TaxTMI 
TaxTMI 
2021 (2) TMI 867
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....tment relating to sale of goods to associated enterprises (grounds 8 to 10) e. Transfer Pricing adjustment relating to advertisement and market promotion expenses (grounds 8 to 10) f. Transfer pricing adjustment relating to royalty (ground 11)." 3. Grounds 1 & 2 are general grounds. Ground No.12 is regarding charging interest u/s. 234B & 234C of the Act and is purely consequential. The AO has to give consequential effect as per directions in this order. 4. Briefly stated, the facts of the case are that 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. 5. 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 ....
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....12,656 20 Factory Equipments- M S Pallets 1,02,637 21 Projector 3,397 22 Pumpsets Trading- Johnson Self Priming Pump 10,577 23 Office Equipments Sony CYBSHOT 892 24 Projector 3,397 25 Bicycle- Avon 2,791 26 Air conditioner- Patna 4,934 27 Refrigerator- Patna 637 28 Office Equipments- Patna 2,062 29 Refrigerator & water dispenser 2,030 30 Projector- Hyderabad 2,223 31 Air conditioner& Outdoor 29,277 32 Air conditioner 2,741 33 Pumpset Trading 6,375 34 Pumpset Trading 4,184 35 Pumpset - Lutz 5,883 36 Projector 3,269 37 Telephones 4,765 38 Factory Equipments- M S Pallets 15,693 39 Equipments- Paper Shredder Machine 3,811 40 Weighing Scale 2,403 41 Weighing Scale 3,461 42 Factory Equipments- Hand Pallet truck 3,206 43 Weighing Scale 5,864 44 Electric Equipments 2,236 45 Electric Equipments 5,610 46 Wall Mounting Fan & C G Make Fan 489 47 Equipments M S Pallets for DO 93,712 48 Equipments M S Pallets for ABR & LK Godown 43,987 49 Equipments- Vacuum Cleaner 2,541 50 Factory Equipments- M S Pallets 81,842 51 2.44M Self supporting ladder with 65MM flat steps 656 52 1.83 M Self supporting ladde....
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....orage racks, ladders, Storage bins etc., as "Plant and Machinery" on the ground that they were used in factory premises. The claim so made by the assessee was rejected by the AO and the same has been affirmed by the High Court. Accordingly, the Ld DR submitted that the 'user character' of these assets would remain the same irrespective of the place they are used, i.e., whether used in factory or in the office. 11. The Tribunal on identical submission in AY 2013-14 in IT(TP)A No.1385/Bang/2017 dated 14.7.2020 held as follows:- "11. We have heard the rival contentions on this issue and perused the record. It can be noticed that the AO has listed out 46 items. According to AO, these items would fall under the category of 'Furniture and Fixture' and they have been classified as "Plant & Machinery" by the assessee. However, a perusal of the list of items of assets extracted above would show that there are certain items like pump sets, refrigerator, camera, telephone, pedestal fan etc., which should fall under the category of "Plant & Machinery", even if the purpose for which they are put to use are not considered. In respect of remaining items, the contention of the assessee is that....
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....the nature of Plant and machinery. It is the claim of the assessee that other items are also used as part of Plant and Machinery. Hence, we are of the view that this issue requires fresh examination at the end of the AO in accordance with the decision rendered by the Hon'ble Karnataka High Court in the case of Hindustan Aeronautics Ltd (supra). Accordingly, we restore this issue to the file of the AO for examining the same afresh in the light of discussions made supra by following the decision rendered by the Hon'ble Karnataka High Court in the case of Hindustan Aeronautics Limited (supra)." 12. The facts and circumstances under which the issue arises for consideration and the arguments of the parties are identical as in AY 2013- 14. Therefore we are of the view that the decision rendered by the Tribunal in AY 2013-14 on the issue should be followed. Respectfully following the aforesaid decision, we set aside the order of the AO and remand to him, the issue for fresh consideration on the lines indicated in the Tribunal's order for AY 2013-14 (supra). 13. The next issue relates to disallowance made out of Sales Promotion expenses. The assessee had incurred expenses on giving o....
