TaxTMI 
TaxTMI 
TaxTMI 
2013 (8) TMI 594
X X X X Extracts X X X X
X X X X Extracts X X X X
.... That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to Rs. 154,12,00,000 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as, 'the AMP expenses') incurred by the appellant. 3.1 That the assessing officer erred on facts and in law in not appreciating that since the appellant is the sole beneficiary of the AMP expenditure incurred by it, its conduct in incurring and bearing the cost of such expenditure was consistent with the arm's length principle. 3.2 That the assessing officer erred on facts and in law in not appreciating that the characterization of the appellant being that of a full fledged manufacturer justifies the conduct of the appellant in incurring and bearing the cost of AMP expenditure. 3.3 That the assessing officer erred on facts and in law in not appreciating that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a 'transaction' in the absence of any understanding/ arrangement between the appellant and the associated enterprise. 3.4 That the assessing officer erred on facts and in law in not appreciatin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the arm's length price of the advertisement and brand promotion expenses could not be made. 3 .14 That the assessing officer erred on facts and in law in ignoring that "bright line limit" is not a prescribed method under the purview of section 92C of the Act. 3.15 Without prejudice that the assessing officer erred on facts and in law in not appreciating that even applying developer assister rule as contained in US Transfer Pricing regulations, viz., REG. 1.482-4, the appellant would be characterized as developer of the marketing intangibles and hence it would not be required to seek reimbursement / compensation for such expenditure from the associated enterprise. 3.16 That the assessing officer erred on facts and in law in applying paras 6.36, 6.37 and 6.38 of the OECD Guidelines which are applicable only to distributors and not to manufacturers such as the appellant. 3.17 That the assessing officer erred on facts and in law in failing to appreciate that the comparable companies as identified in the Transfer Pricing study are not right comparables for applying the bright line test (BLT) due to difference in product profile, product range and target markets of these companies.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Ltd. 1345.1 77.09 5.73% Hyndai Motor India Ltd. 6245.09 198.13 3.17% Honda Siel Cars India Ltd. 2142.3 17.21 0.80% MEAN 3.86 Maruti Suzuki India Ltd. 10910.8 204.4 1.87% 3.27 Without prejudice that the assessing officer erred on facts and in law in not appreciating that, for the purpose of undertaking benchmarking analysis of AMP expenditure of the aforesaid company in passenger automobile segment and the same could not be disregarded on the ground of related party transaction. 3.28 That the assessing officer erred on facts and in law m individually examining the international transactions entered into by the appellant, not appreciating that such transactions being closely linked, ought to have been benchmarked on an aggregate basis. 3.29 Without prejudice that the assessing officer erred on facts and in law in ignoring the fact that, since the appellant earns return commensurate with other brand owners, the appellant is adequately compensated for its functions and AMP expenses. 3.30 Without prejudice that the assessing officer erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately estab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Maruti Brand and reinforcement of Suzuki Brand. 4.7 That the assessing officer erred on facts and in law in failing to appreciate that the License Agreement was entered into by the appellant with the, approval of the Secretariat of Industrial Assistance, Ministry of Commerce and Industry, along with the approval from the Reserve Bank of India. 4.8 That the assessing officer erred on facts and in law in holding that co-branding of "Maruti-Suzuki" has resulted in the reinforcement of value of "Suzuki" brand and simultaneous impairment of "Maruti" trademark. 4.9 failing to appreciate that such concept of "reinforcement" cannot be considered to be an "international transaction" as defined in section 92B of the Act which consists of purchase, sale or lease of tangible or intangible property; 4.10 That the assessing officer erred on facts and in law in holding, on the basis of conjectures and surmises that, the associated enterprises has charged separate royalty for the use of technology and for use of brand name in the proportion in which it incurs expenditure on R & D and Brand promotion. 4.11 Without prejudice, the assessing officer erred in considering the consolidated financi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of India and the balance was held by Indian public and others. 4. The following international transactions had been undertaken by the assessee during the F.Y. 2004-05. 