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2018 (7) TMI 1964
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.... processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. In the course of assessment proceedings, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) for determination of the Arm's Length Price (ALP) of the international transactions entered into by the assessee with its Associated Enterprises (AEs) in the year under consideration. The TPO, after examining the assessee's TP Study / documentation, passed an order under Section 92CA of the Act dt.30.01.2015 proposing TP Adjustment amounting to Rs. 72,81,34,973 which comprised - (i) Rs. 41,12,32,939 in respect of sale of finished goods; and (ii) Rs. 30,18,11,461 in respect of AMP expenditure (Advertisement, Marketing and Sales Promotion). The Assessing Officer then passed the draft order of assessment for Assessment Year 2011-12 under Section 144C r.w.s. 143(3) of the Act vide order dt.27.3.2015, wherein the assessee's income was computed at Rs. 111,37,20,610 by incorporating the TP Adjustment of Rs. 72,81,34,973 proposed by the TPO. 2.2 Aggrieved by the draft order of assessment dt.27.3.2015 for Assessment Year 2011-12, the assessee filed its objections....
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....Drug Company USA, The Himalaya Drug Company Pte Ltd, Himalaya Drug Company, British West Indies, The Himalaya Drug Company (PTY) Ltd and Sia Himalaya Herbal Healthcare Latvia as associated enterprises as defined under section 92A of the IT Act: 1. The honourable DRP and the learned TPO have erred in holding that the appellant and The Himalaya Drug Company FZCO, The Himalaya Drug Company LLC, Himalaya Drug Company USA, The Himalaya Drug Company Pte Ltd, Himalaya Drug Company, British West Indies, The Himalaya Drug Company (PTY) Ltd and Sia Himalaya Herbal Healthcare Latvia are associated enterprises when the conditions of section 92A (2) are not present. 2. The Honourable DRP has failed to appreciate that the reference made to Learned TPO under section 92CA of the Act is invalid for the reason that the appellant and The Himalaya Drug Company FZCO, The Himalaya Drug Company LLC, Himalaya Drug Company USA, The Himalaya Drug Company Pte Ltd, Himalaya Drug Company, British West Indies, The Himalaya Drug Company (PTY) Ltd and Sia Himalaya Herbal Healthcare Latvia are not associated enterprises and consequently, the transactions entered into between them are not international transa....
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.... by the Appellant under TNMM and adoption of CPM as the most appropriate method: 1. The Honourable DRP is not justified in upholding the action of the Learned TPO in rejecting the Transfer Pricing study carried out by the Appellant under TNMM. 2. The Honourable DRP is not justified in upholding the action of the Learned TPO in rejecting arm's length price determined by the Appellant under TNMM based on frivolous/ extraneous reasons. 3. The Honourable DRP is not justified in upholding the action of the learned TPO in adopting CPM as the most appropriate method when CPM is not the right method as per ICAI Guidance Notes and OECD. 4. The Honourable DRP failed to appreciate that the reasoning of the learned TPO in making comparison at gross profit margin level on the ground that below the gross profit margin level, the business operations of the appellant and the group concerns are not comparable as they are carried on in different tax jurisdictions is absurd and irrational as expenses below the gross margin level would also affect the pricing policy and consequently, would reduce the degree of comparability at gross margin level. 5. The Hon'ble DRP and the learned TPO h....
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....al methodology in similar kind of transactions for AY 2005-06 had been accepted by the learned Joint Director of Income-tax (Transfer Pricing - II), Bangalore in his order dated 31.10.2008 passed under section 92CA of the IT Act 14. The Hon'ble DRP erred in law and on facts in upholding the Order under section 92CA passed by the learned TPO when the TPO's order as well as the TPO's notice are manifested with contradictions, non-application of mind and without any reasoning 15. The Hon'ble DRP erred in law and on facts in not quashing the finding of the TPO that the appellant is a contract-manufacturer just because it has not done any functions beyond manufacturing so far its transactions with its group concerns are concerned IX. As regards flaws in determination of ALP based on CPM: 1. The honourable DRP is not justified in upholding the action of the learned TPO in selecting the CPM as the most appropriate method by failing to appreciate that the CPM does not suit the nature of the business carried on by the appellant. 2. The honourable DRP is not justified in confirming the selection of CPM by failing to appreciate that in CPM, comparison has to be made between sim....
