TaxTMI 
TaxTMI 
2020 (1) TMI 404
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.... of (i) advertising, marketing and promotion ("AMP") expenses incurred by the Appellant and (ii) interest accrued on outstanding receivables due to the Appellant from its Associated Enterprises ("AE") alleging the same to be not at arm's length in terms of the provisions of section 92C of the Act read with Rule 10D of the Income-tax Rules, 1962 ("the Rules"). Further, the AO disallowed depreciation amounting to Rs. 2,05,26,740 as a result of reduction in the ALP of the transaction of purchase of fixed assets. GROUNDS AGAINST ADJUSTMENT MADE IN RELATION TO AMP EXPENSES 3. That on the facts and in circumstances of the case and in law, the DRP/AO/TPO have erred in holding that the AMP expenditure incurred by the Appellant in India is an 'international transaction' as per the provisions of the Act. 4. That on the facts and in circumstances of the case and in law, the DRP/AO/TPO, while making adjustments of Rs. 3,42,07,18,758 on account of AMP expenditure, erred in: a. not demonstrating the existence of an 'understanding' or an 'arrangement' or 'action in concert' between the Appellant and its AEs as regards sales promotion spe....
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....t, erred in including direct sale expenses viz. selling and distribution and sales promotion as a part of AMP expenditure while computing the adjustment. 9. That on the facts and circumstances of the case and in law, the TPO in contravention to the direction of the DRP and in violation of provisions of the section 144C(10) of the Act, erred in suo moto using indirect expenses to sales ratio while computing the AMP adjustment in the order giving effect to the DRP directions whereas the TPO himself had taken AMP / sales ratio at the time of passing the Transfer Pricing order. 10. That on the facts and circumstances of the case and in law, the AO/TPO erred in applying mark-up on the alleged incurred excessive AMP expenditure by selecting companies providing market support functions in order to determine the mark-up to be imputed on AMP adjustment. PROTECTIVE ADJUSTMENT 11. That on the facts and circumstances of the case and in law, the DRP /AO / TPO have erred in making a protective adjustment of Rs. 27,81,57,54,132 for the AMP transaction, which is impermissible under law. 12. That on the facts and circumstances of the case and in law, the DRP/A....
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....erest under Sections 234C of the Act. 19. That on the facts and circumstances of the case and in law, the AO erred in initiating penalty proceedings under Section 271(1)(c) and Section 271AA of the Act for furnishing of inaccurate particulars and concealment of income. Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant." 3. Ground Nos. 1 & 2 are comprehensive, 4. Ground nos. 3 to 13 relates to adjustment on account of advertising, marketing and promotion expenses (AMP). At the outset, it was brought to our notice by the ld. AR that the issue of adjustment on account of AMP stands covered in the case of the assessee for the assessment years 2005-06 to 2011-12 and hence, the same may please be followed. 5. On the other hand, the ld. DR relied on the judgment of ITAT in the case of BMW India Pvt. Ltd. for the assessment year 2011-12 in ITA No. 1514/Del/2016 wherein it uphold existence of international transaction of AMP-expenses for BMW India for AY 2010-11. With regarding the ld. AR's contentions that the onus is on the revenue to demonstrate existence of an International Transaction in ....
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....India and resultant profit and loss. AMP expenditure incurred is meant to aid and facilitate the main sales function. The question before us is that, whether this function can be characterized as a transaction which falls under the ambit of an "international transaction" u/s 92B of the Act. Ordinarily, AMP expenditure is manifested in the form of third-party transactions by way of payments for advertisement and brand promotion activities. These transactions cannot per se partake the character of an "international transaction" within the meaning of Section 92B unless the conditions laid down in the provision are met. Section 92B covers transactions between AEs having crossborder element (i.e., involving a non-resident). Section 92B also contemplates existence of international transactions where the parties are not related to each other and don't qualify as AEs under Section 92A of the Act. These situations are those where though in form the transaction is entered into between unrelated parties the substance of the same is governed by an understanding or arrangement between AE of one party with another enterprise. Therefore, for any transaction of AMP entered into between th....
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....idence 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 some tangible material that the two 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 activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest,....
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.... of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose." 40. Therefore, the argument advanced by the Ld. CIT (DR) that the MDF Agreement should be viewed as an evidence to demonstrate the existence of an understanding and arrangement to carry out AMP in India at the behest of the AE needs to be examined in light of the above principles laid down by the Delhi High Court. In the present facts, we find that this transaction of having received assistance /reimbursement has already been shown by the assessee in its Form 3CEB as an international transaction. It has been contended by the Revenue that by virtue of this agreement, the entire AMP expenditure incurred by the assessee should be treated as an international transaction and subject to the provisions of Chapter X of the Act. 41. We find that the Appellant-assessee has entered into an understanding with its AE in respect of a portion of the AMP expenditure by way of the MDF agreement. Under this agreement, the AE of the ass....
