TaxTMI 
TaxTMI 
2016 (7) TMI 21
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....nt year 2007-08. 3. The grounds raised read as under: 1. That the assessing officer erred on facts and in law in completing the assessment under section 143(3) read with section144C of the Income-tax Act,1961 ('the Act') at an income of Rs. 2,249,20,930 as against the returned income of Rs. 14,96,69,234. 2. That the assessing officer erred on facts and in law in making an addition of Rs. 62,205,874 on account of the alleged difference in the arm's length price of the 'international transactions' of (i) Payment of Trademark fees, (ii) Creating of AMP intangible and (iii) export of goods entered into by the appellant with its associated enterprise, on the basis of the order passed under section 92CA(3) read with section 144C(5) of the Act by the Transfer Pricing Officer ("the TPO"). 3. That the assessing officer/DRP erred on facts and in law in holding that arms length price of the international transactions regarding payment of trademark fees of Rs. 2,83,23,000 to be Nil, allegedly on the basis that no recognizable benefit has been passed to the appellant and therefore there was no rationale for paying this trademark fees to the AE. 3.1 That the assessing officer/DRP ....
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....4. That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to Rs. 2,83,23,000 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. 4.1 That the assessing officer erred on facts and in law in not appreciating that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a 'transaction' in absence of any understanding / arrangement between the appellant and the associated enterprise and therefore cannot be termed as an 'international transaction' between the associated enterprise 4.2 That the assessing officer erred on facts and in law in not appreciating that the AMP expenses, etc., incurred by the appellant in India cannot be characterized as an 'international transaction' as per section 92B, so as to invoke the provisions of section 92 of the Act. 4.3 That the assessing officer erred on facts and in law in not appreciating that in the absence of any understanding / arrangement between the appellant and the associated enterprise, the associated enterprise was under no obligation....
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.... BLT, the assessing officer/DRP erred on facts and in law in not considering any comparables for determining arms length AMP expenditure. 4.13 That the assessing officer/DRP erred on facts and in law in making adjustment to the income of the appellant of Rs. 2,83,23,000 on account of the arm's length price of the alleged international transaction AMP expenses, holding that instead of payment of the trademark fee to the AE of Rs. 2,83,23,000 the appellant should receive the said amount for creating and developing marketing intangibles in India. 4.14 That the assessing officer/DRP erred on facts and in law in relying upon the decision of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. vs. Addl. CIT, TPO, New Delhi. [in W.P.(C) 6876/2008 [WP(C) 6876/2008], which has been set aside by the Supreme Court in a Special Leave Petition filed against the decision of the Hon'ble High Court. 4.15 Without prejudice that the assessing officer erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm's length applying Transactional Net Margin Method (TNMM) on entity-wide basis. 5. That ....
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....gs under Section 271(1)(c) of the Act. 4. Ground No. 1 and 2 is general 5. Ground No. 3 to 3.8 - Transfer pricing issue w.r.t. to payment of trademark fee The appellant is a public limited company engaged in the business of manufacture and sale of automobile tyres, tubes and flaps in the brand name of 'Goodyear'. The appellant is a subsidiary company of Goodyear Tyre and Rubber Company (GTRC), USA. The appellant has during the year, inter alia, entered into the transaction of payment of trade mark fee of Rs. 2,83,23,000, as per the Trademark License Agreement entered between Goodyear, USA and the appellant. It was submitted by the appellant before the TPO, that the appellant was granted a non-exclusive, non-transferable, and non sub-licensable right and license to use the name "Goodyear" in its company name, and to use the Licensed Trademarks in respect of all the products, services, advertising and promotional materials dealt in by the appellant Company. In consideration of the rights and licenses granted to Goodyear India, the assessee had agreed to pay Goodyear USA, a trademark fee calculated as 1% of the (net) domestic sales and 2% of the (net) export sales of it....
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.... of all the products, services, advertising and promotional materials dealt in by the appellant company. In consideration of the rights and licenses granted to Goodyear India, Goodyear India agreed to pay Goodyear USA, a trademark fee calculated as 1% of the (net) domestic sales and 2% of the (net) export sales of its manufactured products. This arrangement, it is submitted, was expressly allowed by the Reserve Bank of India (RBI) under the automatic route. Further, it would be noted that as per the Goodyear Group's global practice, the other manufacturing locations pay a consolidated royalty at the rate of 5% of sales for use of technology and Goodyear trade name and trademarks. On the other hand the appellant has started to pay a modest royalty of 1% on domestic sales and 2% on export sales, for use of Goodyear trademark and trademarks. The appellant does not pay any royalty for provision of technology by Goodyear USA. Goodyear USA was supporting the appellant by providing the right/ license to use the valuable Goodyear trade name and associated trademarks in earlier years free of charge. During these years, Goodyear USA actually assisted the Company in keeping its end ....
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....r, natural rubber etc. and such price increase continued till around FY 2005-06. Due to intense competition in the market, where overall production was more than the domestic demand, the appellant company could not pass on the cost increase to its end customers and hence the same had an adverse impact on its operating margin. Further, during FY 2000-01, the company heavily expanded its Rear Farm Tyre business and made huge investments for the same. Since the returns of such investment could only be reaped after a time lag, in the interim, the high depreciation cost led to an adverse impact on the operating margins of the appellant company. Other major reasons for the company to incur losses at the operating level were slowdown in the Indian economy and impact of local government levies like the Haryana Local Area Development Tax (HLADT). It would be appreciated that all of the above business/ industry factors are valid reasons why the appellant company made losses in its earlier years of operation. It is imperative to understand that "Goodyear" trade name is a valuable intangible, but it does not imply that simply because Goodyear India uses the "Goodyear" trade name, it c....
