TaxTMI 
TaxTMI 
2013 (6) TMI 458
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....and in the circumstances of the case and in law by confirming the proposed addition of Rs. 1,629,435,321 [i.e. Rs. 1,062,376,522 based on the provisions of Chapter X of the Income-tax Act (the Act) and Rs. 567,058,799 based on the other provisions of the Act] to the Appellant's total income. 2. Erred in law by upholding / confirming the action of the TPO in not satisfying any of the conditions prescribed under Section 92C(3) of the Act before making an adjustment to the income of the Appellant. 3. Erred on facts and in the circumstances of the case and in law in taking cognizance suo moto of the alleged international transaction which had not been specifically referred to the TPO by the A.O., for adjustment in the Arms Length Price (ALP) under Section 92CA of the Act. The TPO erred in law by exceeding his jurisdiction in considering the question as to whether the expenditure incurred by the Appellant for its domestic operations was in the natue of an international transaction. 4. Erred on facts and in the circumstances of the case and in law in upholding / confirming the action of the TPO, in considering expenditure incurred by the Ap....
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....ng intangibles and excess AMP expenditure, even though the Hon'ble Supreme Court had set aside the applicability of those conclusions. The DRP further erred in law in ignoring the submissions of the Appellant highlighting the difference in its facts as compared to those of Maruti Suzuki. 7.5 Erred on facts and in the circumstances of the case and in law in upholding / confirming the action of the TPO, in considering the action of the TPO in considering even those expenses which are not in the nature of AMP expenses to compute the transfer pricing adjustment in relation to the AMP expenses. 8. Erred on facts in upholding / confirming the action of the TPO in concluding that Appellant performed brand building activity for its Associate Enterprise ("AE") by way of mandatory usage of the AE's logo on the passanger cars manufactured by the Appellant. 8.1 Erred on facts and in law by upholding / confirming the action of the TPO in attributing hypothetical brand development fee based on unreliable data source. 9. Erred on facts and in law in concluding that the legal ownership of the products developed by the Appellant remain....
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....10 (Del.), TPO put the assessee on notice as to why the licensor was not compensating it and why an addition for arm's length price, commensurate with the circumstances should not be made. In such notice, TPO brought to the attention of the assessee that it had incurred advertising and sales promotion expenditure of Rs. 125.92 Crores. As per the TPO, the intangible benefits obtained by the foreign entity on account of compulsory use of its trademark, through such advertisements, stood exposed by the excess expenditure on advertisement, marketing and promotion (AMP) expenses incurred by the assessee, when compared with other entities having no foreign brand obligations. Making a comparison with three companies identified for this purpose, namely, Tata Motors Limited, Mahindra and Mahindra Ltd. and Hindustan Motors Ltd., TPO came to a conclusion that assessee had incurred excessive AMP of 5.75% on its sales against an average of 2.58% on sales incurred by such entities. 5. TPO also brought to the attention of the assessee its claim of product development expenses of Rs. 14.84 Crores, which as per the TPO, benefitted FMC, USA. As per TPO, the technology on which development was don....
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....& Mahindra Ltd. and M/s Tata Motors Ltd. were not ideal candidates for a comparability analysis since first one of them was a seller of cars only to Government, whereas, the second and third ones were predominantly engaged in manufacture and sale of vehicles other than passenger cars. 8. Vis-à-vis product development expenses, reply of the assessee was that such expenditure was incurred with the intention of offering its customers best possible product. These included engineering expenses, travel, testing charges, expenditure for homologation and ongoing developments of its existing models. Such expenditure only benefitted the assessee in India and presumption of the TPO that some assets were created by such expenditure in the nature of product intangibles to M/s FMC, was not correct. 9. However, the TPO was not impressed by any of the contentions of the assessee. According to her, use of the logo " Ford" was mandatory in all products manufactured by the assessee and this was clear from the License Technical Assistance Agreement entered between FMC and assessee. As per TPO, assessee had incurred substantial expenditure on AMP which helped creation of awareness of "Ford....
