TaxTMI 
TaxTMI 
2015 (12) TMI 1332
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....6382/Del/2012 and 3861/Del/2010 for AYs 2006-07, 2007-08, 2008-09 and 2009-10. 3. The Revenue's two appeals, i.e., ITA No.165 of 2015 and 166 of 2015 are directed against the same impugned common order of the ITAT. The seventh appeal, i.e., ITA No.950 of 2015, is by the Assessee and is directed against the order dated 19th June 2015 of the ITAT in ITA No. 471/Del/2015. Background facts 4. The Assessee, Bausch & Lomb (India) Pvt. Ltd. ('BLI'), formerly known as Bausch & Lomb Eyecare (India) Pvt. Ltd., was incorporated on 30th May 2000 under the Companies Act, 1956. It is engaged in the business of manufacturing and trading of soft contact lenses, eye care solutions and protein removing enzyme tablets (vision-care segment) and distribution of imported products such as Excimer Laser System, cataract machines and intra-ocular lenses (surgical segment). 5. The immediate parent company of the Assessee is B&L South Asia Inc., which holds 99.9% of its equity share capital. The balance 0.01% is held by B&L Opticare Inc., USA ('B&L, USA'). B&L, USA began its operations in 1853 and employs 13,000 employees across its Group companies ('B&L Group') in more than a hundred companies. ....
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....he functions relating to carrying out of sales and marketing, business development and warranty and after sales support were also factored in. The declared international transactions were benchmarked applying Transactional Net Margin Method (segmental) ('TNMM') and determined to be at arm's length. The Assessee's case is that the TP study was not disputed by TPO. 11. On 23rd October 2009, the TPO passed an order in which inter alia¸ it was noted that the Assessee had entered into an agreement with its AE, B&L USA, for distribution of the product manufactured by its group companies, in terms of which the Assessee was required to promote the B&L brand and to develop marketing intangibles for B&L products in India by incurring expenditure on AMP. Relying on a press article dated 19th November 2004 the TPO segregated the AMP expense as an international transaction. He benchmarked the said transaction by applying the BLT. The TPO concluded that the Assessee had developed marketing intangibles for its AE and was in the process of making the intangible even more valuable by incurring huge AMP expenses, bearing risks and using both its tangible assets and skilled, trained ....
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....dditions on the basis of the AMP. Accordingly, the total taxable income determined for AY 2006-07 was Rs. 36,45,53,644 as against the disclosed income of Rs. 16,85,26,980. Aggrieved by the above order, the Assessee filed an appeal before the ITAT being ITA No. 3861/Del/2010. 15. For the other AYs 2007-08, 2008-09, 2009-10 and 2010-11 similar orders were passed on the same basis. Order of the Special Bench of the ITAT 16. At this stage, it is required to be noticed that the Special Bench of the ITAT considered the issue of TP adjustment in relation to AMP expenses incurred by Indian entities for improving the market intangibles for their respective AEs. 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) adopted the 'Bright Line Test' ('BLT') for determining the existence of an international transaction involving AMP expenses as well as for determining the ALP. It was held that if the expense incurred by the Assessee on AMP was higher than what was incurred by an independent entity behaving in a commercially rational manner, then the TPO would determine whether the said transaction required re-characterisatio....
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....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 Pricing Officer by applying the parameters specified in paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd.?" 20. The conclusions of the Division Bench in Sony Ericsson (supra) are as under: (i) The Court concurred with the majority of the Special Bench of the ITAT in the LG Electronics case qua the applicability of 92CA(2B) and how it cured the defect inherent in 92CA(2A). The issue concerning retrospective insertion of 92CA(2B) was decided in favour of the Revenue. (ii) AMP expenses were held to be int....
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....ench in LG Electronics Case (supra) 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 done only if exceptions laid down in CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Del) are justified. Re-categorisation and segregation of transactions are different exercises; former would require separate comparables and functional analysis. (xi) Economic ownership of a brand would only arise in cases of long-term contracts and where there is no negative stipulation denying economic ownership. Economic ownership of a brand or a trade mark when pleaded can be accepted if it is proved by the Assessee. The burden is on the Assessee. It cannot be assumed. (xii) After the order ....
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....penses. (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 (supra) were neither invoked in the present case nor were the conditions satisfied. (xix) An order of remand to the ITAT for de novo consideration would be appropriate because the legal standards or ratio accepted and applied by the ITAT was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. The ITAT, in the first instance, would try and dispose of the appeals, rather than passing an order of remand to the AO /TPO. An endeavour should be to ascertain and satisfy whether the gr....
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....e any adjustment in regard to the transactions reported by the Assessee. 25. The ITAT also noted that since this Court in Sony Ericsson (supra) had rejected the applicability of the BLT, it would be appropriate to restore the entire issue to the file of the TPO for benchmarking the AMP functions, keeping in view the decision in Sony Ericsson (supra). It was clarified that while computing the AMP expenditure, direct selling and distribution had to be excluded. As regards selection of comparables, the ITAT was of the opinion that the whole exercise is to be carried out de novo. Issues urged by the Assessee 26. The issues urged by the Assessee in its appeals for AYs 2006-07 to 2009-10 read as under: "(a) Whether Transfer Pricing adjustment on account of Advertisement, Marketing and Promotion ('AMP') expenditure is warranted and justified under the law? (b) Whether the Tribunal proceeded on unlawful and unjustified presumption(s) relating to existence of an international transaction for AMP expenses and on applicability of principles laid down by the Special Bench in the case of L.G. Electronics India Private Limited vs. Assistant Commissioner of Inco....
