TaxTMI 
TaxTMI 
2018 (11) TMI 1106
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....7 are against the addition made on account of adjustment 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....
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....hat account, proposing an adjustment of Rs. 108,01,70,615. On the basis of the adjustment proposed by the Transfer Pricing Officer, the Assessing Officer passed the 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 ....
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....es having same intensity of AMP expenses. He observed that the assessee has not carried out the said exercise while selecting comparables. Thus, on the basis of aforesaid 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. ....
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....ransfer pricing perspective. XII. Apart from above return earned by A.Es, balance profit has been retained by J&J India for functions performed. Since J&J India has retained the balance profit, even if it is held that J&J India consumer segment 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 l....
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....re needs to be benchmarked separately and not through a bundled approach. 4. Selection of the comparables by the TPO for the purpose of determining excessive AMP expenditure and also for determining the Mark up on the some is upheld 5. The expenditure on at the beach and, window display/point of sale expenses has been 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....
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....ernational transaction if there is no arrangement in that regard between the assessee and the AE. He submitted, the Hon'ble Delhi High Court also held that AMP expenditure cannot be segregated from other transactions for making adjustment. He submitted, the ratio laid down by the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) 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 n....
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....lle India Private Limited (ITA No.407/ Del/2015 dated 2 June 2015. 12. In rejoinder, the learned Authorised Representative submitted, the decisions relied upon by the learned Departmental Representative are not applicable as they are prior to the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra).After the decision in Maruti Suzuki India Ltd. (supra), the Courts and Tribunal have consistently held that AMP expenditure does not come within the 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 Communic....
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....ies in India cannot be termed as international transaction within the meaning of section 92B of the Act. On a perusal of the agreement between the assessee and its AE, a copy of which is at Page-790 of the paper book, it is noticed that there is no obligation on the part of the assessee to incur any expenditure on behalf of its AE towards AMP. In fact, while dealing with identical dispute in assessee's own case for assessment year 2011-12, the DRP after verifying the terms of agreement 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 pu....
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....istence of an international transaction regarding AMP expenses." 14. Proceeding further, the Hon'ble Court while deciding the case of Maruti Suzuki India Ltd. (supra) has held as under:- "59. Nevertheless, there is no specific mention of AMP expenses as one of the items of expenditure which can be deemed to be an international transaction. For this purpose, Section 92B(1) read with Section 92(1) becomes significant. Under Section 92B(1) an 'international transaction' means- (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 co....
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....part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. 62. If a step by step analysis is undertaken of Sections 92B to 92F, the sine qua non for commencing the transfer pricing exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price 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....
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....ns to determine whether the Indian subsidiary is incurring AMP expenses unilaterally on its own or at the instance of the AE is to find out whether an independent party would have also done the same." It is asserted: "An independent party with a short term agreement with the MNC will not incur costs which give long term benefits of brand & market development to the other entity. An independent party will, in such circumstances, carry out the function of development of markets only when it is adequately remunerated for the same." 67. Reference is made by Mr. Srivastava to 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 sur....
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....ion of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP. 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purp....
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....9;compensation' owed to the Indian entity by the foreign AE. In such a scenario what will be required to be benchmarked is not the AMP expense itself but to what extent the Indian entity must be compensated. That is not within the realm of the provisions of Chapter X. 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of 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....
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....l. Moreover, the ratio laid down in Maruti Suzuki India Ltd. (supra) would be applicable to the present appeal since facts are more or less similar. Like in Maruti Suzuki India Ltd. (supra), the assessee before us is involved in manufacturing activity, hence, the AMP expenditure incurred in India by making payment to third parties in India certainly is connected with such manufacturing activities. Moreover, the Department has failed to establish on record that there is an arrangement between the assessee and the AE for incurring AMP expenditure. In any case of the matter, quantification of AMP expenditure by applying the bright line test 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 ....