4.1 For benchmarking of the international transactions, the assessee has selected TNMM as the most appropriate method. OP/Sales had been identified as the profit level indicator in the case of assessee. Furthermore, it was stated that OP/sales of the assessee was 11.19%. The margin of the comparables had been computed using OP/Sales at 4.04%. The assessee has selected three comparables for the purpose of bench marking viz. Hindustan Motors, Tata Motors and Mahindra & Mahindra. On the basis of above economic analysis it was concluded by the assessee that the international transaction undertaken during the financial year 2004- 05 are at arms length price. 4.2 However, the TPO was not in agreement with the above. The TPO made the transfer pricing adjustment amounting to Rs. 154,12,00,000/- in relation to advertisement, marketing and sales promotion expenses (AMP expenses) incurred by the assessee. Furthermore, TPO proposed adjustment on account of payment of royalty for use of brand name amounting to Rs. 98,14,06,6....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sistance and information and for the use of the Suzuki Brand name / logo/ trade mark. The License Agreement is a single package, for which the consideration, is inserverable. 1.3 Consequently, no part of royalty payment can be sp[lit and determined for the use of Suzuki's licensed trademarks as such." 6.4 However, the TPO was not satisfied with the above. He observed that the assessee's plea that it was a package deal, does not seem to be convincing as no independent entity would be so eager to make payment and enter into an agreement of this nature without ascertaining the individual split towards technical assistance and brand. 6.5 Hence, the TPO noted that since the assessee has not quantified the payment made by it for use of brand name. The TPO himself embarked upon to find the same. The TPO referred to the financials of the SMC. The TPO observed that it can be logically inferred that SMC has charged royalty for use of technology and for use of brand name in the same proportion in which they are incurring the expenditure on Research and Development and brand promotion. TPO further observed that it can be seen that the amount spent on the Research and Development and brand b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any in 1982 neither the brand name Maruti nor of Suzuki was established in India. That however, due to continued efforts of the assessee company, the brand Maruti became the household name and the brand Suzuki also developed alongwith. The TPO wondered that in such a situation, whether the assessee should have paid the royalty at all for brand to SMC or receive a reasonable portion of itself? 6.8 The TPO further observed that assessee has alleged that TPO has contended that brand Suzuki has zero brand value. In this regard, TPO observed that it was not so. He opined that the point required to be understood is that in 1982 Suzuki has no brand recognition in India. In 10 long years Suzuki was gradually made aware in the Indian territory by the efforts of the Maruti. The TPO observed that the trade mark Maruti with which the launch of vehicle started in the year 1982 was slowly and gradually replaced by the trade mark 'S'. 6.9 The TPO did not accept the assessee's submission that the agreement was a composite agreement and the same cannot be split between the technology and use of brand. He opined that under uncontrolled circumstances, no independent entity would be willing to part ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pto 8% on exports and 5% on domestic sales was allowed under automatic route. However, the TPO was not in agreement with the above submissions. He observed that setting of norms of payment of royalty by RBI was not part of transfer pricing regulations and therefore, cannot be entertained. 6.14 The TPO also rejected the assessee's objections the basis of split. However, he noted that the contention of the assessee to not include the sales promotion and sales incentive expenses was correct. Therefore, the TPO observed that split shall not include these expenses. Accordingly, he revised the split of royalty for the technology and for use of brand name in the ratio of 50.58% and 49.42%. On these basis, the location of royalty between the payment of technology and brand name was worked as under:- Total amount of royalty Rs. 198,57,42,097/- Amount attributable to use of Rs. 100,43,88,352/- Technology being of the Amount of royalty 50.58% Amount attributable to use of Rs. 98,13,53,745/- Brand name being Amount of royalty of the. 49.42% 6.15 The TPO observed that the brand Suzuki has developed in India only by association and efforts of M/s Maruti which was a better known brand....