TaxTMI 
TaxTMI 
2016 (3) TMI 959
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....me by this common and consolidated order for the sake of convenience. 3. The grounds of appeal raised for the assessment year 2009- 10 are as follows: 1) That the order of the learned lower authorities in so far it is prejudicial to the interest of the appellant is bad and erroneous in law and against the facts and circumstances of the case. 2) That the learned lower authorities erred in law and on facts in holding that the appellant promoted the brand of the associated enterprise merely on the ground that the AMP expenses incurred by the appellant are more than the AMP expenses incurred by the comparable entities. 3) That the learned lower authorities erred in law and on facts in presuming that the transaction of brand promotion has taken place without bringing on record any tangible and reliable evidences and such a finding of the learned lower authorities is perverse as being not supported by any materials on record. 4) That the learned TPO erred in law and on facts in determining the arm's length price of an alleged transaction which has not been referred to him even though he has no jurisdiction to go beyond the reference made by the ....
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....ts report in 3CEB: 7. During the previous year relevant to assessment year 2009-10 assessee-company paid the above amount to its AE. The assessee-company sought to justify the consideration paid for the international transactions entered into with the AE to be at ALP. The assessee-company submitted a transfer pricing report adopting operating profit margin to the turnover as the Profit Level Indicator ('PLI') for the transfer pricing studies. The assessee-company applied the Transactional Net Margin Method (TNMM) which was considered to be the most appropriate method for the purposes of benchmarking the international transaction. The assessee-company's operating profit margin (i.e. operating profit/total turnover) was computed at 13.45% and the assesseecompany claimed that the same was comparable with other companies engaged in the similar line of business. For the purposes of the transfer pricing study, the assessee-company chose two comparable entities viz. GKB Opticals Ltd., and Techtran Polylenses and the arithmetic average of the operating profit margins of the said comparables was computed at (-)3.31%. Therefore, according to the assessee-company, since its PLI was more th....
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....0,65,96,361/-, (ii) bad debts of Rs.76,98,072/-, (iii) software expenses of Rs.38,60,822/-, (iv) warranty expenses of Rs.7,38,953/-, (v) warranty replacement of Rs.60,53,621/- and (vi) new product launch expenses of Rs.42,15,017/-. 11. Being aggrieved by the draft assessment order, the assessee-company filed objections before the Dispute Resolution Panel (DRP) contesting all the additions. It was contended by the assessee-company before the DRP, inter alia that (i) in the absence of agreement between the assesseecompany and its AE, the question of promotion of brand or sharing the advertisement expenditure does not arise. (ii) It cannot be presumed that there is an international transaction within the meaning of sec.92B of the Act. (iii)The burden of proof lies on the TPO to prove the existence of international transaction and not on the assessee-company. Without prejudice to the above, it was claimed that the entire expenditure incurred on the advertisement and sales promotion cannot be added as transfer pricing adjustment. It is only the expenditure beyond 3.34% of the revenue that can be trea....
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.... as advertisement marketing expenditure. It was further submitted that these expenses only incurred in connection with the sales. Therefore, it should be treated as selling expenses. On the issue of disallowance u/s 14A of the Act, it was contended that no expenditure was incurred to earn the dividend income and without rendering finding as to the correctness of the claim of the assessee-company, the disallowance should not have been made. 15. On the other hand, ld.CIT(DR) vehemently contested the submissions of the ld. AR and submitted that on the issue of transfer pricing adjustment on AMP, the matter may be restored to the file of the TPO for fresh adjudication in the light of the law laid down by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd. Vs. CIT (374 ITR 118)(Del) and on the issue of disallowance u/s 14A, he submitted that new issue was raised for the first time before the Tribunal that dividends were earned from the subsidiary company and the investments were made in the subsidiary company in the business interests of the assessee-company and out of commercial expediency. Therefore, the disallowance should be confirmed. ....
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.... 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.?" 17. 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 international transaction as this was not denied as such by the assessees. (iii) Chapter X and Section 37(1) of the Act operated independently. The former dealt with the ALP of an international transaction whereas the latter deals with the allowability/disallowability of business expenditure. Also, once the conditions for applicability of Chapter X were sa....
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....actions 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 longterm 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 of the Supreme Court in the Maruti Suzuki case, the judgment of the Delhi High Court does not continue to bind the parties. This position was misunderstood by the majority of the Special Bench in the LG Electronics Case. (xiii) The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods ....
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....o 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 gross/net profit margin would duly account for AMP expenses. When figures and calculations as per the TNM or RP Method adopted and applied show that the net/gross margins are adequate and acceptable, the appeal of the assessed should be accepted. Where there is a doubt or the other view is plausible, an order of remand for reexamination by the AO/TPO would be justifi....
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.... (iv) Yum Restaurants (India) Pvt. Ltd. Vs. ITO (ITA No.349/2015 dated 13/01/2016) and (v) Honda SeilProducts In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon'ble Delhi High Court. The Hon'ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the foreign entity, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting brand of foreign AE. One more aspect highlighted by the Hon'ble High Court is that in the absence of machinery provisions, bringing an imagined transaction to tax was not possible. While coming to this conclusion, the Hon'ble High Court had placed reliance on the decisions of the Hon'ble Apex Court in the ....
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.... the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. 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 shall, for the purposes of sub-section (1), be deemed to be a transaction ....
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....egatived by the Court by pointing out: "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' 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' ._________ÿ_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 acqu....
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....olving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at recharacterising 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 suffi....
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....ted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international 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? ....
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.... adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". 21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee-company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also enure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction in....