TaxTMI 
TaxTMI 
2020 (4) TMI 26
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....tion 92B of the Income-tax Act, 1963 ('the Act'). The Ld. AO / TPO erred in presuming that there existed an agreement, understanding or action in concert, between the Appellant and its Associated Enterprises ('AEs'), for incurring the AMP expenses to enhance the marketing intangibles owned by the AL and thereby erred in contending that the AL ought to compensate the Appellant towards the alleged excessive AMP spend. The Appellant prays that the entire adjustment of Rs.68,29,30,000 towards AMP expenses incurred by it be deleted. 2. On the facts and in the circumstances of the case and in law, the Ld. DRP/ Assessing Officer/ Transfer Pricing Officer erred in making an adjustment towards AMP expenses of Rs. 68,29,30,000 to the income of the Appellant by treating it as a provision of service by the Appellant to the AEs without providing any cogent evidence of a direct / indirect benefit to the AE. 3. On the fads and in the circumstances of the case and in law, the Ld. DRP /AO / TPO erred in disregarding that the issue of marketing intangibles is not relevant to an entrepreneur licensee, as is the case of the Appellant, as the entire marketing....
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....action of: i. erroneously holding that the Appellant should have earned a mark-up on the AMP expenses incurred by alleging that the Appellant has provided market support services to AEs; ii. arbitrarily selecting comparables engaged in provision of business / marketing support services without following a structured search process for computation of the aforementioned mark-up; and iii. considering inappropriate comparables for computation of the aforementioned mark-up. The Appellant therefore prays that appropriate relief be granted. II. Adjustment on import of finished goods 7. On the facts and in the circumstances of the case and in law, the Ld. AO / DRP erred in confirming the Transfer pricing adjustment proposed by the Ld. TPO amounting to Rs. 9,54,00000 to the income of the Appellant in respect of import of finished goods from AES, in the event where the adjustment on account of AMP expenses is deleted by the Hon'ble DRP / Tribunal. In doing so, the Ld. AO/ TPO/ DRP has erred in: i. Disregarding the functional profile and characterization of the Appellant and its AEs, as conducted by the Appellant in t....
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....vying interest of Rs. 7,71,55,200 under section 234B of the Act. 12. On the fads and circumstances of the case and in law, the assessment order dated 30 October, 2017 passed in pursuance of the directions issued by the Ld. DRP is a vitiated order as the Ld. DRP erred both on facts and in law in confirming the addition proposed by the LD. Assessing Officer to the Appellant's returned income." 2. The Tribunal in ITA No.7744/Mum/2012, 1792/Mum/2014, 1105/Mum/2015, 903/Mum/2016, and 674/Mum/2017 had passed composite order passed have decided the appeal of the assessee vide order dated 21.03.2018 for the Assessment Years 2008-09, 2009-10, 2010-11, 2011-12 and 2012-13. 3. However, subsequently assessee filled Miscellaneous application in all the appeals bearing no MA nos 377/MUM/2018, 376,375,374 and 373/M/2018 stating therein that some of the grounds have not been adjudicated by the tribunal while passing the decision on 21.03.2018. 4. The Tribunal, after hearing the parties vide order dated 12.10.2018 had recalled the order passed by the Tribunal on 21.03.2018 for the limited purposes of adjudicating the grounds as under: - ITA No. Ground 7744/Mum/2012 ....
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....,24,717 as per the TDS certificates (also supported by appearing in Form 264S), thereby resulting in a short credit of Rs. 1,16,375. The Appellant prays that the learned AO be directed to allow additional TDS credit of Rs. 1,16,375.' 34. On the facts, and in circumstances of the case and in law, the learned AO has inadvertently sought to recover the refund (allegedly granted through intimation dated 14 September 2009 under section 143(1) of the Act) amounting to Rs. 18,23,901 along with interest, although no such refund has been received by the Appellant till date. The Appellant prays that the learned AO be directed to verify the records and delete the recovery of the refund, which lies never been received by the Appellant." 1792/Mum/2014 "4. On the facts and in the circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Ld. DRP erred in confirming the upward adjustment of Rs.24,13,90,418/- to the income of the Appellant, in respect of import of finished goods from AEs. In doing so the Ld. DRP has grossly erred in: a) Disregarding the functional profile of the Appellant, characterization of the Appellant and its AEs. ....
