TaxTMI 
TaxTMI 
2018 (9) TMI 140
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....einafter referred to as the 'Act') on the following grounds: A. Transfer Pricing Grounds 1. That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant under section 143(3) r.w.s Ita 144C(13) of the Act for the relevant assessment year at Rs. 147,41,69,894 as against the returned income of Rs. 47,55,95,410. 2. That on facts and circumstances of the case and in law the Learned AO/DRP /TPO erred in making an adjustment of Rs. 77,26,36,692 in respect of alleged international transaction pertaining to excess advertisement, marketing and promotion ('AMP') expenditure, alleging that the same to be not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules,1962 ("the Rules"). 3. That on the facts and circumstances of the case and in law, the DRP/AO have erred in not appreciating that suo moto adjustments proposed by the TPO in relation to Advertisement, Marketing and Promotion ("AMP") expenses incurred by the Appellant, without any reference from the AO, was beyond jurisdiction and bad in law. 4. That on the fact....
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....itative adjustments (such as non-payment of royalty / expenditure incurred on new product launches), while computing the alleged excessive AMP expenditure. 11. That the AO / DRP/ TPO erred on the facts and circumstances of the case and in law in not appreciating that mark-up could not be levied on the AMP expenditures incurred by the Appellant. 11.1. Without prejudice to the above and not admitting, if at all a mark-up should have been charged by the Appellant, assuming it to be a brand building service provider, the said mark-up could have been charged only on the value addition expenses incurred by the Appellant for such alleged brand promotion service and not the entire amount incurred / paid to third party vendors. 12. That on facts and circumstances of the case and in law, the Learned AO/DRP/TPO have erred in not providing the Appellant the benefit of 5 percent range as provided by the proviso of section 92C(2) of the Act. 13. That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO erred by applying Comparable Uncontrolled Price Method in a manner that is not prescribed or justified under the law. ....
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....nting the claim of prepaid taxed and foreign tax credit claimed by the appellant. Ita 1. On the facts and in the circumstances of the case, after having computed a taxable income in cases of Appellant, the Ld. A.O has erred in not allowing the entire credit of prepaid taxes (TDS, advance tax and self assessment taxes) amounting to Rs. 16,94,07,775/-. 2. On the facts and in the circumstances of the case, after having computed a taxable income in cases of Appellant, the Ld. A.O has erred in not allowing appropriate credit of foreign taxes amounting to Rs. 13,28,981/-. C. The Ld. A.O has erred, in law and on facts, in not allowing and granting the credit of set off of brought forward of losses of Rs. 19,32,08,420/- claimed by the appellant. D. The Ld. A.O has erred in law and on facts, in not allowing the deduction under Chapter VI-1 of the Act of Rs. 3,97,500/- claimed by the appellant. E. The Ld. A.O has erred, in law and on facts, in charging interest under section 234B of the Act. F. The Ld. A.O has erred, in law and on facts, in charging interest u/s 234D of the Act. G. The Ld. A.O had erred in making computational er....
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.... of the Act, was not satisfied or existed in the present case. 2.1. That on the facts and circumstances of the case and in law, the order passed by the TPO was also bad in law for proposing a suo moto adjustment in relation to Advertisement, Marketing and Promotion ('AMP') expenditure incurred by the Appellant. Further, the AO / Dispute Resolution Panel ("DRP") erred in not appreciating that such adjustment was beyond jurisdiction of the TPO, therefore, ultra-vires, bad in law and void ab-initio. 2.2. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in holding that the unilateral arrangement between the Appellant and Indian third parties for advertisement and promotion would be a "transaction" much less an "international transaction" within the meaning of Chapter X of the Act. Ita 3. That on the facts and circumstances of the case and in law the AO / DRP / TPO have erred in making an adjustment of Rs. 74,59,78,403 in respect of alleged international transaction pertaining to excess AMP expenditure, alleging that the same to be not at arm's length in terms of the provisions of sections 92C(1) and 92C(2) of the Act r....
