TaxTMI 
TaxTMI 
2016 (1) TMI 582
X X X X Extracts X X X X
X X X X Extracts X X X X
....eld by Yum Restaurants Asia Private Limited ('Yum Asia'). After 28th November 2008, the shares were held by Yum! Asia Franchise Pte. Ltd. Singapore ('Yum Singapore') pursuant to a restructuring within the group. Yum India had a licence arrangement with Kentucky Fried Chicken International Holdings Inc. ('KFC') and Pizza Hut International LLC ('Pizza Hut') for opening KFC and Pizza Hut Restaurants in the Indian sub-continent. The licences were later assigned by KFC and Pizza Hut to Yum Asia. Subsequently it was assigned by Yum Asia in favour of Yum Singapore with effect from August 2008. Yum India also entered into an agreement with Yum Asia and subsequently with Yum Singapore with effect from August 2008 for the provision of support to Pizza Hut, KFC and ANW in South Asia. 3. The restructuring that took place in 2008 of the Yum Group saw the splitting up of the business region of Yum Asia, the regional franchisee, into two major regions, viz., China and countries other than China including India. It is stated that the group decided to hold shares in Yum India through Yum Singapore and, therefore, the entire share holding in Yum India was transferred from one holding company,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ies. The additional expenditure where found necessary to be incurred on AMP activities by Yum Marketing, is contributed by Yum India. Yum Marketing's activities are stated to benefit Yum India's business by (i) increasing sales at its 'equity stores' and (ii) in the form of higher royalty income from its franchisees, a major portion of which is retained by Yum India in terms of its licence agreement with Yum Asia/Yum Singapore. It is stated that during the AY in question i.e. 2009-10, Yum India contributed Rs. 4,79,48,122 to Yum Marketing for its 'equity segment'. According to Yum India since this was a purely domestic transaction, it was not included in Form 3CEB and/or transfer pricing (TP) study for the relevant AY. TP proceedings 6. Yum India filed its income tax return for AY 2009-10 on 30th March 2010 declaring a loss of Rs. 18,26,77,909. After accounting for credit for taxes deducted at source in the sum of Rs. 4,00,07,839, a refund was computed. The return was picked up for scrutiny. Reference was made to the Additional Director of Income Tax, Transfer Pricing-II (IV), New Delhi (hereafter the Transfer Pricing Officer i.e. TPO) under Section 92CA(3) of the Act. Yum In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 144(3) read with Section 144C(1) of the Act. The total income of Yum India was determined at Rs. 40,65,40,535. In doing so the AO, inter alia, disallowed the set off and carry forward of business losses incurred till AY 2008-09. Separately, the AO also made a disallowance of Rs. 6,05,01,229 towards payment made to Yum Marketing under Section40A(2)(b) of the Act which again included AMP contributions made by Yum India to Yum Marketing. 10. Yum India then filed objections before the Dispute Resolution Panel ('DRP'). By its order dated 20th December 2013, the DRP upheld the conclusions reached by the AO and rejected Yum India's submission as regards set off and carry forward of business losses. The proposed TP adjustment was also upheld. However, the alternative plea of Yum India that the same AMP expenses could not be disallowed twice, i.e., once as a TP addition and secondly as disallowance under Section 40A(2)(b) of the Act was upheld. Accordingly, the DRP directed that the TP addition of Rs. 5,27,33,344 be deducted from the disallowance of Rs. 6,05,01,229 under Section 40A(2)(b) of the Act. A net disallowance/addition of Rs. 77,67,895 was made under Section 40A(2)(b) of the A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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.?" 15. The important conclusions of the Division Bench in Sony Ericsson (supra) relevant to the case on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ments 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 (BLT) was judicial legislation. By validating the BLT 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 done only if exceptions laid down in EKL Appliances Case [2012] 345 ITR 241 (Del) are justified. Re-categorisation and segregation of transactions are different exercises; former would require separate comparables and functional analysis. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Direct marketing and sale related expenses or discounts/concessions would not form part of the AMP expenses. (xvi) 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. (xvii) 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 gross/net profit margin would duly account for AM....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s incurred. In the present case, there was a change of 100% of the shareholding of Yum India and consequently there was a change of the beneficial ownership of shares since the predecessor company (Yum Asia) and the successor company (Yum Singapore) were distinct entities. The fact that they were subsidiaries of the ultimate holding company, Yum USA, did not mean that there was no change in the beneficial ownership. Unless the Assessee was able to show that notwithstanding shares having been registered in the name of Yum Asia or Yum Singapore, the beneficial owner was Yum USA, there could not be a presumption in that behalf. 20. Having examined the facts as well as the concurrent orders of the AO and the ITAT, the Court finds that there was indeed a change of ownership of 100% shares of Yum India from Yum Asia to Yum Singapore, both of which were distinct entities. Although they might be AEs of Yum USA, there is nothing to show that there was any agreement or arrangement that the beneficial owner of such shares would be the holding company, Yum USA. The question of 'piercing the veil' at the instance of Yum India does not arise. In the circumstances, it was rightly concl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Marketing was set up to provide transparency in regard to the AMP expenses incurred and to enable third parties to make a contribution to the overall AMP activity. It is for this reason that Yum Marketing carried out its marketing activities on a non-profit basis and on the principles of mutuality. 25. Countering the above submissions it is pointed by Mr. G.C. Srivastava, learned counsel for the Revenue, that while an independent third party discharging similar function in an uncontrolled situation would be a proper comparable, the Assessee had to discharge its burden of showing that JFL was promoting the brand owned by its AE 'without any compensation'. It is submitted that agreement between JFL and its AE would have to be examined to ascertain the nature and extent of the obligation of brand promotion that is placed on JFL or the absence thereof. It is conceded that the comparable cannot be limited to application of the BLT. 26. The Court is of the view that after the decision in Sony Ericsson Mobile Communication India P. Ltd. (supra), the adoption of the BLT for determining the existence of an international transaction involving AMP is expenses no longer legally permissi....