TaxTMI 
TaxTMI 
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2016 (7) TMI 21
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....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 erred on facts and in law in not appreciating that t....
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....aking 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 to reimburse the AMP expenses incurred by the appellant for sa....
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....ring 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 the assessing officer /DRP erred on facts and in law in not reducing export ....
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....o. 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 its manufactured products. It was also submitted before the TPO that the assessee has for the p....
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.... 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 customer pricing competitive and achieving a higher market penetration / demand by waiving off the tradema....
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.... 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 cannot ever make losses. This would be a totally unrealistic expectation. Had this been the case, no company with a strong brand name / equity would ever make losses. ....
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....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 use Suzuki name / brand was taken by the assessee in order to advance its own commercial interest. No question arises of the assessee company having conferred any benefit on Suzuki....
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.... 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, for which royalty is being paid, the royalty payments cannot be separately evaluated. Hon'ble Delhi Bench of Tribunal, in a similar case of Maruti Suzuki India Limited vs. ACIT (ITA No. 5....
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..... 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 transaction can never include and would exclude bundle or group of connected transactions. More important would be reference to meaning of the term transaction' in Section 92F, clause (v), which as per the said d....
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....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 aggregate the controlled transactions if the transactions meet the specified common portfolio or package parameters." The Hon'ble High Court further held that if the Indian entity has satisfied Transactional Net Margin Method (TNMM), ....
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....e 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/Del/2011) (ii) Atul Ltd vs ACIT (ITA No 3118/Ahd/2010) (iii) Toyota Kirloskar Motor (P) Ltd. vs. ACIT (ITA No. 1315/Bang/2011) (iv) Panasonic India Pvt Ltd vs Income Tax Officer (ITA No.1417/Del/2008) (v) Hindustan Unilever Ltd. vs. ACIT (ITA No.7868/Mum/2010) (vi) Amphenol In....
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.... 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. 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." In view of the aforesaid it is respectfully submitted that the adjustment made by the TPO is unjustified and liable to be deleted. (iv) Comparison of Goodyear India L....
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....tional 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 under-reported 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 situations, th....
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....curred 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 actually results in profit or not. The Hon'ble High Court held as under: "21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only ....
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....arify 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 expenditure. That decision is outside the authority of the TPO...." Various benches of Hon'ble Tribunal too, in the following cases, applied the aforesaid principle laid down by the Delhi High Court in the case of EKL Appliances (supra): - Kirby Building Systems India Ltd vs. Addl CIT (ITA 1975/ HYD/ 2010) - Dresser Rand India Pvt Ltd vs Addl. CIT (ITA No 8753/Mum/2010)Indigene Pharmaceuticals vs. ACIT (ITA No.1541Hyd/2011 & 1874/Hyd/2012) - Honda Siel Power Products Ltd. vs. DCIT (ITA 5713/ Del/ 2011) - LG Polymers India Pvt....
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.... 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." 9. Reliance has also been placed by the assessee on the decision of Delhi Bench of Tribunal in the case of Lumax Industries Ltd. vs. ACIT (ITA No. 4456/Del/2012), wherein, in the similar case of payment of royalty, this Tribunal concluded that: ".............the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules defines 'transaction' as a number of closely linked transactions. Roy....
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....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, therefore, there shall be no payment of royalty by the assessee either. We have considered this aspect and found that there is difference in business dynamics and commercial realities in both the companies in as much as 60% of the sales made by Goodyear South Asia Limited is made to its related parties itself. Nevertheless, the AR of the assessee has rightly pointed out that in terms of Rule 10B(1)(a) of the Rules, international transactions entered into by the assessee with its AE, Goodyear Inc. USA cannot be compared with the international transaction entered between another AE, Goodyear South Asia Pvt. Ltd. with Goo....
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....olled 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 situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus, it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction." 15. It is also not acceptable that an international transaction which is not undertaken in the preceding year, cannot be undertaken between parties subsequently. In pursuance to direction of the Bench, the appellant has submitted three documents as additional evidence, i.e. (i) certificate issued by the associated enterprise, i.e. The Go....
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....elevant 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 taxpayer. We are of the opinion that, ascertaining whether a service has actually benefitted the assessee is not within the prerogative of the tax authorities.The Hon'ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730(Del) has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. 17. Accordingly, in view of the aforesaid, we are of the opinio....
