TaxTMI 
TaxTMI 
2020 (12) TMI 801
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.... selling and distribution.eic.) taken to further its own Business interests, and that it is the primary benefactor of all expenses (including AMP expenses) incurred by it, whereas any benefit derived by the AE(s) thereof is purely incidental. 1.3 Ground 3: Without prejudice, the Hon'ble DRP and Learned AO/TPO have proceeded to conclude assessment proceedings of the Appellant on the basis of flawed assumptions and subjectively treating the Appellant as a 'Distributor' without giving cognizance to the fact that (i.e. the Appellant) is a full-risk bearing licensed manufacturer engaged in manufacture and sale of alcoholic beverages under the trade names licensed by its AE(s). 1.4 Ground 4: On the facts and circumstances of the case and in law, the Hon'ble DRP and Learned AO/TPO have grossly erred in alleging that the Appellant is providing brand building services to its AE(s) and have subjectively proceeded to make TP addition on account of AMP expenses using Cost Plus method along with gross margin earned by the Appellant in respect of its distribution business. 1.5 Ground 5: Without prejudice, the Hon'ble DRP and the Learned AO/TPO have erred in not giving ....
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....e subject. The Learned TPO/Hon'ble DRP have taken an extremely prejudicial stand without appreciating the facts, and circumstances applicable to the Appellant's instant case. 1.10 Ground 10: On the facts and circumstances of the case, the Hon'ble DRP and the Learned TPO have erred in rejecting the economic analysis carried by the Appellant for the purpose of benchmarking the international transaction involving 'payment of interest' on fully convertible debentures issued to its AE, and thereby erred in applying LIBOR based interest rate without appreciating that debentures issued by an Indian company represents debt in Indian currency. 1.11 Ground 11: On the facts and circumstance of the instant case, the Hon'ble DRP and the Learned \ AO/TPO have erred in law in suo-moto disallowing the entire amount of royalty paid and without providing an opportunity of being heard to the Appellant. Such action of the Hon'ble DRP and / Learned AO/TPO is bad in law and violates the well-established principles of natural justice. 1.12 Ground 12: On the facts and circumstances of the instant case, the Hon'ble DRP and the Learned AO/TPO have erred in rejecting economic analy....
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....s. 92.61 Cr. towards advertisement and market promotion (AMP) expenditure. This amounts to 26.19% of the total sales whereas the comparables' AMP was only 2.61%. After excluding selling expenses Rs. 21.29 Cr. analyzing the net AMP expenses of Rs. 71.32 Cr., the TPO used cost plus method for benchmarking this transaction and after adding a mark-up equal to the assessee's gross profit margin of 31.39%, made a TP adjustment of Rs. 48.57 Cr. on substantive basis. The revenue determined the adjustment on CUP method which is as under: "As per the segmental submitted by the taxpayer vie its submission dated 12.08.2015 the gross profit margin of the taxpayer is as under: Net Sales (A) 275358193 Material cost (B) 188914189 Gross profit (C) = (A)(B) 86444004 Gross profit mark up (D) (C/A *100) 31.39 With these remarks, the adjustment in this head is computed as under: Total Expenditure on AMP by the taxpayer 713,200,846 Mark-up @ 31.39 223,897,230 Adjustment 937,098,076 Less reimbursement received from AE 451,382,839 Adjustment u/s 92CA 485,715,237 The above amount of Rs. 485,715,237/- is being proposed as an ad....
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....dustrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; 3. Intangible property is defined in Explanation (ii) as follows: (ii) The expression "Intangible property" shall include: marketing related intangible assets, such as, trademarks, trade names, brand names, logos;........................ 4. Section 92F(v) defines a transaction as follows: transaction includes an arrangement, understanding or action in concert, whether or not such arrangement, understanding or action is formal or in writing; 5. Rule 10B(2)(c) is as follows: 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely....................... (2) For the purposes of sub-rule (1), the comparability of an international transaction or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following....
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....on that in most cases the assessed have submitted that the international transactions between them and the AE, resident abroad included the cost/value of the AMP expenses, which the assessee had incurred in India. In other words, when the assessed raise the aforesaid argument, they accept that the declared price of the international transaction included the said element or function of AMP expenses, for which they stand duly compensated in their margins or the arm's length price as computed. 53. We also fail to understand the contention or argument that there is no international transaction, for the AMP expenses were incurred by the assessed in India. The question is not whether the assessed had incurred the AMP expenses in India. This is an undisputed position. The arm's length determination pertains to adequate compensation to the Indian AE for incurring and performing the functions by the domestic AE. The dispute pertains to adequacy of compensation for incurring and performing marketing and 'non-routine' AMP expenses in India by the AE. The expenses incurred or the quantum of expenditure paid by the Indian assessee to third parties in India, for incurrin....
