AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (1) TMI 1473
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.... to law and facts. 2. OBJECTIONSAGAINSTTREATMENTOFDOMESTICPURCHA SES AS INTERNATIONAL TRANSACTIONS:- That the Ld. TPO erred in treating appellant's domestic purchases from related party as an international transaction with overseas AE and subjecting it to Transfer Pricing provisions which is without considering the facts and contrary to law OBJECTIONS AGAINST TREATMENT OF ADVERTISEMENT AND MARKET PROMOTION ACTIVITY AS AN INTERNATIONAL TRANSACTION WITH AE That the Ld. TPO / AO have erred in exceeding the jurisdiction provided under the law in treating the expenditure involving payments to third parties towards its advertisement and market promotion activities as an international transaction for the mere reason that the brand was owned by appellant's parent, without establishing that the transaction was based on any underlying agreement or arrangement with its AE in treating arbitrarily attributing INR 34.15 crores as expenditure incurred towards promotion of the foreign brand OBJECTIONS AGAINST COMPARABILITY ANALYSIS Without prejudice to the above grounds, the Ld. TPO had erred in considering dealer comp....
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....5. Ld. Assessing Officer referred the Arms Length Price determination to the ld. Transfer Pricing Officer (herein after referred to as ''the TPO '') in accordance with Section 92CA of the Act. Ld. TPO accepted the claim of the assessee that the transactions mentioned at para 4 above were all done at Arms Length Price. However, according to the ld. TPO, assessee had started the process of setting up an automotive manufacturing unit in financial year 31.03.2009 but had temporarily suspended such activity. As per the ld. TPO, assessee had adopted a new business plan, whereby it purchased cars manufactured by RNAIPL and sold them to a dealer network. As per the ld. TPO, assessee had chosen the option of buying cars assembled by RNAIPL from completely knocked down kits (herein after referred to as ''CKD) and selling such cars to its dealers. Ld. TPO noted that CKD components were imported by M/s. RNAIPL from Renault S.A.S, France and assembled by M/s. RNAIPL in their manufacturing platform. Further, as per the ld. TPO this assembling was done by M/s. RNAIPL based on firm orders placed by the assessee. Relying on the agreement entered between assessee and RNAIPL on 20.09.2013 (called as ....
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....or the sale of the cars by M/s. RNAIPL to the assessee were in substances decided by M/s. Renault S.A.S. France. According to him, this Non Resident entity acted in concert with its two Associated Enterprises namely assessee and M/s. RNAIPL. Relying on the clause (v) of Section 92F of the Act, ld. TPO reasoned that such arrangement would also fall within the definition of a ''transactions''. As per the ld. TPO the procurement of vehicles from M/s. RNAIPL were international transactions. Ld. TPO also analyzed Section 92B(1) of the Act and held that all the elements required for construing a transaction as an international transaction stood satisfied. Thereafter ld, TPO selected four comparables and worked out average operating cost of such comparables as under:- Name Revenue Cost Profit Margin (OP/OR) Shinrai Auto Services Ltd 3450.64 3382.79 67.84 1.97 T &T Motors 6474.24 6305.23 169.01 2.61 T.V Sundaram Iyengar & Sons Ltd 64136.49 63044.84 1091.64 1.7 TAFE Access 4109.62 3999.21 110.4 2.69 Average 2.24 Ld. TPO computed the transfer pricing adjustment as under:- ....
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.... authorities are Not permitted to proceed will the assessment with only suspicion or conjectures. Objection 4 -The Ld. 1'1'0/ AO have erred in making the assessment 011 an incorrect understanding of the facts and without a proper application of mind as evident from the shall' cause notice dated January 13, 2016 and the impugned order under section 92 of the Act, which can)' several factually inaccurate instatements and observations / statements completely irrelevant or nailexistent in the assessee's case. Object/all against Treatment of Domestic Purchases as International Transactions Objection 5: The ld. TPO/ Assessing Officer having failed to consider that when the transactions entered into by RNAIPL with its AEs have been duly reported and also subject to scrutiny by the Ld. TPO in the assessment of RNAIPL, treating the domestic purchase of cars by the assessee from RNAIPL, an Indian company, again as an: international trails action entered into by the AE with the assessee is unwarranted oil/acts and invalid as per the provisions of law. Objection 6 - The Ld. TPO / AO have erred in treating the domestic purchases by the ass....
