TaxTMI 
TaxTMI 
2015 (5) TMI 307
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....n facts and in law in computing the income of the appellant at Rs. 72,76,13,235 against the returned income of Rs. 19,66,32,480. 2. That the DRP/ transfer pricing officer ('TPO') erred on facts and in law in making transfer pricing adjustment amounting to Rs. 52,98,12,391 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. Transfer Pricing Adjustment on AMP Expenses: 2.1 That the DRP/TPO 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. 2.2 That the DRP/TPO erred on facts and in law in not appreciating that the AMP expenses, etc., incurred by the appellant in India cannot be characterized as an international transaction as per section 928, so as to invoke the provisions of section 92 of the Act. 2.3 That the DRP/TPO erred on facts and in law in not appreciating that in the absence of any understanding / arrangement bet....
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....ing officer erred on facts and in law in not appreciating that in absence of specific provision under the Transfer Pricing Regulations in India, adjustment on account of the arm's length price of advertisement and brand promotion expenses could not be made by comparing the ratio of AMP expenses to sales of the appellant with that of the comparable entities. 2.13 Without prejudice that the assessing officer erred on facts and in law in considering selling and distribution expenses amounting to Rs. 13,21,20,439 for the purpose of calculating alleged AMP expenditure of the appellant 2.14 Without prejudice that the assessing officer erred on facts and in law in considering the following companies as comparable for benchmarking advertisement and publicity expenses: S.No. Name of the Company AMP/Sales(%) 1. Mayur Leather Products Ltd. 1.75 2. Sant Rubbers Limited 0.13 3. Phoenix International Ltd. 0.14 4. Sohum Shopee Ltd. 1.7 5. Super Shoes Ltd. 0.5 6. Ashapura Intimates Fashion Ltd. 4.9 7. Mayfair Leather Exports Pvt. Ltd. 0.77 8. Spenta International Ltd. 1.17 9. Subhash Polytex ltd. 3.....
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....o be at arm's length applying Transactional Net Margin Method (TNMM) on entity-wide basis. 2.17. That the DRP/TPO erred on facts and in law in not appreciating that since the operating profit margins of the appellant were higher than margins of the comparable companies, the appellant was adequately compensated for the allegedly excess AMP expenses incurred by the appellant. 2.18 Without prejudice, that the assessing officer/DRP erred on facts and in law in not restricting the adjustment to the purchases made from the associated enterprises. 2.19 That the assessing officer I ORP erred on facts and in law in holding that the appellant has rendered service to the AEs by incurring the AMP expense and by holding that markup has to be earned by the appellant in respect of the AMP expenses, alleged to have incurred for and on behalf of the AE. 2.20. That the DRP/TPO erred on facts and in law in applying a markup of 12.50% on the alleged excess AMP expenditure incurred by the appellant, while computing the value of compensation to be received by the appellant on account of promotion of 'Reebok' brand. 2.21 Without prejudice, the assessing officer/DRP erred on fac....
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....ectronics case and the Hon'ble High Court in the aforesaid decision has not approved of the majority decision of the Special Bench and considering para 17.4 of the Special Bench and the findings of the Tribunal has deprecated the broad brush approach upheld by the Tribunal as unwarranted and amounting to judicial legislation. For the said purpose specific attention was invited to para 120 of the judgement of the Hon'ble High Court. 3.1. Accordingly it was his prayer that since the Hon'ble High Court has not approved of the decision of the Special Bench the issue needs to be restored to the AO/TPO as the facts will need to be addressed afresh in the light of the directions of the Hon'ble High Court. Attention was invited to the relevant findings in the DRP's order and the AO/TPO and page 7 of the judgement filed wherein it has been brought out that against the findings of the ITAT in 2008-09 assessment year both the Revenue and the assessee were in appeal before the Hon'ble High Court. It was submitted that the said order has been considered by the DRP which stands restored by the Hon'ble High Court as the majority decision of the Special Bench in the L. G. Electronics Case was h....