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.... the cumulative value of gifts given to each of the doctors would have exceeded Rs. 1000/-. (b) the quantum of expenditure is huge and excessive. We have noticed that the AO has presumed that the cumulative value of Gifts would have exceeded Rs. 1000/-. First of all, the question as to whether the limit of Rs. 1000/- fixed by MCI would apply to the value of each item of gift or cumulative value in a year is debatable question. Secondly, the question as to whether the code of conduct prescribed for individual doctors should also be made applicable to pharma companies is another debatable question. Be that as it may, we have noticed earlier that the limit of Rs. 1000/- has been prescribed by Medical Council of India for not taking any penal action against the doctors who had accepted gifts having value of Rs. 1000/-. Hence it has been interpreted that the gifts having value of less than Rs. 1000/- could be given. In any case, it was not shown to us that the notification issued by MCI shall be applicable to ayurvedic doctors also. Hence it cannot be conclusively said that the notification issued by MCI shall apply to Ayurvedic doctors also, to whom the sales promotion items have....
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....d Enterprises 20. The associated enterprises (AE) of the assessee included following companies located outside India and the percentage of shares held by M/s Himalaya Global Holdings Ltd (One of the partners of assessee firm) is given against each of them:- 1. Himalaya Drug Co. FZCO - 100% 2. Himalaya Drug Co. LLC - 49% 3. Himalaya Drug Co. Ltd, USA - 100% 4. Himalaya Drug Co. Pte Ltd - 100% 5. Himalaya Drug Co. Ltd, Lativa - 100% 6. Himalaya Drug Co. Cayman islands - 100% 21. The assessee selected TNMM method as most appropriate method. It selected "Customer products - Domestic" as "internal Comparable" and "Net Profit/Net sales" as Profit Level Indicator (PLI). The adjustment made by the TPO is related to Export of Ayurvedic medicaments and preparations to the AE of the assessee. The net profit ratio, i.e., PLI declared under "Customer Products - Domestic" was 1.19%, while the net profit ratio declared under "Export - Associated Enterprises" was 12.60%. Accordingly, the Assessee submitted that its international transaction of Export sales made to its AEs is at arm's length. 22. The TPO accepted selection of "internal comparable" in principle. However....
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....190899683*(3928254389/2840820597) = 1625220797 Arm's length value of international transaction of AE Export (C = A+B) 1190899683 + 1625220797 = 2816120480 Value of international transaction declared by taxpayer: Net sales AE export (D) 151,19,35,024 Adjustment (C-D) 130,41,85,45 The above shortfall of Rs. 130,41,85,456 /- is treated as transfer pricing adjustment u/s 92CA in respect of sales of finished goods for the AY 2015-16." 25. In the grounds urged by the assessee on this issue, the assessee has raised two preliminary issues, viz., (a) It has questioned the validity of reference made to TPO u/s 92CA; and (b) It has also questioned the action of TPO in treating the foreign companies as Associated Enterprises of the assessee. These issues have been urged in ground nos. 8.1 to 8.7. Both the parties agreed that the issue relating to validity of reference made to TPO has been decided against the assessee 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. The issue relating to AE relationship raised in Gr.No.8.6 & 8.7 was declined to be examined by the co-ordinate bench in the above said year and i....
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....with the personal care range of products in India. The personal care division in the domestic market undertakes full fledged marketing activities; including advertisement, sales promotion, etc. However, in respect of exports to AEs/related parties outside India, the entire marketing activities is done by the AEs as the assessee only manufactures the goods as per requirement of the AEs and dispatches the same to them. 8.2.2 In the year under consideration, the assessee exported products amounting to Rs. 74,26,02,810 to AEs. In its TP Study, the assessee selected TNMM as the MAM for determination of the ALP of the international transactions with its AEs. As per its TP Study, 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 of 15.80% from exports to its AEs. This was stated to be done as the pharmaceutical range of products are on par with the personal care range of 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, gover....