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....come or receipts, and also expenses and interest but in a different context. Thus, Section 37(1) and Chapter X provisions pertain to different fields. 56. Chapter X of the Act being a specific statutory provision has to be given effect to and in view of the said provisions arm's length price can be determined. The arm's length procedure prescribed in Chapter X, once applicable has to be given full application. Impact of Chapter X of the Act cannot be controlled or curtailed by reference to the allowability of expenditure under Section 37(1) of the Act. As noticed above and subsequently, provisions of Chapter X are applicable to international transactions between two related enterprises. The purpose of determination of arm's length price is to find out the fair and true market value of the transaction and accordingly the adjustment, if required, is made. The said exercise has its own object and purpose. 57. In terms of the aforesaid discussion, question No.2 has to be answered against the assessed and in favour of the Revenue. (ii) Yum Restaurants (India) Pvt Ltd v. ITO 2016-TII-02HC-DEL-TP 22. On the issue of AMP expense, however, the....
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.... the Revenue, that while an independent third party discharging similar function in an uncontrolled situation would be a proper comparable, the Assessee had to discharge its burden of showing that JFL was promoting the brand owned by its AE 'without any compensation'. It is submitted that agreement between JFL and its AE would have to be examined to ascertain the nature and extent of the obligation of brand promotion that is placed on JFL or the absence thereof. It is conceded that the comparable cannot be limited to application of the BLT. 26. The Court is of the view that after the decision in Sony Ericsson Mobile Communication India P. Ltd. (supra), the adoption of the BLT for determining the existence of an international transaction involving AMP is expenses no longer legally permissible. In that scenario, there would be a need for a detailed examination of the operating Agreement between Yum India, Yum Marketing and the franchisees to ascertain if any part of the AMP expenses is for the purpose of creating marking intangibles for the AE of Yum India. It is only after an international transaction involving Yum India and its AE in relation to AMP expenses is sho....
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.... action is intended to be enforceable by legal proceeding ". 9.8. From the above definition it is apparent that a transaction is an arrangement, understanding or action in concert, whether formal or in writing or whether enforceable or not by legal proceedings. The case of the Revenue is that brand-building by the assessee for its foreign AE via incurring AMP expenses to the extent of more than what other independent entities proportionately incur for advertisement of their products in a similar situation, has resulted into a transaction. On the other hand, it has been argued by the Id. AR that there is a lack of agreement or unison between the assessee and its foreign AE on the question of incurring AMP expenses for brand-building on behalf of the foreign entity. The contention has been made by the Id. AR that in the absence of any mutual agreement between the assessee and its foreign AE, it cannot result into a transaction. 9.9. We do not find any force in this contention made on behalf of the assessee. If the unison or mutual agreement be between two parties was to be deduced only from the terms of some formal agreement, then there was no need for the legislatu....
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....is no express agreement between the assessee and its foreign AE and still the facts and circumstances indicate that the Indian entity incurred some AMP expenses towards brand promotion of the foreign entity, the same shall be considered as an implied or oral transaction. 9.10. We do not find any force in the contention of the Id. DR that the mere fact of the assessee having spent proportionately higher amount on advertisement in comparison with similarly placed independent entities be considered as conclusive to infer that some part of the advertisement expenses were incurred towards brand promotion for the foreign AE. Every businessman knows his interest best. It is for the assessee to decide that how much is to be incurred to carry on his business smoothly. There can be no impediment on the power of the assessee to spend as much as he likes on advertisement. The fact that the assessee has spent proportionately more on advertisement can, at best be a cause of doubt for the AO to trigger examination and satisfy himself that no benefit etc. in the shape .of brand-building has been provided to the foreign AE. There can be no scope for inferring any brand-building without the....
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....imperative to note that the proposition laid down in para 17 is not infallible or is not an unexceptionable rule. Caveat has been included in the immediately next para no. 18. Two exceptions have been carved out of the general rule against re-characterization of any transaction as set out in para 17, viz. "(i) where the economic substance of a transaction differs from its form; and (ii) where the form and substance of the transaction are the same but the arrangements made in relation to the transaction, viewed in their totality differ from those which would have been adopted by the individual enterprise behaving in a commercially rational manner." In our considered opinion, the second exception governs the extant situation, as per which, where the form and substance of the transaction are the same, but arrangements made in relation to transaction viewed in totality differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The assessee incurred AMP expenses and explicitly showed them as such. Thus the form of showing the AMP expenses coincides with the substance of the AMP expenses. But the arrangement made in such transac....
