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2019 (5) TMI 1798
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..... 1,75,60,837 as against returned income of Rs. - 4,62,24,541 computed by the Appellant. Transfer pricing grounds 3. That the Ld. AO/TPO/DRP erred in routinely assuming existence of an independent international transaction by the way of Advertising Marketing and Promotion ("AMP") services and proceeding to make an upward adjustment on that basis. 4. That the Ld. AO/TPO/DRP have grossly erred in disregarding principles laid down by the Hon'ble Delhi High Court and subsequent decisions of Hon'ble Tribunal pertaining to the upward adjustment towards AMP expenditure and further incorrectly relied on the same to justify the adjustment. 5. 'That the Ld. AO/TPO/DRP has grossly erred in law and facts by making a further adjustment towards mark up. 6. That the Ld. AO/TPO/DRP has grossly erred in failing to appreciate and apply the principles laid down by Hon'ble Delhi High Court and various tribunal decisions in letter and spirit, thereby proceeding to make separate adjustments towards AMP expenditure by reference to the very same comparables used for benchmarking other international transactions pertaining to the distributi....
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....d as it has been passed on facts where the assessee has failed all along to produce the relevant agreements with its AE and since the order passed is an order passed after affording a full opportunity to the assessee, the past precedent in view thereof may not be followed. 4. The ld. AR Mr. N. Rao took strong objection to the said departmental line of argument. He made a statement at bar stating that apart from the Joint Venture Agreement placed on record by the assessee and addressed by the tax authorities there is no other Agreement which the assessee has entered into with the AE, thus, the occasion to produce the non existent Agreement does not arise. It was his submission that infact the department had filed a Miscellaneous Application before the ITAT wherein similar assertions had been made. The application was dismissed by order dated 28.12.2017 in M.A. 76/CHD/2017 ( copy filed). The ld. Sr.DR agreed that M.A. had been filed. It was his submission that since the Revenue did not succeed before the ITAT, the issue is pending before the Hon'ble High Court. The Ld. AR on the other hand relying upon the Miscellaneous Application dated 28.12.2017submitted that there is no ot....
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....P directed the TPO to include the direct selling expenses excluded from the AMP expenses. These issues, it was submitted, are being referred to only to highlight the unreasonable stand of the Department. It was submitted that he would be addressing these in greater detail in the course of the hearing however at the outset he would want to invite attention to para 81 of the TPO's order to show how he has come up with two different possible calculations. The Appellate Forum, on the other hand enhances the addition made by the assessing officer on a substantive basis by holding that income of the assessee is enhanced by Rs. 6,37,03,906/- (on substantive basis), Rs. 7,98,44,360/- (on protective basis) and Rs. 2,22,80,489/- (intensity adjustment on protective basis). Referring to the said finding it was his submission that these varying stands of the department demonstrate the pre-mediated determination to somehow make an addition. This wavering and varying stand without addressing whether the addition is to be made on a protective basis as they describe or on a substantive basis or Intensity basis as they propose clearly demonstrates the hollowness of their claim as it unfailingly demo....
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....ed in the original grounds raised and these can be treated to be clarificatory in nature and the Department is not objecting to the raising of the said grounds at this stage. 8. Accordingly, in the light of the submissions of the parties before the Bench, the additional grounds are admitted. 9. The parties made their respective submissions for and against the grounds raised mentioning that factual background of the assessee remains same in both the years. The department has in the arguments advanced only disputed the prayer of the assessee that the view taken in the earlier year may not be followed on the ground that full facts were not made known to the tax authorities for which purpose the Revenue is in appeal before the Hon'ble High Court. The ld. AR, as noted earlier has made a statement at bar that apart from the Joint Venture Agreement, there is no other Agreement. However, at the time of dictation, it was noticed that the parties have been in an error in mentioning that the facts of the two years are identical as the TPO in his page 3 of his 46 paged order has noticed that the assessee in the year under consideration is 100% subsidiary of AE (Widex A/S. Denmark) wi....
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.... the written submission accepting that there is no impact on account of this change in share holding pattern. In the said background, parties were required to re-argue the case. 11. The ld. AR re-iterated his initial argument that the issue is covered in his favour. It was his argument that whereas in the immediately preceding assessment year, the department has insisted contrary to facts that clauses of the Joint Venture Agreement be interpreted in a manner that demonstrated that there was an agreement to incur expenditure at the behest of the AE which submission has been repulsed by the ITAT even in the Miscellaneous Application. In the year under consideration, it was submitted, in view of change in share holding pattern, even the Joint Venture Argument has no relevance. Thus, apart from the trade mark Agreements etc., there is no other agreement. Thus, the issue, it was submitted, is fully covered in his favour. Inviting specific attention to page 8 para 8 which continues at page 9 of the order of the ITAT, the ld. AR carried us through the written submissions which had been placed on behalf of the assessee, which have been recorded at page 12 of the ITAT order and consideri....
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....l transaction in that regard, with B&L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra)...... (emphasis provided by the Bench) 12.1 It was also his submission that the assessee in his Interactions with the AO in the course of some hearing has been conveyed by the TPO himself that the change in shareholding pattern has not impacted the issue in the year under consideration. Oral assertions of the assessee on behalf of the TPO were directed to be communicated in writing for which specific purpose, the ld. Sr.DR was required to place the written reply of the AO/TPO on record. The ld. Sr.DR as noted has placed the TPO's reply on record stating that the change in shareholding pattern in the year under consideration does not impact the issue. For the sake of completeness, the departmental response is extracted hereunder: OFFICE OF THE DEPUTY COMMISSIONER OF INCOME TAX TRANSFER PRICING OFFICER-1(3)(2), ....