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....o USD 30,000,000 assigned by SEC. 4.2 DISTRIBUTOR shall submit to SEC a detailed implementation plan pursuant to the annual Marketing fund schedule in writing at least two weeks in advance of the proposed implementation date for approval of said activities. DISTRIBUTOR shall be entitled to claim a reimbursement for the expenses hereof only when execution of such activities are pre-approved by SEC in a manner stated herein. 4.3 The extent of the Marketing Fund related activities to be reimbursed shall be limited to the following: Category ACTIVITIES Advertising Broadcast media, print media, outdoor ad. Sponsor, intent ad PR Marketing infrastructure Market research, consulting, market data subscription database Other marketing infrastructure activities Promotion Sales promotion activities Dealer support activities (dealer convention, product training, incentive tour) Exhibition, trade, roadshow Sales kit and POP materials Shop display Samsung shop corner Rack & shop light box Other store display activities A perusal of the aforesaid terms of the MDF agreement shows that the reimbursement of a portion of the advertising and mark....
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....sing and marketing activities, its implementation for market penetration in India is solely carried out by the assessee and there is no material on record to infer that there is any arrangement or agreement with the AE at any point of time that assessee is required to spent on AMP or it has been done at the behest of the AE. The reason adopted by the Revenue to conclude that the incurrence of AMP expenditure by the assessee for promoting the brands which is owned by its AE constituting a separate international transaction for the purpose of Section 92B which requires separate bench marking, does not has any legs to stand, because the Revenue has failed to show the existence of any agreement, understanding or arrangement between the assessee company and AE regarding the quantum of AMP spent or it was spent on behest of AE. The TPO has not recorded or identified any such separate arrangement or agreement that AMP expenses incurred by the assessee company are in pursuance of any agreement or arrangement. It is also not the case of the Department that the expenses which has been incurred by the assessee company during the course of its business have any bearing whatsoever on any other ....
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....n reads as follows. the expression "intangible property" shall include- (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos;...................." Thus, under the expanded definition of the term 'international transaction' intangible property has been defined to include marketing related intangible assets such as trademark, trade name, brand name and logos, etc. This inter alia means that where two AEs engaged in the transaction which involved, purchase, sale, transfer, lease or use of intangibles rights then the same shall be classified as international transaction. From the above, definition, apart from transaction relating to purchase, sale or lease of tangible or intangible property, services lending or borrowing money, etc. functions having bearing on the profits, income, losses or assets is reckoned as international 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 trans....
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....ise with a third party in India for its own business purpose. Even the reimbursement, as discussed above, by the assessee to its AE was in lieu of sponsorship fee paid to ICC which again was wholly and exclusively for the assessee's own business and was not at the behest or mandate of AE. This contention of the learned counsel on the face of record is liable to be accepted and in absence of any material or any kind of arrangement discovered or brought on record by the Revenue, remains unrebutted. The onus is on the Revenue to show that the twin requirement of Section 92B exists, that is, firstly, the transaction involved was between the AE, one of which is resident and other a non-resident was involved; and secondly, the transaction of AMP expenses has taken place between the two AEs (except for reimbursement of Rs. 33.60 crore). Now 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 relev....
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.... The amounts incurred as AMP expenditure by the appellant under the MDF Agreement have already been received as reimbursement/assistance and have indisputably been disclosed as an international transaction in Form 3CEB and form part of the transfer pricing study conducted under Rule 10D. The AMP expenditure which is outside the ambit of reimbursement received under the MDF Agreement, has been incurred by the appellant on its own volition as per its own requirements and without any interference of the AE and have been paid to third parties. 44. In view of the above, we hold that the scope and value of international transaction cannot be expanded beyond the reimbursements received under MDF agreement to cover the entire gamut of AMP expenditure incurred by the assessee during the year." 7. Regarding the applicability of the Bright Line Text [(BLT) (specific grounds at 11, 12 & 13)] to determine the adjustment in the AMP expenditure has been rejected by the Hon'ble Jurisdictional High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. in Tax Appeal No. 16 of 2014. In view of the judgment of the Hon'ble High Court, we hereby hold that no International ....
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....made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. We find that the TPO held that as per the provisions any arrangement between two AEs for 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 any one or more of such enterprises is an international transaction. In this case, admittedly, the taxpayer has provided benefit to its AE by way of advancement of interest free loan in the garb of delay receipt of receivables. These funds could have been otherwise deployed for at least earning interest income. The taxpayer has therefore incurred cost in connection with a benefit and services provided to the AE by way of delay receipt of receivables. Accordingly, even otherwise the delay in receipt of receivables is an international transaction u/s 92B(1) read with clause (v) of section 92F. The DRP held that the TPO charged interest on receivables beyond 30 days. The assessee mentioned that in one of the invoices to Samsung Dubai the amount was payable within 30 to 45 days and as per the invoice to Samsung....
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....evenue, we hereby direct that the addition made be deleted. 10. Ground Nos. 16 & 17 deals with adjustment on account of disallowance of mark-up charged by the AE on the sale of fixed assets. The TPO made an adjustment to the international transaction of purchase of fixed assets and made an adjustment to the depreciation claimed on these assets on account of disallowance of the mark-up charged by the AE on sale price of fixed assets. The TPO held that the ALP of the value of the goods purchased included mark-up of 1% in most cases and 5% in one case which was not justified. The DRP upheld the adjustment proposed by the TPO and held that the disallowance should be limited to the actual mark-up charged by the AEs. The ld. AR argued that mark-ups charged were already benchmark using TNMM through a combined transaction approach under manufacturing segment in TP documentation. 11. Heard the arguments of both the parties and perused the material available on record. 12. Regarding the mark-up, the IPC division charged not more than 1% on the procurement cost of fixed asset by the IPC division from the third party and iMarket Korea Inc. charged a mark-up of 5% of un procurement cos....