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....cation 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, or provision of service, etc. The said section further provides that the term 'international transaction' shall include a 'mutual agreement' or 'arrangement' between two or more associated enterprises for allocation or apportionment of or contribution to any cost incurred in connection with any benefit or service provided to any such enterprise. Arm's length test as provided in section 92, can be applied only in respect of an 'international transaction', as stipulated under section 92B, of the Act, which has the following two limbs: (I) There should be a "transaction" between two or more associated enterprises. Or (II) There should be 'mu....
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....n 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 "transaction" or "international transaction", there must be tangible material to show actual, 'arrangement', 'understanding 'or 'action in concert' even though the same may be informal or oral (not in writing). Existence of informal or oral arrangement or action in concert cannot be inferred or implied and there has to be tangible evidence on record to indicate that the parties were ad idem, i.e., there exists an express unison or meeting of minds to indicate that the parties have acted in concert. The existence of an international transaction has, therefore, to be established as a matter of fact. In order to constitute an "international transaction" in terms of section 92B of the Act, an 'arrangement', 'understanding' or 'action in concert' must, in fact....
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....f 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, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; ..... ...... ....." The expression "intangible property" has been defined in clause (ii) of the said Explanation to include, inter alia, "(a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; ..... ...... ..... (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; ..... ...... ....." On the facts of the present case, it would be appreciated that AMP expenses had been incurred by the appellant (s) (tax resident of India) unilaterally, at its....
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.... 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 such alleged marketing intangibles in favour of foreign AE; and (vi) the assessee does not provide any service(s) for market research / market development to the foreign AE. Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd (ITA No 110/2014 & 710/2015), while dealing with the issue of benchmarking AMP expense of assessee, in the absence of existence of an international transaction of provision of brand building services, other than being construed by applying Bright Line Test, held as under: 43. Secondly, the cases which were disposed of by the judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of....
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.... 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 international transaction is a sin a qua non for invoking the transfer pricing provisions contained in Chapter X of the Act, can be further supported by analysis of section 92(1) of the Act, which seeks to benchmark income / expense arising from an international transaction, having regard to the arm's length price. The income / expense must arise qua an international transaction, meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expense payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and unrelated third parties in India, where there is no income arising to the Indian enterprise from the f....
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....ppellant. The fact that AMP expenses incurred by the appellant are lower than that of the other comparable companies clearly establishes that such expenses are incurred in routine, i.e., in the course of carrying on of the appellant's business of manufacture and trading of automobile tires. Such expenses cannot, therefore, be construed as resulting in any benefit in the form of creation of marketing intangibles for the associated enterprise. Even otherwise, Hon'ble High Court in the case of Maruti (supra), on the issue whether such adjustment on AMP expense incurred by the taxpayer can, in any case be made under the provision of law, held as under: 57. The Court next turns to the principal contention of the Revenue that in a particular situation of independent distributors/licensed manufacturers matters relating to promotion of a brand of a foreign AE would necessarily be a matter of negotiation between the parties and not necessarily be reduced to writing as part of an agreement between them. 58. It is necessary at this juncture to discuss the reasons for enactment of Chapter X in the Act with the whole new scheme of provisions concerning transfer pricing in the form of ....
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....nt under Chapter X, equally it cannot be permitted 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. 72. As rightly pointed out by the Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit such an adjustment. Accordingly, ....
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....der Section 10 (2) (xv) of the Act if it satisfies otherwise the tests laid down by the law." 85. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer. Accordingly, since the expenditure is incurred by the appellant for its own benefit, no adjustment can be made on account of incidental benefit, if any, enuring to the associated enterprise. Re: Without prejudice, economic ownership of the brand vests with the appellant: In the instant case, the appellant has a long term license to use the brand name or trademark of the AE, in India. The economic benefits from the development/promotion of a trade mark would, therefore, arise only to the user of such trade mark, selling goods/products under such brand name/trademark. This Hon'ble Court in the case of Sony Ericsson (supra) accepted that even if marketing intangible ....
