TaxTMI 
TaxTMI 
2020 (12) TMI 1060
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....h Doctors d. Transfer Pricing adjustment relating to sale of goods to associated enterprises. e. Transfer Pricing adjustment relating to advertisement and market promotion expenses. f. Transfer Pricing adjustment relating to royalty 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 P....
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....happen to see the advertisement Board. Accordingly, it was submitted that the assessee's brand would get promoted in this process. Accordingly, it was claimed that the above said contribution is in the nature of advertisement expenditure only. The AO however, noticed that the children of Mr. Meeraj Alim Manal had studied in the school till 31-03-2011 and the children of Ms. Lubna Manal, daughter of Shri Meeraj Alim Manal (i.e., grandchildren of Mr. Meeraj Alim Manal) continue to study in this school. Hence, the AO took the view that the contribution for the construction of swimming pool was made by Mr. Meeraj Manal on account of his personal gestures only and hence it is clearly in the nature of personal expenditure. i.e., there is no commercial consideration involved in it. Accordingly, the AO disallowed the above said claim of Rs. 99.66 lakhs. The Ld. DRP upheld the view so taken by the AO by following its decision rendered in AY 2013-14 on an identical issue. The relevant observations made by Ld. DRP in AY 2013-14 are extracted below:- "iii. As per Section 37 of the IT Act, any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not b....
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....020, has decided the issue against the assessee. We heard Ld. D.R on this issue. We notice that the coordinate bench has decided this issue in AY 2013-14 against the assessee with the following observations:- "7. We have heard the rival submissions on this issue and perused the record. The admitted facts are that the children and grandchildren of Mr. Meeraj Alim Manal, has studied/studies in the school in which the assessee has contributed for construction of swimming pool. It is the contention of the assessee that its name is displayed alongside of the swimming pool and hence the same will promote the brand name of the assessee. However, it is not the case of the assessee that it is making such type of contributions to other schools also as a strategy to promote its brand, meaning thereby, the assessee firm has made the contribution to the impugned school only for the reason that the children/grandchildren of Mr. Meeraj Alim Manal has studied/studies in this school. There should not be any dispute that Mr. Meeraj has full control over the assessee firm. Looking at these facts and the circumstances surrounding the contribution, we are of the view that there is merit in the....
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.... depreciation at the rate of 15%, i.e., the rate applicable to plant & machinery and also claimed additional depreciation at the rate of 20% (again applicable to Plant & machinery) on certain new items of assets purchased during the year. The assessee has so claimed depreciation at the above said rates, by classifying those assets as "Plant & Machinery". The AO, however, took the view that the assets listed out in the table at pages 6 to 8 of the assessment order are in the nature of "Furniture and fixtures" only, i.e., they are not "Plant & Machinery" as claimed by the assessee. Accordingly, the AO held that the rate of depreciation applicable to Furniture & Fixtures is only 10% and further additional depreciation cannot be allowed on furniture. Accordingly, the AO allowed depreciation @ 10% applicable to Furniture and Fixtures and disallowed the excess claim. Since additional depreciation is not allowed in the respect of assets classified as Furniture and Fixtures, the AO disallowed the claim of additional depreciation also. Accordingly, the assessing officer made disallowance of Rs. 15,99,366/- out of depreciation claimed by the assessee. 5.1. The Ld. A.R submitted that an id....
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....t in the case of Dinamalar Ltd.(supra). We have gone through the said case-law and notice that the assessee therein had claimed higher rate of depreciation applicable to computers in respect of peripherals used along with the computers. In that context, Hon'ble Madras High Court has taken the view that the peripherals cannot be classified as computers for claiming higher rate of depreciation as applicable to "Computers". In our view, the above said decision has been rendered in a different context, i.e., within the category of 'Plant and Machinery', the sub-question was whether the peripherals could be classified as Computers. Since the functions performed by the peripherals are different from that of a computer, the High Court held that they cannot be classified as "Computers". We notice that the decision rendered by the Hon'ble Karnataka High Court in the case of Hindustan Aeronautics Ltd. (supra), which was followed by Pune Bench of the Tribunal in the case of Serum Institute of India Ltd.(supra) would apply to the facts of the present case. 13. We have noticed that certain items of assets are in the nature of Plant and machinery. It is the claim of the ....