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....y to reduce artificially induced losses/ profit shifting from the assessee towards its holding company. 5. In view of the above mentioned facts, it is amply clear that the change of share holding pattern of the assessee company does not have any impact on the TP adjustments proposed in the case of the assessee company. 6. This issues after prior approval of the Commissioner of Income Tax, TP-1, New Delhi. Sd/- (SADDIK AHMED) Dy. Commissioner of Income Tax, TPO-l(3)(2), New Delhi 12.2 Accordingly, in the light of the said factual background, the parties proceeded to address the issues. 13. Both the parties were been heard at length. 14. The ld. AR again took the position that the appeal of the assessee is allowable in terms of the order of the ITAT passed in the immediately preceding assessment year i.e. 2011-12 in assessee's own case. 14.1 The ld. Sr.DR opposing the prayer, re-iterated the departmental prayer stating that the order may be upheld. The issue, it was submitted, was before the Hon'ble High Court as the assessee before the ITAT had not placed the complete agreements and accordingly the said order was under challeng....
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.... added back and also directed in the alternative also the TPO to instead make addition for the arm's length price calculated on the basis of "intensity". Elaborating the issue, it was his submission that 'intensity' as worked out and understood by the tax department by way of applying to the facts of the case can be best explained as a reverse of Bright Line Test and is a mirror image of the assessee's AMP applied to the very same comparables as selected for the Bright Line Test and considering the assessee's AMP margin has applied to the same selected comparables and on the basis of that the additions have been proposed. 14.4 The ld. AR opposing the intensity approach of calculating the ALP submitted that the Tax Department has lost track of the fact that AMP is a function of a distributor and the assessee admittedly is a distributor and thus, the fact that the very same comparables have been retained for working out the so called excess AMP applying the "intensity" approach of methodology itself gives approval to the assessee's claim as having been accepted by the TPO that the assessee is a distributor. Thus, in the circumstances, reverse BLT which has been describ....
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.... said method. 15. The ld. Sr.DR on the other hand submitted that he relies upon his written submissions and contrary to the TPO's written stand, it was argued by him that it cannot be said that change in share holding pattern cannot have any impact on the AMP expenses and strategy making of the assessee. It was his submission that whereas earlier to the extent of 27% local person had a say in the running of the business and the business decisions which would necessarily have an impact on the functions of the distributions but now as an owner of almost 100% share, the entire show is run by the foreign AE. Accordingly, it cannot be said that it has no impact. It was specifically put to the notice of the ld. Sr.DR that this was the specific fact on account of which clarifications had been fixed and the department was required to address and TPO appears to have given up the case by way of his written submissions. The ld. Sr.DR argued that though the TPO has given up the issue, however it was his submission that it appears to be an incorrect decision to do so. The ld. Sr.DR was required to address whether he can argue beyond the brief of the AO/TPO as he is standing in to defend the ....
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....imbursed by the AE along with a mark-up. The Question of mark-up arises because you have provided some service for promoting the marketing intangible owned by your AE. For these services, you should be eligible for remuneration equivalent to your gross profit to sales ratio (49.84). Therefore, because of the efforts made by you, a further markup of 49.84% on the above AMP spend amount is considered appropriate which is computed as under:- Value of Cross Sales of the assessee 36.19,12,878 AMP/Sales ratio of the Comparables 2.38% Amount that represents similar expenses on AMP by the accepted comparable entities 86,13,526 Total Expenditure on AMP by the assessee 6,18,99,939 Expenditure over and above similar expenses by the accepted comparable entities which constitutes the component of international transaction attributed to the AE towards build -up of intangibles that needs to be suitably compensated by the AE 5,32,86,413 Markup(r) 49.84% 2,65,57,948 Adjustment u/s 92CA 7,98,44,360 16.2 The assessee disputed the adjustment as per its reply dated 18.01.2018 extracted in the TPO's order at internal page 10 on the fol....
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....the aforesaid decisions itself. The judicial position on the said method was well settled by these decisions wherein it had been held that the method had no statutory sanction and evidently admittedly lacked judicial approval also. Despite this, in willful defiance to the stated legal position, the TPO, we note, has resorted to applying the bright line test. This brazen act on record is seen to have been countenanced by the DRP who have unfortunately proceeded to further step up the brazen disregard of the series of decisions of the Hon'ble High Court. Without saying anything further, we note that such an action is not only contrary to the hierarchy of discipline on which the judicial system rests, it also erodes the trust reposed in the fairness of the tax administration. For ready reference, the relevant extract from the TPO's order is reproduced hereunder : (a) LG Electronics India Private Limited v. Assistant Commissioner of Income Tax (ITA No. 5140/DEL/ 2011) A three-member Special Bench was formed in the case of LG Electronics to adjudicate the issue of advertisement, marketing and promotion expenditure. The majority decision held that advertisement carr....
