TaxTMI 
TaxTMI 
2019 (8) TMI 1197
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....ertisement, Marketing and Promotion expenses [AMP] Rs. 35.09 crores ii) Provision of marketing support services Rs. 0.15 crores iii) Outstanding receivables from AEs as loan and imputing interest Rs. 0.12 crores 3. The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused. 4. Brief facts of the case are that the appellant company is one of the companies under the Beam Global Group and engaged in the business of manufacture, sale, marketing and trading of spirits and wine/liquor products/brands, owned by and licensed to the Beam Global group. Fortune Brands is the ultimate holding company of Beam India Holding whole of equity share capital of Beam India through its subsidiaries. 5. During the year under consideration, Beam India was primarily engaged in undertaking the following business activities: i) Bottling operations and sale of Scotch whisky in India; ii) Manufacture and s....
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....d such sale promotion expenditure would not be incurred by a third party as this is a also incurred to meet the aspirational needs of a consumer to own a globally branded product. 10. After considering the facts and after perusing the documents, the TPO issued a show cause notice to the assessee proposing to use the mean/average ratio of AMP/sales of the comparables chosen by the assessee itself as the CUP to determine the routine AMP expenditure with companies in similar business profile of manufacture and sale of liquor. 11. The TPO determined the AMP expenditure as percentage of sales at 27.48% as under: a) Net sales Rs. 141,93,73,422/- b) Advertising and sales promotion Rs. 39,00,37,751/- c) AMP expenses 27.48% 12. The TPO further observed that other Indian companies which have been chosen by the assessee as its comparables and which are in similar line of business of manufacture and trading of alcoholic beverages, which are having their own brands and manufacture branded goods, spend on an average, only 4.92% of their sales on AMP. 13. The following comparables were chosen: Name of the company Brands owned [Major] Net Sales for t....
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....P /sales value taken by the TPO is as under: Sl No Name of the Company AMP as a % of Net Sales 1 Associated Alcohols and Breweries Ltd 0 2 Empee Distilleries .011% 3 GM Breweries .006% 4 1FB Agro Industries Ltd 1.7% 5 Jagatjit Industries 15% 6 Kesar Industries 0 7 Khoday India Ltd 9.03% 8 Tilaknagar Industries 13.62% 9 Radico Khaitan Ltd 7.32% 10 Skol Industries Ltd 12.31% Average = 5.98% 17. Comparing the average of 5.98% of the comparables with those of the AMP spent of the assessee at 27.48%, the amount in excess of arms length, the amount of AMP was taken at Rs. 30,50,88,,252/- and after making further adjustment of mark-up based on PLR, final adjustment on account of AMP spent was made at Rs. 35,09,33,103/-. 18. The assessee vehemently agitated the matter before the DRP but without any success and accordingly, the Assessing Officer framed the assessment order u/s 143(3) r.w.s 144C of the Act. 19. Before us, the ld. AR stated that the revenue has failed to demonstrate that there exists any international transaction on account of AMP expenditure. It is the say of the ld....
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....uments, it was accepted by the Revenue that the TPOs/Assessing Officers have universally applied bright line test to decipher and compute value of international transaction and thereafter applied Cost Plus Method or Cost Method to compute the arm's length price. The said approach is not mandated and stipulated in the Act or the Rules. The list of parameters for ascertaining the comparables for applying bright line test in paragraph 17.4 and, thereafter, the assertion in paragraph 17.6 that comparison can be only made by choosing comparable of domestic cases not using any foreign brand, is contrary to the Rules. It amounts to writing and prescribing a mandatory procedure or test which is not stipulated in the Act or the Rules. This is beyond what the statute in Chapter X postulates. Rules also do not so stipulate." 23. In our considered opinion, while dealing with the issue of bench marking of AMP expenses, the Revenue needs to establish the existence of international transaction before undertaking bench marking of AMP expenses and such transactions cannot be inferred merely on the basis of BLT. For this proposition, we draw support from the judgment of the Hon'ble Delhi High....