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....ia, it has piggybacked the brand name 'Maruti' which was an established brand and therefore, there was no case for the assessee to have paid any brand royalty to SMC Japan for 'Suzuki' brand. Hon'ble Delhi Bench of Tribunal, while deleting the disallowance of payment of royalty made by the TPO/DRP, held as under: "14. Another aspect of the assessee's submissions in this regard is that the TPO has erroneously concluded that Suzuki brand was weak/worthless. In this regard, assessee has submitted that TPO has erred in failing to appreciate SMC's stature, standing and reputation in the small car segment of the motor car industry not only in Japan, but all over the world. The SMC's brand/logo/trade mark has a well established value in the small car segment. The license agreements in this regard have entitled the assessee to manufacture and sell the world renowned car models. The association of the Suzuki trade mark with that of the assessee not only brought an international flavor to the Maruti brand but also helped the assessee in projecting itself as a company which is associated with a global automotive giant. We agree with the assessee's submission that the decision to u....
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....ty to associated enterprises was taken as cost. In the case of the appellant, it is nobody's case that the company has entered into diverse activities. The international transactions of the appellant primarily relate to its business of manufacturing of tyres and such international transactions are closely interlinked or inter-twined. It would also not be possible to determine separately profit from the international transactions of payment of trademark fees. It is pertinent to note here that the royalty relates to the entire turnover/production of the appellant and constitutes an essential part of the cost of sales. The entire business model of the appellant is based on the licenses granted by the associated enterprise to manufacture the tyres which have been highly successful and renowned throughout the world, and for providing all the I.P. rights and technology necessary for the same, for which the royalty payment has been made. Without which, the appellant's business will cease to exist and its entire operations would come to a halt. Accordingly, since the entire operation of the appellant is based on rights and licenses to manufacture the automobile tyres and tubes, fo....
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....able to assess the arm's length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method or methods. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis." It is pertinent to note here that the royalty relates to the entire turnover/production of the appellant and constitutes an essential part of the cost of sales in its manufacturing segment. The Hon'ble Delhi Court, while adjudicating the batch of appeals against the transfer pricing adjustment on account of AMP expenses, in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT (ITA No 16/2014) reported as 374 ITR 118, upheld clubbing of closely linked transactions for undertaking benchmarking analysis applying entity wide TNMM holding as under: "80. The use of expression class of transaction functions performed by the parties in Section 92C(1) illustrates to the contrary, that the word t....
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....s, may be permissible and not ostracized. Aggregation of closely linked transactions or segregation by the assessed should be tested by the Assessing Officer/TPO on the benchmark and the exemplar; whether such aggregation/ segregation by the assessed should be interfered in terms of the four clauses stipulated in Section 92C(3) of the Act, read with the Rules. It would, among other aspects, refer to the method adopted and whether reliability and authenticity of the arm's length determination is affected or corrupted. XXX 91. In case the tested party is engaged in single line of business, there is no bar or prohibition from applying the TNM Method on entity level basis. The focus of this method is on net profit amount in proportion to the appropriate base or the PLI. In fact, when transactions are inter-connected, combined consideration may be the most reliable means of determining the arm's length price. There are often situations where closely linked and connected transactions cannot be evaluated adequately on separate basis. Segmentation may be mandated when controlled bundled transactions cannot be adequately compared on an aggregate basis. Thus, taxpayer can a....
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....bles adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction. XXX (iv) The assessed, i.e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis should be appropriated and reliable so as to include the AMP functions and costs. " Various benches of Tribunal in the following cases also upheld the use of entity level profit applying TNMM for the purpose of benchmarking international transactions which are interlinked or intertwined: (i) McCann Erickson India Pvt Ltd vs Addl CIT (ITA No 5871/D....
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....ITA Nos. 5420 and 5421/Mum/2006), (Affirmed by the Hon'ble Mumbai High Court) - Nimbus Communications Ltd vs ACIT (ITA No 2361/Mum/2007 - Dresser Rand India Pvt Ltd vs Addl. CIT (ITA No 8753/Mum/2010) - Thyssen Krupp Industries India Pvt Ltd vs ACIT (ITA No 7032/Mum/2011) - Hero Motocorp Ltd vs Addl CIT (ITA No 5130/Del/2010) - Kodak India Pvt Ltd vs ACIT (ITA No 7349/Mum/2012) - AWB India Pvt Ltd vs Addl CIT (ITA No 4454/Del/2012) Attention in this regard is invited to the decision of Hon'ble Delhi High Court in the case of CIT vs. Reebok India Co Ltd (ITA no 213/2014), wherein, while upholding the decision of Delhi Tribunal in deleting the adjustment made by the TPO with respect to transaction of payment of royalty, held as under: "185. Royalty payable for availing the right to use would depend upon corresponding price, which would have been paid by an independent or unrelated enterprise. This is judged by applying comparables. TPO has not rejected the quantum of royalty on the said principle. The reasoning given by the TPO is not only erroneous for the reasons stated above, but is also contrary to the Rules. Depen....
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....he same enterprise or an unrelated enterprise from a comparable but definitely uncontrolled transaction, i.e., a transaction between non-associated enterprises. There is no statutory sanction for roping in a comparable controlled transaction for the purposes of benchmarking. When it has been clearly mandated in all the relevant methods for determining ALP that the comparison has to be made by the enterprise's international transaction with comparable uncontrolled transaction, by no sheer logic a comparable controlled transaction can be employed for the purposes of making comparison. There is no warrant for diluting the prescription given by the statute or rules when such prescription itself serves the ends of justice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is ob....