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....es consultants should be excluded from AMP expenses. As per TPO, such incentives were finally passed on to ultimate customers and were nothing but part of the AMP expenses. She thus reached an opinion that assessee had incurred the AMP expenses of 5.75% on sales which was excessive when compared to similar expenditure incurred by the other three candidate companies which averaged only to 2.58%. 11. As for objection against selection of candidate companies, TPO observed that Hindustan Motors Ltd. was producing cars though such cars were not having mass appeal. Hence, as per the ld. TPO, they would have spent considerably more amount of money for promoting their products. As for the other two companies, viz. Mahindra and Mahindra Limited and Tata Motors Ltd., TPO noted that both were involved in car manufacturing and were aggressively promoting their cars in India. Thus she brushed aside the objections of the assessee and applied the average AMP spend of 2.58% of comparables, on the sales of the assessee. The difference of 3.17% translated into Rs. 69,47,97,400/-, and this was treated as the expenditure incurred by assessee for promoting the "Ford" brand in India. An addition of l....
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.... in the last quarter of financial year 2006-07. Considering all these, as per DRP, the determination of Rs. 21,91,79,122/- as the quantum of compensation payable by FMC to assessee, for brand promotion undertaken in India was very conservative. Further, as per DRP, by making it obligatory for the assessee to use the trademark of FMC, assessee was deprived from developing a brand name and logo of its own. The efforts of the assessee resulted in benefitting the build up of brand "Ford". 14. On the expenditure incurred by the assessee and benefits being enjoyed by its holding company, DRP was of the view that of various values a customer received by paying for a product, functional and economic values were achieved through advertisement, whereas, psychological and social values were achieved through brand name. Expenditure of advertisement and sales promotion of Rs. 125.92 Crores benefitted not only the assessee, but FMC as well. As per DRP, the TPO had only determined the arm's length price of the AMP expenditure and compared it with actual AMP expenditure incurred by the assessee. Benefit of the excess expenditure was being received by M/s FMC, whereas, total cost was borne by th....
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.... compared to similarly placed independent entities, would not be a reason to infer that some part of such expenditure were incurred for brand promotion of FMC. Further, as per the learned A.R., in the case of LG Electronics India Pvt. Ltd. (supra), it was clearly held that it was left to the wisdom of an assessee to choose the amount he wanted to spend for advertisement. Here, the assessee had incurred expenditure on advertisement for selling products, which were having assessee's own car name, and therefore, TPO should not have indulged in a transfer pricing analysis on such spends. 19. Continuing in the same vein, learned A.R. submitted that "Ford" had never piggybacked on the assessee. Henry Ford invented the 'car' as such. To say that, an international brand like "Ford", which had an aging in excess of hundred years before coming to India, derived any benefit by virtue of expenditure incurred by its Indian subsidiary for promoting such brand, was in the opinion of learned A.R., a strange proposition. According to him, it was the assessee which had derived benefit by way of "Ford" brand name in India and had piggybacked on such brand name. Assessee got a head start when compa....
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....g further, learned A.R. submitted that in L.G. Electronics case (supra) advertisement of LG India was for the umbrella brand 'LG' and not for any specific products. In the said case, it was demonstrated by the Revenue that there were advertisements in which LG brand alone was mentioned without referring to any specific products. In assessee's case, according to learned A.R., there was no such stand alone advertisement of Ford brand or Ford logo. There was no implied agreement between assessee and FMC for promoting the brand "Ford" in India. LG was manufacturing different types of products, whereas, assessee was manufacturing only passenger cars and the name of "Ford" was also associated only with passenger cars. In 21 I.T.A. No. 2089/Mds/11 other words, as per learned A.R., there was no primary obligation for the assessee to market "Ford" products in India, whereas, such an obligation was there in the case of L.G. Electronics India Pvt. Ltd. (supra). 21. Without prejudice to his contention that there was no brand building exercise in assessee's case, learned A.R. submitted that the tests specified by the Special Bench in LG Electronics's case (supra), if applied in assessee's ca....