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....uld flow and it may require transfer pricing assessment." (emphasis supplied) The aforesaid observation was also reiterated by the coordinate bench in the case of Maruti (supra). In that view of the matter, even if it were to be assumed that excessive AMP expenditure incurred by the appellant resulted in creation of marketing intangibles, such intangibles being exploited by the appellant for purpose of its business in India, it cannot be said that the same was transferred to the AE for which the Indian entity needed to be compensated. That apart, there is nothing on record to show that there was, in fact any transfer of the marketing intangible(s) created as a result of excessive AMP expenses in favour of the foreign AE or that the AE has exploited such intangible(s) for purpose of its business in India. Re: Higher Operating margins of the appellant vis-à-vis comparable companies Hon'ble Delhi High Court in the case of Maruti (supra), reiterating the law laid down by the coordinate bench in case of Sony Erickson, held: 86. In Sony Ericsson it was held that if an Indian entity has satisfied the TNMM i.e. the operating margins of the Indian enterprise are much ....
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....gh Court considering the dispute on facts of several distributors laid down important transfer pricing principles, viz. (a) 'Bright Line Test' applied by the Revenue has no statutory mandate, and the contention of the Revenue that any excess expenditure beyond the bright line should be regarded as separate international transactions is unwarranted (b) clubbing of closely linked transactions is permissible, (c) benchmarking of a bundle of transactions applying entity wide TNMM is permissible (d) once the Revenue accepts the TNMM as the most appropriate method, then it would be inappropriate for the Revenue to treat a particular expenditure like AMP as a separate international transaction. 25. Again, the Delhi High Court in the case of Maruti Suzuki India Ltd (ITA No 110/2014 & 710/2015) has decided the issue of benchmarking AMP expense in the case of manufacturers and at the outset deleted such adjustment holding thatChapter - X of the Act does not authorize the revenue to make quantitative adjustment such as AMP expense. Further, the High Court also held that existence of an international transaction cannot be presumed on the basis of the Bright Line Test. 26. Following the decis....
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....ned and executed by the assessee. (iv) By these efforts the brand has grown in value and significant economic substance has been added to it by the company making decent profits. (v) Obviously a marketing intangible has been created by the assessee benefitting the parent company. " 30. In the case of the Maruti Suzuki (supra), the TPO had arrived at a similar conclusion, reproduced as under (quoted from the order of Hon'ble High Court): Final order of the TPO 17. In the final order, the TPO came to the conclusion that the trade mark 'Suzuki' owned by the SMC had piggybacked on the trade mark 'Maruti', without any compensation being paid by SMC to MSIL. He also came to the conclusion that the trade mark 'Maruti' had acquired the status of a 'super brand' whereas the trade mark 'Suzuki' was a relatively weak brand. He concluded that the promotion of the co-branding of 'Maruti- Suzuki' had resulted in (a) promotion of the trade mark of the AE; (b) the use of the trade mark 'Maruti' of the MSIL; (c) reinforcement of the Suzuki trademark which was a weak brand as compared to Maruti in India and; (d) impairment of the value of the Maruti trademark due to cobranding proce....
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....e to undertake brand development and core marketing of the products and the assessee undertakes the function of local sales and marketing. With this, the ld. DR contended that the assessee undertakes the marketing in India under the guidance and influence of the associated enterprise. 33. The ld. DR also referred to ARTICLE VI - USE AND ADVERTISING of the Trade Mark License Agreement dated 01st Day of October, 2006, between assessee and Goodyear USA, the AE (enclosed at pages 129-147 of the paper book), which reads as under: 1. Licensor's Standards. Licensee will use the Licensed trademarks on the licensed products, in association with its licensed services, and in all advertising and promotional material in accordance with the requirements of licensor. Such usage will include, but not be limited to, all newspaper and magazine advertising, use in catalogs, price sheets, invoices, labels, point-of-sale displays, and radio and television commercials. Upon request, Licensee will furnish to licensor information and sample materials showing in detail the manner in which the license Trademarks are used by Licensee on its Licensed Services, and in its advertising and promotional program....