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....transaction must take into consideration the AMP function; * Compensation for the marketing functions performed by India entity may be in the form of lower purchase price, non or reduced payment of royalty or by way of direct payment to ensure adequate profits for the distribution operations; * AMP function can be aggregated with the primary transaction of purchase and resale of finished goods and benchmarked using transactional net margin method ('TNMM') or adjusted resale price method (gross margins less AMP expenditure); * Segregating approach to benchmark AMP function may be adopted, provided AO / TPO provide adequate reason for doing the same. Upon segregation and before computing the adjustment, the AO / TPO must provide the following set-off: o Any reimbursement, grant, subsidy received by the Indian entity from the AE on account of AMP; o Additional margins earned by India entity from the distribution operations over and above the comparable margins. (c) Maruti Suzuki India Limited v. Commissioner of Income Tax (ITA No. 110/2014 and 710/2015) Delhi High Court adjudicated the appeals pertaining to Maruti ....
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....n case of Sony Ericsson factored a key aspect in the case taxpayers that the trademark or brand was owned by the Foreign AE; and * AMP adjustment cannot be made in case of full risk manufacturers. (d) Commission of Income Tax-LTU v. Whirlpool of India Limited (ITA No. 610/2014) * Delhi High Court adjudicated the appeals pertaining to Whirlpool of India Limited ("WOIL"). In the said order, the Delhi High Court upheld the principles laid in the decision of MSIL and held that the AMP "expenditure is not an international transaction. The key highlights of the order are: * Court discussed the provisions in relation to the proposition of an adjustment and held that there needs to be a transaction in existence with a defined price and TP adjustment is computed by substituting such price with arm's length price; * In case of AMP adjustment, the existence of transaction was deduced from comparison of AMP / sales of WOIL with the bright-line and the expenditure in excess of bright-line was held to be the TP adjustment. Brightline has been disregarded in the case of Sony Ericsson and there is no other mechanism specified in the Act to establish....
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...., Casio, Perfetti, Cummins, Reebok, etc. held that the ruling of Delhi High Court was not available during the proceedings before the Assessing Officer, hence, remanded the matter to the AO / TPO to give them an opportunity. The Bench held the following: * TPO / AO to adopt the bundled approach for benchmarking AMP as the same has been legally settled; * Proposing an adjustment on account of AMP by segregating the transaction is unfair; * AO / TPO may benchmark the transaction as the Assessee itself has benchmarked the AMP expenditure in the TP documentation; * TPO to adopt the comparable companies selected by him as the same were accepted after comparing the functions performed and AMP expenses incurred by the assessee; * Remand is limited to benchmarking of AMP expenses. Other international transactions shall not be tested during the remand proceedings, as the same were held to be at arm's length by the TPO; * TPO may not use any fresh data but may re-use the data already on record for benchmarking the AMP transaction, considering the rejection of bright-line by High Court in Sony Ericsson; and * TPO to a....
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....onal Transaction ii. The routine Selling and distribution expenses are to be excluded while computing the AMP expenses for this purpose iii. The comparables chosen by TPO are good and shall be retained. iv. Only similar bouquet of the AMP Expenses us ordained per High Court ruling shall be considered while matching the assesses expenses with those of the comparables v. TPO shall use Cost Plus Method for this purpose. vi. The mark up on the Excess AMP Expenses shall be as per sub-clause lit) to Rule 10B(l)(c). 51. In view of these facts and discussion, the AMP expenditure is held to be an "International Transaction" within the meaning of section 92B(1) of the Act. 16.6 A perusal of the order further shows that he further supported his conclusion by making a reference to US transfer pricing law (IRC Section 482) which has addressed the issue of AMP incurred by the distributor and its compensation by the foreign trademark owner; The DHL Incorporated and Subsidiaries Vs Commissioner of Internal Revenue Tax Court case, DHL corporation, TCM 1998-46 laffd in part, rev'd in part 285F.3d.1285, 89AFTR2d 2002- 1978 (CA-9,2002) decid....
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....mparable analysis, including AMP expenses, gross profit margins match or are within the specified range, no transfer pricing adjustment is required. In such cases, the gross profit margin would include the margin or compensation for the AMP expenses incurred. Routine or non-routine AMP expenses would not materially and substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions." 16.10 Accordingly, it was submitted that since distribution and marketing were intertwined a bundled approach may be followed. The said argument was also supported by relying on the aforesaid para 165 of the said decision in the case of Sony Ericsson wherein the Court opined; "An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made when ....
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....-up of intangibles that needs to be suitably compensated by the AE. Therefore, the amount that should have been compensated to the assessee company is computed hereunder:- Value of Gross Sales of the 36,19,12,878 AMP/SaIes ratio of the compatibles 2.38% Amount that represents similar expenses on AMP by the accepted comparable entities 86,13,526 Total Expenditure on AMP by the 6,18,99,939 Expenditure over and above similar expenses by the assessee accepted comparable entities which constitutes the component of international transaction attributed to the AE towards buildup of intangibles that needs to be suitably compensated by the AE 5,32,86,413 69. The difference of Rs. 5,32,86,413/- represents the amount that has been spent by the assessee to create the marketing intangible and should have been reimbursed by the AE along with a mark-up. The question of mark-up arises because you have provided some service for promoting the marketing intangible owned by your AE. For these services, you should be eligible for remuneration equivalent to your gross profit to sales ratio (49.84%). Therefore, because of the efforts made by y....