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....marketing and selling expenditure and alleged that the goods are sold at a mark up of 15% on cost. The TPO computed the Gross Profit margin on cost of goods sold in the domestic consumer product division at 102.63% and the cost of goods sold to AEs amounting to Rs. 56,94,29,812 was accordingly increased by the above rate to Rs. 115,38,35,749. From this, the exports to AEs amounting to Rs. 74,26,02,810 was reduced and the Transfer Pricing Adjustment in respect of exports to AEs was determined at Rs. 41,12,32,939. The DRP upheld these views/actions of the TPO. 8.3.1 Before us, the learned Authorised Representative of the assessee sought to explain the transactional and functional differences between the domestic sales to unrelated parties and export sales to AEs to justify the GP margin under the segments. The learned Authorised Representative, referring to the TPO's order under Section 92CA of the Act, argued that the 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....
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....us judicial pronouncements to contend that CPM was the MAM to be adopted in the case on hand. 8.5.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The first issue for consideration is that of what would be the MAM in the facts and circumstances in the case on hand. As per Sec. 92C(1) of the Act, the ALP in relation to an international transaction hall be determined by any of the following methods, being the MAM, having regard to the nature of transaction or class of transaction OR class of associated persons OR functions performed by such persons OR such other relevant factors as the Board may prescribe, viz., (a) Comparable Uncontrolled Price Method; (b) Resale Price Method; (c) Cost Plus Method; (d) Profit Split Method; (e) Transactional Net Margin 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 92....
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....omestic consumer product division with the net profit margin for exports to AEs. At page 46 of his order, the TPO has held that the exports to AEs is comparable in terms of nature of goods to the domestic consumer product division and therefore this section is considered as comparable to exports to AEs. Thus, there is no dispute on the domestic consumer product division being compared with exports to AEs. The TPO, however, compared the gross margin of domestic consumer product division with the gross margin of exports to the AEs. In doing so, we find the TPO disregarded the mandate of Rule 10B(1)(c) of the Rules which require determination of 'adjusted profit mark up' by making adjustments to the 'normal gross profit mark up' by taking into account the functional 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....
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....llowing namely :- "(a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in 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 e....
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....les and export sales are large in number and some being qualitative, unless reasonably accurate adjustments are made to normal gross profit mark up to eliminate the material effects of the many differences between domestic sales and export sales, the two margins cannot be compared. In our view, to give a mathematical number to all these differences would mean indulging in the exercise within a realm of subjectivity which is to be avoided. We are conscious of the principle that CPM can be applied in the case of a manufacturer selling goods to both AEs and non-AEs. However, in our considered view, in the peculiar factual matrix of the case on hand, as discussed and laid out 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 conseq....
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....forward the proposition that CPM should be considered as the MAM for manufacture and sale of finished goods in the domestic markets and exports to AEs. In fact, in this decision (supra), the Tribunal held that 'since the marketing and advertisement expenditure has to be also incurred by the AEs to market the product in their respective territories, therefore this aspect for making adjustments as provided in Rule 10B(1)(c)(iii) has to be considered. It is thus seen that the above decision relied on by the learned Departmental Representative also recognizes that adjustments have to be made as per Rule 10B(1)(c)(iii) under CPM also. No doubt, as a 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:- ....
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....he adjusted profit mark up as per Rule 10B(1)(c) and therefore CPM cannot be considered as the MAM. Consequently, the aforesaid decision relied on by the learned Departmental Representative is not applicable to the facts of the case on hand. 8.5.13 The OECD, TP Guidelines, 2010 relied on by the assessee provides that CPM may become less reliable when there are differences between the controlled and uncontrolled transactions and those differences have a material effect on the attribute being used to measure arm's length conditions. It further states that when there are material differences that affect the gross margins 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 measure....
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....ity of applying the compatibility criteria and enhanced availability of comparables. Net profit record/data is assessable and within reach. It is readily and easily available, entity-wise in the form of audited accounts. The TNM Method is a preferred transfer pricing arm's length principle for its proficiency, convenience and reliability. Ideally, in TNM Method preference should be given to internal or inhouse comparables. In absence of internal comparables, the taxpayer can and would need to rely upon external comparables, i.e. comparable transactions by independent enterprises. For several 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 transaction....
