TaxTMI 
TaxTMI 
2020 (4) TMI 91
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....eturn of income on 29/11/2015 declaring an income of Rs. 68, 49, 30, 320/-under the normal provisions of the Act. During the course of assessment proceedings, it was noticed that the assessee company had entered into various international transactions and specified domestic transactions with its associated enterprises (AEs) during the year and, therefore, the determination of arm's length price of such international transactions was referred to the Ld. Transfer Pricing Officer (Ld. TPO). Ld. TPO by order dated 31/08/2017 passed under section 92CA(3) of the Act proposed adjustment of Rs. 457,20,63,73/-towards arm's length price of the international transaction on account of Advertisement, Marketing and Promotional (AMP) expenditure. 3. Further, learned Assessing Officer noticed that the assessee had deducted capital subsidy amounting to Rs. 13,07,88,520/-in the computation of taxable income and explained that the said capital subsidy was received from the government of West Bengal for WBIDC to the tune of Rs. 11,31,21,158/-and from government of Maharashtra for Paithon plant to the tune of Rs. 1,76,67,362/-. Learned Assessing Officer found that the subsidy amount of Rs. 1,76,67,3....
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....ssion of the Ld. AR is that both the issues are covered in favour of the assessee in assessee's own case for the assessment years 2006-07 to 2013-14 in the decision reported in (2018) 100 taxmann.com 159 (Delhi-Trib). 8. On a reading of the order dated 19/11/2018 in ITA No. 1834/Chand/2010 and batch for the assessment years 2006-07 to 2013-14 reported in (2018) 100 taxman.com 159 (Delhi) we find that the issue of AMP is dealt with by the Tribunal in extenso and a conclusion was reached to the effect that the AMP adjustment made by the Ld. TPO/learned Assessing Officer could be sustained. 9. We deem it just and necessary to refer to the observations of the Tribunal, which read as follows:- 58. Thus, 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 provisi....
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....e Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal Khenger Shah v. KhorshedbannDabidaBoatwala, 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 MacNaghten in Commissioner of Inland Revenue v. Midler and Co. Margarine Ltd. [1901] AC 217 (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 man 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 goodwill? It is a thing very easy to describe very difficult to define. It is the benefit and advantage of the good name, ....
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....aphically described by locality. It has been historically explained as growing and crystallising traditions inthe business. It has been described in terms of a magnet asthe 'attracting force'. In terms of comparative dynamics, good will has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Thoughimmaterial, it is materially valued. Physically and psychologically, it is a 'habit and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 as the 'sap and life' of the business." There is a line of demarcation between development and exploitation. Development of a trade mark or goodwill takes place over a passage of time and is a slow ongoing process. In cases of well recognised or known trade marks, the said trade mark is already recognised. Expenditures incurred for promoting product(s) with a trade mark is for exploitation of the trade mark rather than development of its value. A trade mark is a market place device by which the consumers identify the goods arid services and their source. In the context of trade mark, the sa....
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....uld be recognised as an asset, if and only if, it is probable that future economic benefits attributable to the said asset will flow to the enterprise and the cost of the asset can be measured reliably. The estimate would represent the set off of economic conditions that will exist over the useful life of the intangible asset. At the initial stage, intangible asset should be measured at cost. The above proposition would not apply to internally generated goodwill or brand. Paragraph 35 specifically elucidates that internally generated goodwill should not be recognised as an asset. In some cases expenditure is incurred to generate future economic benefits but it may not insult in creation of an intangible asset in the form of goodwill or brand, which meets the recognition criteria under AS-26. Internally generated goodwill or brand is not treated as an asset in AS-26 because it is not an identifiable resource controlled by an enterprise, which can be reliably measured at cost. Its value can change due to a range of factors. Such uncertain and unpredictable differences, which would occur in future, are indeterminate. In subsequent paragraphs, AS-26 records that expenditure on material....
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....apital expenditure incurred or made for creating an intangible capital asset. Appropriate in this regard would be to reproduce the observations in CTT v. Monto Motors Ltd. [2012] 206 Taxman 43 (Delhi), which read: "4. . . . Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisement are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The advertisements published/displayed may not be of relevance or significance after lapse of time in a highly competitive market, wherein the products of different companies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought on record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses ....
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....y available in India through the subsidiary associated enterprises, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/trade mark/trade-name would be relatively unknown. We have referred to the said position not to make a comparison between different brands but to highlight that these are relevant factors and could affect the function undertaken which must be duly taken into consideration in selection of the comparables or when making subjective adjustment and, thus, for computing the arm's length price. The aforesaid discussion substantially negates and rejects the Revenue's case. But there are aspects and contentions in favour of the Revenue which requires elucidation." 60.1 Thus, the Hon'ble High Court after describing the concept of the "brand" had made a clear cut demarcation between development and exploitation of brand which is either in the form of trademark or goodwill which takes place over a passage of time by which its value depends upon and is attributable to intangibles other than trademark like, infrastructure, knowhow, ability to compete in the established market, leas....
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....for the sake of ready reference is quoted hereinbelow: "6.40 The legal owner will be considered to be the owner of the intangible for transfer pricing purposes. If no legal owner of the intangible is identified under applicable law or governing contracts, then the member of the MNE group that, based on the facts and circumstances, controls decisions concerning the exploitation of the intangible and has the practical capacity to restrict others from using the intangible will be considered the legal owner of the intangible for transfer pricing purposes. 6.41 In identifying the legal owner of intangibles, an intangible and any licence relating to that intangible are considered to be different intangibles for transfer pricing purposes, each having a different owner. See paragraph 6.26. For example, Company A, the legal owner of a trademark, may provide an exclusive licence to Company B to manufacture, market, and sell goods using the trademark. One intangible, the trademark, is legally owned by Company A. Another intangible, the licence to use the trademark in connection with manufacturing, marketing and distribution of trademarked products, is legally owned by Compan....