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....is a complex entity and, accordingly, overseas AE (which is the least complex entity) should have been considered as the tested party; iv. Rejecting the economic analysis submitted by the Appellant in this regard. v. rejecting the use of multiple year data. The Appellant therefore prays that the aforesaid adjustment proposed by the Ld. TPO be deleted." 674/Mum/2017 "5. On the facts and in the circumstances of the case and in law, the Ld. AO/ DRP erred in confirming the Transfer pricing adjustment proposed by the Ld. TPO amounting to Rs. 29,59,00,000 to the income of the Appellant in respect of import of finished goods from AEs in the event where the adjustment on account of AMP expenses is deleted by the Hon'ble DRP, Tribunal. In doing so, the Ld. AO/TPO/ DRP has grossly erred in: i. Disregarding the functional profile and characterization of the Appellant and its AEs ii. Not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations / results; iii. Not appreciating that the Appellant is a complex entity and, accordingly, overseas AE (which is the least compl....
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....P adjustment can be made. In the case before us, the TPO and the DRP have not brought on record the fact that the expenses incurred by the assessee were not for the its own business. Even if for the sake of argument, it is accepted that the AE was benefitted indirectly because of the expenses incurred by the assessee, it has to be held that the transaction was not an IT. The logic behind the finding is very simple-the basic purpose for incurring expenses by the assessee was to expand its business in India and not to look after the interest of the AE. We have taken note of the fact that the assessee had started manufacturing activities in India and wanted to establish its foothold in the country. For that purpose, if it had incurred certain expenditure, it has to be accepted that it wanted to create awareness about its product in the Indian market. We would like to refer to the growth of the business of the assessee for some of the years: AY Turnover/ Revenue from sales (Crores) Growth (%) taking Assessment Year 2007-08 as base 2007-08 44.3 2008-09 70.14 58.33% 2009-10 119.8 170.43% 2010-11 103.41 133-43% 2011-12 104.09 13....
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....products in the fields of body -care, deodorants, creams, shower soaps.talc, first aid dressing etc. If it has to penetrate the local market, it will had to promote the products that could compete with the similar products of other players. 5.4. We find that the issue of AMP expenditure incurred by an assessee, is an IT or not, has been deliberated upon in many a cases. In the case of Thomas Cook (India) Ltd.(supra) the Tribunal, after considering the available High Court judgments had held as under: 8.3.1.First of all, we would like to mention that as on today the legal position is as clear as crystal with regard to AMP expenses. The Hon'ble Delhi High Court has dealt the issue in depth and has arrived at the conclusion that in absence of any agreement for sharing AMP expenses it cannot be held that AMP expenditure was an IT. Probable incidental benefit to the AE would not make such a transaction an IT. The factors like payment under the head AMP expenditure to the third independent parties, promoting own business interest by way of AMP expenses take away the alleged 'internationality' of the transaction. In absence of any direct or direct evidence of incurring o....
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....e 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.55. Section 928 defines 'international transaction' as under: "Meaning of international transaction. 928.(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 enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterpr....
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....mains payable or there is a mutual agreement to not charge any compensation for the service or benefit. "This was negatived by the Court by pointing out; "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v), which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means', part and the 'includes' part of Section 928 (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC." 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court....
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....nt, after the decision in Sony Ericsson (supre), -- the question of applying the BLT to determine the existence-of an-international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function, cannot be construed as a 'transaction'. Further, the- Revenue's attempt at re-characterizing the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognized in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same." 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard with B&L, USA. A similar contention by....
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.... ALP adjustment. " 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. 74.The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 928 of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Reve....
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....involving AMP expense with an ascertainable price is- unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned-in- Sassoon -J David-(supra)-"the--fact that- somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being 'allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law" With reference to the submissions of the DR, we would like mention that first of all the issue before us is not an assessee that is engaged in distribution and manufacturing of certain goods, so the question of slicing of expense in two portions would not arise. However, the other part of the argument that matter should be restored back to the file of the AO/TPO as they were following the order of LG and did not have benefit of later judgmen....
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....the participant in a transaction for which profitability can be ascertained most reliably and for which reliable data on comparables can be founds The tested party will also typically be the party with the least intangibles. For the class of international transactions under consideration, NIVEA India has been chosen as the tested party for the purposes of this report due to the fact that its profitability can also be reliably ascertained." (Emphasis supplied) As can be seen from the assessee's own conclusions, it had rightly chosen itself as tested party from AY 2006-07 till AY 2009-10 in respect of import of finished goods in the TPSR and also during the proceedings before the TPO. But in the AY 2011-12 and 2012-13. the assessee has taken itself as tested party in the TPSR but had changed its stand before the TPO by contending that the AE has to be taken as tested party However, in the AY 2013-14, the assessee has selected AEs as tested parties both in the TPSR and during the course of this proceeding Even though there is no change in facts during current assessment year, the Assessee has arbitrarily chosen the AEs as tested parties claiming that the....