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....of the assessee citing the following reasons:- (i) Assessee had no option other than to procure Renault cars from M/s. RNAIPL and M/s. RNAIPL had no option to sell the cars to anybody other than the assessee, by virtue of the Master Licensing Agreement. (ii) Though M/s. RNAIPL had purchased cars from M/s. Nissan Motors India Pvt. Ltd also, this did not establish its claim that it was an independent operator. (iii) The Master Supply Agreement not only failed to fix the pricing but had specified various models of cars that were to be manufactured by M/s. RNAIPL for supply to the assessee. (iv) Had the transactions been between two independent parties, the pricing would have been negotiated and settled in the agreement itself and not through email transcripts. (v) Renault S.A.S. France had authorized the assessee to use Renault brand name and this was clear from Article 8 of the Master Supply Agreement. (vi) Master License Agreement between Renault S.A.S. France and M/s. RNAIPL was entered on 10.12.2012 and the Master Supply Agreement between M/s. RNAIPL and assessee was entered on 20.09.2013. Even prior to these dates, both the pa....
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....rom M/s. RNAIPL which was an Indian Resident Company. Contention of the ld. Authorised Representative was that ownership pattern of the seller company would not be relevant in deciding its tax residency. As per the ld. Authorised Representative lower authorities had ignored the existence of M/s. RNAIPL and deemed the purchases made by the assessee from M/s. RNAIPL as an international transaction entered by the assessee with M/s. Renault S.A.S. France. 11. Continuing his arguments, ld. Authorised Representative submitted that the burden was on the Revenue to show the existence of international transaction. Reliance was placed on the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd vs. CIT, 381 ITR 117. According to him, this burden was not discharged by the Revenue, but they had presumed it based on mere surmises. Relying on the decision of Mumbai Bench of the Tribunal in the case of Kodak India (P) Ltd vs. Addl. CIT, 88 DTR 242, ld. Authorised Representative submitted that legal character of the assessee and M/s. RNAIPL could not be ignored, just because foreign holding companies could exercise some influence on the pricing. For his contention that the....
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..... Renault S.A.S. France and M/s. RNAIPL clearly demonstrated the control exercised by M/s. Renault S.A.S. France on the pricing as well as the mode of selling the Renault vehicles. Further, according to him, in the master supply agreement dated 20.09.2013 entered between assessee and M/s. RNAIPL, terms of pricing was never indicated. According to him, clause 4.2 of the said agreement clearly indicated that the pricing was to be agreed between parties from time to time. As per the ld. Departmental Representative, all these clearly went to prove the arrangement between assessee, M/s. RNAIPL and M/s. Renault S.A.S. France, and considering the totality of this arrangement, the purchase of cars by assessee from M/s. RNAIPL were rightly considered by the ld. TPO as international transaction entered by the assessee with M/s. Renault S.A.S. France. 14. Ld. Departmental Representative sought to place reliance on Section 92B(2) of the Act for his argument that the tripartite arrangement resulted in an international transaction. According to him, the deeming provisions containing in said sub section, enabled the ld. TPO to consider the arrangement as an international transaction. Reliance ....
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....ases made by the assessee from M/s. RNAIPL as international transaction. 16. We have considered the rival contentions and perused the orders of the authorities below. It is not disputed that assessee had purchased Renault vehicles only from M/s. RNAIPL. Agreement between M/s. RNAIPL and assessee which is called master supply agreement has been placed at paper book at pages 466 to 504. Contention of the Revenue is that the said agreement did not provide for the pricing mechanism and the pricing was dictated by M/s. Renault S.A.S. France. Financial terms and the pricing adjustments given at Article 4 of this agreement is reproduced hereunder:- 4.1 Volume Forecasts for Renault Licensed Vehicles, RIPL shall provide RNAIPL with volume forecasts for Renault Licensed Vehicles annually through the "Vehicle planning and ordering" meeting Financial Terms: In consideration for the Renault Licensed Vehicles sold in terms of this Agreement, RIPL shall pay to RNAIPL the amounts as mutually agreed between the parties and may be reviewed on a quarterly basis due the priceadjustments referred in Article-4.3, and which shall be payable in Indian Rupees Pricing Adjustmen....
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..../s. RNAIPL. No doubt, M/s. RNAIPL could sell the produce only to affiliates of M/s. Renault S.A.S France and M/s. RNAIPL was one such affiliate. However this, in our opinion would not mean that pricing of the cars were dictated by M/s. Renault S.A.S France. We find that shareholding of M/s. Renault S.A.S France in M/s. RNAIPL was only 30% and balance 70% was held by M/s. Nissan Motor Company Ltd, Japan. Hence influence that could be exerted by M/s. Renault S.A.S France on M/s. RNAIPL was not such that it could freely decide on the pricing of latter's products. M/s. Nissan Motors India Pvt. Ltd was a larger shareholder and would not have acceded to such predatory pricing strategy unless it was advantageous to them also. Even if we presume that there indeed was a tripartite agreement between M/s. Renault S.A.S France, M/s. RNAIPL and assessee, to sell cars at a price much lower than the cost, we do not find any economic gain that M/s. Renault S.A.S France would have received from such arrangement. Assessee was a 100% subsidiary of M/s. Renault Group abroad, whereas they held only 30% stake in M/s. RNAIPL. Hence, prudence does not allow acceptance of the claim of the Revenue that asse....
