TaxTMI 
TaxTMI 
TaxTMI 
2016 (5) TMI 431
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....2. 2013 142, 23, 48, 170/- 30/10/2013 2010-11 15/10/2010 33, 28, 54, 912/- 14/11/2014 164, 35, 54, 912/- 28/10/2014 ITA/7714/Mum/2012, AY. 2008-09: 2. Assessee-company was incorporated in India in the year 1991. It is a wholly owned subsidiary of L'Oreal SA France. It is engaged in manufacturing and distribution of cosmetics. 2. 1. First ground of appeal is about transfer pricing (TP) adjustment on account of advertisement, marketing and sales promotion expenses(AMP expenses), including mark-up of Rs. 41. 74 crores. During the assessment proceedings, the AO found that the assessee had entered into international transactions with its associated enterprises(AEs). For determining the Arm's Length Price (ALP) of such transactions, he made a reference to the Transfer Pricing Officer (TPO), as per the provisions of section 92 of the Act. During the TP proceedings, the TPO accepted all the international transactions to be at ALP except one and that was the AMP expenses. He held that the expenditure was on the higher side. He applied profits split method (PSM)to arrive at ALP. The TPO held that the consolidated profits of the group could be attributed to 3 major activit....
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....brand building to the AE. Based on the above the TPO made following AMP adjustments- Particulars Page ref in TP order Manufacturing (Amount in Rs.) Page ref in TP order Distribution (Amount in Rs.) Net Sales of the taxpayer Para 7.7 on Page 22-26 of the TP Order 4,47,84,37,000/- Para 7.7 on Page 26-28 of the TP Order 113,33,68,000/- Arm's length % of AMP Expenditure 8% 4.08% Arm's length AMP Expenditure 35,82,74,960/- 4,62,41,414/- Expenditure incurred by the tax payer on AMP 1,46,48,41,000/- 44,87,17,000/- Excessive expenditure incurred for developing the intangibles 90,36,92,844/- 40,24,75,586/- Mark up @ 8.92% 8,06,09,402/- 3,59,00,822/- Arm's length value of AMP activity 98,43,02,246/- 43,83,76,408/- Value received by the taxpayer Nil Nil Difference-TP adjustment 98,43,02,246/- 43,83,76,408/- After receiving the order of the TPO, the AO sent a draft assessment order to the assessee proposing the adjustment made by the TPO. 2. 2. Aggrieved by the order of the AO, the assessee filed objections before ....
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.... six comparables for MS and four comparables for DS, that the TPO had rejected the comparables in MS without giving adequate reasons, that it had requested the TPO to provide the systematic search process for identification of the comparables, that no such search process was provided by the TPO to the assessee, that the AMP expenses included merchandising expenses as well as sales promotion expenses, that the same did not lead to brand building, that after excluding such expenses the actual AMP expenditure of the assessee was only Rs. 21. 80% on sales, that same was in line with other companies in the industry, that the mark up of 8. 92% on AMP cost was based on cherry picking of the comparables, that the comparables were inappropriate and functionally dissimilar, that the approach of the TPO in arriving at two alternate ALPs by adopting two different method was inappropriate and bad in law. 2. 3. During the course of hearing before us, the Authorised Representative (AR) contended that AMP expenses was not an international transaction as per the provisions of section 92B of the act, that there was no express provision in the act deeming the AMP expenditure to be an international t....
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....ourt in the case of Maruti Suzuki, the DR stated that up to the date of decision i. e. 11/12/2015, the departmental authorities did not have the benefit of the decision, that they were following the order of the LG Electronics (supra)using BLT, that in some cases BLT had been followed and the expenditure on AMP had been sliced into two portions, that the non routine expenditure in excess of BLT was considered separately as international transaction and benchmarked accordingly for the purpose of ALP, that non-routine excess expenditure taken out for benchmarking of AMP would be required to be considered as the part of cost base/expenditure relating to distribution segment/ manufacturing segment as the case may be. He referred to the cases of Toshiba India Private Limited, India Medtronics Private Limited, Johnson & Johnson India Ltd, Essilor India Private Limited and Molson Coors India Ltd. and stated that the Tribunal had restored back the issue of AMP expenses to the file of the AO in all the cases, that the case under consideration should also be sent back to the file of the AO. 2. 4. We have heard the rival submissions and perused the material before us. We find that the assess....