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.... seen Similar exercise was required to be performed in respect of other companies situated in different counters or shown how selected companies were better placed than companies operating in India for comparison. This could have lent some credibility to transfer pricing study filed by the taxpayer in March 2005 although as noted earlier, no information was available in the audit report. Taking of companies with different locations and worked mean profit of 14.86% without relevant details, could into be accepted particularly when it is not stated whether selected companies could also use or not use brand name. Examination and investigation of several circumstance in 17 countries was involved in the transactions. The Id. CIT. therefore, rightly directed the Assessing Officer /TPO to re-do the assessment on the transfer pricing with which one cannot find any fault. We see no logic in the comparable basis put forward by the taxpayer and in selecting companies without care for their geographic location, economic background and evidence of FAR analysis. On facts, we see no good reason to accept margin margin at 14.88% as benchmark representing uncontrolled transition or enterpr....
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.... iv) Imports from Mexico Rs. 15.63 crores." 12. The TPO at page 245 of the paper book had given the following reasons for not accepting the AE as a tested party and had also given the reasons for rejecting the various comparable selected by the assessee for benchmarking the international transaction. The Assessee has accordingly done three benchmarking analysis by identifying comparable cases in the Asia-Pacific region to cover the Thailand and Indonesia entities, the European search to cover Germany and an American search to cover Mexico. The benchmarking analysis undertaken by the Assessee and by taking the associated enterprise as the tested party is not acceptable for these reasons: - i) The selection of data from so many different countries operating in Asia-Pacific vitiates the search as the nature of economic conditions prevailing in Thailand and Indonesia where the associated enterprises located is not necessarily similar to conditions in other countries considered as part of Asia-Pacific region such as Japan, Australia, Philippines etc. There is no reason why the Assessee should select comparables from so many different countries when the associated ent....
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.... submitted that it is having least complex structure. AR further submitted that the reasons for rejecting the comparables given by the TPO was using the multi-year data and / or comparables having different financial year. Further it was submitted that the there is no dispute that the AE of the assessee is having the least complex structure and therefore it can be compared with the other comparable is available in the Asia-Pacific region. 15. The Ld.AR and also drawn our attention to the various judgement of the coordinate benches where the identical views were taken by the bench holding that the AE of the assessee can be considered as a tested party. 16. At the last it was submitted by the Ld.AR that the matter may kindly been remitted back to the file of the TPO/ DRP for the de novo examination of suitability of foreign AE as a tested party and the authorities be also directed to search /examine comparables selected by assessee on the touchstone of FAR or in case the comparables are not found suitable fresh comparable be selected by the TPO/DRP. 17. The learned Departmental Representative for the Revenue has drawn our attention to paragraph 4.3 of the DRP order wherein t....
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....ist of countries is much longer and is contained in page 19 of assessee submission dated 11th October 2013. The assessee has therefore identified companies that are engaged in manufacturing of various products such as breakfast cereals dog food, cookies and crackers chewing gum, coffee, potato chips etc. Even pharmaceutical preparations, soaps and detergents, perfumes and cosmetics, other preparation, cutlery, .....batteries etc have been included in the list. The assessee has thereafter tried to identify companies which are engaged in wholesale or retail distribution activity. The assessee has applied various filters to streamline the cases identified. The filters include intangible assets to total asset greater than 5% fixed asset turnover less than 10% stock to turnover greater than 50% average operating cost operating revenue greater than 50%, etc. After applying all these filters the assessee has concluded that the comparables remaining after the same are these which are engaged in low risk manufacturing activity similar to the AE. The assessee has also used multiple year data which is specifically prohibited under the Indian transfer pricing provisions. Base....
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....osmetics undertaken by the associated enterprises. Thus the assessee has taken or chosen comparables that are engaged in unconnected manufacturing activities. This vitiates the search process undertaken by it. v) in respect of all these comparables no other data has been submitted by the assessee to chow that they are really comparable to time associated enterprise. in fact when on Indian entity is taken as the tested puny. the assessee generally produces the annual report of the comparables, from which some idea about the functions performed assets employed and risks assumed by the comparable cases can be known. However in the given instance the assessee has neither furnished the balance sheet of the associated enterprise that is engaged in manufacturing activity nor has it produced time annual report of the comparable cases front which any conclusion can he drawn regarding their comparability. 26. In the light of all the above factors the benchmarking undertaken by the assessee of the overseas tested party cannot he accepted as reliable data regarding the comparables has neither been furnished by the assessee nor is it readily available to the Indian tax authori....
