TaxTMI 
TaxTMI 
2020 (11) TMI 811
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....c. Transfer Pricing adjustment relating to advertisement and market promotion expenses. (Ground No. 9) d. Transfer Pricing adjustment relating to royalty. (Ground No.10) Other issues urged by the assessee are either general in nature or consequential. 3. The facts relating to the case have been narrated as under by the Tribunal in its order passed for AY 2013-14 in ITA No.:1385/Bang/2017:- "3. The facts relating to the case are stated in brief. The assessee is a partnership firm engaged in the business of manufacture and sale of Ayurvedic medicament and preparations, consumer/personal care products and animal health care products. The partners of the assessee firm are (a) M/s Himalaya Global Holdings Pvt Ltd., a foreign company registered in Cayman Islands and (b) M/s Himalaya Drug Co. Pvt. Ltd. These two partners respectively hold 88% and 12% share in the profits of the assessee firm. The TPO has also discussed ownership details of the above said two partner companies. Mr. Meeraj Alim Manal, is holding 100% shares in M/s Himalaya Global Holdings Pvt. Ltd. He also holds entire shares except one share in M/s Himalaya Drug Co. Pvt. L....
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....passed final assessment order. In the case, the AO has failed to follow the mandatory procedure prescribed under sec. 144C of the Act and the same would vitiate the assessment proceedings. Accordingly he contended that the impugned assessment order is liable to be quashed. 4.4 We notice that the AO has stated that the draft assessment order and the final assessment order have been passed u/s 143(3) r.w.s. 144C of the Act. Section 144C of the Act reads as under:- "Section 144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. (2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,- (a) file his acceptance of the variations to the Assessing Officer; or (b) file his objections, if any, to such variati....
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....he draft order, notwithstanding that such matter was raised or not by the eligible assessee. 9 to 15 ......" The AO has to complete the assessment by passing a final assessment order in conformity with the directions issued by Ld Dispute Resolution Panel (DRP). It can be noticed that the provisions of sec.144C of the Act prescribe procedures for completion of assessment of an "eligible assessee". There is no dispute that the assessee herein is an eligible assessee. Hence as per the provisions of sec.144C, the AO has to issue a draft assessment order to the assessee and the assessee is entitled to either accept it or to file its objections before Ld DRP & AO. There should not be any dispute that no enforceable demand can arise at the stage of passing of draft assessment order and the tax demand shall arise only after passing of final assessment order. 4.5 The Ld D.R submitted that the assessing officer has duly passed the draft assessment order in the instant case and the assessee, after receipt of the same, has filed its objections before Ld DRP within the stipulated time. The Ld Dispute Resolution Panel has issued directions to the AO after considering objections fi....
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.... order. It can be noticed that the Hon'ble Delhi High Court has rendered its decision on different set of facts and hence the same cannot be taken support of by the assessee. 4.8 The Ld A.R took support of decision rendered by Hon'ble Madras High Court in the case of ACIT vs. Vijay Television (P) Ltd (2018)(95 taxmann.com 101). The facts relating to the above said case are stated in brief. The AO referred the matter relating to international transactions to the TPO. After receipt of TPO order, the AO passed an assessment order on 26.3.2013, wherein he appears to have mentioned the section under which the said order was passed as sec.143(3). The AO also issued Notice of demand and penalty notice. Subsequently, noting the mistake that the correct section has not been mentioned, the AO issued a corrigendum on 15.04.2013 stating therein that the assessment order passed on 26.3.2013 has to be read and treated as a draft assessment order as per section 144C r.w.s. 92CA r.w.s 143(3) of the Act. The contention of the assessee before Hon'ble Madras High Court was that the assessment order passed on 26.3.2013 was final assessment order and it cannot be treated as draft assessment order. I....
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....sed under Section 143 (3) is a final assessment, after duly hearing the assessee and perusing the records. 29. However, curiously, the error that had crept in by mentioning of the incorrect Section in the proceeding was found out by the Revenue and, therefore, a corrigendum dated 15.4.2013 has been issued in and by which Column No.13 was to read as 144-C rws 92CA (4) rws 143 (3). 30. It is the contention of the learned senior counsel for the respondent/assessee that the issue as to whether the corrigendum issued by the Asst. Comm of Income Tax is really sustainable and whether it would have the effect of curing the deficiencies crept in the order dated 26.3.13 has been extensively dealt with by the learned single Judge and finally after elaborating the reasons it has been held that the corrigendum would not have the effect of curing the original order and the reasons stated are as under :- Under Section 144 (C) of the Act, the AO is required pass only a draft assessment order. DAO on the basis of the recommendations made by the TPO after giving an opportunity to the assessee to file their objections and only thereafter he could pass a final order. In othe....