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..... vs. CIT : 288 ITR 1 (SC) * CIT V. Bharti Televentures Ltd: 331 ITR 502 (Del) * CIT vs. Padmani Packaging (P) Ltd. : 155 Taxmann 268 (Del) * CIT v. Rockman Cycle Industries Ltd.: 331 ITR 401 (P&H) (FB) * CIT vs. EKL Appliances Ltd. : ITA No. 1068/2011 & 1070/2011(Del HC) * CIT v. Dalmia Cement (P.) Ltd: 254 ITR 377 (Del) * CIT vs. Dalmia Cement (B) Ltd. (supra), (Del) It is respectfully submitted that as long as an item of expenditure has been incurred wholly and exclusively for the purpose of business of the appellant, whether or not such expenditure actually benefits the appellant is an irrelevant consideration for the purpose of determination of ALP. Reliance is placed on the decision of DCIT vs Ekla Appliances: 345 ITR 241, Wherein the Hon'ble Tribunal held that the TPO cannot challenge the judgment of the assessee as to the source from which the technology is to be obtained and at what cost etc. The Hon'ble Delhi High Court while upholding the decision of the Hon'ble Tribunal held that as long as an expense is incurred wholly and exclusively for the purpose of business, it is irrelevant as to whether such expenditure....
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....urt first notes that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO. This distinction was made clear by the ITAT in Dresser-Rand India Pvt. Ltd. v. Additional Commissioner of Income Tax, 2012 (13) ITR (Trib) 422............ ....... 35. The TPO's Report is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise - of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot - after a consideration of the facts - state that the ALP is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing ex....
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....tely evaluated. In the case of the appellant, it is nobody's case that the company has entered into diverse activities. The international transactions of the appellant primarily relate to its business of manufacturing of tyres and such international transactions are closely interlinked or inter-twined. It would also not be possible to determine separately profit from the international transactions of payment of trademark fees. Reliance in this regard is placed by the Ld. Assessee counsel on the decision of Hon'ble coordinate Bench of Tribunal, in a similar case of Maruti Suzuki India Limited vs. ACIT (ITA No. 5237/Del/2011), for assessment year 2005-06, too, held as under: "13.1 Thus, we agree with the submission of the appellant's counsel that the entire business model of the appellant is based on license from SMC, Japan for which royalty has been paid. Without such technology supply the appellant's business will cease to exist and its entire operations would come to a halt. Thus, we agree with the appellant's submission TPO has arbitrarily divided the license agreement of the appellant without appreciating that all the license agreement is a single in severable agreement." ....
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....en paid by an independent or unrelated enterprise. This is judged by applying comparables. TPO has not rejected the quantum of royalty on the said principle. The reasoning given by the TPO is not only erroneous for the reasons stated above, but is also contrary to the Rules. Depending upon the method selected, net profit or gross profit of the assessed has to be compared with profit margins of related enterprise. The formula prescribed under the Rules does not accept the ratiocination adopted and applied by the TPO." 12. Another contention of the TPO that the Goodyear Brand was weak and therefore does not require payment of royalty, is not brought out from the records. The AR of the assessee has made elaborate submission and placed evidence on record to show that 'Goodyear' brand is considered to be one of the top most acclaimed brand across the globe. Therefore, there is no merit in the allegation of the TPO that Goodyear brand has no worth and therefore, the payment made by the assessee for use of Goodyear brand is unwarranted. 13. The DRP has further added that since the sister concern of the assessee, Goodyear South Asia Private Limited, is not making payment of royalty, ....
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.... international transaction with comparable uncontrolled transaction, by no sheer logic a comparable controlled transaction can be employed for the purposes of making comparison. There is no warrant for diluting the prescription given by the statute or rules when such prescription itself serves the ends of justice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AE so that the profit likely to arise from such transactions is not underreported vis-à-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situati....
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....ice of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. 16. In light of the above, we conclude that there exists a direct nexus between the revenue earned by the assessee and the payment of royalty made to the associated enterprise for using brand name, and therefore, it would be incorrect to analyze the transaction of payment of royalty in isolation. Further, the ld. DR had raised a contention that the assessee has not demonstrated how the payment for royalty beneficial to the taxp....
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....ervices' between the associated enterprises, so as to be covered in the first limb of section 92B of the Act. It is respectfully submitted that the order of the TPO/AO needs to be reversed for the reasons elaborated hereunder: Section 92(1) of the Act provides for computation of income arising from an 'international transaction' having regard to the arm's length price. Explanation to section 92(1) of the Act further clarifies that allowance of any expense or interest arising from an 'international transaction' shall also be determined having regard to the arm's length price. Sub-section (2) of section 92 of the Act further provides for application of arm's length test in respect of 'mutual agreement' or 'arrangement' for allocation or apportionment of, or any contribution to any cost or expense incurred in connection with benefit, service or facility provided by one or more associated enterprises in an international transaction. Section 92B(1) of the Act defines 'international transaction' to mean '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,....
