TaxTMI 
TaxTMI 
2015 (12) TMI 1188
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....ational transactions with their respective foreign associated enterprises ('AEs'). The case of the Revenue is that the arm's length price ('ALP') of the AMP expenses incurred by the Indian entity i.e the Assessee is required to be determined since it has been using, for marketing and promotion or otherwise the brand of its foreign AE and that the incurring of such AMP expenses, while enuring to the benefit of the Assessee, is also benefiting the brand of the foreign AE. The attempt by the revenue is to attribute some part of the AMP expenses incurred as having been incurred for the foreign AE for which the Assessee is to be compensated or reimbursed by the foreign AE. The ITAT's decision in LG Electronics 3. Before discussing the facts of the present case it requires to be noticed that the issue of making of TP adjustments to AMP expenses was considered by the Special Bench of the ITAT in a batch of cases. By a majority of 2:1, the Special Bench of the ITAT in LG Electronics India Pvt. Ltd. v. ACIT (2013) 140 ITD 41 (Del), inter alia decided: (i) A TP adjustment in relation to AMP expenses incurred by the Assessee for creating and improving the marketing intangib....
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....i) Whether the additions suggested by the Transfer Pricing Officer on account of Advertising/Marketing and Promotion Expenses (AMP Expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by the Assessing Officer, having regard to retrospective amendment to Section 92CA of the Income Tax Act, 1961 by Finance Act, 2012. (ii)Whether AMP Expenses incurred by the assessee in India can be treated and categorized as an international transaction under Section 92B of the Income Tax Act, 1961? (iii) Whether under Chapter X of the Income Tax Act, 1961, a transfer pricing adjustment can be made by the Transfer Pricing Officer/ Assessing Officer in respect of expenditure treated as AMP Expenses and if so in which circumstances? (iv) If answer to question Nos.2 and 3 is in favour of the Revenue, whether the Income Tax Appellate Tribunal was right in holding that transfer pricing adjustment in respect of AMP Expenses should be computed by applying Cost Plus Method. (v) Whether the Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by the Transfer Pri....
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.... and risks being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. (viii) The Bright Line Test was judicial legislation. By validating the Bright Line Test the Special Bench in LG Electronics Case went beyond Chapter X of the Act. Even international tax jurisprudence and commentaries do not recognise BLT for bifurcation of routine and non-routine expenses. (ix) Segregation of aggregated transactions requires detailed scrutiny without which there shall be no segregation of a bundled transaction. Set off of transactions segregated as a single transaction is just and equitable and not prohibited by Section 92(3). Set-off is also recognized by international tax experts and commentaries. (x) Segregation of bundled transactions shall be don....
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....rs are not in the nature and character of brand promotion. They are not directly or immediately related to brand building exercise, but have a live link and direct connect with marketing and increased volume of sales or turnover. The brand building connect is too remote and faint. To include and treat the direct marketing expenses like trade or volume discount or incentive as brand building exercise would be contrary to common sense and would be highly exaggerated. Direct marketing and sale related expenses or discounts/concessions would not form part of the AMP expenses. (xvii) The prime lending rate cannot be the basis for computing mark-up under Rule 10B(1)(c) of the Rules, as the case set up by the Revenue pertains to mark-up on AMP expenses as an international transaction. Mark up as per sub-clause (ii) to Rule 10B(1)(c) would be comparable gross profit on the cost or expenses incurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. (xviii) The exceptions laid down in EKL Appliances Case were neither invoked in the present case nor were the conditions satisfied. ....
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....,932 Purchase of finished goods and spares of resale TNMM 112,707,323 Contract R&D services 253,406,000 GIS Services 83,723,000 IPO Services 7,329,000 Technical and brand assistance fee CUP 179,832,400 Payment of interest on ECB loan 22,160,415 Cost recharge 233,216,947 10. Noticing that the Assessee had incurred "extremely high level" of AMP expenses, a reference was made by the Assessing Officer (AO) i.e., the Assistant Commissioner of Income Tax ('ACIT') to the TPO under Section 92CA (1) of the Act for determination of the ALP of the international transactions undertaken by WOIL. The documents prescribed under Rule 10D of the Income Tax Rules, 1962 ('Rules') and other details sought by the TPO were submitted by WOIL. The Assessee also submitted a transfer pricing study ('TP study') dated 24th September 2008 for the FY 2007-08. The order of the TPO 11. By an order dated 20th October 2011, the TPO determined that the extent of AMP expenditure incurred by the Assessee was to expand the reach of the AE's brand in India. The Assessee was, therefore, held to be creating "marketing intangibles" in favour of the AE. ....
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....reation of that marketing intangible. That amount is calculated as below. Total sales made by you : Rs. 17,622,456,000 Arm's length level of AMP exp (3. 78% of sale) : Rs. 666,128,836 Amount actually spent on AMP exp. :Rs.1,960,626,136 Amount spent on creation of marketing intangible :Rs. 1,294,497,300" 13. The TPO did not stop at determining the reimbursable amount at Rs. 1,294,497,300. Since the brand building exercise also involved an amount of service, the TPO held that it called for a mark-up which was taken to equal to the prime lending rate of the State Bank of India which for the FY 2007-08 was 12.5%. This worked out to Rs. 161,812,162. However, considering the Assessee's proposition to reduce the ALP of the transactions related to the payment of technical and brand assistance fee to 'nil', that sum was increased as mark up that could have been charged as AMP expenses. As a result, the amount that the Assessee ought to have received from the AE for the AMP expenses was worked out at Rs. 1,294,497,300. Ultimately, the TPO determined the amount paid on the market intangibles at Rs. 1,807,310,769 being the difference between the actua....