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....h is licensed for use to the assessee, is requiring the assessee to furnish the sample materials showing in detail the matter in which the licensed trademarks are used by the assessee. Such general clauses are found invariably in trademark license agreements. 37. We have considered the arguments of the AR of the assessee and the DR. We agree with the submission of the AR of the assessee that the conclusion drawn by the ld. DR, by referring to the aforesaid clauses of transfer pricing study and trademark license agreement, does not lead to an inference of existence of an international transaction of incurring AMP expense by the assessee. Nevertheless, it is equally important to refer to the following findings of the Delhi High Court in the case of Honda Siel Power Products vs. DCIT (ITA No. 346/2015), wherein, the Court has observed that: 26. The relevant facts are that under a Technical Collaboration Agreement, the Assessee is granted exclusive license to manufacture and sell the products of the foreign AEs against payment of royalty of 4% on sales. Additionally, the Assessee entered into agreement dated 19th March, 2007 for obtaining license to use the trademark HONDA. The consi....
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.... pointed out that the agreement whereunder license has been granted to the Assessee, does not contain any stipulation concerning the promotion of the brand name HONDA or for incurring AMP expenses for that purpose. There is, according to the Assessee, no tangible material to show that any arrangement or understanding, even an informal one, exists between the Assessee and its foreign AE in relation to AMP expenses. 38. Accordingly, in view of the aforesaid, we are of the opinion that the adjustment made by the TPO is squarely covered by the decision of Delhi High Court in the case of Maruti (supra) and Honda Siel Power Products (supra) and therefore, in the absence of any international transaction of brand building of 'Goodyear' brand, undertaken by the assessee with its AE, there cannot be any adjustment under the transfer pricing provisions. Further, as held by the Hon'ble High Court, Chapter - X of the Act does not authorize the revenue to make quantitative adjustment under the transfer pricing provisions, such as AMP expense. The contention of the ld. DR about abnormal increase in advertisement expenses in comparison to preceding year, does not render any help to the Revenue, ....
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....wn case for the assessment year 2006-07. The coordinate bench of Tribunal in the said case, has held as under: 11.5 As regards issue of reduction of export incentive from goods sold is concerned, we find that the reasoning adopted by the TPO has considerable cogency. The export benefits are given to the taxpayers to promote and stimulate the growth of exports of goods and services in India. They are also meant to earn valuable foreign exchange for the country. The export incentive was available to the assessee only after trading exports made by the assessee. Global Transfer Pricing policy of the group company mentions cost in inter company transfer before the goods and services are dispatched from the premises of a company to the other company. In the Global Transfer Pricing Policy the future value of benefits which may be available in a few countries cannot be included as this will disturb the very basis/purpose or providing uniform return to teach and every enterprise which is a member of global transfer pricing policy. The very purpose of global transfer pricing is to provide a minimum amount of return to the members of global transfer pricing policy. If India provide tax incen....
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....ITAT in Sony India (P) Ltd., vs. DCIT (Supra) is not applicable on the facts of the present case. The portion of this decision referred by the assessee's counsel was in the context of manufacturing of export to utilize idle facilities to enable the company to improve recovery of its fixed assembly cost. Moreover, in the present case, we are concerned with computation of cost plus markup which was not the case in the Sony India decision. ITA NO. 4360/Del/2010 27 11.10 In the background of the aforesaid discussion, we are of the opinion that TPO has rightly held that export incentive amounting to Rs. 7,872,603/- cannot be deducted from cost of goods sold. 12. As regards issue of deduction of rebate /discount received amounting to Rs. 33,21,586/-, the TPO observed that the assessee in this regard has made the claim for the first time. Assessing Officer further observed as under:- (i) This item of rebate does not find a place in the financials accompanying the TP report. (ii) In the details forwarded by the Addl. C.I.T. (Transfer Pricing) Pune there is no reference to any rebate being allowed by M/s GSATL. (iii) The rebate claimed does not seem to appear anywhere in the audited fin....
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....acts with respect to these grounds are that the appellant had incurred expenditure on routine repair and maintenance of plant and machinery aggregating to Rs. 3,98,26,598 which included expenditure on account of consumables, stores and spares, etc., issued from stores. The balance expenses were also incurred on annual maintenance services, purchase of consumables and spares, job works, etc., for the purpose of repair and maintenance of the existing plant.The assessing officer made disallowance of Rs. 79,65,320 being 20% of the total expenditure on the repairs holding the same to be capital expenditure. 48. It was submitted by the ld. AR of the assessee that the assessing officer did not give effect to the following findings of the DRP allowing necessary relief in this regard: "After considering the facts, the DRP sustains the objection of the assessee. The company has submitted audited accounts before the AO and the latter has not been able to point out specific instances where items of capital nature have been debited to repair expenses. Ad hoc disallowance in audited cases cannot be made. In the past also where such disallowance have been made, the appellate authorities have de....