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....h, the benchmarking analysis of the European associated enterprise is also rejected for the same reasons. 28. The assessee has similarly undertaken a search in the American adopting the same procedure as detailed in the context of European and Asia Pacific search, After employing various quantitative as well as qualitative filters, the assessee has identified 24 and companies as comparable to it that are engaged in manufacture of diverse products such as frozen beverages to foodservices, retail supermarket, snack foods, paperboard manufacturing solutions criteria. The assessee is again considered multiple year data and the comparables chosen by it are in no way similar to the comparables sorry to the associated enterprise. Again there is no basis to conclude that the comparables identified by the assessee are low risk contract manufacturers similar to the associated enterprise. Under the circumstances for the detailed reasons already explained in the current context of Asia-Pacific search, the benchmarking of the associated enterprise and America Is also rejected. 29. The assessee has also benchmarked the royalty paid by the manufacturing entities to the group hol....
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....transactions considered For this purpose it is most essential to examine the concerned royalty agreement in place between the associated enterprise and the group holding company. The terms and conditions in this royalty arrangement have to be compared with the terms and conditions contained in the seven comparable royalty arrangements. However in the given situation the assessee has neither furnished the royalty agreement or arrangement between the group ho/ding company and the associated enterprise, nor has it furnished any of the royalty agreements in respect of the seven comparables considered by it in the absence at these basic documents it is not possible to apply the CUP method to benchmark the International transaction as there is no basis to conclude that the terms and conditions in the impugned transaction are similar to the terms and conditions contained in the comparable cases. II) From the derails , furnishing in the annexure E. it is not clear whether these royalty arrangements (7 comparables being considered) are in place during the relevant previous year. No information in this regard has been furnished. Under the Indian TP regulations only the comp....
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....e tested party as per the TP study report submitted up to the AY 2012-13. the relevant part of the TP report of the assessee for the ÀY 2012-13 regarding the selection of the tested party is reproduced as under for better clarity, "Selection of the Tested Party Any transaction involves at least two enterprises. In the instant case, the first enterprise is NIVEA India and the other parties are its AEs. The most appropriate method for determining the AL]' can he determined/applied with reference to either NIVEA India or its AEs. The enterprise to which the method is applied is called the "tested Party'. The tested party is usually the participant in a transaction For which profitability can be ascertained most reliably and for which reliable data on comparables can be found. The tested party will also typically be the party with the least intangibles. For the class of international transactions under consideration, NIVEA India has been chosen as the tested party for the purposes of this report due to the fact that its profitability can also be reliably ascertained." (Emphasis Supplied) As can be seen from the assessee own co....
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....iding the requisite information TPO had recorded that the said information's were not provided to TPO. Further, we also noticed that the annual reports of the comparables was not considered as comparables were having different calendar years', other than the financial year of the tested party. Further, it was also mentioned that the assessee is carrying out the distribution function with respect to goods imported from its AE. Therefore, foreign AE of the assessee cannot be considered as a tested party for benchmarking the international transaction. 19. On perusal of the paper book and documents submitted by the assessee, it is abundantly clear that the assessee had provided requisite necessary data of the foreign AE of the assessee as well as the comparables to the TPO, this fact was duly acknowledged by the DRP in the order reproduced hereinabove. However, both the lower authorities had rejected the contention of the assessee for considering the foreign AE as a tested party by following the reasons given by the DRP for the assessment year 2009-2010. 20. In the light of the above, we are of the opinion that the order passed by the lower authorities is required to be se....
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.... iii) However, if the DRP comes to the conclusion that the foreign AE of the assessee can be considered as a tested party and thereafter DRP rejects the comparables selected by the assessee, then the DRP may include any other suitable comparable which satisfy the various filters applied by the DRP for that purposes after following the procedure as laid down in chapter 10 of the income tax act read with rule framed there under. IV) The DRP shall decide the matter based on the merits of the case without being influenced by the observation made by the DRP for the assessment year 2009-10. 22. In the result, the appeal of the assessee is partly allowed. Grounds nos. 28, 4, 5, 5, and 5 in ITA Nos. 7744/Mum/2012, 1792/Mum/2014, 1105/Mum/2015, 903/Mum/2016, and 674/Mum/2017 respectively. 23. The tribunal vide order dated 21st Feb, 2018 had allowed the appeals of the assessee. However thereafter the tribunal vide order dated 12.10.018 had allowed the Miscellaneous Petition filed by the assessee for deciding the ground's "pertaining to foreign AE as tested party". The individual grounds raised by the assessee in all the above noted appeal are reproduced herein above. ....