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reement with SMC in Oct 1982 for its models -M 800, Omni and Gypsy where in it was decided to use the Co-Co-branded trade mark "Maruti-Maruti-Suzuki" on the vehicles. The appellant used the co-branded logo "Maruti- Suzuki" even on the cars manufactured by it in 1982. At the time of entering this agreement the appellant was an independent 100% GOI owned entity. The same decision is carried forward in the subsequent License Agreements including the 1992 License Agreements (refer page no 548 of the paper book II). The royalty royalty paid by the appellant was agreed in 1982 when it was a third party. Since the agreement entered into between the appellant and SMC was between two third parties, the said license agreement can be considered to be uncontrolled license agreement and can be used as a Comparable Uncontrolled Price (CUP) to benchmark the royalty rate. The decision to continue the joint trade mark was taken in the company's business interest. Prior to 1992 and thereafter, several other agreements were entered into between the appellant and Suzuki for the manufacture of other car models/variants. These agreements also had the same terms or conditions regarding use of the co- b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ely disregarded the very important factual as well as legal implications of that undisputed position. .In 1992, it was not feasible for the appellant to stop using the said co-branded name for the sale of its products, as it would have resulted in a devastating loss of commercial goodwill. The continued use of the said co-branded name/logo cannot, therefore, be attributed to the dictation of Suzuki from 1992 onwards to the appellant company. In any case, the Suzuki name was always being used on the cars since 1982. Such association enabled the appellant to compete with the global brands entering into the Indian market. This is evident from the fact that the appellant has been able to maintain its leadership position in the automobile industry despite the increased competition. In view of the aforesaid it is submitted that the said decision, which was taken way back in 1993, 12 years before the year under consideration, could never have been influenced by the need to manipulate (and thereby erode) the Indian tax base. The said decision was driven only by a genuine business/ commercial reality/ rationale and was backed by sound/ prudent business/ commercial logic. Since the same t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w of the aforesaid, it is respectfully submitted that the adjustment on account of payment of royalty, made by the TPO, is unlawful, not sustainable and is liable to be deleted. (c) Single/ Inseverable license for manufacture and sale of products An analysis of License Agreement shows that payment of royalty is a consideration for use of "technical assistance and license". The license agreement confers upon the appellant the right to manufacture specific models of Suzuki cars, and for the use of all of SMC's I.P. rights in respect thereof. The appellant's entire manufacturing activities and business is based and founded on these license agreements. The TPO and DRP have completely overlooked this crucial factor which goes to the root of the entire case. Further, the said agreements enable the appellant to produce the world renowned car models, viz., Alto, Swift, WagonR, etc., and not merely the use of name / trade mark "Suzuki". This is an extremely valuable right, which fact is fully reflected in the appellant's rapidly and continuously increasing sales of these models year on year. SMC is only protecting its I.P. rights in respect of the car models by providing for the word "Suz....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is Agreement, in strict accordance with the terms and subject to the conditions herein set forth, (i) the exclusive right (within the meaning as provided for in Article 5.02 of this Agreement) to use the Licensed Information and Licensed Trademarks for the engineering, design and development, manufacture, testing quality control, sale and after-sales service of PRODUCTS and PARTS within the Territory and (ii) the non-exclusive right to use the same for the sale of PRODUCTS and PARTS in such other countries and in such manners of export and sale as may be approved in writing by Suzuki pursuant to Article 5.05." The main object of the license agreement is to provide the appellant exclusive right and license to manufacture and sell the licensed product for a specified limited duration., all others rights vested in the license agreement including technology, technical know how and Trade Mark are linked to the core right to manufacture and sell licensed products. Further, the appellant enters into separate license agreement for each model of motor car. Thus the dominant object of payment of royalty being consideration for allowing use of technical know how for manufacture of the variou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it was not open to the Revenue to split the payment and consider a part of such payments for each of the above items. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in instalments or on the basis that the payment is related to a contingency ('options', in this case), particularly when the transaction does not contemplate such a split up. It is further submitted that for the purpose of computing the ALP, the TPO has re-written the agreements/transaction undertaken by the assessee by artificially segregating the single transaction of payment of royalty into two transactions of payment of royalty for use of brand name and for use of technology. It is respectfully submitted that not only such re-writing of transactions undertaken by the appellant is inconsistent with the factual reality of the case but is also contrary to various judicial pronouncements Reliance is placed on the following observation of the Hon'ble Delhi bench of the Tribunal in the case of Sony India (P) Ltd vs DCIT (ITA no 1189/Del/2005): "(i) Under Fiscal Laws, actual transaction, as entered into between the parties,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that a brand is a notion through which the customers relate the technology and certain other characteristics with a specific product. Apart from other factors, the technology and quality of a product plays a critical role in development of a brand. Globally, the brand "Suzuki", apart from other characteristics, is known for the technology behind its products. Since, the brand "Suzuki" and the technology which that brand represents are interlinked and interdependent, it would be inappropriate to separately evaluate the royalty paid for use of technology and for use of brand name. It is pertinent to highlight here that it is almost impossible to bifurcate the royalty payment in right to use technology and right to use trademark as both of them are very closely inter-linked. Considering this and as directed by the Central government in its approval for Royalty payment ,appellant has been paying R& D cess (payable for import of technology) on the entire royalty paid. Relevant extracts of the RBI approval are reproduced below: "All payment under the collaboration Agreement would be liable for levy of cess under the Research and Development Cess Act, 1986.The 1986 Cess has to be depos....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lue, which is the allegation made by the TPO. Similarly, the inferences made by Ld. TPO about impairment of 'Maruti' brand and reinforcement of Suzuki brand are totally against commercial facts, realities and are more inferences and presumptuous. The aforesaid averments of the appellant are also supported by the brand ranking and brand value of "Suzuki". The fact that Suzuki Brand is an internationally renowned Global Brand can be substantiated by the report of The TOP 500 Brands available on Internet. The Brand Finance (third party) (http://brandirectory.com/) has issued a report of TOP 500 Global Brand, where it has ranked all top 500 brands across the globe. 'Suzuki' brand is at the rank of 236 in that rank list. The Brand Finance (third party) (http://brandirectory.com/) has issued a report of TOP 500 Global Brand (attached as Annexure -1). A brand which has a place in top 500 brands across the globe cannot said to be having a Nil value in India. .The Suzuki Brand has been valued as under year on year:- S.No Year Value (In MillionDollars) 1 2011 4320 2 2010 3211 3 2009 2060 4 2008 3428 Source:- http://brandirectory.com/profile/suzuki In addition to this as per....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised." In the case of Dresser Rand India Pvt Ltd vs Addl. CIT (ITA No 8753/Mum/2010), the Hon'ble Mumbai Bench of the Tribunal held as under It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. XXXX This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ify TP adjustment: See section 92C(3) of the Act and also the judgment of Delhi High Court in the case of Moser Baer (316 ITR 1). The TPO has not placed any empirical evidence or material on record to show either that there has been any impairment of the Maruti brand or that there has been benefit accruing to Suzuki from the use of Suzuki's name conjointly with that of Maruti in India on the appellant's product. This is especially important because Suzuki has no four wheeler sales in India at all and has no right to use the joined name Maruti-Suzuki anywhere in the world. Re: Basic and irreconcilable inconsistency in TPO's order regarding AMP expenses and royalty: The TPO has imputed a very large T.P. adjustment in respect of AMP expenses on the basis or ground that the said expenses incurred by the appellant year after year since 1982 have resulted in a significant increase in Suzuki's brand value. Assuming (without conceding) that this is correct, then Suzuki cannot be considered to be a weak brand which is only reinforcing on Maruti's brand and taking away value from it. In fact, Suzuki has extended a favour by permitting use of their established brand names / models by the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....alty rate of MSIL 1.82% which is less than 5% is with in the arm's length range of the royalty payments, therefore no adjustment at all is warranted on royalty. The Ministry of Commerce and Industry has, through