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....nd. [Disctionary.com Unabridged (v 1.1] Acting in Concert: • An action that has been planned, arranged and agreed on by parties acting together to further some scheme or cause, so that all involved are liable for the actions of one another - also termed concert of action. [Black's Law Dictionary: (8th Edn.) at page 307] • Common intention would be action in consort in pre-arranged plan [Pradeep Kumar vs. Union Administration, Chandigarh : AIR 2006 SC 2992]. Agreement in design or plan: In concert - Together <acting in concert with others>[Merriam-Webster Online] "Transaction', per se, involves a bilateral arrangement or agreement between the parties. A unilateral action by one of the parties without any binding obligation and in the absence of an 'arrangement', 'understanding', or 'action in concert' (e.g. pre-arranged plan, or design agreed by parties), between the parties could not be termed as a 'transaction'. Thus, in order to constitute a 'transaction', there has to be an 'express arrangement', 'understanding' or 'action in concert' between the parties and the same cannot be inferred or implied. In other words, to construe existence of a "....
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...., or any contribution to cost or expense, pursuant to a 'mutual agreement' or 'arrangement'. The pre-condition for invoking arm's length test as provided in sub-section (2) of section 92 of the Act is that two or more associated enterprises must enter into a mutual agreement or arrangement for allocation or apportionment of, or any contribution to, any cost or expense incurred in connection with benefit, service provided by one or more of such enterprises, in an international transaction. Explanation to section 92B has been added by the Finance Act, 2012 w.r.e.f. 1.04.2002 to deem "international transaction" to include, inter alia, "(b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; ..... ...... ..... (d) provision of services, including provision of market research, market development, mark....
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.... had to be disallowed in the hands of the appellant under section 37(1) of the Act itself; there was no need to further benchmark such expenditure under the transfer pricing provisions. The TPO held that the appellant was engaged in the business of brand promotion, even though such business is not sanctioned by the objects clause contained in the Memorandum of Association and the carrying of such business has not been demonstrated on facts. The enlarged definition of 'international transaction', in Explanation to section 92B of the Act, too, does not include within its purview the unilateral incurring of AMP expenses by the assessee in India, albeit using brand name / logo of the foreign AE since: (i) such expenditure is incurred wholly and exclusively for purposes of business of assessee in India; (ii) the benefit of such advertisement enures directly to the assessee; (iii) the benefit, if any, to the AE is only incidental; (iv) expenditure on advertisement is revenue in nature and does not result in any enduring benefit in the capital field; the same does not result in creation of any marketing intangible; (v) there is no transfer or transfer of right to use ....
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....finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses. It would be appreciated that mere agreement or arrangement for allowing use of their brand name by the AE on products does not lead to an inference that there is an 'action in concert' or parties were acting together to incur higher expenditure on AMP in order to render a service of brand building. In fact, such an inference would be in the realm of assumption or surmise. To reiterate, an international transaction has to exist in the first place for the TPO to assume jurisdiction under section 92 of the Act. In other words, the TPO cannot undertake benchmarking exercise to determine whether on facts there exists an arrangement or understanding, etc., which results in an international transaction. Similarly, the TPO is not permitted to embark on benchmarking analysis of allocating the AMP expenses as attributed to the AE without there being a 'agreement' or 'arrangement' for incurring such AMP expenses. The aforesaid view that existence of an internat....
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....ales promotion by comparable companies selected by the appellant in the TP Study report for the year is as follows: Company Name 2000-01 2001-02 2002-03 2003-4 2004-05 2005-6 2006-07 Apollo Tyres Ltd. 3.02% 4.79% 3.33% 3.26% 3.29% 1.91% 2.00% Ceat Ltd. 7.05% 4.04% 4.54% 4.27% 4.16% 4.38% 4.67% Falcon Tyres Ltd. 6.78% 8.41% 9.26% 9.48% 7.31% 5.80% 5.51% J K Tyre & Inds. Ltd. 2.59% DNA 3.48% 4.07% 3.68% 3.28% 2.77% M R F Ltd. 4.51% 4.42% 4.84% 4.66% 4.44% 3.84% 3.43% Kesoram Industries Ltd. 3.92% 3.99% 3.54% 2.37% 3.22% 2.86% 2.96% Mean 4.65 % 5.13 % 4.83 % 4.69 % 4.35 % 3.68 % 3.56 % Even otherwise, it would be appreciated, that during the year under consideration, the appellant has spent 1.37% of its sales on advertisement and sales promotion while comparable companies spent an average of 3.56% of their sales on advertisement and sal....
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....ination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP. 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustmen....
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.... benefit, if any, to the AE is only incidental and it is for this reason that no part of the expenditure have been disallowed by the Revenue in terms of section 37(1) of the Act. On the issue whether any transfer pricing adjustment on account of AMP expense incurred by the assessee be made, on the basis of incidental benefit accrued to foreign AE from such expenditure, the Hon'ble High Court in the case of Maruti (supra) held: Incidental benefit to SMC 84. The Court next deals with the submission of the Revenue that the benefit to SMC as a result of the MSIL selling its products with the cobrand 'Maruti-Suzuki' is not merely incidental. The decision in Sony Ericsson acknowledges that an expenditure cannot be disallowed wholly or partly because its incidentally benefits the third party. This was in context on Section 57(1) of the Act. Reference was made to the decision in Sassoon J David & Co Pvt. Ltd. v. CIT (1979) 118 ITR 26 (SC). The Supreme Court in the said decision emphasised that the expression 'wholly and exclusively' used in Section 10 (2) (xv) of the Act did not mean 'necessarily'. It said: "The fact that somebody other than the Assesse....