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....onal transaction in respect of AMP with AE exists. 2. Yum Restaurants - Matter was referred to revenue to determine existence of an international transaction between assessee and its AE involving AMP expenses. 3. LG Electronics India Pvt. Ltd. - Held that there is transaction between the assessee and AE with regard to AMP expenses. 9. The bright line test was rejected by the Hon'ble Jurisdictional High Court in the case of Cannon India Pvt. Ltd. Vs CIT. On marketing tangibles in the case of Maruti Suzuki (2016) 381 ITR 117 and Whirlpool India Ltd. (2016) 318 ITR 154, the Hon'ble Jurisdictional High Court has rejected the contentions of the revenue and the issue is before the Hon'ble Supreme Court. 10. At the outset, the ld. AR argued that establishment of an existence of an international transaction is sine qua non for any further step to be taken under Chapter X. It was argued since the first step itself has not been fulfilled, the question of quantification and the approach to be adopted for that purpose do not arise. 11. On merits of the issue, the details of the AMP expenditure is submitted which is reproduced as under: Particulars Amount (INR) ....
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....eal on the issue of AMP adjustment is exactly similar to earlier year in assessee's own case for A.Y. 2011-12. The Hon'ble ITAT in ITA No. 1197/Del/2016 vide order dated 27.03.2019 has held that AMP functions performed is an International Transactions in Para 15 of the order. The same is reproduced below: "In view of the above facts, it is held that AMP functions performed by the assessee is an international transaction and bench-marking should be done in the light of the decision of Hon'ble jurisdictional High Court in the case of Sony Ericsson Mobile Communication (India) Pvt. Ltd. vs. CIT (2015) ITR 118 (Del). Therefore, AO/TPO is directed to determine the ALP of international transaction and calculate adjustment accordingly." 2. Basis on which the Hon'ble ITAT Para 15 held in A.Y. 2011-12 AMP expenses an International Transactions. (i) Reimbursement of Part of AMP Expenses In present case there is reimbursement of AMP expenses of Rs. 46,04,13,031/- by AE. [Kindly refer to table (Item No 7) in Para 3 of TP order (internal page 2)]. In the order of Hon'ble ITAT in ITA No. 1197/Del/2016, similar reimbursement is mentioned at item no. 6 ....
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.... Associated enterprise Amount (INR) Bacardi - Martini B. V. 437,444,207 Tradall S. A. 22,791,650 Bacardi - Martini Asia Limited Pacific 2,252,239 Total 462,488,096 It may be mentioned that the distribution agreement of the assessee is with Tradall SA and (Page 82 to 97 of Paper Book) and license agreement is with Bacardi International Ltd. (Page 98 to 112 of Paper Book). Therefore, advertisement expenses reimbursed by the AE namely Bacardi Martini B. P. is purely for Brand building and marketing intangible of Bacardi Group." (iv) No separate function of AMP for AE. Hon'ble ITAT for A.Y. 2011-12 in its order in Para 12 has emphasized that there is no bifurcation of AMP function for the AE for brand Building and for its own purpose by the assessee. Elon'ble ITAT has given the finding that common functions of AMP are performed and only part of the expenses is received from AE. The respective Paragraph is reproduced as under:- "There is no separate agreement between the assessee and its AE to ascertain as to what extent the AE will reimburse advertisement expense. Further (here is no facts available on record that....
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....essee's own case by A.Y. 2011-12 to held entire AMP expenses as an International Transactions. B. Applicability of other judicial pronouncement I. Subsequent to Sony Ericson Mobile ITA No. 16/Del/2014, Hon'ble High Court of Delhi has held that the first step before bench marking the AMP expenses it should be proved that such AMP expenses is an International Transactions as in the case of Maruti Suzuki (2016) 381 ITR 117, Whirlpool (2016) 318 ITR 154, Bansch & Lomb (2016) 381 ITR 227 and other cases. Hon'ble High Court has given the ruling that mere excess expenditure on AMP is not a basis of holding AMP expenses as International Transactions. The findings of the Hon'ble High Court is in no way come against the findings of the Hon'ble ITAT in assesses case against the finding for A.Y. 2011-12 as entire AMP functions is held as International Transactions not on the basis of the excess AMP expenses but on the following grounds: (i) Parts of AMP Expenses are reimbursed by AE. (ii) There is no separate function of AMP for AE. (iii) Reimbursement of expenses is done by the AE which has no connection with the assessee either in dis....
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.... There is detailed judgment on Hon'ble ITAT bench, Delhi in the case of Toshiba India Pvt. Ltd. Vs. DCIT ITA No. 1357/Del/2017, A.Y. 2012-13. On this issue which says that if we accept the entity basic TNMM, then the character of AMP functions as international transaction will be lost. Then relevant para of the order is reproduced as under: "We are unable to countenance the argument advanced on behalf of the assessee for deletion of the addition towards AMP expenses on the plain logic of the assessee's profit margin being higher than that of comparables. This is a fallacious argument. It is pertinent to note that the TPO examined and got satisfied with the assessee's profit margin vis-à-vis the comparables only qua the international transactions of distribution function. He separately determined the ALP of AMP expenses, albeit without examining the AMP functions carried out by the assessee and the comparables. Manner of determination of the ALP of the distribution activity and AMP activity has been set out by the Hon'ble High Court t< be conducted, firstly, in ci bundled manner by considering the distribution and AMP functions performed by the assessee as well ....