its FDI policy and vide Press Note No 18 (1997) permitted an automatic permission for amount not exceeding 5 percent of domestic sales and 8 percent of exports towards payment of royalty outside India.. Similar approval has also been accorded by the RBI under the Current Account Regulations of the Foreign Exchange Management Laws. In view of the permissible rates in the FDI policy (5 percent and 8 percent), the appellant's effective royalty rate of 1.82% percent establishes the fact that the appellant received a huge 'subsidy' in the royalty paid to SMC. Such concession/ subsidy is also evident from the fact that the appellant has earned an operating margin of 11.19% which is significantly higher than the margin earned by the comparables used by the TPO in its TP order. Further, no additional benefit is passed on to SMC by the appellant even though it is using SMC's SMC's trademark/ brand/ logo. (f) No four-wheeler business of Suzuki in India - hence question of promoting....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ral Government approval for payment of royalty no third party comparable was otherwise considered necessary to establish the arm's length price. In a recent case of Sona Okegawa Precision Forgings Ltd (ITA no.4781(Delhi) of 2010, the hon'ble Delhi ITAT up-held the deletion of Transfer-pricing adjustment made by the CIT(A), observing as under: The assessee has placed on record a copy of the letter dated 30.04.1993 written by the Reserve Bank of India, Exchange Control Department, to Sona Steering Systems Ltd., in which payment of royalty @ 3% on domestic sales was allowed to be paid for a period of five years. There are similar other correspondences which have been placed on record. The assessee has also placed on record a press note issued by the Government of India, Ministry of Commerce and Industries, Department of Industrial Policy & Promotion, issued in 2003, under which royalty payment @ 8% on export sales and 5% on domestic sales have been referred to be reasonable for the purpose of processing approval of payments. On the other hand, the AO failed to bring any material on record that payment of royalty @ 3% was not at arm's length. Therefore, the payment stands justified u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the standalone financial data of SMC with respect to its Advertising Expenses and R&D expenses for the past 3 years,:- Particulars (Unit: Million Yen) Ratio 31/03/2005 313/2004 31/03/2003 Total Advertising Expenses 19,192 30,131 29,529 78,852 26% Research & Development Expenses 84,865 74,573 59,530 218,968 74% 297820 Further, the TPO has sought to attribute the royalty charged by SMC purely on the basis of the ratio in which expenses have been incurred by SMC. It may be noted that SMC, in the course of its business operations, is engaged in more than just one segment. SMC, during the year, had a diversified portfolio, and was engaged in manufacture of Commercial vehicles, Motorcycles, outboard motors, generators, general purpose engines, marine and power products and various other products. Further, SMC sells not only in Japan and India, but has a global presence, manufacturing at its 22 locations across the globe and selling across its network of 187 countries which entail significant expenditure on R&D and Brand promotion, which would, be attributable across multiple geographies, and across product lines. Further, the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to any other relevant base. (ii) The net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. (iii) The net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market. (iv) The net profit realized by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub­clause (iii). (v) The net profit margins thus established is then taken into account to arrive at an arms length price in relation to the international transaction. Thus each international transaction needs to be separately benchmarked. The stress is on the word an international transaction. This proposition that each international transaction mandatory requires separate and individual benchmarking, finds supp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ional transaction. (b) The class or classes of associated enterprise entering into the transaction and the function or to be employed and risks assumed by such enterprises. (c) The availability coverage and reliability of data necessary for application of the method. (d) The degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions. (e) The extent to which reliable and accurate adjustments can be made to account for differences if any between the international transactions or between the enterprises entering into such transactions. (f) The nature, extent and reliability of assumptions required to be made in application of a method. A transaction such as rate of interest on loan has to be benchmarked using the market rates available which would mean that comparable uncontrolled Price Method (CUP), is the Most Appropriate Method,. The rate of interest on loan cannot be benchmarked relying upon profitability margin. Thus, transactional Net Margin Method (TNMM), being a method relying upon profit margin is manifestly inappropriate. Similarly, an international transaction such....