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....processed to find out what portion of it was spent on brand building for the foreign AE and then disallowance should be made for such amount with the proper mark-up by way of TP adjustment. The remaining amount had to be considered as incurred by the Assessee for its own business purposes liable for deduction subject to relevant provisions of the Act. It was noted that if the amount of AMP expenses were to be disallowed both under Sections 37 and 92 of the Act "it will result in double addition to the extent of the original amount incurred for the promotion of the brand of the foreign AE de hors the mark-up". It was, accordingly held that the AO was not justified in observing alternatively that a sum of Rs. 180 crores was not allowable under Section 37(1) of the Act. The matter was accordingly remitted to the AO/TPO for re-working the TP adjustment on account of the AMP expenses in the light of the decision of the Special Bench of the ITAT in LG Electronics (supra). Questions urged by the Revenue 19. In the appeal filed by the Revenue against the impugned order of the ITAT the following five questions have been urged for consideration: "(i) Whether the ITAT erred in ....
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....f of its foreign AE and further that such a transaction was in the nature of provision of service by the Assessee to the AE? (d) Whether on the facts and in the circumstances of the case, the ITAT erred in law in not appreciating that such a TP adjustment could not at all be made in respect of AMP expenses which were found to constitute legitimate, bona fide and deductible business expenditure and the Assessee was the economic owner of the benefit of such expenses? (e) Whether on the facts and in the circumstances of the case, the ITAT erred in law in not quashing the adjustment made by the TPO using the "bright line test", without following any of the prescribed methods for determination of the ALP? (f) Whether on the facts and in the circumstances of the case, the ITAT erred in setting aside the order to the file of the assessing officer/ TPO for fresh benchmarking/ comparability analysis adopting only domestic comparable companies, not using foreign brand?" Questions framed for consideration 21. As far as the above questions projected by the Revenue are concerned, Questions (ii) and (iii) stand answered by the decision in Sony Ericsson (supra) in....
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....on by one of the partners without any binding obligation on the other could not be termed as a transaction. There could not be an inference of the existence of such an 'international transaction'. The onus is on the Revenue to demonstrate the existence of such transaction between the two parties. (iv) The observations in Sony Ericsson about the existence of international transaction involving AMP expenses was limited to the distributors of products manufactured by foreign AEs, viz., Sony Ericsson, Canon India and Reebok India and not to the case in hand where the Assessee was also a manufacturer of household products under the trademark 'Whirlpool'. (v) In order to benchmark an expense under Chapter X of the Act, having regard to the ALP, the sine quo non is that the expense should arise under an international transaction with a foreign AE. Chapter X does not envisage the benchmarking of transactions between the Indian entity and third parties in India where there is no income arising to an Indian enterprise from the foreign AE. (vi) The mere fact that the WOIL is a subsidiary of Whirlpool USA, does not mean that unilateral expense incurred on AMP by WOIL....
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.... is in fact no mutual arrangement between WOIL and Whirlpool USA for allocation or apportionment or contribution of AMP expenses. Submissions of counsel for the Revenue 26. Mr. G.C. Srivastava, learned Special counsel for the Revenue, made an elaborate argument and also filed written submissions. He made an extensive reference to the TP study submitted by the Assessee which according to him shows that the Assessee is engaged both in manufacturing and distribution of products. It also imports some finished goods and spares from its AE which are sold in India. The Assessee distributes the manufactured products to neighbouring countries such as Nepal, Bangladesh, Sri Lanka, Maldives and African countries. The major sales of finished goods are to the AEs which constitutes an international transaction. Even in respect of such exports, the Assessee is undertaking marketing activities. It is submitted that the Assessee is not an independent manufacturer but is manufacturing "for the benefit of the group entities" and its status is akin to that of a contract manufacturer. Therefore the AMP activity is not for the sole benefit of the Assessee but for the group as a whole. 27. Accor....
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.... is required to be prefaced by analysis of the relevant provisions concerning the TP adjustment and determination of AMP international transaction. 31. At the outset, it requires to be noticed that Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C , 92D and 92E , "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shal....
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.... "acted in concert" has been interpreted by the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant i.e., Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a certain target company. There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company. For, de hors the element of the shared common objective or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons act....
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..... It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO. 40. Mr. Srivastava submitted that Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions" could be construed as a machinery provision. But then that provision refers to 'price' and to 'uncontrolled conditions'. It implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. BLT as a determinative tool has been expressly invalidated by....
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....the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 43. As regards allowing the entire expenditure under Section 37 of the Act, there is an obvious contradiction which was attributed to be resolved by the ITAT in the impugned order by asking the TPO to rework the AMP expenses into that which was incurred for building the brand of the foreign AE and that which was incurred wholly or exclusively for the benefit of the WOIL. In Sony Ericsson (supra) this was sought to be explained by stating that Section 37 and Chapter X operate in different domains and merely because an expense was incurred wholly or exclusively for the Indian entity it would not mean that it is also not incurred for the foreign AE. The question then is to what extent the Indian entity should be compensated for the expenses incurred by it on behalf of the foreign AE. What will then be required to be benchmarked is not the AMP expenditure but the extent to which the Indian entity must be compensated. 44. Further in Maruti Suzuki India Ltd. (supra) this Court observed: ....