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....distribution and marketing functions being interconnected and intertwined should be benchmarked on an aggregate basis as was established by the Appellant. 6.1. That on facts and circumstances of the case and in law, the AO / DRP have erred in arbitrarily rejecting comparable companies for the aggregate approach for the purpose of benchmarking the alleged excessive AMP expenses and holding that there are no appropriate comparable companies available to benchmark on an aggregate basis. 7. The AO / DRP / TPO have erred in holding that Distribution & Marketing (incurrence of AMP) should be benchmarked separately applying PSM method and further erred in not appreciating that the same would result in over taxation and is contrary to the computation machinery provided in Chapter X. 7.1. That on the facts and circumstances of the case and in law, the AO / DRP/ TPO have erred in not allowing the setoff excess margin earned by the Appellant from distribution function against the adjustment made on account of AMP expenditure even if the same was to be segregated and benchmarked separately. 8. That on facts and circumstances of the case and in law, the AO / ....
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....pecified purpose. 1.3. That on the facts and in the circumstances of the case and in law, the Assessing Officer / DRP have erred innot following the Hon'ble Delhi High Court's order in appellant's own case. Ita 2. Without prejudice to above, that on the facts and in the circumstancesof the case and in law, the deduction for the unspent subsidy amount added to the income in AY 2011-12 should be allowed in the AY 2012-13 where such sum has been utilized for the specified purpose and included in income for AY 2012-13. B.2 Without prejudice to the above, the Learned AO has erred, in law and on facts, in not granting the claim of prepaid taxes. 1. That on the facts and in the circumstances of the case and in law, after having computed a taxable income in case of Appellant, the learned AO has erred in not allowing the credit of TDS amounting to Rs. 385,168/-. B.3 That on the facts and in the circumstances of the case and in law, in not allowing the deduction under Chapter Vl-A of the Act of Rs. 500,000/- claimed by the Appellant. B.4. That on the facts and in the circumstances of the case and in law, in charging interest under section....
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....d a sum of Rs. 86,84,79,282 to taxable income of the assessee. Vide notice under section 143(2) dated 29.01.2014, the assessee was asked to explain why a sum of Rs. 86,84,79,282 should not be added to the taxable income of the assessee as directed by the TPO. The assessee reiterated the submissions as were put before the TPO. As per the directions of the TPO, the Assessing Officer adopted the Arm's Length Price determined by the TPO and accordingly an amount of Rs. 86,84,79,282 being the difference in the Arms Length Price determined by the TPO was added back to the total income of the assessee. In this regard a draft of the proposed order of assessment was passed and sent to the assessee. The assessee filed objections before the Dispute Resolution Panel challenging the variation proposed to be made in the draft order. The DRP vide order dated 24.12.2014 has restored the matter to the file of the transfer pricing officer for verification. The TPO vide report dated 21.01.2015 revised the value of Ita compound adjustment to Rs.77,26,36,692/-instead of Rs. 86,24,79,282/-as proposed in the draft assessment order. In compliance to the directions of the DRP and the order of TPO, the addi....
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.... Further the satisfaction to be arrived at by the Assessing Officer regarding the existence of the international transaction for making the reference to the TPO. The Ld. AR relied on the decision of the Hon'ble Delhi High Court case of Indo- Rama synthetics (India) Pvt. Ltd. vs. ACIT (2016) 386 ITR 665 (DEL) wherein the Hon'ble High Court has rejected revenues contention that CBDT instruction 3/2016 dated March 10, 2016 which was replaced by instruction 15/2015 specifically lays down procedure to be followed by Assessing Officer making TPO reference prospective. The Hon'ble High Court has held that the instruction clarifies the correct legal position and cannot be construed as not applying to the facts on hand. Being procedural it requires to be applied even the case where a reference was made by the Assessing Officer to the TPO prior to the issue is of the circular. The Ld. AR relied on the decision of Hon'ble Punjab and Haryana High Court in the case of Shri Vishnu Etables (India) Ltd. vs. DCIT (2016) 387 ITR 385 and Hon'ble Gujarat High Court in the case of Alpha Nipon Innovatives Ltd. vs. DCIT (2016) 291 CTR 309. In the present case, the TPO had first constructed/determine that....