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., 2003. Prior to the new agreement, same services were provided by a 3rd Party i.e. Container Maritime Agency Pvt. Ltd. (CMAPL) under a similar agency agreement dated 20th Oct, 1999 which had expired in Aug, 2003. The Tribunal held that it would not be appropriate, for making any comparison in the relevant year, the earlier agency agreement with the third party CMP AL that had expired prior to Sep, 2003 as the rates were applicable in the earlier years. The earlier party could not be considered as an external CUP. Thus, the rates of the earlier agreement will not be appropriate parameter for determining the ALP, in the current A Y. Res judicata There is a plethora of jurisprudence on this issue, wherein it has been held that resjudicata is not applicable to taxation cases. In fact, the Hon'ble Accountant Member, relying upon M/s Distributors Baroda Pvt. Ltd. ; in the case of M/s Sumitoms Corporation India P. Ltd. v. DCIT- 2013, 32 Taxmann.com 85 Delhi has held that" to perpetuate an error is no heroism". (c) None of the prescribed method applied by TPO. Counter Submissions The TPO has relied on CUP. In the cases of M/s Deloitte Consulting India (P) Ltd. v. DCIT- 30/03/2012, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es, have not ruled out the determination of reasonableness of expenditure. This has been elaborated by the Hon'ble Delhi ITAT in the case of Mis Ericsson India P. Ltd. v. ACIT- (ITA No. 514/Del/2011) dated 11.05.2012, of Sh. G.D. Aggarwal and Sh. I. P. Bansal. Paragraph 30, thereof, which being relevant, is being reproduced. [Pease See Annexure 6] Incidentally, the assessee has only selectively quoted this order. The relevant portion is - 30. Keeping in view the aforementioned decision of Hon 'ble Delhi High Court, we are of the opinion that it will be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee. At the same time it has also to be seen that whether the price paid by the assessee is at arm's length. The term 'arm's length price' has been defined in section 92F which means a price which is applied or proposed to be applied in the transactions between the persons other then Associate Enterprises in uncontrolled conditions. It is only because of that their Lordships in the aforementioned decision have observed that "the quantum of expenditure can no doubt be examined by the TPO as per l....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... legal obligation arises from the joint venture agreements, which is a pre- incorporation agreement which is binding. This argument is to be rejected as "ALP" has to be determined irrespective of any contractual obligation undertaken by the parties. If is held that the TP provisions do not apply whenever there is a legal obligation to pay, then the entire objective of the provisions will be defeated. The issue which the TPO requires to adjudicate is not whether the assessee has a legal obligation to pay and whether the payment made is for the purpose of business etc, but only to determine the ALP of the transaction i.e., to examine as to whether the transactions are at arm's length. If the transactions are, in the opinion of the TPO, not at arm's length, the required adjustment has to be made, as provided in the Act, irrespective of the fact that the expenditure is allowable under other provisions of the Act. " (f) Effective rate of royalty in any case is far lower than permissible and thus heavily subsidized. Counter Submissions. The assessee has brought in some new facts, based on internet search. Further the assessee has relied upon RBIIFDI norms. It is pointed out that, as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....40/D/2011) of Jan.2013, Para 29.1 till 29.16 (Para VIII) of the order is relevant." 9. We have carefully considered the submissions and perused the records. We find that assessee in this case is a license manufacturer of cars in India of its Associated Enterprise SMC. In terms of the license assessee has paid lumpsum royalty as well as running royalty SMC. TPO was of the opinion that the royalty paid should be split towards technical assistance and brand. For making the above bifurcation. TPO referred to financials of SMC. The TPO referred to the figures of advertisement and research and development expenditure of SMC for the past 5 years. he compiled the respective totals of these two items. He further computed the ratio between them. He opined the percentage of expenditure of research and development can represent amount attributable to use of technology and the percentage of advertisement expenditure can represent amount attributable to use of brand. He split the royalty as under:- Total amount of royalty Rs. 198,57,42,097/- Amount attributable to use of Technology being 50.58% of the Amount of royalty Rs. 100,43,88,352/- Amount attributable to use of Brand name being 49.4....