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....all be equivalent to the GP/Sales ratio of the comparables, as per sub-clause (ii) to rule 10 B(l)(c). Accordingly, the total amount of AMP attribution to the AE and mark-up thereon is computed as under:- Value of Gross Sales of the assessee 36,19,12,878 AMP/Sales ratio of tine Comparables 2.38% Amount that represents similar expenses on AMP by the accepted comparable entities 86,13,526 Total Expenditure on AMP by the assessee, as computed above 1,99,69,057 Expenditure over and above similar expenses by the accepted comparable entitles which constitutes the component of international transaction attributed to the AE towards build up of intangibles that needs to be suitably compensated by the AE 1,13,55,531 Markup @ 19.55% 22,20,006 Adjustment u/s 92CA 1,35,75,537/- 82. The above amount of Rs. 1,35,75,537/- is being proposed as an adjustment u/s 92CA of the Income-tax Act on substantive basis. Since the AMP issue is sub-judice before various appellate forums, the benchmarking was initially done on a protective basis resulting in an adjustment of Rs. 7,98,44,360/-u/s 92CA of the Income-tax Act, as ....
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....yer. Thus, a natural consequence is that the Indian taxpayer should be suitably compensated for the DEMPE functions being carried out by it. 17.2 We find on a reading of the DRP's decision that the abrupt conclusion that the assessee is performing DEMPE functions unilaterally arrived at has no build up either by way of any prior discussion or basis for the conclusion on facts. The acronyon DEMPE stands for Development, Enhancement, Maintenance, Production and Exploitation of the intangibles. For the said abrupt conclusion, we find there is no supporting discussion in the order or what was the assessee's stand thereto. Though the issue is not relevant for adjudicating in the present proceedings, we briefly refer for the sake of completeness hereunder to the 6 steps envisaged for addressing the same : 1. Identify the intangibles and risks within a particular transaction 2. Identify the contractual agreements relating to the transaction in question 3. Identify which parties performed DEMPE functions, by means of a functional analysis 4. Determine whether the conduct of the parties was consistent with the contractual assumption of risk ....
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.... 23,13,681 24,59,240 40,20,921 30,55,802 34,98,127 Conference, Camps & Seminar's-Tverseos 17,10,227 5,80,341 14,09,976 70,21,129 75,78,141 PR Services 2,52,261 70,006 - - - Publicity Material 9.00,103 4,03,323 11,50,487 15,05,338 17,13,622 Brand Ambassador 7,50,000 8,50,000 8,50,000 12,00.000 12,00,000 Reimbursement from AE - - (61,40,324) - - Commissions 71,35,577 74,59,187 1,30,01,224 1,22,26,069 1,71,40,278 Discounts 49,08,917 31,14,276 57,92,710 49,64,308 89,59,918 Total 3,16,35,473 2,11,30,988 4,16,88,884 5,29,97,907 6,18,99,939 17.5 The assessee was required to address the same and considering the following reply of the assessee, it was concluded that the assessee is taking a contradictory stand and is now trying to project itself as a high risk distributor despite its claim in its TP Study that it was low risk distributor. The following reply of the assessee which did not find favour with the DRP is extracted hereunder from the order of the DRP itself for ready reference : However, In reply to the question....
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....les vi. Waver of royalty/fees paid to the taxpayer by the AE on account of distribution of AE's goods to third party or direct sales made by AE to the third parties in India for which market development has been carried out by the taxpayer. vii. By any other manner. The assessee has in no way been compensated for the DEMPE functions carried out by it. The TPO was therefore, justified in benchmarking the AMP functions and in carrying out TP adjustment in respect of the expenditure incurred by the taxpayer. 17.7 In view thereof, it was held that the TPO was justified to benchmark the AMP functions. 17.8 The DRP referring to the ECD/G-20 BEPS action 8 to 10 (Base Erosion & Profits Splitting Project ) and referring to the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson and certain orders of the ITAT wherein following the decision of the Delhi High Court in the case of Sony Ericsson the issues were remanded back which orders came up on a challenge to the remand by the ITAT etc. before the Hon'ble High Court concluded that bright line test as the other method had statutory support. Specific reference was made to the....
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....e was held to be not justified in its arguments that the bundled or aggregating series or chain of transactions in its TP Report should remain undisturbed. The un-usual features in the facts of the said case, it was held, remained unexplained by the assessee and the TPO was held to be justified in seeking further details. For ready reference, relevant extract relied upon by the DRP is extracted from its order hereunder : 8.2.5 Dense India Ltd. v. CrT2016-Tll-14-HC-DELTP In Denso India, the Hon'ble Delhi High Court upheld the decision of the TPO to separately benchmark the transaction observing as follows: 6. The factual discussion in this case clearly reveals that the assessee chose to import components not from the manufacturer (which was an AE) but an intermediary. Normally, this would have been a commercial decision, which revenue authorities would not question. However, interestingly, the vendor of the components (which constituted over 85% of the raw materials imported and about 38% of the total raw materials sourced) was also connected with both the assessee and the manufacturer. If these realities emerged during the TP exercise, compellin....