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....d the rival submissions and perused the material available on record. A perusal of the same shows that the Reebok Group is claimed to be a US based global company in the design and marketing of sports and fitness products, including footwear, apparel and accessories, as well as the design and marketing of the same. As per the Transfer Pricing report on record considered by the tax authorities it is claimed to be a German Athletic giant as Adidas AG had acquired Reebok for about 3.8 billion USD. Adidas Group is considered to be a global leader in the sportswear goods industry and is considered to have the broadest portfolio of products. The assessee company as per record is incorporated on 01.03.1995 as a joint venture between the Reebok Mauritius Ltd. and Focus Energy Ltd. (formerly known as Phoenix Overseas). The assessee is stated to be engaged in the business of distribution of footwear, apparel, fitness equipment and sportswear. It procures finished goods (mostly from local suppliers) and resells through distributors and franchise stores. The assessee in the year under consideration had declared taxable income of Rs. 19.66 crore odd. In view of the TPO's order proposing an adju....
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....one of those and instead introduced 5 new comparables which were considered to be engaged in similar distribution and sales activities of similar products and thereby he arrived at the arithmetic mean of 0.85% and concluded that the assessee had incurred expenditure in excess of the bright line to the following extent:- Amount in INR Value of Gross Sales 7,78,15,09,376 AMP/Sales of the Comparables 0.85% Amount that represent bright line 6,61,42,829 Expenditure on AMP by assessee 83,85,01,350 Expenditure in excess of bright line 77,23,58,521 9.3. As a result of this, he proposed an adjustment of Rs. 86.89 crores odd in the following manner:- Amount in INR Value of Gross Sales 7,78,15,09,376 AMP/Sales of the Comparables 0.85% Amount that represent bright line 6,61,42,829 Expenditure on AMP by assessee 83,85,01,350 Expenditure in excess of bright line 77,23,58,521 Markup @ 12.50% 9,65,44,815 Adjustment required to be made 86,89,03,336 9.4. The assessee thereafter is found to have submitted a list of 34 comparables for benchmarking the AMP/sales as the average mea....
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....ision of the ITAT in assessee's own case for 2008- 09 assessment year which had also relied upon the aforesaid decision of the Special Bench. 10.4. Similarly objections No.-1.13 and 1.16 to 1.19 challenging the use of "bright line test"; use of routine risk distributor as a comparable, considering the methodology approved by the Special bench in L. G. Electronics case were also rejected. 10.5. The remaining objections No.-1.14, 1.20 were also dismissed relying upon the aforesaid decision of the Special Bench. Similar fate was met by objection No.1.15 where the without prejudice argument put forth by the assessee being an "economic owner of the marketing intangibles" was also not accepted as the concept following the view of the Special Bench. 10.6. Objection No.-1.22 addressing the issue of selling and distribution expenses following the decision of ITAT in assessee's own case in 2008-09 assessment year was restored back to the AO. The objections posed to the 4 comparables by the assessee vide objection No.-1.23-1.25 was also not accepted. Similarly the objection No.-1.27, 1.28 challenging the mark-up of 2.15% was also dismissed. 11. In the aforesaid background the argu....
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.... brand. It is in this manner that value of the brand or brand equity is calculated. Such calculations would be relevant when there is an attempt to sell or transfer the brand name. Reputed brands do not go in for advertisement with the intention to increase the brand value, but to increase the sales and thereby earn larger and greater profits. It is not the case of the Revenue that the foreign AEs are in the business of sale/transfer of brands." 11.1. Reference has been made to paras 111 and 112 of the said judgement so as to point out that the issues considered in the light of the parameters of the majority judgement in L.G. Electronics India Pvt. Ltd. (supra) as set out in para 17.4 are no longer good law as they have been held to be "unrealistic and impracticable, if not delusive and misleading". The branded products due to consumerism and commercial reality have been held to "own" and have a reputation and intrinsic believability and acceptance which also results in higher price and margins contrary to the conclusions of the majority view in the decision of the Special Bench consequently both the tax authority and the tax payer will need to address the issues afresh. For ....