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.... XXX 60. As far as clause (a) is concerned, SMC is a non-resident. It has, since 2002, a substantial share holding in MSIL and can, therefore, be construed to be a non-resident AE of MSIL. While it does have a number of 'transactions' with MSIL on the issue of licensing of IPRs, supply of raw materials, etc. the question remains whether it has any 'transaction' concerning the AMP expenditure. That brings us to clauses (b) and (c). They cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL 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 MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand of SMC. 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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....some tangible evidence on record to demonstrate that there exists an international transaction in relation with incurring of AMP expenses for development of brand owned by the AE. In our considered opinion, in the absence of such demonstration, there is no question of undertaking any benchmarking of AMP expenses. The relevant findings of the Hon'ble High Court in the case of Whirlpool of India Ltd [supra] read as under: "32. Under Sections 92B to 92F, the pre-requisite for commencing 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. XXX 34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists an....
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....hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP." 26. Respectfully following the judgment of the Hon'ble High Court of Delhi [supra], we hold that BLT has no mandate under the Act and accordingly, the same cannot be resorted to for the purpose of ascertaining if there exists an international transaction of brand promotion services between the assessee and the AE. 27. Considering the facts of the case in hand, in the light of judicial decisions discussed hereinabove, we are of the considered opinion that the Revenue needs to establish on the basis of some tangible material or evidence that there exists an international transaction for provisions of brand building services between the assessee and the AE. 28. The Hon'ble Delhi Court in its recent decision in the case of CIT vs Mary Kay Cosmetic Pvt Ltd (ITA No.1010/2018), too, dismissed the Revenue's appeal, following the law laid down in its earlier decision (supra) and held as under: "We have examined the assessment order and do not find an....
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....rined in Chapter X of the Act do not seek to benchmark transactions between two Indian enterprises. 31. The Hon'ble High Court of Delhi in the case of Soni Ericsson Mobile Communications India Pvt Ltd [supra] has held that if an Indian entity has satisfied Transactional Net Margin Method (TNMM), i.e., as long as the operating margins of the Indian enterprise are higher than the operating margins of comparable companies, no further separate compensation for AMP expenses is warranted. The relevant findings of the Hon'ble High Court read as under: "101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assum....
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.... 29.91% 2.54% 6.41% 3.17% 33. The aforementioned charts explain the entire story. Similar view was taken by the co-ordinate bench in the case of M/s Pernod Ricard [India] Pvt Ltd ITA No. 910/DEL/2015 and M/s Sennheiser Electronics India Ltd in ITA No. 7574/DEL/2017. 34. However, since the aforementioned working has been given by the assessee and needs verification, we therefore, restore this limited issue of verification of the aforesaid calculations to the file of the Assessing Officer/TPO with a direction to examine the aforesaid calculations and after being satisfied with the margins of the comparables, vis a vis that of the assessee, AMP adjustment should be deleted. With these directions, Ground No. 1, with all its sub-grounds, is allowed. 35. The second quarrel is in respect of adjustment on account of international transaction pertaining to provision of marketing support services. 36. A perusal of the TP report of the assessee reveals the following: "Beam India undertakes support service of products/brands BIO sold by JBBCo., U.S. under Beam Global's brand names towards ISC and Indian GTR sales. The services, inter alia include the following:....
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....g profit 5999204 PLKnet cost plus markup) 85.18% Net cost plus markup of comparable companies 10.44% 37. During the course of TP assessment proceedings, the TPO noticed that reimbursement for advertisement marketing has not been included in the cost base, leading to erroneous profit margin. The TPO was of the opinion that when the same is included in the cost base, it results in an operating loss. The TPO proposed to the assessee, vide letter dated 24.12.2012, that the so called reimbursement has to be included in the cost base and as to the filters adopted by the assessee, the TPO made the following observations: Filter Used (for elimination) Remarks of this Office 1 Insufficient financial information This is an appropriate filter. However, the companies with F.Y 2008-09 data must be selected and only data for FY 2008-09 is to be used. 2 Company with Nil Sales This is an appropriate filter. 3 Sick or restructuring or abnormal financials This is a suitable filter. However, with respect to abnormal financials alone cannot be a ground for rejection, it has to be seen on case to case basis. 4 Mfg/trading 25% This is....