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....(TP)A No. 1385/Bang/2017 and the Tribunal, vide its order dated 14.07.2020 has decided the issue in favour of the assessee. We heard Ld. D.R on this issue. We notice that the coordinate bench has decided this issue in AY 2013-14 in favour of the assessee with the following observations:- "15. We have heard the rival contentions and perused the record. Both the parties took support of various decisions to reiterate their respective claims. The ld. DR submitted that the gifts given to doctors are against the ethics and hence, the same is liable to be disallowed, whereas the ld. AR relied on various case laws to contend that these expenditure is allowable as sales promotion expenses and further the amount of each of the gifts did not exceed Rs. 1000/- which is limit fixed by the MCI in the code of conduct for not taking any action against the doctors, i.e. receipt of gifts having value of less than Rs. 1000/- will not attract penal action by MCI. It is pertinent to note that the assessee has spent a sum of Rs. 15.26 Crores on gifts given to doctors. It is stated that the nature of gift consists of prescription slips, doctor names, bags, medical testing apparatus, pen, room fr....
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....bulation of how and to whom these expenses are spent on. 6.5 The assessee firm is also not able to compute the amount and value of gifts given to a particular doctor/clinic for usage, as to whether the total amount spent on a particular doctor would be above or below Rs. 1000/- at a particular gifting instance or during the year. Keeping all the above factors in mind and also keeping in view the quantum of expenditure incurred, I disallow 20% of the amounts incurred under the following heads: Gifts to Doctor:-Brand Reminder Cost less than Rs. 100 : 9,95,53,309 Cost less than Rs. 500 : 3,25,94,673 Cost less than Rs. 1000 : 25,69,462 13,47,17,444 6.6 20% of the above amount is disallowed as being excessive expenditure on gifts to Doctors which is not confirmed by the recipients and not being an ethical practice to promote the sales of the firm among Ayurvedic Doctors." We notice that the various case laws relied upon both the parties related to complete disallowance of sales promotion expenses, whereas in the instant case, the AO has made estimated disallowance of 20% of sales promotion expenses claimed by the ass....
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.... the expenditure claimed by the assessee on the basis of two reasoning given by him, which have been rejected by us. When the AO is accepting 80% of the expenditure, we do not find any justification for disallowing the remaining 20%. Hence, we are unable to sustain the estimated disallowance made by the AO. Accordingly, we direct the AO to delete the disallowance." 6.2. During the year under consideration also, the AO has given identical reasoning for disallowing 20% of the expenses on gifts and promotional aids given to doctors. Accordingly, following the decision rendered by the co-ordinate bench in AY 2013-14, we direct the AO to delete the impugned disallowance. 7. The next issue relates to the Transfer Pricing adjustment made in respect of goods sold to Associated Enterprises (AEs). During this year, the assessee reported following international transactions:- 1. Export of Semi-finished products -Rs. 2,98,04,235 2. Export of Ayurvedic Medicaments and Preparations -Rs. 169,87,78,383 3. Web designing and Support service -Rs. 26,04,816 4. Reimbursement of Expenses -Rs. 3,21,21,390 The TPO has made adjustment in respect of export of ayu....
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....e 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 assessee is aggrieved with the TPO/DRP action is not allowing adjustments as per Rule 10B(1)(c)(iii) of the IT Rul....
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....ting, 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, that the GP ratio differed mainly in respect of the marketing, distribution, selling and other similar expenses incurred by th....
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.... 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 and export sales and that TNMM be taken as the MAM as it was less affected by the transactional and functional differences as comparison i....
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....M 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 into account the functional and other differences, if any, between the international transaction [or the specified domestic transaction] and the co....
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....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, advertisement, transportation, sales promotion, commission, travel, salary, traveling, administrative costs and also undertakes risks such as market risk....
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.... 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 higher gross margin in the domestic market because it incurs significant administration, selling and distribution expenses, etc. In case of group concerns (AEs) sin....
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....e 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-à-vis gross margins in domestic segment. There are various differences in the functions performed and the risk assumed in these two segments and therefore, the same cannot be considered as comparable cases for determining the ALP. There is no marketing risk in the export segment, ....
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....termine 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 exports made to the AEs and Non-AEs. Therefore, we do not find merit in the submission of the learned counsel for the assessee that in cases where t....
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....se 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 respect to the classification of expenses in the gross or operating profits may make it difficult to evaluate the comparability of gross margins, while the....