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....ission of the Revenue that the Assessment Order passed under section 143(3) read with the corrigendum issued shall be treated as Draft Assessment Order cannot be countenanced. It is not the case of the Revenue that the Assessing Officer has consciously passed the Draft Assessment Order under Section 144-C, however, indicated the Section wrongly. 46. The Revenue, with a view to squirm around from under wrongful act of passing the assessment order, which is prohibited by law and an unlawful one, had issued a corrigendum, amending the Section under which the order has been passed, forgetting that the content of the order that matters and not the mere quoting of the Section alone. In other words, the window dressing which has been attempted by the Revenue would not give life to an order passed without jurisdiction. It is to be pointed out that the order of assessment, once issued under Section 143 (3), becomes final and reopening the same is impermissible. The mistake committed by the Revenue in not following the mandatory requirement of Section 144-C by passing an order under Section 143 (3) cannot be cured by the issuance of a corrigendum. In other words, the proceedings iss....
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.... assessing officer has also entered the demand raised under the above said order in "Demand and Collection Register" maintained by the department and further the demand was also uploaded on the website of the department. However, the above assessment order was titled as "Draft assessment order". The assessee filed its reply before the AO against the penalty notice issued u/s 271(1)(c) of the Act and also filed a petition for stay of recovery of tax. Subsequently, the assessee filed an appeal before Ld CIT(A), wherein it contended that the impugned assessment order is invalid as the same has been passed in violation of the procedure set out in section 144C of the Act. Subsequently the AO passed another order of assessment on 24.05.2010, wherein it was stated that since the assessee had not filed its objections before the DRP against the draft assessment order dated 24.03.2016, the final assessment order dated 24.05.2016 has now been passed. Under these set of facts, the co-ordinate bench held that the assessment order dated 24.3.2016 has not been passed in compliance of provisions of sec.144C of the Act and hence the same is to be held as a legal nullity. It can be noticed that t....
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....ver, we have observed earlier that the assessing officer, in the instant case, has passed the draft assessment order u/s 143(3) r.w.s. 144C of the Act. The assessee has also, in terms of sec.144C of the Act, filed its objections before the Ld DRP. After the receipt of the directions from Ld. DRP, the assessing officer has passed the final assessment order. Except for attaching a notice of demand along with the draft assessment order, everything has been done in accordance with the law. 4.12 The question that boils down is whether the notice of demand attached with the draft assessment order would make the said draft assessment order as final order and consequently, the whole assessment proceedings is liable to be quashed as illegal. In our view, the answer should be negative. As rightly pointed by Ld D.R, the notice of demand issued along with the draft assessment order is a legal nullity and does not exist in the eyes of law, since no valid demand could be raised under the draft assessment order. In our considered view, a document, which is held to be a legal nullity, cannot vitiate the assessment proceeding and the assessment order. Accordingly, we do not find any merit in ....
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....P)A No.807/Bang./2016 dated 04-07-2018 relating to AY 2011-12. The issue relating to AE relationship was declined to be examined by the co-ordinate bench in the above said year and it appears that the assessee has not objected to the same. Following the decision rendered by the co-ordinate bench referred above, we reject these grounds. 21. The ground numbers 7.7 to 8.4 relates to the adoption of "Cost Plus Method" as most appropriate method by the TPO and consequent transfer pricing adjustment made by him, which were confirmed by Ld DRP. Identical issues were considered by the co-ordinate bench in assessee's own case in IT(TP)A No.807/Bang./2016 dated 04-07-2018 relating to AY 2011-12 reported in (2018)(96 taxmann.com 335). We extract below the relevant discussions made by the coordinate bench:- "8.1 Ground VIII (supra) is raised in respect of the rejection of the assessee's TP Study/documentation done adopting TNMM as the Most Appropriate Method (MAM) and the TPO's adoption of CPM as the MAM in place of TNMM. Ground IX (supra) is in respect of the alleged flaws in determination of ALP based on CPM, without admitting CPM as the MAM. In Ground No.X, the ass....