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....rrangement and not whether the contract is subsequently renewed. However, it is open to the party, i.e. the assessed, to place evidence including affirmation from the brand owner AE that at the start of the arrangement it was accepted and agreed that the contract would be renewed. 153. Economic ownership of a brand is an intangible asset, just as legal ownership. Undifferentiated, economic ownership brand valuation is not done from moment to moment but would be mandated and required if the assessed is deprived, denied or transfers economic ownership. This can happen upon termination of the distribution-cum-marketing agreement or when economic ownership gets transferred to a third party. Transfer Pricing valuation, therefore, would be mandated at that time. The international transaction could then be made a subject matter of transfer pricing and subjected to tax. 154. Brand or trademark value is paid for, in case of sale of the brand or otherwise by way of merger or acquisition with third parties. .... ..... ..... Re-organisation, sale and transfer of a brand as a result of merger and acquisition or sale is not directly a subject matter of these appeals. A....
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....below. 22. We have heard the rival contentions in the light of the material produced and precedents relied upon. A Special Bench was constituted in the matter of L.G. Electronics India Pvt. Ltd., to consider the above controversy relating to transfer pricing adjustment in relation to AMP expenses. The Special Bench, vide order dated 23-01-2013 in ITA No. 5140/Del/2011, inter alia, came to the conclusion that where the expenditure on advertisements of the foreign brand incurred by the taxpayer are proportionately higher than those incurred by comparable cases, the same leads to the inference of "transaction" between the taxpayer and the foreign AE for creating marketing intangibles on behalf of the later. The Special bench further held that the bright line test is used only to ascertain the cost / value of service rendered by the taxpayer to foreign AE towards creation and improvement of marketing intangibles. 23. In the meanwhile, the Delhi High Court in a batch of appeals including the case of Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT (374 ITR 118) and others, dealing with the controversy relating to transfer pricing adjustment in relation to AMP expenses h....
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....t recognition and popularity in India and therefore, the assessee, instead of paying royalty for use of trade name, ought to have charged similar compensation from the AE. According to him, the case of the assessee is at distance from other cases, wherein, the revenue has applied bright line test to determine the non-routine expenditure incurred for the purpose of building brand owned by the associated enterprise and therefore, the decision of High Court in the case of Maruti Suzuki (supra) does not apply to the case of the assessee. 29. We are unable to gather as to how the conclusion drawn by the revenue in making such transfer pricing adjustment on account of incurring AMP expense, by the assessee, is different from the controversy dealt by the Hon'ble High Court in the case of Maruti (supra).In the present case, the TPO at page 26 of his order dated 27.09.2010 has arrived at the following conclusion for making such adjustment: '5.8 After going through the discussion in the preceding paras the following conclusions may be arrived at: (i) the assessee has been mandatorily using the Goodyear trademark/ logo in India since 1922 (ii) Over the years, the assessee has made....
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....should enhance the income of the assessee by an amount of Rs. 154.12 Crores on account of compensation to be received from its AE for promoting the brand name of its AE." 31. From conjoint reading of the orders passed by the TPO under both cases, it is noted that in both the cases, the TPO is claiming the foreign brand to be weak, and seeking compensation of the marketing efforts undertaken by the assessee for promoting/ building that foreign brand in India. The only difference in both the cases is that in the case of Maruti Suzuki, the TPO has applied bright line test to determine the compensation, however, in the case of the assessee, the TPO has determined the compensation equivalent to what the assessee was paying for use of such trade name. In our opinion, there may be a difference in the computation mechanism of seeking compensation, however, the important element, i.e. seeking compensation for the alleged brand promotion of the AE is common in both the cases. 32. The ld. Departmental Representative subsequently changed his line of argument and held that there exists an international transaction in the case of the assessee and therefore, the case of the assessee is diff....
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....by assessee during this year are raised to double the expenses shown to have been incurred in preceding assessment year. 35. The ld. AR of the assessee, in his rebuttal, first made elaborate arguments as to whether the DR is empowered to improve upon the order passed by the TPO himself. The AR of the assessee further submitted that the chart depicted at page 15 of the transfer pricing report, under the head 'overview of the function' discriminates the functions undertaken by the respective parties to the international transactions undertaken during the year under consideration and it cannot be assumed that since the associated enterprise is undertaking the function of brand development and core marketing, the associated enterprise controls and supervises the local sales and marketing function of the assessee. The assessee undertakes the function of marketing in India for the purpose of selling goods manufactured by it in India and as the chart suggests, the associated enterprise, on its own, undertakes the brand development and core marketing, without influencing the assessee, in any manner, whatsoever. 36. With regard to the Trade Mark License Agreement, the AR of the assess....
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....t." Reference is made to the statement that "this brand name has been developed and popularised by HSPP in India." According to the Revenue, therefore, there is no dispute that the Assessee is engaged in "developing and maintenance of brand/trade name in India." 28. A reference is made by the Revenue to the Export Agreement whereunder the Assessee has been granted rights to export products to certain 'permitted countries' for payment of royalty of 8 per cent of the export price, which was subsequently raised to 12.25 per cent from 1st February 2008. Honda, Japan reserved the right to change the permitted countries at any time. According to the Revenue this indicates that the Assessee has not been an independent manufacturer and is only functioning as a contract manufacturer for the AE. It is also pointed out that the list of countries to which export is permitted by Honda, Japan included the countries falling in the same geographical location as India. It is stated that the terms of the agreement with such distributors in other countries "could have worked as a sound comparable" but that the Assessee had not chosen to make any such attempt in its TP documentation. 29. In resp....
