TaxTMI 
TaxTMI 
2019 (4) TMI 1774
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.... CASIO products in India manufactured by its parent company and is acting as an independent distributor of CASIO products. During the year, assessee has undertaken the following international transactions as reported in TP study report: - Sl. No Type of International Transaction Total value of Transaction (INR) Method Selected 1. Purchase of finished goods 82,17,04,260/- TNMM using operating Profit/Operating Revenue as a PLI. 2. Purchase of spare parts 29,04,040/- 3. Receipt of product guarantee fee 85,01,083 4. Receipt of Global SMS Modification Fee 28,54,895/- 5. Provision of customer support services 50,65,985/- TNMM using operating Profit/Operating cost as a PLI 6. Reimbursement of Expenses 31,79,549/- No Benchmarking required. 3. Ld. TPO noted that the assessee has incurred AMP expenditure of Rs. 7,49,01,076/- which has not been separately benchmarked. According to him, such an AMP expenses has led to building of the brand value "CASIO" which has benefitted the parent company who owns the brand. He further noted that in the past assessment years, the assessee us....
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.... under: - "The bright line concept applies regardless of the functional profile of the assessee. The rationale underlying the concept is simply to determine what is the excessive marketing spend over and above the comparable who are not promoting any brand. The excessive marketing spend leads to creation of a marketing intangible for the overseas AE for which the assessee should also be remunerated on an arm's length basis, regardless of its functional profile. This requires the reimbursement of the AMP spend with an appropriate mark-up to the assessee since the assessee has created marketing intangible for the overseas AE. Hence, whether the assessee is a low risk distributor or a full risk bearing entity, it does not matter inasmuch as regardless of the same, the assessee needs to be compensated for its marketing efforts. The assessee has argued that application of the bright line concept would result in a compensation for non-performance where the sales do not increase but high AMP expenditure is incurred (thereby leading to a high AMP/ sales ratio). Here, I wish to highlight that the assessee has not correctly appreciated the concept of bright line test. For a....
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....efore, no separate benchmarking is not required as such an higher expenditure is subsumed in the higher profit margin. After detailed discussion, TPO held that AMP has to be determined in accordance with Bright Line Test and after analysing the various comparable companies, he applied Bright Line margin of 3.62% based on certain comparables and made following adjustment:- Particulars Value (Rs.) Value of gross sales of Casio India 130,16,28,045 Arithmetic mean of AMP/Sales of comparables 3.62% Amount that represents 'Bright Line' 4,71,18,935/- Expenditure incurred by Casio India on AMP 7,49,01,076/- Expenditure in excess of 'Bright Line' that ought to have been received by Casio India as a compensation 2,77,82,141/- 6. Thereafter, he also applied further mark up of 14.88% of 41,33,983/- and finally made adjustment of Rs. 3,19,16,124/. 7. The DRP has also taken note of the finding and observation of the TPO that there was an agreement between the assessee and M/s. CASIO Computer Ltd., Japan (AE) in the earlier years whereby AE was outsourcing the advertisement function to the assessee and for this purpose AE was paying special promotion subs....
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....ter referred as the SECOND PARTY) has exclusive rights for the sale of all the products with the trade mark of CASIO COMPUTER CO., LTD(Herein after referred as THE PRODUCTS and FIRST PARTY respectively) in India (hereinafter referred as TERRITORY). Second party as the exclusive sales company in the territory market, shall put the best efforts to expand the business of the products in territory market: for the first party, and for aforesaid purpose provide the necessary maximum information to the first party and contribute to the first party's decision of business strategy, and the second party shall put the best efforts to expand and strengthen own business set up. (Bold portion - Emphasis Supplied) Second party as an Indian company, shall strengthen the autonomous independent management system, and shall remain aware about the responsibility of contributing to Indian society, and for aforesaid purposes, gain the necessary profits and work on to strengthen the marketing and distribution channel set ups to gain the necessary profits. The first party to gain the wide recognition and increase the value of its products and the registered trade mark, shall carry out general....