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....the proceedings before him, the provisions of this Chapter shall apply as if such other international Ita transaction is an international transaction referred to him under sub-section (1)". It is clear that any transfer pricing issue can be taken up by the TPO as the same is referred to the TPO by the Assessing Officer as per sub-section 1 of Section 92CA of the Act. In fact, sub-section 2 of Section 92CA itself is clear in that respect that where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm's length price in relation to the international transaction [or specified domestic transaction] referred to in sub-section (1) of the Act. Thus, Ground No. 3 is dismissed. 9. Ground no. 4 is relating to non-existence of international transaction. Ground no. 5 is relating to no creation of marketing intangible in favour of AE. Ground no. 6 is relating to non rendition of any brand building services. For these three grounds, the Ld. AR submitted ....
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....le for improving its business market in India and increasing the sales of products. The assessee had incurred expenditure on AMP to cater to local market needs. It is to be appreciated that the AMP expenditure has been incurred in relation to local product advertisements into domestic independent third parties, thus the domestic unilateral expenditure incurred by the assesee for the purpose of its business cannot be classified as intentional international transaction under section 92B (2) of the Act. The Ld. Ita AR further submitted that onus to prove existence of international transaction has not been discharged by the revenue. It is settled law that the onus to prove the existence of arrangement regarding incurrence of unilateral AMP expenditure by the taxpayer is solely for the brand promotion of its foreign AE is on the revenue. Existence of an international transaction cannot be a matter for inference or surmise and the burden to prove the existence of an agreement/arrangement prior to incurring of the AMP expenses is on the revenue. Unless revenue definitely shows that the Assessee was obliged to incur AMP expenses of certain level for promoting its AE's Brand, an internation....
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....ed all the records. This issue is not verified properly by the TPO and therefore, it requires verification as there is no mention of the specific agreements to the effect of the AMP whether is a international transaction or not. Therefore, we direct the TPO/AO to verify this issue in light of the agreements signed by the assessee Ita with its AEs as well as the main company. Needless to say the assessee be given the opportunity of hearing by following principles of natural justice. Ground No. 4, 5 and 6 of the assessee's appeal are partly allowed for statistical purpose. 12. The Ld. AR further submitted that without prejudice to the aforesaid, AMP expenditure is not amenable to Chapter - X, the assessee's contentions in relation to benchmarking of the alleged international transaction are as under: * Ground No. 7 is relating to wrong application of Bright Line Test by the AO/DRP/TPO. * Ground No. 13 is relating to wrong application of CUP method in a manner not prescribed under law by the AO/DRP/TPO. * Ground No. 14 is relating to wrong determination of ALP of the alleged international transaction as per Section 92C of the Act, read with, Income Tax Ru....
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....art of the AMP expenditure as under: Particulars Amount (INR) AMP spent of Assessee 30,14,21,790 Trade Discount 30,44,59,945 Commission 85,86,473 Selling & administrative expenses 19,66,32,788 Subsidy 46,49,73,415 Total AMP considered by TPO 127,60,74,411 The Ld. AR submitted that the trade discount, commission and other sales related expenses are not in the nature of "brand promotion", i.e. they are not directly or immediately related to "brand building", in fact, these expenditures have live link and direct connect with increase in sales or turnover. Further, selling and administrative expenses primarily pertain to direct selling activities being conducted by the Assessee to push its sales in the Indian market and accordingly should be excluded for the purpose of AMP analysis of Assessee. The Ld. AR pointed out that TPO itself in its order dated 01.01.2016, for subsequent A.Y. 2011-12 has not included trade discount, commission and other selling and administrative expenditure in the ambit of AMP expenditure for benchmarking purposes. The Ld. AR further pointed out that the Tribunal vide order dated 03.05.2013 for A.Y. 2006-07 to 2008-0....