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.... person would have incurred the "substantial" AMP expenditure unless it had the written assurance of continued distribution rights over Widex products. It was held that AMP was not a normal distribution function. Accordingly, considering the transfer pricing methodology adopted by the assessee, the international profile of the assessee in paras 8.4, 8.5, 9, 9.1, 9.2, 9.3 and 9.4, it was held that the TPO was entitled to select the most appropriate method and he was justified in changing the method of bench-marking related to the distribution segment to TNMM against RPM. The DRP was of the view that since the assessee was not a normal distributor since the assessee had spent an amount of Rs. 6.18 Crore odd which was 17.10% of the sales and "higher than level of expenses on most comparables" of such activity directed that distribution and selling expenses were not to be excluded. It was noted that the TPO relying upon decision of the Delhi High Court in the case of Sony Ericsson had excluded these but DRP took a contrary view in view of the fact that the issue was under challenge before the Apex Court. The DRP took note of the fact that the TPO had required the assessee to give the d....
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....t and Marketing The assessee is receiving promotional advertising material from its AE. This shows that the entire control over the advertisement and sales promotion and the nature and content of the advertisement and marketing activities is of the AE. They incur expense on advertisement and thus control the nature and content, but the taxpayer reimburses the expense incurred. 17.14 The DRP further addressing the Cost Plus Method, upheld the application of the said method also and in the absence of any comparable uncontrolled transactions, upheld the gross profit of the assessee as an appropriate mark up for the services rendered as applied by the TPO. 17.15 Addressing the addition on protective basis, referring to the TPO's order and various decisions of the ITAT and certain decision of the Delhi High Court namely the case of Noble Resources wherein upholding the CUP method, the matter was remanded, the DRP referring also to the decision of the Hon'ble Delhi High Court in the case of Sumitomo Corporation India where berry ratio as a PLI was held to be justified referring to another decision of Hon'ble Delhi High Court in the case of (170) TOLL Global Forward....
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....udy. It is however, apparent that the AMP intensity of the assessee is very different from the AMP intensity of companies which are suitable comparables. 3. In his order, the TPO has observed that the assessee had incurred Rs. 6.18 Cr. Towards advertisement and market promotion (AMP) expenditure for promoting marketing intangibles owned by its AE. This expenditure representing 17.10% of its sales was clearly extraordinary considering that the AMP/Sales ratio of the comparables was only 2.38%. 4. The AMP expenditure incurred by the assessee has been considered for adjustment on the premise that the assessee in India was incurring these expenses for and on behalf of its parent company outside India, and these expenses promoted the brands/ trademarks that are legally owned by foreign parent AEs. These expenditures created or developed marketing intangibles in the form of brands / trademarks, customer list, dealer's/distribution channels etc. even though the Indian company had no ownership rights in these intangibles. The assessee carried out functions which are in the nature of development, enhancement, maintenance, protection and exploitation (DEMPE functions) o....
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....rious arguments of the parties qua the grounds originally raised and the additional grounds subsequently raised. Though arguments have been briefly brought out in the earlier part of this order, however, before addressing the same, it is necessary to first and foremost adjudicate upon the issue raised by way of Ground Nos. 1,3, 4, 6 and 7 in the present proceedings. The central issue summed up therein is, can an international transaction be presumed to exist due to "excessive" AMP expenses incurred by the assessee distributor in the facts of the present case. As noted in the arguments of the parties addressed in the earlier part of this order wherein the assessee relies upon the decisions of the Co-ordinate Bench rendered in assessee's own case and the Sr.DR relies on the orders of the authorities below stating that the earlier order under challenge before the Hon'ble High Court may not be followed for reasons set out in greater detail in the earlier part of this order. 18.1 Accordingly, having considered the rival stand in regard to the past history of the assessee before adverting to the facts on record, we deem it appropriate to first touch upon the propositions of la....
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....of the Act. The Court while arriving at the conclusion was conscious of the international tax jurisprudence and was constrained to hold that even international tax jurisprudence and commentaries do not recognize the bright line test for bifurcation of routine and non routine expenses. The purpose why we feel the need to address which we thought was a well settled legal position is on account of the resort to the bright line test not only by the TPO despite the available judicial opinion to the contrary but this lapse, we note unfortunately was not addressed by the DRP also who instead have tried to do some skillful tip toeing around the issue and did not clearly refer to the settled legal position thereon and left the conclusion arrived at by the Hon'ble High Court in ambiguity. When we consider how "Intensity approach" as a method which has been carved out by the DRP which we have referred to in the earlier part of this order while adverting to the objections posed by the taxpayer, we find ourselves in agreement to the objections posed and we have no hesitation in holding that what applies to bright line test fully applies to the Intensity approach as worked out in the facts o....
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....s 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 any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be an international transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance b....
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...., industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature. Clause (ii) of the aforesaid Explanation further explains the expression "intangible property" as marketing related intangible assets, such as trade marks, trade names, brand names, logos etc. amongst others. A reading of the aforesaid provisions makes it clear that when the two AEs engaged in a transaction involving either purchase or sale ; or transfer or lease; or use of intangible assets then the transaction shall be classified as international transaction. As is evident from the expanded definition that even provision of services; or lending or borrowing of money; or any other transaction having a bearing on the profits, income, losses or assets of such enterprises which shall also including mutual agreements or arrangement between the two for allocation, apportionment or contribution of cash etc. incurred or to be incurred shall fall under the definition of 'International transaction" for the purposes of Chapter-X of the Income Tax Act,1961. 18.7. A further reading of Sections 92B and 92F in concert also makes it clear that the pre-requisit....
