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2016 (5) TMI 1249
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....wever, the learned Authorized Representative conceded that the main grounds that required to be adjudicated are as follows:- Transfer Pricing Issues: i) The learned Assessing Officer / DRP has erred in confirming the order of the learned TPO who had held that the appellant ought to have received fees of Rs. 2,04,42,31,513/- towards brand / logo promotion activity undertaken by the assessee from HMC Korea in accordance with the provisions of section 92B & 92C of the Act. ii) The learned Assessing Officer /DRP has erred in confirming the order of the learned TPO who has held that the expenditure incurred towards advertisement was in excess to the extent of Rs. 64,15,77,200/- when compared with other comparable companies in international transactions and thereby added the excess expenditure to the income of the assessee under the provisions of section 92B & 92C of the Act. iii) The learned Assessing Officer / DRP has erred in determining the ALP of royalty payable by the assessee to its AE at Rs. 283.78 crores as against the actual amount paid Rs. 390.46 crores which was confirmed by the learned TPO and thereby addition to the extent of Rs. 106,67,84,000/- was made. Cor....
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....itation valued by the organization "Inter-brand" the learned TPO arrived at a conclusion that brand value of the assessee's parent company has increased year after year. Thereafter the learned TPO arrived at a conclusion that Rs. 204,42,31,513/- has to be attributed to the assessee company as the compensation for building the brand of the holding company. However, as pointed out by the learned Authorized Representative this issue was decided by the Tribunal on the earlier occasion for the assessment year 2007-08 in ITA No.2157/Mds/2011 dated 28th August, 2015, wherein it was held that the "Bright line test" would be the best method for determining the development of an intangible property. The relevant portion of the order is reproduced herein below for reference:- "4.4. We have heard the rival submissions and carefully perused the materials available on record. The main grouse of the Revenue is that the appellant company being the user of the Holding Company's brand name and logo indirectly benefits the Holding Company. The appellant company instead of promoting its own brand has been promoting the brand logo of the Holding company. Thereby the Holding Company is benefited beca....
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.... Line Test, the TPO held that the expenses in excess of 1.39 % of the sales are towards brand promotion of the AE and proposed a transfer pricing adjustment. * The Dispute Resolution Panel ("DRP") not only confirmed the approach of the TPO, but also directed to charge a markup of 13 % on such AMP expenses towards opportunity cost and entrepreneurial efforts. Issues: * Whether transfer pricing adjustment can be made in relation to advertisement, marketing and sales promotion expenses incurred by the assessee? * Whether the assessee ought to have been compensated by the AE in respect of such AMP expenses alleged to have been incurred for and on behalf of the AE?" Observations & Ruling The Tribunal has held as follows: * Confirmed validity of jurisdiction of the TPO by observing that the assessee's case is covered u/s. 92CA(2B) of the Income Tax Act, 1961 ('the Act') which deals with international transactions in respect of which the assessee has not furnished report, whether or not these are international transactions as per the assessee. * The incurring of AMP expenses leads to promotion of LG brand in India, which is legally owned by the foreign ....
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....djustment towards excess AMP expenditure. The Tribunal also ruled that the expenditure directly in connection with sales had to be excluded in computing the AMP adjustment. Thereafter, the Tribunal deleted the hypothetical brand development fee adjustment computed at 1% of sale made by the TPO. The Tribunal has disregarded the concept of add on brand value on normal sales and add on brand value on additional sales brought by the tax department to justify two additions in relation to brand building, and deleted the brand development fees computed at 1% of sales. 4.7 Considering the facts of the case which is identical to the case decided by the Special Bench of the Tribunal and the Chennai Bench of the Tribunal cited supra, we hereby direct the Ld. Assessing Officer to delete the adhoc addition of 1% on sales which is treated as brand development fee by following the decision of the Tribunal cited supra. The aforesaid decisions of the Tribunal has also held that Bright Line Test would be the best method for determining developer of the intangible property, which the Ld. A.R. claimed that such test was made on the assessee by the Ld.DRP; however no additions were made because on t....