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.... products exported outside India and further the margin of domestic pharma division was not comparable as the parameters of marketing, manufacturing, competition, exposure and acceptance of ayurvedic products by customers, government control, etc are entirely different in India for pharma division. 8.2.3 On the other hand, the personal care division products are sold through distributors and the same is market driven and therefore the ranges of personal care division in India was considered with export to AEs. Since the net margin from exports to AEs was higher than the net margin from domestic sales to unrelated parties, the assessee concluded that its exports to AEs were at arm's length. 8.2.4 The TPO after examining the assessee's TP Study issued show cause notice to the assessee proposing to substitute CPM as the MAM in place of TNMM adopted by the assessee. In this regard, the TPO compared the gross margin earned on exports at 23.32% as against gross profit of 50.65% earned by the domestic consumer product division and proposed Transfer Pricing Adjustment. The assessee filed its objections thereto challenging the adoption of CPM as the MAM, inter alia....
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....e TPO accepted that various expenditure like distribution, marketing, advertisement, selling, administrative costs, etc were incurred in the domestic market segment and that the same was not incurred in connection with exports to AEs. It was submitted that in the domestic market, since the assessee had to incur huge expenditure on distribution, marketing, advertisement, selling, etc. in the domestic market, the selling price and gross profit of products for sale in domestic market was fixed at a high price. On the other hand, as the AEs themselves incur similar expenses in the foreign markets, the selling price of products exported to AEs does not factor in similar expenditure and hence the selling price and gross profit of these products are lower when compared to that of products sold in the domestic market. 8.3.2 The learned Authorised Representative referred to and placed reliance on OECD Guidelines for transfer pricing, illustration given thereunder and various judicial pronouncements in order to explain why TNMM and not CPM be regarded as the MAM. It was submitted that CPM cannot be considered as MAM due to transactional and functional differences between domestic an....
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....n Method; (f) Such other method as may be prescribed by the Board. Sub-section 2 of Section 92C of the Act provides that the MAM referred to in sub-section (1) shall be applied, for determination of the ALP, in the manner as may be prescribed. Rule 10B of the IT Rules, 1962 provides for the determination of ALP under Section 92C of the Act. The TPO in the case on hand has applied CPM as the MAM. Rule 10B(1)(c) deals with the determination of ALP as per CPM and the same is extracted hereunder :- "(c) cost plus method, by which,- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take i....
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.... and other differences between the international transactions and the comparable uncontrolled transactions. (** Mistake in numbering) 8.5.5 It is an undisputed fact on record that, in respect of finished goods exported to AEs, the entire marketing, adjustment, distribution and sales activities are performed by the AEs and not by the assessee. The TPO has acknowledged/accepted this fact at various places in his order under Section 92CA of the Act; viz. at the 1st para on page 3 and 6, last para of page 4, 2nd para on page 5, etc. The TPO, however, rejected TNMM as the MAM and adopted CPM for determination of ALP of sale of finished goods to the assessee for the reason that, even though the products sold in the domestic consumer product division are comparable to the products sold to AEs, the functions performed, assets employed and risks undertaken in both the segments are not the same. The selling price and gross profit of products sold in the domestic consumer division is higher than that of the products exported to AEs for the reason that the assessee in the domestic consumer product division undertakes all function and incurs expenditure on distribution, marketing, adve....
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....force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." As per Rule 10B(3), an uncontrolled transaction shall be comparable to an international transaction if :- "E (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." The effect of Rule 10B(2) and (3) is to compare an international transaction with an uncontrolled transaction with reference to the parameters as explained at (a) to (d) above and to make reasonably accurate adjustments to eliminate the material effects of differences between the international transactions and uncontrolled transactions. 8.5.8 In the case on hand, as discussed above, the assessee mentions a hig....
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....t above, we are of the view that CPM cannot be considered as the MAM. In coming to this view, we are fortified by the decision of the Pune Bench of the ITAT in the case of Drilbits International (P.) Ltd. v. Dy. CIT [2011] 142 TTJ 86, wherein on similar facts and circumstances, it was held that gross profit mark up on domestic sales cannot be compared with gross profit on export sales to AE, reasonably accurate adjustments cannot be made to eliminate the differences between the domestic sale; export sales and consequently CPM cannot be considered as the MAM; and in this regard at para 50 thereof held as under :- "50. Considering the above submissions, vis-à-vis the method i.e. CPM (cost plus method) adopted by the learned TPO to determine the ALP, which has been relied upon by the learned Departmental Representative, we find that the learned TPO while adopting CPM has failed to appreciate several material aspects of the issue as discussed above. In our view, the learned TPO was not justified in comparing the gross margin in export segment vis-a-vis gross margins in domestic segment. There are various differences in the functions performed and the risk assumed in the....