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....sion for warranty 55. The assessing officer disallowed the entire expenditure on provision for warranty of Rs. 17,72,000 holding that the said liability towards warranty is not ascertained and is a contingent liability and therefore not allowed deduction. The assessee submitted its objection before the DRP. The DRP affirmed the action of the assessing officer in this regard. 56. We have heard the rival contentions in the light of the material produced and precedent relied upon. Ld. Counsel of the assessee submitted as under: "During the financial year ended on 31st March 2007 the appellant, had incurred /made provision for warranty claims to the extent of Rs. 17,72,000 on the basis of past trend and experience of actual warranty claims. The provision for warranty is made on a scientific and actual basis and not an adhoc provision. It will be appreciated, that the provision for warranty is not a future or a contingent liability. The liability towards warranty expenses is incurred as soon as the sale is made by the appellant and, therefore, it is a liability in presenti and has definitely arisen in the accounting year. Deduction therefore should be allowed in the year of sales, ....
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....he case of the assessee. In the background of the aforesaid discussions and precedents, we hold that provision for warranty made by the assessee is allowable." 57. The Ld. DR relied upon the order of the AO and DRP. 58. On this issue, we note that during the financial year ended on 31st March 2007 the appellant, had incurred /made provision for warranty claims to the extent of Rs. 17,72,000 on the basis of past trend and experience of actual warranty claims. The provision for warranty is made on a scientific and actual basis and not an adhoc provision. The assessee has duly submitted and demonstrated the computation of its claim for warranty along with past data. In fact, the basis of computation of warranty was found to same as computed in the preceding year, i.e. AY 2006-07, in which this co-ordinate Bench of Tribunal in the assessee's own case has allowed the appeal and directed the assessing officer to delete such disallowance. 59. Accordingly, respectfully following the decision of the co-ordinate bench of Tribunal in the assessee's own case for the assessment year 2006-07, we hold that provision for warranty made by the assessee is allowable. Hence, we set aside the order....
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....ss 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 considering the same expenditure as having not been incurred Rs. wholly and exclusively' for the purposes of assessee's business. If the amount of AMP expenses is disallowed by processing under both the sections, that is 37 and 92, it will result in double addition to the extent of the original amount incurred for the promotion of the brand of the foreign AE de hors the mark-up. In view of the foregoing discussion, we are of the considered view that the AO was not justified in observing alternatively that a sum of Rs. 180 crore and odd is not allowable as per section 37(1) of the Act. We, therefore, va....
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.... no adverse inference could be drawn on this account. 3.2 That the assessing officer/the TPO erred on facts and in law in computing adjustment on account of international transaction of payment of trademark fee without applying any of the prescribed methods, thereby, violating the basic principles of TP regulations. 3.3 That the assessing officer/the TPO erred on facts and in law in holding that the entire arrangement of the payment of trademark fee is designed to shift profits outside India. 3.4 That the assessing officer/the TPO erred on facts and in law by not appreciating that the AE has not charged trademark fee from the appellant in earlier years considering the adverse financial condition. 3.5 That the assessing officer/the TPO erred on facts and in law in not appreciating that the trademark fees paid by the appellant to the AE (1% of the net domestic sales and 2% of the net export sales) is within the limits prescribed by the RBI. 3.6 That the assessing officer/the TPO erred on facts and in law in comparing the other subsidiary (Goodyear South Asia Tyres Private Limited, Aurangabad, Maharashtra, hereinafter referred as "Goodyear Aurangabad") of Goodyear USA with t....
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....t in relation to creation of marketing intangible in favour of AE is an international transactions". 4.6 That the assessing officer/TPO erred on facts and in law in holding that the appellant has developed marketing intangible for the associated enterprise in India by performing all functions and by bearing all economic costs and risks. 4.7 That the assessing officer/TPO erred on facts and in law in not appreciating that advertisement and marketing expenses incurred by the appellant is not on behalf of or for the benefit of the AE, any benefit to the AE being only incidental. 4.8 That the assessing officer/TPO erred on facts and in law in not appreciating that the AMP expenses incurred by the assessee, did not result in creation of any marketing intangibles; much less on account of the AE. 4.9 That the assessing officer/TPO erred on facts and in law in not appreciating that in absence of any understanding / arrangement between the appellant and the associated enterprise, the associated enterprise was under no obligation to reimburse the AMP expenses incurred by the appellant for sale of its products. 4.10 That the assessing officer/TPO erred on facts and in law in not app....