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.... main components of providing services. Agreement does not provide for reimbursement of these expenses. Therefore, the quantum of expenses related to the market support services claimed back as reimbursement is an integral part of these services which has been reclaimed without an element of mark-up. The TPO further observed that no unrelated party would provide these services without an element of profit on it. Accordingly, he discarded the agreement of the assessee for not charging mark-up on alleged reimbursement of expenditure. Drawing support from various judicial decisions, the TPO was of the opinion that the legal form of an agreement is reimbursement in case of interpretation of documents and all that matters is substance of the document and not form. Finally, the Arm's Length Margin was computed as under: Sl. No. Name of the Company OP/OC 1. IDC (India) Ltd 10.93% 2 Basiz Fund Service Pvt Ltd 46.75% 3. Cameo Corporate Services Ltd 14.95% 4 Global Procurement Con. Ltd 30.37% 5. Killick agencies and Mktg Ltd 29.48% Average 26.5% Arm's Length Margin 26.50% Operating Cost 26109732 ....
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....e on behalf of someone unless and until he makes some profit out of it. But the same principle cannot be applied in case of related parties for the simple reason that if someone wants some expenditure to be incurred somewhere, he will obviously ask his related person or his associate to incur that expenditure on his behalf and, such incurring of expenditure is reimbursed at cost. 45. On perusal of the agreement between the assessee and the AE, and considering the scope of activities provided for marketing support services by the assessee to its AE, we are of the considered opinion that such reimbursement of expenditure at actual cost by the AE do not call for any mark-up on account of profit by the assessee. We find that for marketing support and coordination activity undertaken by the assessee for its overseas AEs, it is compensated by commission basis of sales. 46. Therefore, as far as these costs are concerned, the assessee does not add any value and does not undertake any risk whatsoever and acts only as a pass through agent. Even the OECD Guidelines at clause 7.36 provides that it would be sufficient for the AEs to reimburse such costs to the assessee without any mark-up....
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....rities to disregard the 'form' of a transaction and look into its substance to ensure that the tax base of the country does not suffer unjust erosion. 49. The TPO proceeded by determining the applicable interest for bench marking the receivable and observed that under the CUP method the interest that is charged between unrelated parties under similar circumstances would be the arm's length interest. Thereafter, the TPO proceeded by examining the ratings for government bonds and after considering the ratings the TPO was of the firm belief that the yield rates for BB which is having the highest rating, should be applicable in the case of an assessee. 50. The TPO further observed that it is very difficult to get other tax payers in the similar circumstances so the interest rate that would have been charged in similar circumstances or the interest rate that the tax payer could have got by lending such money to private persons in India or interest rate the company could have got from independent third party in India by lending such surplus money under comparable circumstances. 51. Considering all these circumstances, the TPO finally concluded by holding that the prime lending r....
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....an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Appellant will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a- vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that A Y can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself." 12. It is not the case of the revenue that the impugned transaction is sham or bogus transaction, therefore, the re-characterization of the receivables as unsecured loans is uncalled for. 13. There is no dispute that remittances from unrelated third partie....
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.... 21 10,825.90 7 DEL/COMM 001/2009 31-Mar- 09 913,828.00 17-Jul-09 108 78 33,627.87 8 DEL/COMM 002/2009 31-Mar- 09 1,498,353.00 17-Jul-09 108 78 55,137.75 Total 29,849,811.00 934,110.34 57. In our considered view, since the receivables have been received by the assessee within ordinary time period, it cannot be recharacterized as unsecured loans and accordingly, no adjustment on account of delay in receipt of receivable can be made in the income of the assessee considering the fact that delay is not inordinate but reasonable. Considering the facts in hand, in totality, in light of the factual matrix discussed hereinabove, vis a vis the judicial decisions on the point of issue, we are of the considered opinion that resorting to Explanation (1)(c) to section 92B is uncalled for. We, accordingly direct the Assessing Officer/TPO to delete the adjustment of Rs. 9,34,110/-. Ground No. 3 stands allowed. 58. Ground No. 4 is general in nature and needs no adjudication. 59. Ground No 5 has not been pressed and hence the same is dismissed as not pressed. 60. Ground No. 6 i....