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....gth price. The aforesaid discussion substantially negates and rejects the Revenue's case. But there are aspects and contentions in favour of the Revenue which requires elucidation." (emphasis provided) 11.2. Referring to para 113 it has been submitted that considering the applicability of bright line test, the minority and the majority view in the context of para 17.4 and 17.6, and the stand of the Revenue; and the varied nuances of the "brand" and "brand building" in para 117 their Lordships found the argument of the Revenue as sceptical and conjectural. Their Lordships held that the Revenue has generalised and the argument adopts a universal and ubiquitous approach in the contention that increased turnover would not benefit the Indian AE. 11.3. Inviting attention to para 118 it was submitted that the Indian subsidiaries in the present case are engaged in distribution and marketing functions of the products manufactured by foreign AEs and in some cases, products are also manufactured by them under license in India. The facts consequently need to be considered afresh. 11.4. Referring to the said para it was submitted that their Lordships have held that even though the func....
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....f time. The aforesaid arguments fails to notice the fundamental principle of international taxation and Chapter X of the Act that the foreign AE and the Indian AE are two separate tax centres and taxable entities. Profits or enhanced profits consequent to higher manufacturing turnover would be taxed in the hands of the foreign AE, whereas higher profits as a result of increased turnover relatable to distribution and marketing functions would be taxed in the hands of the Indian subsidiary, i.e. the AE. The position would be different if the foreign AE has Permanent Establishment in India. The Revenue has generalised and the argument adopts a universal and ubiquitous approach in the contention that increased turnover would not benefit the Indian AE. The argument is sceptical and conjectural. Moreover, transfer pricing can always correct profit shifting, albeit, by reducing/increasing price/consideration payable to the Indian AE. 118. The Indian subsidiaries in the present case are engaged in distribution and marketing functions of the products manufactured by foreign AEs and in some cases, products are also manufactured by them under license in India. Figure 2.1 refers to the valu....
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....facturer is the reason why services of Indian assessees have been engaged by the AEs resident abroad. This argument itself does not show that brand building is being independently undertaken and, therefore, should be treated as a separate international transaction. However, the arm's length computation made both by the assessee as well as the TPO must take into account the AMP expenses. 120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be subjected to the 'bright line test' on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate international transaction of brand building. Such a broad-brush universal approach is unwarranted and would amount to judicial legislation. During the course of arguments, it was accepted by the Revenue that the TPOs/Assessing Officers have universally applied 'bright line test' to decipher and compute value of international transaction and thereafter applied 'Cost Plus Method' ....
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....rand name 'Reebok' by 'Adidas' and asserted that the entire benefit was reaped by the parent entity and not by Reebok India Company Ltd.. Re-organisation, sale and transfer of a brand as a result of merger and acquisition or sale is not directly a subject matter of these appeals. As noted above, in a given case where the Indian AE claims economic ownership of the brand and is deprived or transfers the said economic ownership, consequences would flow and it may require transfer pricing assessment. In the written submissions filed by Sony India Private Limited, they have accepted the said position and stated as under:- 7.8. "Two inferences are therefore inevitable- till a brand gets terminated, transferred or sold, its value is measured only in terms of the market share or sales turnover. At the time of the sale, in certain circumstances it becomes an independent standalone transfer of an intangible right commanding a separate value or consideration. As a result of which: 7.8.1 The commercial benefit of advertisement or marketing accrues to the appellant/the tested party in India for having promoted the sale of the products in India. Income-tax Act recognises this and therefore....
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....ly shoulders the burden in case of a bad judgment. Profits or losses, therefore, correspond to the risk and market consideration. There is also functional incompatibility between a distributor and a retailer. Retailers cannot be compared with distributor also performing marketing functions. Foreign global enterprises frequently adopt a subsidiary model, i.e. the products are distributed and marketed in a targeted country through a wholly owned subsidiary or a sales subsidiary. A comparable would be an unrelated identity with similar distribution and marketing functions." 13. Giving our utmost consideration to the initial prayer of the Revenue, we find on facts that the prayer of the Ld. AR that the issue needs to be considered afresh has to be accepted as full and necessary facts are not available as both the tax payer and the tax authorities have necessarily proceeded at the relevant point of time as per the prevalent legal precedent which undisputably has been upset by the Jurisdictional High Court as would be further evident from the aforesaid paras where their Lordships have summed up the view taken:- 194. In view of the aforesaid discussion, substantial questions of law ....