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....argin level are incurred in different jurisdictions ignoring the fact that such expenditure will impact the pricing of the product which definitely affect the gross profit. 9. The Honourable DRP failed to appreciate that the learned TPO is not justified in ignoring the selling and marketing expenses while calculating comparable gross profit margin as if it had incurred similar expenditure in respect of sales to group concerns, the price that it would have quoted to the group concerns would have been higher. 10. The Honourable DRP is not justified in upholding the action of the learned TPO in adopting 102.63% as the comparable gross profit margin which is extremely high and abnormal. X. Without prejudice to the objections on adoption of CPM, as regards not allowing adjustments as per Rule 10B(1)(c)(iii) 1. The Honourable DRP is not justified in upholding the action of the Learned TPO in determining the ALP under CPM without making adjustments, as required to be made under Rule 10B(1)(c)(iii), for the functional differences, other differences and for risk adjustments which materially affect the gross profit mark-up in the open market. 2. The honourable DRP ought to hav....
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....d that risk attributable to transactions with group concerns is anticipated risk whereas risk in case of transactions with third parties is existing risk. 11. The Honourable DRP is not justified in not directing adjustment for financial risk and investment risk just because the appellant had stated in its TP study that these risks are not borne by it in the international transactions ignoring that these risks are borne by the appellant vis-a-vis the domestic division of consumer products which is adopted as comparable. 12. The Honourable DRP has failed to appreciate that the learned TPO having observed that the foreign exchange fluctuation risk, debt risk and inventory risk are borne either by the appellant or the group concerns is not justified in not making suitable adjustments for these risks. XI. As regards adjustment on account of alleged advertisement and marketing promotion (AMP) expenditure: 1. The Hon'ble DRP is not justified in upholding the action of the learned TPO in holding that the appellant carried out brand promotion activity without issuing a notice to that effect. 2. The honourable DRP is not justified in directing adjustment on account of alleged ....
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....RP ought to have appreciated that Himalaya Global Holding Limited does not fall under the definition of enterprise as defined by section 92F(iii) of the Act and hence, Chapter X does not apply to transactions, if any, with such person. 10. The Hon'ble DRP failed to appreciate that the learned TPO is not justified in holding that the appellant had rendered brand promotion services to its AEs merely relying on the expenditure incurred without bringing on record any evidence to prove that the appellant has actually rendered those services and the capability of the appellant to render those services. 11. The Honourable DRP is not justified in treating the AMP expenditure incurred by the appellant as brand promoting expense and that it is an international transaction though the Department had treated similar kind of expenditure as expenditure incurred in respect of domestic consumer products' division of the appellant in the assessment year 2005-2006, thereby taking contradictory and inconsistent stand. 12. The Honourable DRP has failed to appreciate that the appellant is in fact the economic owner of the brand with unfettered right to use the brand although Himalaya Global Hol....
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....ods manufactured by Himalaya Global Holding Limited. 20. The Honourable DRP has failed to appreciate that the learned TPO is not justified in applying the bright line test as Himalaya Global Holdings Limited whose brand is alleged to be promoted in India has not effected any sale in India nor the assessee is a distributor for the products manufactured by Himalaya Global Holding Ltd. 21. The Honourable DRP failed to appreciate that the learned TPO is not justified in sitting in the armchair of the appellant and deciding whether the AMP expenditure is reasonable or not. 22. Without prejudice to the above grounds, the Hon'ble DRP ought to have held that the manner of determination of ALP is not in accordance with section 92C read with relevant Rules. 23. The honourable DRP is not justified in directing adjustment towards the alleged AMP expenditure without carrying out or causing to be carried out any transfer pricing analysis, including outlining the alleged international transaction, selection of comparable uncontrolled transactions, determination of most appropriate method, applying the most appropriate method, carrying out various adjustments and determining the arm....