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....saction could never have taken place. In that scenario, the global transaction shall only survive, without any tax implications under domestic laws''. 17. Coming to the definition of international transaction as given in Section 92B(1) of the Act, said section is reproduced hereunder:- ''(1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a 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 services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises''. For a transaction to be deemed as international transaction either or both of the Associated Enterprise has to be Non Resident. ....
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....rnational transaction and hence not exigible to an Arm Length Pricing analysis or adjustment thereof. Ground No.2 of the assessee stands allowed. 18. Adverting to ground No.3, which assails the treatment of advertisement and market promotion activity as an international transaction, ld. Authorised Representative submitted that, by virtue of judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd (supra), AMP spends could not be considered so. 19. Per contra, ld. Departmental Representative strongly supported the orders of the authorities below. 20. We have considered the rival contentions and perused the orders of the authorities below. Ld. TPO had found expenditure of F123.80 crores incurred by the assessee towards advertisement and sales promotion expenses as helping the promotion of ''Renault'' brand in India. According to him, assessee had mentioned this in its own business plan. Though the assessee argued against any adjustment on brand promotion, relying on the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd (supra), ld. TPO did not accept it. According to him, in the case of the assessee there was an admission that it ....
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.... the Act which indicates how, in the absence of the bright line test, one can discern the existence of an international transaction as far as AMP expenditure is concerned. The court finds considerable merit in the contention of the assessee that the only transfer pricing adjustment authorised and permitted by Chapter X is the substitution of the arm's length price for the transaction price or the contract price. It bears repetition that each of the methods specified in section 92C(1) is a price discovery method. Section 92C(1) thus is explicit that the only manner of effecting a transfer pricing adjustment is to substitute the transaction price with the arm's length price so determined. The second proviso to section 92C(2) provides a "gateway" by stipulating that if the variation between the arm's length price and the transaction price does not exceed the specified percentage, no transfer pricing adjustment can at all be made. Both section 92CA, which provides for making a reference to the Transfer Pricing Officer for computation of the arm's length price and the manner of the determination of the arm's length price by the Transfer Pricing Officer, and section 9....
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....nt 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 transfer pricing adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit such an adjustment. 73. It bears repetition that the subject matter of the attempted price adjustment is not the transaction involving the Indian entity and the agencies to whom it is making payments for the AMP expenses. The Revenue is not joining issue, the court was told, that the Indian entity would be entitled to claim such expenses as revenue expense in terms of section 37 of the Act. It is not for the Revenue to dictate to an entity how much it should spend on AMP. That would be a business decision of such entity keeping in view its exigencies and its perception of what is best needed to promote its products. The argument of the Revenue, however, is that while such AMP expense may be wholly and exclusively for the benefit of the Indian entity, it also enures to building the brand of the foreign associated ente....
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....d that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance. 76. As explained by the Supreme Court in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international tr....
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.... raw material sales, increased brand value, etc. 80. The Revenue is proceeding on a presumption regarding the comparative benefits to MSIL and SMC as a result of the AMP expenditure incurred by MSIL. The Revenue is unable to deny that MSIL's expenditure on AMP is only 1.87 per cent. of its total sales whereas SMC's expenditure worldwide on AMP is 7.5 per cent. of its sales. In the circumstances, in the absence of some data, it cannot be simply asserted that the benefit of MSIL's AMP spend to SMC is not merely incidental. The court is unable to accept the assertion of the Revenue that the mere fact of incurring AMP expenditure should lead to an inference of the existence of an international transaction. 81. It must be recalled here that the royalty paid to SMC for use of its logo on the product manufactured with its technical know-how is separately subject to transfer pricing. Likewise, payments for use of patents or copyrights are separately assessed. What the present appeals are concerned with is only the AMP expenditure incurred and nothing more. As pointed out by the Revenue the issue is not about the expenditure incurred by MSIL in engaging Indian ....
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.... 84. The court next deals with the submission of the Revenue that the benefit to SMC as a result of the MSIL selling its products with the co-brand "Maruti-Suzuki" is not merely incidental. The decision in Sony Ericsson acknowledges that an expenditure cannot be disallowed wholly or partly because its incidentally benefits the third party. This was in context on section 57(1) of the Act. Reference was made to the decision in Sassoon J. David and Co. Pvt. Ltd. v. CIT [1979] 118 ITR 261 (SC). The Supreme Court in the said decision emphasised that the expression "wholly and exclusively" used in section 10(2)(xv) of the Act did not mean "necessarily". It said : "The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by the law". 85. The Organisation for Economic Co-operation and Development Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an associate enterprise group service only because it gets an incidental benefit for being part....