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....the distribution activity and AMP expenses are two separate but related international transactions. It is only for the purposes of determining their ALP that these two should be aggregated. The process of such aggregation does not take away the separate character of the AMP expenses as an international transaction. An analysis and examination of the distribution and AMP functions carried out by the assessee must be necessarily done in the first instance, which should be then compared with similar functions performed by some probable comparables. If the distribution and AMP functions performed by the assessee turn out to be different from those performed by probable comparables, then, a suitable adjustment should he made to the profits of the comparable so as to counterbalance the effect of such differences. If however differences exist in such functions, but no adjustment can be made, then, such probable comparable should be dropped from the list of comparables. If, in doing this exercise, there remains no company doing comparable distribution and AMP functions, then, both the international transactions are required to be segregated and then examined on individual basis by finding ....
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....is flawed and fallacious for several reasons. There are inherent flaws in the said argument'. It held vide para 165 of the judgment that: 'An external comparable should perform similar AMP functions. ' Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. The alternative prescription of the judgment is that if ALP of both the transactions of Distribution and AMP cannot be determined in a combined manner, then the ALP of AMP functions should be separately done. The submission advanced by the assessee of considering the profit on an entity level without making comparison of AMP functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view amounts to treating AMP spend as a non- international transaction, which is patently incapable of acceptance". In subsequent decision of Hon'ble High Court in Sony Ericssion has observed that TPO has accepted TNMM at entity level. Therefore, the no adjustment of ALP of AMP is required. But in subsequent decision of Sony Ericsson, Hon'ble High Court has approved the contention that AMP is not an international transact....
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....ile of the Assessing Officer ('AO') to decide the issue in the light of that decision. 4. The decision of the Special Bench of the ITAT in LG Electronics (supra) was examined by this Court in Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 (Del). The decision of this Court was rendered on 16th March 2015, which was shortly after the impugned order of the ITAT in the present case. One of the significant conclusions in Sony Ericsson (supra) was that the Bright Line Test ('BLT') could not be applied for either determining the existence of an international transaction involving AMP expenses or for determining the ALP of such transaction. Therefore, the very basis of the decision of the Special Bench of the ITAT in LG Electronics (supra) was rendered non-existent. 5. This Court in Sony Ericsson (supra), after discussing the various dimensions of the exercise of determining the ALP of an international transaction involving AMP expenses incurred on behalf of the foreign AE, gave a series of directions for the ITAT to reconsider the issue on remand. 6. This Court in Sony Ericsson (supra) decided the appeals of si....
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....nst the Assessee by the earlier decision of this Court in Sony Ericsson (supra) and if the Court accepts the plea of the Assessee it would amount to reviewing the earlier decision. He also drew attention to the specific finding in para 52 of the decision of Sony Ericsson (supra) that: "The contention that AMP expenses are not international transactions has to be rejected." 10. As already noticed, the earlier decision of this Court in Sony Ericsson (supra) proceeded on the basis that the Assessees whose cases were being disposed of did not dispute the existence of an international transaction involving AMP expenses. This Court is not required to opine whether such concession was rightly made or not. However, as far AY 2010-11 is concerned, the Assessee appears to have raised a specific ground both before the DRP as well as the ITAT regarding existence of an international transaction and this is reiterated in this Court in the present appeal of the Assessee as well. Such plea will have to be decided by the ITAT in accordance with law. 11. Consequently, it is ordered that: (i) The impugned order of the ITAT dated 27th February 2015 in ITA No.554/Del/2015 is ....
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....l 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 928 defines 'international transaction' as under: "Meaning of international transaction. 928.(1) For the purposes of this section and sections 92, 92C, 92D and 92E ,"international transaction" means a transaction between two or more associated enterprises, either or both of whom are non- residents; in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or fac....
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.... is on the Revenue to first show the existence of an international transaction. 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. 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. 23. Respectfully following the aforesaid decision of the Hon'ble Jurisdictional High Court, we hold that the AMP expenditure is not an international transaction in the case of instant assessee for the instant year and hence no adjustment to ALP need to be made thereon. Accordingly, the grounds raised by the assessed are allowed. Interest on FCDs: 24. Regarding the FCD, the assessee stated that it paid interest on foreign convertible debentures 25. During the year under consideration assesses had issued FCD to AE, on which an amount of Rs. 5,59,16,667/- was paid as interest @ 10%. The AO determined that interest rate of 3.68% is only allowable by determining the adjustment by CUP ....