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....to incur AMP expenditure more than corporates if a firm were to compete with corporates 31. Without prejudice to the above, the Honourable DRP has failed to appreciate that the learned TPO is not justified in applying the bright line test though the facts in the appellant's case are different compared to the facts in the so called Indian case study which is used as the basis for applying the bright line test. 32. The Honourable DRP is not justified in upholding action of the TPO in making adjustment towards alleged AMP expenditure which was beyond his powers as stipulated in section 92CA. 33. The Honourable DRP ought not to have directed adjustment towards alleged AMP expenditure which was not incurred with related parties, thereby making section 40 A (2) inapplicable and without establishing that the expenditure was non-genuine thereby making the same not disallowable under section 37 (1). This action of the honourable DRP is against the principle of Expressio unius est exclusio alterius. 34. The Honourable DRP has failed to appreciate that the learned TPO is not justified in holding that selling and administrative expenditure incurred by the appellant represents expen....
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....erest under section 234B. 3. The learned Assessing Officer erred in law and on facts in determining interest under section 234C at Rs. 58486. For the above reasons and for such other reasons which may be allowed by the Honourable Members to be urged at the time of hearing, it is prayed that the aforesaid appeal be allowed." 4. Ground No.I. 4.1 This ground being general in nature, no adjudication is called for thereon. 5. Ground No.II. 5.1 In this ground, the contention of the assessee is that the impugned final order of assessment was not passed within the time limits prescribed by law and therefore the same being bad in law is liable to be quashed. 5.2.1 We have heard both sides and perused the material on record before us. In the case on hand, the DRP issued its directions on 17.12.2015 and while the same were admittedly received by the Assessing Officer on 29.12.2015, the final order of assessment was passed on 18.02.2016. According to the assessee, this final order of assessment for Assessment Year 2011-12 is bad in law since it was not passed within one month from the end of the month in which the DRP directions were received. This ground was considered and dec....
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....e order beyond period prescribed therein where as there was no such express bar in the provisions of sub-section (13) of sec.144C of the Act. The Hon'ble Supreme Court in the case of Thirumalai Chemicals Ltd. vs. Union of India (2011) 11 taxmann.com 204(SC) has held that limitation provisions are only procedural in nature unless they go to the root of the matter, it does not create any substantive right. The Hon'ble Andhra Pradesh High Court in the case of Rain Cements Ltd. vs. Dy.CIT (392 ITR 253) held that the provisions of sub-section (12) of section 144C of the Act do not go to root of jurisdiction on DRP to pass the order. The relevant paragraphs of the judgment are as under: "40. But in this case, sub-section (12) of Section 144C, on the face of it, appears to pose an obstacle. Under sub-section (12), no direction can be issued by the DRP under sub-section (5), after the expiry of nine months from the end of the month in which the draft assessment order was forwarded to the eligible assessee. In this case we have found the date of forwarding of the draft assessment order to be 22-8-2014. Hence, the period stipulated under sub-section (12) would expire by 31-5-2015. But the....
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....any ratio, the same gives an indication as to how to understand the purport of Section 144C. The order of the Supreme Court in the said case reads as follows: "3. We are of the view that in the peculiar facts and circumstances of this case, particularly when the High Court has remitted the matter to the Transfer Pricing Officer from whose order an appeal is pending before the CIT (A), it would be in the interest of both sides to resort to alternative dispute resolution mechanism suggested in the budget of 2009 (see Section 144C of the Income Tax Act, 1961). It is made clear that the competent authority will not reject the application herein made by the assessee on the ground that the proposal has come after the cut-off date." 45. Therefore we are of the considered view that it is possible for this Court to set aside the order of the Dispute Resolution Panel and remit the matter back to them for a consideration on merits, inspite of the fact that the period stipulated in sub-section (12) would have expired by 31-52015." Therefore, having regard to the principles enunciated in the above case and also the plain provisions of section 144C of the Act, we are of the considered o....