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enced by the need to manipulate and thereby erode the Indian tax base. Hence, the same terms and conditions of agreement are in place during the Financial Year 2004-05, the license agreements can be said to be at arm's length. 9.3 In this regard, we place reliance upon the decision of the Mumbai Tribunal the case of SC Enviro Agro India Ltd vs DCIT (ITA No 704/Mum/2012), wherein it was held that "Facts this year in which royalty has been paid based on the same agreement as in earlier are identical. Therefore, respectfully following the decision of the Tribunal in assessee's own case in assessment years 2003-04 and 2004-05 (supra), we set aside the order of CIT(A) and delete the addition made." 9.4 Hence, in light of the aforesaid, we agree with the contention of the assessee that the action of the TPO in holding that the payment of royalty by the assessee was unjustified is not sustainable. 9.5 In this regard, Ld. Departmental Representative has submitted that even in 1982 and 1992, there existed a relationship of control (or association) between MSIL and SMC, Japan. He has further submitted that transaction have to be evaluated every year. 9.6 Ld. Departmental Representative h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the agreement themselves have not contemplated a split up in the agreement and have considered the agreement as an entire package. The relevant citations in this regard has been brought out in detail in the assessee's submission above. Thus, we find that for the purpose of computing the arms length price, the TPO has re-written the agreement / transaction undertaken by the assessee by artificially segregating the single transaction of payment of royalty into two transactions of payment of royalty for use of brand name and for use of technology. We agree with such re-writing of transaction undertaken by the assessee is inconsistent with the factual realities of the case and is also contrary to the various judicial pronouncements. In this regard, the following case laws referred by the assessee's counsel are germane and supports the case of the assessee. i) Hon'ble Delhi High Court decision in the case of Sony India (P) Ltd. DCIT (I.T.A. No. 1189/Del/2005) ii) Hon'ble Delhi High Court decision in the case of C.I.T. vs. EKL Appliances (I.T.A. No. 1068/2011 and 1070/2011). 13.1 Thus, we agree with the submission of the assessee's counsel that the entire business model of the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... C.I.T. (I.T.A. No. 8753/Mum/2010) iii) Decision of Vishakhapatnam Bench of the Tribunal in the case of LG Polymers India Pvt. Ltd. vs. Addl. C.I.T. (I.T.A. No. 524/Vizag/2010). iv) Decision of the Tribunal in the case of M/s Ericsson India Pvt. Ltd. vs. DCIT (I.T.A. No. 5141/Del/2011). v) Decision of the Mumbai Tribunal in the case of SC Enviro Agro India Ltd. vs. DCIT in (I.T.A. No. 2057 & 2058/Mum/2009). 16. We further find that TPO has imputed a very large T.P. adjustment in respect of AMP expenses on the basis that the said expenses incurred by the assessee year after year since 1982 have resulted in a significant increase in Suzuki's brand value. If this be so then Suzuki cannot be considered to be a weak brand which is only reinforcing on Maruti's brand and taking away value from it. 17. On the basis of above said discussion and precedents, we are of the opinion that TPO was not justified in making adjustment of Rs. 98,13,53,745/-. Thus we hold that TPO's conclusion that the payment of above sum as royalty to SMC was attributable to use of brand name is not sustainable. Further, TPO's conclusion that payment of above sum was not required is liable to be set aside. Hence....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... referred to this special bench are inter-linked, still we are taking up question no. 1 first. The ld. Counsel for the assessee ahs assailed the impugned order on various legal and factual issues. In so far as the first question is concerned, we have divided such submissions into seven broader parts for the sake of convenience, which will be dealt with one by one. I. JURISDICTION OF TPO II. RULE 29 III. TRANSACTION IV. INTERNATIONAL TRANSACTION V. COST/ VALUE OF TRANSACTION VI. METHODS FOR DETERMINATION OF ALO OF INTERNATIONAL TRANSACTION VII. MARUTI SUZUKI'S CASE" 7.2. In the wake of these criterias the Special Bench proceeded to decide various issues by a very lengthy order, which is conveniently reproduced for the sake of brevity. The issue of retrospective application, jurisdiction, AO/TPO's powers etc. etc. have been decided in favour of revenue and against the assessee in L.G. Electronics India Pvt. Ltd. by following observations: "7.19. Here it is relevant to note that the Finance Act, 2012 introduced sub-sec. (2C) along with sub- sec. (2B) of section 92CA. Whereas sub-section (2B) has been made retrospectively applicable from 1.6.2002, sub-section (2C) has been giv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctions not referred to him. It is a different matter that the reference by the AO may be for one international transaction and the TPO while determining . ALP in respect of that one international transaction, also comes across certain. other international transactions requiring determination of ALP. Thus, reference by the AO to the TPO for at least one international transaction is a necessary stipulation to assume power for determining ALP in respect of other transactions. 