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....vailable on record. The TPO vide order dated 01.01.2016, for subsequent A.Y. 2011-12 has not included trade discount, commission and other selling and administrative expenditure in the ambit of AMP expenditure for benchmarking purposes. The Tribunal vide order dated 03.05.2013 for A.Y. 2006-07 to 2008-09 held that all selling expenditure including trade discount and commission along with subsidy should be excluded from the ambit of AMP expenditure. Thus, the same read with the subsequent directions of the Hon'ble Delhi High Court in Assessee's own case i.e. judgment in batch of cases of Sony Ericsson (supra) case, the TPO should be directed to exclude Trade discount, commission and special purpose subsidy from the ambit of the AMP expenditure. Thus, following the order of the Tribunal for A.Y. 2006- 07 to 2008-09 read with the subsequent directions of the Hon'ble Delhi High Court in Assessee's own case, it will be appropriate to direct the TPO to exclude Trade discount, commission, selling and administrative expenses and special purpose subsidy from the ambit of the AMP expenditure, as given in the tabulated form hereinabove after verifying the same in accordance with the records a....
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....be any adjustment. The Ld. AR submitted that in fact, the Hon'ble Delhi High Court in the case of distributor has upheld the use of RPM as one of the most appropriate method. Further, the court under no circumstances propounded that the PSM is one of the most appropriate method to benchmark the AMP expenses. Applying the said principles laid down by the Hon'ble High Court, the assessee has computed the adjusted gross margin of the comparable companies to demonstrate that the adjusted gross margin of the assessee vis-à-vis the comparable companies is better and therefore, the alleged transaction / attribution of marketing function of the assessee (which was at principle to principle basis) is at arm's length and no adjustment is required for the same. A tabulation showing the aforesaid adjusted gross margins was annexed to the synopsis by the Ld. AR. The Ld. AR submitted that from the perusal of the adjusted gross margins would show that the assessee's margins were better than that of the comparable companies and therefore, no adjustment on account of AMP expenditure was required to be made. The adjustment made by the AO/TPO, is therefore, prima facie untenable and deserves t....
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.... India Pvt. Ltd. become income of the assessee. Besides, this method of accounting has been followed by the assessee consistently. In these circumstances, we are of the view that unspent subsidy being not Ita income of the assessee but a liability to be spent for specified purposes and recoverable for non-utilization for specific purposes cannot be treated as income of the assessee. Therefore, this ground of the assessee is also allowed. Since we have allowed the main ground, there is no need to go into alternate arguments." 28. The said view taken by the ITAT has been affirmed by the Hon'ble Jurisdictional High Court in ITA Nos. 137 & 138/2014 vide order dated 03.08.2015 in assessee's own case and relevant findings have been given in para 20 of the said order which read as under: "20. We are, therefore, unable to accept the Revenue's contention that the unutilized subsidy is required to be recognized as income of the Assessee in the year of its receipt. This would be contrary to the matching concept, which is the substratal principle for computing income during a relevant period. It is necessary that income be recognized along with the corresponding expendi....
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....ax Act. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer. Thus, this issue is remanded back to the file of the Assessing Officer. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. C, D, E of the assessee's appeal are partly allowed for statistical purpose. 33. As regards to Ground No. F, G, and H the same are consequential, hence dismissed. Ita 34. In result, assessee's appeal being ITA No. 1405/DEL/2015 for A.Y. 2010-11 is partly allowed for statistical purpose. 35. As regards Revenue's appeal, the Ld. AR submitted that the same should not be allowed as per the submissions made in the appeal filed by the assessee. The Ld. DR relied upon the directions of the DRP. 36. We have heard both the parties and perused all the relevant records available before us. Ground No. i) of the Revenue's appeal is already decided in favour of the assessee as per Ground Nos. B, B.1, 1, 1.1, 1.2. Therefore, Ground No. i) of the Revenue's appeal is dismissed. As relates to Ground No. ii) is regarding deletion of the addition made by the Assessing Officer on account of low GP by ....