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....alth care products. The manufactured products are sold in India (domestic sales) and are also exported to AEs / related entities outside India. The exports to related entities are from all these ranges of products, i.e. pharmaceutical products, consumer / personal care products and animal health care products. The assessee also sells these products to unrelated parties in CIS countries. In India, pharmaceutical products are driven by the prescription of Doctors. In CIS countries, Ayurveda is widely recognized and therefore largely the practice is akin to India. However, in the other countries, the international business for these products is largely, driven by marketing and advertisement and not by prescription; as is the case with the personal care range of products in India. The personal care division in the domestic market undertakes full fledged marketing activities; including advertisement, sales promotion, etc. However, in respect of exports to AEs / related parties outside India, the entire marketing activities is done by the AEs as the assessee only manufactures the goods as per requirement of the AEs and dispatches the same to them. 8.2.2 In the year under consideration,....
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....are at a price ex-factory. Therefore, since the gross profits would be different in both these segments, they cannot be compared by applying CPM. It was also contended that since the net margin in both segments are less effected by transactional differences at net profit level, therefore TNMM is the MAM. 8.2.5 The TPO, however, rejected the assessee's contention and passed order under Section 92CA of the Act wherein he considered CPM as the MAM and considered the Gross Profit margin earned in the consumer product division for bench marking. The TPO also held that the assessee acted as a contract manufacturer in respect of products manufactured and exported to AEs as it did not undertake distribution, advertisement, marketing and selling expenditure and alleged that the goods are sold at a mark up of 15% on cost. The TPO computed the Gross Profit margin on cost of goods sold in the domestic consumer product division at 102.63% and the cost of goods sold to AEs amounting to Rs. 56,94,29,812 was accordingly increased by the above rate to Rs. 115,38,35,749. From this, the exports to AEs amounting to Rs. 74,26,02,810 was reduced and the Transfer Pricing Adjustment in respect of ex....
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.... the MAM due to the difference in G P Margin in domestic and export sales. The learned Departmental Representative filed a chart showing the percentage of GP to cost of goods sold, in both consumer products in domestic market and exports to AEs for Assessment Years 2009-10 to 2013-14 and submitted that due to huge difference in G P rate in both the above segments, the Transfer Pricing Adjustment made by the TPO is fully justified. The learned Departmental Representative contended that TNMM cannot be considered as the MAM since distribution, marketing, selling expense are incurred only in the domestic market and not in connection with the products exported to AEs. The learned Departmental Representative relied on various judicial pronouncements to contend that CPM was the MAM to be adopted in the case on hand. 8.5.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The first issue for consideration is that of what would be the MAM in the facts and circumstances in the case on hand. As per Sec. 92C(1) of the Act, the ALP in relation to an international transaction hall be determined by ....
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....ermined by making adjustments to 'normal gross profit mark up' to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions OR between the enterprises entering into such transactions, which could materially affect such profit mark up in the open market. The 'normal gross profit mark up' means the gross profit mark up on direct and indirect costs of production arising from the transfer of the same OR similar property by the enterprise or by an unrelated enterprise, in a comparable uncontrolled transaction OR a number of such transactions. 8.5.4 In the case on hand, the assessee compared the net profit margin from domestic consumer product division with the net profit margin for exports to AEs. At page 46 of his order, the TPO has held that the exports to AEs is comparable in terms of nature of goods to the domestic consumer product division and therefore this section is considered as comparable to exports to AEs. Thus, there is no dispute on the domestic consumer product division being compared with exports to AEs. The TPO, however, compared the gross margin of domestic consumer product divi....
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....ions performed, assets employed and risks undertaken by the domestic consumer product division and export to AEs; the pricing policy followed by the assessee due to these differences in both segments. In this view of the matter, we are of the considered opinion that the TPO's approach, in applying the gross profit margin of the domestic consumer product division to the cost of goods sold in exports to AEs to determine the ALP, is factually erroneous and contrary to the mandate of Rule 10B(1)(c) of the Rules. 8.5.7 As per Rule 10B(2), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following namely :- "(a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transacti....
