TaxTMI 
TaxTMI 
2019 (3) TMI 459
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....sumption 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 expenses for promoting the brands owned by overseas AE, instead of appreciating that the Appellant was only car....
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....judice 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 method by recalculating sales to benchmark the said international transaction; 19. without prejudice to the above, in an attempt to account for difference in intensity of AMP functions, erred in inadvertently ma....
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.... 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 average PLI of comparable was reported at 113.08%. In distribution segment, the PLI of assessee as per the Transfer Pricing Study was 57.93% on the sale whereas average PLI for comparable was 49.70% based on the same, the assessee claimed that international transaction related to manufacturing and distr....
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....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 objection of assessee with regard to adjustment on account of AMP concluded that this issue is covered in favour of assessee by the order of Tribunal in assessee's own case for AY 2008-09 to AY 2010-11, however, the department have no right to file appeal against the order of DRP, the DRP uphold the additio....
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....hile 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 each year for such advertising. The entire AMP expenses of assessee in India are effectively controlled by AE outside India, who is the owner of brand and other marketing intangible. 9. In rebuttal submission, the ld. AR of the assessee submits that Clause-8 of the agreement between the assessee and AE's canno....
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.... 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 same were manufactured and distributed by it,that he had also held that the assessee had incurred huge expenses for promoting the brands owned by its AEs and that it was a deemed international transaction, that he further observed that the transactions involved significant intangibles and that the PSM was the most appropr....
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....nover.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 expenditure,but the real issue was the benefit conferred by it to its AE.s in form of promotion and brand value augmentation of the brands owned by them. In these circumstances,in our opinion,the fundamental question to be answered is to decide as to whether in absence of any agreement for payment of AMP expenses by the AE.s can it be held t....
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....e 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 incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 'of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there ....
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....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 level for SMC for the purposes of promoting the brand of SMC." 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. vs. Jayaram Chigurupati 2010(6)MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by t....
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....ot 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 holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard with B&L, USA. A similar contention by the Revenue, namely the fact that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also encure to the AE is itself self sufficient to infer t....
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....ready 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 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? 63. Further, in Maruti Suzuki India Ltd. '(supra) the Court further....
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....e 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 prove that expenses were not for the business carried out by the assessee in India-and following the judgments of the Hon'ble Delhi High Court delivered in the case of Bausch and Lomb(India) Pvt. Ltd (supra),we are of the opinion that the transaction in question was not an international transaction and that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction. With regard to the submissions of the AR that the issue of AMP should be r....
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....dia) 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 'territory' is defined under clause 1.5 of the agreement, which means the territory of Nepal, Bhutan, Bangladesh, Maldives, Mauritius, India and Sri Lanka. However, it excludes any free trade zone, which may exist or may be created. Further it excludes duty free shops located in the duty free or travel retail area which is the specialized in sales against foreign currency to foreigner or diplomatic corps, shipchlanders, airlines companies or shipping companies. Though the AE has reserves its right for t....
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....he 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 without bringing any comparable on record, purely on the basis of lack of commercial expediency is unjustified. The transfer pricing officer has no jurisdiction to see whether the expenditure incurred by the assessee meets the test of section 37(1) of the Act. In support of his submission, the ld. AR of the assessing relied upon the decision of honorable Bombay High Court in case of CIT vs. Lever India Exports Ltd. (78 taxmann.com 88). The Ld. AR further submits that similar agreement was in force for as....
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....s 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 clause 11 specifies bifurcation of royalty into two components i.e. 5% for technical knowhow and 1.5% for trademark. Thus, the contention of assessee that TPO wrongly bifurcated royalty into two components are not correct as the clause of the agreement itself specify the bifurcation. The reliance on the decision of Delhi Tribunal in Maruti Suzuki India (supra) is misconceived as facts of the case are entirely different. For technical knowhow, the ld. DR submits that TPO was correctly brought on record th....