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.... proposition, the above principle holds good, however, as we have held that, in the case on hand reasonably accurate adjustments cannot be made to determine the adjusted profit mark up as per Rule 10B(1)(c), CPM cannot be considered as the MAM. 8.5.12 The learned Departmental Representative also placed reliance on the decision in the case of Diamond Dye Chem Ltd. v. Dy. CIT in ITA No.3073/Mum/2006 dt.14.5.2010, wherein the Tribunal accepted CPM as MAM for the following reasons as held at para 35 thereof, which is extracted hereunder :- "35. We find the assessee is manufacturing Optical Brightening Agents (OBAs) which are being used in textile and paper industries and which are exported by the assessee to the AEs as well as Non- AEs. Therefore, we do not find any merit in the contention of the assessee that there is product dissimilarity between goods exported to AEs and unrelated parties and, therefore, the Cost Plus Method is not applicable. Further the learned counsel for the assessee also could not satisfactorily explain as to what are the substantial differences in the functional and risk profiles of the activities undertaking by the assessee in respect of the....
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....ins earned in controlled and uncontrolled transactions, adjustments should be made to account for such differences. The extent and reliability of those adjustments will affect the relative reliability of the analysis. 8.5.14 On the other hand, the OECD, TP Guidelines, 2010, provides that TNMM is less affected by the transactional and functional differences as seen form Part III, B.2 at 2.68 thereof :- "2.68 One strength of the transactional net margin method is that net profit indicators (e.g. return on assets, operating income to sales, and possibly other measures of net profit) are less affected by transactional differences than is the case with price, as used in the CUP method. Net profit indicators also may be more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margins. Differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently, this may lead to a wide range of gross profit margins but still broadly similar levels of net operating profit indicators. In addition, in some countries the lack of clarity in the public data with respe....
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....everal reasons, database providers, it is apparent, have the requisite information and data of external comparables to enable comparability analysis of the controlled and uncontrolled transactions with necessary adjustment to obtain reliable results under TNM Method. This method also works to the benefit and advantage of the tax authorities in view of convenience and easier availability of data not only from third party providers, but on their own level, i.e. assessment records of other parties. 90. The strength of the TNM Method is that net profit indicators are less affected by transactional differences in comparison with some other methods. This method is more tolerant to functional differences between controlled and uncontrolled transactions in comparison with resort to gross profit margins......." 8.5.16 In the case on hand, the net margin earned by the assessee in respect of personal care division in the domestic segment at 11.30% was compared to the net margin from exports to AEs at 15.80%. Since the net margin from exports to AEs was higher than the net margin from domestic sales to unrelated parties, the assessee concluded that its exports to AEs....
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.... assessee itself. At para 1.2 on page 3 of his order under Section 92CA of the Act, the TPO has accepted that the assessee has its own range of products and the AEs only choose from the standard products which are manufactured by the assessee for the Indian Market. In our view, the TPO's understanding of a contract manufacturer will make every manufacturer of goods in India who would not only make domestic sales but also effect sales to an overseas distributor as a contract manufacturer. A coordinate bench of this Tribunal in the case of Essilor Mfg. India (P.) Ltd. v. Dy. CIT [2016] 67 taxmann.com 377 held that an assessee carrying out its independent activity of manufacturing cannot be treated as a contract manufacturer. It was held that in such circumstances CPM cannot be applied and TNMM will be the MAM. In view of the overall consideration of the peculiar facts and circumstances of the case, as discussed above, we hold that CPM adopted by the TPO is incorrect and contrary to the facts of the instant case and that the assessee is justified in adopting TNMM for determining the ALP in respect of finished goods exported to AEs. In this view of the matter, the Transfer....