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.... 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 assessee'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 goods, being treated as a component of cost of goods sold." 5.4 That the assessing officer / TPO erred on facts and in law in holding that the approach of the appellant in considering export incentive for computing cost of goods sold was in violation of its Global Transfer Pricing Policy. 5.5 'That the assessing officer / TPO erred on facts and in law in ignoring that the Global Transfer Pricing Policy of the group company provides for reducing the cost of merchandise by the export incentives available to the exporting entity. 5.6 That the assessing officer / TPO erred on facts and in law in holding that the export incentive does not form part of invoice price of goods sold and hence the same cannot be reduced from the cost of goods sold. 6. That the assessing offer erred on....
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....P') Expenses The aforesaid grounds and issue are identical to the grounds raised by the assessee in ground No. 4 to 4.15 for the appeal for the assessment year 2007-08 in ITA No. 5650/Del/2011. Respectfully following our decision in the appeal for the assessment year 2007-08, these grounds of the assessee is allowed. Grounds No. 5-5.6 - Transfer pricing issue w.r.t. to export of goods 68. The aforesaid grounds and issue are identical to the grounds raised by the assessee in ground No. 5-5.2 for the appeal for the assessment year 2007-08 in ITA No. 5650/Del/2011. Respectfully following our decision in the appeal for the assessment year 2007-08, Respectfully following the decision of the coordinate 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 assessment year 2006-07. Needless to add that the assessee should be given reasonable opportunity of being heard. G....
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....ing the sales of these products by the appellant in India and benefit of which was derived entirely by the appellant. Such expenses incurred in India, do not have any reach outside India so as to result in any benefit to the other group company which are the owner of the said brand. The Supreme Court in the case of Sassoon J. David and Co.; (P) Ltd. Vs. CIT : 118 ITR 261 held that expenditure incurred wholly and exclusively for purpose of business of an assessee would be allowable deduction notwithstanding that such expenditure may incidentally b Hon'ble Delhi High Court in the case of CIT vs. Adidas India Marketing (P) Ltd. : 195 Taxman 256, held that"..........No doubt, brand name of 'Adidas' is already a well-known brand which belongs to the parent company of the assessee. However, to popularize the said product in India and to promote its sale in the Indian territories, it became essential for the assessee to incur expenditure on advertising to propagate the aforesaid brand name. The benefit thereof had to necessarily accrue to the assessee as well as the main purpose of the advertisement is to augment the sales. The contention of the assessee that it was a commercial pract....
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...., we are of the considered view that the AO was not justified in observing alternatively that a sum of Rs. 180 crore and odd is not allowable as per section 37(1) of the Act. We, therefore, vacate the alternative finding given by the AO for disallowance." In view of the aforesaid, adhoc disallowance of Rs. 5,12,04,000 incurred on advertisement and publicity is unlawful and is liable to be deleted. Further, regarding disallowance of expense of Rs. 15,11,304 incurred by the assessee on advertisement expense, it is respectfully submitted that complete details of advertisement expense of Rs. 17.06 crores has been duly submitted by the assessee during the course of assessment, which are verifiable from the records. Accordingly, no addition can be proposed on account of non submission of details of expense. 74. The ld. CIT-DR relied on the order of the assessing officer and the DRP. 75. We have heard the rival contentions in the light of the material produced and precedent relied upon. We have already held that the advertisement expenditure incurred by the assessee is incurred wholly for the purpose of its business and profession and ought to be allowed deduction in entirety. Duri....
