TaxTMI 
TaxTMI 
2019 (3) TMI 459
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....nt, Marketing and Promotion ('AMP') expenses Presumption of fictitious transaction in the nature of 'provision of brand promotion services' 2. erred in making an adjustment in respect of AMP expenses of Rs. 304.69 crores alleging that the AMP expense incurred by the Appellant is an international transaction under Section 92B; 3. erred in ignoring that the alleged AMP expenses incurred by the Appellant represents only domestic transactions undertaken with third parties and hence in absence of a valid international transaction, the adjustment is outside the purview of the jurisdiction of learned TPO; 4. erred in not appreciating that there is no arrangement whatsoever between the Appellant and its Associated Enterprises ('AEs') for promotion of AEs brand by incurring AMP expenses on behalf of the AEs; Expenses on marketing support services 5. erred in alleging that the payments made by the Appellant to its AEs for availing marketing support services (DMI services) were in the nature of AMP expenses; Business and commercial expediency 6. erred in holding that the Appellant incurred AMP expe....
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.... companies comparable to the Appellant, for computing the mark-up to be applied to the alleged excessive AMP expenses and considering inappropriate comparables; 15. without prejudice to the above, erred in computing mark-up over alleged excessive AMP expenses incurred without appreciating that an addition if any, shall be commensurate with agency function, if any, undertaken by the Appellant; Alternate adjustment - International transaction of import finished goods from AEs for resale 16. erred in making an arbitrary adjustment amounting to Rs. 26.40 crores to the distribution segment of the Appellant on account of alleged differences in intensity of AMP functions performed by the Appellant vis a vis the comparable companies to align the functions, assets and risks ('FAR') profile of the Appellant with that of the comparable companies; 17. erred in rejecting the economic analysis undertaken by the Appellant by use of resale price method ('RPM') to benchmark the aforesaid transaction without giving an opportunity with regard to the proposed adjustment; 18. erred in using 'adjusted RPM' as the most appropriate metho....
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....gs 28. erred in charging interest under section 234B, 234C, 234D of the Act; 29. erred in initiating penalty proceedings under section 271(1)(c). 2. Brief facts of the case are that the assessee company is subsidiary of L'Oreal SA, France. The assessee is engaged in the business of manufacturing, marketing and selling of cosmetic and beauty products imported from its overseas Associate Enterprises (AE). The assessee filed its return of income for Assessment Year 2012-13 on 29.12.2012 declaring total income of Rs. 81,75,72,077/-. In the return of income, the assessee reported international transaction with its Associate Enterprises (AE's) in Form-3CEB. Consequent upon the reporting of international transaction during the relevant financial year, the Assessing Officer made a reference under section 92CA(3) for computation of Arms Length Price (ALP). As per report in Form 3CEB, manufacturing segment and distribution segment was determined by applying Cost Plus Method (CPM) and Resale Price Method (RPM) respectively. In the manufacturing segment, the Profit Label Indicator (PLI) of assessee as per Transfer Pricing Study report was 223.44% on input cost whereas aver....
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....unt of Trademark Royalty of Rs. 18.43 Crore on the basis that assessee should not have paid royalty for the use of Trademark as brand name of L'Oreal was not known in the Indian market and the value of Trademark is generated by assessee by incurring AMP expenses. The TPO held that assessee should not have paid royalty for the use of Trademark and thus, made adjustment of Rs. 18.43 Crore. 4. The TPO also made the adjustment on account of technical knowhow Royalty of Rs. 29.48 Crore. The TPO determined the ALP by considering the difference between average rate royalty in term of agreement (6.1%) where only use of Trademark was provided and average rate of royalty in term of agreement 8.4%), whereas uses of both Trademark and technical knowhow was provided. The TPO determined the ALP at 2.3% on account of difference in ALP of technical knowhow royalty. On receipt of report of TPO, the AO served the draft assessment order passed under section 143(3) r.w.s. 144C(1) dated 31.03.2016. The assessee filed its objection before the DRP on 03.05.2016. The objection of the assessee was decided by DRP by after granting opportunity to the assessee on 26.12.2016. The DRP while deciding the obje....
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.... by following the order of earlier years for A.Y. 2008-09 to 2010-11 held that there is no international transaction on account of AMP expenses. 8. On the other hand, the ld. DR for the Revenue submits that there exist international transaction between the assessee and its AE. It was further submitted that while passing the order for A.Y. 2008-09 to 2010-11 & 2011-12, the Tribunal has not considered the facts of Clause-8 of the agreement between the assessee and its AE. The ld. DR for the Revenue further submits that department has filed appeal before the Hon'ble Bombay High Court against the order of Tribunal for A.Y. 2008-09 to 2010-11 and accordingly prayed that adjustment on account of AMP should be upheld. The TPO passed the order after analyzing international transaction. The ld. DR further submits that various terms and conditions regarding marketing advertisement between the assessee and AE. Further as per Clause-7, the assessee is mandated to mark the license product under Trademark as per Clause-8 under the head "Advertisement". The assessee is responsible for advertising the license product in the territory. The assessee is also mandated to allocate annual budget for ....