7.21. Another point urged by the ld. counsel for the appellant was that sub-sec. (I) requires making a reference by the AO with the previous approval of the Commissioner. It was contended that insofar as suo motu exercise of power by the TPO on other international transactions is concerned, the requirement of seeking approval from the CIT will be lacking, rendering the assumption of jurisdiction by the TPO over such other international transactions as invalid. Here again we find ourselves in respectful disagreement with the submission. What sub-sec. (1) requires is that the AO should seek previous approval of the Commissioner in respect of the transactions for which he is making reference to the TPO. There is no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd including them in sub-section (2B) of section 92CA. It is relevant to note that sub-sec. (2A) is a general provision on the issue of the TPO suo motu taking up an international transaction not referred by the AO, whereas sub-sec. (2B) is a special provision limited in its scope only to such international transactions in respect of which the assessee did not furnish report u/s 92E. We have thoroughly discussed elsewhere in this order that when there is special provision governing a particular types of cases, then such cases stand excluded from the general provision governing all the cases. As such we are of the considered opinion that the scope of sub-sec. (2B) covers all types of international transactions in respect of which the assessee has not furnished report, whether or not these are international transactions as per the assessee's version. The contention of the ld. counsel in this regard is thus sans merits and is hereby rejected. We want to clarify that the above discussion has been made only to deal with the contention raised on behalf of some of the interveners. But for that, it is only academic in so far as we are concerned with the present appeal involving the A.Y. 20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r AY 2007-08; and Rs. 25,47,70,503/- for AY 2008-09 shall only be reconsidered by assessing officer for the purpose of ALP by applying suitable comparables afresh to decide the TP adjustments in this behalf in accordance with law. Per contra ld. CIT(DR) contends that the entire issue of expenditure shall be set aside, restored back to the file of assessing officer. The assessee counters the CIT(DR)'s contention that all the details are on record and were produced before every lower authorities. In the absence of any objection or adverse comment it will amount to harassment of the assessee to face second round of proceedings for no fault of it. Ld. CIT(DR) also could not offer any adverse comment on the segregation and details of sales related expenses i.e. trade discount, volume rebate, cash discount, commission etc. So also, no adverse comments were offered in respect of subsidy received from Singapore to meet the AMP expenses. While dictating this order, we came across the ITAT Chandigarh Bench decision in the case of M/s Glaxo Smitkline Consumer Healthcare Ltd. for A.Y. 2007-08, which came across nearly similar type of situation, where such type of selling expense were excluded ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oming from any of the lower authorities i.e. AO/ TPO, DRP and also ld. CIT(DR), there is no justification in setting aside these expenses for verification again to AO/TPO. Our view is supported by the Chandigarh Bench judgment in the case of M/s Glaxo Smitkline Consumer Healthcare Ltd. (supra). Consequently, the figures mentioned at Placitum 'E' of the table, reproduced in para 4.23 above, are set aside back to the file of AO/TPO to decide the issue of AMP expenses by applying the proper comparables after hearing the assessee and keeping in view the Special Bench directions in this behalf. Thus, the grounds about TP adjustments in respect of AMP expenses are partly allowed for statistical purposes." 23. Respectfully following the Special Bench decision the legal grounds were decided against the assessee and as a consequence thereof the relevant ground raised in the memo of appeal, touching the legal grounds were dismissed. Following the same ratio, we also dismiss the legal grounds raised by the assessee in the memo of appeal. 24. We further note that Ld. Counsel of the assessee has submitted that the assessee has filed an application for admission of additional evidence and also....