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....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 were at arm's length. The TPO has taken AE sales comprising of both pharma and personal care products and compared the same with the personal care products ....
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....nly 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 co-ordinate 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 Pricing Adjustment of Rs. 41,12,32,939 made by the TPO by adopting CPM is accordingly deleted. Consequently, ground No. VIII & IX raised by the assessee are allowed." ....
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....rsonal 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 marking the international transaction of Export to AEs has been rejected by the Co-ordinate bench in AY 2010-11 and 2011-12 in the assessee's own case. Accordingly, consis....
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....g 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 expenses are not required to be incurred/allocated for "Exports to AE segment". The Marketing expenses is, in fact, huge expenditure incurred by the assessee. Since the a....
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....s Rs. 92.35 crores, while the aggregate amount of net profit shown in the Profit and loss account prepared by TPO was Rs. 11.66 crores. Since the TPO has only recast the segmental profit and loss account by shifting the discount expenses from "before gross profit item" to "after gross profit item" the aggregate amount of net profit should not change. Hence it appears that the TPO has made some more adjustments while preparing the profit and loss account, even though he did not discuss about it in his order. Hence, we proceed to discuss the issues on the basis of segmental profit and loss account prepared by the assessee. 7.8. The assessee has shown the rate of net profit margin at 12.31% in "Consumer products -Domestic" (Personal care division), while the margin earned by the assessee in respect of "Export Sales to AEs" was 24.03%. Accordingly, it was submitted that its export made to associated enterprises was at arms length. However, the TPO has re-cast the profit and loss account at pages 6 and 7 of his order. Accordingly, he has worked out the net profit margin @ 0.58% in "Domestic-Personal care division" and at 24.03% in "Exports to AEs" division. Since the TPO proceeded to....
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....hich came to be 20.02%. Hence the excess profit was 19.97% (20.02% (-) 0.06%). The TPO took the share of Associated Enterprises at 25%. Accordingly, he made transfer pricing adjustment of Rs. 87,47,35,998/- in respect of the selling and marketing expenses. 8.1. We heard the parties and perused the record. The AO/TPO has made identical transfer pricing adjustments in AY 2013-14 and 2011-12 also. Accordingly, identical issue was considered by the co-ordinate bench in AY 2013-14 and the same was decided in favour of the assessee by following the decision rendered by the coordinate bench in 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 coordinate 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 ....
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....liance was placed by the learned Authorised Representative on the Affidavit of Sri Meeraj Alim Manal dt. 27.8.2012 (pages 452 to 454 of Paper Book 2), the major shareholder of M/s. Himalaya Global Holdings Ltd., Cayman Islands ('HGH'), to contend that it is the assessee firm which has developed all its assets including the trademarks of the products in India and the assessee is exclusively and beneficially entitled to explore and use the same in India. It was submitted that as per the above Affidavit, the legal ownership of the brand with 'HGH' was necessitated 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 advertiseme....
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....s of total revenue is not clear from the material on record. That apart, the assessee-company has been throughout contesting before all the authorities the very existence of international transaction on account of incurring AMP expenditure between assessee-company and its AE and therefore, the contentions that the law laid down by the Hon'ble Delhi High Court in Sony Ericsson Mobile Communication India (P.) Ltd. (supra) should be applied to the case on hand, is not correct. Therefore, the submission of the learned Departmental Representative that the matter be remanded to 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) an....
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....ommissioner of Income Tax-LTU v. Whirlpool of India Ltd.) and many of the points urged by the counsel in these appeals have been considered in these two judgments. 53. A reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment 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 st....
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....end that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, 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 an....
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....me into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the 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 determ....
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....e the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ** ** ** 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. 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, 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 th....
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....regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to 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 su....
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....etermine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to 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 thi....
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....rnational transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise." 11.4.3 In our considered view, the requirement of there being an international transaction has not been satisfied in the case on hand. In fact, it is not the case of the TPO that there exists an arrangement between the assessee and 'HGH' to promote the brand by incurring AMP expenses. The case 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 benefited 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 expen....
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....at of the comparable companies whose profit margin is 4.04%. Therefore, applying the TNMM method it must be stated that there is no question of TP adjustment on account of AMP expenditure.' 11.4.4 In the case on hand, the net margin from exports to AEs at 15.80% is more than the net margin earned by the assessee in respect of personal care product division in the domestic argument at 11.30%. In the factual matrix of the case, as discussed above, the ALP of the assessee'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 i....