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....ed Enterprise Consideration (INR) Purchase of digital hearing aids and its spare parts. Widex A/S, Denmark 18,85,23,124 /- (Qty.-20,110) Import of Lab Equipments, Advertisement material, consumables etc. Widex A/S, Denmark 1,84,938/- (Multiple Items) 18.10 The TPO noting the advertising, marketing and sales promotions expenses amounting to Rs. 6,18,99,939/- rejecting the assessee's explanation considered them to have been incurred for the benefit of the AE for which compensation had not been received. The specific break up of the expenses is extracted hereunder from the order : S. No Particulars Amount (Rs.) 1 Advertisement & Business Promotion 3,57,99,743 2 Discount 89,59,918 3 Commission 1,71,40,278 Total 6,18,99,939 18.11 The assessee on the basis of FAR analysis claimed to be low risk distributor as all major risks of technology, warranty and market risks were borne by the AE. Consequently, it was claimed that the benefit of the AMP expenses was for the assessee even if AE got some incidental benefits. Extracting the FAR analysis from the TP Study, the TPO....
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....sales activity starting from procuring the digital hearing aids to selling them to either the dealers or the end users. The Widex India determines the need of its sales personnel and accordingly sets their remuneration. It is also responsible for determining the sale price of tlie digital hearing aids to the unrelated customers. Invoicing, Collection and Distribution. The Widex India is responsible for maintaining the distribution network and delivering the digital hearing aids to the dealers or the end users. It houses the inventory in its warehouses and also maintains a control the inventory. The Widex India handles the invoicing in case of the sale of digital hearing aids in India. The Widex India is also responsible for handling the import administration of the digital hearing aids. After -sales activities The Widex India handles the customer complaints and is responsible for carrying out repairs in case of any defect. The Widex India also handles its oxen billing and collection of money. Accounting The Widex India is involved in processing the sales order from unrelated parties. It also maintains its own accounts, ....
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.... Changes in currency rates can cause foreign exchanges profits and losses where products, resources or services are purchased in one currency and then sold in another currency. Widex India does bear some foreign exchange risk, as it is has to make remittance to AE on account of purchases in foreign currency. Accounts Receivable/Credit Risk Credit risk is the risk that a client will be unable to fulfill its obligation to pay for its purchases or services under the terms of its contract. Another component of credit risk is the cost of replacing a customer order after the client has defaulted. The products are sold to end users by Widex India through its dealer's network and also directly with average credit payment term of30 days, taking into account the past recovery trends of Widex India there is very low credit risk. Product Price Risk Product price risk is the risk that the value of future income streams is subject to external market prices or market rates. Effectively, it is the risk that an entity will not be able to sell products for the prices it anticipated after the product was purchased. Widex India does n....
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....e incurred was at the behest of the AE. 18.13. Considering the FAR analysis of the assessee, it can be safely concluded in the absence of anything to the contrary that the decision of incurring AMP expenses etc. was purely market driven in the interest of assessee itself exploiting the brand of the foreign AE to achieve a higher market penetration in the country. The hearing aid market as claimed on record is very limited and very competitive admittedly there is no agreement available and nothing in the arrangement or conduct of the assessee has been brought on record to show that the sales strategy, budgeting, pricing, market distribution etc. were done at the behest of the foreign AE. In the absence of any reference to any agreement or arrangement or for that matter, the conduct of the parties it cannot be inferred that the AE has a role for sales and marketing in India. Alternately that the assessee is carrying out these sales and marketing strategy conducted by the AE for the benefit of AE. We have come to the above conclusion considering the peculiar facts of the present case and the relevant provisions of the Act and the rules. 18.14 At this stage, it would not be out o....
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....m the AMP expenses of comparables for the reasons that such expenses lead to benefit to the AE? (iv) Whether the ITAT erred in deleting the addition of Rs. 1,80,73,10,769/- made by AO/TPO on account of advertising and marketing promotion under Section 37 of the Act? (v) Whether the ITAT erred in directing the AO/TPO that no addition is called for i.e. amount of Rs. 1,80,73,10,769 under section 37 of the Act?" 18.14.2 The question raised by the assessee in appeal before the Court for consideration are also extracted hereunder : '(a) Whether on the facts and in the circumstances of the case, the ITAT erred in law in upholding, in principle, transfer pricing adjustment made by the Assessing Officer/TPO in respect of expenditure incurred on AMP expenses? (b) Whether on the facts and in the circumstances of the case, the ITAT erred in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not be characterized as an international transaction as per Section 92B, in the absence of any proved understanding/arrangement between the Assessee and the AE so as to invoke Section 92 of the Act? ....
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.... "question (e) does not survive after the decision of this Court in Sony Ericsson Mobile Communications India (P.) Ltd. (supra), since it specifically overruled the decision of the majority of the Special Bench of the ITAT in LG Electronics India (P.) Ltd. and held that the BLT could not be adopted for determining the ALP of an international transaction involving the AMP expenses" Accordingly, the Court framed the following questions for consideration in the assessee's appeal : (i) Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act? (ii) If the answer to the above question is in affirmative, was the ITAT justified in remanding the matter to the AO/TPO for segregating the AMP expenses incurred into the extent attributable to promote the brand of the AE, and that was wholly and exclusively for the business purposes of the Assessee, allowable under Section 37 of the Act? 18.14.5. Considering the submissions on behalf of the assessee which are near similar to what has been argued in the present proceedings, the Court considered the departmenta....