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....also there was a clear display of CASIO Logo and prominently which leads to enhancement of CASIO brand in carrying out AMP expenses. 9. The DRP has also rejected the assessee's contention that AMP is covered by TNMM and it has higher profit margin on OP/sales which was at 13.11% and same was much more than the comparables. The reason for such rejection was that the assessee has failed to substantiate that it was compensated on account of discharge of AMP services and such compensation is reflected by way of higher profit margin of the assessee. The pricing policy also does not include compensation to the assessee on account of AMP. After detailed discussion, DRP held that neither the Indian transfer pricing law nor the international practice supports the simultaneously benchmarking of ALP of different transactions. 10. The DRP also rejected the search process of the comparables conducted both by the assessee as well as by the TPO and observed that in absence of any details provided by the assessee with regard to the price details on which the assessee has sold to the third in India or abroad, internal CUP cannot be worked out. The DRP then further carried out its own search p....
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....sp; 2.94 -1.23 11.28 1.62 11. However, after detailed discussion, the DRP observed that Bright Line Test is nothing but CUP method used by the TPO for determination of the ALP on AMP services and upheld BLT for benchmarking the AMP expenditure to justify TP adjustment. 12. Further on the issue of applying of mark up of 14.88%, DRP directed the TPO to quantify the amount of AMP service charges receivable by the AE ad apply a rate equal to the base rate of SBI to the Financial Year under consideration and apply at 150 base point. 13. Regarding TPO's action in holding sales relating to expenses, namely, trade discounts, commission etc as part of AMP expenditure, the DRP has upheld the same on the ground that the decision of the ITAT Special Bench in the case of LG Electronics Pvt. Ltd. (supra) is pending before the Hon'ble Delhi High court. DECISION 14. We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material referred to before us. The assessee had carried out various international transactions with the AE lik....
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.... Article 2: Indemnification In any case, CASIO INDIA will indemnify and hold CASIO harmless from any and all damages and expenses occurred to CASIO in connection with any claim or suit brought against CASIO alleging infringement of third party. Article 3 Payment and Subsidy Amount Casio shall pay to Casio India the expenses only after Casio receives the evidence. However, Casio's payment to Casio India shall not exceed JPY 7,000,000 (say Japanese Yen seven million only). Casio India shall invoice Casio not later than 30th September, 2007 to comply with the fiscal year end accounting purpose of Casio. Article 4: Period Promotion under this agreement must be carried out strictly in the period starting 25 day of April, 2007 and ending by 30the September, 2007. Casio shall be exempted from payment for promotion executed before and/or after this period. Article 5: Evidence Casio shall be exempted from payment of the agreed amount unless such evidence as described below are completely presented to CASIO. 1) Invoice to CASIO duly signed by CASIO INDIA. 2) Copies of corresponding invoices to concerne....
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....TPO has brought sufficient material on record to justify that the assessee has entered into the exercise of development of marketing independently by its AE by incurring AMP expenditure. Such an inference is purely based on surmise dehors any material on record. The assessee had furnished all the advertisement material before the TPO which has also been acknowledged by him and the DRP has wrongly held that no such material was filed before the TPO. Even from bare perusal of the MOU dated 01.07.2009 noted by the DRP, nowhere it is borne out that the assessee has to carry out AMP functions either at the behest of the AE or providing any kind of benefit to the AE. It only highlights that the assessee shall put best effort to expand the business of the product in the territory market and to co-operate AE by providing necessary information and opinion of the activities carried out in its territory. In fact from the said MOU, it is clearly borne out that all the necessary advertisement and promotional activities is done by the assessee on its own cost. Thus, it cannot be held that incurring of AMP expenses for promotion of sale by the assessee company was to provide any kind of benefit t....
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.... the assessed raised the aforesaid argument, they accept that the declared price of the international transaction included the said element or function of AMP expenses, for which they stand duly compensated in their margins or the arm's length price as computed. 53. We also fail to understand the contention or argument that there is no international transaction, for the AMP expenses were incurred by the assessed in India. The question is not whether the assessed had incurred the AMP expenses in India. This is an undisputed position. The arm's length determination pertains to adequate compensation to the India, AE for incurring and performing the functions by the domestic AE. The dispute pertains to adequacy of compensation for incurring and performing marketing and 'nonroutine' AMP expenses in India by the AE. The expenses incurred or the quantum of expenditure paid by the Indian assessee to third parties in India, for incurring the AMP expenses is not in dispute or under challenge. This is not a subject matter or arm's length pricing or determination." 17. Considering the above positions of law, it is clear that AMP expense incurred by the assessee is an international ....
