TaxTMI 
TaxTMI 
2020 (1) TMI 82
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....61 ("the Act") is bad in law and erroneous, which was relied upon by the Ld. AO and Hon'ble DRP while passing the order under section 144C(1) of the Act. 3. That the Ld. AO/ Ld. TPO/ Hon'ble DRP erred on facts and in law in not appreciating that the comparables selected by the Appellant in its transfer pricing documentation are functionally comparable with the distribution activity undertaken by the Appellant. 4. The Ld. AO/ Ld. TPO/ Hon'ble DRP has erred in including Liva Healthcare Ltd. in the final comparable set as the said comparable fails the related party to sales filter of 25%. 5. The Ld. AO/ Ld. TPO/ Hon'ble DRP erred in including certain non-operating expenses and" excluding operating income for the purpose of computing the operating margin of the Appellant. 6. The Ld. AO/ Ld. TPO/ Hon'ble DRP erred in considering the Transactional Net Margin Method ("TNMM") as the most appropriate method and disregarding the Resale Price Method ("RPM") to benchmark the distribution activities of the Appellant. 7. The Ld. AO/ Ld. TPO/ Hon'ble DRP erred in not including subvention income as part of operating income or deducting subvention income....
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....urred by the Appellant are for the purpose of the business of the Appellant and have not been incurred to enure any benefit to the associated enterprise. 17. That the Ld. AO/ Ld. TPO/ Hon'ble DRP erred on facts and in law in not appreciating that the AMP expenses are incurred by the Appellant at its own volition and for its own benefit and any benefit accruing to the associated enterprise is incidental for which no compensation is warranted. 18. That the Ld. AO/ Ld. TPO/ Hon'ble DRP have disregarded the judicial pronouncements in India in undertaking the TP adjustment. Corporate tax issues 19. That the Ld. AO erred on facts and in law, in proposing to disallow depreciation amounting to Rs. 3,12,061 out of the total depreciation claimed by the Appellant on account of UPS, computer cables & wirings etc. 20. That the Ld. AO/ Ld. TPO/ Hon'ble DRP have disregarded the judicial pronouncements in India in disallowing depreciation. Other Grounds 21. The Ld. AO/Hon'ble DRP has erred both on facts and in law in initiating the penalty under section 274 read with section 271(1)(c) of the Act. 22. The Ld. AO/Hon'ble DRP has....
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.... to the product, was held to be not correct. The TPO analyzed the segment on net basis and observed that the assessee was incurring losses. He further observed that in case the subvention income was not considered as operating then the results were even worse. Show cause notice was issued to the assessee in this regard and it was pointed out that the analysis done by assessee at gross level was not reliable; even the comparables used by using multiple year data to benchmark the international transactions of trading in medicine and drugs, was not accepted by the TPO. The TPO also noted that the assessee had incurred significant advertisement, marketing and promotion expenses in order to develop the brand of its AE. The TPO thus observed that the assessee could be characterized as a distributor undertaking significant functions and value additions. Accordingly selection of RPM as the most appropriate method to benchmark the international transaction was not the correct approach. Hence the assessee was asked to explain why net level analysis should not be done. The assessee in reply submitted that under the TP regulation, the selection of most appropriate method was generally based on....
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.... scope of AMP functions to be performed by the assessee, as understood by the assessee and its AE, the TPO noted that the assessee had incurred expenditure of Rs. 24.13 Crores on sales and marketing team and Rs. 57.84 Crores on marketing, development and promotion. The TPO was of the view that the marketing expenditure incurred by it was part of brand building expenses. He further applied the Bright Line Test and was of the view that the issue of marketing intangible falls squarely within the definition of transaction as per section 92F(v) of the Act. Further relying on the explanation on (i)(a) under section 92B of the Act inserted by Finance Act, 2012, the TPO observed that the assessee had used intangible property and therefore expenditure incurred towards promotion of marketing intangible was an international transaction. Since the aforesaid expenditure on AMP was incurred to promote brand name "MSB", which was owned by the AE, such expenditure thus resulted in the brand building and the same had to be benchmarked as an international transaction. It was observed that where the expenditure incurred by the assessee company was for the international transaction of its AEs, since t....