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....l, where purchase of the products manufactured and remuneration are guaranteed by the principal, irrespective of whether and if so at what price the principle is able to re-sell the product. 9.2 In the case on hand, the products involved are standard goods manufactured by the assessee and selling them in the ordinary course of its business, both in the domestic and overseas markets. The assessee does not depend on the technology of the AEs for manufacture of products; whose specifications whether technical or otherwise are decided by the 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 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 i....
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....of 13.39% from exports to its AEs whereas the net loss suffered by the assessee in respect of the personal care division in the domestic segment is (-) 10.16%. As the net margins from the assessee's exports to its AEs is higher when compared to the result of its margins in respect of transactions in the personal care division in the domestic segment, the price of the sale of finished goods are at arms length. In this factual view of the matter, the TP Adjustment of Rs. 38,84,32,314/- made by the TPO by adopting CPM as the MAM is accordingly deleted. Consequently, grounds 5 to 7 are disposed off as above." 24. In assessment year 2010-11, the co-ordinate 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....
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....ressed 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 assessee has to factor in huge marketing expenses and other expenses that are requi....
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....cts through the doctors. In 1995, the Hon'ble Supreme Court banned cross prescriptions, i.e., doctors other than ayurvedic discipline cannot prescribe ayurvedic products. Hence, in 1998, the assessee firm started consumer products division and started advertising its products. At the same time, the assessee firm underwent change in its constitution by introduction of new partner named MMI Corporation (which was later renamed as Himalaya Global holdings Ltd), which was a foreign company registered in Cayman islands. Consequently, the profit sharing ratio between the partners also underwent change from time to time. Finally, following two persons remained as partners with the following profit sharing ratio:- M/s Himalaya Global Holdings Ltd - 88% M/s Himalaya Drug Company Pvt Ltd - 12% New partnership deed was executed whenever, there was change. In the partnership deed executed in 2003, it was stated that the "brand name of 'Himalaya'" and "logo" shall be owned by the major partner, viz., M/s Himalaya Global Holdings Ltd. 30. In the aforesaid background, the AO examined the AMP expenses incurred by the assessee and noticed that the assessee has incurred a sum of Rs. 152....
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....artners named M/s Himalaya Global holdings Ltd located in Caymen islands. However, the assessee herein has continued to use the said logo and brand name for manufacturing the products. It is an admitted fact that the assessee does not pay any royalty to M/s Himalaya Global Holdings Ltd for using the brand name and logo. It is also an admitted fact that there is no agreement between the assessee and M/s Himalaya Global Holdings Ltd with regard to incurring of advertisement expenses. The assessee has incurred following expenses towards advertisement and market promotion: - Advertisement and Publicity - Rs. 69,23,19,080 Sales Promotion - Rs. 32,46,93,420 Promotional discounts - Rs. 50,57,77,473 Total Rs. 152,27,89,973 It is the submission of Ld A.R that the expenditure incurred on Sales promotion and promotional discounts are directly related to actual sales realised and hence the same cannot be said to be related to alleged brand building. He submitted that the actual amount spent on advertisement and publicity was only Rs. 69.23 crores, while the domestic turnover of the assessee is around Rs. 1000 crores. Hence the advertisement expenses account for only about ....
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.... @ 24.05%. The TPO applied this rate to sales of Rs. 197,25,42,327 and the routine expenses were determined at Rs. 47,43,96,429. Reducing this amount from the actual selling and marketing expenditure of Rs. 77,62,07,890, the nonroutine expenditure was computed at Rs. 30,18,11,461 and after adding a mark up of 5% on this, the TPO determined the adjustment at Rs. 31,69,02,034. The DRP upheld and confirmed the above views/contentions of the TPO. 11.2.1 Before us, the learned Authorised Representative for the; assessee placed reliance on the decisions of the coordinate bench of this Tribunal in the case of Essilor India (P.) Ltd. v. Dy. CIT [2016] 68 taxmann.com 311 (Bang. - Trib.); Dy. CIT v. Nike India (P.) Ltd. in IT (TP) Appeal No.232/Bang/2014 and other judicial pronouncements to contend that in the absence of any agreement OR arrangement with M/s. Himalaya Global Holdings Ltd., Cayman Islands to incur AMP expenses on its behalf to promote the brand value of the products, the AMP expenses cannot be treated as an international transaction. 11.2.2 Reliance was placed by the learned Authorised Representative on the Affidavit of Sri Meeraj Alim Manal dt.27.8.2012 (pages 452 to 4....