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.... Tribunal in case of L.G. Electronics India Private Ltd. vs. Assistant Commissioner of Income Tax (ITA No. 5140/Del/2011), when the legality and validity of such principle is disputed before this Court? (k) Without prejudice to the above, whether Comparable Uncontrolled Price ('CUP') Method and selection of an arbitrary rate of 10% as the mark-up for application of CUP to benchmark AMP is unjustified under provisions of Act and Rules?" 27. As regards AY 2010-11, the questions urged by the Assessee are as under: "(a) Whether Transfer Pricing adjustment on account of Advertisement, Marketing and Promotion ('AMP') expenditure is warranted and justified under law? (b) Whether Tribunal erred in restoring the dispute relating to adjustment to/disallowance of Advertisement, Marketing and Promotion ('AMP') expenditure in Appellant's case to Transfer Pricing Officer ('TPO') for de novo consideration without finally adjudicating issues raised before the Tribunal and without correctly appreciating submissions of Appellant in view of decision of this Hon'ble Court in case of Sony Ericsson Mobile Communications India Pvt. Ltd....
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.... afresh in accordance and in conformity with the judgment of Special Bench in case of LG Electronics India Pvt. Ltd. Vs. ACIT (2013) 152 TTJ(Del) 273? 2. Whether the ITAT has erred in law and on facts in not appreciating that order of the TPO is a legally tenable order and the facts of the transactions of the instant case are not in conformity with that of LG Electronics India Pvt. Ltd. v. ACIT and hence the order of the TPO should be upheld? 3. Whether in the facts and circumstances of the case, the ITAT was correct in directing the TPO to consider the combined effect of 14 factors for determining the cost/value of the international transactions, ignoring that this shall make the whole process of comparability impractical and ineffective?" Questions framed 29. In view of the developments noted hereinbefore and in particular with the decision in Sony Ericsson (supra) having rejected the BLT adopted by the TPO, for AYs 2006-07 to 2009-10, the Court is of the view that the question of remanding the case to the TPO for consideration of the issue afresh in the light of the judgment of the Special Bench of the ITAT in LG Electronics (supra) does not arise. If at ....
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....ssessee has throughout been contesting the existence of such transaction. It is further submitted by Mr. Rao that the figures of AMP expenses incurred by the Assessee includes huge trade discounts, sampling, marketing research and points of sales expenditure. Even according to the decision in Sony Ericsson (supra) such expenditure has to be excluded from the calculation of AMP expense. He pointed out that for the AYs 2006-07 to 2009-2010, the TPO not only treated the entire expenses as recoverable from B&L, USA but has further applied a mark-up of 10%, 14.93%, 15% and 15.27% for the aforementioned AYs respectively. There was no basis for such a mark-up. 34. The central thrust of Mr. Rao's argument is that marketing or brand enhancement is just one of the incidental activities and not a separate line of service. Marketing could, at best, be a 'function' but not a 'transaction' for the purposes of Section 92B of the Act. The promotion of services, according to him, could be a 'transaction'; but AMP expenses for this purpose can only be a 'function' and not a 'transaction'. Under Chapter X what was required to be bench-marked was an 'international transaction' and not a ....
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.... of the Act to the effect that the AMP expenses incurred were not wholly or exclusively for the benefit of the Assessee and since no AMP adjustment was made under Chapter X in the earlier AYs, there was no justification for the TPO to treat the AMP expenses as a separate international transaction for the AYs in question. Since higher margin had been earned by the Assessee vis-a-vis the comparables under all segments, it was clear that the Assessee's relationship with its AE had not affected the business dealings between the parties. 38. Mr. Rao submitted that the TPO's action in marking up the AMP expenses was also impermissible in law. A cost mark-up was permissible in a situation where the provision of AMP was part of the Assessee's business. This was not even the Revenue's case. Elaborating these submissions, Mr. Rao pointed out that there was no arrangement for cost contribution to the AMP expenses and therefore the question of applying a mark-up did not arise. In any event, expenses relating to selling and distribution have been held in Sony Ericsson (supra) to not form part of AMP. 39. The following figures were referred to in order to demonstrate that the revenue of th....
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.... constitutes a major portion of the Assessee's business and that the manufacturing activity is relatively small. Since the comparables chosen were only of Indian companies involved in distribution of the products of foreign AEs, there was justification in seeking remand of the matter to the TPO for a fresh determination. It is submitted that the question of whether the AMP expenses is to be treated as 'function' or 'separate transaction' should also be sent back to the TPO. 43. Mr. Srivastava submitted that merely because there was no explicit agreement between the Assessee and its AE with regard to AMP expenses did not mean that from the overall facts and circumstances an inference could not be drawn regarding the Assessee and its AE 'acting in concert''. He reiterated that the creation of brand building/marketing intangibles for the AE amounted to the provision of a service to the AE and therefore the mark up of the AMP expenses was called for. 44. As regards the decision in Sony Ericsson (supra), covering the present cases as well, a reference was made by Mr. Srivastava to paras 51 and 52 of the said judgment where the Court had answered the question of whether....
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.... were highlighted as illustrative examples, was a distributor of products manufactured by the foreign AE. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of a transfer pricing adjustment in terms of Section 92 of the Act. The Assessee here has throughout been contesting the very existence of any international transaction involving AMP expenditure between the Assessee and its AE, i. e., B&L, USA. Further the Revenue has not been able to contest the submissions of Assessee that as far as the Assessee is concerned that it received no subsidy/subvention from its AE, which, however, was not the case of the Assessees in Sony Ericsson (supra). 49. Therefore, it is not correct to contend that the decision in Sony Ericsson (supra), to the extent it has remanded the cases to the ITAT for a fresh consideration, would apply to the present appeals and that the same directions would have to issue in these appeals. 50. Accordingl....
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....ns 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 shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated ent....
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....ion' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC." 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of 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 ....
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....the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same." 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard, with B&L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of ....
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....l transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. ......... 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Se....