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....uced on account of the many / various differences like, freight to move goods to the sales depots and subsequently to the stockists, commission to C&F Agents through whom the sales are achieved, filed staff salaries, sales commission to employees, travelling cost to promote and achieve sales all over India, communication charges, brand premium, allowances for negative publicity in the international market, etc. 8.5.9 Rule 10B(1)(c) r.w. Rule 10B(3) provides for making reasonably accurate adjustments to eliminate the material effects of differences between transactions being compared. In the case on hand, from the details on record, the differences between domestic sales and export sales are large in number and some being qualitative, unless reasonably accurate adjustments are made to normal gross profit mark up to eliminate the material effects of the many differences between domestic sales and export sales, the two margins cannot be compared. In our view, to give a mathematical number to all these differences would mean indulging in the exercise within a realm of subjectivity which is to be avoided. We are conscious of the principle that CPM can be applied in the case of a manuf....
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....nd sale of various industrial products such as decanters, separators, etc. to its AE located abroad as well as in the domestic sector, in view of the fact that there were various differences in export segment and domestic segment, such as market fluctuations, geographic differences, volume difference, credit risk, RPT, etc., the Bench held that the TPO was not justified in adopting CPM as the MAM as suitable adjustments are not possible. 8.5.11 The learned Departmental Representative for Revenue placed reliance on the decision of the Delhi Bench of ITAT in the case of Wrigley India (P) Ltd. Vs. Addl.CIT (2011) 14 taxmann.com 91 to put forward the proposition that CPM should be considered as the MAM for manufacture and sale of finished goods in the domestic markets and exports to AEs. In fact, in this decision (supra), the Tribunal held that 'since the marketing and advertisement expenditure has to be also incurred by the AEs to market the product in their respective territories, therefore this aspect for making adjustments as provided in Rule 10B(1)(c)(iii) has to be considered. It is thus seen that the above decision relied on by the learned Departmental Representative also reco....
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.... this decision (supra), the Tribunal accepted CPM as the MAM considering the fact that the assessee was not able to satisfactorily explain the substantial difference in the FAR analysis in respect to exports to AEs and non-AEs and therefore did not accept that comparison should be made at the operating level using the net operating margin. In the case on hand, however, the assessee has brought on record many functional, quantitative and qualitative differences between the domestic consumer product division and the exports to AEs. As discussed earlier, reasonably accurate adjustments cannot be made in the case on hand to determine the adjusted profit mark up as per Rule 10B(1)(c) and therefore CPM cannot be considered as the MAM. Consequently, the aforesaid decision relied on by the learned Departmental Representative is not applicable to the facts of the case on hand. 8.5.13 The OECD, TP Guidelines, 2010 relied on by the assessee provides that CPM may become less reliable when there are differences between the controlled and uncontrolled transactions and those differences have a material effect on the attribute being used to measure arm's length conditions. It further states that....
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....e should be given to internal or in-house comparables. In absence of internal comparables, the taxpayer can and would need to rely upon external comparables, i.e. comparable transactions by independent enterprises. For several reasons, database providers, it is apparent, have the requisite information and data of external comparables to enable comparability analysis of the controlled and uncontrolled transactions with necessary adjustment to obtain reliable results under TNM Method. This method also works to the benefit and advantage of the tax authorities in view of convenience and easier availability of data not only from third party providers, but on their own level, i.e. assessment records of other parties. 90. The strength of the TNM Method is that net profit indicators are less affected by transactional differences in comparison with some other methods. This method is more tolerant to functional differences between controlled and uncontrolled transactions in comparison with resort to gross profit margins......" 8.5.16 In the case on hand, the net margin earned by the assessee in respect of personal care division in the domestic segment at 11.30% was compared to the net m....