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....dinate bench has also examined the Arms length price of export to AEs under TNM method. It has compared Net margin rate declared by the assessee in respect of "Domestic - Personal Care Division" with the net margin rate declared in Exports to AE. After comparison, the co-ordinate bench has held that the net margin rate from assessee's exports to AE is higher when compared to the result of its margins in respect of transactions in the personal care division in the domestic segment and accordingly held that the price of sale of finished goods to its AE is at arm's length. Accordingly, the co-ordinate bench has deleted the T P adjustment made in respect of Exports made to AEs. Before us, the Ld A.R submitted that the Net profit margin declared during the year under consideration was 12.60% in Export to AE and the net profit margin declared in the domestic personal care division was 1.19%. Accordingly, he submitted that the international transaction of Export to AEs is at arms length and hence the impugned T P adjustment should be deleted. 25. We heard the parties on this issue and perused the record. We have noticed that the CPM method adopted by the TPO for bench ma....
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..... He further submitted that the TPO himself has accepted that (a) AEs perform marketing function and the assets required to perform the function of marketing are owned by the AEs. (b) In AY 2012-13, the TPO has expressed the view that the Corporate expenses should not be debited to "Exports to AE section". (c) The TPO has also observed in AY 2012-13 that the administrative and selling expenses are not incurred on export to AEs. The Ld A.R submitted that the division wise profit and loss account prepared by the assessee for the year under consideration adheres to the view taken by the TPO. He submitted that the TPO has, in principle, has accepted the division wise profit and loss account except with regard to discounts, i.e., The assessee had deducted discounts and discounts for damaged goods from Sales figure, while the TPO has taken it as a Profit and Loss item. He submitted that this adjustment made by TPO will not have any impact when the net profit margin rate is taken as PLI. He submitted that the assessee had to incur Corporate expenses, Administrative expenses and Marketing expenses for "domestic personal care division", while these expens....
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....he net profit margin @ 19.43% in "Domestic-Personal care division" and at 13.08% in "Exports to AEs" division. Since the TPO proceeded to compare gross profit margin, he did not give any significance to the net profit margin. We have earlier rejected the methodology adopted by the TPO and we have upheld the assessee's stand on TNMM and Net profit margin. 5.8 The assessee has furnished explanations in this regard. It has submitted that the TPO has omitted to deduct following expenses while working out the net profit for "Domestic - Personal care division":- Payments to and Provision for employees - Rs. 17,63,83,224 Freight and forwarding charges - Rs. 11,70,49,511 The assessee submitted that the net profit worked out by the assessee in "Domestic-Personal care division" was Rs. 28.68 crores. The TPO has worked out the net profit at Rs. 58.02 crores. The difference represents the aggregate amount of above said two expenses, i.e., Rs. 29.34 crores. The Ld A.R submitted that the TPO has excluded both the above said expenses without assigning any reason. The Ld A.R submitted that the assessee has adopted consistently very same methodology to work out net profit in....
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....n AY 2011-12. The discussions made by the Tribunal in AY 2013-14 are extracted below:- "33. We notice that an identical issue was examined by the co-ordinate bench in the assessee's own case in AY 2011-12. The relevant discussions made by the co-ordinate bench in assessment year 2011-12 are extracted below:- "11. Ground No.XI - Advertisement, Marketing & Sales Promotion (AMP) Expenses - Transfer Pricing Adjustment : Rs. 31,69,02,034. 11.1 In the course of proceedings, the TPO noted that the assessee had incurred huge advertisement and selling expenditure in marketing its products. Taking into account the fact that the brand name and logo 'Himalaya' is owned by M/s. Himalaya Global Holding Ltd; Cayman Islands, the TPO held that the legal owner, namely, M/s. Himalaya Global Holding Ltd., Cayman Islands (viz. holding 88% share in the assessee firm) should meet the expenditure on promotion of the brand name OR it should compensate the assessee for performing the function of developing the brand name and logo in India. The TPO was of the view that the AMP expenditure incurred by the assessee is in excess of the gross profit itself, it cannot be said th....
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....by the fact that the assessee, being a firm was not recognized as a legal entity outside India and therefore 'HGH', being a partner and a legal entity was recognized as the owner of the brand. It was contended that Sec. 92 of the Act is a machinery provision and not a charging section and therefore notional income cannot be charged to tax. According to the learned Authorised Representative, the advertisements aired OR printed do not carry the name of 'HGH' and in this regard, relying on the certificate issued by M/s. Starcom Worldwide (page 471 of Paper Book - 2) submitted that the advertisement expenses are for the Indian Market only as these advertisements are not aired in the international market. The learned Authorised Representative further contended that the 'Bright Line Test' adopted by the TPO for making the Transfer Pricing Adjustment has no legal sanctity and hence entire Transfer Pricing Adjustment should be deleted. 11.2.3 Without prejudice, it was contended by the learned Authorised Representative that selling expenses do not form part of AMP and consequently if the correct amount of advertisement expenses is considered, it would be see....