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....hat year Not applicable as no brand royalty is paid 7 Where the Indian AE has got a manufacturing license from the foreign AE, is it also using any technology or technical input or technical knowhow acquired from its foreign AE for the purposes of manufacturing such goods? Yes. Yes. 8 Where the Indian AE is using technical knowhow received from the foreign AE and is paying any amount to the foreign AE, whether the payment is only towards fees for technical services or includes royalty part for the use of brand name or brand logo also? Royalty payment is only towards the technical license, but the agreement also allows use of brand. The parent company has a right to demand for Brand royalty later. Royalty payment is towards technical license and not towards brand name or trademark or logo. 9 Whether the foreign AE is compensating the Indian entity for promotion its brand in any form, such as subsidy on the goods sold to the Indian AE? Details not available. There is no such brand promotion, so no question of "subsidy" on goods sold to Indian AE to compensate brand promotion. 10 Where such subsidy is allowed by the foreign AE, whether the ....
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....d then making a further addition for excess AMP spends, based on the Bright Line test. This resulted in double addition, according to him. 24. Vis-à-vis DRP observation that assessee had significantly contributed to the enhancement of trademark value of FMC, learned A.R. submitted that comparison between the two quarters ending 31st March, 2006 and 31st March, 2007, would clearly show that increase in value of trademark was only US$ 550 lakhs. Assessee's percentage of sales to the total sales of Ford all over the world was only 0.415% and if this percentage was applied on absolute terms, contribution of the assessee for brand enhancement, could at the best be only US$ 2,28,250. This when converted into Indian rupee at Rs. 50 per dollar, came to Rs. 1,14,12,500/-. 25. In any case, according to him, the Bright Line test devised by lower authorities, was not one of the accepted methods under the Transfer Pricing Rules. Relying on the decision in the case of L.G. Electronics India Pvt. Ltd. (supra), learned A.R. submitted that no new procedure could be invented, apart from the procedures set out in Rule 10B of Income-tax Rules, 1962 for determining ALP. According to learne....
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....ibles, generated through market development, consisted of three ingredients. Two were generated through market targeting and third was through product targeting. They were separately considered and valued and according to him, it was not a case of double addition. Further, as per learned D.R., international transactions in Ford Group were not transparent and its business strategies in all countries were remote controlled by the foreign parent. A wholly owned subsidiary will always to endeavour to maximize the profit its parent company. What was built by the excessive AMP spending in India was promotion of an international brand and not any indigenous brand. There was an opportunity cost to the assessee, which was foregone. Assessee when it could have developed its own brand, had, on the other hand, built up the foreign brand in India. 29. Justifying the methodology adopted by the TPO, learned D.R. submitted that value of intangibles like brand were made through perceptions of the products of the assessee, in the minds of the consumers. This created a market capitalization value over and above the accounted value of AMP cost. Assessee had employed market-targeted method and produ....
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.... comprehensive information were considered before considering 1% as the applicable rate. (iv) Brand was one of the most important assets of an organization and valuation thereof was an essential element in taxation. Royalty relief approach considered by the Revenue was one of the accepted methods for such valuation. (v) Judgment of Hon'ble Delhi High Court in Maruti Suzuki's case (supra) which held that Mahindra and Mahindra Limited, Tata Motors Limited and Hindustan Motors Ltd. might not be appropriate comparables, would not militate against fundamental aspect of existence of marketing intangibles. The transfer pricing methodology adopted only tried to create comparison and evaluation models for what were difficult to compare. (vi) Argument of the assessee was only for doing a global comparability, whereas, comparables when selected and applied, had to be based on honest statistics. (vii) FMC which was assessee's parent company, had from the very first step used a strategy which ensured that proper evaluation of their brand building could not be done. (viii) TPO had used widely accepted brand evaluation method for finding the brand enhancement bestowed by the assess....
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....aid case? (8) Is the disallowances of Rs. 14.8 Crores incurred by the assessee on product development justified? 34. We are making a sincere effort to answer each of the questions raised above, and through this resolve the disputes between the parties. 35. First, question is whether there was any international transaction coming within purview of Chapter X of the Act and whether assessee's case is distinguishable on facts with that in the case of L.G. Electronics Pvt. Ltd. (supra) decided by the Special Bench. Contention of the Revenue is that this stands answered by the decision of Special Bench in the case of L.G. Electronics Pvt. Ltd. (supra). On the other hand, contention of the assessee is that in LG's case, there were some special features in the agreement entered by LG Korea with LG India, which were not available in assessee's case. As per the assessee, LG India was obliged to sell only LG products in India, whereas, there was no such exclusivity clause for the assessee. In our opinion, assessee was bound by the technical collaboration agreement dated 19th August, 1996 entered with M/s FMC. By virtue of such agreement, assessee had to sell products licensed by FMC ....