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....ake the doctors prescribe the drug, the assessee had to make them aware of composition of the drug, so that the drugs could be sold in India. It was further pointed out that the expenditure on the sales and marketing team of Rs. 24.13 Crores, was expenditure on the personnel of the assessee, would not in any way promote the business of the AE; but these were the direct expenses of the assessee, incurred as regular distributor. Referring to para 6.2 onwards of the order of the TPO, it was pointed out that the Bright Line Test was applied and also explanation under section 92B inserted by Finance Act, 2012 was applied, to benchmark the aforesaid transaction as international transaction. The learned AR for the assessee stressed that the transaction undertaken by the assessee was not international transaction and the reliance of the AO on different decisions of the Tribunal was misplaced, especially because of the decision of Hon'ble Delhi High Court in the Maruti Suzuki India Ltd. vs CIT (in short "Maruti Suzuki") in ITA No.110/2014 order dated 11.12.2015 [2015] 64 taxmann.com 150 (Del.) and Sony Ericsson Mobile Communications India (P.) Ltd. vs CIT-III (in short "Sony Ericsson") [201....
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....ld not be camouflaged as direct selling expenses. He further pointed out that in Sony Ericsson (supra) Bright Line Test has been negated but Bright Line Test was only a statistical tool to estimate the routine expenses incurred for building brand and the method to be applied was cost plus method. 11. We have heard the rival contentions and perused the record. The issue which needs to be adjudicated is whether the AMP expenditure incurred by the assessee on sales plus marketing Team of Rs. 24.13 crores and Marketing, Advertisement and Promotion expenses of Rs. 57.84 crores, is an international transaction and benchmarking of the same is to be carried out by treating it as an international transaction. The assessee was the subsidiary of its foreign AE and was dealing in finished good pharmaceuticals i.e. Anti Diabetics Drugs and also Thereupatic and critical care drugs. The case of the assessee was that for sale of the drugs, no advertisement can be made. The expenditure which was booked under the head AMP was the direct selling expenses incurred by the assessee in order to increase awareness of the drugs and thus promote the sales of the said drug. In order to benchmark the sa....
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....needs of the assessee and is to be allowed as revenue expenditure. Accordingly, we direct the Assessing Officer to allow the expenditure of Rs. 24.13 crores. 13. Now, coming to the 2nd set of expenditure of Rs. 57.84 crores booked under the head Advertising, Marketing and Promotion (in short "AMP"). The assessee claims that since it was dealing with only specialized drugs, which were imported by the assessee form its AE and distributed within the territory of India, then it was incumbent upon the assessee to spread awareness of the contents/formulations of the drugs dealt in by the assessee. It was dealing in specialized drugs i.e. anti-daibatic drugs and thereupatic drugs. Under the domestic laws, no advertisement of the said drugs could be made in India. The expenditure incurred for promoting the sales of the aforesaid drugs thus could not be benchmarked as an AMP expenditure. The case of the Revenue was that the expenditure booked by the assessee being AMP expenditure resulted in promotion of brand of Assessing Officer, was an international transaction undertaken by the assessee and consequently BLT was applied to benchmark the said transaction. The Assessing Officer ackno....
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....Act, 1961? (iii) Whether under Chapter X of the Income Tax Act, 1961, a transfer pricing adjustment can be made by the Transfer Pricing Officer/ Assessing Officer in respect of expenditure treated as AMP Expenses and if so in which circumstances? (iv) If answer to question Nos.2 and 3 is in favour of the Revenue, whether the Income Tax Appellate Tribunal was right in holding that transfer pricing adjustment in respect of AMP Expenses should be computed by applying Cost Plus Method. v) Whether the Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by the Transfer Pricing Officer by applying the parameters specified in paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd.?" 17. The Hon'ble Delhi High Court in later decision decided on 11.12.2015 in the case of Maruti Suzuki (supra) vide para 29 has summarized conclusion of the Division Bench of Sony Ericsson (supra) as under:- (i) "The Court concurred with the majority of the Special Bench of the ITAT in the LG Electronics case qua the applicability of 92CA(2B) a....
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....n to make a comparison of a horizontal item without segregation would be impermissible. (viii) The Bright Line Test was judicial legislation. By validating the Bright Line Test the Special Bench in LG Electronics Case went beyond Chapter X of the Act. Even international tax jurisprudence and commentaries do not recognise BLT for bifurcation of routine and non-routine expenses. (ix) Segregation of aggregated transactions requires detailed scrutiny without which there shall be no segregation of a bundled transaction. Set off of transactions segregated as a single transaction is just and equitable and not prohibited by Section 92(3). Set-off is also recognized by international tax experts and commentaries. (x) Segregation of bundled transactions shall be done only if exceptions laid down in the EKL Appliances Case are justified. Re-categorisation and segregation of transactions are different exercises; former would require separate comparables and functional analysis. (xi) Economic ownership of a brand would only arise in cases of long-term contracts and where there is no negative stipulation denying economic ownership. Economic ownership of a brand....