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.... "5.5 After hearing both sides and perusing the orders of the Tribunal cited by the Ld. A.R supra, we hereby accept the concept of Bright Line Test (BLT) as held by our predecessors with respect to the concept of Bright Line Test for distinguishing between the routine and nonroutine expenditure incurred on advertisement and brand promotion wherein advertisement and marketing promotion expenses to the extent incurred by uncontrolled comparable distributors is to be regarded within the "Bright Line Limit" of the routine expenses and the advertisement and market promotion expenses incurred by the distributors beyond such "Bright Line Unit" constituted non-routine expenditure resulting in creation of economic ownership in the form of marketing intangibles which belong to the owner of the brand. However, in this case even after computing the ALP by following the Bright Line Test the Ld.TPO has deleted the addition Rs. 76.63 crores. Accordingly, this ground raised by the assessee is dismissed." 9. Following the above decision of the Tribunal, we hereby hold that the concept of bright line test has to be applied in the case of the assessee for determining the ALP on advertisement exp....
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....tition and whether the markets are wholesale or retail. 6.5 Further perusing the order of the Ld. TPO in page 40 in para Nos.25 & 26 the Ld. TPO herself observed that in respect of royalty payment in automotive sector from the study of 35 licenses, the average works out to 4.7% and the median works out to 4% which is higher than the appellant's average rate of royalty payment of 4.22%. Further the Ld. TPO has observed that the assessee company has been bestowed with the latest technology by its Holding Company and it cannot be said that old technology has been dumped in the Indian market (para 27 of the TPO's order). The relevant portion of the Ld. TPO's order is extracted herein below for reference:- "26 In the table given above it is seen that in automotive sector on study of 35 licenses in respect to royalty payment minimum royalty payment was 1% maximum was 15% royalty payment. Average comes to 4.7% and the median royalty rate was 4.0%. 27. In the case of the assessee what will be the right percentage of royalty that would compensate the assessee suitably. In this connection it is relevant to discuss certain relevant facts. As discussed earlier, India is a vast market ....
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....fore, we hereby delete the addition of Rs. 104,27,36,417/- made by the Ld. TPO following the directions of Ld. Members of the DRP." 13. However, in the relevant assessment year, we find that the learned TPO has made categorical finding that the average percentage of royalty paid by other comparable companies is 2.54% while as the assessee has paid royalty @ 3.47% on sales. Thus, there is a difference of 0.93% which works out to Rs. 106,67,84,000/-. The finding of the learned TPO is extracted herein below for reference:- "The learned TPO has rejected the arguments of the assessee and its representative by summarizing as follows:- a) The assessee has not given any convincing reason as to why any of its Indian competitor or counterpart is not found fit to be comparable company. b) The assessee has not given any reason as to why foreign companies, operating in a totally different economic environment should be considered as a comparable. c) The comparables chosen by the assessee fail the basic test of comparability of product. d) The comparison adopted by the assessee is untenable, from economic, geographic factors too." Thereafter the learned Assessing Officer cor....
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....ost of asset in lieu of the subsidy received from SIPCOT: 15. The learned Assessing Officer had reduced the capital subsidy received from SIPCOT from the value of the asset acquired and thereby disallowed the depreciation claimed by the assessee towards the same amounting to Rs. 3,55,957/- for the relevant assessment year. The learned DRP confirmed the order of the learned TPO by observing as under:- "This issue does not require much deliberation because for assessment year 2003-04 the same issue was adjudicated by the first appellate authority who had directed the assessing authority to verify and allow the claim of the eligible assessee on merit. The eligible assessee points out that effect to the order of first appellate authority have not been so far. This has led to disallowance this year as well. The assessing authority shall give effect to the order of the first appellate authority forthwith and shall apply the same position taken by the Revenue on the issue involved for this year as well." 16. At the outset, the learned Authorized Representative submitted that the Tribunal on the earlier occasion on this identical matter has remitted the case back to the file of....
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....entive towards target plus scheme is bestowed as a reward in order to encourage the accelerating growth in exports. The incentive on target plus scheme is also nothing but an entitlement for a duty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freight cost and other externalities to select international market with a view to enhance India's export competiveness in these countries. It is pertinent to note that the assessee will be entitled to such benefit only after verification of the claim of the assessee by the relevant Govt. authorities and issuance of the license by such Government authorities. Therefore, the facts of the assessee's case are similar to the facts of the case decided by the Hon'ble apex Court cited supra. Therefore, respectively following the decision of the Hon'ble apex Court we hereby hold that the notional income computed by the assessee cannot be treated as taxable income of the assessee during the relevant to assessment year, however the same shall be taxed in the previous year in which the assessee has received the licenses ....