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....record; including the judicial pronouncements cited. The question of whether incurring AMP expenditure result in an international transaction was considered at length by a co-ordinate bench of this Tribunal in the case of Essilor India (P.) Ltd. (supra) which decision was followed by another coordinate bench of this Tribunal in the case of Nike India (P.) Ltd. (supra). In the case of Nike India (P.) Ltd. (supra), after considering various judicial pronouncements on the subject, the co-ordinate bench held that in the absence of any arrangement between the assessee and the foreign AE for incurring AMP expenditure, no Transfer Pricing Adjustment can be made in respect of AMP expenditure. In this regard, we find that at paras 19 to 22 of its order in the case of Essilor India (P.) Ltd. (supra), it was held as under :- '19. In the present case, the assessee-company imports the lens from its foreign AE and after some processing, sells the products on its own. However, the amount of value addition on account of processing in terms 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 ....
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....f Maruti Suzuki India Ltd. (supra) and Whirlpool of India (P.) Ltd. (supra) had considered the question of existence of the international transaction and computation of ALP thereon in the case of Bausch & Lomb Eyecare (India) (P.) Ltd. (supra) vide para 51 to 65 as under: "51. The central issue concerning the existence of an international transaction regarding AMP expenses requires the interpretation of provisions of Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE. 52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgement dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner 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....
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.... transaction are determined in substance between such other person and the associated enterprise." 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to one or more of such enterprises. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend 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' ....
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....eaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a certain target company. There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company. For, de hors the element of the shared common objective or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come 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....
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....to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be 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....
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....rties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that 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, ma....
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....nvoking the provisions of Chapter X of the Act. 22. Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should be treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine 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....
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.... expenditure as the transfer pricing 'adjustment'. This runs counter to legal position explained in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required a TPO "to examine the 'international transaction' as he actually finds the same." In other words the very existence of an international transaction cannot be a matter for inference or surmise." At para 76 of its order, the Hon'ble High Court has held as under:- "76. As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international 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 arrang....
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....a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer. MSIL's higher operating margins 86. In Sony Ericsson it was held that if an Indian entity has satisfied the TNMM i.e. the operating margins of the Indian enterprise are much higher than the operating margins of the comparable companies, no further separate adjustment for AMP expenditure was warranted. This is also in consonance with Rule 10B which mandates only arriving at the net profit by comparing the profit and loss account of the tested party with the comparable. As far as MSIL is concerned, its operating profit margin is 11.19% which is higher than that 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....
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....slands ('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." The submissions of the assessee would show that though M/s Himalaya Global Holdings Ltd (HGH) is the legal owner, yet it was admitted that the assessee firm only has developed 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 busines....
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....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:- "8.6 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 marketed the products in Africa, it would have gained the entire profits. The AE based in UAE/Dubai is getting the profits because it performs the critical functions-assets-risks. But the taxpayer is performing the critical function of providing license to AE to trade in the A....
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....roduct 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 the assessee only. He submitted that the AEs are marketing the products as mere traders and they are not concerned with the registration formalities. In fact, the dealers should have obtained necessary license to deal with pharma products at their individual level. Accordingly, the Ld A.R submitted that the view taken....
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.... 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, sell those products as mere traders. The AEs do not carry on any manufacturing activity and there was no necessity to give license to them. The product registration/license is only a basic formality to be complied with in order to market finished products and hence it cannot be said that the same has resulted in any intangible asset. 44. The submissions as made above are i....
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....nternational 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 clear case of exploitation of Brand name belonging to M/s Dabur India Ltd. Non-charging of Royalty was sought to be defended by submitting that there was no agreement for collecting royalty. The said contention was....