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....P, in addition to the above, inter-company selling price may include mark-up to cover other directly related expenses, such as, general and administrative expenses. 41. It was submitted before the TPO that for computing the gross profit margin or the mark-up from such international transactions of export of traded goods to the AEs, the export incentive amounting to Rs. 62,92,772/- in respect of such purchases from GSATL in terms of off take agreement dated 01-09-2001 is to be deducted from the cost of goods sold. 42. The TPO, however, did not accepted this contention of the assessee and without deducting export incentive from the cost of goods sold, computed the margin of the assessee. The TPO, to the extent of shortfall in the margin of the assessee than the margin of 5% agreed between the parties in terms of Global Transfer Pricing Policy, made transfer pricing adjustment with respect to transaction of export of goods. The assessee in this case has submitted the objections to the Dispute Resolution Panel. However, the DRP rejected the assessee's submission and upheld the TPO order. 43. Against the above order the assessee is in appeal before us. 44. We have heard the ....
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...., which has not yet accrued at the time of sale of goods, being treated as a component of cost of goods sold. 11.6 The TPO's reference to the OECD guidelines is also germane. In this regard, we find that in the said guidelines gross profit are defined as "the gross profits from a business transactions are the amount computed by deducting from the gross receipts of the transactions the allocable purchased or production costs of sales, with due adjustment for increases or decreases in inventory or stock in traded, but without taking account of other expenses." 11.7 From the above it follows that while determining the gross profits from sale of goods such incentives cannot be adjusted to determine the cost of goods sold. TPO has rightly observed that export incentives does not form part of the invoice price of goods sold. In such a case, it cannot be reduced from the cost of goods sold. We agree with the TPO that an expenditure that does not form part of the books of accounts cannot be treated as an expense for the purpose of transfer pricing accounting. 11.8 Assessee's reliance of Accounting Standard (AS)-II- Verification of inventories issued by Institute of Chartered Accou....
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....eceived upon purchase of goods is deductible from the value of cost of goods sold. Hence, in our considered opinion, assessee is entitled for deduction of rebate received upon purchase of goods from the value of goods sold. 12.2 We further find that the rebate amount was netted off and net amount of purchase cost shown in the profit and loss account. In this regard, TPO has contended that the said amount was not reflected in the books and accounts of the assessee. In our considered opinion, this factual aspect needs verification. Hence, we remit this issue regarding verification of netting off of rebate from cost of purchase to the file of Assessing Officer. Needless to add that the assessee should be given adequate opportunity of being heard. 45. Respectfully following the decision of the co-ordinate bench of Tribunal in the assessee's own case for the assessment year 2006-07, we uphold the order of the TPO to the extent of netting off of export incentive from the cost of goods sold and set aside the issue of netting off of rebate/discount from the cost of goods sold, to the file of assessing officer/TPO, for verification of the claim in light of our decision for the assessm....
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....e assessee. But the Delhi Tribunal in assessee's own case for assessment year 2003-04 and 2004-05 upheld the order of the Ld. Commissioner of Income Tax (A) deleting the similar disallowance of expenditure out of repair and maintenance expenses for plant and machinery. We also note that Revenue has not filed any appeal before the High Court of Delhi against the aforesaid order passed by the Tribunal. Hence, in the background of the aforesaid discussions and precedents, we set aside the order of the Assessing Officer and decide the issue in favour of the assessee." 51. Ld. AR of the assessee also brought our attention toe order of the DRP, wherein, following the order of the Hon'ble Tribunal, DRP in the appellant's own case for the assessment year 2008-09, deleted the similar ad-hoc disallowance of 20% of expenditure incurred on machinery repair and maintenance expenses, proposed by the assessing officer. 52. The Ld. DR relied upon the order of the AO and DRP. 53. We have heard the rival contentions and in light of the material produced and precedent relied upon, respectfully following the decision of the Hon'ble coordinate bench of tribunal in the assessee's own case (supr....
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....ppellant's own case for the assessment year 2006- 07, wherein, similar ad-hoc disallowance of warranty were deleted, as under: "We agree with the assessee's contention that provision for estimated expenditure to be incurred for warranty obligation in respect of sales made in the relevant previous years is to be accounted as expenditure in the year of sale, in order to match the cost with revenue. The provision for warranty is necessarily required to be made by the companies which are required to follow mercantile system of accounting. In this regard, we further find that Courts have consistently held the view that liability for provision for warranty for replacement on account of manufacturing defects arises at the time of sale and is to be allowed as deduction in that year on the basis of rational /scientific estimate, notwithstanding that the exact amount of liability is ascertained at a later date. We further find that action of the assessee in creating provision for warranty is also in consonance with the decision of the Hon'ble Apex Court in the case of Rotork Controls India Ltd. vs. C.I.T. 314 ITR 62. Similarly, we find that relying on the above decision in the case ....
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....etail Stores, the appellant had spent nearly Rs. 2,27,35,000 during the year and an amount of Rs. 1,93,08,000 was spent towards launching and introducing the new product range called "Excellence" for passenger cars. This two expenses alone totaled to Rs. 4,20,43,000 out of total increase in expenditure of Rs. 4,87,14,000. Further, it was submitted that with the increase in advertisement and sales promotion expense, the company has demonstrated sales growth of nearly 28% as compared to financial year 2005-06. The gross sale in year 2005- 06 was Rs. 751.74 crores, which has grown to Rs. 958.11 crores in 2006-07. It would be appreciated that despite having low spending on advertisement and marketing expenditure, the appellant has maintained substantial growth in terms of sales and sustained in this competitive business. In terms of section 37(1) of the Act, deduction is admissible for expenditure incurred wholly and exclusively for purposes of business. Expenditure justified by business considerations and incurred out of commercial expediency is allowable deduction. It was also submitted that since the aforesaid expenditure of advertisement and brand promotion has undergone a....