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....study submitted by the Assessee which according to him shows that the Assessee is engaged both in manufacturing and distribution of products. It also imports some finished goods and spares from its AE which are sold in India. The Assessee distributes the manufactured products to neighbouring countries such as Nepal, Bangladesh, Sri Lanka, Maldives and African countries. The major sales of finished goods are to the AEs which constitutes an international transaction. Even in respect of such exports, the Assessee is undertaking marketing activities. It is submitted that the Assessee is not an independent manufacturer but is manufacturing "for the benefit of the group entities" and its status is akin to that of a contract manufacturer. Therefore the AMP activity is not for the sole benefit of the Assessee but for the group as a whole. 27. According to the Revenue, the TP report shows that the market risks with respect to the product including customer acceptance are borne by the Whirlpool Group. Therefore, it was "not open to urge that AMP functions of the appellant are solely for its own benefit". Considering the Assessee was paying brand fee @1% of the domestic and export sa....
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....not be a matter of inference. There has to be some tangible evidence on record to show that two parties have "acted in concert". (emphasis supplied by bold texting). Referring to the decision of the Apex Court in the case of Daiichi Snakyo Co. Ltd. v. Jayaram Chigurupati [Civil Appeal No. 7148 of 2009, dated 8-7-2010] wherein the interpretation of the expression "acted in concert" arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The Court examining on facts the question, whether at the relevant time the Appellant i.e., Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4)(b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The Court in para 44 observed that; 'The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a certain target company. There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the targ....
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....n unable to explain why there should a presumption that as a result of the TLA, there must have been an understanding between Whirlpool USA and WOIL and that WOIL will spend 'excessively' on AMP in order to promote the 'Whirlpool' brand in India. In other words, it is not clear why a presumption should be drawn that since an incidental benefit might enure to the brand of Whirlpool USA, a proportion of the AMP expenses incurred must be attributed to it." 18.14.10 In view thereof, the Court agreed with the submissions advanced on behalf of the assessee about lack of machinery provision which when considered on the facts of the present case where multiple possible alternate assessments are found to have been made on record i.e. one on a substantive and two on protective basis suggests clear lack of machinery provisions where the tax authorities in the absence of relevant provisions on the Statute and Rules are trying to outguess the possible outcome of the issues pending before the Apex Court or which may be carried to the Apex Court. These frantic actions of somehow bringing to tax something for which the provisions have not been made i.e. machinery is lacking full....
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....ion 92C(2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the "safe harbour" rules for determination of the ALP, can be applied only if the TP adjustment involves substitution of the 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.' 42. Again in Maruti Suzuki India Ltd. (supra) the Court held: "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 step is to ascertain the disclosed 'pric....
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....re is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP. 48. Question (i) in the Assessee's appeal viz., "Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act?" is answered in the negative, i.e., in favour of the Assessee and against the Revenue. Consequently Question (ii) in the Assessee's appeal is not required to be answered. Further, the only question framed in the Revenue's Appeal viz., "Whether the ITAT erred in deleting the addition of Rs. 180,73,10,769 made by the AO/TPO on account of AMP expenses under Section 37 of the Act?" is answered in the negative, i.e. in favour of the Assessee and against the Revenue. ....
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.... Act. The Ld. counsel for the assessee contended that the AMP expenditure incurred had not been mentioned as a separate international transaction in the TP Study by the assessee but was considered as a function for benchmarking import and trading business. The Ld. counsel for the assessee drew our attention to the relevant pages of the TP Study i.e. pages 4 and 8, para 4.1 to 4.5, page 17 of the TPO order, pages 26 to 30 of the TP Study and pages, 53 to 68 of the Paper Book, which were the objections filed before the DRP. The Ld. counsel for the assessee stated that the AO/DRP/TPO had proceeded on incorrect presumption about existence of AMP expenditure as international transaction without citing any basis. The Ld. counsel for the assessee placed reliance on the decision of the I.T.A.T. Delhi Special Bench in LG Electronics India Pvt. Ltd. Vs. ACIT and Delhi High Court decision in Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 in support of this contention. The Ld. counsel for the assessee pointed out that in the case of Sony Ericsson Mobile Communications India P. Ltd., for subsequent assessment year, the Hon'ble Delhi High C....
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....r recommends Rs. 4.86 crore addition on account of Advertising Marketing and Promotion (AMP) expenditure (refer internal page 35). A categorical finding is recorded that other transactions are at arms-length (this includes international transaction of imports). > AMP spending not mentioned as separate international transaction in Transfer pricing study by Appellant - but was considered as a function in benchmarking import and trading business.(kindly refer(i) page 4 & page 8 para 4.1 to 4.5 and page17(conclusion on international transaction) of TP order, (ii)pages 26 & 30 of paperbook transfer pricing study (Hi) Objections filed before DRP pages 53 to 68 of Paper book) Before TPO as also DRP, Appellant contended that AMP expenditure cannot be treated as separate international transaction for chapter X; AO/DRP/TPO proceeded on incorrect presumption about existence of AMP as international transaction without citing any basis - reliance was placed on decision of special bench in LG electronics and Delhi High court decision in Sony Ericsson (374 ITR 118) in support of such presumption - such presumption has no factual foundation whatsoever. In Sony's own case for ....