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....facts and contentions raised by the parties, we find that both TPO and ld. DRP have ultimately benchmarked the AMP expenditure by applying Bright Line Test, willfully relying upon the decision of Special Bench in the case of LG Electronics India Pvt. Ltd. vs. ACIT, 140 ITD 41, wherein this approach was upheld. However, subsequently the Hon'ble Delhi High Court in the case of Sony Ericson Mobile Communication India Pvt. Ltd. (supra) categorically held that BLT was not a valid test for determining the ALP transaction as it was not statutorily mandated. Later on, the Hon'ble Jurisdictional High Court has expanded this jurisprudence in other cases like Maruti Suzuki India Ltd, Whirlpool India Ltd.; and Bausch & Lomb Eyecare (India) Pvt. Ltd. (supra). The distinction has been sought to be drawn by the ld. CIT-DR that the judgment of Sony Ericson was with regard to the batch of appeals dealing with the assessee who were distributors and subsequent judgments dealt with manufacturers who were operating as risk bearing entities. Here, in this case, the assessee undisputedly is an independent distributor whereby it was purchasing finished goods and spare parts from its AE and selling....
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.... of products sold to customers in India are: * Product margins (various pricing structures, rebates, bundled products etc.); * Sales volume; * Market share * Strategic segmentation, level of competition and channel capability. * Determining the level of rebates provided to customers is also the responsibility of Casio India. Sales * The sales function refers to all activities associated with direct customer contact and negotiations to bring at cut purchases by the customer of the firm s products. * Casio India employs a sales force that is responsible for both identifying and developing new business opportunities and maintaining the existing customer base in India. The sales force is also responsible re-negotiating with customers in relation to product purchases and pricing. Casio India sets sales forecasts any sales targets on an annual basis to assist in the product planning and budgeting process. Distribution Channel * Distribution networks enable the firm to locate customers, determine their needs and provide services or products to meet those needs. * Casio India determines the d....
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....iness risk. Inventory Risk * This risk relates to the potential for losses associated with carrying product or component inventory. Losses include obsolescence, shrinkage, or market collapse such that products are only saleable at prices that are inadequate to cover product costs. * Casio India is responsible for storage of imported finished goods and spares and subsequently for sale of these goods. Thus, the inventory risk is borne by Casio India. However, for sales made to Casio India, Casio Japan maintains certain inventory and thus bears the associated inventory risk. Scheduling Risk * Scheduling risk relates to the uncertainty involved in scheduling import of finished goods in respond m unpredictable fluctuations in demand. Scheduling risk is of particular concern for companies with highly volatile demand or demand that is extremely sensitive to timing of product delivery. * Casio India would primarily bear the scheduling risk as it would enter into contract with customers. Casio India would place the order on the AE along with delivery schedules. While the AE would be responsible to meet TC orders provided by Casio India w....
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....cannot be inferred that AE has any role for sales and marketing in India or assessee is carrying out sales or marketing at the behest of AE or for its own benefit. Now we have to see that under the facts and circumstances of the case and on FAR analysis, is incurring of AMP expenditure is an international; transaction within the ambit of the Act. 21. Section 92B defines the international transaction in the following manner: - "(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 enter....
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....al transaction. Besides this, if such a transaction is based on any mutual agreement or arrangement between the AEs for allocation or any contribution to any cost or expenditure incurred or to be incurred for the benefit, service or facility, then also such an agreement or arrangement is treated as international transaction. Clause (v) of Section 92F reads as under: "92F (v). "transaction' includes an arrangement, understanding or action in concert, - (A) Whether or not such arrangement, understanding or action is formal or in writing; or (B) Whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings." This definition of transaction has to be read in conjunction with the definition given in section 92B, which means that the transaction has to be first in the nature given in Section 92B (1); and then when such transaction includes any kind of arrangement, understanding or action in concert amongst the parties, whether in writing or formal, then too it is treated as international transaction. Here the conjoint reading of both the sections lead to an inference that in order to characterized as international....