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....the file of TPO for fresh decision in the light of law laid down by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P.) Ltd. (supra), cannot be acceded to. 20. Subsequent to the decision in the case of Sony Ericsson Mobile Communication India (P.) Ltd. (supra), the Hon'ble Delhi High Court had rendered five decisions on the same issue. Those decisions are: (i) Maruti Suzuki India Ltd. v. CIT (282 CTR 1), (ii) CIT v. Whirlpool of India Ltd. (129 DTR (169), (iii) Bausch & Lomb Eyecare (India) (P.) Ltd. v. Addl. CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. v. ITO (ITA No.349/2015 dated 13/01/2016) and (v) Honda Seil Products In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon'ble Delhi High Court. The Hon'ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certa....
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....ent +is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain 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....
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....it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an '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 ....
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.... shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being." 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 Ex....
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....adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed '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 p....
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....arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at 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....
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....o determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered as a part of the operating cost. Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed.' 11.4.2 In the case on hand, the TPO has made the Transfer Pricing Adjustment in respect of AMP expenses on the ground that the said expenditure has resulted in promotion of the brand 'Himalaya' owned by M/s. Himalaya Global Holdings Ltd., Cayman Islands and has applied the 'Bright Line Test' for this purpose. However, neither the TPO nor the Assessing Officer has brought on record any material evidence to substantiate the existence of any agreement or arrangement, either express or implied between the assessee and 'HGH', Cayman Islands for promotion of its brand. The Hon'ble High Court of Delhi in a series of decisions, inter alia, including the case of Maruti Suzuki India Ltd. v. CIT [2015] 64 taxmann.com 150/[2016] 237 Taxman 256/381 ITR 117 (Delhi) emphasized the importance of Revenue having t....
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.... of the TPO is that the AMP expenditure incurred by the assessee has resulted in a benefit to the legal owner of the brand and the logo, i.e. M/s. Himalaya Global Holdings, Cayman Islands. The contentions of the TPO that the foreign AE has benefitted on account of the AMP expenditure incurred and therefore the AMP expenditure cannot be said to have been incurred by the assessee for its own business, etc. have been rejected by the Hon'ble Delhi High Court. In the case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra), the Hon'ble Delhi High Court at para 121 of its order observed that there is nothing in the Act on Rules to hold that it is obligatory that AMP expenses must be necessarily be subjected to the 'Bright Line Test' as this would amount to adding words in the statute and Rules and introducing a new concept which has not been recognized and accepted as per the general principles of international taxation accepted and applied universally. In the case of Maruti Suzuki India Ltd. (supra), the Hon'ble Delhi High Court at paras 84 to 86 thereof have held as under :- "84. The Court next deals with the submission of the Revenue that the be....
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....#39;s international transactions with its AEs were at Arm's Length and therefore no separate adjustment for AMP expenditure is called for. We, consequently hold that the Transfer Pricing Adjustment of Rs. 31,69,02,034 made by the TPO in respect of AMP expenditure is to be deleted. Ground No. XI is accordingly allowed." 34. We notice that the co-ordinate bench has, following various decisions, held that the revenue has to first show that the AMP expenses would fall under the category of "international transactions". For that purpose, the revenue has to show that there existed an agreement between the assessee and its AE in the matter of incurring of AMP expenses. Admittedly, it is not shown in the instant case that there existed any agreement relating to incurring of AMP expenses. Thus, we notice that there is no change in facts relating to this issue between the current year and the AY 2010-11/2011-12. It was also held that when TNMM method is applied to benchmark the entire international transactions, then there is no requirement of making separate TP adjustment on account of AMP expenditure. In the earlier paragraphs, we have also held that TNMM as most appropriate m....