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..... 9-10 pertaining to levy of interest u/s. 234B & 234C and initiation of penalty proceedings are consequential and Premature. ITA No. 6240/Del/2012 - Assessment Year 2008-09 This appeal by the assessee is directed against the order of the Assessing Officer u/s. 143(3) read with section 144C of the I.T Act for the assessment year 2008- 09 on the following grounds : 1. That the assessing officer / the Transfer Pricing Officer (TPO) erred on facts and in law in making adjustment of Rs. 11,60,71,871 to the arm's length price of the international transaction entered into by the appellant with its associated enterprise. 2. That the assessing officer/the TPO erred on facts and in law in disregarding the payment of trademark fee of Rs. 5,64,08,000 to the Associated Enterprise ("AE"), The Goodyear Tire & Rubber Company, Akron, USA (hereinafter referred as "Goodyear USA" or "Goodyear Group") without providing any cogent reasons and basis. 3. That the assessing officer/the TPO erred on facts and in law in holding that arm's length price of the international transactions regarding payment of trademark fees to be nil allegedly concluding that no recognizable benefit has been pass....
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....ice of the alleged international transaction AMP expenses, holding that instead of payment of the trademark fee to the AE of Rs. 5,64,08,000 the appellant should receive the equivalent amount as compensation for creating and developing marketing intangibles in India. 4.2 That the assessing officer/TPO erred on facts and in law in not appreciating that AMP expenditure unilaterally incurred by the appellant, could not be regarded as a 'transaction' in absence of any understanding / arrangement between the appellant and the associated enterprise. 4.3 That the assessing officer/TPO erred on facts and in law in not appreciating that the AMP expenses, incurred by the appellant in India cannot be characterized as an 'international transaction' in terms of section 92B, so as to invoke the provisions of section 92 of the Act. 4.4 That the Dispute Resolution Panel (DRP) erred on facts and in law in upholding the transfer pricing adjustment allegedly on account of AMP expenditure even while observing that, "we are of the opinion that economic realities cannot yield to agreement or arrangements whether formal or informal. Having said that we are of the firm view that arrangements whet....
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....ed on facts and in law in not appreciating that even applying Bright Line Test ("BLT") no adjustment on account of AMP expenditure could be made in as much as AMP expenditure incurred by the appellant was lower than AMP expenditure incurred by comparable companies. 4.15 That the assessing officer/TPO erred on facts and in law in relying upon the decision of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. vs. Addl. CIT, TPO, New Delhi. [in W.P.(C) 6876/2008 [WP(C) 6876/2008], which has been set aside by the Supreme Court in a Special Leave Petition filed against the decision of the Hon'ble High Court. 4.16 Without prejudice that the assessing officer/TPO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm's length applying Transactional Net Margin Method (TNMM) on entity-wide basis. 5. That the assessing officer / TPO erred on facts and in law in making adjustment of Rs. 32,55,871 in the arm's length price of the international transaction of export of finished goods entered into by the appellant with its associated enterprise. 5.1 That the assessing officer /TPO err....
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....s business and were allowable deduction as business expenditure. 7.2 That the assessing officer erred on facts and in law in disallowing expense incurred on advertisement of Rs. 15,11,304 holding that the details of these expense were not furnished by the appellant, grossly ignoring the complete details of advertisement expense of Rs. 17,06,32,000 submitted by the assessee. 7.3 Without Prejudice, the assessing officer erred on facts and in law in making disallowance of advertisement expense of Rs. 5,12,04,000 without appreciating the fact that similar disallowance has already been made by the TPO for Rs. 5,64,08,000, thereby making total disallowance of Rs. 10,76,12,000 on the same account. 8. That the assessing officer erred on facts and in law in levying interest under section 234B of the Act at Rs. 2,98,47,544 instead of correct interest computed under that section at Rs. 2,79,96,013. 9. That the assessing officer erred on facts and in law in wrongly computing the tax liability at Rs. 26,97,85,022 as against Rs. 26,57,22,293. 66. Ground No. 1 is general 67. Ground No. 2 to 3.6 - Transfer pricing issue w.r.t. to payment of trademark fee The aforesaid grounds ....
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....ee has incurred a large amount on advertisement and publicity which is resulting in benefit to the associated enterprises who own the brand, (ii) the assessee was not able to demonstrate as to how it is wholly benefited from such brand building and that whole arrangement was concocted to lower its profit and to save expenditure of the associated enterprises. 72. The assessing officer accordingly made disallowance of Rs. 5,12,04,000 out of the total expenditure of Rs. 17,06,32,000 incurred on advertisement and publicity, allegedly relatable to the promotion of brand in India. 73. In this regard, he appellant has submitted the following before us: "The aforesaid advertisement and sales promotion expenses are generally required to be incurred to beat competition in the trade for promoting their products and had direct nexus with the sales of the products in India. The above mentioned expenses were incurred for sales promotion and advertisement in India only and that too in respect of products in which the appellant was dealing in India. Similar advertisement and sales promotion expenses are incurred by the competing companies for promoting sales of their products as well. ....