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.... and enhancing the brands owned by the AEs. Alternatively, he made the computation of compensation receivable on account of AMP expenditure, using the Bright Line Standard (BLS). In the MS, he had rejected five out of the six comparables selected by the assessee and identified five other companies that were engaged in manufacturing cosmetics and were of similar size. The arithmetic mean of the AMP expenditure of the six comparables (on Net sales) was computed @12. 53%. Considering the fact that the companies would be incurring AMP expenses for the purpose of brand owned by them, the TPO held that BLS for the routine AMP expenditure should be taken at 8% of the net sales. It is found that the assessee had objected to the figure of 8% and that the TPO rejected the five other comparables suggested by the assessee. It is also observed that he had rejected two of the four comparables selected by the assessee in DS and had determined the excess AMP of Rs. 40. 25 crores for the year under appeal, that after applying mark-up of 8. 92%, he determined an adjustment of Rs. 43. 84 crores in the second segment. We also find that the sales of the assessee had increased 19 time since the year 1....
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....omote its own business. In other words, the TPO has failed to prove that the real intention of the assessee in incurring advertisement and marketing expenses were to benefit the AE. s. and not to promote its own business. The turnover of the assessee proves that during the year under consideration the assessee had done a reasonably good business, as state earlier. The resultant profit was offered for taxation in India. Therefore, transferring of profit from India, the basic ingredient to invoke the provisions of section 92 of the Act, remains unproved. We find that in the cases of Maruti Suzuki(supra)Whirlpool India(supra), Bausch & Lomb Eyecare(India) Pvt. Ltd(ITA 643 of 2014 of Hon'ble Delhi HC), the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the TPO/DRP have been analysed thread bare. We would like to reproduce relevant portion of the judgment of Bausch & Lomb Eyecare (India) Pvt. Ltd. (supra) and same reads as under: "53. A reading of the heading of Chapter X['Computation of income from international transactions having regard to arm's length price"]and Section 92 (1) which states that any income arising from an ....
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....n 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part. of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'under....
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....n 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 acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of ....
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....wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an* exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to 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 AEs in uncontrolled conditions", Since the reference is 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. The Court does not see this as a machinery provision particularly -in-light of the fact that -the-BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT, 70. What is clear is that it. is the 'price' of an international transact....
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....under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods. " In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. " The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be "impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic appro....
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....ach and every case. Unnecessary litigation has to be avoided and issues have to be settled for once and all. We are of the opinion that after the judgments of Maruti Suzuki and Bausch & Lomb (supra)there is no scope of any other interpretation about the AMP expenditure. In the case under consideration, the AO/TPO has not brought anything on record that there existed and agreement, formal or informal, between the assessee and the AE to share/reimburse the AMP expenditure incurred by the assessee in India. In absence of such an agreement the first and primary precondition of treating the transaction in question an international transaction remains un - fulfilled. Conducting FAR analysis or adopting an appropriate method is the second stage of transfer pricing adjustments. The first thing is to find out whether the disputed transaction in is international transaction or not. Without crossing the first threshold second cannot be approached. In the case under consideration, we are of the opinion that AMP expenditure is not an international transaction and therefore we are not inclined to restore back the issue to the file of the AO. Considering the peculiar facts and circumstances of t....
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....a) to which both of us are the parties. Further, said issue was also considered by ITAT Mumbai in the case of ITO V/s Graham Firth Steel Products (I) Ltd (2008) 24 SOT 106(Mum). In the said case the unabsorbed depreciation in AYs 1997-98 to 2001-2002 was added to the amount to the allowance of depreciation for the assessment year 2002-03 and held that be deemed to be part of that allowance, or if there is no such allowance for that previous year i. e. assessment year 2002-03 be deemed to be allowance for that previous year, and so on for the succeeding previous year, which means unabsorbed depreciation up to assessment year 2001-02 could be carried forward for set off for indefinite period. We consider it prudent to reproduce para 8 of the said order as under : "8. On reading the provisions of section 32(2) as it stood prior to the amendment made by the Finance (No. 2) Act, 1996, i. e. , operative up to and including assessment year 1996-97, it is seen that where, in the assessment of assessee, full effect cannot be given to the depreciation allowance owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being les....
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....unabsorbed depreciation as the old section 32(2) operative up to assessment year 1996-97 has been substituted. According to section 32(2), as substituted by the Finance (No. 2) Act, 1996 with effect from 1-4-1997, the unabsorbed depreciation of earlier years can be carried forward to the following assessment year and can only be set off against the profit and gains, if any, of any business or profession carried on by the assessee and assessable for that assessment year and following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed. However, for availing the benefit of carried forward of unabsorbed depreciation, it is essential that the business or profession for which the allowance was originally computed continued to be carried on by the assessee in the previous year relevant for that assessment year as stipulated in the 1st proviso to section 32(2)(iii) as substituted with effect from 1-4-1997. In this context, it may be observed that amended section 32(2) as substituted by the Finance (No. 2) Act, 1996 (with effect from 1-4-1997) has been substituted by the Finance Act, 2001....