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....d to pay a royalty of 5% on sale price of all licensed products. 37. Now coming to the second agreement, which is "Name License Agreement", what has been bestowed on the assessee through this agreement, is only a license to use the word "Ford" as its corporate name. Except for the license to use "Ford" as part of its corporate name, there is nothing in this agreement which enabled the assessee to use the word "Ford" in any of the products manufactured or marketed by it. 38. The litmus test for deciding whether an international transaction can be discerned out of an arrangement through which an assessee in India was manufacturing and marketing products branded with the name of a foreign enterprise, when they were related parties, had indeed come up before the Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra). There also the main argument taken by the concerned assessee was that there was no marketing intangible in the nature of brand building for LG in India, which could be construed as an international transaction. After going through the definition of "transaction" given under Section 92F(v) of the Act, Special Bench felt that there was no need for Legisl....
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....ut some tacit understanding between the assessee and the foreign AE on this score. As in the case of an express agreement, the incurring of AMP expenses for brand building draws strength from such express agreement; in the like manner, the incurring of proportionately more AMP expenses coupled with the advertisement of brand or logo of the foreign AE, gives strength to the inference of some informal or implied agreement in this regard." 39. As mentioned by us, here the assessee had simultaneously advertised the logo "Ford" along with the model name of its own cars. May be it is true that assessee was not legally constrained to manufacture only cars for which technical knowhow was made available by M/s FMC and it had freedom to do independent manufacturing of cars as well. No doubt, the technical agreement dated 19th August, 1996, mentioned above by us, does not say in so many words that assessee was to exclusively manufacture cars which carried the logo "Ford" and use only the technical knowledge made available to it by FMC. In our opinion, such contrived situations cannot and should not blind one to the ground realities. Admittedly assessee was a 100% owned subsidiary of FMC. O....
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.... of the brand "Ford" in India. 42. We do appreciate the submission of learned A.R. that Mr. Henry Ford had manufactured the first car and "Ford" as a brand was developed over hundred years and had a substantial value even prior to their entry in India. But this cannot be so interpreted to mean that every Indian knew "Ford" before assessee sold the cars in India. Ford might have been known among middle class and upper middle class strata, but, without doubt, there would be a substantial number of persons in India, who would have become aware about the brand "Ford" through the advertisements placed by the assessee and its marketing efforts in India. A compilation and analysis of assessee's market share vis-à-vis its major competitors, done by us, based on 42 I.T.A. No. 2089/Mds/11 the data given by the assessee in its written submission, reveals interesting results:- Comparative sales chart (Rs. in Crores) Financial year Maruti Suzuki India Hyundai Motor India Mahindra & Mahindra Ltd. Total Ford India Pvt. Ltd. (assessee) % of sale of assessee to total 2006-07 17458 10354 11238 39050 2192 5.61 2007-08 21221 12215 1301....
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....mprised in the logo "Ford" by the assessee for and on behalf of FMC. FMC was a non-resident and such transaction was of the nature of "provision of service" as held by Special Bench in the case of L.G. Electronic's case (supra). In the facts and circumstances of the case, we cannot, therefore, fault the revenue authorities for treating the transaction of brand building as an international transaction. We do not find anything substantial or material enough to depart from the view taken by the Special Bench in this regard. Thus both legs of the first question are answered in favour of Revenue. 45. Coming to the next question which is whether TPO can take suo motu cognizance of a transaction for ALP analysis, in our opinion this also stands answered by Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra). Admittedly, assessee had not reported the brand promotion exercise as an international transaction as required under Section 92E. Once there was no reporting of an international transaction by the assessee, as held by the Special Bench, it was well within the power of the TPO to consider such transaction also, whether or not it was referred by Assessing Officer to....