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....erstanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that the two parties have "acted in concert"". (Paras 34- 35). (c) The Court cited the Supreme Court decision of Daichi Sankyo v. J. Chiguripati (Civil Appeal No. 7148 of 2009) to emphasize that "action in concert" would necessarily entail a "shared common objective or purpose" between two or more persons. In the absence of such shared objective or purpose, no presumption of a transaction can be made. (d) As regards the onus to show the application of TP provisions, the Court held that "initial onus is on the Revenue to demonstrate through same tangible material that the no parties acted in concert and further there was an agreement to enter into an international transaction concerning AMP expenses". (Para 37). (e) As regards the presumption for imposing a transfer pricing adjustment in relation to AMP, the Court held that "37. The provisions under Chapter X do envisage a 'separate entity concept'. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the a....
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....business purpose. As stated above, it has been well settled by the Hon'ble Jurisdictional High Court in the case of Maruti Suzuki India Pvt. Ltd. (supra) that onus is upon the Revenue to demonstrate that there existed an arrangement between the assessee and its AE under which assessee was obliged to incur excess amount of AMP expenses to promote the brands owned by the AE. The relevant observation and the finding of the Hon'ble High Court in paragraph 60 reads as under: "60......Even if the 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, income 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 SMC...... 61......Even if the word 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it still incumbent....
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....lving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson Mobile Communications India (P.) Ltd. (supra) having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated." "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead ....
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....e transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus, for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP. 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' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. 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 ....
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....ompute 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. The argument and reasoning in paragraph 17.6 in a way loses focus on the main issue and controversy; whether the arm's length price fixed between the two AEs is adequate and justified and would have been paid if the transaction was between two independent enterprises. The two independent enterprises must be two unrelated parties having no connection. It does not matter whether the comparables are domestic enterprises or not. However, and it is manifest that the comparable s....
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....us, form the plain reading of the aforesaid principles laid down by the Hon'ble Jurisdictional High Court, the key sequitur is that: (i) International transaction cannot be identified or held to be existing simply because excess AMP expenditure has been incurred by the Indian entity. (ii) International transactions cannot be found to exist after applying the BLT to decipher and compute value of international transaction. (iii) There is no provision either in the Act or in the Rules to justify the application of BLT for computing the Arm's Length Price and there is nothing in the Act which indicate how in the absence of BLT one can discern the existence of an international transaction as far as AMP expenditure is concerned. (iv) Revenue cannot resort to a quantify the adjustment by determining the AMP expenses spent by the assessee after applying BLT to hold it to be excessive and thereby evidencing the existence of the international transaction involving the AE. 26. Another key contention of the department, especially by the DRP has been that, by way of an advertisement where there is a display of 'CASIO' Logo which needs to enhancement of....
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....ided on 12th February. 1970 in Khushal Khenger Shah v. Mrs. Khorshedbanu. Dabrtda Boa mala, to describe 'goodwill', can be adopted to describe a brand as an intangible asset being the whole advantage of the reputation and connections formed with the customer together with circumstances which make the connection durable. The definition given by Lord McicNaghten in Commissioner of Inland Revenue v. Muller & Co' & Margarine Ltd. [1901] 217 AC 223 can also be applied with marginal changes to understand the concept of brand. In the context of 'goodwill' it was observed: "It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is bought and sold every day. It may be acquired. I think, in any of the different ways in which property is usually acquired. When a tan has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will - of course, under the conditions attaching to property of that nature..... What is good-will? It is a thing very easy to describe very difficult to define. It is the benefit and advantage of the good name, reputation,....
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....t leaders. Brand value, therefore, does not represent trademark as a standalone asset and is difficult and complex to determine and segregate its value. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. 106. Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. There are a good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also cases where in spite of extensive and large scale advertisements, brand values have not been created. Therefore, it would be erroneous and fallacious to treat brand building as counterpart or to commensurate brand with advertisement expenses. Brand building or creation is a vexed and complexed issue, surely not just related to advertisement. Advertisements may be the quickest and effective way to tell a brand story to a large audience, but just....