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.... on page 3 of his order under Section 92CA of the Act, the TPO has accepted that the assessee has its own range of products and the AEs only choose from the standard products which are manufactured by the assessee for the Indian Market. In our view, the TPO's understanding of a contract manufacturer will make every manufacturer of goods in India who would not only make domestic sales but also effect sales to an overseas distributor as a contract manufacturer. A co-ordinate bench of this Tribunal in the case of Essilor Manufacturing India (P) Ltd. Vs. DCIT (2016) 67 taxman.com 377 (Bang-Trib) held that an assessee carrying out its independent activity of manufacturing cannot be treated as a contract manufacturer. It was held that in such circumstances CPM cannot be applied and TNMM will be the MAM. In view of the overall consideration of the peculiar facts and circumstances of the case, as discussed above, we hold that CPM adopted by the TPO is incorrect and contrary to the facts of the instant case and that the assessee is justified in adopting TNMM for determining the ALP in respect of finished goods exported to AEs. In this view of the matter, the Transfer Pricing Adjustment of....
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.....2.1 Before us, the learned Authorised Representative for the ;assessee placed reliance on the decisions of the co-ordinate bench of this Tribunal in the case of Essilor India Pvt. Ltd. Vs. DCIT (2016) 178 TTJ 69 (Bangalore-Trib); DCIT Vs. Nike India Pvt. Ltd. in IT(TP)A No.232/Bang/2014 and other judicial pronouncements to contend that in the absence of any agreement OR arrangement with M/s. Himalaya Global Holdings Ltd., Cayman Islands to incur AMP expenses on its behalf to promote the brand value of the products, the AMP expenses cannot be treated as an international transaction. 11.2.2 Reliance was placed by the learned Authorised Representative on the Affidavit of Sri Meraj Alim Manal dt.27.8.2012 (pages 452 to 454 of Paper Book 2), the major shareholder of M/s. Himalaya Global Holdings Ltd., Cayman Islands ('HGH'), to contend that it is the assessee firm which has developed all its assets including the trade marks of the products in India and the assessee is exclusively and beneficially entitled to explore and use the same in India. It was submitted that as per the above Affidavit, the legal ownership of the brand with 'HGH' was necessitated by the fact that the assessee, b....
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....nouncements on the subject, the co-ordinate bench held that in the absence of any arrangement between the assessee and the foreign AE for incurring AMP expenditure, no Transfer Pricing Adjustment can be made in respect of AMP expenditure. In this regard, we find that at paras 19 to 22 of its order in the case of Essilor India Pvt. Ltd. Vs. DCIT (2016) 178 TTJ 69 (Bangalore-Trib.), it was held as under :- " 19. In the present case, the assessee-company imports the lens from its foreign AE and after some processing, sells the products on its own. However, the amount of value addition on account of processing in terms of total revenue is not clear from the material on record. That apart, the assessee-company has been throughout contesting before all the authorities the very existence of international transaction on account of incurring AMP expenditure between assessee-company and its AE and therefore, the contentions that the law laid down by the Hon'ble Delhi High Court in Sony Ericsson Mobile Communication India (P) Ltd. (supra) should be applied to the case on hand, is not correct. Therefore, the submission of the learned Departmental Representative that the matter be remanded t....
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....s of Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE. 52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgement dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner of Income Tax-LTU v. Whirlpool of India Ltd.) and many of the points urged by the counsel in these appeals have been considered in these two judgments. 53. 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 and 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 ....
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....r 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. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to....
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....ersons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company. For, de hors the element of the shared common objective or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come....
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....nly referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ........... 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....
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....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 'compensation' an Indian entity would be entitled to if it is found 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 ....
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....ed to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should be treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered as a part of the operating cost. Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The gr....
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....d by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd. vs. 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 transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise." 11.4.3 In our considered view, the requirement of there being an international transaction has not been satisfied in the case on hand. In fact, it is not the case of the TPO that there exists an arrangement between the assessee and 'HGH' to promote the brand by incurring AMP expenses. The case of the TPO is that the AMP expenditure incurred by the assessee has resulted in a benefit to the legal owner of the brand and the logo, i.e. M/s. Himalaya Global Holdings, Cayman Islands. The contentions of the TPO that the foreign AE has benefitted on account of the AMP expenditure incurred and therefore the AMP expenditure cannot be said to have been incurred by the assess....