TaxTMI 
TaxTMI 
2018 (11) TMI 1106
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....tment made to the arm's length price of advertisement, marketing and promotional (AMP) expenditure incurred by the assessee in respect of consumer segment. 6. Brief facts relating to this issue are, the assessee an Indian company is engaged in manufacture of pharmaceuticals, medical care and consumer goods. As stated by the Assessing Officer, the assessee is a subsidiary of Johnson and Johnson, USA, and De Puy Medical Pvt. Ltd., India. For the assessment year under dispute the assessee filed its return of income on 27th September 2008, declaring total income of Rs. 211,09,75,238, under normal provision and book profit of Rs. 20,88,69,163 under section 115JB of the Act. During the assessment proceedings, the Assessing Officer noticing that the assessee has entered into international transactions with its overseas Associated Enterprises (AE) made a reference under section 92CA of the Act to the Transfer Pricing Officer for determining the arm's length price (ALP) of the international transaction. In course of proceedings before him, the Transfer Pricing Officer after verifying the audit report and other materials on record found that in the relevant previous year, the assess....
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....draft assessment order. Against the draft assessment order so passed, the assessee raised objection before the DRP. Having failed before the DRP, it came in further appeal before the Tribunal. The Tribunal, while disposing off assessee's appeal in ITA no.7133/Mum./2012, dated 19th February 2014, restored the issue back to the file of the Assessing Officer for de novo adjudication keeping in view the Special Bench decision of the Tribunal, Delhi Bench, in L.G. Electronics India Pvt. Ltd. v/s ACIT, 152 TTJ (Del.) (SB) 273. On the basis of aforesaid directions of the Tribunal, the Transfer Pricing Officer proceeded to decide the issue afresh in the light of the Special Bench decision of the Tribunal in L.G. Electronics India Pvt. Ltd. (supra).The assessee objected to the method adopted by the Transfer Pricing Officer for independently benchmarking the arm's length price of AMP expenditure by submitting that it has not incurred any AMP expenditure for brand building of the AE. Assessee also brought to the notice of the Transfer Pricing Officer the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. v/s CIT, [2015] 381 ITR 117 (Del.) to submit that the expenditu....
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....esaid analysis the TPO proceeded to determine the arm's length price of the AMP expenditure at Rs.108,01,70,615. On the basis of the order passed by the Transfer Pricing Officer the Assessing Officer added back the aforesaid amount in the draft assessment order. Being aggrieved of such addition, assessee raised objection before the DRP. 8. Before the DRP, the assessee made elaborate submissions which have been broadly summarized in the order of the DRP as under:- "I.The payment for AMP expenses is made to the third parties in India and accordingly, it is not an international transaction. II.The Hon'ble Delhi High Court in various decisions (cited in the submission above) has concluded that in absence of explicit arrangement between the Assessee and its AE for incurring AMP expenses, the same cannot be considered as an international transaction. III. There is no arrangement between J&J India and its AE, oral or written for undertaking brand building activity on behalf of AE. IV. AMP spend by J&J India are solely for its own benefit and even if such expenses incidentally Without prejudice to the transfer pricing documentation submitted, it is evident from the above s....
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....nt requires any compensation for marketing activities, then it can be concluded that J&J India has been adequately compensated for the functions performed by it. XIII. The bench marking analysis undertaken by the Assessee should not be rejected. XIV. Use of bright line or routine ALP level determination and using it as CUP to benchmark the appropriateness of the marketing spends of the assessee is not appropriate as it is not one of the method provided by Indian transfer pricing regulations. XV. Without prejudice to above, Exhibition, Window display / Point of sales expenses do not lead to brand building and cannot be taken into consideration for making the adjustment, as these expenses can in any way be considered as incurred from brand promotion. The AMP spend after excluding the above expenditure works out to Rs. 109.36 crore (i.e., 13.66% of turnover). XVI. The benchmarking analysis done by the learned TPO is not based on systematic search process and the same tantamount to cherry picking of comparable companies. XVII. Since the companies identified by learned TPO are arrived at without providing a search process, the same tantamount to cherry picking. Further the com....
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.... rightly considered by the TPO as part of AMP expenditure. Accordingly, all objections raised by the assessee are dismissed and the order of the TPO on this issue is upheld." 9. Therefore, following its own order for assessment year 2012-13, the DRP dismissed the objections raised by the assessee. On the basis of the aforesaid order of the DRP, the Assessing Officer passed the final assessment order. 10. Shri Rajan Vora, learned Authorised Representative submitted that the assessee is manufacturing most of its products itself and only few products are purchased from the AE. He submitted, wherever the assessee avails technical knowhow of the AE and utilises its brand it is paying royalty for the same. He submitted, all other international transactions with the AE including purchase of raw materials were held to be at arm's length. He submitted, the entire profit from marketing and trading is retained in India. Therefore, unless it is established that assessee is incurring expenditure for promoting the brand value of AE, it cannot be said that the assessee has incurred AMP expenditure for its AE. He submitted, the Transfer Pricing Officer is unjustified in saying that the ass....