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....would lead to difficulty and unforeseen tax implications and complications. Tata. Hero. Mahindra. TVS. Bajaj. Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of brand names. They incur substantial AMP expenditure. If we apply the 'bright line test' with reference to indicators mentioned in paragraph 17.4 as well as the ratio expounded by the majority judgment in L.G. Electronics India (P) Ltd case (supra) in paragraph 17.6 to bifurcate and segregate AMP expenses towards brand building and creation, the results would be startling and unacceptable. The same is the situation in case we apply the parameters and the 'bright line test' in terms of paragraph 17.4 or as per the contention of the Revenue, i.e. AMP expenses incurred by a distributor who does not have any right in the intangible brand value and the product being marketed by him. This would be unrealistic and impracticable, if not delusive and misleading. (Aforesaid reputed Indian companies, it is patent, are not to be treated as comparables with the assessed, i.e. the tested parties in these appeals, for the latter are not legal owners of the brand....
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.... be treated as separate international transaction which needs separate benchmarking and accordingly we delete the entire AMP adjustment made by the Assessing Officer. 30. The next issue raised in assessee's appeal is with regard to bad debts of Rs. 3,86,63,023/-, 31. The brief facts emanating from the impugned orders are that, assessee-company was initially named as "Casio Bharti Mobile Communications Limited" with the sole motive of doing pager business in India. However, in view of the adverse scenario of the pager business in India, Casio India has discontinued the Pager business; owing to which, there were outstanding dues pertaining to Pager business and the same had been appearing in the books of accounts of Casio India since FY 2001-02. Despite numerous attempts by Casio India to recover the said amount of debts via legal notices, recovery suits and other legal actions, most of these companies either gone under liquidation or were declared dormant for which reference was made to Items 16A to 16E of the paper-books being reports on the same by the Registrar of Companies, NCT of Delhi. Subsequently, on the basis of the observations made by the Statutory Auditors, the afo....
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....tted where the provision for doubtful debts created during the year of Rs. 6,91,84,545/- have been added to income and finally business loss of Rs. 1,11,62,127/- computed. Further the item 'other income' for assessment year 2010-11 contains a sub item 'provisions no longer required written back of Rs. 5,96,96,810/-, the break-up of which is as under: Expense for which the provision is written back Amount (in Rs.) Amount of Tax Audit Fees for FY 2008-09 5,929 Amount of 10A Audit Fees for FY 2008-09 7,170 Provision for Special Additional Duty Refund for February and March 2008 5,120 Provision for Watch Scheme 6,04,816 Expense Wrongly booked (698) Provision for doubtful debts 4,36,84,216 Interest paid u/S 234C of the Act incorrectly booked as advance tax (21,201) Provision for Income Tax provided in FY 2005-06 to FY 200809 reversed as MAT credit has been taken 1,50,51,413 Transfer of excess credit balances in project expenses 2,10,987 Provision for other miscellaneous expense 1,49,058 Total 5,96,96,810 The DRP, on one hand held that addition of Rs. 4,36,81,216/- should be deleted, because there was no impact on....
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....ng for a long period pertaining to aforesaid five entities, the details of which has been incorporated above. 35. Before us, the ld. counsel has also filed copy of ledger account of these parties right from the financial year 1998-99 onwards. Since assessee has credited other items the details of which has been incorporated by the DRP as reproduced above and net debt was claimed in the return of income. This amount of Rs. 3,86,63,023/- ostensibly is part of the same amount of Rs. 4,36,84,216/- which was actually in the nature of bad debt and has been written off in the books of account. Thus, all the conditions laid down for claiming of bad debt in accordance with Section 36(1)(vii) stands duly satisfied; and we find no reason as to why the Assessing Officer has made the disallowance, when assessee has produced all the copy of ledger account which contains amount taken as sales in the earlier years and same has been written off in this year. Accordingly, the addition on account of bad debt is directed to be deleted. 36. Coming to the Revenue's appeal, only ground raised is against the direction of the DRP for allowing the deduction u/s.10A. 37. The facts in brief are th....