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.... 3.1 That the assessing officer/the TPO erred on facts and in law in holding that arms length price of the international transaction of payment of trademark fees to be nil allegedly holding that no recognizable benefit has been passed on to the appellant and therefore there is no rationale for paying this trademark fees to the AE. 3.2 That the assessing officer/the TPO erred on facts and in law in not appreciating that the international transaction of payment of trademark fees was appropriately benchmarked applying Transactional Net Margin Method ("TNMM") as the most appropriate method and was accordingly established to be at arm's length. 3.3 That the DRP / TPO erred on facts and in law in holding that the entire arrangement of the payment of trademark fee is designed to shift profits outside India. 3.4 That the DRP erred on facts and in law in holding that "............ except for 3 years from 2000 to 2002 the taxpayer have always been making profit which shows that payment for "trademark fee" has no connection with the profitability of the taxpayer........................" 3.5 That the DRP erred on facts and in law in upholding the action of the TPO in considering the a....
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....ational transaction in terms of section 92B of the Act, even after its amendment by the Finance Act, 2012. 4.5 That the DRP erred on facts and in law in holding that ".......by using the trademark / logo on advertisement and sales promotion the taxpayer is creating / strengthing the marketing intangible or its AE and that too without any fee or any reimbursement from the AE..........." 4.6 That the DRP erred on facts and in law in holding that, "there is an international transaction between the assessee and the foreign AE under which the assessee incurred AMP expenses towards promotion of brand which is legally owned by the foreign AE". 4.7 That DRP / TPO erred in allegedly benchmarking the reimbursement received as support from AE as AMP transaction. 4.8 The DRP erred on facts and in law in not holding that merely because the Indian company had incurred expenditure on product advertisements including the foreign brand and the AMP expenses incurred by the taxpayer, were proportionately higher than those incurred by comparable cases taken by the TPO, did not lead to the inference of "transaction" between the taxpayer and the foreign AE for creating marketing intangibles on b....
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....n not appreciating that even if marketing intangible has been created then the appellant is the economic owner of the benefit of such intangible. 4.17 The DRP/TPO erred on facts and in law in applying Bright Line Test not appreciating that in absence of specific provision in the Transfer Pricing statutory provisions in India., adjustment on account of the arm's length price of the advertisement and brand promotion expenses could not be made. 4.18 The DRP/TPO erred on facts and in law in not appreciating that such a Transfer Pricing adjustment cannot atall be made in law without determining the Arm's Length Price ("ALP") by applying one of the methods specified in section 92C of the Act. 4.19 Without prejudice, that even if contention of TPO is accepted then AMP adjustment should be applied only on distribution segment of the appellant and not on manufacturing segment. 4.20 Without prejudice that the assessing officer erred on facts and in law in ignoring the fact that, since the appellant earns return commensurate with other brand owners, the appellant is adequately compensated for its functions and AMP expenses. 4.21 Without prejudice that the DRP/TPO erred on facts and ....
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....rchandise by the export incentives available to the exporting entity. 5.6 That the assessing officer / TPO erred on facts and in law in holding that the export incentive does not form part of invoice price of goods sold and hence the same cannot be reduced from the cost of goods sold. 6. That the assessing offer erred on facts and in law in disallowing provision for obsolete spares and parts amounting to Rs. 20,36,000 allegedly holding it to be in the nature of provision for replacement loss (warranty) and on the premise that the said expenditure is based on estimate and without any scientific basis. 6.1 That the assessing officer erred on facts and in law in disallowing the said expenditure not appreciating that the details and explanation wrt provision of obsolete spare and parts submitted during the course of assessment proceedings. 7. That the assessing officer erred on facts and in law in making an adhoc disallowance of Rs. 3,20,71,500 being 30% of the total expenditure of Rs. 10,69,05,000 on advertisement and publicity incurred by the appellant holding that the expenditure was incurred for brand building for the entities owning the brand. 7.1 That the assessing offi....
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....aid grounds and issue are identical to the grounds raised by the assessee in ground No. 4 to 4.15 for the appeal for the assessment year 2007-08 in ITA No. 5650/Del/2011. Respectfully following our decision in the appeal for the assessment year 2007-08, these grounds of the assessee is allowed. Grounds No. 5-5.6 - Transfer pricing issue w.r.t. to export of goods 80. The aforesaid grounds and issue are identical to the grounds raised by the assessee in ground No. 5-5.2 for the appeal for the assessment year 2007-08 in ITA No. 5650/Del/2011. Respectfully following our decision in the appeal for the assessment year 2007-08, Respectfully following the decision of the coordinate 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 assessment year 2006-07. Needless to add that the assessee should be given reasonable opportunity of being heard. Grounds No. 6-6.1 - Disal....