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.... be contrary to common sense and would be highly exaggerated. Direct marketing and sale related expenses or discounts/concessions would not form part of the AMP expenses. (xvii) The prime lending rate cannot be the basis for computing mark-up under Rule 10B(1)(c) of the Rules, as the case set up by the Revenue pertains to mark-up on AMP expenses as an international transaction. Mark up as per sub-clause (ii) to Rule 10B(1)(c) would be comparable gross profit on the cost or expenses incurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. (xviii) The exceptions laid down in EKL Appliances Case were neither invoked in the present case nor were the conditions satisfied. (xix) An order of remand to the ITAT for de novo consideration would be appropriate because the legal standards or ratio accepted and applied by the ITAT was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. The ITAT, in the first i....
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.... before them, where the very existence of international transaction was in issue. The case of the appellant therein was that the Revenue had failed to show the existence of any agreement, understanding or arrangement between Maruti Suzuki and its AE regarding the AMP spend. Further, case was that BLT was applied to the AMP spend by Assessing Officer/TPO to (a) decide the existence of an international transaction involving; and (b) to make quantitative adjustment to the Arm's Length Price to the extent that the expenditure exceeded the expenditure by comparable entities. Another aspect which was pointed out was that in Sony Ericsson (supra) where the Hon'ble High Court disapproved the BLT as a legitimate means for determining the Arm's Length Price of an international transaction involving AMP expenses, then there was no case of the revenue. The Hon'ble High Court in Maruti Suzuki (supra) vide para 47 held as under:- 47. "As regards the submission regarding the BLT having been rejected in the decision in Sony Ericsson is concerned, the Court notes that the decision in Sony Ericsson expressly negatived the use of the BLT both as forming the base and determining if....
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....n the Act with the whole new scheme of provisions concerning transfer pricing in the form of Sections 92B to 92F. 59. Nevertheless, there is no specific mention of AMP expenses as one of the items of expenditure which can be deemed to be an international transaction. For this purpose, Section 92B(1) read with Section 92(1) becomes significant. Under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are nonresident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or 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. 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, b....
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....or SMC for the purposes of promoting the brand of SMC." 22. The Hon'ble High Court then took note of the provision of Chapter X of the Act and answered the question "whether there is any machinery provision for determining the existence of an international transaction involving AMP expenses" and observed as under:- Absence of a machinery provision 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only 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 t....
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....ernational 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." 24. The Hon'ble High Court in Maruti Suzuki (supra) concluded by holding as under:- 71. "Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, 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. 72. As rightly pointed out by the Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of th....
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....n'ble High Court also held as under:- 43. "As regards allowing the entire expenditure under Section 37 of the Act, there is an obvious contradiction which was attributed to be resolved by the ITAT in the impugned order by asking the TPO to rework the AMP expenses into that which was incurred for building the brand of the foreign AE and that which was incurred wholly or exclusively for the benefit of the WOIL. In Sony Ericsson (supra) this was sought to be explained by stating that Section 37 and Chapter X operate in different domains and merely because an expense was incurred wholly or exclusively for the Indian entity it would not mean that it is also not incurred for the foreign AE. The question then is to what extent the Indian entity should be compensated for the expenses incurred by it on behalf of the foreign AE. What will then be required to be benchmarked is not the AMP expenditure but the extent to which the Indian entity must be compensated. ..................... 45. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make it explicit that in the absence of any machinery provisi....
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....nses to promote the brand of the AE and in the absence of the same, no functional transaction can be said to exist. 29. Such is the proposition laid down in Casio India Co.(P.) Ltd. (supra). It may be pointed out herein itself that the concern Casio Ltd. was marketing the casio products in India, which were manufactured by its parent company and was acting as an independent distributor of the Casio products. 30. Before parting we may also refer to the stand of the Ld. DR before us that the Hon'ble Delhi High Court in Sony Ericsson (supra) had laid down the proposition that incurrence of the AMP expenditure in respect of brand not owned by the assessee was to be treated as an international transaction. The Hon'ble Delhi High Court in the case of Maruti Suzuki (supra) explained the ratio laid down in Sony Ericsson (supra) and has not accepted the said proposition and has also observed that BLT has not been accepted in Sony Ericsson (supra) and in the absence of application of BLT to arrive at arms length price, the incurring of AMP expenditure cannot be said to be an international transaction. The Ld.DR for the Revenue relied on the several decision of Delhi Tribunal in support....