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....tle. Here also the PepsiCo Inc which is legal owner of the trademark license to the assessee has not performed any relevant function or used any assets or assumed any risk albeit has acted only as a title holder. It is not even entitled to any return for holding such title and in such circumstances, there seems to be no reason as to why it should compensate its subsidiary in India for the marketing activities while operating in India as a full-fledged manufacturer who alone is reaping the profit from the operation in India. It has been clearly demonstrated by the assessee that the risk with respect to its manufacturing operation in India was undertaken wholly by the assessee and not by the US parent AE. This is even evident from the various clauses of the agreement also. 62. Before us, learned CIT-DR submitted that the stand of the Revenue is that, the expenditure incurred by the Indian subsidiary of an MNE group on market function amounts to incurring of such expenses for and on behalf of the parent company outside India because; ♦ Firstly, such kind of expenses promote the brand/trademarks that are legally owned by the foreign parent AE; ♦ S....
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....ny direct sales by AE in India. Further it needs to be seen, whether marketing activities relating to DEMPE functions reflected in any such expenditure incurred by the resident tax payer company and the non-resident AE in India are in conformity with the functions and risk profiles and the benefit derived by the tax payer company and the AE. It is also very relevant to examine, whether the AE is assuming any kind of risk in the Indian market or is benefitting from India in one way or the other. Thus, FAR analysis is the key which needs to be seen what kind of functions is being carried out by the AE in India, the nature of assets which have been deployed and the risk which have been assumed. If there is no risk of such attributes which is being carried out by the non-resident AE in India then there is no question of AE compensating to its subsidiary in India for any marketing expenses. Here, we have already stated at several places that parent AE of the assessee-company has not carried out any function in India and had not assumed any risk in India and even for the license for use of trademark, no royalty has been paid. Hence, no benefit whatsoever has accrued to the parent AE. Acc....
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....elative contribution as per (ii) and (iii) above, and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise is to be taken to be the net profit arising to that enterprise from the international transaction." The OECD Transfer Pricing Guidelines, 2010 provides that PSM first requires the identification of the profits which is to be split among the AEs, from the controlled transactions in which the AEs were engaged (the combined profit). Thereafter, the combined profit between the AEs is required to be split on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length. The combined profit to be split should only be those arising from the controlled transaction. In determining those profits, it is essential to first identify the relevant transaction to be covered under PSM. Where a taxpayer has controlled transactions with more than one AE, it is also necessary to identify the parties in relation to that transaction. Comparable data is relevant in the profit split ana....
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....ing activities. Thereafter, he has compared the AMP spent by the AE with that of the assessee company and multiplied that ratio with the global net profit of the US parent AE arising from marketing activities to compute the Transfer Pricing Adjustment on account of AMP expenses. Such an approach of the learned TPO at the threshold is wholly erroneous, because PSM is applicable mainly in international transaction involving transfer of unique intangibles or in multiple international transactions which are interrelated and interconnected that they cannot be evaluated separately for the purpose of determining the Arm's Length Price of any one transaction. Here in this case this is not in dispute that no transfer of any unique intangibles has been made accept for license to use trademark which too was royalty free. According to the Rule, under the PSM, combined net profit of the AEs arising from the international transaction has to be determined and thereafter, if incurrence of AMP expenses is to be considered from the value of such international transaction then the combined profit has to be determined from the value of such international transaction. No FAR analysis of AE....
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....roup on a worldwide basis was nothing but a distorted version of the BLT. 10. For the year 2014-15 also, on the same reasoning and following the view taken by the Tribunal for the assessment years 2006-07 to 2013-14 the issue was held in favour of the assessee. 11. In respect of the issue relating to IPA, in the order for the assessment years 2006-07 to 2013-14, a coordinate Bench of this Tribunal observed that,- 107. We have heard the rival submissions and also perused the relevant findings given in the impugned orders. The assessee has received subsidiary from Government of West Bengal for WBIDC plant and Government of Maharashtra for Paithon plant. The subsidy from the Government of West Bengal was received for setting up for a new project in West Bengal under the West Bengal incentive scheme 2000 and 2004 which was to promote the establishment of the industries in the state. The nature of subsidy has already been described above. The Assessing Officer has allowed the claim of subsidy from Government of Maharashtra and also the State Capital Investment Subsidy by the West Bengal Govt. as it was computed on 15% of fixed capital investment which has been treated as ....
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....004 is capital in nature and cannot be taxed as revenue receipts. Thus, this issue is decided in favour of the assessee. 12. As rightly observed by the Ld. DRP in its order these two issues are covered in assessee's own case for the assessment year 2006-07 to 2013-14 and followed by the Tribunal for the assessment year 2014-15. Only ground of the Ld. DRP not accepting the same is that the department had filed appeals against the Tribunal's orders before the Hon'ble High Court. Fact remains that as on the date there is no change of circumstances nor the orders of the Tribunal are rendered invalid. Inrespect of the directions issued by the Ld. DRP to reduce the amount of capital subsidy from the block of assets are appearing in the books of accounts of the assessee, it is challenged that such a direction does not have any backing of law and is otherwise inconsistent with the approach followed in the preceding years by the authorities in assessee's own case. Ld. AR referred to the decision dated 27/6/2019, of the Tribunal in the case of M/s SevaHealthcare Ltd vs. ACIT in ITA No. 1062 to 1068/PUN/2017 for assessment year 2007-08 to 2013-14. The question dealt with there was in re....