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....r the TPO, such excess amount was incurred by the assessee for and on behalf of M/s FMC, and it would not have normally incurred such excess if it was developing its own brand in India. Applying 3.17% on the sales of the assessee, she arrived such excess AMP at Rs. 69,47,97,400/-. In other words, the marketing intangible in the nature of brand promotion of M/s FMC done by the assessee was fixed at Rs. 91,39,76,522/-. 47. Written submission given by the Department before us and the arguments of the learned D.R. does show that Revenue is confused with regard to the demarcating lines of the two elements which made up the value of "Ford" brand development in India. Argument of the Revenue is that low profits of the assessee was due to lower margins fixed on the prices of cars sold by it and this was done under the direction of FMC, since FMC was in lieu getting a benefit by way of additional marketing intangible in the nature of brand building. As per the Revenue, the brand building exercise gave a future value to the brand which would accrue to the parent company, namely, FMC. This concept of add-on brand value on normal sales and add-on brand value on additional sales, brought out....
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....he scheme of Section 92C, since what was determined by applying such test was only cost/ value of international transaction. Bright Line is only the line drawn within an overall amount of AMP expenditure. The amount on one side of Bright Line, was the amount on AMP expenditure incurred on normal business of the assessee, whereas the balance amount represented expenses incurred for and on behalf of FMC for creating and maintaining its marketing intangible which was the "Ford" logo. When both expenses were inter-built, some mechanism needs to be devised for ascertaining the cost of international transaction. Assessee here had not declared any cost/value for the international transaction comprising of brand building and therefore, it became imperative for the TPO to apply Bright Line test for determining such value. TPO had identified three comparable cases and ascertained the amount of advertisement, marketing and promotion expenses incurred by them as a percentage of their sales, and applied it to the turnover of the assessee. The excess of total AMP expenses over such amount does give a measure of the brand promotion expenditure incurred by the assessee for FMC. Thus, we have to ho....
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....old that the method applied by the TPO suffered from such a serious flaw which could invalidate the determination of ALP as a whole. As held by the Special Bench, steps mentioned in Rule 10B(1)(c) have necessarily to be followed while working out arm's length price. There is, therefore, a deficiency in the modality of working out ALP of AMP expenditure and determining the brand development cost. Even if the authorities below did not mention any recognized method, or mentioned a different method than one used, the orders cannot be declared void ab initio as held by Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra), if in essence one of such recognized methods was applied. Non-following of the steps in a given methodology can at the best be a lacuna in applying a procedural provision, in the sense that ALP was not computed strictly as per the force of the prescribed method. Therefore, we have to hold that BL test applied by the TPO did fall within the method prescribed under Section 92C and the lacuna was only in not following the steps mentioned in the Rule 10B(1)(c) in the manner prescribed. 50. The next question is whether the selling expenses are to be excl....
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....is a short one, which is reproduced in entirety, as under:- 'Order Leave granted. By consent, the matter is taken up for hearing. In this case, the High Court has remitted the matter to the Transfer Pricing Officer ("the TPO" for short) with liberty to issue fresh show-cause notice. The High Court has further directed Transfer Pricing Officer to decide the matter in accordance with law. Further, on going through the impugned judgment of the High Court dated July 1, 2010, we find that the High Court has not merely set aside the original show-cause notice but it has made certain observations on the merits of the case and has given directions to the Transfer Pricing Officer, which virtually conclude the matter. In the circumstances, on that limited issue, we hereby direct the Transfer Pricing Officer, who, in the meantime, has already issued show cause notice on September 16, 2010, to proceed with the matter in accordance with law uninfluenced by the observations /directions given by the High Court in the impugned judgment dated July 1, 2010. The Transfer Pricing Officer will decide this matter on or before December 31, 2010. The civil appeal is, accordingly, dispose....
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....the lower authority to complete the proceedings by exercising any of the options at his command. In such a case the lower authority gets choice to exercise any of the options A, B or C. It cannot be said by such later direction of the higher authority, exercising option A has been debarred. The change is only to the extent that the otherwise mandatory option A in the first situation has been substituted with the direction of the authority to choose any option. If the authority still chooses A option, his action will not become void for this reason alone. 29.13 Applying the same logic to the facts of the instant case, it is notice that with the advent of the judgment of the Hon'ble Supreme Court, the directions given by the Hon'ble High Court to the TPO for determining ALP as per the afore discussed Part has lost the tag of binding force. Now the TPO is free to determine the ALP in any of the ways open before him. Thus the contention of the ld. AR that the judgment of the Hon'ble jurisdictional High Court has been reversed, is jettisoned. 29.14 Now we take up the next contention of the ld. AR about the merger of the judgment of the Hon'ble jurisdictional High Court with that o....
