement was entered between LGK and LGI on 10th March 1997, as per which both entered into a mutual foreign collaboration agreement. Thereafter a Technical assistance and royalty agreement was entered into between these two entities on 1-7-2001 by which LGI, in the capacity of a licensee, obtained a right to use the technical information, designs, drawings and industrial property rights for the manufacture, marketing, sale and services of the agreed products from the LGK i.e. the licensor. As per the agreement, the assessee agreed to pay royalty to LGK at the rate of 1% as a consideration for the use of industrial property rights, designs and technical knowhow, for the manufacture and sale of the greed products. The licensor allowed the licensee to use its brand name and trade marks to products manufactured in India during the validity period of the agreement, which in the instant case is "without any restriction". Article 7 of this agreement with caption 'Use of 'LG' Brand name & trade marks' provides that : 'The Licensor hereby allows the Licensee for the use of its Brand Name and Trade Marks for the licensed products manufactured in India during the validity period of the Agreement'. Second para of this article further states that : "In case at any stage in future the Licensor demands any royalty payment on this account, the Licensee will take steps to get the Government of India's approval for payment of such royalty payment". It is not the case of the Revenue that the licensor demanded any royalty payment for use of LG brand name and trade marks during the year in question. The Assessing Officer (hereinafter also called 'the AO') referred the international transactions reported by the assessee to the Transfer Pricing Officer (hereinafter called 'the TPO'). One of such transactions included in the assessee's audit report was "Contribution towards Global Cricket Sponsorship". The TPO observed that the assessee had received contribution from its Associated Enterprise (hereinafter called the 'AE') for the expenditure incurred on sponsorship of Global Cricket events. The quantum of contribution received was considered as a part contribution for the brand promotion carried out by the assessee on behalf of its foreign AE. The TPO observed that the assessee's expenses on advertisement, marketing and promotion including trade discount and volume rebate, described by him as Advertising, Marketing and Promotion (hereinafter called 'the AMP expenses') were 3.85% of its sales at Rs. 6553.36 crore. He computed similar percentage in the case of Videocon Appliances Ltd. (0.12%) and Whirlpool of India Ltd (2.66%) with their arithmetic mean at 1.39%. It was opined that the assessee was promoting LG brand owned by its forei