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....ertisement and promotion expenses, made on the ground that such expenses incidentally resulted in promotion of the brand owned by Maruti Udyog Limited. It is further respectfully submitted that since the aforesaid expenditure of advertisement and brand promotion has undergone a benchmarking analysis under the Transfer Pricing regulations and an arm's length price thereof has been determined, there could not be any further disallowance of the said payment under section 37(1) of the Act, holding the same to be not an expenditure incurred wholly and exclusively for the purpose of the business of the appellant. Reliance is placed on the decision of the Hon'ble Delhi Bench of the Tribunal in the case of Whirlpool of India Ltd. vs. DCIT (ITA No. 426/D/13), wherein, it is held as under: "16.......................Once the total amount of AMP expenses is processed through the provisions of Chapter X of the Act with the aim of making TP adjustment towards AMP expenses incurred for the foreign AE, or in other words such expenses as are not incurred for the assessee's business, there can be no scope for again reverting to section 37(1) qua such amount to make addition by consid....
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....ax Act, 1922) if it satisfies otherwise the tests laid down by the law". 76. Respectfully following the decision of the Hon'ble Delhi High Court in the case of Whirlpool and several other decisions submitted by the assessee, we are of the considered view that AO was not justified in making such disallowance and therefore, direct the assessing officer to delete the adjustment on this account. 77. In the result, the appeal of the assessee is allowed on this issue. Grounds No. 8-9 are consequential in nature and thus, need no specific adjudication. ITA No. 961/Del/2014 - Assessment Year 2009-10 This appeal by the assessee is directed against the order of the Assessing Officer u/s. 143(3) read with section 144C of the I.T Act for the assessment year 2009- 10 on the following grounds : 1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 67,38,74,300 as against the income of Rs. 50,17,92,004 returned by the appellant. 2. That the assessing officer / the Transfer Pricing Officer (TPO) erred on facts and in law in making adjustment of Rs. 13,68,57,865 to t....
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.... with a valuable brand, etc.) in both the companies were entirely different. 4. That the assessing officer/TPO erred on facts and in law in making transfer pricing adjustment amounting to 6,69,11,000 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. 4.1 That the assessing officer/TPO erred on facts and in law in making an addition of Rs. 6,69,11,000 on account of the arm's length price of the alleged international transaction AMP expenses, holding that the appellant was promoting the brand of the associated enterprise and instead of payment of the trademark fee to the AE of 6,69,11,000 the appellant should receive the equivalent amount as compensation for creating and developing marketing intangibles in India. 4.2 That on the facts and in the circumstances of the case, the DRP erred in law in upholding, in principle, transfer pricing adjustment made by the assessing officer / TPO in respect of expenditure incurred on advertising, marketing and publicity ("AMP expenses"). 4.3 The DRP/TPO erred on facts and in law in not appreciating that the AMP expenses, etc., unilaterally ....
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....rized by Chapter X of the Act. 4.11 The DRP/TPO erred on facts and in law in holding that expenditure incurred by the appellant which incidentally resulted in brand building for the foreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of a service by the appellant to the AE. 4.12 That the DRP/TPO erred on facts and in law in holding that AMP expenses incurred by the appellant resulted in promotion of brand owned by the associated enterprise, thereby creating marketing intangibles whose ultimate benefit inured to the associated enterprise 4.13 That TPO / DRP erred on facts and in law by questioning the commercial expediency of AMP expenditure incurred by the appellant and assuming that benefit has accrued to AE on account of AMP expenses incurred by the appellant in India. 4.14 The DRP/TPO erred on facts and in law in not appreciating that the advertisement and marketing expenses were incurred by the appellant wholly and exclusively for purposes of its business and not on behalf of or for the benefit of the AE; any benefit to the AE being only i....
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....penses incurred by the appellant was appropriately established to be at arm's length applying Transactional Net Margin Method (TNMM). 5. That the assessing officer / TPO erred on facts and in law in making adjustment of Rs. 30,35,865 in the arm's length price of the international transaction of export of finished goods entered into by the appellant with its associated enterprise. 5.1 That the assessing officer /TPO erred on facts and in law in not appreciating export incentive, being a compensation for the cost incurred for sale of goods, is required to be reduced from the cost of goods sold for computing gross profit margin for determining the arm's length price. 5.2 That the assessing officer / TPO erred on facts and in law in holding that incentive received in respect of export of finished goods, should not be taken into account for determining the profit/cost in respect of the international transaction of export. 5.3 That the assessing officer / TPO has erred on facts and in law in holding that "if the appellant's method of calculation of 'cost of goods sold' is followed, it would tantamount to a claim that benefit, which has not yet accrued at the time of sale of g....
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....advertisement has been subjected to benchmarking analysis by the TPO under section 92 of the Act and appropriate arm's length price in this regard has been determined, there cannot be any further disallowance for the said expenditure under section 37 of the Act on the basis that a part of such expenditure was incurred for the benefit of the overseas associated enterprise. 7.4 Without Prejudice, the assessing officer erred on facts and in law in making disallowance of advertisement expense of Rs. 3,20,71,500 without appreciating the fact that similar disallowance has already been made by the TPO for Rs. 6,69,11,000, thereby making a double disallowance to that extent. 8. That the assessing officer erred on facts and in law in disallowing expenditure amounting to Rs. 11,16,932 allegedly holding that the appellant has failed to provide complete details of expenditure incurred by the appellant and that the expenditure were not incurred wholly and exclusively for the purpose of business. 9. That the assessing officer erred on facts and in law in levying interest under Section 234B and Section 234C of the Act. 78. Ground No. 1 an 2 are general. 79. Ground No. 3 to 3.7 - Tr....