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....ome non-existent as having been overruled or fully merging with that of the Hon'ble Supreme Court. If, for a moment, the contention of the ld. AR that the judgment of the Hon'ble Delhi High Court has completely merged with that of the Hon'ble Supreme Court is presumed to be correct, which we really do not accept as correct, it would mean that only the judgment of the Hon'ble Supreme Court in the case of Maruti Suzuki India Ltd. (supra) is existing. The relevant part of this judgment is that: "In the circumstances, ...., we hereby direct the Transfer Pricing Officer, who, in the meantime, has already issued a show cause notice on ...... to proceed with the matter in accordance with law......". We have noticed above that there was no express agreement for brand building between Maruti and Suzuki. It shows that as per this judgment, the Hon'ble Supreme Court has directed the TPO to take a de novo determination of the ALP of the transaction of brand building for the foreign AE in such circumstances. The direction for such determination inherently recognizes that there is a transaction of brand building between the assessee and the foreign AE, which is an international transaction as pe....
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....estions raised in this regard are answered accordingly. 53. Coming to the last question which is the disallowance of product design expenditure of Rs. 14.84 Crores, finding of the TPO is that ownership of the developed product vested with FMC and therefore, expenditure incurred in development of the product had to be attributed to FMC. On the other hand, as per assessee, it was only improving on various models of the cars manufactured and sold in India and economic ownership of the product improvement was with it, though legal owner was FMC. We are of the opinion that both the assessee as well as FMC had benefitted from the product development expenditure incurred. Through the technical collaboration agreement, assessee derived all assistance including technical knowhow for manufacturing various models of the cars, though ownership of all such knowhow was with M/s FMC. Assessee was doing research and development work for improving the cars, but nevertheless, the ownership over such innovations were also with FMC. Fruits of the improvement, which was better engineered cars, was enjoyed by the assessee whereas ownership was with M/s FMC. In other words, assessee had an economic ad....
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....sfer pricing. 57. Vide its ground No.11, grievance raised by the assessee is that provision made for bad and doubtful debts were disallowed. 58. Facts apropos are that assessee had made a provision of Rs. 2,04,66,701/- towards doubtful advances and claimed it stating that such money could not be recovered from its suppliers, since it represented value of rejected parts. However, nothing was shown before us to prove that there was any actual write-off. A mere provision in the account will not be equivalent to a write-off. At the best be considered as a provision for unascertained liability. Nothing was brought on record to show that correspondingly debtors accounts were reduced. We are of the opinion that the addition was rightly made by the Assessing Officer. No interference is required. 59. Ground No.11 is dismissed. 60. Vide its ground No.12, grievance raised is regarding disallowance of penalty of Rs. 5,10,454/- paid under Central Excise & Service Tax Law. Nothing was brought before us by the learned A.R. to show that these payments were not for any infringement of law. Explanation to Section 37 would squarely apply and therefore, in our opinion the disallowance was ....
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....pressed. 71. Vide ground No.16, grievance raised by the assessee is that a subsidy of Rs. 1 Crore received by it was considered as revenue receipt. 72. Facts apropos are that assessee had received subsidy of Rs. 1 Crore under Mega Projects Scheme of Tamil Nadu Government. A.O. was of the opinion that it was an incentive given to industrial entrepreneurs for starting big projects and could only be considered as revenue receipts. He proposed an addition of Rs. 1 Crore. This was confirmed by DRP. 73. Now before us, learned A.R., strongly assailing the orders of authorities below, submitted that subsidy was received under an incentive scheme known as State Capital Subsidy. Placing reliance on the order of Government G.O.Ms.No.43 of Government of Tamil Nadu dated 13.12.1992, learned A.R. submitted that it was only a capital subsidy. It was an incentive for mega investment in the State. Such investment was in the capital field. Therefore, the subsidy had to be considered as capital receipt. Reliance was placed on the decision of Hon'ble High Court of Jammu & Kashmir in the case of Shree Balaji Alloys v. CIT (198 Taxman 122). 74. Per contra, learned D.R. supported the orders o....