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....) has been followed in various other decisions. In support of his contentions, the learned Authorised Representative relied upon the following decisions:- i) Whirlpool of India Ltd (TS-622-HC-2015(DEL)-TP) dated 22 December 2015; ii) Bausch and Lomb Eyecare (India) Pvt. Ltd. (TS-626-HC-2015(DEL)-TP) dated 23 December 2015; iii) Honda Siel Power Products (TS-627-HC-2015(DEL)-TP) dated 23 December 2015; iv) Valvoline Cummins (P) Ltd (84 Taxmann.com 191) dated 31 July 2017 (Delhi HC); v) Diageo India Pvt Ltd vs DCII (ITA No 7545/M/2012, ITA no. 1120/M/2014) dated 27 April 2016; vi) ACIT v/s Colgate Palmolive (I) Ltd., ITA no.6073/Mum./2014, etc., order dated 04.05.2018; vii) Nivea India Pvt. Ltd. v/s ACIT, 92 taxmann.com 165; viii) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.1246/Mum./2016, etc., order dated 02.05.2018; and ix) India Medtronic Pvt. Ltd. v/s DCIT, ITA no.7555/Mum./2012, dated 04.05.2018. 11. The learned Departmental Representative, Shri Jayant Kumar, relying upon the observations of the Transfer Pricing Officer and the DRP submitted that the Tribunal while remitting the issue had directed the Transfer Pricing Officer to decide the issue of bench marki....
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....e definition of international transaction. Dealing with each of the decision relied upon by the learned Departmental Representative, the learned Authorised Representative submitted that in case of Sony Ericson Mobile Communications (supra), the Hon'ble Delhi High Court held that bright line test has no statutory mandate and AMP expenses can be bench marked using bundled approach. Further, it was held that the AMP expenses incurred in India by the assessee can be categorized as an international transaction under section 92B of the Act. However, he submitted, subsequently, the Hon'ble Delhi High Court in case of Maruti Suzuki Ltd. (supra) after taking note of its own decision in Sony Ericson Mobile Communications (supra) held that in the absence of any arrangement between the assessee and the AE for incurring of AMP expenditure, the same will not come within the terms "international transaction". Referring to the decision of the Hon'ble Delhi High Court in Yum Restaurants India Pvt. Ltd. (supra) the learned Authrised Representative. submitted, the Hon'ble Delhi High Court set aside the issue as to whether AMP expenditure is an international transaction to be decided i....
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....greement has categorically observed that the agreement does not reveal any arrangement between the assessee and its AE for AMP expenditure. Thus, after following the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra), the DRP held that the AMP expenditure incurred by the assessee cannot fall within the definition of international transaction as per section 92B of the Act. Keeping in view the aforesaid facts, we need to decide the issue at hand. It is evident that the Transfer Pricing Officer relying upon the Special Bench decision of the Tribunal, Delhi Bench, in L.G. Electronics India Pvt. Ltd. (supra) has held that AMP expenditure incurred by the assessee comes within the purview of international transaction. Further, applying the said decision, he has also determined the arm's length price of the AMP expenditure by adopting bright line test (termed as routine arm's length price by the Transfer Pricing Officer). In case of Maruti Suzuki India Ltd. (supra) the Hon'ble Delhi High Court after taking note of its own decision in Sony Ericson Mobile Communications (supra) has held that in the absence of any arrangement between the assessee and....
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.... (a) a transaction between two or more AEs, either or both of whom are nonresident; (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to one or more of such enterprises. 60. As far as clause (a) is concerned, SMC is a non-resident. It has, since 2002, a substantial share holding in MSIL and can, therefore, be construed to be a non-resident AE of MSIL. While it does have a number of 'transactions' with MSIL on the issue of licensing of IPRs, supply of raw materials, etc. the question remains whether it has any 'transaction' concerning the AMP expenditure. That brings us to clauses (b) and (c). They cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the A....
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....discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with the ALP and make the transfer pricing adjustment by substituting the ALP for the contract price. 63. A reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP, Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 64. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make t....
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.... some sample agreements between Reebok (UK) and Reebok (South Africa) and IC Issacs & Co and BHPC Marketing to urge that the level of AMP spend is a matter of negotiation between the parties together with the rate of royalty. It is further suggested that it might be necessary to examine whether in other jurisdictions the foreign AE i.e., SMC is engaged in AMP/brand promotion through independent entities or their subsidiaries without any compensation to them either directly or through an adjustment of royalty payments. Absence of a machinery provision. 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between p....
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....den 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 adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment 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 re....
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.... the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compen....
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.... or any such similar method has not only been disapproved by the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (supra) but also in Maruti Suzuki India Ltd. (supra). In our considered view, the Transfer Pricing Officer was totally wrong in not applying the principle laid down in the decision of the Maruti Suzuki India Ltd. (supra) by taking the alibi that the decision is of a Non-Jurisdictional High Court. Further, the Transfer Pricing Officer was totally wrong in determining the arm's length price expenditure by applying the bright line test or routine arm's length price simply relying upon the Special Bench decision of the Tribunal, Delhi Bench, conveniently ignoring the fact that the bright line test method adopted in case of L.G. Electronics India Pvt. Ltd. (supra) was disapproved by the Hon'ble Delhi High Court not only in case of Sony Ericson Mobile Communications (supra) but also in case of Maruti Suzuki India Ltd. (supra). Thus, the reasoning of the Assessing Officer in not following the decision of Maruti Suzuki India Ltd. (supra) is totally unacceptable. We must put it on record, the decision of the Hon'ble Delhi High Court in Maruti Su....