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...., it is made to clear that the right to exploit the brand name, logo, trademarks etc., continue with the assessee only. Hence, the assessee is also beneficiary of AMP expenses or the promotion of brand. In this view of the matter also, the question of making T.P adjustment in respect of AMP expenses on account of "brand promotion" does not arise. Hence, on this reasoning also, the impugned TP adjustment on AMP expenses is liable to be quashed. 36. Accordingly, following the decision rendered by the coordinate bench in the assessee's own case in AY 2011-12 (referred above) and also for the reasons discussed in the preceding paragraph, we direct the AO to delete the T.P adjustment made in respect of AMP expenditure." 6.2 The facts and circumstances surrounding this issue is identical in this year also. Accordingly, following the decision rendered by the Tribunal in AY 2013-14 and 2011-12, we direct the AO to delete the transfer pricing adjustment made in respect of Selling and Marketing expenses. 7. The last issue relates to the Transfer pricing adjustment made in respect of royalty. The TPO noticed that the assessee has got "Research and Development" unit. He took the....
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....applied for registration. He also noticed that one of the conditions put by the concerned authorities is that they can visit to India in order to audit the manufacturing facilities of the assessee in India. The TPO noticed that the assessee possesses 597 products registrations in various Countries. The TPO took the view that the "Product registrations/license" is an intangible asset. The TPO noticed that the assessee did not market its products directly by using the "Product registration/license" obtained from various Countries. However, it has indirectly marketed the products through its AEs and has also allowed its AEs to use the Product registration/license. Accordingly, he took the view that the assessee should have collected royalty from its AEs. Accordingly, he took the view that the AEs have exploited the benefits of the product licences obtained by the assessee without paying royalty or usage charges to the assessee. Following observations made by the TPO are relevant here:- "3.6 It is also observed that an AE which is resident in UAE is marketing products in African Countries using taxpayer's product registration. Had tax payer itself ma....
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....rice charged by the assessee on exports would include all the costs incurred by it for sale of its products in foreign countries. He submitted that the view taken by the TPO is against trade practice, i.e., no manufacturer would charge separate amount as royalty over and above the selling price. He submitted that the product license/registration could be obtained only by the manufacturer of the drugs, since the manufacturer alone would hold the details of clinical trials, technical details of products etc. He submitted that it is primary condition prescribed by any Country to obtain product registration/licences before marketing the drugs/beauty products and the same has to be obtained only by the manufacturer, before marketing the products in a Country. Hence it is only a matter of compliance with concerned Government regulations. He submitted that the decision as to direct marketing of products by itself or marketing the products through distributors appointed, is a commercial decision/business strategy of any business concern. The compliance of Government regulations actually help or enable the assessee to market its products in those Countries and hence the real beneficiary is ....
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....as also exported to non-AEs and did not charge royalty separately. He further submitted that the AEs did not carry on any manufacturing activity and assessee has not given any license to the AEs. It has simply exported the finished goods for resale only. 45. He submitted that the decision rendered in the case of Dabur India Ltd (supra) is not applicable to the facts of the present case. He submitted that, in the case of Dabur India Ltd, the foreign AE was carrying on manufacturing activity and the assessee therein gave license to the said AE to use its brand name on the products manufactured by the foreign AE. It was also noted that the said products were manufactured earlier by another company (unrelated to the assessee), from whom the assessee had collected royalty for use of its brand name. The said company was acquired by the assessee and hence it became its AE. After becoming AE, it stopped collecting royalty contending that there is no agreement to pay royalty. Under the above set of facts, it was held that the TPO was justified in making T.P adjustment. He submitted that the assessee herein is simply exporting the finished goods to its AEs, which in turn, s....
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....M/s Dabur India Ltd. Subsequently M/s Dabur India Ltd acquired 100% shareholding in M/s Redrock. Consequently M/s Redrock was renamed as M/s Dabur International Ltd. It is pertinent to note that M/s Dabur International Ltd was manufacturing certain items with the support of M/s Dabur India Ltd and it was also manufacturing certain other items without such support. However, it used the brand name of "Dabur" for all its products, i.e, whether the products were produced with or without the support of M/s Dabur India Ltd. However, during the year under consideration, it did not pay the royalty of 1% on the products manufactured without the support of M/s Dabur India Ltd. The TPO determined ALP of royalty @ 1%, as the same rate was paid by erstwhile M/s Redrock. The action of the TPO was upheld by the Tribunal and the Hon'ble Delhi High Court. 49. We notice that the facts prevailing in the case of M/s Dabur India Ltd is totally different from the facts prevailing in the instant case. We have noticed that M/s Dabur International ltd was manufacturing certain goods without the support of M/s Dabur India Ltd, but used the Dabur brand name for those items also. Hence it was a c....