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....ra (b) on internal page 4 & table at page 11 of DRP order (II) table at page 146 of Paperbook). IV. Without prejudice to above all dealings with Associated Enterprises are at arms-length o Alternative analysis by applying Resale price method submitted before DRP( kindly refer running page 71, internal page 34, of the appeal set) applying gross margin of two comparable companies (not disputed by TPO) selected and deducting Rs. 4.86 crores of AMP proposed by TPO as recoverable from AE (assuming without accepting). Still Gross margin of Appellant being better than comparable company Gross margin further confirmed arms-length dealings between AE's. o Direct selling expenditure not excluded from Advertisement, Marketing and promotion expenditure despite of DRP direction -> entire Rs. 3.58 crores (after excluding discount and commission) considered. DRP itself adoptsRs. 1.88croresasthe revised number for discussion (kindly see para b on page 4 of DRP order AND rectification application filed which is placed at page 146 of paper book). IV. Other issues: o Fact of no royalty payment by Appellant for use of established trade mark/ brand usage....
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....us cases by the High Courts which have highlighted the tests to be applied for ascertaining whether there existed a transaction for brand promotion in a particular case. We find that in the case of Bausch and Laumb Eyecare (India) Pvt. Ltd. (supra) the Hon'ble Delhi High Court has deliberated extensively on the issue of AMP expenditure and the existence of international transaction vis a vis the same, dealing with each and every argument raised by the TPO/DRP and analyzing the same threadbare. The Hon'ble High Court interpreted the provision of Chapter X, section 92B to 92F, and stated that the applicability of TP provisions begin with the existence of an International Transaction at a certain disclosed price which is substituted with the ALP by way of adjustment under TP provisions. The Hon'ble High Court then went on to interpret the definition of International Transaction as provided in section 92B and stated that the definition of the same pre-supposes the existence of an arrangement or agreement or understanding between the two AE's whereby one is obliged to spend excessively on AMP to promote the brand of the other. The Court then went on to negative the arguments of the ....
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....disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price 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 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(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 ....
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....#39;international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra) one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains 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 ....
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.... 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), 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-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO "to exami....
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....losed '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 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 ....
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.... the same time addressing the apprehension of tax avoidance." 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. 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 this position explicit. Therefore, where the existence of an international transaction 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". 66. On the issue of the intra group services, the Assessee is justi....
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....e by the assessee we are of the opinion that the TPO has wrongly invoked the provisions of Chapter X of the Act for the said AMP spend. Addition made of Rs. 4,59,11,663/- is, therefore, directed to be deleted. Further since the addition made has been deleted for the aforestated reason we do not consider it necessary to deal with the other arguments raised by the Ld.Counsel for the assessee. 15.Ground No.1 to 8 raised by the assessee are, therefore, allowed. 16.In ground No.9, the Ld. counsel for the assessee has sought directions to be given to the Assessing Officer to given due credit for unabsorbed depreciation brought forward from previous years. 17.We direct the AO to examine the claim of the assessee and decide the same in accordance with law after giving due opportunity of hearing to the assesssee. 18. In the result appeal of the assessee is allowed." 18.17 We find that the correctness of the said order to the extent permissible u/s 254(2) was challenged by the Revenue in M.A.76/CHD/2017 wherein the issues identified by the Co-ordinate Bench were set out as under : 2. Vide this Miscellaneous Application it has been pointed out that in th....
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....es whereby one is obliged to spend on AMP to promote the brand of the other , and that merely because the expenses resulted in service or benefit to the other party would not by itself constitute the transaction as an international transaction. The I.T.A.T. found that in the present case, there was no finding of any clause in the agreement entered into between the two parties, requiring the assessee to undertake brand promotion expenses on behalf of the assessee and it was also found that AMP spend had been treated as international transaction since it was found to benefit the AE only as the brand was owned by the AE. Therefore, following the decision of the Hon'ble Delhi High Court in the case of Bausch & Laumb Eyecare (India) Pvt. Ltd. (supra) the addition made on account of AMP expenses, treating it as an international transaction, was deleted. 4. In the Miscellaneous Application now filed before us, the contention of the Revenue is that the case of the assessee is different from the case of Bausch & Laumb Eyecare (India) Pvt. Ltd. (supra) and the same has been pointed out by referring to a clause in the agreement entered into between Widex Holding, Denmark and Mr.T....
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....reement between the assessee and its associated enterprise reflecting the entrustment of the liability/responsibility to carry out brand promotion expenses on behalf of the parent AE by the assessee. The clauses now referred to by the Revenue in support of its contention that they reflect the entrustment of the responsibility of carrying out brand promotion to the assessee by AE, we find are of no relevance. Clause No.21 of the JV referred to by the Revenue only states that the assessee company would market the licensed products which are manufactured in India. This is just a normal sales promotion responsibility for the goods manufactured by the assessee, entrusted to the assessee. It cannot by any stretch of logic be read to mean that the expenses for promoting the brand of AE was entrusted to the assessee. Similarly, the trade mark agreement at clause 22 of the Joint Venture agreement referred to by the Revenue in its Miscellaneous Application merely states that the trade mark name and logo of Widex is the exclusive property of the parent AE and separate agreement would be executed between the parties to ensure that it remains so in future also. We fail to understand how this th....