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.... excessive AMP expenditure in India basis higher AMP expenditure of Assessee (as a percentage of sales) compared to Canon Inc., AMP percentage to sales (at consolidated level) (refer para 20 at page 96 of paper-book 1); > Thereafter, TPO observed that such excessive AMP expenditure: i. Adds to the brand value of Canon group, i.e., Assessee is contributing to valuable intangible to its AE; and ii. Leads to increased global profits for Canon group. Ita > Accordingly, TPO concluded that Canon Inc. should compensate Assessee for excessive AMP expenditure, being an international transaction for creation of marketing intangible in India. The Ld. AR pointed that the TPO under the grab of PSM, has applied BLT only, by comparing the AMP expenditure to sales ratio of the Assessee with the AE. By comparing the AMP expenses to sales ratio of the Assessee and the AE, in a way the TPO is comparing two controlled transactions, which is against the very premise of transfer pricing, as the intend of the legislature under transfer pricing is, that controlled transaction is to be compared with uncontrolled transaction. The Ld. AR submitted that the TPO placed re....
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....he same has also been applied incorrectly, de-hors conditions laid down in Rule 10B(1)(d) of the Income-tax Rules, 1962 ('Rules'). The Ld. AR submitted that PSM is applicable only in situation cases where there is a transfer of intangible between AEs or where there are multiple inter-related international transactions which cannot be separately benchmarked. In this regard, the Ld. AR pointed out table herein under, which as per the Ld. AR culls out the intent of legislature as provided in Rule 10B(1)(d) of the Rules for applying Ita the PSM method: S. No. Rule 10B(1) (d) of the Rules Assessee's submissions "profit split method, which may be applicable mainly in international transactions [or specified domestic transactions] involving transfer of unique intangibles or in multiple international transactions [or specified domestic transactions] which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which- As per sub-clause (d) of Rule 10B(1) PSM is applicable where the transaction involves transfer of unique intangible or multiple inter related international ....
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.... compensated for enhancing the value of the brand and global profits of Canon group. The Ld. AR submitted that Delhi High Court in the Assessee's own case, i.e., decision in Sony Ericsson (supra) case, held Ita that AMP expenses do not necessarily lead to brand promotion of foreign AE. paras 9.10 and 106 of the order of High Court is in Assessee's own case (Supra). The Ld. AR pointed out that the Hon'ble Delhi High Court in the Assessee's own case (supra) has not blessed PSM as an appropriate method to benchmark the transaction of AMP function. On the contrary, it directed that the aggregate approach is to be adopted and if taxpayer is able to demonstrate that the international transaction of distribution and marketing is at arm's length there should not be any adjustment [Refer paras 164 and 165 of the Sony Ericsson judgment (Supra)in Assessee's own case], 46. Thus, the Ld. AR submitted that Resale Price Method (RPM) has been held to be one of the most appropriate methods for distributors in the High Court ruling. Also, in Assessee's own case the TPO has not disputed / questioned RPM for benchmarking the distribution function. In view of the same, RPM should be considered as th....
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....given in the present appeal as well. It is pertinent to note that the issue of AMP has been remanded back to the file of the TPO/AO. Therefore, these grounds become infructuous. Hence Ground No. 6, 6.1, 6.2 & 7 are dismissed. 53. As regards to Ground No. 8 & 8.1 relating to exclusion of certain selling and distribution expenditure and subsidy, the same are identical with Ground no. 8 of the Appeal filed by the Assessee for A.Y. 2010-11. Therefore, the observations made in that respect are applicable in the present appeal as well. Thus, following the order of the Tribunal for A.Y. 2006-07 to 2008-09 Ita read with the subsequent directions of the Hon'ble Delhi High Court in Assessee's own case, it will be appropriate to direct the TPO to exclude Trade discount, commission, selling and administrative expenses and special purpose subsidy from the ambit of the AMP expenditure, as given in the tabulated form by the Ld. AR along with the synopsis at the time of hearing after verifying the same in accordance with the records available with the TPO/AO. Thus, this issue is remanded back to the file of the TPO/AO. Needless to say, the assessee be given opportunity of hearing by following p....