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....e on account of AMP expenditure. 32. In the facts of the present case, the Assessing Officer/DRP/TPO have given a finding that there was no arrangement between the assessee and its AE, as far as incurring of AMP expenditure was concerned. However, the Assessing Officer/DRP/TPO observed that the AMP expenditure was an international transaction which had not been benchmarked by the assessee, which needed to be benchmarked and he goes on to determine the price of the said transaction by applying BLT. In the facts before us, we hold that the expenses which were booked by the assessee were for promotion of drugs, which undoubtedly have been imported by the assessee from its AE, but while spreading awareness to promote its sales, it cannot be said, in the absence of any agreement or arrangement to the contrary, that the assessee was promoting the brands of its AE. Since the expenditure incurred by the assessee was neither incurred at the instance or behest of its AE nor there was any understanding or arrangement between the parties to allocate or contribute any part of the expenditure or towards reimbursement of any part of AMP expenditure, then no transaction or international transac....
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....ich resulted in value addition and because of the same, RPM could not be held to be correct method. The Ld.AR for the assessee before us has relied on the following decisions:- (i) ACIT vs Kobelco Construction Equipment India Ltd. [2017] 81 taxamnn.com 31 (Delhi-Trib.); (ii) M/s. Celio Future Fashion Pvt.Ltd. vs ACIT ITA No.1928/Mum/2016(Mum.-Trib.) order dated 15.03.2019 35. The Ld.DR for the Revenue on the other hand placed strong reliance on the orders of the authorities below and pointed out that under RPM, there was requirement of high level comparability, whereas under the Transactional Net Margin Method there was tolerance range. 36. We have heard the rival contentions and perused the record. For deciding the aforesaid issue raised by the assessee under the distribution segment, we may refer to our decision in the paras above, wherein we have held that the expenditure incurred on promotion, advertisement and marketing by the assessee is not an international transaction to be benchmarked in the hands of the assessee. The case of the Assessing Officer/TPO in this regard was that since the assessee while undertaking the activities of the distribution ....
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.... non-operating income, for the purpose of computation of PLI. It was also observed by the Assessing Officer vide para 5.35 at page 26 of the TPO's order that if the shortfall in the revenue of the assessee is compared vis-à-vis the subvention payment of Rs. 77.12 crores, there was still shortfall of Rs. 1.14 crores. Accordingly, he proposed to enhance the income of the assessee by Rs. 19.27 crores. The said adjustment was made by the Assessing Officer in the draft assessment order and objections were rejected by the DRP and final assessment order was passed against the assessee. The assessee has raised Ground of appeal No.7 with regard to non-inclusion of subvention income as part of operating income. 38. The assessee has also raised additional grounds vis-à-vis the decision of the Assessing Officer/TPO on reliance of Safe Harbour Rules. 39. We have heard the rival contentions and both the authorized representatives. First of all the issue relates to the subvention income received by the assessee amounting to Rs. 77.12 crores. As per the understanding between the parties vide clause 5 to schedule (A) of the sales agreement between MSD India and MSD BV, it was....
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.... is raised on without prejudice basis vide ground of appeal No.11 is whether the said subvention amount is operating in nature and the same has to be includable as receipt in the hands of assessee while computing PLI for the year under consideration. The assessee was a subsidiary of Nalco, USA and since it was incurring losses, the parent company allowed promotional allowance to prevent the assessee from becoming sick company. This is evident from the Memo placed at page 139 of Paper Book and also from consequential Memo for approval of subvention and relevant e-mails and relevant documents thereto. The assessee received sum of Rs. 65,19,47,000/- towards subvention. The assessee had offered the said amount as taxable in its hands initially but before the DRP, it was pleaded that the same was not taxable in its hands. The issue vis-à-vis its taxability i.e. receipt of subvention from parent company now stands settled by recent decision of Hon'ble Supreme Court in Siemens Public Communication Network (P.) Ltd. Vs. CIT (supra). The Hon'ble Supreme Court had held that voluntary payments made by parent company to its loss making Indian company can also b....
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..... Such onetime payment received by assessee is thus, operating in nature. The learned Authorized Representative for the assessee had pointed out that the subvention amount related to two years. We hold that amount relatable to the year, need to be considered for computing PLI of the assessee. We direct the Assessing Officer to carry out the said exercise. As far as reliance on the decision of Mumbai Bench of Tribunal in the case of UPS Jetair Express Pvt. Ltd. (supra) is concerned, wherein the proposition laid down was since the subvention income had been offered to tax, then the same would be available to the assessee for set off against TP adjustment proposed by TPO. The said proposition will not be applicable to the issue raised before us since the Hon'ble Apex Court has decided the taxability of subvention income to be capital in nature and hence, the said income is not taxable in the hands of assessee and same would not be available as set off as against TP adjustment made by Assessing Officer/TPO. Accordingly, there is no merit in the directions of DRP in this regard. We in the final analysis hold that subvention income is capital receipt in the hands of assessee, hence not t....