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....eveloped all its assets including trademarks. Hence the brand name has actually been developed by the assessee. It is also stated that the assessee is exclusively and beneficially entitled to explore and use the same in India. Hence, it is admitted that the legal ownership was transferred to HGH due to business necessity/compulsion. Hence the transfer of legal ownership is an internal arrangement between related parties, which was made on account of business necessities. However, 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 co-ordinate 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....
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....alty. He estimated the royalty @ 2% of the net sales of AEs. Accordingly he made transfer pricing adjustment of Rs. 3,39,75,568/- towards royalty. 9.2. The Ld. A.R submitted identical adjustment was made by TPO in AY 2013-14 and it was deleted by the Tribunal. 9.3. We heard Ld. D.R and perused the record. We notice that an identical issue has been examined by the co-ordinate bench in AY 2013-14 (supra) and it was decided as under:- "37. The next issue urged by the assessee relates to the Transfer Pricing adjustment relating to "royalty". The facts relating thereto are discussed in brief. The TPO noticed that the assessee is having a "Research & Development" unit in India and accordingly developing all its products. He also noticed that, if any company wants to market any of its food/medical products in any country, then it has to obtain approval from local authorities of that Country. The drug controller in any Country will need valid test data and clinical reports on the efficacy and genuineness of the drug in order to give approval for marketing the products. The TPO noticed that it is the assessee, which has obtained approval for its products in various Countries.....
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....angibles. 39. Accordingly, the TPO issued a show cause notice to the assessee asking it to show as to why ALP of royalty should not be determined on use of intangible assets, referred above. The assessee submitted that the selling price charged to its AEs is inclusive of everything. It was also submitted that nowhere in the world, a manufacturer would sell the goods for a price and also charge separate amount for royalty. The assessee also submitted that the TPO has made TP adjustments in respect of sale of goods to the AEs and hence no further adjustment is required on account of royalty. 40. The TPO, however, took the view that the royalty payable on usage of a license/product registration is an independent transaction, i.e., independent of export. Hence it is a separate intangible and the assessee would have charged royalty from non-related parties. Accordingly the TPO held that the ALP of the royalty should be determined. He noticed that the royalty rates reported by Association of University Technology Managers (AUTM) and the Licensing Executive Society (LES) range from 0.1% to 25%. The TPO noticed that the products manufactured by taxpayer are both pharma an....
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.... India (P) Ltd. vs. DCIT (2013)(34 taxmann.com 282)(Bang.-Trib.). Hence the fact that no TP adjustment was made in AY 2011-12 and earlier years would not debar the AO/TPO to make adjustments in this year. She submitted that the product registration/license is a separate intangible asset, which has been used by the AEs without adequately compensating the assessee. The Ld. DR submitted that the AEs could not have conducted the business in their respective countries without these licenses. The Ld. DR submitted that, had the assessee has not obtained the product license, the AEs would have obtained it themselves. She submitted that the assessee would have collected royalty from third parties for use of these licenses. The Ld. D.R further submitted that there is no requirement of existence of any agreement for payment of royalties for use of intangibles. 43. The Ld. D.R placed her reliance on the decision rendered by Delhi bench of Tribunal in the case of Dabur India Ltd. vs. ACIT (2017)(83 taxmann.com 305), which has since been affirmed by Hon'ble Delhi High Court in the same case reported in (2018)(89 taxmann.com 78)(Delhi). She submitted that, in the above cited case, th....
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....ny dispute that the technical details; the details of clinical trials etc., are available with the assessee only, since it has actually developed the products. Hence the assessee could submit those details to the concerned Government authorities for getting product registration/license. The TPO has expressed the view that the concerned AEs would have obtained the product registration/license, if the assessee had not obtained the same. However, it is the undisputed fact that, if at all the AEs wanted to obtain product registration/license, they have to get relevant details from the assessee only. 47. The assessee has submitted that such kind of approvals are required to market pharma products in any country. Hence these licenses enable the assessee to market its products. The AEs, in the capacity of distributors, should have also obtained separate license for trading in pharma products. There is also no dispute that the AEs have marketed products as re-sellers only. It is also submitted that it is not the commercial practice to charge any amount as royalty over and above the selling rate. In our view, this submission of the assessee is a reasonable one and also makes sense.....