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....ost, as against 146.71% on input-cost of the assessee, that the it had claimed that transaction in the MS were at arm's-length, that for DS it had adopted RPM, that the gross margin in the DS was bench marked against the gross margin of the comparable distribution companies, that the arithmetic mean of the comparables was 33.37% on sales as against 61.01% on sales of the comparables, that it had also bench marked the transactions using TNMM,that the operating expenses(other than the direct expenses) were allocated between the two segments on the basis of turnover, that the operating margin in MS was 7.46% on sales as against that of the comparables of 9.12%, that the assessee has used the latest available year's data, that the operating margin of the assessee in DS was 8.37% on sales as against the 8.03% of the comparables, that the TPO had held that none of the above methodologies had given reliable results, that the assessee had incurred an expenditure of Rs. 186 crores on AMP on net sales of Rs. 561 crores, that the expenditure was 33.15% of the net sales, that he further observed that the assessee was developing and promoting the brands that were not owned by it though ....
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....ure of the business carried out by the assessee was such that to establish its product it had to spend huge expenses.The TPO had ignored the fact that expenditure was incurred for products launched especially for the Indian market and that the brand of the AEs was not promoted.The manufacturing unit of the assessee had shown a huge turnover.Thus,we do not find force in the arguments of the TPO / DRP that AMP expenses incurred by the assessee were primarily or secondarily aimed to benefit the AE.s.and that it was entitled to a reasonable compensation for such AMP expenses.Secondly,the important issue raised by the assessee that it had huge amount on account of sales promotion had not been dealt with by the TPO/DRP.In our opinion,it is an important factor for determining the ALP. We further find that the TPO has not brought on record any evidence to prove that the assessee had rendered any services to its AE.s under the head AMP.On the contrary,payment on account of advertisements etc.was made to unrelated domestic third parties.In our opinion,these basic facts compelled the TPO to hold that in the case under consideration the international transaction was not the actual AMP expendit....
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....ng the TP 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 that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 928 defines 'international transaction' as under: "Meaning of international transaction. 928.(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 in....
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....submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. "This was negatived by the Court by pointing out; "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v), which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means', part and the 'includes' part of Section 928 (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain....
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....nd the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred, for the AE. In any event, after the decision in Sony Ericsson (supra), -- the question of applying the BLT to determine the existence-of an-international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function, cannot be construed as a 'transaction'. Further, the- Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same." 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc....
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..... 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 hereinbetore, 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. 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 ....
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....to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v, CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is- unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentionedin- Sassoon -J David-(supra)- "the--fact that- somebody other than the Assessee is also benefitted 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 (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". Considering the facts-like absence of an agreement between the assessee and the AE's. for sharing AMP expenses ,payment made by the assessee under the head AMP to the domestic parties, failure of the TPO prov....
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....the appeal of revenue was dismissed vide ITA No. 663/Mum/2016 vide order dated 11.09.2018 holding as under: "16. Upon hearing both the counsel and perusing the records. We find in Revenue's appeal, the issue raised pertains to the deletion of international transaction addition consisting of Amp transaction by the Transfer Pricing Officer following the decision by ITAT in assessee's own case and also decision of Hon'ble Delhi High Court in the case of Sony Eriscon Mobile Communication (India) Pvt. Ltd. (now known as Sony India Ltd.) v. CIT[2015] 374 ITR 118 (Delhi), Maruti Suzuki India Ltd. vs. ACIT [2016] 381 ITR 117 (Del) and Whirlpol of India Ltd (supra). Since the DRP's direction is supported by the Hon'ble High Court's decision, we do not find any infirmity in the same. Hence, the Revenue's appeal is dismissed." 12. We have also perused the agreement of assessee with its AE dated 4th January 2011 executed between assessee and its AE. Clause 7 of the agreement descries about right of distribution of licensed product in the territory. As per clause 8 of the said agreement the assessee is responsible for the advertising the licensed product in the territory. The 'terri....
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....nsed use of the trademark owned by the AE's. This fact was explained to the transfer pricing officer vide submissions dated 22 January 2016 copy of which is filed on record at page no1756 of paper book. The transfer pricing officer and DRP have not disputed the trademark and benefit by the assessee from such use; therefore, it is not open to them to disallow the entire expenditure on account of commercial expediency. The ld. AR further submits that in the expenses were incurred by the assessee for the purpose of selling the products manufactured and distributed by the assessee in India. Therefore, incurrence of AMP expenses has no connection with the payment of royalty on trademark. The Tribunal in its order dated 4th May 2016 for assessment year 2008- 09 to AY 2010-11 have expressly held that alleged AMP expenses are incurred by assessee has grown up the sale of its product. 14. In alternative submissions the ld. AR for assessee further submits that transfer pricing officer determined the arm's-length price at Nill without applying any of the prescribed method under section 92C of the Act. Since the TPO made the adjustment without following any of the prescribed methods and wit....
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....t page no. 1757 of Paper Book. TPO erred in determining ALP at 2.3% by taking the difference between average rate 8.5% of agreements the trademark and technical know-how vis a vis the average rate at. 6.1% of the agreements with only trademark by purporting to apply the CUP Method. The ld. AR submits that when no separate rate was found for use of technical knowhow in the comparable agreements selected by the TPO, it was not open for him to estimate a rate for use of technical know-how. In support of his submission, the ld. AR of the assessee relied upon the decision of Mumbai Tribunal in case of Maruti Suzuki India Ltd. vs. Addl. CIT(supra). 16. On the other hand, the ld. DR for the Revenue submits that clauses 2 and 11 of the license agreement dated 4th January 2011 are relevant in respect of payment of royalty. By clause 2 of the agreement, the assessee is given exclusive right to manufacture the licensed product of L'OREAL and therefore, to use the technology as well as licensed trademark and exclusive right to import and distribute and sale the licensed product in the territory. Further, as per clause 11 of the agreement the assessee paid royalty @ 6.75% upto June 2011. The....