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....sis, which would include AMP function/expenses. (ii) The second step mandates ascertainment of comparables or comparable analysis. This would have reference to the method adopted which matches the functions and obligations performed by the tested party including AMP expenses. (iii) A comparable is acceptable, if based upon comparison of conditions a controlled transaction is similar with the conditions in the transactions between independent enterprises. In other words, the economically relevant characteristics of the 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 the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate the effect of such differences on the price or margin. Thus, identification of the potential comparables is the key to the transfer pricing analysis. As a sequitur, it follows that the choice of the most appropriate method would be dependent upon availa....
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....ion and quality. "Brand" has reference to a name, trademark or trade name and like 'goodwill' is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. (x) Parameters specified in paragraph 17.4 of the order dated 23rd January, 2013 in the case of L.G. Electronics India Pvt Ltd (supra) are not binding on the assessed or the Revenue. The 'bright line test' has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate 'routine' and 'non-routine' AMP or brand building exer....
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....s 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 a part of inter-connected international transaction and subjected to arm's length pricing. 195. The above noted pointers have to be read along with our discussion under the headings D to P. In case of any doubt, debate or purported conflict, it would be preferable to rely upon detailed elucidation made under the headings, D to P. 196. Common questions raised by the Revenue in their appeals:- "1. Whether the Income Tax Appellate Tribunal was right in distinguishing and directing that selling expenses in the nature of trade/volume discounts, rebates and commission paid to retailers/dealers etc. cannot be included in the AMP Expenses?" In terms of and subject to our discussion under the headings O and P, the substantial question of law has to be answered against the Revenue and in favour of the assessee." 14. Accordingly on a consideration of the entirety of the facts and submission of t....
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....e (iv) can give reliable and accurate results, internal comparables could still be applied. This would likely happen, when AMP expenses are insignificant in quantum. 163. Thus, in such cases, external comparables where said parties are performing similar functions including AMP expenses would give more accurate and precise results. 164. However, it would be wrong to assert and accept that gross profit margins would not inevitably include cost of AMP expenses. The gross profit margins could remunerate an AE performing marketing and selling function. This has to be tested and examined without any assumption against the assessed. A finding on the said aspect would require detailed verification and ascertainment. 165. An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be ....
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....pheld adoption of CP Method after applying 'bright line test' in the case of Reebok India Co. Ltd. and Canon India Pvt. Ltd. The 'bright line test' adopted to demarcate the routine and nonroutine AMP expenditure is predicated on selection of a 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, the said finding would not be correct. The approach and procedure for ascertaining /determining arm's length price under the RP Method is different. For this reason, and other grounds recorded, we have passed an order of remit to the Tribunal for examination of the factual matrix." 15. A perusal of paras 179 -183 of the said judgement further shows that the royalty paid to Reebok International Ltd., U.K. was bench-marked by the assessee using CUP method as the most appropriate method which was not accepted by the TPO. However the Tribunal did not uphold the finding of the TPO who had concluded that the assessee had not derived any commercial benefit as technology and know-how had not resulted in any substantial profit increase. The finding of the Tribunal that the question of ....
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....ayer. Examination of details revealed that following expenses were not in the nature of legal and professional and could not be said to have been incurred in the normal course of business:- 05.04.2009 Gym Maintenance charges Rs.17,000 09.04.2009 Bonus payout Rs.42,250 30.04.2009 Mobile bill Rs.3,000 30.04.2009 Rent on club into cell Rs.40,000 05.05.2009 Gym maintenance charges-J.K.Sharma Rs.17,000 05.06.2009 Gym maintenance charges-J.K.Sharma Rs.17,000 17.06.2009 DLF Golf Expenses of Harpreet Rs.45,000 06.07.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 17.07.2009 Conveyance expenses to Nisha Verma & Vinita Sharma Rs.6,244 29.07.2009 Reimbursement of expenses Vinita Shetty Rs.11,000 29.07.2009 Rent club into cell Rs.40,000 07.08.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 07.09.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 07.10.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 19.11.2009 Rent to club into cell Rs.40,000 04.12.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 07.01.2010 Gym Maintenance charges-J.K.Sharma....